UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 3, 2003


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 000-31859

CRYSTAL DECISIONS, INC.

(Exact name of registrant as specified in its charter)


Delaware		77-0537234
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

895 Emerson St.,
Palo Alto, California		94301
(Address of principal executive offices)		(Zip Code)

Telephone: (650) 838-7410
(Registrant’s telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:		None
Securities registered pursuant to Section 12(g) of the Act:		Common stock, par value of $0.001

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).Yes o No x

On October 31, 2003, 76,241,011 shares of the registrant’s common stock, $0.001 par value per share, were issued and outstanding.

TABLE OF CONTENTS


Part I. FINANCIAL INFORMATION
	Item 1.Financial Statements (Unaudited)
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		Condensed Notes to Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
Part II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Exhibit Index
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

CRYSTAL DECISIONS, INC.

INDEX


		Page

PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets as of October 3, 2003 and June 27, 2003		3
	Consolidated Statements of Operations for the three months ended October 3, 2003 and September 27, 2002		4
	Consolidated Statements of Cash Flows for the three months ended October 3, 2003 and September 27, 2002		5
	Condensed Notes to Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		47
Item 4.	Controls and Procedures		48
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		49
Item 4.	Submission of Matters to a Vote of Security Holders		49
Item 6.	Exhibits and Reports on Form 8-K		49
SIGNATURES			51

Part I. FINANCIAL INFORMATION

Item 1.Financial Statements (Unaudited)

CRYSTAL DECISIONS, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)


			October 3,		June 27,
			2003		2003 (1)

ASSETS
Current assets:
	Cash and cash equivalents (note 5)		$	114,761	$	99,823
	Short-term investments (note 5)			3,413		4,880
	Restricted cash (note 6)			2,026		2,019
	Accounts receivable, net of allowance of $2,616 and $2,560			47,067		51,436
	Income taxes receivable			—		77
	Inventories, net			619		515
	Deferred tax assets			12,082		10,229
	Prepaid and other current assets (note 7)			8,633		10,635

		Total current assets		188,601		179,614
Property and equipment, net				27,655		24,817
Deferred tax assets				1,052		1,052
Long-term investments (note 5)				3,194		3,215

		Total assets	$	220,502	$	208,698

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable (note 8)		$	18,240	$	17,464
	Accrued employee compensation			16,347		20,267
	Accrued expenses (note 7)			16,380		15,217
	Deferred revenues			49,762		48,245
	Income taxes payable			31,930		28,659

		Total current liabilities		132,659		129,852
Deferred tax liabilities				1,072		1,284
Deferred revenues				1,724		1,806

		Total liabilities		135,455		132,942
Commitments and contingencies (notes 2, 14 and 17)
Stockholders’ equity:
Common stock – 150,000,000 shares authorized; issued and outstanding – 76,225,451 and 76,091,581 at $0.001 par value per share, respectively (note 15)				76		76
Additional paid-in capital				36,323		35,771
Retained earnings				47,616		39,893
Accumulated other comprehensive income				1,032		16

		Total stockholders’ equity		85,047		75,756

		Total liabilities and stockholders’ equity	$	220,502	$	208,698

See accompanying notes.

(1) The information in this column was derived from the audited consolidated balance sheet as of June 27, 2003.

CRYSTAL DECISIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)


			For the three months ended

			October 3,			September 27,
			2003			2002

Revenues (note 4):
	Licensing		$	52,534		$	41,787
	Maintenance, support and services (note 8)			29,751			23,261

		Total revenues		82,285			65,048
Cost of revenues:
	Licensing			1,329			1,732
	Maintenance, support and services			14,558			13,907

		Total cost of revenues		15,887			15,639

Gross profit				66,398			49,409
Operating expenses:
	Sales and marketing			29,688			23,900
	Research and development			12,173			9,403
	General and administrative (note 8)			14,315			6,580

		Total operating expenses		56,176			39,883

Income from operations				10,222			9,526
Interest income and other income, net				589			452

Income before income taxes				10,811			9,978
Provision for income taxes (note 10)				(3,088	)		(2,895	)

Net income			$	7,723		$	7,083

Basic net income per share (note 11)			$	0.10		$	0.09

Diluted net income per share (note 11)			$	0.09		$	0.09

See accompanying notes.

CRYSTAL DECISIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


			For the three months ended

			October 3,			September 27,
			2003			2002

Operating activities
Net income			$	7,723		$	7,083
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization of property and equipment			2,710			1,751
	Bad debt expense and other reserves			151			244
	Deferred income tax recovery			(2,001	)		(3,507	)
	Amortization of other current and non-current assets			425			425
Changes in operating assets and liabilities:
	Accounts receivable			4,218			(1,102	)
	Income taxes receivable			77			817
	Inventories			(104	)		9
	Prepaid and other current assets			2,516			290
	Accounts payable			(1,791	)		(1,158	)
	Accrued employee compensation			(3,920	)		984
	Accrued expenses			1,258			923
	Deferred revenues			1,435			449
	Income taxes payable			3,207			(1,782	)

		Net cash provided by operating activities		15,904			5,426

Investing activities
Purchases of property and equipment				(2,981	)		(5,606	)
Purchase of short-term investments				—			(7,520	)
Maturity of short-term investments				1,470			—
Purchase of long-term investments				—			(666	)

		Net cash used in investing activities		(1,511	)		(13,792	)

Financing activities
Issuance of common stock				552			273
Deposit to secure overdraft credit facility				(7	)		(2,000	)

		Net cash provided by (used in) financing activities		545			(1,727	)
Effect of exchange rate changes on cash and cash equivalents				—			(23	)

		Net increase (decrease) in cash and cash equivalents		14,938			(10,116	)
Cash and cash equivalents at the beginning of the period				99,823			71,451

Cash and cash equivalents at the end of the period			$	114,761		$	61,335

See accompanying notes.

CRYSTAL DECISIONS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)

1. Description of Business and Basis of Presentation

Crystal Decisions, Inc. (“Crystal Decisions” or the “Company”) provides business intelligence software and services that enable the effective use and management of information within and among organizations. Crystal Decisions develops, markets and supports products that allow organizations of all sizes to access data from disparate systems, create useful, interactive information from that data through analysis and reporting and reliably deliver that information to the users that need it. Crystal Decisions is incorporated in Delaware and headquartered in Palo Alto, California.

Crystal Decisions is a majority owned subsidiary of Seagate Software (Cayman) Holdings Corporation (“SSCH”), a Delaware corporation, which is a majority owned subsidiary of New SAC, a Cayman Islands limited corporation (“New SAC”), whose predecessor was Seagate Technology, Inc. (“Old Seagate”). Old Seagate’s disc drive business was continued by Seagate Technology, of which New SAC is the majority shareholder. On October 15, 2003, 100 shares of SSCH were transferred to and are held by CB Cayman, a Cayman Islands exempted company and wholly owned subsidiary of New SAC. New SAC acquired 75,001,000 shares, or 99.7%, of Crystal Decisions’ outstanding common stock at November 22, 2000. This transaction is referred to hereafter as the New SAC Transaction. The New SAC Transaction constituted a purchase transaction of Old Seagate and resulted in change of control of Crystal Decisions.

The unaudited consolidated financial statements of Crystal Decisions have been prepared by the Company, in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited interim financial statements should be read in conjunction with the annual audited consolidated financial statements and related notes of the Company in its Annual Report on Form 10-K for the year ended June 27, 2003 as filed with the SEC on August 19, 2003.

The consolidated financial statements reflect, in the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for the fair presentation of the consolidated financial position, results of operations and cash flows. The results of operations for the three months ended October 3, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending July 2, 2004 or future operating periods. All information is stated in U.S. dollars unless otherwise noted.

Crystal Decisions operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to June 30. Accordingly, fiscal 2003 ended on June 27, 2003 and comprised 52 weeks. Fiscal 2004 will be a 53-week year and will end on July 2, 2004. The three-month period ended October 3, 2003 comprised 14 weeks and the three-month period ended September 27, 2002 comprised 13 weeks.

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

CRYSTAL DECISIONS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)

2. Acquisition by Business Objects S.A.

On July 18, 2003, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), as amended August 29, 2003, with Business Objects S.A. (“Business Objects”), a société anonyme organized under the laws of the Republic of France, several wholly owned subsidiaries of Business Objects and SSCH. Upon completion of the Mergers, Crystal Decisions will no longer exist. Accordingly, Business Objects has been identified as the acquirer.

Under the terms of the Merger Agreement, upon consummation of the Mergers, holders of common stock issued and outstanding immediately prior to the consummation, subject to the restrictions set forth in the Form S-4 filed by Business Objects on October 31, 2003 will receive, subject to certain adjustments,

(i)

a number of newly issued Business Objects American depository shares (“ADSs”), each ADS representing one ordinary share of Business Objects to be determined by a formula in the Agreement and Plan of Merger that allocates approximately 26.5 million shares based on the number of shares of Crystal Decisions common stock issued and outstanding immediately prior to the consummation of the Mergers and the value of stock options at the time of closing; and

(ii)

a proportionate amount of $300.0 million in cash, without interest.

In addition, other than as set forth in the next sentence, options to acquire the Company’s common stock outstanding immediately prior to the consummation of the Mergers will, upon consummation of the Mergers, be converted into options to acquire Business Objects ADSs. Stock options held by nonemployee members of the Company’s board of directors, or that have been granted under the Company’s 1999 Stock Option United Kingdom sub-plan or the Company’s 2000 Stock Option Plan will vest in full prior to the closing of the Mergers and will not be assumed or converted.

The Mergers are conditioned upon, among other things, (i) the approval of the stockholders of Business Objects and the Company, as applicable, (ii) clearance or expiration of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which waiting periods expired or were terminated in September 2003 and (iii) other customary conditions. In lieu of a meeting of the stockholders of Crystal Decisions, on July 18, 2003, SSCH, which held approximately 98.6% of the outstanding shares of the Company’s common stock on such date, executed a written consent approving and adopting the Merger Agreement. In the event that Crystal Decisions or Business Objects fails to close the proposed merger due to the occurrence of certain events, either party may be required to pay the other a termination fee equal to $21 million.

Upon the successful completion of the proposed acquisition by Business Objects, Crystal Decisions agreed to pay transaction fees based on a formula and to reimburse certain expenses to its financial advisors contingent upon completion of the Merger. The minimum amount of such fees is estimated to be $6.0 million, although the final amount has yet to be determined. Accordingly, these amounts once they become known will be recorded in the consolidated statements upon completion of the Merger. During the three months ended October 3, 2003, operating expenses included $3.5 million of costs related to the Company’s postponed initial public offering and $4.8 million related to integration costs incurred related to the proposed merger. Other costs associated with the Merger are expensed as incurred.

CRYSTAL DECISIONS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)

3. Accounting for Stock-Based Compensation

Crystal Decisions accounts for options granted under its 1999 Stock Option Plan using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“ABP 25”) and related interpretations. Crystal Decisions accounts for options granted under its 2000 Stock Option Plan in accordance with EITF No. 00-23 “Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44”, Issue 21, as all stock options were granted to employees of Crystal Decisions’ parent or a company under common control. These options were granted at fair market value and become fully vested and exercisable immediately prior to a merger or sale of substantially all of the Company’s assets or on the effective date of an initial public offering. The Company expects to record a non-cash dividend when vesting of the 2000 Stock Option Plan options occurs.

The following table provides pro forma disclosures of the effect on net income and net income per share if the fair value-based method had been applied in measuring compensation expense (in thousands, except per share amounts):


		For the three months ended

		October 3,		September 27,
		2003		2002

Net income – as reported		$	7,723	$	7,083
Add: Stock-based employee compensation expense included in reported net income, net of tax			—		41
Deduct: Stock-based employee compensation expense determined under the fair value-based method for all awards, net of tax			2,533		1,489

Net income – pro forma		$	5,190	$	5,635
Net income per share – as reported
	Basic	$	0.10	$	0.09

	Diluted	$	0.09	$	0.09

Net income per share – pro forma
	Basic	$	0.07	$	0.07

	Diluted	$	0.06	$	0.07

Aside from a charge of approximately $41,000 in connection with certain stock options issued to employees in England, no stock-based employee compensation cost was reflected in reported net income for the periods presented as all other stock options granted under the 1999 Stock Option Plan and 2000 Stock Option Plan (the “Plans”) had an exercise price equal to the market value of the underlying common stock at the date of grant. For purposes of the pro forma disclosures, the estimated fair value of the stock options was amortized over the stock options’ vesting period.

The pro forma effects of applying SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) for the periods presented are not likely to be representative of the pro forma effects of future periods as the stock options usually vest over a period of four years, no options were issued under the Plans prior to November 1999, the number of stock options granted varies from period to period and the Black-Scholes fair value of each grant depends on the assumptions at the grant date.

CRYSTAL DECISIONS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)

The weighted average assumptions used and the resulting estimates of weighted average fair value of stock options granted were as follows:


	For the three months ended

	October 3,			September 27,
	2003			2002

Volatility factor		86	%		102	%
Expected life of stock options		3 years			3 years
Risk-free interest rate		2.2	%		2.1	%
Dividend yields		0.0	%		0.0	%
Weighted average fair value of stock options granted during the period	$	6.56		$	3.48

For purposes of pro forma disclosures pursuant to SFAS 123, the expected volatility assumptions used by the Company were based on an average of the Company’s competitors’ historical stock price volatilities over the expected life of the stock options as the Company does not have sufficient historical volatility from its own common stock.

4. Revenue Recognition

The Company derives revenues from the sale of licenses for software products and services such as maintenance, technical support, training and consulting services. Licenses for software products are sold separately or with services as part of a bundled arrangement. Maintenance and technical support contracts are sold with licenses in a bundled arrangement or sold separately as a contract renewal. Training and consulting services are provided as part of a bundled arrangement or sold separately based on a project or time and materials basis.

For each sales transaction, the Company determines whether evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is probable. If any of these criteria are not met, recognition of revenues is deferred until such time as all of the criteria are met.

In bundled software arrangements that include rights to multiple software products and/or services, the Company recognizes revenues using the residual method as prescribed by the Statement of Position 98-9 “Modification of SOP No. 97-2 Software Revenue Recognition with Respect to Certain Transactions.” Under the residual method, revenues are allocated to the undelivered elements based on vendor specific objective evidence of fair value of the undelivered elements and the residual amount of revenues are allocated to the delivered elements. Vendor specific objective evidence of the fair value of maintenance and technical support contracts is based on renewal rates as determined by the prices paid by the Company’s customers when maintenance is sold separately. Vendor specific objective evidence of fair value of training and consulting services is based upon daily rates as determined by the prices paid by the Company’s customers when these services are sold separately.

For all bundled arrangements, the Company assesses whether the service elements of the arrangement are essential to the functionality of the other elements of the arrangement. When services are considered essential or the arrangement involves customization or modification of the software, both the license and service revenues under the arrangement are recognized under the percentage of completion method of contract

CRYSTAL DECISIONS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)

accounting, based on cost of labor inputs. Expected losses, if any, with respect to consulting services are accrued once they become known.

For those arrangements for which the Company has concluded that the service elements are not essential to the other elements of the arrangement, the Company uses vendor specific objective evidence of fair value for the service elements to account for the arrangement using the residual method, regardless of any separate prices stated within the contract for each element. Revenues allocable to maintenance and technical support contracts are recognized ratably over the term of the respective contracts, which are typically one year. Maintenance contracts include rights to unspecified software product enhancements and upgrades when and as the Company makes them available. Revenues allocable to training and consulting services are recognized as the services are performed.

For sales to distributors and resellers, revenues are recognized upon product delivery. The Company reserves an amount equal to its estimate of all product subject to rights of return and resale contingencies. Some of the factors that are considered in determining this estimate include historical experience, level of inventory in the distribution channels, nature of the product, fixed or determinable fees and payment terms. The reserve reduces the revenues and the related receivables.

For sales to original equipment manufacturers (“OEMs”), revenues are recognized when the OEM reports sales that have occurred to an end user customer, provided that collection is probable. Some OEM arrangements include the payment of an upfront arrangement fee which is deferred and recognized either ratably over the contractual period or when the OEM reports sales that have occurred to an end user customer, in accordance with the contractual terms. If the Company determines, through royalty audits or other means, that an OEM did not report revenues accurately, the Company attempts to reconcile the discrepancies and, if appropriate, records additional revenues upon resolution.

Deferred revenues represent amounts under license and service arrangements for which the earnings process has not been completed. These amounts relate primarily to provision of maintenance and technical support services with future deliverables and arrangements where specified customer acceptance has not yet occurred. Deferred revenues classified as long-term in nature represent revenues that will not be realized for more than 12 months after the date of the consolidated balance sheet.

5. Cash, Cash Equivalents, Short-term and Long-term Investments

The Company’s cash, cash equivalents, short-term and long-term investments are summarized in the table below. Crystal Decisions classifies its investments in debt securities as available-for-sale and records these investments at the amortized cost, which approximates their fair value. Gains and losses on available-for-sale securities held at October 3, 2003 and June 27, 2003 and gross realized gains or losses on sales of available-for-sale securities during the three months ended October 3, 2003 and September 27, 2002 were not significant.

CRYSTAL DECISIONS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)


		October 3,		June 27,
		2003		2003

		(in thousands)
Cash		$	13,563	$	9,852
Cash equivalents:
Money market funds			86,391		73,127
Commercial paper			14,807		16,844

	Total cash equivalents		101,198		89,971

	Total cash and cash equivalents		114,761		99,823

Short-term investments:
Commercial paper			1,412		1,878
U.S. government and government sponsored securities			2,001		3,002

	Total short-term investments		3,413		4,880

Long-term investments:
U.S. government and government sponsored securities			3,194		3,215

	Total long-term investments		3,194		3,215

Total cash, cash equivalents, short-term and long-term investments		$	121,368	$	107,918

6. Restricted Cash

On September 26, 2002, the Company placed $2.0 million on deposit with The Bank of Nova Scotia as a general hypothecation to an overdraft credit facility. The monies held and the interest earned thereon is classified as restricted cash. The overdraft credit facility provides up to Canadian $2.0 million credit for certain overdrafts plus a foreign exchange forward trading line supporting notional contracts of between $4.0 million and $6.0 million. At October 3, 2003 and June 27, 2003, there was no balance or contract outstanding under this facility.

7. Derivative Financial Instruments

Beginning in May 2003, Crystal Decisions began hedging a portion of its exposure to the foreign currency exchange risk on the Company’s forecasted Canadian dollar costs. During the three months ended October 3, 2003, all hedges were effective. As a result, no gain or loss related to hedge ineffectiveness was included in net income during the quarter. At October 3, 2003, the Company recorded a mark-to-market adjustment of $1,016,000 related to these hedges to value the existing forward contracts. This amount was included in accumulated other comprehensive income. The total net amount of realized loss was $284,000, which was reclassified into payroll related expense during the three months ended October 3, 2003.

As of October 3, 2003, the Company held Canadian dollar foreign exchange forward contracts with a notional amount of $40.2 million. The forward contracts have semi-monthly maturities from October 15, 2003 through July 2, 2004, coinciding with the Company’s Canadian payroll periods.

CRYSTAL DECISIONS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)

The following table segregates items related to hedging transactions included on the balance sheet:


	October 3,		June 27,
	2003		2003

	(in thousands)
Forward contract assets (included in prepaid and other current assets)	$	996	$	75
Forward contract liabilities (included in accrued expenses)	$	—		95

Net forward contract asset (liability)	$	996	$	(20	)

8. Related Party Transactions

Seagate Technology LLC

In December 2000, Crystal Decisions signed a software license agreement (the “License Agreement”) with Seagate Technology LLC, an indirect subsidiary of New SAC. Under the terms of the License Agreement, Crystal Decisions granted Seagate Technology LLC a non-exclusive, non-transferable, perpetual license to use certain business intelligence products and receive related maintenance and support services for one year. The maintenance and support services related to the License Agreement were renewed for one year during the three months ended December 28, 2001 and for an additional year in the three months ended March 28, 2003. Revenues from maintenance and support services are recognized ratably over 12 months. Crystal Decisions recognized maintenance and support revenues from Seagate Technology LLC of $108,000 and $106,000 in the three months ended October 3, 2003 and September 27, 2002, respectively.

Seagate Technology LLC provides various services as requested by Crystal Decisions, for which it charges Crystal Decisions through corporate expense allocations. Crystal Decisions’ management believes that the allocation methods applied to the costs provided under the agreements in place are reasonable. Amounts charged to Crystal Decisions general and administrative expense were $57,000 and $104,000 for the three months ended October 3, 2003 and September 27, 2002, respectively. Because Seagate Technology LLC charged Crystal Decisions the fair market value of these services, no material additional costs would have been incurred had Crystal Decisions obtained these services from a third party. Commencing November 23, 2000 and up to and including the three months ended December 27, 2002, these balances included a quarterly charge of $25,000 for consulting and advisory fees under an annual monitoring agreement that were paid on Crystal Decisions’ behalf by Seagate Technology LLC to certain New SAC investors. In December 2002, Seagate Technology LLC discontinued the annual monitoring agreement. In settlement for the remaining term of the agreement, $625,000 was paid by Crystal Decisions, which was included in general and administrative expense on the statement of operations for the three and six months ended December 27, 2002.

As of October 3, 2003 and June 27, 2003, there were no amounts outstanding from Seagate Technology LLC included in accounts receivable. As of October 3, 2003 and June 27, 2003, respectively, there were approximately $181,000 and $195,000 due to Seagate Technology LLC included in accounts payable.

Veritas Merger and Indemnification Agreement

In connection with the New SAC Transaction, New SAC and its affiliates, including Crystal Decisions, entered into an Indemnification Agreement on March 29, 2000 with VERITAS Software Corporation (“VERITAS”) under which the parties agreed to assume and indemnify VERITAS and its affiliates for

CRYSTAL DECISIONS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)

substantially all liabilities arising in connection with Old Seagate’s and Crystal Decisions operating assets and for selected tax liabilities. In return, VERITAS, Old Seagate and their affiliates agreed to indemnify New SAC and its affiliates, including Crystal Decisions, for certain liabilities, including all taxes of Old Seagate for which New SAC and its affiliates are not obligated to indemnify VERITAS and its affiliates. VERITAS deposited $150 million into an escrow account, of which the full amount remains at October 3, 2003. This amount will reduce these tax liabilities, including those of Crystal Decisions and our subsidiaries. To the extent that any part of the $150 million is not utilized to satisfy these tax liabilities, it will be paid to the former stockholders of Old Seagate.

In July 2002, Crystal Decisions entered into a Reimbursement Agreement with Seagate Technology and its affiliates which allocates the respective liabilities and obligations of the parties under the Indemnification Agreement. Under the Reimbursement Agreement, if Crystal Decisions and Seagate Technology became obligated to indemnify VERITAS or Old Seagate under the indemnification agreement, a subsidiary of Seagate Technology will be responsible for the first $125 million of the tax liabilities. Any amount in excess of the first $125 million will be allocated pro rata in accordance with the portion of the purchase price allocated to each entity in connection with the New SAC Transaction among various subsidiaries and affiliates of Seagate Technology, including Crystal Decisions. For indemnification obligations other than tax liabilities, the parties agreed that the responsible entity will reimburse any entity that satisfies the obligation on its behalf.

In connection with the Agreement and Plan of Merger that Crystal Decisions entered into on July 18, 2003 with Business Objects, Crystal Decisions obtained from VERITAS a written release on September 16, 2003, from its obligations to indemnify VERITAS for matters arising prior to the New SAC Transaction. The release will only become effective if the transaction with Business Objects is completed prior to March 31, 2004 and will not be of any force or effect unless and until the proposed acquisition is completed.

In addition, on July 18, 2003, New SAC entered into an indemnification letter agreement with Crystal Decisions whereby New SAC agreed to reimburse Crystal Decisions and SSCH (and Business Objects as the successor to those parties upon completion of the proposed acquisition) for any claims arising prior to March 31, 2006 and related to tax matters under the Reimbursement Agreement or the Indemnification Agreement. The indemnification letter agreement becomes effective only upon the closing of the proposed acquisition of Crystal Decisions by Business Objects and will not be of any force or effect if the proposed acquisition is not completed.

9. Revolving Loan Agreement

In October 2002, Crystal Decisions executed an accounts receivable-based revolving facility (the “Revolving Line”) with Comerica Bank-California (“Comerica”). The Revolving Line provides up to $15.0 million in borrowings for general working capital purposes. Interest is calculated, depending on the nature of the advance, at either Comerica’s U.S. prime rate or Comerica’s LIBOR plus 2.5% per annum. On prime rate advances, interest is payable monthly. On LIBOR advances, interest is payable on a quarterly basis and at the end of each LIBOR period. Borrowings under the Revolving Line are limited to 80% of eligible accounts receivable with an additional $2.0 million available in any month in which Crystal Decisions maintains $15.0 million of its investment accounts with Comerica or its affiliates. The Revolving Line expires on September 30, 2004 at which time the outstanding principal and interest payable balances are due immediately. Upon notice to Comerica and without penalty, Crystal Decisions may terminate the agreement at any time provided

CRYSTAL DECISIONS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)

that all obligations have been paid in full. The Revolving Line is collateralized by substantially all the Company’s personal property, excluding intellectual property. The agreement also required the Company’s U.S. and Canadian subsidiaries to pledge their assets in support of Crystal Decisions’ obligations under the agreement. The Company was required to pledge shares of most of its subsidiaries to Comerica.

The terms of the Revolving Line require Crystal Decisions to maintain certain quarterly financial covenants related to liquidity, minimum tangible net worth and quarterly free cash flow. The agreement restricts certain of the Company’s activities. For example, it restricts the Company from selling, leasing or otherwise disposing of any part of the business or property under most circumstances. In addition, the agreement prohibits the Company from entering into arrangements which will result in a change of control or in which the Company would incur certain forms of indebtedness without Comerica’s consent. The Company is also restricted from making certain types of distributions and investments. The Company is required to maintain at least an aggregate of $10.0 million in investment accounts with Comerica and some of its affiliates. No amounts were outstanding under the Revolving Line at October 3, 2003 or June 27, 2003. At October 3, 2003, Crystal Decisions maintained $65.4 million of its cash equivalents balance with Comerica. Crystal Decisions earned interest of $214,000 on its deposits with Comerica at an average rate of 1.3% for the three months ended October 3, 2003.

10. Income Taxes

The Company is subject to income taxes in both the United States and numerous foreign jurisdictions and the use of estimates are required in determining the Company’s provision for income taxes. Although the Company believes its tax estimates are reasonable, the ultimate tax determination involves significant judgment that could become subject to audit by tax authorities in the ordinary course of business.

The effective rate used to record income tax expense for the three months ended October 3, 2003 differed from the U.S. federal statutory tax rate primarily due to the effect of operating in foreign jurisdictions that have differing tax treatments as compared to the United States, acquisition costs incurred related to the proposed Business Objects transaction and the reduction in valuation allowance to reflect those future tax benefits that were more likely than not to be realized.

At October 3, 2003, the Company reduced its valuation allowance against deferred tax assets to reflect the amount of the future tax benefit that was more likely than not to be realized. A valuation allowance continues to be provided against those deferred tax assets for which there is uncertainty of future realization.

CRYSTAL DECISIONS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)

11. Net Income Per Share

The reconciliation of the numerator and denominator for the calculation of basic and diluted net income per share is as follows (in thousands, except per share amounts):


		For the three months ended

		October 3,		September 27,
		2003		2002

Basic net income per share:
Numerator:
	Net income	$	7,723	$	7,083

Denominator:
	Weighted average number of common shares outstanding		76,171		75,895

Net income per share – basic		$	0.10	$	0.09

Diluted net income per share:
Numerator:
	Net income	$	7,723	$	7,083

Denominator:
	Weighted average number of common shares outstanding		76,171		75,895
	Dilutive effect of stock options under the treasury stock method		9,740		3,782

	Weighted average number of common shares outstanding on a diluted basis		85,911		79,677

Net income per share – diluted		$	0.09	$	0.09

As of October 3, 2003 and September 27, 2002, respectively, the total number of outstanding options to purchase common stock was 20,356,940 and 13,398,720. During the three months ended October 3, 2003, Crystal Decisions issued 133,870 shares of common stock upon the exercise of options granted under the 1999 Stock Option Plan. The number of anti-dilutive stock options excluded from the diluted net income per share calculation was 2,775,694 for October 3, 2003 and 254,925 for September 27, 2002.

12. Comprehensive Income

During the three months ended September 27, 2002, accumulated other comprehensive income was comprised solely of foreign currency translation gains and losses. Effective March 29, 2003, Crystal Decisions changed the functional currency of the remainder of its foreign subsidiaries from their respective local currency to the U.S. dollar. Accordingly, thereafter, all gains or losses on foreign currency translation are included in net income. During the three months ended October 3, 2003, accumulated other comprehensive income was comprised solely of the net unrealized gain or loss on derivative financial instruments accounted for as cash flow hedges.

CRYSTAL DECISIONS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)

The components of comprehensive income were as follows (in thousands):


		For the three months ended

		October 3,		September 27,
		2003		2002

Net income		$	7,723	$	7,083
Foreign currency translation adjustments			—		(226	)
Unrealized gain on derivative financial instruments			983		—
Reclassification adjustment for gain on derivative financial instruments			33		—

	Comprehensive income	$	8,739	$	6,857

13. Business Segment Information

Crystal Decisions has one reportable business segment — information management software.

14. Legal Proceedings

In November 1997, Vedatech Corporation (“Vedatech”) commenced an action in the Chancery Division of the High Court of Justice in the United Kingdom against Crystal Decisions (UK) Limited, a wholly owned subsidiary of Crystal Decisions. The liability phase of the trial was completed in March 2002, and Crystal Decisions prevailed on all claims except for the quantum meruit claim. The court ordered the parties to mediate the amount of that claim and, in August 2002, the parties came to a mediated settlement. The mediated settlement was not material to Crystal Decisions’ operations and contained no continuing obligations. In September 2002, however, the Company received a notice that Vedatech is seeking to set aside the settlement. The mediated settlement and related costs are accrued in the consolidated financial statements. In April 2003, Crystal Decisions filed an action in the High Court of Justice seeking a declaration that the mediated settlement agreement is valid and binding. In connection with this request for declaratory relief Crystal Decisions paid the agreed settlement amount in the court. In October 2003, Vedatech filed an action against Crystal Decisions, Crystal Decisions (UK) Limited and Susan J. Wolfe, Vice President, General Counsel and Secretary of Crystal Decisions, in the United States District Court, Northern District of California, San Jose Division, alleging that the August 2002 mediated settlement was induced by fraud and that the defendants engaged in negligent misrepresentation and unfair competition. In October 2003, Crystal Decisions (UK) filed an application with the High Court of Justice claiming the proceedings in United States District Court, Northern District of California, San Jose Division were commenced in breach of an exclusive jurisdiction clause in the settlement agreement and requesting injunctive relief to restrain Vedatech from pursuing the United States District Court proceedings. Although Crystal Decisions believes that Vedatech’s basis for seeking to set aside the mediated settlement and its claims in the October 2003 complaint are meritless, the outcome cannot be determined at this time. If the mediated settlement were to be set aside or Crystal Decisions were to be found liable in the October 2003 action, a negative outcome could adversely affect Crystal Decisions’ financial position, liquidity and results of operations.

In addition to the foregoing, Crystal Decisions is also subject to litigation in the ordinary course of its business. Where the Company believes a loss is probable and can be reasonably estimated, the estimated loss is accrued in the consolidated financial statements. Where the outcome of these matters is not determinable no provision is made in the financial statements until the loss, if any, is probable and can be reasonably estimated or the outcome becomes known.

CRYSTAL DECISIONS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)

While Crystal Decisions believes that the ultimate outcome of these matters will not have a material adverse effect on the Company, the outcome of these matters is not determinable at this time and negative outcomes may adversely affect the Company’s financial position or results of operations.

15. Rescission Offer

Certain shares issued and option grants made under the 1999 Stock Option Plan to residents of California, Maryland and New York may not have complied with all applicable securities laws of those states. Accordingly, the Company has made a rescission offer to these stockholders and optionees which will allow the holders to elect, during a limited period of time, to return their shares or options to the Company in return for a payment equal to their purchase price or 20% of their aggregate exercise price, respectively, plus any applicable interest. The rescission offer opened on November 4, 2003 and expires at 5:00 p.m. Pacific time on December 5, 2003. Approximately 327,970 outstanding shares of the Company’s common stock and approximately 1,439,792 outstanding options are subject to the rescission offer. The shares and options had purchase and exercise prices ranging from $4.00 to $11.82 per share. In the event that all of the persons eligible to participate in the rescission offer accepted the Company’s offer, the Company would make total payments of approximately $3.4 million, which the Company would fund from existing cash balances.

At the time the rescission offer was mailed to stockholders and optionees, Crystal Decisions reclassified the share capital and related additional paid-in capital associated with the redeemable stock on the consolidated balance sheet as “Redeemable Common Stock”, outside of stockholders’ equity. The carrying value of the redeemable common stock is equal to the exercise price of the stock subject to the rescission offer plus applicable interest from the date of exercise until acceptance by stockholders of the rescission offer. On December 6, 2003, the eligible shares of common stock that are not redeemed and the related additional paid-in capital will be reinstated. The interest paid on the repurchase of shares on acceptance of the offer, if any, will be charged either to compensation expense or to additional paid-in capital. For stock options held by optionees, Crystal Decisions will incur compensation expense equal to the amount of the cash paid, including interest, to repurchase the option, if and when an employee accepts the cash settlement feature up to the date the rescission offer expires.

16. Guarantor’s Accounting for Guarantees

The Company from time to time enters into certain types of contracts that contingently require the Company to indemnify parties against third party claims. These contracts primarily relate to: (i) certain agreements with the Company’s officers and directors, under which the Company may be required to indemnify such persons for liabilities arising out of their duties to the Company; (ii) the pledge of certain assets and shares in connection with the Revolving Line agreement with Comerica described in note 9; (iii) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; and (iv) agreements under which the Company indemnifies customers and partners for claims arising from intellectual property infringement. In addition Crystal Decisions entered into certain indemnification and reimbursement agreements related to the New SAC Transaction.

Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these obligations, there is no pending litigation or claims related to

CRYSTAL DECISIONS, INC.
Condensed Notes to Consolidated Financial Statements
(Unaudited)

these obligations, and no liabilities have been recorded for these obligations on the balance sheet as of October 3, 2003 and June 27, 2003.

The Company warrants that its software products will operate substantially in conformity with product documentation and that the physical media will be free from defect. The specific terms and conditions of the warranties vary depending upon the type of agreement and the product sold, ranging from 30 to 90 days. The Company provides for the costs of warranty when specific problems are identified. The Company has not experienced any significant warranty claims to date and no liabilities related to warranty costs were recorded on the balance sheet as of October 3, 2003 and June 27, 2003.

17. Employment Contract Commitments

In connection with the proposed acquisition of the Company by Business Objects, Crystal Decisions entered into various employment contracts, change-of-control arrangements and separation agreements.

The Company entered into an amendment to the employment agreement with Jonathan J. Judge, its President and Chief Executive Officer, and into retention agreements with seven members of the executive team. The terms of these agreements allow for varying payments at varying times, including termination and severance payments, health benefits and other discretionary payments and certain modifications to existing stock option agreements. In addition, each of the individuals under management retention agreements will be entitled to continued employment for a period of three months following the close of the proposed acquisition by Business Objects. All terms are contingent upon the completion of the proposed Merger.

The new or amended agreements resulted in modifications of the stock option agreements previously entered into by these parties and are being accounted for in accordance with APB 25 and FIN 44, “Accounting for Certain Transactions involving Stock Compensation” (“FIN 44”). Under FIN 44, management is required to make its best estimate of the ultimate benefit that these parties will receive as a result of the modification of existing agreements or the entering into of new agreements. The Company has not recorded any expense for the three months ended October 3, 2003, as the proposed acquisition has not been completed and the Company is currently unable to estimate whether the individuals will retain a benefit that might have otherwise been forfeited. Should the Merger be completed, the current estimate of compensation cost associated with the modification of Mr. Judge’s agreement is $11.3 million based on the difference between the fair market value and the exercise price of his options at the date of the amended employment agreement. This modification is the result of the extension of the exercise period for Mr. Judge’s stock options from 90 days to one year after termination. The ultimate compensation expense that will be reported related to the executive retention agreements will be based on the benefit of accelerated vesting, absent the modification, on the date of termination.

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

The following discussion and analysis should be read in conjunction with our unaudited interim consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and the Management’s Discussion and Analysis of Financial Condition and Results of Operations and Audited Consolidated Financial Statements and related notes contained in our Annual Report on Form 10-K for the fiscal year ended June 27, 2003 as filed with the Securities and Exchange Commission (“SEC”) on August 19, 2003. Certain statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and information contained in this Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated in such forward-looking statements as more fully described in the “Factors Affecting our Future Operating Results” section of this Item and elsewhere in this Form 10-Q. We do not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events.

Overview

Crystal Decisions provides business intelligence software and services that enable the effective use and management of information within and among organizations. Our revenues are derived primarily from licensing fees for software products and, to a lesser extent, fees for services related to these products, including maintenance, technical support, training and consulting. We sell our software products through two channels: directly to end user customers through our sales force and indirectly through resellers, original equipment manufacturers, systems integrators and distributors, including independent software vendors. Original equipment manufacturers, which are independent software vendors and hardware vendors, generally integrate our products with theirs or resell them with their products. Our other indirect vendors resell our software products to end user customers.

We were incorporated in Delaware in August 1999. Our headquarters are located at 895 Emerson Street, Palo Alto, California 94301. Our telephone number is (650) 838-7410.

We operate and report financial results on a fiscal year of 52 or 53 weeks ending on the Friday closest to June 30. Accordingly, our Fiscal 2003 ended on June 27, 2003 and comprised 52 weeks. Fiscal 2004 will be a 53-week year and will end on July 2, 2004. The three-month period ended October 3, 2003 comprised 14 weeks and the three-month period ended September 27, 2002 comprised 13 weeks.

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

Recent Events

On July 18, 2003, we entered into an agreement and plan of merger with Business Objects S.A. (“Business Objects”), several wholly owned subsidiaries of Business Objects and Seagate Software (Cayman) Holdings Corporation (“SSCH”). Pursuant to the agreement and plan of merger, as amended on August 29, 2003, we have agreed to be acquired by Business Objects for aggregate consideration to our stockholders (other than SSCH and stockholders who exercise appraisal rights under Delaware law) and common stockholders of SSCH, of approximately $300 million of cash, subject to adjustments, and a number of newly issued Business Objects ordinary shares or American Depository shares (“ADSs”) to be determined by a

formula based on our outstanding shares of common stock and the value of our outstanding options to acquire common stock at the time of closing. In addition, certain of our options will be converted into options to acquire Business Objects’ ADSs having a per option value equivalent to the cash and Business Objects’ shares to be received per share by holders of our common stock. The proposed acquisition is subject to the approval of Business Objects shareholders and receipt of various regulatory approvals. Assuming receipt of those approvals, we and Business Objects anticipate that the proposed acquisition will occur prior to the end of calendar 2003.

Sources of Revenue

Licensing revenues. We generate licensing revenues from the sale of licenses to use our software products. We price our products on a per user, processor or concurrent user basis. We generally do not sell licenses for our products on a time or subscription basis.

We currently operate with virtually no order backlog because our software products are typically delivered shortly after orders are received. Licensing revenues in any quarter are substantially dependent on orders booked and delivered in that quarter. Historically, we have recognized a substantial portion of our revenues in the last month of a quarter. As we sell more large-scale deployments of our products, orders may become larger and the impact of the longer sales cycle of these deployments may make our revenues harder to predict.

Maintenance, support and services revenues. Our maintenance revenues are derived from selling rights to existing customers to receive product upgrades, when and if we make them available. Our maintenance agreements generally have a term of one year. Customers may renew their maintenance agreements for additional consecutive periods. Our technical support revenues are derived from fees charged to customers for post-sales efforts. We sell technical support services under several different programs generally on a 12-month basis, on a fee for use, fixed price or a per incident basis.

Our professional services organization generates revenues for training and consulting to plan and execute the deployment of our products and accelerate end user adoption. In addition, we provide training to our customers’ employees to enhance their ability to utilize fully the features and functionality of the product purchased. We provide training and consulting services related to the use of our products and receive project- or time-based fees as a result.

Cost of Revenues

Our cost of licensing revenues consists primarily of materials, product packaging, distribution costs, related fulfillment personnel and third-party royalties. Our cost of maintenance, support and services revenues consist primarily of personnel and related overhead costs for technical support, training, consulting and the cost of materials delivered with product upgrades and enhancements.

Operating Expenses

Sales and marketing expenses include salaries, benefits, commissions and bonuses earned by sales and marketing personnel, advertising, product promotional campaigns, promotional materials, travel, facilities and other overhead costs. Research and development expenses are expensed as incurred and consist primarily of personnel and related costs associated with development of new products, the enhancement and localization of existing products, quality assurance and testing, as well as facilities and other overhead costs. General and administrative expenses consist primarily of personnel and related costs for finance, legal and human resources, as well as other administrative costs. During the three months ended October 3, 2003, operating

expenses included $3.5 million of costs related to our postponed initial public offering and $4.8 million of costs related to integration costs incurred related to the proposed acquisition by Business Objects.

Foreign Exchange

We conduct the majority of our business and collect the majority of our revenues in U.S. dollars, which is the currency in which we report our financial results. We also earn approximately 20% of our revenues in currencies other than the U.S. dollar including the euro, the British pound and the Canadian dollar. Our total revenues are affected by changes in the exchange rates for these currencies relative to the U.S. dollar.

We incur a significant portion of our expenses in Canadian dollars. Our total expenses fluctuate according to the changes in the exchange rate of the Canadian dollar relative to the U.S. dollar. With the exception of our Canadian dollar expenses, the impact of fluctuations in foreign exchange rates on our net operating income is nominal as our foreign denominated revenues substantially offset our foreign denominated expenses. For the three months ended October 3, 2003, a 10% increase in the exchange rate for the Canadian dollar would have increased our revenues by less than 1% but would have increased our expenses by approximately 4%. We recently implemented a partial hedging strategy for these exposures. We may experience substantial foreign exchange gains or losses due to the volatility of the Canadian dollar or other currencies compared to the U.S. dollar, to the extent our hedging activities are ineffective or to the extent that expenses are not covered under our partial hedging strategy.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and form the basis for the following discussion and analysis on critical accounting policies and estimates. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities during the course of preparing these consolidated financial statements. On a regular basis we evaluate our estimates and assumptions including but not limited to those related to recognition of revenues, allowance for doubtful accounts, contingencies and litigation, income taxes and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis of our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates.

The following critical accounting policies reflect our more significant estimates and assumptions we have used in the preparation of our consolidated financial statements:

Recognition of Revenues. We follow specific and detailed guidelines in measuring revenues; however, certain judgments and estimates affect the application of the policy. Revenues in any given period are difficult to predict and any shortfall in revenues or delay in recognizing revenues could cause operating results to vary significantly from quarter to quarter.

We sell licenses for software products separately or with services as part of a bundled arrangement. We sell maintenance and technical support contracts with licenses in a bundled arrangement or separately as a contract renewal. We provide training and consulting services as part of a bundled arrangement or separately based on a project or time and materials basis.

For each sales transaction, we determine whether evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is probable. If any of these criteria are not met, we defer recognition of revenues until such time as all of the criteria are met.

In bundled software arrangements that include rights to multiple software products and/or services, we recognize revenues using the residual method as prescribed by the Statement of Position 98-9 “Modification of SOP No. 97-2 Software Revenue Recognition with Respect to Certain Transactions.” Under the residual method, revenues are allocated to the undelivered elements based on vendor specific objective evidence of fair value of the undelivered elements and the residual amount of revenues are allocated to the delivered elements. Vendor specific objective evidence of the fair value of maintenance and technical support contracts is based on renewal rates as determined by the prices paid by our customers when maintenance is sold separately. Vendor specific objective evidence of fair value of training and consulting services is based upon daily rates as determined by the prices paid by our customers when these services are sold separately.

For all bundled arrangements, we assess whether the service elements of the arrangement are essential to the functionality of the other elements of the arrangement. When services are considered essential or the arrangement involves customization or modification of the software, both the license and service revenues under the arrangement are recognized under the percentage of completion method of contract accounting, based on cost of labor inputs. We accrue expected losses, if any, with respect to consulting services once they become known.

For those arrangements for which we have concluded that the service elements are not essential to the other elements of the arrangement, we use vendor specific objective evidence of fair value for the service elements to account for the arrangement using the residual method, regardless of any separate prices stated within the contract for each element. We recognize revenues allocable to maintenance and technical support contracts ratably over the term of the respective contracts, which are typically one year. Maintenance contracts include rights to unspecified software product enhancements and upgrades when and as we make them available. We recognize revenues allocable to training and consulting services as the services are performed.

For sales to distributors and resellers, we recognize revenues upon the delivery of our products to these parties. We reserve an amount equal to our estimate of all product held by such parties which are subject to rights of return and resale contingencies. We consider several factors in determining these estimates including historical experience, level of inventory in the distribution channels, nature of the product, fixed or determinable fees and payment terms. We reduce our revenues and the related receivables by this estimate.

For sales to original equipment manufacturers, we recognize revenues when the original equipment manufacturer (“OEM”) reports sales that have occurred to an end user customer, provided that collection is probable. Some OEM arrangements include the payment of an upfront arrangement fee which is deferred and recognized either ratably over the contractual period or when the OEM reports sales that have occurred to an end user customer, in accordance with the contractual terms. If we determine, through royalty audits or other means, that an OEM did not report revenues accurately, we attempt to reconcile the discrepancies and, if appropriate, record additional revenues upon resolution.

Allowance for Doubtful Accounts. The allowance for doubtful accounts, which is netted against our accounts receivable on our consolidated balance sheets, totaled $2.6 million as of October 3, 2003 and June 27, 2003. The allowance for doubtful accounts represents estimated losses resulting from the inability of our customers to make required payments. We base our estimates on specific identification of probable bad debts based on collection efforts, aging of accounts receivable, our historical experience including bad debt write-offs and other factors. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, we may be required to record additional allowances. If the data we use to calculate the allowance does not reflect the future ability to collect outstanding receivables, we may be required to record additional allowances and our future results of operations could be materially impacted. Our bad debt expenses are reflected in general and administrative expenses.

Contingencies and Litigation. We evaluate contingent liabilities including threatened or pending litigation in accordance with SFAS No. 5, “Accounting for Contingencies.” We assess the likelihood of any adverse judgments or outcomes to a potential claim or legal proceeding, as well as potential ranges of probable losses, when the outcome of the claims or proceedings are probable and estimable. A determination of the amount of reserves required, if any, for these contingencies is made after analysis of each matter. Because of uncertainties related to these matters, we base our accruals on the information available at the time. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Any revisions in the estimates of potential liabilities could have a material impact on our results of operations and financial position.

Income Taxes. We are subject to income taxes in both the United States and numerous foreign jurisdictions and we use estimates in determining our worldwide provision for income taxes. This process involves estimating actual current tax liabilities together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities that are recorded on the consolidated balance sheet. Our deferred tax assets consist primarily of net operating losses carried forward. We assess the likelihood that deferred tax assets will be recovered from future taxable income, and, a valuation allowance is recognized if it is more likely than not that some portion of the deferred tax assets will not be recognized. We provided a full valuation allowance against all our deferred tax assets as of June 28, 2002. During fiscal 2003 and the three months ended October 3, 2003, we released a portion of our valuation allowance against our deferred tax assets and have recorded current and long-term deferred tax assets at October 3, 2003 and September 27, 2002. To the extent we establish any valuation allowance against our deferred tax assets or change this valuation allowance in a period, we reflect the impact in the provision for (benefit from) income taxes in our consolidated statements of operations. Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgment that could become subject to audit by tax authorities in the ordinary course of business.

Stock-Based Compensation. We measure compensation expense for the majority of our stock option plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Because there has been no public market for our stock, the compensation committee previously determined the fair value of our common stock by considering a number of factors, including, but not limited to, contemporaneous valuations, our current financial performance and prospects for future growth and profitability, the status of product releases and product integration, the absence of a resale market for our common stock, the control position held by New SAC and comparisons to certain of our key metrics with similar metrics for comparable publicly traded companies, including measures of market capitalization based on revenue multiples, price-to-earnings ratios and operating margins. Commencing on July 18, 2003, the compensation committee determined our fair market value pursuant to the exchange ratios set forth in the agreement and plan of merger.

We have elected not to apply fair value-based accounting provided under SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”) because it requires the use of options valuation models, which in our opinion, do not provide a reliable measure of the fair value of our employee stock options.

As required by SFAS 123, as modified by SFAS No. 148 “Accounting for Stock Based Compensation –Transition and Disclosure – an Amendment of FASB Statement No. 123”, we provide pro forma disclosure of the effect of using the fair value-based method of measuring compensation expense. For purposes of the pro forma disclosure, we estimate the fair value of stock options issued to employees using the Black-Scholes option valuation model. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected life of options and our expected stock price volatility. Therefore, the estimated fair value of our employee stock options could vary significantly as a result of changes in the assumptions used.

Change in Control of Crystal Decisions

We became an indirect subsidiary of New SAC (“New SAC”) on November 22, 2000 when New SAC indirectly acquired 75,001,000, or 99.7% of our common stock outstanding at that date, under the terms of a stock purchase agreement with Old Seagate and Seagate Software Holdings. In the acquisition, New SAC purchased all of the operating assets of Old Seagate and its consolidated subsidiaries for cash and borrowings of $1.84 billion, including transaction costs of $25 million. This included Old Seagate’s rigid disc drive, storage area network, removable tape storage solutions businesses and operations, our common stock, and certain cash balances, but excluded the approximately 128 million shares of VERITAS Software Corporation (“VERITAS”) common stock then held by Seagate Software Holdings and certain of Old Seagate’s equity investments.

The New SAC transaction resulted in a change in control of our company. Under rules and regulations of the Securities and Exchange Commission, because more than 95% of our company was acquired and a change of control occurred, we restated all our assets and liabilities in our financial statements as of November 22, 2000 on a push down accounting basis, which involved the application of the purchase method of accounting to the financial statements of our company in the business combination. We recorded $75,000 and $270,000 less depreciation expense for the three months ended October 3, 2003 and September 27, 2002, respectively, than we would have had the push down adjustments not been made. There was no other impact on the financial results in the periods reported.

Results of Operations

The following table sets forth certain consolidated statement of operations data expressed as a percentage of total revenues for the periods indicated.


			For the three months ended

			October 3,			September 27,
			2003			2002

Revenues:
	Licensing			64	%		64	%
	Maintenance, support and services			36	%		36	%

		Total revenues		100	%		100	%

Cost of revenues:
	Licensing			1	%		3	%
	Maintenance, support and services			18	%		21	%

		Total cost of revenues		19	%		24	%

Gross margin				81	%		76	%
Operating expenses:
	Sales and marketing			36	%		37	%
	Research and development			15	%		14	%
	General and administrative			17	%		10	%

		Total operating expenses		68	%		61	%

Income from operations				13	%		15	%
Interest and other income, net				0	%		1	%

Income before income taxes				13	%		16	%
Provision for income taxes				(4	%)		(5	%)

Net income				9	%		11	%

Revenues

The following table sets forth information regarding the composition of our revenues and fiscal period-to-period changes (dollars in thousands):


		For the three months ended

		October 3,			Percent			September 27,
		2003			Change			2002

Licensing revenues		$	52,534			26	%	$	41,787
	Percentage of total revenues		64	%					64	%
Maintenance, support and services revenues		$	29,751			28	%	$	23,261
	Percentage of total revenues		36	%					36	%
	Total revenues	$	82,285			26	%	$	65,048

The majority of our revenues were derived from licensing fees for our products and we anticipate that licensing fees will continue to represent the majority of our revenues for the foreseeable future. Our revenues have increased as the result of the continued delivery of new products, better sales training, the increased size and productivity of our sales force, increased numbers of distributors and OEMs and our targeted marketing campaigns. Additionally, we continued to add new customers with our Crystal 8 and 9 suite offerings, which included major releases including Crystal Enterprise 8.5 in May 2002, Crystal Analysis 8.5 in June 2002, Crystal Reports 9.0 in August 2002 and Crystal Enterprise 9.0 in January 2003. Our Crystal Reports and

Crystal Enterprise products comprise over 95% of our total revenues. The total revenues from these products for the three months ended October 3, 2003 increased 36% over the three months ended September 27, 2002.

During the three months ended September 27, 2002, revenues from a distributor, Ingram Micro, Inc. (“Ingram”), totaled $6.2 million or 10% of total revenues. Revenues from Ingram represented less than 10% of total revenues for the three months ended October 3, 2003. No other customer or distributor accounted for 10% or more of our total revenues during these periods.

For the three months ended October 3, 2003, our revenues were $61.9 million, or 75% of total revenues, from customers in North America, $14.1 million, or 17% of total revenues, from customers in Europe, the Middle East and Africa and $6.3 million, or 8% of total revenues, from customers in the Asia Pacific region. For the three months ended September 27, 2002, our revenues were $48.1 million, or 74% of total revenues, from customers in North America, $12.6 million, or 19% of total revenues, from customers in Europe, the Middle East and Africa and $4.3 million, or 7% of total revenues, from customers in the Asia Pacific region. Total revenues increased across all consolidated regions for the three months ended October 3, 2003 from the three months ended September 27, 2002.

Licensing revenues. The increase in licensing revenues occurred across all sales channels and all consolidated regions, and was primarily the result of the increased size and productivity of our sales force and the addition of new customers purchasing through our direct channel.

Maintenance, support and services revenues. The increase in maintenance, support and services revenues was primarily attributable to increased maintenance fees associated with sales of new licenses of our products and increased technical support revenues. Because many of our customers renew maintenance and technical support each year, increased maintenance and technical support revenues are generated from the cumulative growth in our customer base.

Cost of Revenues

The following table sets forth information regarding the composition of our cost of revenues and fiscal period-to-period changes (dollars in thousands):


		For the three months ended

		October 3,			Percent			September 27,
		2003			Change			2002

Cost of licensing revenues		$	1,329			(23	%)	$	1,732
	Percentage of licensing revenues		3	%					4	%
Cost of maintenance, support and services revenues		$	14,558			5	%	$	13,907
	Percentage of maintenance, support and services revenues		49	%					60	%
Total cost of revenues		$	15,887			2	%	$	15,639
	Percentage of total revenues		19	%					24	%

The absolute dollar decrease in cost of licensing revenues was primarily due to the absence of the shipment of a major product release in the three months ended October 3, 2003 compared to the costs associated with releasing Crystal Reports 9.0 in August 2002. In addition, we changed our method of distribution for manuals, which reduced costs. Cost of licensing revenues will vary depending on the volume, distribution method and mix of software licenses shipped. Cost of maintenance, support and services revenues increased as we continued to expand our customer support and professional services organizations to meet the demands of our growing customer base. These costs included increases in salary and benefit costs of $1.6 million, associated with an increase of over 50 employees. This increase was partially offset by cost

control initiatives and the absence of certain costs that were incurred in the three months ended September 27, 2002 in connection with hiring of key personnel.

Gross Margin

Our gross profit as a percentage of total revenues, or gross margin, increased from 76% for the three months ended September 27, 2002 to 81% for the three months ended October 3, 2003. Our gross margin from licensing revenues increased from 96% to 97% and our gross margin from maintenance, support and services revenues increased from 40% to 51%. The increase in maintenance, support and services margins resulted primarily from an increase in margins in maintenance, consulting and training. Our support and services margins are impacted by the rate of utilization of our personnel and personnel costs relating to the use of our employees versus outside contractors, who are generally more expensive than our personnel. During the three months ended October 3, 2003, the use of outside services by our professional services organization decreased by $1.1 million.

Operating Expenses

The following table sets forth information regarding the composition of our operating expenses and fiscal period-to-period changes (dollars in thousands):


		For the three months ended

		October 3,			Percent			September 27,
		2003			Change			2002

Sales and marketing		$	29,688			24	%	$	23,900
	Percentage of total revenues		36	%					37	%
Research and development		$	12,173			29	%	$	9,403
	Percentage of total revenues		15	%					14	%
General and administrative		$	14,315			118	%	$	6,580
	Percentage of total revenues		17	%					10	%
Total operating expenses		$	56,176			41	%	$	39,883
	Percentage of total revenues		68	%					61	%

Sales and Marketing. The increase in sales expenses in absolute dollars was primarily associated with increased salary and benefits expense of $4.3 million related to an overall increase in our sales force and the resultant higher total commissions. In addition, ancillary costs such as travel and entertainment increased by $632,000; however, these were offset by $619,000 in lower advertising and promotion costs. In addition, increases in facilities and overhead costs accounted for $1.5 million of the increase. The decrease in our sales and marketing expenses as a percentage of revenues resulted primarily from increased productivity in our direct sales force.

Research and Development. The increase in research and development expenses in absolute dollars primarily resulted from increased salary and benefit costs of $1.2 million associated with increased headcount and increased outsourcing costs of $274,000. In addition, allocations for increases in facilities and overhead costs accounted for $993,000 of the increase. We expect research and development expenses to increase in absolute dollars in future periods as we invest in new products and improvements to our existing products.

General and Administrative. The increase in general and administrative expenses in absolute dollars and as a percentage of total revenues was primarily due to increases in salary and benefits expense of $1.1 million relating to increased staffing to support our growth, the write-off of $3.5 million of costs related to our postponed initial public offering and $4.6 million of the $4.8 million in costs associated with the proposed

acquisition by Business Objects. Professional fees not included in either of these groups, decreased by approximately $915,000 due to decreased legal accruals and the absence of certain relocation fees.

Net interest and other income, net.

Net interest and other income, net comprised the following (dollars in thousands):


		For the three months ended

		October 3,		Percent			September 27,
		2003		Change			2002

Net interest income		$	451		42	%	$	318
Other income			138		3	%		134

	Total interest and other income, net	$	589				$	452

Net interest income fluctuates depending on movements in the general level of interest rates, our average cash and available-for-sale securities balances and the interest rates applied thereon. The increase in net interest income is primarily the result of increased cash and available-for-sale securities balances.

Other income (expense) was largely comprised of net foreign exchange gains or losses, which represent the impact of foreign currency fluctuations on the translation of foreign currency transactions and quarter end balances into U.S. dollars and varies depending upon movements in currency exchange rates. During the three months ended October 3, 2003 and September 27, 2002, respectively, we realized a net foreign currency gain of $61,000 and $124,000.

Income Taxes


		For the three months ended

		October 3,			September 27,
		2003			2002

		(dollars in thousands)
Provision for income taxes		$	3,088		$	2,895
	Effective tax rate		29	%		29	%

Liquidity and Capital Resources


	October 3, 2003		June 27, 2003		Percent Change

	(dollars in thousands)
Cash and available-for-sale securities*	$	121,368	$	107,918		12	%
Working capital		55,942		49,762		12	%

* Includes cash equivalents and short and long-term investments and excludes restricted cash of approximately $2.0 million in each period.

The majority of our cash and available-for-sale securities are held in U.S. dollar denominated bank deposits or highly liquid investments in accordance with our investment policy. The remaining portion of our cash balance is denominated in the local currencies of our foreign operations, including Canadian dollars, British pounds, Japanese yen, euros and other currencies. All of our cash is maintained in accounts with high credit quality financial institutions and our available-for-sale securities are maintained in highly rated instruments.


	For the three months ended

	October 3, 2003			September 27, 2002			Percent Change

Net cash provided by operating activities	$	15,904		$	5,426			193	%
Net cash used in investing activities		(1,511	)		(13,792	)		(89	%)
Net cash provided by (used in) financing activities		545			(1,727	)		132	%

Operating Activities. Our principal source of liquidity is our cash and available-for-sale securities, as well as the cash we generate from operations. We continued to record more revenues year-over-year, including deferred revenues. The increase in cash provided by operating activities was primarily due to the higher net income as a result of increased revenues over the comparative period, which in addition to strong collection efforts and one additional week during the quarter have resulted in additional collected accounts receivable. Our income tax payable liability has continued to increase without an offsetting decrease in cash. These increases are offset by a $3.9 million decrease in accrued employee compensation, which was the result of the timing of compensation payments during the quarter.

During the three months ended October 3, 2003, we expensed approximately $3.5 million of costs related to our postponed initial public offering. The majority of the initial public offering costs were incurred in previous periods and set up as prepaid expenses until this quarter. We were required to expense these costs during the three months ended October 3, 2003 as at this date it was estimated that our initial public offering would be postponed for at least 90 days.

In addition, we expensed approximately $4.8 million in costs associated with the proposed merger with Business Objects. The majority of the integration costs incurred related to professional fees for legal, accounting and tax services and were either paid or accrued during the three months ended October 3, 2003.

In fiscal 2003, we began an extensive implementation of an enterprise resource planning system (“ERP”) for our North America and Asia Pacific regions. We are in the process of implementing the system in the European region and expect to have the entire implementation completed by the end of calendar 2003. To date, we have incurred approximately $7.3 million of expenditures in connection with the implementation of our global ERP. The implementation of the ERP and the adjustment of our procedures to adapt to the new system have been slower and more costly than we anticipated.

Investing Activities. Investing activities for the three months ended October 3, 2003 included property and equipment purchases, the majority of which were the result of costs associated with information technology and telecommunication system upgrades and build outs, costs associated with our ERP implementation in Europe and other computer purchases. During the three months ended October 3, 2003, no short-term or long-term investment securities were purchased. We received $1.5 million on maturity of certain short-term investments. Investing activities for the three months ended September 27, 2002, were primarily for the purchase of computer equipment and costs associated with the implementation of our global ERP system. Investing activities for the three months ended September 27, 2002 also included the use of funds for the purchase of short-term and long-term investments totaling $8.2 million.

Financing Activities. We receive cash payments on the issuance of common stock on the exercise of stock options by our employees and directors. Cash received from this source was $552,000 and $273,000 for the three months ended October 3, 2003 and September 27, 2002, respectively.

During the three months ended September 27, 2002, our Canadian subsidiary deposited $2.0 million into a guaranteed investment certificate to secure an overdraft credit facility. The balance and interest earned thereon is classified as restricted cash.

Known Contractual Obligations

There have been no significant changes in the operating lease commitments for our facilities since June 27, 2003.

In May 2003, we agreed to pledge $1.0 million to the Community Foundation of Silicon Valley, which we accrued and expensed in fiscal 2003 and paid on June 30, 2003. We also agreed to match employee contributions to the Community Foundation of Silicon Valley up to 1% of our prior fiscal year net income before interest, taxes and amortization. The amount accrued to account for our matching contribution for fiscal 2003 was approximately $220,000. We accrued and expensed this amount in the three months ended June 27, 2003 and paid this amount in July 2003. The maximum matching contribution for fiscal 2004 is approximately $453,000. During the three months ended October 3, 2003, we did not accrue or pay any material amount as our matching contribution.

Certain shares issued and option grants made under our 1999 stock option plan to residents of California, Maryland and New York may not have complied with all applicable securities laws of those states. Accordingly, we made a rescission offer to these stockholders and optionees which will allow the holders to elect, during a limited period of time, to return their shares or options to us in return for a payment equal to their purchase price or 20% of their aggregate exercise price, respectively, plus any applicable interest. The rescission offer was opened on November 4, 2003 and expires at 5:00 p.m. Pacific time on December 5, 2003. Approximately 327,970 outstanding shares of our common stock and approximately 1,439,792 outstanding options are subject to the rescission offer. The shares and options had purchase and exercise prices ranging from $4.00 to $11.82 per share. In the event that all of the persons eligible to participate in the rescission offer accepted our offer, we would make total payments of approximately $3.4 million, which we would fund from our existing cash balances.

As described in Note 17 to the consolidated financial statements, we entered into either employment contracts, change-of-control arrangements or separation agreements with Jonathan Judge and certain of our executives that will require various payments at varying times in the future. No charges have been recorded in the results of operations, as the change-of-control has not yet occurred.

Upon the successful completion of the proposed acquisition by Business Objects, we agreed to pay transaction fees based on a formula and to reimburse certain expenses to our financial advisors contingent upon completion of the Merger. The minimum amount of such fees is estimated to be $6.0 million, although the final amount has yet to be determined. Accordingly, these amounts once they become known will be recorded in the consolidated statements upon completion of the Merger. Other costs associated with the merger are expensed as incurred.

Financing Agreements

In October 2002, we executed an agreement with Comerica Bank-California (“Comerica”) for a $15.0 million revolving line of credit. The revolving line provides for interest to be calculated at Comerica’s U.S. prime rate or Comerica’s LIBOR plus 2.5% per annum. Borrowings under the revolving line are limited to 80% of eligible accounts receivable, with an additional $2.0 million available in any month in which we maintain $15.0 million of our investment accounts with Comerica and some of its affiliates. On September 30, 2004, any outstanding principal and interest under the line of credit will be immediately due and payable. Upon notice to Comerica and without penalty, we may terminate the agreement at any time provided that all obligations have been paid in full. The revolving line is collateralized by substantially all of our personal property, excluding our intellectual property. The agreement also required our U.S. and Canadian subsidiaries to pledge all of their assets in support of our obligations under the agreement. We pledged shares of most of our subsidiaries.

The terms of the revolving line require us to maintain certain quarterly financial covenants related to liquidity, minimum tangible net worth and quarterly free cash flow. The agreement restricts certain of our activities. We are restricted from selling, leasing or otherwise disposing of any part of our business or property under most circumstances. In addition, the agreement places restrictions on entering into arrangements which will result in a change of control, places restrictions on our ability to pay dividends and restricts our ability to incur other forms of indebtedness. We are also required to maintain at least an aggregate of $10.0 million in investment accounts with Comerica and some of its affiliates. No amounts were outstanding under the revolving line at October 3, 2003, June 27, 2003 or at the date of this document. As of October 3, 2003, we maintained $65.4 million of our cash equivalents balance with Comerica.

Our Canadian subsidiary entered into an overdraft credit facility with The Bank of Nova Scotia (the “Bank”) during fiscal 2002 whereby the Bank will provide up to Canadian $2.0 million credit for certain overdrafts plus a foreign exchange forward trading line generally supporting notional contracts in the range of $4.0 million to $6.0 million. Any overdraft balances are subject to interest computed at the Bank’s prime lending rate payable monthly. At October 3, 2003, there was no balance or contract outstanding under this facility. On September 26, 2002, our Canadian subsidiary placed $2.0 million on deposit with the Bank as a general hypothecation to the overdraft credit facility. The funds held and the interest earned thereon is classified as restricted cash on our consolidated balance sheets. During the three months ended October 3, 2003, we entered into spot transactions and also settled forward contracts that were in existence before the quarter commenced.

Our future liquidity and capital requirements will depend on numerous factors, including:

•

the amount and timing of our revenues;

•

the extent to which our existing and new products gain market acceptance;

•

the extent to which customers continue to renew maintenance agreements;

•

the extent of required and planned capital expenditures required to support our current operations and growth; and

•

available borrowings under future credit arrangements, if any.

We believe that our current cash, cash equivalents, short-term investments and the cash generated from our operations, the overdraft agreement with The Bank of Nova Scotia, and the available borrowings under the revolving line of credit with Comerica will be sufficient to meet our operating and capital requirements until the close date of the proposed acquisition of our Company by Business Objects.

Should the proposed merger with Business Objects not close, upon the occurrence of certain events, we may be required to pay Business Objects a termination fee equal to $21 million. In addition, under certain circumstances as set forth in the merger agreement, Business Objects may be required to pay us a termination fee of $21 million. In addition, some of the costs related to the proposed acquisition, such as legal, accounting, financial printing and a portion of the fees of our financial advisor must be paid even if the acquisition is not completed. In the three months ended October 3, 2003, we incurred and expensed $4.8 million of costs related to integration related activities for the proposed Business Objects acquisition.

Factors Affecting our Future Operating Results

Risks Related to the Proposed Acquisition

The fair market value of the consideration will fluctuate and is not subject to adjustment.

Upon completion of the acquisition, each share of our common stock, other than those held by Seagate Software (Cayman) Holdings or persons who exercise appraisal rights under Delaware law, and each share of Seagate Software (Cayman) Holdings common stock, will receive a combination of cash and Business Objects’ shares, either in the form of ordinary shares or ADSs. The market price of Business Objects’ shares may fluctuate substantially both prior to and following completion of the acquisition, which could impact the aggregate value of the proposed acquisition. The terms of the merger agreement do not provide for any adjustment in the number of Business Objects’ shares to be issued in the acquisition as a result of such fluctuations. In addition, we are not permitted to withdraw from the acquisition or resolicit the vote of our stockholders solely because of changes in the market price of Business Objects’ shares. The price of Business Objects’ shares is subject to general price fluctuations in the market for publicly traded equity securities, and the price of Business Objects’ shares has experienced significant volatility in the past. We cannot predict or give any assurances as to the respective market prices of Business Objects’ shares at any time before or after the closing of the acquisition.

The announcement of the acquisition may have a negative impact on our relationships with customers and our earnings.

The public announcement of the acquisition may have a material and adverse effect on our revenues and profitability in the short term. In particular, prospective customers could be reluctant to purchase licenses for our products or our services if they are uncertain about the strategic direction of the combined company, the continuation of our product offerings or the willingness of the combined company to support and maintain existing products. Uncertainty created by the announcement of the acquisition may cause one large customer, or a large number of smaller customers, to delay their purchase decisions until the completion of the acquisition, which could cause our quarterly financial results to be significantly below the expectations of market analysts, which could cause a reduction in their expectations of the results of operations of the combined company and the market price of Business Objects’ shares.

The announcement of the acquisition may cause other relationships to be impaired.

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

Regardless of whether the acquisition occurs, we will incur costs that affect our profitability.

We will incur direct transaction costs in connection with the proposed acquisition, which will be expensed in the quarters in which they are incurred, and which will reduce our earnings for that period. A substantial amount of these costs will be incurred whether or not the acquisition is completed. In addition, because we have elected to proceed with the proposed acquisition in lieu of our previously announced initial public offering, we expensed approximately $3.5 million of legal, accounting and investment banking fees

associated with the previously proposed initial public offering in the three months ended October 3, 2003 that would not have otherwise been recorded as current expenses.

In the quarter in which the acquisition is completed or in the following quarters, we believe that the combined company may incur charges to operations, such as costs associated with combining the businesses of the two companies, which currently cannot be estimated reasonably to reflect costs associated with integrating our company with Business Objects. We cannot assure you that the combined company will not incur additional material charges in subsequent quarters to reflect additional costs associated with the acquisition. In addition, a portion of the acquisition related costs may be included in the purchase price and capitalized as an element of goodwill. Goodwill is required to be tested for impairment at least annually and the combined company will be required to record a charge to earnings in any period that impairment of goodwill is determined.

Business Objects’ business is different than ours and, as a result, the market prices of Business Objects ADSs may fluctuate in unexpected ways.

When the acquisition is completed, our stockholders will become holders of Business Objects’ shares. Business Objects’ business differs from ours and Business Objects’ results of operations, as well as the price of Business Objects’ shares, may be affected by factors different from those affecting our results of operations.

We may face negative consequences if the acquisition is not completed.

If the proposed acquisition is not completed, we may be subject to the following material risks, among others:

•

upon the occurrence of certain events, we may be required to pay Business Objects a termination fee equal to $21 million;

•

we may not be able to undertake our proposed initial public offering in the short-term and our stockholders and holders of options to acquire our common stock may not have a public trading market in which to sell our common stock;

•

market analysts’ estimates of our valuation may decline due to uncertainty regarding our stand-alone prospects;

•

some costs related to the proposed acquisition, such as legal, accounting, financial printing and a portion of the fees of our financial advisor, must be paid even if the acquisition is not completed; and

•

the diversion of management’s attention from our day to day business, the uncertainty for employees and the unavoidable disruption to relationships with current and potential customers, original equipment manufacturers, distributors and other strategic partners during the period before the closing of the proposed acquisition may make it difficult for us to regain our financial and competitive position if the acquisition does not occur.

Further, if the acquisition agreement is terminated and our board of directors determines to seek another acquisition or business combination, we may not be able to find a partner willing to pay an equivalent or more attractive price than that which would be paid in the proposed acquisition by Business Objects.

In addition, while the acquisition agreement is in effect and subject to certain limited exceptions, we are generally prohibited from initiating, soliciting, knowingly encouraging or knowingly inducing or participating in any discussions regarding a proposal to enter into any business combination with any party other than Business Objects.

Risks Related to Our Business that Will Impact Us if the
Proposed Acquisition Does Not Occur

We experience quarterly fluctuations in our results of operations due to a number of factors, including changes in demand for our products and changes in the mix of our revenues, which could decrease our profitability.

Our revenues have been and in the future may continue to be subject to significant quarterly fluctuations as a result of a number of factors including:

•

the size and timing of orders from and delivery of products to major customers;

•

the mix of products and services of, and the amount of customization required for, our customer orders, which may delay the timing of our recognition of revenues;

•

delay in customer purchasing decisions due to anticipated product upgrades or new products;

•

smaller than anticipated increases in revenues from the introduction of new products;

•

general weakening of the economy resulting in a decrease in the overall demand for computer software and services;

•

effect of competitors on our market, including Microsoft Corporation’s recent beta release of Reporting Services, a competing report product, and its recent announcement to release Reporting Services as an add on to SQL Server 2000;

•

seasonal factors, potentially resulting in slower sales in our first and third fiscal quarters; and,

•

disruption and delay of business due to man-made or natural disasters, including health concerns such as Severe Acute Respiratory Syndrome, or SARS.

In addition, our expenses have been and, in the future, may continue to be subject to significant quarterly fluctuations as a result of a number of factors including:

•

the impact of changes in foreign exchange rates on our expenses and the cost of our products;

•

the degree of utilization of our consulting personnel and third party consulting services;

•

the timing and amount of our capital expenditures;

•

the cost of improving or maintaining our systems;

•

the use of outside professional services, such as for internal improvement initiatives, litigation and expansion into new foreign markets;

•

timing of product development and new product initiatives;

•

accruals for any litigation settlement amounts; and

•

the timing of recruiting and relocation costs, especially those for senior officers.

Fluctuations in our revenues and expenses may cause our quarterly results to be unpredictable, which may cause our stock price to decline.

We cannot assure you that we will sustain or increase our profitability.

While we achieved profitability in fiscal 2003 and in the three months ended October 3, 2003, we cannot assure you that we will be able to sustain or increase profitability on a quarterly or annual basis. We achieved net income of $33.5 million for fiscal 2003, with net income of $7.1 million for the three months ended September 27, 2002. We achieved net income of $7.7 million for the three months ended October 3, 2003. We expect our operating expenses to increase as our business grows and we anticipate that we will continue to make investments in our business. Therefore, our results of operations will be harmed if our revenues do

not increase at a rate equal to or greater than increases in our expenses or are insufficient for us to sustain profitability.

Our sales forecasts are only estimates and if we overestimate revenues, we may be unable to reduce our expenses to avoid or minimize a negative impact on our quarterly results of operations.

Our revenues, particularly our licensing revenues which represent a majority of our revenues, are difficult to forecast and may fluctuate significantly from quarter to quarter. Our licensing revenues represented 64% of our total revenues for each of the three months ended October 3, 2003 and September 27, 2002. While analysis of anticipated sales trends provides us with guidance in business planning and budgeting, our estimates may not correlate with actual revenues in a particular quarter or over a longer period of time. Variations in the rate and timing of conversion of our sales prospects into actual licensing revenues could cause us to plan or budget inaccurately and those variations could adversely affect our financial results. In particular, delays, reductions in amount or cancellation of customers’ purchases would adversely affect the overall level and timing of our revenues, and our business, results of operations and financial condition could be harmed.

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

We have a long sales cycle for large-scale deployments of our products, which could make it difficult for us to plan our expenses and forecast our revenues.

Although we are not currently dependent on large-scale deployments of our products for a substantial portion of our revenues, we expect large-scale deployments to increase in number in the future. To date, potential customers who are contemplating significant deployments of our products have typically invested substantial time, money and other resources and involved many people in the decision to license our software products. As a result, we may experience a six to 12 month delay between the first contact with a potential customer and the placement of an order while the potential customer completes a product evaluation and seeks internal approval for the purchase. During this long sales cycle, events may occur that could affect the size, timing or completion of the order. For example, the potential customer’s budget and purchasing priorities may change, the economy may experience a further downturn or new competing technology may enter the marketplace. We may lose significant sales or experience reduced sales as the result of our long sales cycle, which would reduce our revenues.

We use our distributors and other resellers to market and distribute our products and, if we fail to maintain and expand these sales channels, we may not be able to maintain or increase our revenues.

Sales to a small number of distributors and other resellers generate a significant amount of our revenues. Our indirect sales accounted for 34% and 32% of our total revenues for the three months ended October 3, 2003 and September 27, 2002, respectively. Our sales to Ingram Micro, Inc., a distributor, accounted for less than 10% of our total revenues for the three months ended October 3, 2003 and 10% of our total revenues for the three months ended September 27, 2002. If Ingram Micro or our other distributors were to materially reduce their purchases from us, our business, financial condition and results of operations would suffer unless we substantially increase sales to other distributors or other resellers or through other sales channels.

Our distributors and other resellers decide whether to include our products among those that they sell and generally carry and sell product lines that are competitive with ours. Because distributors and other resellers are generally not required to make a specified level of purchases from us, we cannot be sure that they will

prioritize selling our products. Thus, our relationships with these distributors and other resellers depend upon their continued cooperation. We rely on our distributors and other resellers to sell our products, report the results of these sales to us and to provide services to certain of the end user customers of our products. If the distributors and other resellers do not sell our products, report sales accurately and in a timely manner and adequately service those end user customers, our revenues and the adoption rates of our products could be harmed.

Substantially all of our revenues are derived from two of our products and a decline in sales for those products could substantially reduce our revenues and affect our profitability.

We derive substantially all of our revenues from our Crystal Reports and Crystal Enterprise products and related services. Revenues from these product lines account for, and are expected to continue to account for, substantially all of our revenues for the foreseeable future. We may not be able to replace revenues from these products and services if they were to decline. Accordingly, our future results of operations will depend on maintaining and increasing customer purchases of these products and services and maintaining or increasing the average selling prices of these products.

We face significant exposure to foreign exchange rate fluctuations and if we were to experience a substantial fluctuation, our profitability may change in unpredictable ways outside of our control.

Because we have substantial research and development, sales operations and administration in Canada and the United Kingdom, we pay a substantial portion of our expenses in the Canadian dollar and the British pound but receive a substantial majority of our revenues in U.S. dollars. Approximately 80% of our revenues were denominated in U.S. dollars, 6% in British pounds and less than 5% in Canadian dollars for the three months ended October 3, 2003. Approximately 38% of our total monetary expenses were denominated in U.S. dollars, 12% in British pounds and 38% in Canadian dollars for the three months ended October 3, 2003. These percentages fluctuate with exchange rates, business operating changes and cash flow versus expense patterns. Even a relatively minor change in exchange rates could have a material impact on our expenses and results of operations. For the three months ended October 3, 2003, a 10% increase in the exchange rate of the Canadian dollar relative to the U.S. dollar would have increased our revenues by less than 1% but would have increased our expenses by approximately 4%. We recently implemented a partial hedging strategy for these exposures. Although we recently began hedging, we cannot be certain that our efforts to minimize this risk will be effective. We may also experience substantial foreign exchange gains or losses due to the volatility of other currencies compared to the U.S. dollar.

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

Large, enterprise-wide deployments of our products require greater technical stability, performance and support than we have typically had to provide in the past. We may have difficulty managing the timeliness of these deployments and our internal allocation of personnel and resources. Any difficulty could cause us to lose existing customers, face potential customer disputes or limit the number of new customers who purchase our products, which could cause a decline in or delay in recognition of revenues or rate of growth, and could cause us to increase our research and development and technical support costs, either of which could impact our profitability.

If our products are not compatible with various operating systems, we may not be able to sell products to potential customers.

Our products are used in combination with various operating systems. Our future success depends on our ability to continue to support widely-used operating systems. Our applications run primarily on the Microsoft operating systems. Therefore, our ability to increase sales currently depends on the continued acceptance of Microsoft’s operating system products. In addition, we have increased our product development efforts for the Unix platform. We also expect to develop additional versions of our products for HP-UX, Linux and other non-Microsoft-based operating systems. If we are unable to develop and market products that support non- Microsoft platforms on a timely and cost-effective basis, our sales will decrease and our results of operations will be harmed.

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

We have strategic relationships with Microsoft and SAP that enable us to bundle our products with those of Microsoft and SAP, and we are also developing certain utilities and products to be a part of Microsoft’s and SAP’s products. We have limited control, if any, as to whether these companies will devote adequate resources to promoting and selling our products. If either Microsoft or SAP reduces its efforts on our behalf or discontinues its relationship with us and instead develops a relationship with one of our competitors or designs its own competing business intelligence software, our revenues and operating results may be reduced.

We will not be able to maintain our sales growth if we do not attract, retain and motivate qualified sales personnel.

We depend on our direct sales force for a majority of our sales and have made significant expenditures in recent years to expand our sales force. Our future success will depend in part upon the expansion and productivity of our sales personnel. We continue to experience voluntary and involuntary attrition in our direct sales force and need to hire replacements. As a result, our ability to continue to attract, integrate, train, motivate and retain new sales personnel will also affect our success. We face intense competition for sales personnel in the software industry, and we cannot be sure that we will be successful in hiring and retaining these personnel in accordance with our plans. We cannot assure you that sales force turnover will not be significant in the future. Even if we hire and train a sufficient number of sales personnel, we cannot be sure that we will generate enough additional revenues to exceed the cost of the new personnel.

Undetected product errors or defects could result in the loss of revenues, delayed market acceptance of our products or claims against us.

Software products as complex as those we offer frequently contain undetected errors, defects, failures or viruses especially when first introduced or when new versions or enhancements are released or are configured to individual customer systems. Despite product testing, our products, or third party products that we incorporate into ours, may contain undetected errors, defects or viruses that could:

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require us to make extensive changes to our products which could increase our research and development expenses;

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expose us to claims for damages;

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require us to incur additional technical support costs;

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cause a negative customer reaction that could reduce future sales;

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generate negative publicity regarding us and our products; or

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result in customers’ delaying their purchase until the errors or defects have been remedied.

Any of these occurrences could have a material adverse effect upon our business, results of operations or financial condition.

Risks Related to Our Industry and Competition that Will Impact Us if the
Proposed Acquisition Does Not Occur

If the market in which we sell business intelligence software does not grow as we anticipate, our revenues may not grow.

Our market is still emerging, and our success depends upon its growth. Our potential customers may:

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not fully value the benefits of using business intelligence products;

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not achieve favorable results using business intelligence products;

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experience technical difficulty in implementing business intelligence products; or

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use alternative methods to solve the problems addressed by business intelligence software.

These factors may cause the market for business intelligence software not to grow as quickly or become as large as we anticipate, which may reduce the growth of our revenues.

If we do not compete effectively with companies selling business intelligence products, our revenues may not grow and could decline.

We have experienced, and expect to continue to experience, intense competition from a number of business intelligence software companies. We compete principally with vendors of integrated query, reporting, analysis and information delivery software such as Actuate Corporation, Brio Software, Inc., Business Objects, Cognos Incorporated, Hummingbird Ltd., Information Builders, Inc. and MicroStrategy Incorporated. Our competitors may announce new products, services or enhancements that better meet the needs of customers or changing industry standards. Increased competition may cause price reductions and reduce gross margins and loss of market share, any of which could have a material adverse effect on our business, results of operations and financial condition.

Additionally, we face competition from many companies with whom we have strategic relationships, including Baan Company N.V., Hyperion Solutions Corporation, International Business Machines Corporation, Lawson Software, Inc., Microsoft, PeopleSoft, Inc. and SAP, all of whom offer business intelligence products that compete with ours. For example, in February 2003, Microsoft announced that it intends to extend its SQL Server business intelligence platform to include reporting capabilities, and in October 2003 released a public beta of the Reporting Services product, which competes directly with both our Crystal Reports and Crystal Analysis products. In June 2003, Microsoft announced that it anticipates releasing Reporting Services as an add on to SQL Server 2000 by the end of calendar 2003. These companies could bundle their business intelligence software with their other products at little or no cost, giving them a potential competitive advantage over us. Some of the companies that bundle our products with theirs could elect not to do so in the future, which could have a material adverse effect on our business, results of operations and financial condition. These other companies could also invest additional resources in existing products or develop and market additional business intelligence products that compete directly with ours, which could harm our business, results of operations and financial condition.

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

If one or more of our competitors were to merge or partner with another of our competitors, the change in the competitive landscape could adversely affect our ability to compete effectively. For example, Hyperion recently acquired Brio Software, Inc. Our competitors may also establish or strengthen cooperative relationships with our current or future distributors, resellers, original equipment manufacturers or other parties with whom we have relationships, thereby limiting our ability to sell through these channels and reducing promotion of our products. Disruptions in our business caused by these events could reduce our revenues.

Because some of our competitors have significantly greater financial, technical, sales and marketing resources than we have and pre-existing relationships with many of our potential customers, we might not be able to sustain profitability or gain additional market share.

Some of our competitors have significantly greater financial, technical, sales and marketing resources and greater name recognition than we do. These competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion, sale and support of their products. In addition, some of our competitors may be more successful than we are in attracting and retaining customers. This competition could harm our ability to sell products and services, which may lead to lower prices for our products, reduced revenues and reduced gross margins.

If the current economic slowdown continues and our customers reduce, delay or cancel purchases of our products and services, our results of operations will be harmed.

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

Technological advances and evolving industry standards could reduce our future product sales, which could cause our revenues to grow more slowly or decline.

The markets for our products are characterized by rapidly changing technology, changing customer needs, evolving industry standards and frequent new product introductions and enhancements. The emergence of new industry standards in related fields may adversely affect the demand for our products. This could happen, for example, if new standards and technologies emerged that were incompatible with customer deployments of our applications. We cannot assure you that we will succeed in developing and marketing product enhancements or new products that respond to technological change, new industry standards, changed customer requirements or competitive products on a timely and cost-effective basis. Additionally, even if we are able to develop new products and product enhancements, we cannot assure you that they will achieve market acceptance.

Due to the length of our product development cycle, we may fail to react rapidly to market forces, which would hinder our ability to meet market demands.

Business intelligence software is inherently complex, and it generally takes a long time to develop and test major new products and product enhancements. Our future success will depend on our ability to design, develop, test and support new software products and enhancements on a timely and cost-effective basis. If we are unable to identify a shift in market demand quickly enough, we may not be able to develop products to meet the new demand in a timely manner, or at all. Our failure to respond successfully to changing market conditions could have a negative effect on our business, results of operations and financial condition.

Risks Related to Our Intellectual Property that Will Impact Us if the
Proposed Acquisition Does Not Occur

If we fail to protect our intellectual property rights, our customers or competitors might be able to use our technologies to develop their own products, which could weaken our competitive position or reduce our revenues.

Our success is heavily dependent on our proprietary technology, primarily software. It is difficult to protect and enforce our intellectual property rights and protect third parties from infringing on our products for a number of reasons, including:

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applicable laws and our contracts and procedures provide only limited protection to our intellectual property rights;

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third parties may develop similar technology independently;

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policing unauthorized copying or use of our products is difficult and expensive;

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software piracy is a persistent problem in the software industry and for us;

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our patents may be challenged, invalidated or circumvented, and, therefore, the rights granted under these patents might not provide us with competitive advantages; and

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our shrink-wrap licenses may be unenforceable under the laws of certain jurisdictions.

In addition, the laws of many countries do not protect our proprietary rights to as great an extent as those of the United States. We believe that effective protection of intellectual property rights is unavailable or limited in certain foreign countries, creating an increased risk of potential loss of proprietary information due to piracy and misappropriation. For example, we recently began to conduct business in the People’s Republic of China and intend to outsource some of our operations to India where we believe there is an increased risk that we may not be able to enforce our contractual and intellectual property rights. If we fail to protect our intellectual property rights, our business may be harmed.

Our results of operations may decline if we were subject to a protracted infringement claim or one that results in a significant damage award.

From time to time, companies in our industry receive claims that their products or business infringe the intellectual property of third parties. Our competitors or other third parties may challenge the validity or scope of our patents, copyrights and trademarks. We believe that software product developers will be increasingly subject to claims of infringement as the functionality of products in our market overlaps. A claim may also be made relating to technology that we acquired from our predecessors or third parties. If we were subject to a claim of infringement, regardless of the merit of the claim or our defenses, the claim could:

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require costly litigation to resolve;

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absorb significant management time;

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cause us to enter into unfavorable royalty or license agreements;

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cause us to cease selling our products;

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require us to indemnify our customers, distributors, original equipment manufacturers or other resellers; or

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require us to expend additional development resources to redesign our products.

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

In addition, from time to time there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products.

We use a limited amount of open source software in our products and may use more open source software in the future. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. Any of this litigation could be costly for us to defend, have a negative effect on our results of operations and financial condition or require us to devote additional research and development resources to change our products.

The inability to obtain third-party licenses required to develop our products could require us to obtain substitute technology of inferior quality or performance standards or at a greater cost, which could reduce our revenues or increase our cost of revenues.

We license certain technologies from third parties to be used in our products, generally on a nonexclusive basis. For example, we have obtained rights from third parties that allow us to market software tool kits that are designed specifically to assist our products to be compatible with products made by the third parties. If these agreements are terminated or are not renewed, then we may lose the right to distribute the tool kits or otherwise use them. In addition, the termination of third party licenses or the failure of third party licensors adequately to maintain or update their products could delay our ability to deliver some of our products while we seek to implement alternative technology. Alternative technology may be of inferior quality or performance standards or may not be available on commercially reasonable terms or at all. If we are unable to obtain necessary or desirable third party technology licenses, our revenues could be reduced, our cost of revenues could increase and our business could suffer.

Other Risks Related to Our Business that Will Impact Us if the
Proposed Acquisition Does Not Occur

We are in the process of implementing an enterprise resource planning system, which may result in a short-term increase in our operating expenses and capital expenditures, particularly if the implementation takes longer than we expect.

In May 2002, we began to implement a global enterprise resource planning system in North America and the Asia Pacific region. The implementation of an enterprise resource planning system is a complex and labor-intensive process that requires the investment of a substantial amount of time, money and other resources. We have experienced significant difficulties in this implementation. The implementation process to date has involved greater than anticipated expenditures of technical, financial and management resources. While we initially anticipated that the remaining regional implementation would be completed by the end of fiscal 2003, we now believe that implementation may not be completed until the end of calendar 2003.

Further difficulties may delay completion of the implementation even longer. We also anticipate that we will need to expend greater time, money and resources than we originally expected. If we continue to experience further difficulties in the implementation, this could:

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result in significant and unexpected increases in our operating expenses;

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complicate and prolong our internal data gathering and analysis processes;

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require us to restructure or develop our internal processes to adapt to the new system;

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result in extended work hours for our employees and the temporary use of outside resources, with a resulting increase in expenses, to resolve any software configuration issues or to process transactions manually until issues are resolved;

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result in the loss of management focus as attention paid to implementation is diverted

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from other issues; and

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cause disruption of our operations if the transition to the new enterprise resource planning system creates new or unexpected difficulties or if this system does not perform as expected.

We may not be able to operate our business successfully as it grows, if we are unable to improve our internal systems, processes and controls.

In order to operate our business successfully as it grows, we need to improve our internal systems, processes and controls. In order to achieve this, we are increasingly relying on technical systems such as sales prospects management systems, technical support systems, scheduling systems and order entry systems. If we have difficulty providing and managing our internal systems, processes and controls, these difficulties could disrupt existing customer relationships, causing us to lose customers, limit us to smaller deployments of our products or increase our technical support costs.

We derive a material portion of our revenues from customers outside of North America, and our failure to address the difficulties associated with marketing, selling and supporting our products outside North America could cause our sales to decline.

We have significant international operations including development facilities, sales personnel and customer support operations. Our primary product development facilities are located in Vancouver, Canada and Ipswich, England. We derived 25% and 26% of our total revenues for the three months ended October 3, 2003 and September 27, 2002, respectively, from sales outside of North America. Our international operations are subject to certain inherent risks including:

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exchange rate fluctuations and the impact on pricing of our products and our expenses;

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increases in tariffs, duties, price controls, restrictions on foreign currencies or trade barriers imposed by foreign countries such as import and export restrictions;

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technical difficulties associated with product localization;

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lack of experience in certain geographic markets;

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longer payment cycles for sales in certain foreign countries;

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seasonal reductions in business activity in the summer months in Europe and certain other countries;

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the significant presence of some of our competitors in some international markets;

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potentially adverse tax consequences;

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management, staffing, legal and other costs of operating an enterprise spread over various countries;

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political instability in the countries where we are doing business; and

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fears concerning SARS or other travel or health risks that may adversely affect our ability to sell our products and services in any country in which the business sales culture encourages face-to-face interactions.

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

In addition, we intend to continue to invest resources to expand our sales and support operations into strategic international locations such as the People’s Republic of China. If the revenues generated by these operations are not adequate to offset the expense of establishing these foreign operations, our business, results of operations and financial condition could be materially harmed.

Our ability to pay dividends and engage in other transactions may be limited if we do not receive Comerica Bank — California’s consent because we are subject to limitations under our revolving line of credit.

In October 2002, we executed an agreement with Comerica Bank — California for a $15.0 million revolving line of credit. As of October 3, 2003 and the date of this quarterly report, we did not have any outstanding borrowings under the revolving line. Subject to limited exceptions, we are restricted in our ability to pay dividends by the covenants contained in our revolving loan agreement with Comerica. We are permitted to repurchase stock and/or pay cash dividends in an aggregate amount not to exceed $2.0 million during the term of the agreement, provided that we are not in default under the agreement and that a default would not occur immediately after payment of the dividend. We may be unable to repurchase stock or pay dividends in excess of those amounts if Comerica does not agree.

The terms of the revolving line also require us, among other things, to maintain quarterly financial covenants related to liquidity, minimum tangible net worth and quarterly free cash flow. We are restricted from selling, leasing or otherwise disposing of any part of our business or property under most circumstances. In addition, the agreement places restrictions on entering into arrangements that will result in a change of control and restricts our ability to incur specified forms of indebtedness. We are also restricted from making some types of distributions or investments. We are also required to maintain at least an aggregate of $10 million in investment accounts with Comerica and some of its affiliates. We may not be able to engage in these types of transactions, such as the sale of debt securities, unless we obtain Comerica’s consent. A potential acquirer, lender or other strategic party may be reluctant to enter into an arrangement with us that contemplates any of these transactions unless we obtain Comerica’s consent. If we are unable to obtain consent or cannot obtain consent in a timely manner, the other party may not elect to proceed with a transaction that we believe to be in our stockholders best interests.

We may be obligated to indemnify our customers if they are subject to third party claims and any indemnification obligation could hurt our results of operations and harm our reputation.

Our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims. Existing or future United States federal or state laws, foreign laws or unfavorable judicial decisions may make these provisions ineffective. Because our products are used with enterprise software systems and databases, our liability could be substantial if we receive an unfavorable judgment. In addition, our insurance against product liability may not be adequate to cover a potential claim.

We are a party to litigation, including an action commenced by Vedatech Corporation in the United Kingdom, which could cause us to incur expenses to defend ourselves, and in the event of an adverse judgment against us in any litigation, we may have to pay damages, which could affect our liquidity.

In November 1997, Vedatech commenced an action in the Chancery Division of the High Court of Justice in the United Kingdom against Crystal Decisions (UK) Limited, our wholly owned subsidiary. The liability phase of the trial was completed in March 2002, and we prevailed on all claims except for a quantum meruit claim. The court ordered the parties to mediate the amount of that claim and we came to a mediated

settlement with Vedatech in August 2002. The mediated settlement was not material to our operations and contained no continuing obligations. In September 2002, however, we received notice that Vedatech is seeking to set aside the settlement. In April 2003, we filed an action in the High Court of Justice seeking a declaration that the mediated settlement agreement is valid and binding. In October 2003, Vedatech filed an action against us, our subsidiary, Crystal Decisions (UK) Limited, and Susan J. Wolfe, our Vice President, General Counsel and Secretary in the United States District Court, Northern District of California, San Jose division, alleging that the August 2002 mediated settlement was induced by fraud and that we engaged in negligent misrepresentation and unfair competition. In October 2003, Crystal Decisions (UK) filed an application with the High Court of Justice claiming the proceedings in United States District Court, Northern District of California, San Jose Division were commenced in breach of an exclusive jurisdiction clause in the settlement agreement and requesting injunctive relief to restrain Vedatech from pursuing the United States District Court proceedings. Although we believe that Vedatech’s basis for seeking to set aside our mediated settlement and its claims in the October 2003 complaint are meritless, the outcome cannot be determined at this time. If the mediated settlement were to be set aside or we were found liable in the October 2003 action, a negative outcome could adversely affect our business, results of operations and financial condition.

In addition to the foregoing, we are subject to other litigation in the ordinary course of our business. While we believe that the ultimate outcome of these matters will not have a material adverse effect on us, the outcome of these matters is not determinable at this time and negative outcomes may adversely affect our business, results of operations and financial condition.

Risks Related to our Relationship with New SAC and Seagate Technology
that Will Impact Us if the Proposed Acquisition Does Not Occur

If we are compelled to pay any indemnity claims by VERITAS, our assets could be depleted substantially.

In a series of transactions that took place in November 2000, New SAC purchased the operating business of Old Seagate, including the business intelligence software business that we now operate. In a concurrent transaction, Old Seagate and Seagate Software Holdings, our former parent, were sold to VERITAS.

In connection with these transactions, New SAC and certain of its affiliates, including us, agreed to indemnify VERITAS, Old Seagate and some of their affiliates for substantially all liabilities arising in connection with our operating assets. Although we have agreed with Seagate Technology and several of its affiliates on a methodology to allocate liability, our liability, like Seagate Technology’s, is not capped. As a result, we continue to face possible liability for actions, events or circumstances arising or occurring both before and after the New SAC Transaction. Some areas of potential liability include:

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tax liabilities;

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obligations under federal, state and foreign pension and retirement benefit laws; and

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existing and future litigation.

In the event that our indemnity obligations are triggered, we could experience a material adverse effect on our business and financial condition.

Our directors may have conflicts of interest because of their ownership of capital stock of, and their board membership or employment with, New SAC and its other affiliates.

Many of our directors own interests in our majority stockholder, New SAC, and some of them hold shares and options to purchase the capital stock of Seagate Technology. Ownership of New SAC or Seagate

Technology could create, or appear to create, potential conflicts of interest when our directors are faced with decisions that could have different implications for us and for New SAC or its other affiliates.

Some of our directors also serve on the boards of directors of New SAC, Certance Holdings, a removable tape storage company and an affiliate of New SAC, and Seagate Technology. Several of our directors also serve as officers of those entities, as well as other affiliates of New SAC. We expect that some of our directors will continue to spend a substantial portion of their time on the affairs of New SAC and Seagate Technology, for which those entities may pay our directors director fees or other compensation. In view of these overlapping relationships, conflicts of interest may exist or arise with respect to existing and future business dealings, including the relative commitment of time and energy by our directors to us and New SAC and Seagate Technology, potential acquisitions of businesses or properties and other business opportunities, the issuance of additional capital stock, the election of new or additional directors or the payment of dividends by us. We cannot assure you that any conflicts of interest will be resolved in our favor.

Because New SAC controls our board of directors and owned 98.4% of our outstanding stock as of October 3, 2003, your ability to influence corporate matters is greatly limited.

New SAC beneficially owned approximately 98.4% of our outstanding common stock as of October 3, 2003, and we expect New SAC to continue to own a substantial number of shares of the combined company after the acquisition. In addition, the shareholders of New SAC are parties to a shareholders agreement governing the ownership of New SAC’s stock. These arrangements result in New SAC and the New SAC shareholders acting together with respect to matters submitted to our stockholders. Through its influence on our board of directors and as a majority stockholder, New SAC has the ability to determine the direction of our business, our operating budget, whether to pursue possible acquisitions, whether to pursue a sale of our company and other matters, including all matters submitted to our stockholders. For example, New SAC and its wholly owned subsidiary, Seagate Software (Cayman) Holdings, have delivered actions by written consent to Business Objects for the purpose of effecting the proposed acquisition, and the number of shares represented by those consents are sufficient to approve the proposed acquisition. Stockholders who are opposed to the merger would have appraisal rights as their remedy. New SAC and the shareholders of New SAC may be the largest single stockholder of the combined company after the acquisition is completed and for the foreseeable future and may decide not to enter into a transaction in which you would receive consideration for your Business Objects shares that is much higher than the cost to you or the then-current market price of those shares. In addition, New SAC and New SAC’s shareholders could elect to sell a controlling interest in us and you may not have a right to participate in the sale. Any decision regarding their ownership of us or Business Objects that New SAC and its shareholders may make at some future time will be in their absolute discretion.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates and foreign exchange rates. We do not hold or issue financial instruments for trading purposes.

Interest Rate Risk

Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. The investment of cash is regulated by our investment policy of which the primary objective is the safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk. Among other selection criteria, our current investment policy states that all investments, with the exception of up to 20% of cash and cash equivalents, must be maintained in U.S. dollar denominated investment grade securities, with no maturities exceeding two years. We may hold up to 20% of cash and cash equivalents in investment grade non-U.S. denominated securities. In addition, our investment policy does not allow for investment in technology companies.

We mitigate the effect of default risk by investing in only high credit quality securities and by using a portfolio manager to respond appropriately to a significant reduction in credit rating of any investment issuer, guarantor or depository. The portfolio includes only diversified marketable securities with active secondary or resale markets to ensure portfolio liquidity.

Our investments in debt securities include money market funds, investment grade commercial paper, corporate bonds, government agency securities and other debt securities. The diversity of our portfolio helps us to achieve our investment objective. As of October 3, 2003 and June 27, 2003, all of our cash, cash equivalents, short-term and long-term investments were classified as available-for-sale.

While we are exposed to interest rate fluctuations in many countries, our interest income is most sensitive to fluctuations in the general level of U.S. interest rates. Declines in interest rates over time will reduce our interest income and we do not attempt to reduce or eliminate our exposure to interest rate risk through the use of derivative financial instruments due to the short-term nature of the investments. For the three months ended October 3, 2003, fluctuations in the U.S. interest rate did not have a material impact on our net income.

Foreign Currency Risk

We conduct business on a global basis in international currencies. As such, we are exposed to adverse or beneficial movements in foreign currency exchange rates. The majority of our sales are denominated in U.S. dollars, the currency in which we report our consolidated financial statements; however, we do conduct a portion of our business in currencies other than the U.S. dollar, including the British pound, euro, Canadian dollar and Japanese yen.

We are also exposed to foreign exchange rate fluctuations as the financial results of our foreign subsidiaries are translated into U.S. dollars on consolidation. Commencing on March 29, 2003, all translation gains and losses have been included in the determination of net income and are no longer recorded as an adjustment to accumulated other comprehensive income as part of stockholders’ equity. As exchange rates vary, these results, when translated, may vary from expectations and adversely or beneficially impact overall expected profitability. We also have exposure to foreign exchange rate fluctuations when we translate cash from one currency into another to fund operational requirements. In addition, we have exposure to the change

in rates as the result of timing differences between expenses being incurred and paid. As exchange rates vary, we may experience a negative impact on financial results.

We incur the majority of our research and development, customer support costs and administrative expenses in Canadian dollars and British pounds. For example, approximately 80% of our revenues were denominated in U.S. dollars, 6% in British pounds and less than 5% in Canadian dollars for the three months ended October 3, 2003. Approximately 38% of our total monetary expenses were denominated in U.S. dollars, 12% in British pounds and 38% in Canadian dollars for the three months ended October 3, 2003. These percentages fluctuate with exchange rates, business operating changes and cash flow versus expense patterns. We have evaluated our exposure to these risks and have determined that our only significant operating exposure to foreign currencies at this time is to the Canadian dollar. The strengthening of the Canadian dollar has negatively affected and may continue to negatively affect our operating expenses and net income and we continue to have foreign currency risk from this source. For the three months ended October 3, 2003, a 10% increase in the Canadian dollar relative to the U.S. dollar would have increased our revenues by less than 1% but would have increased our expenses by approximately 4%.

We cannot predict the effect of exchange rate fluctuations upon our future operating results. In May 2003, we implemented a partial hedging strategy for exposure to fluctuations in the exchange rate of the Canadian dollar relative to the U.S. dollar. Although we recently began hedging, we cannot be sure that any hedging techniques we may implement will be successful or that our business, results of operations, financial condition and cash flows will not be adversely affected by exchange rate fluctuations.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in internal control over financial reporting. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

Refer to Part I. Financial Information, Note 14 of the Condensed Notes to the Consolidated Financial Statements.

Item 4. Submission of Matters to a Vote of Security Holders

On July 18, 2003, Seagate Software (Cayman) Holdings Corporation, which owned 98.6% of our common stock at such date, executed an action by written consent of stockholders to approve the proposed acquisition of our company by Business Objects S.A. and the Agreement and Plan of Merger by and among Business Objects S.A., Borg Merger Sub 1, Inc., Borg Merger Sub II, Inc., Borg Merger Sub III, Inc., Seagate Software (Cayman) Holdings Corporation and Crystal Decisions, Inc. We cannot complete the acquisition by Business Objects until 20 days after we mail an Information Statement describing the written consent and complying with the requirements of Schedule 14C promulgated by the Securities and Exchange Commission to our stockholders. The Information Statement was mailed to our stockholders on November 4, 2003.

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits.


Exhibit
Number		Description

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of President and Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b)

Reports on Form 8-K

On July 18, 2003, we filed a Current Report on Form 8-K announcing our revenues for our fiscal quarter ended June 27, 2003.

On July 22, 2003, we filed a Current Report on Form 8-K announcing the issuance of a July 18, 2003 joint press release with Business Objects S.A. announcing an Agreement and Plan of Merger between our Company and Business Objects S.A.

On July 25, 2003, we filed a Current Report on Form 8-K for the purpose of filing the Agreement and Plan of Merger related to the proposed acquisition of our Company by Business Objects S.A.

On September 5, 2003, we filed a Current Report on Form 8-K announcing that we had entered into an amendment to the Agreement and Plan of Merger.

On October 17, 2003, we filed a Current Report on Form 8-K announcing the transfer of 100 shares held by New SAC to CB Cayman.

On October 23, 2003, we filed a Current Report on Form 8-K announcing our revenues and financial results for our fiscal quarter ended October 3, 2003.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Crystal Decisions, Inc.
(Registrant)


November 14, 2003	By:	/s/ Jonathan Judge	President and Chief Executive Officer

Date		(Jonathan Judge)	(Principal Executive Officer)

November 14, 2003	By:	/s/ Eric Patel	Chief Financial Officer

Date		(Eric Patel)	(Principal Financial and Accounting Officer)

Exhibit Index


Exhibit
Number		Description

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of President and Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

CRYSTAL DECISIONS INC 10-Q