Letter to Shareholders

Karl-Heinz Streibich, Chief Executive Officer

Dear Ladies and Gentlemen,

In the preceding quarter, we made history with the takeover of U.S. software company webMethods, Inc. Valued at USD 560 million, the takeover represents one of the largest transactions in the European software industry. Under the motto “The Power of Two,” the integration of the two companies has created a new, globally leading provider of infrastructure software for business processes with more than 4,000 enterprise customers worldwide. The transaction is a major step toward achieving our stated goal of pushing up revenues to one billion euros and at least doubling Group earnings by 2011.

Growth strategy continues to show success

Announced at the start of April, the acquisition of webMethods, Inc., a leading supplier of software solutions for integrating and optimizing business processes, took effect as of May 25, 2007. This takeover will enhance our already successful growth strategy by creating a number of synergies: We are optimizing our product portfolio in integration software – the growth market for Service-Oriented Architecture (SOA) - and we are improving our global market presence and expanding our client base. At the same time, we are strengthening our base in major geographic markets and reinforcing our strategic partnerships, especially in the area of system integration.

By integrating webMethods, we are adhering to our principle of sustainably increasing value. For us, this means focusing on communication with customers and partners, maintaining our high level of sales activities, tying in key expertise on a long-term basis, securing the market value of webMethods, and merging all divisions as partners. The integration is proceeding according to plan. webMethods has been delisted from the stock exchange, and Software AG's previous “Crossvision” business line has been renamed “webMethods.” We succeeded in implementing some projects more quickly than expected, such as our new product planning roadmap. The first integrated product will be available as early as the first quarter of 2008. Together, Software AG and webMethods offer the most comprehensive product portfolio of all independent suppliers of system software and have advanced to No. 3 in the global market for integration technology. The merger of sales activities in the EMEA (Europe, Middle East, Africa) and APAC (Asia, Pacific) regions is also being implemented more rapidly than planned, and establishment of a new sales structure in the U.S. has been scheduled for the fourth quarter of 2007.

In addition to the positive effects on the growth of our Company, we have also identified numerous cost synergies. In the second half of 2007, we will achieve cost synergies of USD 15 million, with synergies reaching up to USD 50 million per year in the subsequent periods.

The takeover has already been acknowledged by the capital markets: The price of Software AG stock climbed from €68.85 on April 5, 2007 to €77.34 on July 20, 2007. Moreover, the transaction has been highly commended by nearly all sector experts and financial market participants.

In the first quarter of the year we also announced an additional acquisition: the majority takeover of SPL Software, our Israeli sales partner, as of April 1, which will increase our market presence in Israel. The acquisitions of SPL Software and webMethods, Inc. have allowed us to successfully implement our M&A strategy in the first half of the current fiscal year.

New customers acquired

In the second quarter of 2007, we - including SPL and webMethods, Inc. – closed more than 200 new business transactions. Customer feedback regarding the joint product roadmap of Software AG and webMethods, Inc. has also been quite positive, and we have received the first orders for products from both companies.

In the first half of 2007, we conducted a customer survey of some 180 companies regarding mainframe applications. The results of the survey were promising:

75 percent of those surveyed place priority on modernizing existing applications rather than developing new applications, purchasing new products, or outsourcing. Specifically, mainframe clients focus clearly on optimizing business processes, i.e., linking IT and corporate management. These results confirm Software AG's approach of modernizing mainframe applications to make them Internet compatible by combining the high capacity of mainframe computers with modern Internet flexibility.

Results reflect successful corporate strategy

The figures for the second quarter of 2007 have confirmed that we are on the right track in pursuing dynamic internal and external growth. We have once again significantly improved nearly all key figures. SPL was consolidated in the financial statements as of April 1 and webMethods, Inc. was consolidated as of May 25. The Group's operating revenues rose by 28 percent over the previous quarter (currency-adjusted: 32 percent) to €154.8 million in the second quarter of 2007. License revenues contributed in particular to this growth. The Enterprise Transaction Systems (ETS) business line increased licensing revenue by 11 percent (currency-adjusted) over the prior-year quarter to €32.8 million. Licensing revenue for the webMethods business line rose by an impressive 139 percent to €24.5 million. Operating earnings (EBITA) grew by 28 percent to €37.9 million due to additional optimizations in business processes along with initial synergy effects from the acquisition of webMethods, Inc.

Forecast raised after takeover

We have adjusted our forecast for the current fiscal year to reflect the acquisition of webMethods, Inc. In comparison with 2006, we expect Group revenues to increase by approximately 30 to 35 percent, with licensing revenues climbing by 45 to 50 percent. The merger is also expected to positively impact earnings per share in the first year. We anticipate an increase in earnings per share between €3.10 and €3.25.

Yours sincerely,
Karl-Heinz Streibich
Chief Executive Officer

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