Software AG

2. Quarterly Report 2008

1. Significant events during the reporting period

Software AG successfully continued its growth trend in the second quarter of 2008, and reported the best Q2 and half-year results in the Company’s history. We have continued to pursue important operational improvements, which are contributing to the achievement of our ambitious goals for fiscal 2008 as a whole. Despite difficult market conditions, we can reaffirm our forecast for the year 2008 as a whole, with revenue growth of between 24 and 27 percent and an increase in the EBIT margin from 22 to 24 percent.

First anniversary of the integration of webMethods and Software AG

June 2008 was the first anniversary of the merger between Software AG and webMethods, Inc. This US acquisition was clearly the right decision for Software AG. We have acquired an excellent product portfolio, outstanding experts, a recognized brand, and very good customers in the integration software market segment, where our goal is to become the world leader in Service-Oriented Architecture (SOA) and Business Process Management (BPM). Moreover, by taking over a US company we have significantly expanded our presence in the USA, the world’s largest IT market and have achieved the critical size needed to expand our market share. Software AG grew its share of the integration software market to 6.4 percent, and is currently the world’s third-largest vendor in this market segment, following Oracle and IBM.

Reorganization of sales units

The Supervisory Board approved a reorganization of the Executive Board in April 2008, with the goal of increasing sales efficiency and in particular promoting revenue growth in the webMethods division. Although webMethods reported stable revenue figures in the US during the first quarter, revenues were weak in the EMEA and Asia/Pacific regions. The reorganization should supplement the current focus of the webMethods division on the US market with an effective global market presence. Accordingly, at the Executive Board level, there will be two regional managers responsible for the sales of both the ETS and webMethods business divisions:

Both Mark Edwards, Executive Board member of Software AG since 2003, and David Broadbent, member of the Executive Board since 2007, have many years of sales experience in the business infrastructure software market. The restructuring will create greater sales efficiency primarily for our webMethods product portfolio and above all in Europe and Asia. The two sales organizations will remain part of the ETS and webMethods divisions but will be split regionally, East and West. Within the regions, both sales organizations will have a common manager at the Executive Board level. This structure will preserve the focus of sales activities in the different business divisions, while simultaneously allowing management to integrate both sales organizations under a unified and customer-focused market strategy. Management of both sales units will concentrate on acquiring major projects from new and existing customers in the software market for Service-Oriented Architecture.

Dr. Peter Kürpick, responsible for R&D in the webMethods division, will now also be responsible for ETS R&D, previously overseen by David Broadbent. This intergration into a single R&D organization promises to create significantly increase efficiency, particularly with regard to the development of complementary products.

New technologies and awards

At the end of June, we presented two product innovations at the user conference in Seville: Natural SQL Gateway and Event Replicator for Adabas on Open Systems. Both of these products improve the exchange of real-time data for mainframes and open systems.

Natural SQL Gateway offers users a comprehensive and uniform view of data, which extends across different applications and databases. By consolidating data access into a single application, these data can be optimally analyzed and used with existing Natural applications. Natural SQL Gateway can also be used to outsource non-business-critical data from mainframe systems, thereby reducing hardware platform costs.

Event Replicator for Adabas on Open Systems uses SQL to automatically replicate Adabas data in third-party databases and messaging systems on open system platforms. By making centralized business data immediately available for other important operational systems such as business intelligence tools or ERP systems, all users can work on the basis access to complete and up-to-date data.

In this way, Software AG is investing in the continuous refinement of the ETS product portfolio, with approximately US$40-50 million annually in research and development for Adabas and Natural. Adabas is one of the world’s most widely used mainframe databases, and forms the basis for the centralized transaction systems used in one-fifth of Global 500 companies. Natural, Software AG’s development and execution environment for business applications, is well-known for its ability to rapidly and efficiently create company-wide transaction systems for mainframe and open system platforms.

A recent study by a leading international market research company notes that based upon its market share in 2007, Software AG is currently the third-largest vendor in the markets for Business Process Management Suites (BPMS) and Enterprise Service Bus (ESB). Another leading market research firm has also rated us as the “leader” in B2B Gateway software.

Expansion of customer base and partnerships

Software AG acquired a total of 118 new customers in the first half of the year, 75 of which were acquired in the second quarter alone, thereby further expanding its global customer base. The new IT strategy implemented by the Swedish financing group Volvofinans, for example, is based upon Software AG’s technology. The company uses Software AG’s CentraSite as a company-wide platform for governance and metadata management in a Service-Oriented-Architecture in order to accelerate the market introduction of new products and services. Other new customers of the webMethods division in Germany include T-Mobile and the Federal State of Brandenburg.

In addition to the new customers, successful ongoing projects with well-known customers such as UNIQA, SaskTel, Unique, and 3Com have also been reported to the market in press releases and case studies during the second quarter of 2008.

Following the success of their joint BPM project at Zurich airport, Software AG and Qualysoft are expanding their partnership in Germany and Switzerland. The companies will work together to develop innovative BPM solutions throughout the entire German-speaking region. A recent new industry study has shown that many companies still have development needs in the area of Business Process Management. Our aim is to address this potential.

Software AG assumes corporate responsibility

Although it has become a successful global company, Software AG has not forgotten its local roots. We are convinced that assuming responsibility for our region is an important component in the Company’s overall success. The first IT Forum Darmstadt Rhein Main Neckar was held in May 2008 in order to establish this region as a top IT location in Europe. The goal was to begin promoting inter-company and inter-industry networks, strengthen the marketing of the area as a business location, and improve the competitive situation of regional business concerns. Hosts of the event included Germany’s Minister of Justice, Brigitte Zypries, and Karl-Heinz Streibich, CEO of Software AG, and the president of the Darmstadt chamber of commerce, Dr. Michael Römer.

In addition, the Hesse Ministry of Economic Affairs gave an award to Software AG as part of a state competition for the creation of an IT cluster. Project proposals submitted by Software AG and its partners TU Darmstadt, SAP Research (Darmstadt), and IHK Darmstadt Rhein Main Neckar were singled out, and their cluster network will be subsidized with state funds of €350,000 for three years. The cluster network will have its headquarters in Darmstadt.

We reached a milestone in the field of “Green IT” following a one-year research project with the Potsdam-based Hasso Plattner Institute for Software Systems Engineering (HPI). Together we were able to develop methods and tools to optimize the interaction of different IT systems, thus reducing energy use and hardware costs.