2005 was a good year for European equities. While the most important Wall Street share price indices barely gained in value, European stock markets developed positively throughout the year. German blue chips were among the top performers: The DAX rose by 27 percent, reaching its highest level in four years shortly before the end of 2005. Raw materials and energy stocks made particularly high gains.

Investors were initially cautious about technology stocks, with the TecDAX showing only modest gains in the first two quarters. In the second half of the year, the market environment for German technology shares improved steadily. The TecDAX surged, supported by high demand for telecommunications and solar energy stocks. A significantly improved performance over 2004 was achieved with a rise of 12,5 percent at the end of the year. The index for the U.S. technology sector, the NASDAQ 100, was almost unchanged compared to the end of 2004 with a rise of 1.5 percent.

Software AG shares nearly double in value
Software AG was one of the most successful stocks in the TecDAX in 2005. On December 30, 2005 the stock closed at €41.15 in Xetra trading, a gain of 73 percent compared to December 30, 2004 (€23.80). Market capitalization surpassed the historic high of €1 billion for the first time since 2001. This places Software AG in the mid-cap range, sparking more attention and opening up access to new investor circles, both of which support our goal of broadening our shareholder base.

Dividend continuity
In addition to price gains, our investors also benefited from a resumption of dividend payments in 2005. Software AG paid out a total of €20.45 million (€0.75 per share) to shareholders as resolved by the Annual Shareholders’ Meeting. This corresponds to a dividend ratio of more than 38 percent of net operating income. We expect to maintain this dividend policy in the future, depending on earnings and liquidity. The Executive and Supervisory Boards are recommending to the Annual Shareholders’ Meeting that dividends of €0.80 be paid for each share entitled to dividends. Based on the share price at the end of the year 2005 (€41.15), this represents a dividend yield of 1.94 percent.

Appealing combination of value and growth
Our main goal is to widen Software AG’s investor circle to further decrease stock volatility. Our investor relations activities are aimed at expanding and intensifying contact with investors and financial analysts. Software AG stock is followed regularly by over twenty brokerage firms, including an increasing number of global brokerages as international interest picks up. One of our primary aims for 2006 is to raise coverage by U.S. brokers.

Our return to growth will also shift our stock back into the focus of growth investors, opening up a new investor target group. Software AG stock will also continue to appeal to value investors due to its dividend yield and high cash flows.

We intensified our direct contact with investors in the past year by holding approximately 50 days of road shows, primarily in Europe and America, though also for the first time in Asia. We presented Software AG in over 300 individual discussions with potential investors and analysts as well as 16 conferences with brokerage firms. We continue to be involved in the investor relations community. This includes work on committees of the German Investor Relations Association (DIRK), the European Council of Investor Relations, and the International Investor Relations Federation (IIRF).

Changes in share capital
The upward share price trend permitted employees and executives to exercise stock options based on the programs of 1999 to 2001 during the year under review. As a consequence, the number of outstanding shares rose by 2.8 percent to 28,036,009. An additional 81,000 options may be exercised from the same programs by mid-2006. Furthermore, an additional 790,000 options are outstanding from an additional program, which, however, may not be exercised during 2006.

ADR program increases access to the U.S. stock market and improves name recognition for Software AG
We initiated an ADR program in October of 2005. American Depositary Receipts (ADRs) are deposit certificates issues by a U.S. depository bank. They document ownership of shares in non-U.S. companies and make it possible to buy and sell non-U.S. securities in U.S. dollars. Software AG ADRs are traded on the over-the-counter market as part of a Sponsored Level I ADR program and are therefore not subject to the reporting requirements of the Sarbanes-Oxley Act. Since only existing shares are converted to ADRs, the program has not necessitated a capital increase.

Please refer to the financial statements for additional information on stock options.