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in Q3 2006
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  Letter to Shareholders  
Karl-Heinz Streibich   Karl-Heinz Streibich, Chief Executive Officer
Engineer. Chief Executive Officer since 2003
Darmstadt, Germany

Dear Ladies and Gentlemen,

Software AG is developing rapidly due to our increased international business activities.

In today’s global market, growth and profitability are critical factors, and providing these is the cornerstone of our corporate strategy – a successful strategy as the facts show. We have consistently reported double-digit growth in sales and earnings this year, driven by a strong increase in license revenue. Software AG’s own high-margin products now contribute nearly 100 percent of licensing revenue and one-third of total revenue.

Strong performance in both product lines
Both of our product groups, Enterprise Transaction Systems (ETS) and crossvision, are dependable revenue drivers and contributed once again in reaching our financial goals.

Recent market developments have endorsed our strategic direction: Contrary to expectations, the significance of mainframes in companies’ IT environments is again on the rise, resulting in increased business in mainframe modernization with our Enterprise Transaction System products. At the same time, crossvision – our new service-oriented architecture (SOA) product line – is setting the standard in the integration growth market. The increase in licensing revenue is also having a positive impact on the maintenance business.

The combination of our two business lines, Enterprise Transactions Systems and crossvision, allows us to take advantage of the potential offered by the rapidly growing integration market while benefiting from the stability of our established mainframe basis. Analysts agree that Software AG is well positioned for further market success. We can meet these high market requirements and expectations on a sustained basis by expanding our product portfolio in both business units based on customer and market demands.

Increased presence in Japan and Brazil
Part of our growth strategy is based on geographical expansion. Our focus is now on Japan and, starting in 2008, Brazil. Both of these markets have been serviced by distributors for many years. Now we are taking direct control of this business to enable us to operate more effectively in these markets.

In Japan, we have a strong established customer base consisting of some 200 organizations, mainly in the area of Enterprise Transaction Systems. We plan to increase business with this customer base and to expand introduction of our crossvision products in the medium term. We anticipate annual revenue potential of approximately €10 to 20 million in Japan, and we are optimistic that the EBIT ratio here will reach Group levels.

In Brazil, we estimate a possible business volume of €50 to 100 million per year in the long term. We are currently preparing to enter this market and, starting in 2008, we will distribute our products directly.

Initiatives for more market visibility
The optimization of mainframes and their interaction within a service-oriented architecture is a global information technology market trend. We have an extensive portfolio of legacy modernization products and methods giving us the potential to be the market leader. Our legacy modernization software is part of the crossvision product family. This software enables customers to gear their existing mainframe IT structures more easily to new IT strategies and market requirements. We will be initiating a marketing and PR campaign on the topic of legacy modernization in the fourth quarter in order to make our customers more aware of the advantages of this concept.

In the months to follow, our efforts will remain centered on initiatives to promote our company and our brands, with the focus on increasing the visibility of Software AG in the market for serviceoriented architecture.

Main strategic points are unchanged
We are continuing to emphasize profitable growth through our own efforts. Acquisitions remain an option if the target company would enhance our portfolio by adding technical components or products and increase our enterprise value. We are also continuing to expand geographically. Our medium-term plans involve growth in Latin America, the Middle East, and Japan in particular.

We are also expanding our cooperation network to include strategic partners. This will ensure that individual strengths are combined, which we see as an efficient method of offering our customers the best possible service and promoting the advancement of Software AG by concentrating on our core competencies.

Karl-Heinz Streibich
Chief Executive Officer

  Interim Report Q3/06 (PDF)
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