Annual Report 2007

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General

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Basis of presentation

Software AG's consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as promulgated by the International Accounting Standards Board (IASB) and as applicable in the EU. The lAS/IFRSs applicable as of December 31, 2007 were observed, as were the interpretations of the International Financial Reporting Interpretations Committee (IFRIC - formerly SIC). The same accounting policies were used as in the financial statements for 2006 with the exception of the new standard IFRS 8 Operating Segments. In fiscal year 2007, the notes were supplemented to include the disclosures required pursuant to IFRS 7.

Software AG is a registered stock corporation under German law with registered offices in Darmstadt. It is the parent company of a Group that is globally active in the fields of development, licensing, and maintenance of software as well as IT services.

The consolidated financial statements of Software AG are expressed in thousands of euros unless otherwise stated.

New accounting provisions with regard to which Software AG has not opted for early application

The IASB has published the following standards, interpretations, and amendments to standards that are not yet required to be applied and with regard to which Software AG has not opted for early application to the consolidated financial statements for the year ended Desember 31, 2007. For these IFRSs to be applied, they must first be endorsed by the EU.

• The revised IAS 1 Presentation of Financial Statements will come into effect for fiscal year 2010.
• The revised IAS 23 Borrowing Costs will come into effect for fiscal year 2009.
• The revised IFRS 3 Business Combinations will come into effect for fiscal year 2010.
• The revised IAS 27 Consolidated and Separate Financial Statements will come into effect for fiscal year 2010.
• IFRIC 11 - IFRS 2 Group and Treasury Share Transactions will come into effect for fiscal year 2008.
• IFRIC 12 Service Concession Arrangements will come into effect for fiscal year 2009.
• IFRIC 13 Customer Loyalty Programmes will come into effect for fiscal year 2009.
• IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction will come into effect for fiscal year 2009.

Software AG does not expect initial application of the aforementioned standards and interpretations to have a significant influence on the consolidated financial statements.

Principles of consolidation

The separate financial statements of the companies included in the consolidated financial statements were prepared in accordance with uniform accounting policies pursuant to IFRS as of the balance sheet date for the consolidated financial statements (December 31, 2007).

The initial consolidation method applied to business combinations was based on the respective date of foundation in the case of companies founded by Software AG. For acquired companies, the date of acquisition was taken as the consolidation date.

The initial consolidation of the companies that were first consolidated prior to December 31, 2002 was performed on the basis of the book value method in accordance with Section 301 (1) Sentence 1 of the German Commercial Code (HGB). Accordingly, the acquisition and start-up costs were offset against the Group's share in equity of the consolidated subsidiaries. Initial consolidation after the transition to IFRS on January 1, 2003 was performed in accordance with IFRS 3 regulations. Subsequent consolidations were derived from the relevant initial consolidation.

Goodwill arising from business combinations was offset against retained earnings for acquisitions prior to January 31, 2001 in accordance with Section 309 (1) of the Commercial Code. Goodwill arising after January 31, 2001 was capitalized in accordance with previously applicable HGB (German Commercial Code) accounting principles and amortized over 10 years using the straight-line method. In accordance with the option set out in IFRS 1.14, the Company continues to account for business combinations and the resulting goodwill on the date of transition to IFRS in accordance with the German Commercial Code.

Since the transition to IFRS on January 1, 2003 (date of transition), goodwill previously capitalized in line with the Commercial Code has been measured in accordance with IAS 36. Thus goodwill was frozen at the carrying amount stated on the date of transition from HGB to IFRS on January 1, 2003 and only written down in the case of impairment. Goodwill reported on the balance sheet is tested annually for impairment.

Revenue, expenses and income, and receivables and payables arising between consolidated companies have been eliminated. Intercompany earnings are eliminated where they have not arisen from services to third parties. Group equity and net income attributable to minority interests are reported separately from equity and net income attributable to the shareholders in the parent company.

Scope of consolidation

The consolidated financial statements include Software AG and all of the companies it controls. Control is generally considered to exist if Software AG directly or indirectly controls the majority of voting rights of a company's subscribed capital and/or is in a position to govern the financial and operating policies of a company.

The following affiliated companies are part of the Group of Software AG (parent company):

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