Risks through lawsuits
With the development of jurisdiction regarding patent laws in the USA and the European Union, software increasingly becomes subject to patent protection. This means that Software AG is also increasingly involved in patent lawsuits.
At the moment, two such lawsuits are underway in the USA. Provisions have been made for both procedures. For detailed information, please see the appendix in the Notes.

Moreover, there is a risk of becoming involved in court proceedings regarding sales disputes. Software AG was involved in such a legal dispute with a software house in Israel. This dispute was settled in January 2005. The amount of this settlement is fully incorporated in the annual financial statement for 2004.

Risks through US export regulations
The US restrictions regarding exports to countries which are under US embargo, or business partners who are blacklisted by the US government, have an impact on our research and development in the USA. The US export regulations are also applied to products that merely contain some components manufactured in the USA. Software AG also maintains a research facility in the USA. As soon as this facility contributes more than 10 percent to the development of the company's products, these products will be subject to the US laws and regulations which govern the export restrictions. Software AG, with customers in more than 70 countries world-wide, works around these tight export restrictions by keeping the amount of research contributed by the American research center to well under 10 percent.

Securing acquisitions
The acquisition of enterprises in order to expand the range of technologies offered is part of Software AG's growth strategy. In order to ensure successful acquisition, Software AG has defined processes in both the pre- and post-acquisition phases.

• Pre-acquisition phase: When selecting an object for acquisition, the economic situation is carefully analyzed. This is followed by a thorough assessment as to whether the technology represents a logical and consistent extension of the product portfolio, and whether the company culture of the enterprise in question is compatible with that of Software AG.
• Post-acquisition phase: In order to identify possible problem areas as early as possible, finances, legal issues, research and development, sales, marketing and internal communications are all analyzed as closely as possible.

Loss of intellectual assets
Software AG is a technology leader in the development of high performance databases and integration. Therefore, employees with extensive knowledge in this area are subject to recruiting attempts by competitors. Software AG guards itself against such recruiting attempts through the following measures:

• identification of key intellectual assets
• motivation
• (in part) agreement on a non-competition clause.

Exchange rate risks
As a global enterprise, Software AG operates in various currency zones and is therefore subject to exchange rate risks. Based on internal guidelines, financial derivatives are used in order to reduce the impact of exchange rate fluctuations. Besides securing existing foreign currency assets and liabilities, these hedging tools also secure planned payments as well as income from individual companies within the group, which is earned in foreign currency, against value changes through exchange rate fluctuations.