Setting the course for future growth
These were essential focal points of our strategy:

• Continuously increasing efficiency for higher profitability
• Focusing on core competencies through the formation of two business lines
• Definition and market-driven development of the portfolio
• Geographic consolidation with a new regional structure to reinforce our presence in specific countries
• Diversification into newly industrialized countries penetrating regional growth markets.

Increased efficiency – Higher profitability
We continued our process of increasing efficiency through specific focused activities. In order to enhance profitability, the company analyzed market demands and adapted the number of employees to market requirements. As a result of the drop in sales experienced over the last few years, we reduced our staff in the research and development sector by 35 percent in the first quarter of 2004.

Structuring business sectors
Since 2003, Software AG has been focusing on the business lines Enterprise Transaction Systems and XML Business Integration Portfolio. The Enterprise Transaction Systems sector's main focus lies in supporting customers in increasing their productivity and efficiency. XML Business Integration facilitates the integration of highly diverse customer data and applications. This results in consistent access to all information, as well as the ability of diverse applications to communicate with each other on different platforms.

To help us focus on our core business areas, in 2004 we integrated market-relevant functions such as marketing and product management, along with research and development, directly into the business lines. This brought lasting improvements in competence, flexibility, and customer orientation. Today, specific features of different business areas can be integrated much more thoroughly. Research and development is linked to the market much more closely. This strengthens our ability to identify customer requirements in advance and directly implement them in market-driven, innovate product, services and solutions. Our market position therefore benefits, especially in the fast developing field of integration based on XML technology.

Extended range of products to meet market needs
To enhance the ‘value add’ for our customers, we extended our range of products and services. In the first quarter, the Enterprise Transaction Systems business line introduced new product packages to the market. Our optimized range of solutions reinforced our traditional position in the business area of high-performance databases. It assisted our customers in optimizing, expanding and managing their database applications and platforms.

In the second quarter, Software AG also expanded the XML Business Integration portfolio. Integration packages completed the existing range of services and products, adding technology platforms for the integration of data and information. The focus lies on system integration (Enterprise Legacy Integrator), data integration (Enterprise Information Integrator) and service integration (Enterprise Service Integrator).

In order to expand our integration business, we established a Business Process Management (BPM) unit. BPM enhances the efficiency of business processes along the entire value chain of an enterprise. BPM is therefore a logical expansion of the Software AG integration business portfolio.

Besides the horizontal, non-industry specific integration packages, we added specific vertical industry focused integration solutions in the third quarter. Software AG strengthened its profile as a technology and solution provider. The company has already released integration solutions for financial service providers, health services, and public administration with further industry solutions to follow.

Geographic consolidation
With a new international organizational structure, the company is now aiming for growth in traditional markets and fast, effective development of new markets. Three regions now support the 59 countries where we have either branch offices or distribution partners. This makes it easier to cater to specific customer requirements, as well as to diverse market, economic and cultural characteristics. Each of the regions is headed by an executive board member.

• Region North America / Northern Europe – including the USA, Canada, the United Kingdom, Scandinavia, and South Africa. This grouping promotes cooperation between the primarily English-speaking countries. At the same time, the exchange of knowledge and experience between countries is intensified. In adopting this structure, the company benefits from the traditionally close connections within the English-speaking culture group.
• Region South – including Southern Europe and South America. With this grouping, the company not only makes use of the common linguistic base of these countries, but also founds future growth on the historically close cultural and economic relationships between Spain and the South American countries.
• Region Central / Asia - including the central and Eastern European countries, Russia, the Middle East, plus Asia and Australia. With this structure and added support from Germany, the company caters to the special characteristics of these promising growth markets.

Markets of the future - diversification into newly industrialized countries
Up-and-coming economic regions offer promising opportunities for Software AG. In 2004, we began to focus on these countries. Our strategic alliance with a Chinese partner strengthened our position in China. It is primarily geared towards the distribution of our integration products and solutions. Our previous sales cooperation in South Africa was replaced by our own representative office. Together with a local company, we initiated a Competence Center in Russia. Here, the focus lies on upgrading mainframe computers. In Bahrain, we set up a representative office, servicing 20 clients in Oman, Qatar, Bahrain, Kuwait, the United Arab Emirates, and Saudi Arabia. Last but not least, with our branch office in Chile, we succeeded in entering the South American market directly. Our geographic diversification led to almost instant success. In Chile, we are supporting the government, the ministry of health, and the Chilean mail service. Furthermore, newly-won customers include the Russian government, and the municipal government of Shanghai.