Annual Report 2005 CITIGATESTOCKHOLM.COM PRINT: EDITA PHOTO: JANN LIPKA

Telelogic • Annual Report 2005 CITIGATESTOCKHOLM.COM PRINT: EDITA PHOTO: JANN LIPKA

Signiﬁ cant Events 2005 2 Message from the CEO – First steps taken toward 2005 our ﬁ ve-year vision 3 Mission Annual Report – Mission, Strategy, and Goals 6 – Why 5X5Y? 8

Offering and Market – Telelogic helps customers to meet new challenges 10 – The Market 14

Operations – Selling Telelogic’s Products 16 – Regular Product Updates 20 – Telelogic Out in the World 22 – EMEA 23 – Americas 24 – Asia/Paciﬁ c 25

Employees and Organization – Motivation and Values 26

Risk Analysis 28 The Telelogic Share 30 Directors’ Report 32 Income Statement 35 Balance Sheet 36 Summary of Changes in Shareholders’ Equity 38 Cash Flow Statement 40 Notes 41 Auditor Report 64 Corporate Governance 65 7 Year Summary 68 Quarterly Data 69 Key Figures 70 Deﬁ nitions 71 Board of Directors 72 Executive Management 74 Addresses 76 Annual Shareholders’ Meeting 2006 77 Financial Reports and Information 77

This document is essentially a translation of Swedish language original thereof. In the event of any discrepancies between this translation and the original Swedish document, the latter shall be deemed correct.

International Headquarters Box 4128, 203 12 Malmö, Sweden Tel: +46 40 650 00 00 • Fax: +46 40 650 65 55

US Headquarters 9401 Jeronimo Road, Irvine, CA 92618, USA Tel: +1 949 830 8022 • Fax: +1 949 830 8023

Ofﬁ ces in Europe, North and South America, Asia, and Australia Distributors worldwide

[email protected] • www.telelogic.com Telelogic • Annual Report 2005 CITIGATESTOCKHOLM.COM PRINT: EDITA PHOTO: JANN LIPKA

Signiﬁ cant Events 2005 2 Message from the CEO – First steps taken toward 2005 our ﬁ ve-year vision 3 Mission Annual Report – Mission, Strategy, and Goals 6 – Why 5X5Y? 8

Offering and Market – Telelogic helps customers to meet new challenges 10 – The Market 14

Operations – Selling Telelogic’s Products 16 – Regular Product Updates 20 – Telelogic Out in the World 22 – EMEA 23 – Americas 24 – Asia/Paciﬁ c 25

Employees and Organization – Motivation and Values 26

International Headquarters Box 4128, 203 12 Malmö, Sweden Tel: +46 40 650 00 00 • Fax: +46 40 650 65 55

US Headquarters 9401 Jeronimo Road, Irvine, CA 92618, USA Tel: +1 949 830 8022 • Fax: +1 949 830 8023

Ofﬁ ces in Europe, North and South America, Asia, and Australia Distributors worldwide

[email protected] • www.telelogic.com In 2005 we expanded our line of products and services. The acquisitions Annual Shareholders’ Meeting 2006 of the FOCAL POINT and SYSTEM ARCHITECT software applications The Annual Shareholders’ Meeting for Telelogic AB will be held at Notice including name, address, phone number, total shares, helped Telelogic offer increasingly extensive process tools. Our vision is 3:00 pm on May 2, 2006, at Börshuset, Skeppsbron 2, Malmö, Sweden. personal ID number or corporate registration number must be to grow additionally and increase sales fi vefold between 2005 and 2009. For those interested, a presentation of the Company’s areas of op- submitted in writing: erations will be given at 2:30 pm. by mail to: Telelogic AB Shareholders whose shares are registered in their own name with attn: Jenny Bothén VPC on the day of record, April 25, and who have notifi ed Telelogic Box 4128 that they intend to participate by 4 pm on April 27, are entitled to par- 203 12 Malmö, Sweden ticipate at the Meeting. Shareholders who wish to be accompanied by by e-mail to: [email protected] Our Five-Year Vision Our Value Proposition Our Customers Our Biggest Customers a maximum of two assistants to the Annual Shareholders’ Meeting must notify Telelogic of this request at the same time. or by fax: +46 (0)40-650 65 55 Telelogic is currently ranked as one of the world’s ten most infl uential fi nances. The IT industry is currently in a consolidation phase and Telelogic’s product portfolio is an inte- Telelogic aims its product line at large Airbus Q Shareholders whose shares are registered in the name of a nomi- Telelogic will send out written confi rmation once notifi cation is companies in software development according to the journal Computer our strategy is to acquire more fi rms. Telelogic must also become grated total solution for ELM marketed global companies that develop complex Alcatel Q Alpine Q nee must request to have their shares temporarily re-registered in registered. Business Review. Analyst fi rms such as Ovum, the Butler Group, and bigger in order to focus on our entire potential customer base, which under the name Telelogic Lifecycle products and IT-based systems. Boeing Q their own names in order to be entitled to participate at the Meeting. If the shareholder intends to participate by proxy, the power of IDC have declared several of Telelogic’s software solutions to be world is already asking for total solutions. We also intend to broaden our Solutions. In a changing world everything is mov- Bombardier QQ leaders, from both a technical perspective and within their respective product offering to keep pace with our customers’ needs. ing at an ever faster pace in response to Shareholders who wish to re-register must inform their nominees in attorney must be submitted to the Company in conjunction with noti- British Aerospace Q good time prior to April 25. fi cation of intent to attend. The Board of Directors’ complete propos- niches. In 2005, our sales increased 24%, stated in Swedish kronor. The Company will focus on organic growth supplemented by This covers: new requests from customers, increased Convergys To retain and secure our position as a global market leader, we strategic acquisitions with the goal of achieving a fi vefold increase global competition, stricter safety and Daimler Chrysler als for the Annual Shareholders’ Meeting may be ordered from the plan to invest heavily in the business in terms of both technology and in operations over the course of fi ve years, beginning in 2005. Requirements Management Solutions environmental regulations, growing Delphi Company as described above. demand for performance, and a never- Deutsche Bank Telelogic DOORS ending fl ow of new technological break- EADS Telelogic FOCAL POINT throughs. Therefore enterprises must Ericsson Federal Reserve deliver new products and services faster, Ford without sacrifi cing quality. In addition, General Electric Q Software Asset Management the organizational structure of compa- General Motors :6 Solutions nies is becoming increasingly complex Hewlett-Packard with staff who are scattered across Telelogic SYNERGY Honeywell Q Our Market: several continents but need to work in Lockheed Martin Q Enterprise Lifecycle Management close collaboration, while key individuals Lucent Q are constantly on the go, and important Motorola Q NEC Enterprise Architecture and functions are outsourced. Q Telelogic’s total market can be described by the Enterprise Lifecycle Nokia Q Modeling Solutions Organizations and companies have Management (ELM) concept. ELM is a software solution that optimizes, Panasonic QQ aligns, and automates the customers’ business processes – from Telelogic SYSTEM ARCHITECT a growing need for software that helps Peugeot them deal with these external and powerful modeling of objectives, structures, and product development Telelogic TAU Philips Q processes to development of advanced systems and software. internal challenges. Telelogic’s software Raytheon Q 6AB EAB The global ELM market consists of all or parts of three segments. supports these central processes. Robert Bosch The ELM market was worth about USD 3 billion in 2004, with an average Sectors of particular interest include Samsung Q Sharp Q annual growth rate estimated at almost 10% over the next fi ve years. Services aerospace and defense, public adminis- Financial Reports and Information Siemens QQ Consulting tration, telecom, automotive, pharma- Texas Instruments QQ ceutical, banking and fi nance, companies Training Toyota that produce medical equipment, and Financial information pertaining to Telelogic for fi scal 2006 will be The Company’s management meets regularly with fi nancial ana- United Technologies Q released on the following dates: lysts, investors, and private shareholders in various locations in software and systems companies. US Department of Defence Q Enterprise Architecture (EA) Vodafone Q April 19, 2006 Interim Report January - March 2006 Sweden and abroad to present Telelogic. Volkswagen May 2, 2006 Decisions from the Annual Shareholders’ Meeting The Company holds a capital market day once or a few times each Application Lifecycle Management (ALM) year for fi nancial market players. July 19, 2006 Interim Report April - June 2006 Aerospace and Defense October 18, 2006 Interim Report July - September 2006 Product Lifecycle Management (PLM) Telecom To obtain fi nancial information about Telelogic AB Banking and Finance January 24, 2007 2006 Year-End Report The fastest way to receive information about Telelogic is online. Software and Systems All fi nancial reports are posted at Telelogic ’s website, Automotive In addition to these scheduled events, Telelogic regularly releases www.telelogic.com, as soon as they are published. Other information to the fi nancial market during the year in several ways: You can also visit the website to register to receive the reports in On the same day that interim reports are published, the manage- printed format by conventional mail, or digital format by e-mail. It ment holds an analyst conference in Stockholm that can be moni- is also possible to subscribe to receive Telelogic’s press releases by tored either by phone or online. e-mail. In conjunction with publication of the Interim Reports, members Sales, SEK million Earnings per share, SEK Cash fl ow, SEK million Number of employees Sales by Region Sales by Product Group Sales by Customer Group Telelogic’s Annual Report and Interim reports in Swedish and from operating activities of corporate management carry out a Road Show in the larger English can be ordered from: fi nancial markets when the report is presented to stockholders 1,500 1.00 200 1,500 and investors. 47% Europe, Middle East 49% Requirements Management 35% Aerospace and Defense Telelogic AB 1,200 0.75 160 1,200 and Africa 26% Software Asset Management 24% Telecom All news and events that may infl uence the share price are pub- Box 4128 41% Americas 25% Enterprise Architecture 9% Banking and Finance 900 0.50 120 900 lished via press releases and simultaneously on the Company’s 203 12 Malmö, Sweden 12% Asia/Pacifi c and Modeling 7% Software and Systems website, www.telelogic.com. The Company’s policy regarding sales Tel: +46 (0)40-650 00 00 600 0.25 80 600 6% Automotive Fax: +46 (0)40-650 65 55 19% Other is to announce all deals greater than SEK 5 million. 300 0.00 40 300 E-mail: [email protected]

0 -0.25 0 0 2003 2004 2005 2003 2004 2005 2003 2004 2005 2003 2004 2005

Note that fi gures from 2003 are not restated to IFRS and therefore are not fully comparable with later years. TELELOGIC 2005 77 In 2005 we expanded our line of products and services. The acquisitions Annual Shareholders’ Meeting 2006 of the FOCAL POINT and SYSTEM ARCHITECT software applications The Annual Shareholders’ Meeting for Telelogic AB will be held at Notice including name, address, phone number, total shares, helped Telelogic offer increasingly extensive process tools. Our vision is 3:00 pm on May 2, 2006, at Börshuset, Skeppsbron 2, Malmö, Sweden. personal ID number or corporate registration number must be to grow additionally and increase sales fi vefold between 2005 and 2009. For those interested, a presentation of the Company’s areas of op- submitted in writing: erations will be given at 2:30 pm. by mail to: Telelogic AB Shareholders whose shares are registered in their own name with attn: Jenny Bothén VPC on the day of record, April 25, and who have notifi ed Telelogic Box 4128 that they intend to participate by 4 pm on April 27, are entitled to par- 203 12 Malmö, Sweden ticipate at the Meeting. Shareholders who wish to be accompanied by by e-mail to: [email protected] Our Five-Year Vision Our Value Proposition Our Customers Our Biggest Customers a maximum of two assistants to the Annual Shareholders’ Meeting must notify Telelogic of this request at the same time. or by fax: +46 (0)40-650 65 55 Telelogic is currently ranked as one of the world’s ten most infl uential fi nances. The IT industry is currently in a consolidation phase and Telelogic’s product portfolio is an inte- Telelogic aims its product line at large Airbus Q Shareholders whose shares are registered in the name of a nomi- Telelogic will send out written confi rmation once notifi cation is companies in software development according to the journal Computer our strategy is to acquire more fi rms. Telelogic must also become grated total solution for ELM marketed global companies that develop complex Alcatel Q Alpine Q nee must request to have their shares temporarily re-registered in registered. Business Review. Analyst fi rms such as Ovum, the Butler Group, and bigger in order to focus on our entire potential customer base, which under the name Telelogic Lifecycle products and IT-based systems. Boeing Q their own names in order to be entitled to participate at the Meeting. If the shareholder intends to participate by proxy, the power of IDC have declared several of Telelogic’s software solutions to be world is already asking for total solutions. We also intend to broaden our Solutions. In a changing world everything is mov- Bombardier QQ leaders, from both a technical perspective and within their respective product offering to keep pace with our customers’ needs. ing at an ever faster pace in response to Shareholders who wish to re-register must inform their nominees in attorney must be submitted to the Company in conjunction with noti- British Aerospace Q good time prior to April 25. fi cation of intent to attend. The Board of Directors’ complete propos- niches. In 2005, our sales increased 24%, stated in Swedish kronor. The Company will focus on organic growth supplemented by This covers: new requests from customers, increased Convergys To retain and secure our position as a global market leader, we strategic acquisitions with the goal of achieving a fi vefold increase global competition, stricter safety and Daimler Chrysler als for the Annual Shareholders’ Meeting may be ordered from the plan to invest heavily in the business in terms of both technology and in operations over the course of fi ve years, beginning in 2005. Requirements Management Solutions environmental regulations, growing Delphi Company as described above. demand for performance, and a never- Deutsche Bank Telelogic DOORS ending fl ow of new technological break- EADS Telelogic FOCAL POINT throughs. Therefore enterprises must Ericsson Federal Reserve deliver new products and services faster, Ford without sacrifi cing quality. In addition, General Electric Q Software Asset Management the organizational structure of compa- General Motors :6 Solutions nies is becoming increasingly complex Hewlett-Packard with staff who are scattered across Telelogic SYNERGY Honeywell Q Our Market: several continents but need to work in Lockheed Martin Q Enterprise Lifecycle Management close collaboration, while key individuals Lucent Q are constantly on the go, and important Motorola Q NEC Enterprise Architecture and functions are outsourced. Q Telelogic’s total market can be described by the Enterprise Lifecycle Nokia Q Modeling Solutions Organizations and companies have Management (ELM) concept. ELM is a software solution that optimizes, Panasonic QQ aligns, and automates the customers’ business processes – from Telelogic SYSTEM ARCHITECT a growing need for software that helps Peugeot them deal with these external and powerful modeling of objectives, structures, and product development Telelogic TAU Philips Q processes to development of advanced systems and software. internal challenges. Telelogic’s software Raytheon Q 6AB EAB The global ELM market consists of all or parts of three segments. supports these central processes. Robert Bosch The ELM market was worth about USD 3 billion in 2004, with an average Sectors of particular interest include Samsung Q Sharp Q annual growth rate estimated at almost 10% over the next fi ve years. Services aerospace and defense, public adminis- Financial Reports and Information Siemens QQ Consulting tration, telecom, automotive, pharma- Texas Instruments QQ ceutical, banking and fi nance, companies Training Toyota that produce medical equipment, and Financial information pertaining to Telelogic for fi scal 2006 will be The Company’s management meets regularly with fi nancial ana- United Technologies Q released on the following dates: lysts, investors, and private shareholders in various locations in software and systems companies. US Department of Defence Q Enterprise Architecture (EA) Vodafone Q April 19, 2006 Interim Report January - March 2006 Sweden and abroad to present Telelogic. Volkswagen May 2, 2006 Decisions from the Annual Shareholders’ Meeting The Company holds a capital market day once or a few times each Application Lifecycle Management (ALM) year for fi nancial market players. July 19, 2006 Interim Report April - June 2006 Aerospace and Defense October 18, 2006 Interim Report July - September 2006 Product Lifecycle Management (PLM) Telecom To obtain fi nancial information about Telelogic AB Banking and Finance January 24, 2007 2006 Year-End Report The fastest way to receive information about Telelogic is online. Software and Systems All fi nancial reports are posted at Telelogic ’s website, Automotive In addition to these scheduled events, Telelogic regularly releases www.telelogic.com, as soon as they are published. Other information to the fi nancial market during the year in several ways: You can also visit the website to register to receive the reports in On the same day that interim reports are published, the manage- printed format by conventional mail, or digital format by e-mail. It ment holds an analyst conference in Stockholm that can be moni- is also possible to subscribe to receive Telelogic’s press releases by tored either by phone or online. e-mail. In conjunction with publication of the Interim Reports, members Sales, SEK million Earnings per share, SEK Cash fl ow, SEK million Number of employees Sales by Region Sales by Product Group Sales by Customer Group Telelogic’s Annual Report and Interim reports in Swedish and from operating activities of corporate management carry out a Road Show in the larger English can be ordered from: fi nancial markets when the report is presented to stockholders 1,500 1.00 200 1,500 and investors. 47% Europe, Middle East 49% Requirements Management 35% Aerospace and Defense Telelogic AB 1,200 0.75 160 1,200 and Africa 26% Software Asset Management 24% Telecom All news and events that may infl uence the share price are pub- Box 4128 41% Americas 25% Enterprise Architecture 9% Banking and Finance 900 0.50 120 900 lished via press releases and simultaneously on the Company’s 203 12 Malmö, Sweden 12% Asia/Pacifi c and Modeling 7% Software and Systems website, www.telelogic.com. The Company’s policy regarding sales Tel: +46 (0)40-650 00 00 600 0.25 80 600 6% Automotive Fax: +46 (0)40-650 65 55 19% Other is to announce all deals greater than SEK 5 million. 300 0.00 40 300 E-mail: [email protected]

0 -0.25 0 0 2003 2004 2005 2003 2004 2005 2003 2004 2005 2003 2004 2005

Note that ﬁ gures from 2003 are not restated to IFRS and therefore are not fully comparable with later years. TELELOGIC 2005 77 Telelogic provides software solutions to optimize, align, and automate its customers’ business processes – from powerful modeling of objectives, structures, and product development processes to requirements-driven development of advanced systems and software. The purpose is to save time, improve quality, and cut costs. Signiﬁ cant Events 2005

New fi ve-year vision – focus on strong growth In early 2005 Telelogic announced its long-term growth vision: to increase the business fi vefold in fi ve years. Telelogic achieved its interim goal for 2005 of 10% organic growth and with acquisitions included, the Company grew 24% during the year.

Acquisition of two ﬁ rms with complementary products During the year Telelogic acquired two ﬁ rms: US Popkin Software and Swedish Focal Point. Both companies manufacture and sell market-leading products in their respective niches. Through Popkin Software, Telelogic now offers SYSTEM ARCHITECT, an enterprise architecture and business process management tool. Telelogic FOCAL POINT is a web-based solution for decision support, product management, and portfolio management.

Launch of Telelogic Lifecycle Solutions (TLS) With newly acquired products and additional improvements to existing products Telelogic TAU, Telelogic DOORS, and Telelogic SYNERGY, during the year Telelogic launched TLS – a suite of software that takes an integrative approach to its customers’ development processes.

Honors – A World-Leading Company According to Computer Business Review 2005, Telelogic was one of the ten most infl uential software development companies in the world. In SD TIME’s annual ranking of IT companies that show great leadership, either through their infl uence in the market or through truly signifi cant and innovative technologies, Telelogic DOORS, SYNERGY, TAU, and SYSTEM ARCHITECT all ranked in the top ten in the world in their respective categories during 2005.

KEY FIGURES 2005 2004 20031 Sales, SEK million 1,289.9 1,039.3 937.0 Change in sales, % 24.1 10.9 –16.4 Operating margin excl. goodwill, % 15.1 16.8 2.8 Earnings before tax, SEK million 201.7 177.6 5.2 Earnings after tax, SEK million 165.2 134.3 -16.1 Earnings per share before dilution, SEK 0.70 0.63 -0.08 Share price at year-end 20.40 15.70 11.50 Market capitalization at year-end, SEK million 4,965.9 3,411.4 2,351.0 Cash and cash equivalents at year-end, SEK million 447.3 249.5 139.8 Equity per share, SEK 5.59 3.23 2.69 Equity/assets ratio, % 69.4 61.3 53.9 Number of employees at year-end 929 719 639

1 Please note that 2003 is not restated under IFRS, which means that the key fi gures for profi t/loss before tax, profi t/loss after tax, earnings per share, equity per share and the equity/assets ratio are not comparable with 2004 and 2005.

2 TELELOGIC 2005 Message from the CEO

First Steps Toward Our Five-Year Vision

Telelogic is well on the way to creating a large world-leading software company with good profi tability. In 2005 we successfully took the fi rst steps toward our fi ve-year vision with the goal of achieving a fi vefold increase in the operation in fi ve years.

Telelogic is the leading global provider However, the consolidation of the market in which benefi ts of scale can have the of software for optimizing, aligning, and in recent years has also meant that our greatest impact on the bottom line. With automating its customers’ development competitors have improved their selec- substantial product development costs processes. We have created this position tion of products. Telelogic therefore wants and high margins, volume is critical. Like based on an understanding of the complex to continue to actively participate in this many of our competitors, Telelogic realizes environment in which our customers are consolidation process in order to secure that economies of scale are essential for active. Large companies that develop com- and develop our leading position. generating sustainable high profi tability. plex products face a number of challenges: The software industry is one of the prioritizing which products to focus on world’s most fragmented industries, with Telelogic’s Five-Year Vision and which projects to implement many small but global players. Combin- Telelogic’s current strong position, with ing innovative product development and continued investments and solid market handling change and making well- a global presence with high profi tability growth, sets the scene for continued robust founded decisions during the course is a challenge for any small enterprise. At development. Against this background, last of the project the same time the software industry is one year Telelogic announced its new fi ve-year automating and accelerating time- consuming and repetitive sequences optimizing and minimizing costs throughout the organization

In recent years it has become clear that customers require more complicated software for a growing number of processes. Telelogic has identiﬁ ed this need early on in its new ﬁ ve-year vision. One of the key elements of this vision is to grow with our customers by expanding our product offering. We have accomplished this in 2005 by both improving existing products and acquiring complementary products.

Continued Consolidation One clear trend driving consolidation is that customers prefer working with fewer providers from whom they demand a broader selection of products. Over the years Telelogic has built up a strong, well- integrated portfolio. The acquisitions of Popkin Software and Focal Point during 2005 further strengthened this portfolio.

TELELOGIC 2005 vision – 5X5Y1. According to this vision, requirements management product that it expands its offering to business process Telelogic will continue to invest in organic provides easy access to requirements modeling. growth supplemented by strategic acquisi- management, even across low-bandwidth The acquisition of Popkin is an excellent tions with the goal of achieving a fi vefold connections. doors xt builds on the example of how Telelogic can expand its increase in operations over the course of world-leading position Telelogic estab- line of products to related fi elds. Telelogic’s fi ve years, beginning in 2005. lished with its current doors product. customer portfolio includes several of the In June Telelogic launched an im- largest companies in the world. Business Growth – Product Development proved version of its integrated solu- process modeling is of growing impor- – Increasing Profi ts tion, “Telelogic Lifecycle Solutions” tance to these enterprises and according to system architect Demand for Telelogic’s products was good in all markets. The release consisted of industry analysts, is in 2005. Telelogic’s total growth for the Telelogic doors, Telelogic synergy the leading product in the fi eld. One ex- year was 21%, translated into local cur- and Telelogic tau, which together offer ample showing that the integration process rency (24% in SEK). During the year all of superior support throughout the life also works well is the release of Telelogic system architect Telelogic’s market divisions demonstrated cycle of the application. version 10.3. This good sales growth. Overall, Telelogic’s version of system architect is fully emea operations in (Europe, Middle East Earnings before tax improved thanks to integrated with Telelogic’s other life cycle and Africa) were stable with a growth rate robust growth, strong cost control, and products, which means that requirements doors tau of 14%. In Europe, however, the market world-leading products. Earnings per share from and models in and system architect climate varied from country to country. increased 12% year on year. can now be viewed Demand in Germany was strong, but lack- simultaneously in doors. This version luster in the United Kingdom. Operations Successful Acquisitions was released in late 2005 – less than nine in North and South America demonstrated During the second quarter of 2005 months after the acquisition. robust sales growth during the year of Telelogic acquired two companies: the 30%, calculated in local currency. The us company Popkin Software in April and Stage Two Asia/Pacifi c market division had a weak the Swedish company Focal Point in June. In 2006 our 5X5Y vision will continue to start to the year, but came back strong in Focal Point was a successful small Swedish guide our work as we continue to focus on the fourth quarter with a growth rate of company, with 26 employees and strong organic growth supplemented by strategic 42%. For full-year 2005, the Asia/Pacifi c growth over the past few years. The focal acquisitions. Telelogic acquisitions will operation grew 13% in local currency. All point product, a requirements analysis 1) strengthen our existing line of products market divisions also reported good profi t- and decision-making support tool, holds 2) increase our line of products in software ability. a strong position in the Nordic countries, development 3) expand our line of prod- elm2 On the product side Telelogic continued but has been essentially unknown in the ucts to related fi elds in . to invest heavily in research and develop- rest of the world. Telelogic’s global organi- Telelogic shareholders should be aware ment. In 2005, Telelogic invested 15% of zation and strong customer portfolio are that 5X5Y is a vision and not an absolute sales in product development and it con- just what focal point needs to attain goal. Becoming fi ve times bigger in fi ve tinued working on improved versions of a global breakthrough. Properly managed, years at the same time that profi ts also have all product families. Telelogic also devoted focal point can achieve tremendous to become fi ve times bigger is an enormous considerable effort to improving integra- growth over the next few years. task, but Telelogic has made this journey tion among its own product families, as Privately owned Popkin Software was before. Between 1999 and 2004 we grew well as with complementary products from a provider of system architect, a glob- from almost SEK 200 million in sales and other providers. Examples of important ally leading enterprise architecture tool. SEK 1 million in profi ts to SEK 1,000 product news in 2005 include: Telelogic identifi ed Popkin as a successful million in sales and SEK 100 million in At the beginning of the year Telelogic company with a product that is a good fi t profi ts. During this period we success- launched doors xt to a select group with Telelogic’s current product line in the fully implemented and integrated twelve of customers. doors xt is an expanded fi eld of modeling, at the same time that acquisitions, at the same time that we built

4 TELELOGIC 2005 up a leading position in our global niche. Because of these results, year after year Computer Business Review lists Telelogic as one of the world’s most inﬂ uential companies in software development – and Telelogic is the only non-US company on the list. Many factors must fall in place if we are to achieve our vision; hard work is not enough. Above all, we must be able to carry out attractive acquisitions and successfully integrate them into our operation. Valuation of acquisition targets must also continue to be attractive. All this can only be possible with the continued support of our shareholders. With a strong organization, an attractive product offering and world-leading customers, Telelogic is well equipped to continue building a large, world-leading software company with strong proﬁ tability.

1“Increase 5 times in 5 years.” 2Enterprise Lifecycle Management, please see page 12 for more information.

Anders Lidbeck President and CEO Malmö in February 2006

TELELOGIC 2005 Mission

Mission, strategy, and goals

Telelogic is the leading global provider of software solutions to optimize, align, and automate its customers’ business processes – from powerful modeling of objectives, structures, and product development processes to requirements-driven development of advanced systems and software. Telelogic’s solutions are mainly aimed at large companies that develop complex projects in geographically widely dispersed sites.

Mission So we work with a sense of urgency in everything We provide integrated best-in-class software we do. Speed is essential. solutions for Enterprise Lifecycle Management that enable customers to make and implement Passion and Fun – We constantly look for what is the right decisions about their products and fun and unique creating an environment that “To defi ne, automate, and support a world-class process, you need a processes, and then design and build them in stimulates creativity and job satisfaction is one world-class support tool. We evalu- the most effi cient way. of our greatest challenges. ated the most popular tools on the market today, and FOCAL POINT Vision Strategies clearly stands out as the superior choice not only for its traditional ad- To be the clear choise for optimizing Enterprise Offer a complete and integrated ELM solution that ministration features, but also for its Lifecycle Management. automates and optimizes our customers’ processes. focus on value and decision making.” Our goal is to continue to generate a comprehen- Bertil Lundberg, SVP IT-Control, Swedbank Values sive platform that supports our customers’ elm Telelogic’s core values have gradually evolved over processes. the course of the company’s more than twenty- year history. In the late 1990s when the company Strengthen our products’ position as leading tools began its substantial expansion it was important in their respective fi elds. to document these values to make it easier to For several years independent industry analysts work with them on a large scale. Since then, their have designated Telelogic software as leading basic content has remained unchanged, but we products in the market. Telelogic will build on have gradually expanded upon and refi ned their this position by continuing to collaborate with defi nitions. our customers to achieve innovative product development that further improves the products Customers First – We always prioritize our custom- and their integration. ers and our business operations. Nothing is more important than constantly exceeding customers’ Focus on customers who require expanded function- expectations and winning new business. ality for large-scale development in geographically dispersed sites. Excellence in Execution – We do everything with Telelogic’s products are particularly suitable for quality, and we like what we do. We take full solving complex problems for companies with responsibility and deliver what we have prom- large-scale development and with development ised, on time. Our defi nition of effi ciency is: the teams located in sites that are often geographi- solution works, it’s faster than yesterday’s and it’s cally dispersed. This type of environment allows better than the competition. users to best take advantage of the products’ high functionality. Do the right thing – We do the right things. Doing the right thing is about survival. Our defi nition Build strategic relations with key customers. of the right thing is doing what gives added value Telelogic’s customers are scattered all over the to our customers and generates business. world and require a global presence. Telelogic creates long-term relations with its key customers, Sense of Urgency – Our business environment is where the customer receives local support and changing rapidly, and we must change with it. global coordination.

6 TELELOGIC 2005 Continuously develop the organization’s productivity. Financial goals 2006 During the year Telelogic will continue to im- Market demand will be good in 2006, with simi- prove its internal effi ciency and productivity with lar quarterly fl uctuations as in 2005. The Compa- the objective of improving those processes that ny expects organic growth to reach at least 10% facilitate growth. in local currency during the year. As part of this goal, Telelogic intends to substantially strengthen Achieve strong growth. its market position in Asia. The Company expects Telelogic has always endeavored to achieve sales in Asia to grow faster in 2006 than in other growth. In order to retain and secure its market regions. leadership, over the next few years Telelogic will Telelogic expects earnings per share and cash implement concrete growth strategies in all geo- fl ow, including the effects of acquisitions, to in- graphical regions. crease in 2006 compared with the previous year. The Board of Directors’ long-term goals are to Attract and develop individuals with exceptional achieve an equity/asset ratio greater than 40% knowledge and an outstanding attitude. and to keep the net debt to equity ratio below In companies such as Telelogic the individual is 0.5. Acquisitions may cause the net debt to a crucial competitive advantage. To continuously equity ratio to temporarily exceed this goal. improve Telelogic’s position as an attractive and stimulating employer and to retain profi ciency Achievement of Objectives 2005 and high energy levels throughout the organiza- The Company achieved the objectives it an- tion is a high-priority area. nounced in early 2005. For full year 2005, Read more on the next page Telelogic achieved organic growth of 10%, as about what Telelogic’s COO Five-Year Vision well as improved earnings per share and cash fl ow. Scott Raskin and CFO Håkan Telelogic’s position, combined with continued Operations in Asia grew during 2005 with the Tjärnemo have to say about investments and market growth, sets the scene for addition of 69 people, for a total of 240 employ- customer benefi t and the continued good development. The Company will ees in early 2006, representing a 40% increase. 5X5Y vision. continue to focus on organic growth supplemented by strategic acquisitions with the vision of achieving a fi vefold increase in operations over the next fi ve years, beginning in 2005.

TELELOGIC 2005 7 Mission

Why 5X5Y?

The Company will focus on organic growth is active in a technology-intensive market, What sort of enterprises will Telelogic buy? supplemented by strategic acquisitions with new and improved products constantly Håkan: There’s no simple answer to that with the goal of achieving a fi vefold in- entering the scene. The second reason is question. Many factors must fall into place crease in operations over the course of that our customers prefer to avoid working for a purchase to happen: the right product, fi ve years, beginning in 2005. Telelogic with too many providers, since this can be the right values, adequate profi tability, the calls this vision Telelogic 5X5Y, which is ineffi cient and expensive. right price, and so on. We look for com- a catchy way to say “increase 5 times in panies with products that can strengthen 5 years”. So the need for more products is the Telelogic in one of the following three areas: impetus behind the 5X5Y vision? 1) strengthen our existing offering; in other Every day Scott Raskin, Telelogic’s Chief Oper- Scott: Yes, but only in part. Economies of words, a rival product. scale are also a factor when growing fi ve ation Offi cer, takes note of customer needs. 2) increase our offering in software-devel- times bigger in fi ve years. Clearly con- He can explain, together with Telelogic’s Chief opment, like the acquisition of Focal Point solidation is necessary in this fragmented Financial Offi cer, Håkan Tjärnemo, why the last year. 5X5Y vision is so important. industry, with its preponderance of small players representing numerous companies, 3) expanded our offering into related fi elds in ELM, like the acquisition of Popkin. Since Telelogic is already doing well all struggling to demonstrate adequate today, can’t you just continue as before? profi tability. What kind of company will Scott: Telelogic’s customers operate in a Telelogic become? complex environment. Therefore Telelogic How will size help Telelogic become Håkan: Telelogic quintupled its operations must be sensitive and grow with its custom- more profi table? once before and during that period we car- ers by offering products for new areas. With Håkan: Since we’re a software company ried out several large acquisitions, launched the fast pace of developments and competi- our fi xed costs for developing new ap- successful new products, and demonstrated tors whose product portfolios are becoming plications remain the same, whether we that we can be highly profi table. Currently increasingly complete, at the very least we sell one or one hundred licenses for our we are focusing on a repeat performance by have to keep the same pace if we’re still software solutions. The same applies to our achieving a fi vefold increase in sales while going to be around as a successful company sales organization, which has to be global. retaining profi tability. Until we have ac- a few years from now. Telelogic’s customers are large global companies that want global support. We have to complished this we will not discuss the next step, but there is nothing in our mission to Couldn’t Telelogic just be satisfi ed maintain a presence in the countries where prevent us from becoming even bigger. with offering fewer products that could our customers are active in order for them be integrated with other providers’ to choose us as provider. A small company incurs high fi xed costs per country in rela- What are the risks of this vision? products instead? tion to its sales. When the enterprise grows, Håkan: One of the biggest risks is that we Scott: There are two main reasons. The fi rst fi xed costs only increase marginally and the won’t fi nd a suitable acquisition target. Even is that it’s easier to achieve well function- increased revenues become profi t instead. if we achieve double-digit organic growth ing integration using our own products than we still need acquisitions to achieve 5X5Y. Scott: Although we already have about 1,000 with our competitors’ products. Currently The other risk is a repeat of something employees in the Group, our global sales Telelogic has a strong product line that like September 11 or the telecom industry force is still relatively small. appeals to many customers. But Telelogic crisis of the past few years. With the drastic cutbacks associated with both these events, it would be diffi cult to achieve growth.

Do you think that Telelogic will be successful? Scott: Deﬁ nitely! Håkan: Telelogic’s management and its Board of Directors support this vision 100%. We’ve announced it to the market because we believe it’s completely feasible.

Scott Raskin, Chief Operator Ofﬁ cer, is responsible for Telelogic’s global sales and Håkan Tjärnemo is responsible for Telelogic’s global ﬁ nance and Administration.

TELELOGIC 2005 Offering and Market

Telelogic offers software to optimize, align, and automate its customers’ operating procedures. The market for this type of product has global sales of about USD 3 billion. Offering and Market

Telelogic helps customers to meet new challenges

The enterprises and organizations that Telelogic focuses on face major challenges. In a changing world everything is moving at an ever faster pace in response to new requests from customers, increased global competition, stricter safety and environmental regulations, growing demand for performance, and a never-ending ﬂ ow of new technological breakthroughs. Therefore enterprises must deliver new products and services faster, without sacriﬁ cing quality.

“Adding value, reliability and control Market Demand on a large-scale basis. Sectors of particular interest of processes is what is important to In addition, the organizational structure of include aerospace and defense, public administra- us. Telelogic DOORS allows us to achieve this in a unique and power- companies is becoming increasingly complex tion, telecom, automotive, pharmaceutical, bank- ful way – and saves us time in the with staff who need to work in close collabora- ing and ﬁ nance, companies that produce medical process.” tion scattered across several continents, while equipment, and software and systems companies.

Jakob Hermansen, Head of Risk Management key individuals are constantly on the go, and at BankInvest, Denmark. important functions are outsourced. Telelogic’s Offering To date many companies have taken an isolated Telelogic offers software to optimize, align, and approach to tackling these challenges by looking for automate its customers’ operating processes. solutions in one area without considering similar Telelogic’s software is divided into three product problems elsewhere in the organization, or their divisions: need for coordination. For example a company can create a highly Requirements management solutions efﬁ cient development organization, but without Telelogic doors ensuring that developments are consistent with Telelogic focal point Sales by Product Group long-term goals. Other companies that succeed with this may do so at the expense of complex, Software assets management solutions manual, and cumbersome systems. Telelogic synergy There is a growing need for software that helps organizations and companies apply a coordinated Enterprise architecture and modeling solutions approach to handle these external and internal Telelogic system architect challenges. The purpose is to save time, improve Telelogic tau

49% Requirements Management quality, and cut costs. 26% Software Management Please see pages 12 and 13 for a more detailed 25% Modeling and Business Telelogic’s Target Group presentation of the individual products. Process Management Telelogic aims its products at large global companies that develop advanced systems and software

Customer requirements Competition External Challenges – doing the right things he right The survival of a company or organization depends on successfully g t thi oin ng providing the products and services that customers demand. They must: D Doing s recognize requirements and capture market trends things right prioritize the right products and implement the right projects manage change during the course of the project Outsourcing Greater efﬁ ciency Internal Challenges – doing things right Distributed Common Providing the right product isn’t enough; a company or organization must also work mobile teams goal the right way and use all available resources wisely. This requires documents that: optimize efﬁ ciency and minimize costs throughout the organization coordinate so that all employees work toward a common goal and eliminate CHALLENGES overlapping activities automate and optimize time-consuming and repetitive sequences

Laws and regulations Technical breakthroughs

TELELOGIC 2005 Consulting and Training Services Acquisitions Complement Product Portfolio Investing in Telelogic products frequently Since its inception, Telelogic has focused on and involves new and more effi cient procedures. For found its strength in the development depart- maximum return on investment, Telelogic offers ments of large companies. Telelogic’s software consulting and training services for the software. solutions and services help companies to pro- Although customers can implement the product vide products faster and more cost-effectively. without any further modifi cation, many choose Originally, Telelogic’s offering was limited to to customize the software. developing embedded software, but after several acquisitions over the past decade the Company Telelogic’s consulting services include: has expanded its portfolio to include all types of Process support: help identify and improve advanced system and software development. “It’s easy to make organizational existing processes and see what additional tools Customers can achieve even greater effi ciency changes, but to make changes for if their development processes are integrated the better, you have to really under- might be needed to meet the customer’s needs. stand the organization. Enterprise with the other processes, structures, and goals Deployment support: help deploy Telelogic’s Architecture (EA) is a structured way in the organization. To meet this need, in to study the organization so deci- product and processes in the companies’ 2005 Telelogic acquired the companies Popkin sions can be made on facts, not an- operations. system architect ecdotes. Using SYSTEM ARCHITECT, Software and its product , we have identifi ed approximately Tool support: help adapt the product to the as well as Focal Point and its product focal 100 redundant systems that DOI will customer’s existing processes. point. Telelogic integrated these software solu- retire within the next one to three years, resulting in millions of dollars tions with its other tools. in savings.” To ensure that customers take maximum Colleen Coggins, Chief Architect, advantage of the software, Telelogic offers both US Department of the Interior standardized and customized training programs. Training and consulting services accounted for 20% of Telelogic’s sales in 2005.

TELELOGIC 2005 11 Offering and Market

“Telelogic’s tools allow us to Integrated Products software and systems throughout their life minimize programmers’ time and Telelogic’s software solutions can be used inde- cycle, including change management, project effort for producing code. We can now concentrate on developing the pendently or in combination. Its portfolio of management, and requirements management. best possible software quickly and products offers a strong, consistent value proposi- Product Lifecycle Management (plm): de- effectively.” tion that Telelogic markets under the Telelogic velopment and management of mechanical Alexander Karnyukhin, Managing Director, Lifecycle Solutions name. products throughout their life cycle, including AM Telecom This integrated product line provides enterpris- change management, project management, and es with a total solution that aligns and optimizes requirements management. Telelogic only of- processes throughout the organization. Telelogic fers plm tools for comprehensive development Lifecycle Solutions help companies and organiza- phases. tions to develop and deliver systems and software more effi ciently, which means: In many cases, the same customer carries out development in all market segments. Enterprise the entire development cycle is automated to Lifecycle Management (elm) is Telelogic’s des- achieve high-quality results faster. ignation for the relevant components of the ea, support for development projects to ensure that alm, and plm markets. they meet customer requirements and business Sales for the total elm market are about usd objectives. 3 billion and analysts expect this market to grow access to critical information throughout the at an average annual rate of almost 10% over the development process, enabling management to next few years. set priorities and make the right decisions. an open technical platform that works together Market Segments Coordinated with other applications, systems, and processes. Looking for an integrated solution is still a new concept. Even if companies and organizations Customers fi nd that Telelogic products – sepa- increasingly realize the benefi t of integrated rately or in combination – save time, improve development projects, they usually use software quality, and cut costs. solutions that are not integrated. alm and plm are closely related in several Enterprise Lifecycle Management (ELM) elm ways. Telelogic is currently one of just a few com- The market refers to Telelogic’s total market, panies in the world that offers products for the which can be divided into three segments: entire alm segment, which encompasses gather- Enterprise Architecture (ea): modeling and ing data, analysis, requirements, software design, analysis of processes, structures, and objectives testing, and change and confi guration manage- in the organization. ment. Today’s sophisticated products are often a Application Lifecycle Management (alm): combination of complex software and hardware. development and management of advanced

Telelogic’s product portfolio is an Telelogic DOORS Telelogic FOCAL POINT integrated total ELM solution marketed – take control of requirements – make the right decision faster under the name Telelogic Lifecycle So- lutions, TLS. The products are available Telelogic DOORS is the world’s leading requirements Telelogic FOCAL POINT is a web-based solution for separately and as components of TLS. management tool that helps customers gather, sort, decision support, product management, and portfolio analyze, communicate, and follow up on requirements management, especially in requirement analysis. within and between organizations throughout a project. FOCAL POINT helps customers make better and faster DOORS offers great fl exibility to organize the user’s in- decisions by prioritizing requirements and weighing formation and optimally support the user’s procedures. them against each other based on various param- DOORS makes it easy to monitor a requirement at any eters (such as cost and customer benefi t). FOCAL time in the development process, from concept to test, POINT, which was acquired during 2005, complements to see how it affects the software. Industry analyst fi rm Telelogic’s range of products with a product whose users Yphise named Telelogic DOORS the best requirements are largely found in earlier phases of the development management tool in 2005. process compared with Telelogic’s previous products. TELELOGIC’S PRODUCTS TELELOGIC’S

TELELOGIC 2005 plm, which provides full control and integration Enterprise Lifecycle Management (elm) involves of a product’s processes, applications, and data optimizing and integrating the various processes throughout its life cycle, is therefore well accepted in alm, plm, and ea and that these processes are in several of Telelogic’s customer segments, such clearly supported by the company’s structures and as aerospace and defense, automotive, telecom, objectives. and medicine. Many of Telelogic’s alm customers already use plm solutions. Competitive Environment In a large organization many other processes Industry analysts consider each of Telelogic’s and activities need to be optimized. Most of all, products to be among the market leaders, from such companies need to connect alm and plm to the perspective of technology and within their their organizational structure and business pro- respective applications. The integrated products cesses to ensure that development and production work together and comprise a portfolio with a not only meet customer requirements, but are strong, consistent value proposition. also in line with the company’s strategic mission. Telelogic’s overall market position is strong, Enterprise Architecture (ea) provides structure since only three providers in the world can offer for these business processes and comprises an a total solution for Enterprise Lifecycle Manage- integrated collection of models and documents ment (elm). The other providers that offer the in four key areas: business processes, information, same type of solution are ibm/Rational and Bor- systems, and technology. In ea companies design, land. In addition, Serena Software has created a visualize, and analyze models, objectives, and solution through acquisitions that overlaps some organizational structures. of the segments that Telelogic’s products handle.

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Telelogic SYNERGY Telelogic SYSTEM ARCHITECT Telelogic TAU – handle versions and changes efﬁ ciently – analyze structures and processes – optimize software development

Telelogic SYNERGY is the company’s tool family for Telelogic SYSTEM ARCHITECT is a leading Enterprise Telelogic TAU is a development environment for managing changes, confi gurations, and versions in Architecture tool with an integrated collection of models analysis, design, deployment, and testing of advanced development projects. SYNERGY provides an overview and documents in four key areas: business processes, software. TAU is unique because it offers full visual that enables users to understand in retrospect why information, systems, and technology. Organizations all modeling of the software application, which effectively a specifi c change was made, who made it, what its over the world use SYSTEM ARCHITECT to more easily improves quality in software design. TAU also auto- consequences were, and if desired, to recreate the design, visualize, and analyze models and organization- matically generates textual program code, resulting conditions present before the change was carried out. al structures. SYSTEM ARCHITECT, which was acquired in signifi cant timesaving. The software also features Large-scale projects often involve groups that work in 2005, broadened Telelogic’s customer base. While integrated testing and built-in quality control. simultaneously on the same program and who, for Telelogic’s other products mainly focus on traditional example, deliver versions in different languages. engineering departments, SYSTEM ARCHITECT also SYNERGY automates handling of these processes. addresses users in other departments and at a higher level in the organizations.

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The market for Telelogic’s ELM solutions includes 2) MDD PLM most of ALM, parts of PLM, and EA. It is worth noting Model Driven Development, MDD, is a logical way to Product Lifecycle Management, PLM, involves man- that leading industry analysts classify the market dif- develop software in which development is based on agement of the physical product throughout its de- ferently than the market on which Telelogic focuses. models or drawings. Telelogic’s MDD-related product velopment cycle. The total PLM market is about four In certain cases, Telelogic only addresses parts of the is TAU (excluding TAU Tester and TAU Logiscope). An times larger than the ALM market. However, Telelogic defi ned markets in the table below. important element of MDD for Telelogic is embed- does not intend to address the entire market, but ded systems. Certain industry analysts, such as IDC, will focus on two segments within PLM: require- ALM also include SYSTEM ARCHITECT in its MDD analysis ment and change management, which is similar to Application Lifecycle Management (ALM) includes because the product is also based on a modeling Customer Needs Management (CNM), in analyses by gathering and analysis of requirements, software and theory, though not for software development, but for industry analysts, and Product Portfolio Management. system design, testing, and change and confi guration enterprise-wide system architecture. Telelogic’s DOORS and SYNERGY products are related management. The TELELOGIC products related to the to CNM, while FOCAL POINT is intended for PPM. ALM market are DOORS, FOCAL POINT, SYNERGY, 3) Testing and TAU. The ALM market can in turn be divided into Testing, which some industry analysts also refer to EA four segments: as Automated Software Quality testing (ASQ), involves Enterprise Architecture, EA, includes modeling and testing software systems. Telelogic’s products in this analysis of processes, structures, and goals in busi- 1) SCM market are TAU Tester and TAU Logiscope. nesses. Telelogic’s product in this segment is SYSTEM Software Confi guration Management Tools, SCM, ARCHITECT. The table below includes EA in the MDD are useful for confi guration and change manage- 4) RM market. ment. Telelogic’s product in this segment is called Requirements Management (RM) is a market that SYNERGY. some analysts consider separately. Telelogic’s requirements management products are called DOORS and FOCAL POINT.

Facts about Relevant Markets

Forecast Size 2004, Growth growth/year Forecast Market Telelogic Product USD m1 2003–2004, % 2004–2009, % 2009, USD m Source

ALM2 DOORS, FOCAL POINT, SYNERGY, TAU 2,136 9.2 3,3174 SCM SYNERGY 1,068 14.9 9.0 1,646 IDC

MDD TAU, SYSTEM ARCHITECT 507.5 4.9 9.7 805.2

Testing TAU Tester, TAU Logiscope 465 15.1 Gartner RM DOOR, FOCAL POINT 95.8 27.5

PLM3 DOORS, FOCAL POINT, SYNERGY, TAU 777 1,465 CNM DOORS, SYNERGY 259 14.0 20.0 624 AMR Research

PPM FOCAL POINT 518 10.0 11.0 842

According to Telelogic, the ELM market is worth about USD 3 billion.

1 Licensing and maintenance sales. For Testing and RM, though only license sales. 2 The part of the ALM market that Telelogic targets. 3 The part of the PLM market that Telelogic targets. 4 Forecast for the size of the testing and RM markets in 2009 is not available. However, according to IDC the total ALM market is growing at an average annual rate of 9.2%.

External sources: AMR Research: “The Product Lifecycle Management Applications Report, 2004–2009” Gartner DataQuest Market Share-Application Development Software, Worldwide 2004, published Sept 2005 IDC: “Worldwide Application Life-Cycle Management Tools 2005-2009 Forecast” Doc # 33067 IDC: “Worldwide Software Conﬁ guration Management Tools 2005-2009 Forecast Update” Doc # 34690 IDC: “Worldwide Model-Driven Development Software 2005-2009 Forecast and 2004 Vendor Share” Doc # 34435

No analyses for 2005 were published at the time of this writing.

14 TELELOGIC 2005 Business With 7,400 customers worldwide, Telelogic showed growth in 2005 in the Americas, EMEA, and in Asia/Paciﬁ c. Business Customers

Selling Telelogic’s Products

Percentage of sales by Telelogic currently has more than 7,400 customers, many of whom are leading play- customer group ers in their market segments. In 2005 Telelogic intensiﬁ ed collaboration with existing customers and at the same time added more than 400 companies around the world to its customer base.

Telelogic’s ten biggest customers accounted for In 2005 the aerospace and defense industry seg- 26% of sales in 2005 and no single customer ac- ment continued to grow from 34% of Telelogic’s counted for more than 6% of sales. sales in 2004 to 35% in 2005. The telecom in- 35% Aerospace and defense dustry accounted for 24% of total sales in 2005. 24% Telecom Expanded Customer Base Through Acquisitions Banking and ﬁ nance grew to 9% of sales, the au- 9% Bank and ﬁ nance The two acquisitions for 2005, Popkin Software tomotive industry remained steady at 6%, while 7% Program and systems 6% Automotive and Focal Point, had a combined customer base software and system providers increased to 7%. 19% Other of about 500 companies and organizations. Sev- The category “other” consists of those segments eral were already Telelogic customers, though in that individually accounted for less than 5% of many cases involved other companies or depart- sales and includes segments such as the medical ments from the customer’s group. Altogether, device and pharmaceutical industries, home sales of system architect and focal point electronics, and the transportation industry. accounted for 11% of Telelogic’s sales in 2005. Telelogic Works Close to its Customers The aerospace and defense industry continues Telelogic works close to its customers, which of- to be the biggest customer segment ten helps to achieve long-term customer relations. Historically the telecom industry has been According to Telelogic, the majority of total sales Telelogic’s key customer segment, but in recent in 2005 involved existing customers. Overall, years, Telelogic has broadened its customer base Telelogic estimates that over half of its customers considerably and the aerospace and defense seg- use two or more Telelogic products to optimize ment has now superseded telecom as the biggest and automate processes in their businesses. segment. Telelogic’s objective is to further expand sales to new customer segments.

SYSTEM ARCHITECT Wins Award from US Department of the Interior

In 2005 SYSTEM ARCHITECT was honored when the US Department of the Interior (DOI) received the highest rating for its Enterprise Architect program across the Federal Government by the US Govern- ment Ofﬁ ce of Management and Budget (OMB). Using SYSTEM ARCHITECT, the DOI was able to build a roadmap showing the relationships between existing processes, data, and the technology infra- structure. From there, it was able to create modern- ization blueprints to improve internal efﬁ ciencies and services, minimize security and privacy risks, and reduce costs. “It’s easy to make changes, but to make changes for the better, you have to really understand the

US Department of the Interior organization. Enterprise Architecture (EA) is a struc-

TELELOGIC 2005 First American MLS First

More Satisﬁ ed Customers with FOCAL POINT

First American MLS Solutions, Inc. is a software development company and Sales Process leading provider of Multiple Listing System (MLS) software used by real es- The practical process of selling Telelogic products tate associations in the United States. Approximately 500,000, or half of all can vary from case to case, depending on the U.S. real estate agents use First American MLS’s MLXchange and TEMPO customer’s size, the product or product mix sold, products to help homebuyers and sellers fi nd and sell their homes. the size of the order, or the country in which the In order to ensure that it develops the right functions, twice a year, First sale takes place. American MLS Solutions surveyed its vast customer base to help product The cornerstone of the Telelogic sales model developers prioritize features for the next release of MLXchange and ana- is to conduct sales using local sales teams in the lyze the requests by customer size and geographic region. First American twenty countries where Telelogic is currently rep- MLS Solutions had been using an independent consulting fi rm to conduct resented by its own sales and marketing compa- the customer research, but that all changed when Rich Paulson, Director of Product Management, First American MLS Solutions, got a cold call from nies. Each national team is responsible for its own a Telelogic FOCAL POINT sales representative. fi nancial performance and reports to the three “It was quickly evident to me that FOCAL POINT could do a lot more larger market divisions. The sales teams in each than the basic survey tools we were using, and could do it at a lower cost,” country consist of: Paulson explained. Account Managers, responsible for customer Three months after selecting FOCAL POINT, it was up and running at relations. First American MLS Solution’s headquarters. “The actual cost of the FOCAL POINT software license was half of what Field Application Engineers (FAE) support the we were paying an outside consulting fi rm to conduct research for us one account managers during the sales process. time. “Now we can do the work ourselves as many times we want and only A number of select, large customers have their incur the costs for additional FOCAL POINT licenses we may need,” says own dedicated sales teams. Paulson. “But the biggest return on investment from using FOCAL POINT is improved customer satisfaction because they know we’re listening to them Inside Sales. and we feel more confi dent that we are improving our product to better Field Marketing sales associates who work with meet our customers’ needs.” direct marketing.

tured way to study the organization so decisions can be “We selected SYSTEM ARCHITECT for its functionality, made based on facts, not anecdotes,” said Colleen Coggins, ﬂ exibility, enterprise architecture capabilities, its ability Chief Architect at the Department of the Interior. to modify meta-models and its support for model- “Using SYSTEM ARCHITECT, we have identiﬁ ed ap- ing techniques such as UML and IDEF,” Coggins said. proximately 100 redundant systems that DOI will retire “SYSTEM ARCHITECT is DOI’s decision support tool. within the next one to three years, resulting in millions Without SYSTEM ARCHITECT, DOI would not have of dollars in savings,” Coggins said. “But that’s not all. the information to do the analysis and make funding Decision-makers can now see direct links between recommendations.” their IT systems and investment and department goals targeted for accomplishment.” DOI compared several market-leading enterprise architecture tools. Following a successful pilot program in 2003, DOI made SYSTEM ARCHITECT its standard business modeling and enterprise architecture reposi- tory tool.

TELELOGIC 2005 17 Business Customers

Telelogic sells various types of licenses, such as modifi cations. Since Telelogic’s products usually node-locked licenses, which involves installing involve a more effi cient, but also a different way one license per computer. Other more fl exible of working, some training is usually required forms allow multiple users to share one license, for the staff that will work with the products. such as common license pools with fl oating Telelogic offers both standard and customized licenses. The most fl exible form of license sales training programs. involves token-based access, in which customers buy several “license rights” that can be exchanged Regular Customer Contact for optional product licenses as customers need Telelogic has support centers in the US, Europe, them for their processes. Telelogic signs frame- and Asia that take care of customers’ problems by work agreements with larger customers to provide phone, e-mail, and through its website. In addi- greater customization. tion to support services Telelogic maintains close Usually customers sign a one-year maintenance and regular contact with its customers through agreement in conjunction with new license agree- methods such as: ments. By signing maintenance agreements the Arranging seminars and advanced training customer automatically gains access to new prod- for customers. uct versions and to telephone and e-mail support. Newsletters to customers that inform about The sales process is rarely shorter than two new versions and how to download them. months and is usually longer – in some cases, it can take up to a year. White papers about how to use tools, applying a process-based approach, and other news Installation of interest to customers. Once the parties agree and sign a contract, a ver- Every year an inside sales associate contacts the sion of the product is deployed and the consult- customer and offers an extended maintenance ing organization joins the process to help with agreement. both process improvements and major software

Airbus Selects Telelogic DOORS to Deliver Global Requirements Management Solution

Airbus is fl ying high these days. In the past three ments management tool, into the company’s IT decades, the company, based in Toulouse, France, operation when designing the latest aircraft models. has become one of the world’s leading aircraft manu- Included in the agreement are licenses, maintenance facturers, consistently capturing about half of all or- and professional services. ders for airliners with more than 100 seats. Its prod- The decision to deploy DOORS was made after a uct line-up, which covers a full spectrum of twelve proof of concept during a two-month pilot project fo- base aircraft models from a 100-seat single-aisle to cused on Airbus operations in Europe. The long-term the largest civil airliner ever – the double-deck A380 objective is to standardize the use of DOORS through- – have set new standards for the airline industry. out the entire organization and replace a competitive With a mission to provide aircraft best suited to RM tool used by the customer today. Airbus is already the market’s needs and to support these aircraft using Telelogic TAU for its software development. with the highest quality of service, Airbus manages Airbus is another leading company in its fi eld that a monumental operation that spans the globe and has seen the value and benefi ts that DOORS can Airbus has received more than 4,800 orders from some deliver as part of a requirements-driven development 180 customers. In addition, it provides support for process. As with many of Telelogic’s customers, it is the highly reliable operation of approximately 3,300 also an example of a long-term relationship where Airbus aircraft currently in operation with more than the customer decides to expand its usage of Telelogic 190 operators around the world. products based upon a value proposition that delivers Consequently, when Airbus wanted to improve the integrated best-in-class software tools, supported effi ciency and quality of its requirements manage- by professional services, that enable companies to ment (RM) processes, it signed a three-year license automate their entire development lifecycle, result- agreement worth €2.4 million with Telelogic to ing in improved quality and reduced time-to-market incorporate DOORS, the industry’s leading require- and overall costs.

TELELOGIC 2005 AM Telecom

Ingenico adopts Telelogic for Complete Application AM Telecom Increases Speed and Accuracy of Lifecycle Management Software Development with Telelogic TAU

In order to be the world’s leading provider of secure elec- As a key telecommunications provider to Moscow and tronic payment systems and largest global manufacturer other major Russian cities, AM Telecom has been a key of smart card reading terminals, a company needs to be player in bringing twenty-fi rst century technology to one step ahead of the competition when it comes to product millions of people. The Russian telecommunications quality throughout the entire software development lifecycle. market is as dynamic and rich with potential as the With more than 4 million terminals sold to date in 45 coun- Russian landscape. AM Telecom knows that the best tries, Ingenico Northern Europe holds that title as it designs, way to succeed in a highly competitive environment is to develops and markets an extensive range of electronic pay- provide superior products and services that exceed cus- ment terminals and associated software application solutions tomer expectations while reinforcing the bottom line. from its Northern Europe headquarters in Fife, Scotland. AM Telecom designs and manufactures sophisti- Consequently, when Ingenico Northern Europe decided it cated telecommunications equipment for many large needed to optimize all of its development processes and re- organizations throughout the country. When the spond faster to changes in its dynamic marketplace, it turned company decided that it needed to be able to com- to Telelogic for a lifecycle management solution. pletely automate code generation for increased speed “Using Telelogic’s tools across our entire development life- and accuracy in the development process, it turned to cycle will enable us to automate and improve many aspects Telelogic. AM Telecom decided to deploy the Telelogic of our development processes,” said Sinclair Bruce, chief TAU suite to improve the development of real-time engineer for Ingenico Northern Europe. “With TAU G2, SYN- software used by its PBXs or switches in the telecom- ERGY and DOORS working together, we now have the tools in munications network. place to help our geographically scattered teams work more Programmers are able to implement 100% auto- effectively, cope better with changes, communicate require- matic code generation at an early stage, removing ments more effi ciently, and minimize development errors.” the need for time-consuming manual coding and The bottom line is that Ingenico Northern Europe’s early ensuring validation and verifi cation. The end result is adoption of the UML 2.0 standard and TAU G2 will allow it to application code that is as accurate and error-free as re-use valuable design information across multiple projects possible. and integrating the complete Telelogic application lifecycle According to AM Telecom, Telelogic’s tools will al- management solution will enable the company to improve low it to minimize programmers’ time and effort for product quality and reduce time-to-market even further. producing code. They will now be able to concentrate on developing the best possible software quickly and ...Thus keeping a leader in its fi eld in the lead for years to come. effectively. In addition, the professional training from Telelogic included under the agreement will provide the company with value-added knowledge on how to use these tools more effectively within the organization. Ingenico

19 Business: Product Development

Regular Product Updates

Telelogic’s customers undergo rapid changes and encounter new problems all the time. To meet this challenge and help its customers to retain their competitive edge, Telelogic must constantly improve and renew its offering. Through a combination of acquisitions and in-house development, Telelogic has built up and reﬁ ned a broad and attractive product portfolio over the course of more than two decades.

Successful Product Development At the end of 2005, product development took In 2005, Telelogic invested SEK 191.5 million in place at six development centers around the world: product development, corresponding with 15% in Irvine and New York, in the us, as well as of sales. If this investment is to result in products in Edinburgh, Scotland, Bangalore, India, and that customers want to buy, the Company must Malmö and Linköping, Sweden. A total of about be sensitive to market trends and to the constant- 210 people work with research and development. ly changing requirements of its customers. Con- Telelogic also has subcontractors in Russia, sequently Telelogic has worked for many years Romania, and India who carry out simple and with a “Leadership Council” for a group of key standardized parts of development projects on “The main benefi t Friends Provi- dent has gained through Telelogic customers, where future versions of the products behalf of Telelogic. SYNERGY is the ability to do 24/7 are discussed at an early stage and customers are Telelogic also collaborates with colleges and development for fast-track projects. given the opportunity to plan future versions and universities all over the world. By doing so The tools and processes that this solution provides helped us get a new submit requests for functionality in the products. Telelogic ensures access to both engineers and e-commerce offering out to market Product development is divided into three to the cutting edge technology research at the in a few months, rather than the year product divisions based on the three product universities. In exchange the universities have ac- it would have taken.” areas, plus a division for common functions and cess to Telelogic products for teaching purposes. Steve Quarrington Senior Service Delivery future strategies. The product divisions work Currently the products are used at about one Manager, Friends Provident Group closely with the sales department and specialized hundred universities around the world. sales teams. Each product division is responsible for its own fi nancial performance. Breakthrough After Breakthrough Through focused and determined development initiatives, Telelogic has produced a number of breakthrough products. Over the years the company has been fi rst to market with products such as: model-based development for faster software development model simulation for troubleshooting early in the development process document-based requirements management for more convenient and effi cient gathering of external and internal requirements for products task-based confi guration management for convenient accessibility of information and changes associated with different software versions industrial tools based on global standards uml 2.0 and later Sysml. At the same time product development has al- lowed Telelogic to focus on more and larger markets. From initially offering strong products for developing embedded systems, through organic development and acquisitions Telelogic has successfully broadened its appeal to the entire elm

20 TELELOGIC 2005 market. Please see pages 10 to14 for a description of this market.

Recognized Technical Leadership Several leading industry analysts have recognized Telelogic, both for the market position of its products and for their technical functionality. system architect is the global leader in the Enterprise Architecture tool market. doors is the world-leader in the requirements management market and designated the best requirements management tool in the industry in 2005 by industry analyst Yphise1. The Butler Group has praised Telelogic’s alm solution and considers Telelogic to be the industry leader in alm2.

Continuous Quality Improvements Telelogic constantly measures and follows up on the quality of the end product and the quality of the company’s internal processes. Telelogic’s development center in Edinburgh complies with iso 9001 according to an external audit conducted by bsi (British Standards Institute), and the company has applied the lessons it learned to its other development centers. In an effort to identify new areas for improvement Telelogic also regularly analyzes all development centers based on the cmmi model for process improvements. manufacturers. To pursue and monitor this trend Telelogic and Global Standards Telelogic belongs to the industry organization autosar. In systems development, Telelogic is Telelogic works actively in several nonprofi t stan- incose dardization and coordinating bodies, mainly in an honorary member of , an organization three fi elds: software standards, communication that works with issues about the best way to carry technology, and system development methods. out general systems development. For example, the company is active in the telecom By actively participating in these organiza- organization itu and etsi with standardization tions, in which customers are also represented, of the development languages sdl and ttcn. Telelogic becomes aware of new technology at an Telelogic is also a member of omg, which works early stage, at the same time that the Company is with the development languages uml 2.0 and involved in formulating the new technologies and Sysml, two standards to which Telelogic has standards. As a result Telelogic can develop prod- contributed. Telelogic’s Chief Strategist, Jan ucts based on customer requests, as well as products Popkin, has been a member of omg’s board of adapted to new standards right from the start. directors since September 2005. In the automotive industry the growing signifi cance of various software-controlled systems has led to the development of industry standards aimed at decreas- ing costs through coordination among various

1 “Requirements-driven Application Lifecycle Management”, May 2005. 2 “Application Lifecycle Management Technology Audit”, June 2005.

TELELOGIC 2005 21 Business: Geographical Markets

Telelogic Out in the World

Sales by Region Telelogic’s sales organization is divided into three market divisions: Americas, EMEA (Europe, Middle East and Africa), and Asia/Paciﬁ c. Global sales management is based in the US. In 2005, all market divisions demonstrated growth and a 34 to 38% contribution margin.

New Organization for Sales Processes sales, basic customer support, and consulting and 47% EMEA Telelogic’s fundamental principle is that the training services in the local region. 41% Americas majority of sales-related activities shall take place Telelogic currently has its own sales offi ces in 12% Asia/Pacifi c as close to the customer as possible. To make twenty countries. New sales offi ces opened during the sales process more effi cient, during the year the year in Russia and in the United Arab Emir- Telelogic decided to appoint a coo in charge ates. In addition Telelogic has distributors and Sales growth by region of global sales, marketing, and support. The OEM partners in another eighteen countries. company’s central marketing organization handles In 2005 the Americas accounted for 41%, Local comprehensive marketing functions such as emea 47%, and Asia 12% of Telelogic’s sales. currency, % SEK, % product launches, pricing, and packaging issues. EMEA 14 18 There is also a global customer support function. Americas 30 34 The three market divisions are responsible for all Asia/Pacifi c1318 EMEA

The EMEA market division is divided into four regions: Western Europe with subsidiary in the uk and distributors in Eastern Europe. Central Europe with subsidiary in Germany and operations in Austria and Switzerland. Southern Europe with subsidiaries in France, Spain, and Italy. Extended Europe with subsidiaries in the Nordic countries, Netherlands, Middle East, and Russia.

As a whole, emea had a steady growth rate compared with the previous year. For the full year, sales increased 14%, with a contribution margin of 34%. In some of the market division’s markets the general investment climate was diffi cult, which had a negative impact on Telelogic’s sales in the local market. Telelogic continued to work on strengthening growth in the emea region during 2005. Telelogic opened two new sales offi ces during the year in the United Arab Emirates and in Russia. The EMEA 2005 2004 2003 number of employees increased by 59, mainly due Sales, SEK million 603.8 510.0 474.0 to the acquisitions of Popkin Software with sales % of Group’s sales 47 49 51 offi ces in the uk and the Netherlands, and Focal Operating profi t, SEK million 205.3 186.9 92.5 Point in Sweden. Contribution margin, % 34 37 20 The market climate in Western Europe deterio- Number of employees, sales-related1 125 113 102 rated sharply during the fi rst half of the year. The Number of employees total1 397 338 351 market has since recovered, though not to a satisfactory level for Telelogic. Central Europe also 1 At year-end. showed weaker than expected growth during the fi rst half of the year, mainly as a result of sluggish development within the automotive segment. However, developments were satisfactory for the mainly because of Ericsson and Nokia. This seg- twelve-month period. During the fall Telelogic ment carried out new investments in 2005, which uk had a positive effect on Telelogic’s sales. worked on restructuring in the and Germany doors to create the right dynamic in the sales organiza- , the largest product in the region, in - tion in order to effi ciently handle the company’s creased in sales during the year. Just as in the Americas, the acquired products focal point current product portfolio, which is now larger system architect than ever. The same restructuring process will be and had a positive effect on implemented in France and the Nordic countries sales in the region. in 2006. Telecom and fi nance developed well during the In 2005 growth stabilized in the southern Eu- year, while growth in the aviation and automotive ropean operation. Certain organizational changes segments was only weakly positive. Large customers in the emea region include British Aerospace, were carried out in France to accelerate growth. eads In the Extended Europe region, the Nordic , Ericsson, Nokia, Philips, Siemens, and countries showed robust growth. The telecom Thales. segment dominated sales in the Nordic countries,

TELELOGIC 2005 23 Business: Geographical markets

Americas

The Americas market division covers subsidiaries in North America and external distributors in Central and South America. The Americas continued to grow with good profi tability during each quarter of the year. The division grew a total of 30% in 2005, with a contribution margin or 38%. In 2005 Telelogic continued to strengthen its organization with the purpose of increasing growth and strengthening its market position in the American markets. The number of employees increased by 82, largely due to the acquisition of Popkin Software, which had its head offi ce and one of its development centers in New York. Telelogic’s requirements management products dominate sales in the Americas market division, with doors as the best-selling tool. The products acquired during the year, system architect and focal point, had a positive effect on growth in America. The aerospace and defense industry is the biggest segment in the Americas market division. Smaller segments in automotive, fi nance, and it Americas 2005 2004 2003 have also grown in signifi cance during the year. Sales, SEK million 527.6 394.9 356.9 With this strong position in the aerospace and % of Group’s sales 41 38 38 defense industry, the four biggest deals in the Operating income, SEK million 200.6 146.8 115.7 Americas during the year were with customers in Contribution margin, % 38 37 32 this segment. Number of employees, sales-related1 111 96 79 The biggest customers in the Americas include Number of employees total1 292 210 173 groups such as Boeing, British Aerospace, Lock- heed Martin, Motorola, Northrop Grumman, 1 At year-end. Panasonic, and Raytheon. Other important customers can be found among government authori- ties and departments in the United States.

24 TELELOGIC 2005 Asia/Paciﬁ c

The Asia/Pacifi c market division consists of subsidiaries in Japan, India, China, South Korea, Australia, and Singapore, which also includes operations in Malaysia, Thailand, and the Philippines. The region showed growth of 13% for 2005 and a contribution margin of 35%, in which Asia/Pacifi c was only marginally affected by the acquisitions of Popkin and Focal Point, since neither of these companies had any business activities in Asia. Asia/Pacifi c showed low growth early in the year but came back strong in the fourth quarter when the division grew 42%. The increased growth rate is largely dependent on the investments and activities that Telelogic pursued over the past two years to increase the growth rate and strengthen its market position in Asia/Pacifi c. Even in 2004 the Group achieved a new level of sales and business. Achieving even better growth will require further investments in human resources and products. The number of employees in the market division has therefore increased by 69. India performed especially well during the year, with a doubling of sales in two years. South Asia/Pacifi c 2005 2004 2003 Korea also had a good year with strong growth. Sales, SEK million 158.5 134.4 106.0 In 2005, doors developed into the strongest % of Group’s sales 12 13 11 product in the market division. The expected Operating income, SEK million 54.8 51.0 33.6 decline in sales of tau g1 was almost completely Contribution margin, % 35 38 32 offset by the increased sales of tau g2. Number of employees, sales-related1 79 77 49 Telecom is the biggest segment in the region. Number of employees total1 240 171 115 Other segments on the move are the aerospace 1 At year-end. and defense segment and fi nance and it. Im- portant customers in this region include nec, Samsung, Philips, Panasonic, and Motorola.

TELELOGIC 2005 25 Employees and Organization

Motivation and Values

Good managers and dedicated employees with the right expertise are essential if Telelogic is to succeed with its growth strategy. A sound and carefully formulated employee policy is paramount, especially since Telelogic’s colleagues are scattered across multiple continents, but need to work in harmony. To accomplish this Telelogic has ﬁ ve core values that serve as guidelines for its employees. These core values, together with a carefully structured organization, an attractive incentive program, and encouragement of individual initiative create conditions in which high motivation and internal efﬁ ciency thrive.

Strong Corporate Culture in a Global Organization One example in which the strategy proved to be “Our Freightliner truck, set for release Telelogic’s philosophy is to come as close to its successful is in India, where the newspaper “Deccan in 2007, has more than 200 features customers as possible through an organization Herald Avenues” gave Telelogic an award for the with complex requirements for each one.Tracing all of these features back that promotes and benefi ts from distinctive “Best Human Resources Practice for Employee to the requirements, and re-using features related to both geography and special- Motivation”. Telelogic’s values are described on them for common components, ized knowledge. Telelogic employees are scattered page 6. would be extremely diffi cult to do without DOORS.” across three continents. This organizational model facilitates decentralized management and local Telelogic’s Employees Arno von Querfurth, Manager of Specifi cations At year-end Telelogic had 929 employees. The and Software Systems, DaimlerChrysler accountability, which encourages individual initiative. At the same time it places great demands number of employees increased during the year on management, both centrally and locally. Since by 210 people, mainly because of the two corpo- Telelogic’s industry is also characterized by rapid rate acquisitions conducted during the year. The change, it is essential that the company have clear Company hired new employees primarily for the common core values. sales organizations in the Americas and the Asia/ These values apply throughout the operation Pacifi c market divisions to encourage continued and are kept relevant through a variety of activi- growth, as well as in the product development ties such as themes in the Company’s employee center in Bangalore, India. EMEA is currently the newsletter, articles, contests, and nominations of biggest individual region in terms of employees, employees who are positive role models represent- the Americas second biggest, and Asia is small- ing the different values. est. Based on the average number of employees

President and CEO

Business Information and PR Development

Software Asset Enterprise Requirements Technology and Architecture Market Finance and Management Management Development and Modeling Operations Administration Product Division Product Division Product Division

Americas EMEA Asia/Paciﬁ c Global Support Marketing Market Division Market Division Market Division

During the year Telelogic carried out a restructuring program to optimize its increasingly global processes. The Chief Operation Ofﬁ cer, who is also responsible for global marketing and support, now heads the global sales organization, which was previously divided into three separate market divisions. The product development organization was further developed in February 2006 to create an even more competitive operation with an innovative product development department that can quickly respond to market needs. The organization consists of three product divisions that are responsible for each of Telelogic’s product areas, as well as a technology and development department responsible for common technology, integration between product areas, and future technical strategies. Administrative functions consist of Information, Business Development, and Finance and Administration. Telelogic has built up Group-wide networks and a decentralized organization for these functions. Most employees are close to the customers out in the market divisions.

TELELOGIC 2005 When Telelogic acquires companies

Telelogic is in a strong growth phase in which ics such as Telelogic as a company, its core val- corporate acquisitions are a key element of the ues, why the merger is beneﬁ cial and what the strategy. new organization looks like. Also of considerable In an acquisition process the productivity of signiﬁ cance is the presentation of the vision of the acquired company usually dips for a shorter what the companies will achieve together. or longer period of time because of the change The purpose is to make it clear that the newly that employees face. Telelogic’s strategy is to acquired company is Telelogic. Therefore sym- minimize this period by formulating a detailed bolic actions are crucial, such as quickly chang- integration plan before each acquisition. Once ing the name of the acquired company, printing the acquisition is made public, Telelogic is well new business cards, and setting up Telelogic prepared with people in charge of every aspect signs. The personnel in the newly acquired of the integration process. company must feel involved in Telelogic and gain

INTEGRATION The plan includes assigning each employee access to common internal information. in the acquired company a place and a supervi- Within the ﬁ rst week all employees in the sor in Telelogic’s organization. As soon as pos- acquired company are contacted by their su- sible – preferably on the same day – Telelogic’s pervisors and invited to “Bootcamp”. Bootcamp management will meet personally with the involves one or two days of a thorough introduc- employees in the newly acquired company. If a tion to Telelogic, in which information from rel- personal meeting is not possible, personnel can evant managers alternates with social activities. take part in the information meeting online. At Telelogic’s introduction package is identical in this initial meeting employees learn about top- all countries.

during the year, women account for 26% of the Salaries and Incentive Programs Distribution of employees by function workforce. Telelogic offers competitive wages and salaries Staff turnover (defi ned as employees who ter- that are well within the framework of market minate employment) was 14%. rates. The goal is for all employees to have a combination of a fi xed and variable salary. For Expertise and Skills Enhancement corporate management, sales associates, and The level of education in the company is high consultants the variable portion is linked to sales and an absolute majority of employees are college targets. Variable wage components are also of- 39% Sales and marketing graduates. The biggest group has degrees in engi- fered in product development and administration 27% Support and services neering with a focus on computers or electronics. and the variable component is primarily linked to 23% Research and development This is also refl ected in the distribution by func- targets related to delivery times and quality. 11% Administration tion, in which product developers, sales associates To further motivate employees Telelogic offers and consultants are the biggest groups. These an ongoing employee stock option program. functions require both technical expertise and Telelogic’s policy is to offer all employees warrants good product awareness. on at least one occasion. In 2005, the Company Distribution by geography All Telelogic employees have the opportunity offered two stock option programs that included to pursue continuing education. Employees work 437 employees. together with their supervisors to defi ne individual training programs. Examples of these programs Sweden’s Third Healthiest Company during the year include technical continuing According to the insurance company Folksam’s education, leadership, language, and sales train- 2005 Health Index, which is based on companies’ ing. Moreover, every year Telelogic holds large sickness absence rate in 2004, Telelogic is the 43% EMEA in-house seminars that focus heavily on education third healthiest company in Sweden. 31% Americas in each specialty. In addition to an active information campaign, 26% Asia/Pacifi c To ensure that Telelogic can continue to attract professional skills development, and clear incen- skilled employees in the future and to provide tive programs, Telelogic works purposefully with customers with access to engineers who know the wellness programs and social activities to raise technology, Telelogic collaborates with colleges employee well-being and job satisfaction. and universities around the world. In the most Absence due to illness was also low in 2005: only common form of partnership, universities teach 1.4%, compared with 0.9% the previous year. about Telelogic’s software in their classes.

TELELOGIC 2005 27 Risk Analysis

Telelogic’s risk is well diversiﬁ ed because of its global operations with its own ofﬁ ces in twenty countries and a large number of customers in a broad mix of industry segments.

Segment growth as Economic Trends Products and Technology a percentage of total sales Telelogic offers tools that optimize its customers’ Telelogic’s competitiveness and market position

% business activities, which means that custom- are largely dependent on the company’s ability to 100 ers need this type of product even in times of produce innovative products. Telelogic’s products

80 cutbacks and scarce resources. Nevertheless, even have a high technology content and historically, Telelogic suffers from a worsening economy the company has delivered products, which in 60 because customers are less likely to invest. By many cases are considered to be the most ad- 40 maintaining a broad customer base in a number vanced in their respective ﬁ elds. of segments and operations on several continents, Telelogic actively works with various standard- 20 Telelogic has diversiﬁ ed its risk, since individual ization bodies to ensure that the products are 0 2001 2002 2003 2004 2005 customer segments and countries develop differ- always on the cutting edge of the latest trends.

Aerospace and Defense ently during a business cycle. Every year Telelogic also invites its key customers Telecom to a “leadership council” to inform them about Banking and Finance Customer Structure upcoming product news and where customers Software and Systems In recent years Telelogic has reduced its dependence may make requests for future functions. All in Automotive on individual customers and customer segments. all, this event gives Telelogic an excellent picture Other Countries In 2005, the ten biggest customers accounted for of what the market wants and reduces the risk of Reduced dependence on individual 26% of sales and none of these customers individu- not keeping up to date about customer needs. sectors spreads risk more effectively. ally generated more than 6% of revenues. Competitive Scenario Agreement Structure The software market is extremely fragmented Telelogic currently has some long-term contracts, with many players. However, only a few compa- with preset fees during the term of the agreement. nies can offer a total solution that is competitive The contracts also stipulate general terms such as in relation to Telelogic’s solution. A large number penalties and the right to terminate the agree- of software companies have merged and Telelogic ment if Telelogic is responsible for delayed deliv- believes that this trend will continue. The result ery. The main value of the agreements, however, could be companies offering products lines that is related to software sales for which Telelogic has are much stronger than today, which could in- no direct production costs, thereby considerably crease competition and have a negative impact on reducing the risk of negative impact on proﬁ t. Telelogic’s negotiating position and proﬁ t margin.

Income Distribution Human Resources Development In 2005 Telelogic’s income from licenses and Telelogic’s success is largely dependent on the maintenance accounted for 80% of sales and ability to hire, train, motivate, and retain engi- income from services for the remaining 20%. neers and other highly skilled personnel to devel- This distribution has been relatively stable over op successful new products, support the existing the past three years. Gross margin for income product line, and provide products and services from licenses and maintenance is signifi cantly to the customers. There is still strong competition higher than for services, though this is balanced for skilled employees in the it industry. Telelogic to some extent by the fact that license sales are constantly works on improving its salary and more diffi cult to forecast. Nevertheless, income benefi t policy and takes other measures as well, from maintenance is Telelogic’s most predictable but there is a risk – especially in the us where revenue since it is usually invoiced for twelve salary and employee option benefi ts are extremely months at a time and the majority of Telelogic’s different than in Sweden – that Telelogic will not customers choose to renew their maintenance successfully attract and retain skilled employees. agreements annually. Telelogic usually knows two to three months in advance what its income will be for consulting services and education.

28 TELELOGIC 2005 Integration of Acquisitions The company’s policy is to hedge 40 to 80% of Telelogic’s revenue and Part of Telelogic’s strategy is to carry out acqui- future currency fl ows expected to occur between expenses in each currency sitions. Telelogic only carries out acquisitions Telelogic’s different companies over the com- when it determines that the process will result ing year. Examples of currency fl ows include Revenue, %Expenses, % in a number of positive effects, but acquisitions royalties, dividends, and other payment fl ows. SEK 7 16 are also associated with increased risk. There are Exposure is limited to a great extent by netting EUR 26 19 many such risks: synergistic benefi ts may fail to receivables and liabilities each month among all GBP 12 16 arise; cutbacks may be necessary due to overlap- of the Group’s companies. The actual net risk USD 42 38 ping duties, creating a poor atmosphere and arises in the Parent Company, and hedging there- OTHER 13 11 increasing undesired staff turnover; and the in- fore primarily concerns Swedish kronor against the major currencies, the euro and the us dollar. Even though 93% of Telelogic’s sales use tended product offering may not meet customer currencies other than SEK, income is not demand due to unsuccessful product integration. Only forward contracts were used as hedging particularly vulnerable to currency exposure because the Group’s expenses are largely instruments in 2005. geographically tied to revenues. Legal Risks Telelogic could become involved in lawsuits as Financial Situation and Liquidity a consequence of the company’s normal busi- Cash and cash equivalents as at December 31, ness activities. Legal disputes can be expensive, 2005, totaled sek 447.3 million. Interest bearing prolonged, and disrupt normal operations. It is liabilities totaled sek 39.8 million. Net cash is also diffi cult to predict the outcome of compli- therefore sek 407.5 million. In addition Telelogic cated lawsuits. An unfavorable ruling in a specifi c has an unused line of credit of sek 566.7 million. case could have a substantially negative effect In 2005 Telelogic generated a positive cash on the Telelogic’s operations, performance, and fl ow of sek 179.6 million. A positive exchange fi nancial situation. Currently the Telelogic Group rate difference increased cash fl ow by sek 18.2 is involved in a few ordinary commercial disputes million. The Company’s cash fl ow therefore sig- that are not expected to have a material effect on nifi cantly improved in 2005 compared with the performance. previous year.

Financial Risks Interest Risks The Group’s fi nancial functions are centralized As at December 31, 2005, Telelogic had sek 39.8 and handled from corporate headquarters. Local million in outstanding interest-bearing liabilities; business organizations report directly to the cen- a 1% increase in the interest rate would increase tralized business and fi nancial department, which Telelogic’s interest costs by only about sek 0.4 allows good control of the Group’s fi nancial million. exposure at the same time that it provides cost benefi ts. The Group’s fi nancial policy establishes Credit Losses guidelines and rules for fi nancial risk manage- Telelogic has traditionally had few problems with ment and for general fi nancial operations. outstanding accounts receivable because most of our customers are large companies that are Currency Risk reliable payers. Credit losses in 2005 totaled sek A total of 93% of Telelogic’s sales are in curren- 10.0 million, or about 0.8% of net sales. Over cies other than Swedish kronor. Revenues are the past year, outstanding accounts receivable therefore particularly vulnerable to currency fl uc- signifi cantly declined, mainly due to active collec- tuations. However, income is not as vulnerable tion of accounts receivable. to the same exposure because the sales offi ces’ sales mainly occur in the same local currency It should be noted that all of the risk factors that as the expenses that the sales offi ces incur. The affect Telelogic’s operations cannot be described Group’s development centers are also geographically here; a comprehensive assessment must also dispersed in four different currency areas. Because include other information in the Annual Report, the Group’s operational organizations are located other material on Telelogic, and general business within the currency areas in which the products are intelligence. sold, the Group’s fl ow exposure is relatively limited.

TELELOGIC 2005 29 The Telelogic Share

Geographical Distribution Telelogic shares were initially offered on the O list of the Stockholm Stock Exchange of Owners on March 8, 1999. The initial offering price was SEK 5.00, recalculated after splits. The Telelogic Share is currently trading on the Attract 40 list. As at December 30, 2005, one trading lot comprised 1,000 shares.

Capital Stock standing stock option programs may only cause Capital stock in Telelogic AB totaled sek a maximum dilution of 5.2% for the rest of the 2,434,301 as at December 31, 2005, distributed shareholders (estimated as net increase of shares sek 86% Sweden among 243,430,104 shares at a par value of in the company through warrants, divided by 4% Luxembourg 0.01 per share. Telelogic shares entitle the holder total number of shares and warrants), including 3% US to one vote per share at General Meetings, and 3.5% for employee options and 1.7% for war- 2% UK 5% Other all shares confer equal rights to shares in the rants issued in conjunction with the acquisition Company’s proﬁ ts and assets. of Focal Point.

Stock Option Program Share Price Trend and Trading During the year Telelogic issued two employee In 2005, the Telelogic Share rose 29.9%, which stock option programs. One was aimed at the was on a par with the six General Index, which company’s employees in accordance with the rose 31.6%, but worse than the six it index, company’s stock option policy (to 13) and which rose 57.7%. Over a three-year period, how- one program (to 12) was part of the purchase ever, Telelogic climbed more than both the six consideration related to the acquisition of Focal General and it indices. The last price paid for the Point AB. Telelogic Share on December 30 was sek 20.40. The equivalent of 1,745,932 shares were At this price, market capitalization is sek 4,966 redeemed during the year. For a more detailed million. The lowest price paid during the year description of the individual programs, please see was sek 13.50 and the highest price paid was sek note 21 on page 55. 20.70. A total of 360 million shares were traded, equivalent to a value of sek 5,999 million. Dur- Dilution ing the year an average of 1,426,000 shares were Calculated according to ias 33 and only taking traded daily for a value of sek 23.7 million. into accounts warrants for which the share price as at December 31, 2005, exceeded the redemp- Dividend Policy tion rate, total dilution is 2.0%. Total number of Telelogic’s proﬁ ts are being reinvested to continue shares, diluted, calculated according to ias 33, is developing the company. The dividend policy therefore 248,286,823 shares. However, out- this year will therefore continue to be restrictive.

Analysts Who Monitor Telelogic Share Price Performance 2003–2005

20 Company Analyst

ABG Sundal Collier Patrick Clase 16 Alfred Berg Karl Berglund Danske Bank Peter Trigarszky 12 CA Cheuvreux Johan Eliason 120,000 Carnegie Daniel Djurberg 8 Enskilda Securities Lars Sveder and Andreas Joelsson 90,000 Kaupthing Bank Jonas Elofsson Handelsbanken Securities Stefan Wård 60,000 Nordea Mats Bersgtröm

Redeye Greger Johansson 4 30,000

3 03 04 05 (c) SIX

The Share SIX IT Number of shares traded, thousands SIX General Index (incl. after hours) 30 Telelogic’s Ten Largest Owners Outstanding Debentures with Attached Warrants for Subscription of Shares Percentage of votes Calculated in- Name No. of shares and capital Subscrip- Subscrip- Equivalent crease in number Fjärde AP-fonden 14,096,000 5.79 tion price tion number of of shares at full 1 AMF Pensionsförsäkrings AB 7,400,000 3.04 Program SEK deadline shares subscription, % Lannebo Småbolag Select 6,137,700 2.52 TO 7 (2001/2006) 6.30 Apr. 30, 06 219,538 0.09 SEB Sverige Aktiefond 1 4,559,000 1.87 TO 8 (2001/2006) 8.40 Apr. 30, 06 1,214,085 0.5 SEB Sverige Småbolagsfond 4,198,000 1.72 TO 9 (2001/2006) 8.50 Apr. 30, 06 1,648,327 0.67 Gamla Livförsäkringsaktiebolaget SEB Trygg 3,781,000 1.55 TO 10 (2003/2007) 5.15 Oct. 31, 07 1,115,366 0.46 SEB Världenfond 3,710,000 1.52 TO 11 (2004/2008) 17.30 July 31, 08 1,617,000 0.66 Svolder Aktiebolag 3,300,000 1.36 TO 12 (2005/2007) 17.20 Jan. 31, 07 4,288,890 1.73 Lannebo Småbolag Select 3,238,000 1.33 TO 13 (2005/2010) 17.50 Jan. 31, 10 3,200,000 1.3 Carnegie Fond AB/Småbolag 3,200,000 1.31 13,303,206 5.18 1 For dilutive effects see note 19.

Largest Owners, by Category Capital Stock 1998–2005

Percentage of votes and Change (num- Total number Name No. of shares capital Year Transaction ber of shares) of shares SEB Funds 18,365,330 7.54 1998 Opening balance - 6 Fjärde AP-fonden 14,096,000 5.79 1999 Split 1:1000 5,994,000 6,000,000 Lannebo Funds 13,569,700 5.57 1999 New issue (stock-market ﬂ oatations) 2,000,000 8,000,000 Robur’s Funds 11,008,170 4.52 2000 Redemption of warrants (owner) 120,000 8,120,000 AMF Pensionsförsäkrings AB 7,400,000 3.04 2000 New issues 1,450,000 9,570,000 AMF Pension Funds 5,027,000 2.06 2000 Split 1:10 86,130,000 95,700,000 Skandia Funds 4,876,025 2 2000 New issues 18,853,494 114,553,494 Handelsbanken Funds 4,262,525 1.75 2000 Exercise of warrants 10,811,470 125,364,964 AFA Försäkring 3,913,279 1.61 2001 New issues 61,466,850 186,831,814 Gamla Livförsäkringsaktiebolaget SEB Trygg 3,781,000 1.55 2001 Exercise of warrants 2,211,244 189,043,058 2001 Conversion of convertibles 363,576 189,406,634 2002 New issues 7,281,551 196,688,185 Distribution of Ownership by Holdings 2002 Exercise of warrants 4,492,217 201,180,402 2002 Conversion of convertibles 1,656,650 202,837,052 Number of 2003 Conversion of convertibles 1,596,420 204,433,472 No. of shares % shareholders % 2004 Exercise of warrants 1,130,506 205,563,978 1 – 10,000 41,083,743 16.9 24,057 93.8 2004 Conversion of convertibles 11,728,804 217,292,782 10,001 – 50,000 27,395,067 11.2 1,222 4.8 2005 Exercise of warrants 1,745,932 219,038,714 50,001 – 100,000 11,818,906 4.8 164 0.6 2005 Conversion of convertibles 671,257 219,709,971 100,001 – 1,000,000 48,138,583 19.8 149 0.6 2005 New issues 23,720,133 243,430,104 1,000,001 – 5,000,000 87,360,105 35.9 41 0.2 5,000,001 - 27,633,700 11.4 3 0.01 243,430,104 100 25,638 100 Distribution Between Institutional Investors and Private Individuals

Number of shareholders, % Holdings, % People 89.5 25.2 Legal entities 10.5 74.8 All tables are based on data from VPC as at December 31, 2005.

TELELOGIC 2005 31 Directors’ Report

The Board of Directors and the Chief Executive Offi cer of Telelogic AB 185.1 million for 2004, for a growth rate of 43% in Swedish kronor (a publicly held corporation), 556049-9690, hereby submit the annual and 40% in local currency. report for fi scal year 2005. Customer Categories Description of Operations Demand from the telecom segment began to build once again in 2005 Telelogic is a global provider of software for optimizing, aligning, and after a weak fi rst quarter. Telecommunication’s percentage of total automating its customers’ processes. Telelogic’s customers are ma- sales was 24% in 2005, compared with 26% in 2004. Demand from jor leading companies in a number of industries. Its fi ve biggest cus- the telecom segment stabilized during the year and is expected to tomer segments are telecom, aerospace and defense, the automotive increase over time as profi ts in this industry strengthen. industry, the banking and fi nancial sector, and software and systems During the second quarter Telelogic signed a large agreement providers. With its fi ve product groups, SYSTEM ARCHITECT for worth SEK 10.1 million with a European telecom provider, in which business process modeling, DOORS for requirements management, the customer renewed and expanded its existing agreement for FOCAL POINT for demand analysis and decision-making support TAU and DOORS for another year. Three of the quarter’s four largest systems, TAU for design and testing, and SYNERGY for change and contracts were signed with telecom customers. One global telecom confi guration management, Telelogic is one of only three companies provider invested SEK 22 million in four of Telelogic’s fi ve product in the world that offers products spanning the entire product life families. A one-year agreement provides them with access to Telelogic cycle for developing software and systems. The Group has its own DOORS, TAU, SYNERGY, and FOCAL POINT. Another global telecom companies in twenty countries and has been listed on the O list provider signed a one-year agreement worth SEK 19 million that (Attract 40) of the Stockholm Stock Exchange since March 1999. includes Telelogic DOORS, TAU, and FOCAL POINT. In addition, a leading supplier of mobile products and broadband solutions, Market Segment embedded systems, and wireless networks invested SEK 11 million Telelogic expects the market for its products to grow and demand for in both generations of Telelogic TAU. the products has been good in 2005, during which all of Telelogic’s Telelogic performed well in the aerospace and defense segment market divisions showed combined sales growth of 24% in Swedish during the year in all of Telelogic’s market divisions. The segment kronor and 21% in local currency. increased its share of total sales from 34% in 2004 to 35% in 2005. Telelogic is divided into three market divisions: EMEA, the Americas Telelogic DOORS has a strong position in this segment. and Asia/Pacifi c. The EMEA market division, with business activities Telelogic signed two large agreements in aerospace and defense in Europe, Middle East and Africa, accounted for 47% of the company’s during the fi rst quarter. One leading global systems integrator signed sales in 2005. The market division demonstrated sales growth of 14% a six-year agreement worth SEK 12.5 million to deploy Telelogic in local currency and a contribution margin of 34% in 2005. The per- DOORS, DOORS XT, and DocExpress in the customer’s offi ces in vari- formance of the various countries in the EMEA has not been homo- ous locations in the UK. The quarter’s other large agreement involved geneous in 2005. For example, demand in Germany was strong, but a European government research institute, which signed a four-year lackluster in the United Kingdom. agreement worth SEK 7.5 million. According to this agreement, The Americas market division, with business activities in North which is for licenses, maintenance, and some services, Telelogic and South America, accounted for 41% of Telelogic’s total sales in DOORS XT, SYNERGY, and TAU Generation 2 will be deployed as the 2005. This division showed good sales growth during the year at 30%, institution’s standard ALM solution. Telelogic DOORS was already the calculated in local currency. Profi tability was also satisfactory with research institute’s standard solution for requirements management. a contribution margin of 38%. The Americas market demonstrated During the second quarter a US avionics supplier signed a four-year stable growth during the year. agreement worth SEK 16 million. The customer expanded its use of The Asia/Pacifi c market division, with business activities in Asia DOORS and introduced the recently acquired product FOCAL POINT. and Australia, accounted for 12% of Telelogic’s total sales in 2005. Telelogic entered into two major agreements during the third quarter. For full-year 2005 the market division grew 13% in local currency A world-leading provider of communications systems to the avia- and showed a contribution margin of 35%. Growth in Asia/Pacifi c tion industry signed an agreement for licenses, maintenance, and was sluggish at the beginning of the year, but the division came professional services with a value of SEK 17 million. The customer back strong in the fourth quarter when it grew 42%. invested in Telelogic’s ELM solution, which includes DOORS, SYSTEM ARCHITECT, FOCAL POINT and SYNERGY. Telelogic’s biggest deal in Sales the fourth quarter was with a customer in aerospace and defense. Telelogic’s sales for full-year 2005 were SEK 1,289.9 million, com- A US supplier of defense systems signed a three-year contract worth pared with SEK 1,039.3 million in 2004. This resulted in growth of SEK 36 million. The agreement gives them access to Telelogic’s TAU, 24% in Swedish kronor and 21% in local currency for 2005. Sales of DOORS, and SYNERGY. licenses and maintenance totaled SEK 1,025.9 million, compared with Sales in the automotive industry were more or less unchanged SEK 854.2 million for 2004, showing growth of 20% in Swedish kronor compared with the previous year and accounted for 6% of Telelogic’s and 17% in local currency. All in all, licensing and maintenance sales in 2005. Activity in this segment is still primarily concentrated revenues accounted for 80% of total sales during the year. Sales of to Germany. Telelogic is working on building up this segment in the consulting services totaled SEK 264.0 million, compared with SEK US and Japan, though it still represents just a small part of sales in

32 TELELOGIC 2005 these countries. Sales in this segment outside Europe are still too to have their development teams geographically scattered. Using low for any clear business trends to become apparent. DOORS XT considerably improves collaboration among these devel- Sales in banking and fi nance were successful in 2005 and the seg- opment teams and coordination of their projects. ment’s share of total sales increased from 7% in 2004 to 9% in 2005. In May Telelogic and PLM company MatrixOne launched a demand- During the fi rst quarter a globally active bank in Singapore signed a driven solution that integrates Telelogic’s requirements management four-year agreement for DOORS and SYNERGY worth SEK 3.9 million. tool DOORS with MatrixOne Product Central, which is MatrixOne’s During the third quarter Telelogic signed a licensing agreement in PLM solution for managing a portfolio of products, properties and the US for DOORS and SYNERGY worth SEK 9.3 million with one of confi gurations throughout the life cycle of a product. the world’s biggest service providers in the fi nancial sector. In June Telelogic launched an improved version of its integrated In the 2005 interim reports Telelogic began to report on an addi- ALM solution in all markets. The release consisted of Telelogic tional segment – software and system suppliers – since it comprised DOORS, Telelogic SYNERGY, and Telelogic TAU, which together offer over 5% of total sales. Previously this segment was included under superior support throughout the life cycle of the application. “other.” Sales for software and system suppliers comprised 7% of In October Telelogic launched SYSTEM ARCHITECT version Telelogic’s sales in 2005. 10.3. This version of SYSTEM ARCHITECT is fully integrated with Other customer segments are not reported separately since they Telelogic’s other life cycle products, which means that requirements do not exceed 5% individually. Overall, these other segments account from DOORS and models in TAU and SYSTEM ARCHITECT can now be for 19% of Telelogic’s sales. The medical device and pharmaceutical viewed simultaneously in DOORS. industries are among the customer segments listed under “other” During the third quarter TAU G2 was also adapted so that it now that began to attract interest in 2005. supports the Systems Modeling Language (SysML) standard. SysML is a modifi cation of Unifi ed Modelling Language (UML) for system Results modeling. TAU SysML expands UML 2.0, the standard for visual mod- For full year 2005 Telelogic reported net profi t before tax of SEK 201.7 eling in software development, to even encompass the model-based million and after tax of SEK 165.2 million, an improvement of pre-tax description language for system modeling. profi t of SEK 177.6 for 2004. Operating margin for full year 2005 was 15.1%, compared with 16.8% in 2004. Acquisitions Earnings per share totaled SEK 0.70 for 2005, a 12% increase During the second quarter of 2005 Telelogic acquired two companies. compared with 2004. In April 2005, Telelogic acquired the privately-held Popkin Soft- Fixed costs as a percentage of sales remained stable during the ware, an Enterprise Architecture (EA) tools provider. Telelogic identi- year at 64.3% in 2005, compared with 63.7% in 2004. fi ed Popkin as a successful company with a product that is a good fi t Gross margin stabilized at about 80%. In 2005 it was 79.4%, com- with Telelogic’s current product line in modeling, at the same time pared with 80.5% in 2004. Gross margin for licensing and mainte- that it expands the line to encompass EA. Popkin’s sales for 2004 nance income was also stable at 94.2%, compared with 93.4% in were USD 19.1 million, which represented a 28% growth rate com- 2004. Gross margin for consultant services totaled 22.2% in 2005, pared with 2003, and with a pre-tax profi t of USD 2.5 million. Popkin compared with 21.2% in 2004. Telelogic expects gross margin to has over 100 employees in offi ces in the US, the UK and a sales offi ce remain at these levels. in the Netherlands. The purchase price was USD 45 million. Popkin is now completely integrated with the Group’s other business activities. Products Focal Point has belonged to the Telelogic Group since June. One aspect of Telelogic’s strategy is to make major investments in FOCAL POINT is a successful Swedish company with 26 employees research and development. In 2005 Telelogic invested SEK 191.5 and a product that is a good fi t with Telelogic’s products and ser- million in product development, corresponding with 14.8% of sales. vices. The company will have an excellent opportunity for growth as According to a number of industry analysts, Telelogic’s tools hold a part of the Telelogic Group. Focal Point’s sales in 2004 totaled SEK leading position and the Company intends to strengthen this position. 22.1 million. The acquisition was carried out through a public offer Its strategy is to continue investing in products aimed at large com- to the shareholders of Focal Point to acquire all outstanding shares panies that develop advanced products in distributed environments. in the company. Payment was made in Telelogic shares and war- It is in these types of environment that users can best take advantage rants for a market value of SEK 110 million on the transaction date of the products’ functionality. with full acceptance of the offer. As a result of the offer 5.7 million In 2005 Telelogic continued to improve all product family versions. new Telelogic shares and about 4.3 million warrants were issued. For example, Telelogic has worked to improve integration among its During the regular and extended acceptance period, shareholders own product families and with the complementary products of other accepted the equivalent of 97.9% of voting rights and 95.8% of capital vendors. in the Focal Point offer. Telelogic received preemptive rights for the At the beginning of the year Telelogic launched DOORS XT to a remaining outstanding shares of Focal Point and therefore owns the limited group of customers. DOORS XT is an expanded requirements company in full. Focal Point was also fully integrated with the rest of management product that provides easy access to requirements the business. management, even across low-bandwidth internet connections. It is becoming increasingly common for systems and software companies

TELELOGIC 2005 33 Personnel Events after balance sheet date The number of employees totaled 929 at year-end, an increase from No signifi cant events occurred after the balance sheet date. 719 at the beginning of the year. This increase was relatively evenly distributed across functions such as sales, product development, and Parent Company consulting. At the end of 2005, employee totals were distributed as The Parent Company handles the Group’s management functions, follows: 43% in Europe, 31% in the Americas, and 26% in Asia. A total sales to a few large customers, product development for TAU, and of 39% of Telelogic’s personnel work in sales and marketing, 27% in fi nancing of the new DOORS generation. All product development, support and services, 23% in research and development, and 11% including new development, is reported on a current basis in the with administrative tasks. Parent Company, but reported in the Group according to RR 15. Net income before tax was SEK 57.1 million and net income after tax SEK Financial Position and Investments 73.5 million. Cash and cash equivalents increased to SEK 447.3 million, compared with SEK 249.5 million at the beginning of the year. The change was Change in Accounting Principles due to a positive cash fl ow from current operations in the amount As of 2005, Telelogic applies the EU adopted International Financial of SEK 183.1 million, issuance of new shares for SEK 305.5 million, Reporting Standards (IFRS) and the EU approved interpretations of partial repayment of an outstanding loan of SEK 10.2 million, net current standards, IFRIC. The most important differences between payment for the acquisitions of SEK 258.8 million, other investments previous accounting principles and IFRS are that deprecation for totaling SEK 40.0 million, and a gain in cash and cash equivalents goodwill has been eliminated, share-related incentive programs due to exchange rate differences in the amount of SEK 18.2 million. are reported as an expense, and derivatives are carried at current Telelogic paid USD 40 million of the USD 45 million purchase price value. Figures for the comparative year 2004 were restated in order for Popkin. The remainder will be paid in 2006. Telelogic has received to achieve comparability in terms of the Group’s development and preemptive rights for the remaining shares of Focal Point and there- position. fore owns the company in full. The total purchase consideration of SEK 114.3 million was paid mainly with own shares and warrants. Distribution of Profi ts In addition to the cash and cash equivalents, Telelogic has unused The following retained earnings from the Parent Company are lines of credit available for SEK 566.7 million. The entire amount was available for disposition by the shareholders at the Annual General unused as of the end of December 2005. Meeting: For a description of the Company’s fi nancial risks and risk management, please see note 25. SEK thousand Retained earnings 34,811 Long-Term Strategy Net income for the year 73,470 Telelogic’s position, combined with continued investments and market growth, sets the scene for continued good development. The Total 108,281 Company will continue to focus on organic growth supplemented by strategic acquisitions with the goal of achieving a fi vefold increase in The Board of Directors proposes that the retained earnings be carried operations over the next fi ve years, beginning in 2005. forward. For information about the Group and Parent Company’s per- In 2005 Telelogic made two acquisitions. The Company increased formance and position in general, please see the following income total revenue by 24% compared with 2004. Profi t per share and cash statement, balance sheet, cash fl ow statements, and associated fl ow, including the effects of the acquisitions, also increased. accounting principles and notes. The ability and the opportunity to implement successful acquisitions is a crucial component for achieving the long-range strategy. Information about corporate governance is available on pages 65–67. The industry continued to consolidate in 2005, while prices of potential acquisition candidates increased.

Outlook for 2006 Underlying market demand will be good in 2006, with similar quarterly ﬂ uctuations as in 2005. The Company expects organic growth to reach at least 10% in local currency during the year. As part of this goal, Telelogic intends to substantially strengthen its market position in Asia. The Company expects sales to grow faster in Asia in 2006 than in other regions. Telelogic expects earnings per share and cash ﬂ ow, including the effects of acquisitions, to increase in 2006 compared with the previous year.

34 TELELOGIC 2005 Income Statement

Group Parent Company

January 1 - December 31 Note 2005 2004 2005 2004

SEK thousand

Licensing and maintenance revenues 2, 3 1,025,906 854,155 116,243 133,078 Consulting revenues 2, 3 264,005 185,099 73,417 43,726

Net sales 1,289,911 1,039,254 189,660 176,804

Licensing and maintenance expenses –59,856 –56,286 –1,230 –2,251

Consulting expenses –205,264 –145,878 - -

Gross income 1,024,791 837,090 188,430 174,553

Selling expenses –527,527 -428,345 -5,642 -6,567

Administrative expenses –94,888 -78,120 -44,262 -34,971

Product development expenses –191,482 -154,206 -79,145 -67,252

Other operating expenses 6 –15,742 -1,256 - -16,944 Other operating income 5---2,595

Operating income 3, 7, 8, 9, 26 195,152 175,163 59,381 51,414

Net income from ﬁ nancial items Income from holdings in Group companies - 7,598

Financial income 8,495 3,410 12,695 5,742

Finance expenses -1,945 -937 -14,980 -12,699

Net ﬁ nancial items 10 6,550 2,473 -2,285 641

Net income before tax 201,702 177,636 57,096 52,055

Taxes 11 -36,511 -43,310 16,374 -13,022

NET INCOME FOR THE YEAR 165,191 134,326 73,470 39,033

Attributable to shareholders of the Parent Company 165,191 134,326

Earnings per share (SEK) 19

basic 0.70 0.63

diluted 0.69 0.61

TELELOGIC 2005 35 Balance Sheet

Group Parent Company SEK thousand Note Dec. 31, 2005 Dec. 31, 2004 Dec. 31, 2005 Dec. 31, 2004

ASSETS 4

Noncurrent assets

Intangible assets Capitalized development costs 12 151,101 149,611 - - Other intangible assets 12 24,277 2,326 1,772 2,317 Goodwill 12 523,328 174,388 - -

698,706 326,325 1,772 2,317

Property, plant, and equipment Equipment, ﬁ xtures and ﬁ ttings 13 34,775 27,757 3,300 3,195

Financial assets Participations in Group companies 29 500,570 385,100 Other long-term receivables 14 14,930 12,669 1,061 124

14,930 12,669 501,631 385,224

Deferred tax assets 11 179,120 89,999 66,668 49,619

Total noncurrent assets 927,531 456,750 573,371 440,355

Current assets

Current receivables Accounts receivable 15 458,312 331,517 19,262 6,705 Receivables from Group companies 28 440,915 222,654

Tax assets 2,608 1,366 - - Other receivables 14 14,348 17,240 296 232 Prepaid expenses and accrued income 16 109,220 89,269 34,421 27,043

584,488 439,392 494,894 256,634

Cash and cash equivalents 17 Cash and cash equivalents 447,324 249,478 291,762 106,390

Total current assets 1,031,812 688,870 786,656 363,024

TOTAL ASSETS 1,959,343 1,145,620 1,360,027 803,379

36 TELELOGIC 2005 Group Parent Company SEK thousand Note Dec. 31, 2005 Dec. 31, 2004 Dec. 31, 2005 Dec. 31, 2004

EQUITY & LIABILITIES 4

Shareholders’ equity 18

Restricted equity Capital stock 2,434 2,173 2,434 2,173 Other paid-up capital 3,163,903 2,745,079 Share premium reserve - 342,115 Reserves 40,409 -32,417 Statutory reserve 761,059 120

763,493 344,408

Non-restricted equity Loss brought forward -2,012,136 -2,146,462 34,811 -4,222 Net income for the year 165,191 134,326 73,470 39,033

108,281 34,811

Total shareholders’ equity 1,359,801 702,699 871,774 379,219

Long-term liabilities Long-term interest bearing liabilities 20, 25 - 2,447 - 2,447 Other liabilities 23 3,385 318 - -

3,385 2,765 - 2,447

Current liabilities Bank overdraft facility 17 - 7,007 - - Accounts payable 42,057 33,502 6,850 6,773 Liabilities to Group companies 429,061 392,503 Tax liabilities 5,690 11,175 - - Other interest-bearing liabilities 20 39,778 226 - - Other liabilities 23 52,030 44,891 4,499 1,460 Accrued expenses and prepaid income 24 442,815 334,794 37,843 20,977 Provisions 22 13,787 8,561 10,000 -

596,157 440,156 488,253 421,713

TOTAL EQUITY & LIABILITIES 1,959,343 1,145,620 1,360,027 803,379

PLEDGED ASSETS AND CONTINGENT LIABILITIES 27 Pledged assets 45,000 45,000 45,000 45,000 Contingent liabilities 10,841 5,246 70,744 30,109

TELELOGIC 2005 37 Summary of Changes in Shareholders’ Equity

Equity attributable to shareholders of the Parent Company

Retained earnings including Other paid-up Translation net income SEK thousand Capital stock capital reserve for the year Total Equity Shareholders’ equity, Jan. 1, 2004 2,044 2,694,636 - -2,146,462 550,218

Change in translation reserve for the year -32,417 -32,417 Net income for the year 134,326 134,326

Total change in net assets, excluding transactions with the Company’s shareholders - - -32,417 134,326 101,909

Stock options exercised by employees 11 8,768 8,779 Conversion of loans 118 38,944 39,062 Vested share-based payment 2,731 2,731

Shareholders Equity Dec 31, 2004 2,173 2,745,079 -32,417 -2,012,136 702,699

Equity attributable to shareholders of the Parent Company

Retained earnings including Other paid-up Translation net income SEK thousand Capital stock capital reserve for the year Total Equity Shareholders’ equity Jan. 1, 2005 2,173 2,745,079 -32,417 -2,012,136 702,699

Change in translation reserve for the year 72,826 72,826 Net income for the year 165,191 165,191

Total change in net assets, excluding transactions with the Company’s owner - - 72,826 165,191 238,017

New issue 180 291,414 291,594 New issue in conjunction with acquisition 57 93,364 93,421 Warrants issued 13,170 13,170 Stock options exercised by employees 17 13,871 13,888 Conversion of convertible loan 7 2,490 2,497 Vested share-based payment 4,515 4,515

Shareholders Equity Dec. 31, 2005 2,434 3,163,903 40,409 -1,846,945 1,359,801

38 TELELOGIC 2005 Summary of Changes in the Parent Company’s equity

Restricted equity Non-restricted equity Total Statutory Share premium Retained Net income SEK thousand Capital stock reserve reserve earnings for the year Shareholders’ equity Jan. 1, 2004 2,044 120 525,901 -36,328 -197,901 293,836

Distribution as per Annual General Meeting decision -234,229 36,328 197,901 0 Group contributions -4,386 -4,386 Merger result 164 164

Net income for the year 39,033 39,033

Total change in net assets, excl. transactions with the company’s shareholders - - -234,229 32,106 236,934 34,811

Stock options exercised by employees 11 8,768 8,779 Conversion of convertible loan 118 38,944 39,062 Share-based payments regulated with equity instruments 2,731 2,731

Shareholders’ Equity Dec 31, 2004 2,173 120 342,115 -4,222 39,033 379,219

Restricted equity Non-restricted equity Total Statutory Share premium Retained earn- Net income for SEK thousand Capital stock reserve reserve ings the year Shareholders’ equity Jan. 1, 2005 2,173 120 342,115 -4,222 39,033 379,219

Distribution as per Annual General Meeting decision 39,033 -39,033 0

Net income for the year 73,470 73,470

Total change in net assets, excl. transactions with the company’s shareholders 0 0 0 39,033 34,437 73,470

Shareholders’ Equity Dec. 31, 2005 2,434 761,059 0 34,811 73,470 871,774

TELELOGIC 2005 39 Cash Flow Statement

Group Parent Company January 1 – December 31 Note 2005 2004 2005 2004 SEK thousand 30

Operating activities Net income 201,702 177,636 57,096 52,055 Adjustment for items not included in cash ﬂ ow 57,022 40,800 7,290 13,429 Income tax paid -25,500 -14,307 -676 -2,582

Cash ﬂ ow from operating activities before changes in operating capital 233,224 204,129 63,710 62,902

Cash ﬂ ow from changes in operating capital Increase (-)/Decrease (+) in operating receivables -69,469 -87,745 -239,196 121,167 Increase (+)/Decrease (-) in operating liabilities 19,373 36,397 63,472 -106,711

Cash ﬂ ow from operating activities 183,128 152,781 -112,014 77,358

Investing activities Acquisition of property, plant, and equipment -14,483 -19,769 -1,155 -

Divestiture of property, plant, and equipment 522 - -2,356 -1,911

Acquisition of intangible assets - -2,726 21 -

Capitalized development expenditure -26,022 -21,900 - -2,726

Acquisition of subsidiaries -258,836 --2,001

Acquisition of ﬁ nancial assets - -124 -4,607 -124 Cash ﬂ ow from investing activities -298,819 -44,519 -8,097 -2,760

Financing activities New issue 305,483 8,779 305,483 8,779

Amortization of loan -10,143 -602 - - Cash ﬂ ow from ﬁ nancing activities 295,340 8,177 305,483 8,779

Cash ﬂ ow for the year 179,649 116,439 185,372 83,377 Cash and cash equivalents at the start of the year 249,478 139,786 106,390 23,013

Exchange rate difference in cash and cash equivalents 18,197 -6,747 - - Cash and cash equivalents, December 31 447,324 249,478 291,762 106,390

40 TELELOGIC 2005 Notes

NOTE 1 ACCOUNTING PRINCIPLES Application in Advance of Newly Published or Revised IFRSs and Interpretations During 2005 Conformity with Laws and Standards No revised or new standards were applied in the consolidated accounts for 2005. The consolidated accounts have been prepared in accordance with the International According to the Group, no new IFRSs or interpretations will have any impact on the Financial Reporting Standards (IFRS) issued by the International Accounting Stan- Group during the upcoming periods other than increased disclosure requirements. dards Board (IASB) and the interpretations of the International Financial Reporting Interpretations Committee (IFRIC) as approved by the EU Commission for application Segment Reporting within the EU. This fi nancial report is the fi rst complete fi nancial report prepared in A segment is a component of the Group that is identifi able for accounting purposes accordance with IFRS. In connection with the transition from previously applied ac- and either supplies products or services (business segments), or goods or services, counting principles to reporting according to IFRS, the Group has applied IFRS 1 as the within a particular economic environment (geographical area) that is subject to risks standard to describe how the transition to IFRS is reported. In addition, the Swedish and returns that are different from those of other segments. Financial Accounting Council’s recommendation RR 30 on Supplementary Rules for Information about segments is only submitted for the Group, in accordance with IAS 14. Consolidated Financial Statements has been applied. The Parent Company applies the same accounting principles as the Group, except in Classifi cation the cases indicated under the section “Parent Company’s Accounting Principles.” The Noncurrent assets and long-term liabilities consist in every substantial way only of discrepancies between the principles of the Parent Company and the Group are due amounts that are expected to be recovered or paid after more than twelve months to restrictions that the Annual Accounts Act and the Act on Safeguarding of Pension counted from the balance sheet date. Current assets and current liabilities consist in Obligations lay down for the adoption of IFRS by the Parent Company, as well as for every essential way only of amounts that are expected to be recovered or paid within tax-related reasons in certain cases. twelve months, counted from the balance sheet date. Notes 34 and 35 include a compilation with explanations of how the transition to IFRS affected the fi nancial results, fi nancial position, and the reported cash fl ows of Consolidation Principles the Group. Subsidiaries are companies over which Telelogic AB has a decisive infl uence. A decisive infl uence means the right to determine a company’s fi nancial and operating Assumptions in the Preparation of the Parent Company and the strategies in order to obtain economic benefi ts. When determining whether a decisive Group’s Financial Reports infl uence exists, potential voting shares that can be exercised or converted without The Parent Company’s functional currency is Swedish kronor (SEK), as is the report- delay are taken into account. ing currency of the Parent Company and the Group, which means that the fi nancial Subsidiaries are normally accounted for in accordance with the purchase method, statements are reported in Swedish kronor. Unless stated otherwise, all amounts are if the acquisition of a subsidiary involved the acquisition of business activities and rounded off to the nearest thousand. Assets and liabilities are carried at historical not just assets and liabilities. According to the purchase method, the acquisition of cost, with the exception of certain fi nancial assets and liabilities, which are carried at the subsidiary occurs through a transaction in which the Parent Company indirectly fair value. Financial assets and liabilities reported at fair value comprise derivative acquires the subsidiary’s assets and assumes its liabilities and contingent liabilities. instruments and fi nancial assets classed as fi nancial assets reported at fair value in The Group’s cost is determined through an acquisition analysis with regard to the the Income Statement. acquisition of operating entities. This analysis determines the cost of the shares or The preparation of fi nancial reports in accordance with IFRS requires the Board of operations as well as the fair value of acquired, identifi able assets and assumed Directors and Executive Management to make estimates and assumptions that affect liabilities and contingent liabilities. The cost of the shares in the subsidiary and the the application of accounting principles and the carrying amounts of assets, liabilities, operations, respectively, consists of the fair values on the transfer date for assets, revenues, and expenses. Estimates and assumptions are based on historical experi- liabilities incurred or assumed, and equity instruments issued and used as consid- ence and a number of other factors that appear to be reasonable under current condi- eration for the net assets acquired and the transaction cost directly attributable to tions. The result of these estimates and assumptions is then used to determine the the acquisition. If the cost exceeds the fair value of acquired identifi able assets and carrying value of assets and liabilities otherwise not clearly indicated by other sources. assumed liabilities and contingent liabilities, the difference is recognized as goodwill. Actual outcomes may deviate from these estimates. If the cost is less than the fair value of acquired identifi able net assets and contingent The estimations and assumptions are revised regularly. The effects of changes in liabilities, the difference is recognized directly in the Income Statement. estimations are reported in the period in which the changes were made if the changes The fi nancial reports of subsidiaries are included in the consolidated accounts from affected this period only, or in the period the changes were made and future periods if the time of acquisition until such time as the controlling infl uence ceases. the changes affect both the current period and future periods. The Telelogic Group holds no shares in associates, nor were any specialized compa- When applying IFRS, assessments made by the Company’s Executive Management nies formed for specifi c purposes that should have been consolidated. and Board of Directors that have a signifi cant effect on the fi nancial statements and estimations made that may result in substantial adjustments to the following year’s TRANSACTIONS THAT ARE ELIMINATED ON CONSOLIDATION fi nancial statements are described in greater detail in note 32. Intra-group receivables and liabilities, income and expenses, as well as gains or loss- The accounting principles of the Group detailed below have been applied consis- es arising from intra-group transactions between Group companies, are eliminated in tently to all periods presented in the consolidated fi nancial statements and when their entirety when preparing the consolidated accounts. preparing the consolidated opening balance sheet in accordance with IFRS as of Janu- ary 1, 2004, which explains the transition from previously applied accounting principles Foreign currency in accordance with Swedish GAAP to accounting principles in accordance with IFRS. TRANSACTIONS IN FOREIGN CURRENCIES The accounting principles of the Group have been consistently applied to reporting and Transactions in foreign currencies are translated into the functional currency at the consolidation of the Parent Company and subsidiaries. exchange rate on the day of the transaction. The functional currency is the currency of the primary economic environment in which the company operates. On the balance Change in Accounting Principles sheet date, monetary assets and liabilities in foreign currencies are translated into the The transition to IFRS accounting has been reported in accordance with IFRS 1 for the functional currency at the exchange rate applicable on that day. Exchange rate differ- Group and is described in notes 34 and 35. In accordance with a voluntary exception in ences arising from translation of currencies are reported in the Income Statement. IFRS 1, IAS 39 is not applied to the comparative fi gures for 2004, but instead forward Translation differences on non-monetary assets and liabilities, recorded at historical from January 1, 2005. Application of IAS 39 did not have any impact on equity as of purchase values, are translated at the exchange rate on the date of the transaction. January 1, 2005. Non-monetary assets and liabilities that are reported at their fair values are translated into the functional currency using the exchange rates prevailing at the time they are recognized at fair value. The translation differences are then reported in the same way as other changes in the amounts of assets and liabilities.

TELELOGIC 2005 41 Notes

FINANCIAL STATEMENTS OF FOREIGN OPERATIONS To a large extent, these centers also take care of administration for the smaller com- Assets and liabilities of foreign operations, including goodwill and other consolidated panies in neighboring countries. surplus and defi cits, are translated from the currency of the foreign operation into Swedish kronor at the exchange rate in effect on the balance sheet date. The income RESEARCH AND DEVELOPMENT EXPENSES and expenses of foreign operations are translated into Swedish kronor at an average Telelogic develops and sells its own standard software. Expenses primarily refer to rate that is an approximation of the rates at the respective transaction dates. Revenue product development at Telelogic’s four development centers in the US, Scotland, Swe- and expenses attributable to foreign operations located in countries with hyperinfl a- den, and India. To a limited degree, external personnel are also engaged. Expenses for tion are translated to the functional currency at the exchange rate on the balance developing new software are carried as intangible assets. The carrying value includes sheet date. The Group does not pursue any business activities in countries with hyper- expenditures for material, direct expenditures for salaries, and indirect expenditures infl ation. The translation differences that arise in connection with translation of foreign that can reasonably and consistently be attributed to the asset. In the Group, this operations are recorded directly to equity in the accounts as a translation reserve. means that product development expenses are reduced by the expenses related to the projects that are capitalized in the period and increased with the amortization of NET INVESTMENT IN A FOREIGN OPERATION previously capitalized projects. Translation differences that arise in connection with translation of a foreign net investment are recorded directly as translation reserves in equity. When a foreign operation OTHER OPERATING EXPENSES is divested, the accumulated translated differences pertaining to the operations are This item includes amortization of other intangible assets when it has not been pos- realized after deduction of possible hedging in the consolidated income statement. sible to distribute these items by function in a reasonable and reliable manner. Accumulated translation differences from foreign operations that arise after the transition to IFRS in January 2004 have been disclosed as a separate component EXCHANGE RATE GAINS AND LOSSES (translation reserve) in shareholder’s equity. Exchange rate gains and losses from operative transactions are carried under operating income, while fi nancial exchange rate gains and losses are carried under fi nancial items. Revenues LICENSING REVENUES COSTS PERTAINING TO OPERATIONAL LEASES Telelogic’s software licensing revenues consist primarily of packaged software without Costs pertaining to operational leases are carried in the Income Statement on a customer modifi cation. Software is sold either with perpetual licenses or time-limited straight-line basis over the term of the lease. Benefi ts received in conjunction with licenses. Revenue from perpetual or time-limited licenses is reported upon delivery signing an agreement are carried in the Income Statement on a straight-line basis and a signed purchase order/contract has been obtained, which is the point in time over the term of the lease. when risks and benefi ts are transferred to the customer. If the customer obtains an extended payment term, the customer’s ability to pay is assessed and the remunera- FINANCING INCOME AND EXPENSES tion recognized as income is discounted to its present value. If there is uncertainty Financing income and expenses consist of interest income on bank balances, receiv- as to the ability to pay, either in the short- or long-term, licensing revenue is instead ables, and marketable securities, interest expenses on loans, dividends, exchange rate reported upon payment. differences, unrealized and realized gains on fi nancial investments and derivatives used in fi nancial operations. SOFTWARE MAINTENANCE Interest income on receivables and interest expense on liabilities are calculated by Maintenance contracts include technical support and the right to upgrade to new applying the effective interest method. Effective interest is the interest rate at which versions. Maintenance is normally invoiced one year in advance. Income is normally the present value of all future cash infl ows and outfl ows is equal to the carrying reported on a current basis over the term of the contract; for example, for a twelve- amount of the receivable or liability. The interest component in fi nancial lease pay- month contract, a portion equal to 1/12 is applied each month. ments is recognized through profi t or loss by applying the effective interest method. Interest income includes accrued transaction costs and any discounts, premiums, and CONSULTING ASSIGNMENTS other differences between the original value of the receivable and the amount received In conjunction with software orders, customer usually also order services for training upon maturity. and implementation support. The services are recognized as income when delivery is Issue expenses and similar direct transaction costs to raise loans are included in made. Service assignments in progress at a fi xed rate are recognized as income ac- the cost of the loan and are recognized over the duration of the loan. cording to the percentage of completion. The percentage of completion is determined Dividend income is recognized when the right to receive payment is determined. by the relationship between expenses incurred on the balance sheet date and esti- The Group and the Parent Company do not capitalize interest in the acquisition mated total expenses. Provisions are recorded for any loss risks for the assignment. value of its assets. Income not yet invoiced is carried as accrued income. Financial Instruments Operating Expenses and Financial Income and Expenses Financial instruments are valued and reported in the group in accordance with the rules LICENSING AND MAINTENANCE EXPENSES of IAS 39 as of January 1, 2005, without retroactive restatement of the comparative year. Refers to external license expenses, expenses for delivery (e.g. license keys, manuals, Financial instruments carried in the balance sheet include on the asset side cash and personnel), as well as expenses for the support departments at Telelogic. and cash equivalents, accounts receivable, shares that are not shares in subsidiaries or associates, other equity instruments, loans receivable and bonds receivable, and CONSULTING EXPENSES derivatives. Liabilities and equity include accounts payable, issued debt and equity Refers to direct expenses for training material, training personnel, external and in- instruments, loan liabilities, and derivatives. ternal consulting personnel, travel, and the appropriate portion of fi xed expenses Financial instruments are reported initially at cost corresponding to the instru- (e.g. premises, and depreciation of computers). ment’s fair value plus transaction expenses for all fi nancial instruments, except in the case of those under the category fi nancial assets designated at fair value through prof- SELLING EXPENSES it or loss, which are reported at fair value excluding transaction expenses. Recognition Telelogic’s own personnel are responsible for its primary sales and marketing activi- then takes place according to how they have been classifi ed as described below. ties. This expense is reported here along with external marketing expenses, such as A fi nancial asset or fi nancial liability is recognized in the balance sheet when the expenses for direct advertising, advertising, and external conferences. company becomes subject to the instrument’s contractual terms. Accounts receivable are recognized in the balance sheet when an invoice is sent. A liability is recognized ADMINISTRATIVE EXPENSES when the counterparty has performed under the agreement and there is a contractual Telelogic’s global administration, encompassing the CEO, Accounting and Finance, obligation to settle, even if no invoice has been received. Accounts payable are recog- IT Systems & IT Infrastructures and Human Resources, is located in Malmö, Sweden. nized when an invoice has been received. Administrative centers are also located in the US, the UK, Germany, and Singapore.

42 TELELOGIC 2005 A fi nancial asset is derecognized from the balance sheet when the rights in the agree- at amortized cost, according to the effective interest method. Noncurrent liabilities ment are fulfi lled, due, or the company loses control of them. This also applies for a have an expected maturity longer than one year, while current liabilities have a matur- part of a fi nancial asset. A fi nancial liability is removed from the Balance Sheet when ity shorter than one year. the obligation in the contract is fulfi lled or otherwise extinguished. This also applies for part of a fi nancial liability. CONVERTIBLE DEBENTURES ISSUED A fi nancial asset and a fi nancial liability are set off and reported at a net amount Convertible debentures can be converted into shares by the counterparty exercising in the balance sheet only when a legal right of set-off exists and when a payment in a the option to convert the instrument into shares, and are recognized as a compound net amount is intended to take place, or when the simultaneous sale of the asset and fi nancial instrument comprising a liability component and an equity component. The payment of the liability is intended to take place. fair value of the liability is calculated by discounting future cash fl ows using the cur- Acquisitions and disposals of fi nancial assets are recognized on the date of the trans- rent market interest rate for an equivalent liability without a conversion. The value action, which is the date on which the Group undertakes to acquire or divest the asset. of the equity instrument is calculated as the difference between the issue proceeds On each reporting date, the company evaluates whether there are objective indica- when the convertible debenture was issued and the fair value of the fi nancial liability tions that a fi nancial asset or pool of fi nancial assets is impaired. Financial instrument at the time of issue. The transaction costs relating to the issue of a compound fi nancial are classifi ed on initial recognition based on the purpose for which the instrument was instrument are apportioned between the liability component and the equity component acquired. Reporting thereafter depends on how they are classifi ed in accordance with in the same proportions as the issue proceeds. The interest cost is recognized in the the criteria below. Income Statement and calculated using the effective interest rate method.

Financial Assets Carried at Fair Value through Profi t or Loss ACCOUNTS PAYABLE This category consists of two subgroups: fi nancial assets and liabilities held for trad- Accounts payable belong to the category other fi nancial liabilities. Accounts payable ing and other fi nancial assets and liabilities that the company initially chose to place in have a short expected maturity and are valued without discounting at a nominal this category. A fi nancial asset is classifi ed as held for trading if it is acquired for the amount. purpose of selling in the near term. Derivatives that are independent and embedded derivatives are classifi ed as held for trading, except when they are used in hedge ac- Derivatives and Hedge Accounting counting. Assets in this category are measured at fair value and changes in fair value Derivative instruments comprise futures that are used to cover the risk of exchange are recognized in the Income Statement. rate fl uctuations. Derivatives are also terms of agreement that are embedded in other agreements. Embedded derivatives shall be reported separately if they are closely Loan Receivables and Accounts Receivable related to the host contract. Changes in the value of derivative instruments, indepen- Loan receivables and accounts receivable are fi nancial assets that are not derivatives dent or embedded, are reported in the Income Statement, based on the purpose of the with fi xed payments or with determinable payments that are not quoted on an active holding. market. Receivables arise when Telelogic provides money and services directly to the credit recipient with no intention of conducting trade in receivable rights. This category RECEIVABLES AND LIABILITIES IN FOREIGN CURRENCIES also includes acquired receivables. Receivables are reported at accrued acquisition When hedging assets or liabilities against currency risks, forward exchange contracts value. The amortized cost is determined based on the effective interest calculated at are used. No hedge accounting is needed for these hedges, since both the hedged the time of acquisition. This means that surplus values and defi cit values as well as item and the hedging instrument are translated to the exchange rate on the balance transaction costs are distributed over the maturity of the instrument. sheet date and foreign exchange differences are recognized in the Income State- ment. Changes in the value of operating receivables and liabilities are recognized in Other Financial Liabilities operating profi t, while changes in the value of fi nancial receivables and liabilities are Financial liabilities that are not held for trading are valued at amortized cost. Amor- recognized under net fi nancial items. tized cost is determined based on the effective interest that was calculated when the liability was assumed. This means that surplus values and defi cit values, as well as di- TRANSACTION EXPOSURE rect issue expenses and other transaction expenses, are distributed over the maturity Currency exposure from future forecast cash fl ows is hedged through forward ex- of the liability. Issued dividends are recognized as a liability, once the Annual General change contracts. Currency exchange forwards that protect the forecast cash fl ows are Meeting has approved the dividend. reported in the balance sheet at their fair value. The changes in value are recognized directly in the Income Statement since the hedges are short-term and do not meet IAS CASH AND CASH EQUIVALENTS 39 requirements for hedge accounting. The hedged cash fl ows can be both contracted Cash and cash equivalents consist of cash and bank assets that can be accessed im- and forecast transactions. mediately and are held in banks and similar institutions, as well as short-term investments with original maturity of less than three months and which are only exposed to Property, plant, and equipment a marginal risk of fl uctuations in value. OWNED ASSETS Property, plant, and equipment are recognized as assets in the balance sheet if it is LONG-TERM RECEIVABLES AND OTHER RECEIVABLES likely that the company will receive future fi nancial gains and the acquisition value of Long-term receivables and other current receivables are receivables that arise when the asset can be reliably measured. the enterprise provides money directly to the debtor without the intent to trade its Property, plant, and equipment are recognized in the consolidated accounts at cost claim. If the maturity or the anticipated holding period is longer than one year, they minus accumulated depreciation and any impairment losses. The acquisition value in- are considered noncurrent receivables, and if it is shorter than one year they are clas- cludes the purchase price and costs directly attributable to the asset in order to bring sifi ed as other receivables. These receivables belong to the category loan receivables it on site, in a condition to be used in compliance with the intention of the acquisition. and accounts receivable. Examples of directly attributable costs included in cost are delivery and handling, installation, title, consulting and legal services. Borrowing costs are not included in cost ACCOUNTS RECEIVABLE of noncurrent assets produced in-house. The accounting principles for impairment Accounts receivable belong to the category loan receivables and accounts receivable. losses follow below. Accounts receivable are carried at the amount expected to be collected after deduc- The carrying value of property, plant, and equipment is excluded from the balance tion for bad debts, assessed on an individual basis. Accounts receivable have a short sheet when the asset is sold or disposed of or when no future economic benefi ts are maturity and therefore they are carried at their nominal amount without discounting. expected from its use or sale or disposal. The gain or loss that arises on the sale or Impairment losses on accounts receivable are recognized in operating expenses. disposal of an asset comprises the difference between the sales price and the asset’s carrying value less direct selling expenses. Gains and losses are recognized as other LIABILITIES operating income/expenses. Liabilities classifi ed as other fi nancial liabilities are initially recognized at the amount received after deducting transaction expenses. After acquisition, the loans are carried

TELELOGIC 2005 43 Notes

DEPRECIATION PRINCIPLES Impairment Testing for Intangible Assets and Property, Plant, and Equipment as well as Depreciation is reported using the straight-line method over the estimated useful life Shares in Subsidiaries of the asset. If any such indication exists, the recoverable amount of the asset is estimated accord- The useful life is 5 years for offi ce equipment and 3 years for computers and similar ing to IAS 36 at the higher of its value in use and net selling price. equipment. When determining the value in use, future cash fl ows are discounted using a dis- The residual value and the useful life of an asset are reviewed each year. count rate that takes into account the risk-free interest rate and risk associated with the specifi c asset. An impairment loss is recognized in the Income Statement. Intangible Assets The estimated recoverable amount is assessed annually for goodwill and other GOODWILL intangible assets with an indefi nite useful life and intangible assets that are not yet Goodwill represents the difference between the acquisition value of acquired opera- ready for use. tions and the fair value of acquired assets, assumed liabilities, and contingent If it is not possible to establish material independent cash fl ows for an individual liabilities. asset, when assessing these assets the impairment requirement shall be grouped at For goodwill in acquisitions made before January 1, 2004, the Group has not ap- the lowest level at which it is possible to identify material independent cash fl ows (a plied IFRS retroactively with the transition to IFRS, but rather the value reported on so-called cash generating unit). Impairment is indicated when the reported value of this date continues to be the Group’s acquisition value, following impairment testing; an asset or cash-generating unit exceeds the recovery value. An impairment loss is please see note 12. recognized in the Income Statement. Goodwill is distributed to cash-generating units and is no longer amortized; in- Impairment of assets attributable to a cash-generating unit (group of units) is stead, impairment tests are carried out on an annual basis. allocated mainly to goodwill. After that, a proportionate impairment loss is applied to other assets included in the unit (group of units). CAPITALIZED DEVELOPMENT COSTS Goodwill and other intangible assets with an indefi nable useful life were tested for Telelogic develops and sells its own standard software. In the Group, Telelogic capital- impairment as of January 1, 2004 (transition date to IFRS), even though there was no izes product development expenses when the following criteria are met: software shall indication of impairment at that time. be technically feasible to complete; there shall be adequate resources to complete development; it shall be possible to use and sell; there shall be a market for the prod- Impairment Testing for Financial Assets uct; and it shall generate probable future economic benefi t. It must also involve new On each reporting date, the Company evaluates whether there is objective evidence product generation or a completely new functionality within existing products. A devel- that a fi nancial asset or pool of assets is impaired. Objective evidence comprises opment project is capitalized in its entirety at such time that its primary functionality observable conditions that occurred and that have a negative impact on the possibility is completed, installed, tested for function and approved in a large client delivery. After of recovering the cost of the asset. that the capitalized development costs are amortized on a straight-line basis over a The recoverable amount of assets in the category loans and receivables, which are fi ve-year period. Maintenance of existing products is not capitalized and is recognized recognized at amortized cost, is determined as the present value of future cash fl ows in the Income Statement as an expense when it arises. discounted at the effective rate at initial recognition of the asset. Assets with short ma- Capitalized product development expenses, are amortized over 5 years, which cor- turities are not discounted. An impairment loss is recognized in the Income Statement. responds to an estimate of economic useful life. Amortization begins when the product is commercially available. Development expenses recognized as assets are stated at REVERSAL OF IMPAIRMENT LOSSES cost less accumulated amortization and write-downs in the Balance Sheet. In the Par- An impairment loss is reversed if there is an indication that the need for impairment ent Company’s fi nancial statements, however, all expenses for product development are no longer exists and there has been a change in the estimates used to determine recognized as an expense in the Income Statement. Telelogic carries out regular test- the asset’s recoverable amount. However, an impairment loss for goodwill is never ing of the value of its capitalized development costs. If the carrying amount exceeds reversed. An impairment loss is only reversed to the extent that the carrying amount the discounted anticipated future cash fl ow, the item is written down to this value. of the asset does not exceed the carrying amount that should have been reported, net of depreciation, if no impairment loss should have been recognized for the asset in OTHER INTANGIBLE ASSETS prior years. Impairment losses of loan receivables and accounts receivable that are Other intangible assets acquired by the Group are recognized at cost less accumulated reported at amortized cost are reversed if a later increase in the recoverable amount amortization and impairment losses. can objectively be attributed to an event that occurred after the impairment loss was The values assigned to customer contracts at the time of acquisition are recognized made. The written down value is the value upon which subsequent revaluations are as other intangible assets. based. Revaluations are recognized directly in equity. Accrued expenses for internally generated goodwill and internally generated Impairment losses from other assets are reversed if a change has occurred in the brands are recognized in the Income Statement when costs arise. assumptions that served as the basis for determining recoverable value. Impairment is reversed only to the extent the carrying value of the assets following AMORTIZATION the reversal does not exceed the carrying value that the asset would have had if the Amortization is reported in the Income Statement on a straight-line basis over the es- impairment had not been recognized, taking into account the depreciation or amorti- timated useful life of the intangible asset, unless the useful life is indefi nite. Goodwill zation that would have been recognized. and intangible assets with indefi nite useful lives are tested for impairment annually or as soon as indications arise that the asset in question has fallen in value. Amortizable Employee Remuneration intangible assets are amortized from the date they are available for use. The estimated DEFINED CONTRIBUTION PLANS useful lives are: Obligations related to contributions to defi ned contribution plans are expensed in the value of acquired contracts 1–3 years Income Statement as they arise. capitalized development expenditure 5 years acquired software 5 years DEFINED BENEFIT PLANS The Group has no defi ned benefi t plans. Evaluation of the useful life of an asset and any residual value is carried out annually. TERMINATION BENEFITS IMPAIRMENT LOSSES When employees are terminated, a provision is reported only if the company is demon- The reported values for the Group’s assets are checked on each balance sheet date to strably obligated to terminate an employee’s employment before the normal time, or determine whether any write-down need is indicated. IAS 36 is applied to test the need when benefi ts are offered to encourage voluntary departure from the company. for impairment for assets other than fi nancial instruments, assets for sale, and divest- In cases where the company terminates employment, a detailed plan is drawn up ment groups recognized in accordance with IFRS 5, and deferred tax receivables. encompassing at least the workplace, positions, and approximate number of people affected, along with remuneration for each category of personnel or position and a schedule for implementation of the plan.

44 TELELOGIC 2005 SHARE-BASED PAYMENTS this is practicable within the framework of the Swedish Annual Accounts Act and tak- An option program enables employees to acquire shares in the company. The fair ing into account the relation between accounting and taxation. The recommendation value of the allocated options is recognized as a personnel expense with an equivalent states what exceptions and additions may be made in relation to IFRS. The differences increase in equity. The fair value is determined on the grant date and allocated between the Group and Parent Company’s accounting Principles are explained below. over the vesting period. The fair value of the granted options is calculated using a In accordance with a set of transition rules in RR 32, the Company has chosen not to binomial method and the terms and conditions on the grant date are considered. The apply Annual Accounts Act chap. 4 § 14 a–e, which permits valuation of certain fi nan- recognized cost is adjusted to refl ect the actual number of vested options and shares. cial instruments to fair value. As of January 1, 2006, the rules of chap. 4, §14a-e of the However, no adjustment is made when options expire because the share price does Annual Accounts Act will apply, which will entail changes in accounting principles. not reach the level needed for the options to vest. The accounting principles for the Parent Company have been consistently applied to Social security contributions related to share-based payments to employees for all periods presented in the Parent Company’s fi nancial reports. services rendered are recognized as expenses allocated to the periods in which the employees render the services. The provision for social security contributions is based DIVIDENDS on the fair value of the options and shares at the reporting date. The fair value is de- Anticipated dividends from subsidiaries are reported in those cases that the Parent termined according to the same measurement model that was used on the grant date. Company has sole right to decide about the size of the dividend and the Parent Com- pany has decided about the size of the dividend before the Parent Company publishes Provisions its fi nancial reports. A provision is recognized in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outfl ow of FINANCIAL INSTRUMENTS economic resources will be required to settle the obligation, and a reliable estimate of The Parent Company does not apply the valuation rules in IAS 39. The Parent Company the amount can be made. When the timing of the payment will have a material effect, carries fi nancial assets at cost less impairment and fi nancial current assets according provisions are estimated through discounting of expected future cash fl ow to a pre-tax to the lowest value principal. interest rate that refl ects current market assessments of the time value of money and, if appropriate, the risks specifi c to the liability. DERIVATIVES AND HEDGE ACCOUNTING Derivatives not used for hedging are valued in the Parent Company according to the RESTRUCTURING lowest value principal. Reporting of derivatives used for hedging is governed by the A restructuring provision is recognized when the group has a detailed, formal plan for hedged item. This means the derivative is treated as an off-balance-sheet item as long the restructuring, and the restructuring plan has commenced or has been publicly as the hedged position is not included in the balance sheet, or if it is included in the announced. No provision is made for future operating costs. balance sheet at cost. If a hedged item is included in the balance sheet, the hedged item is recognized taking the effect of the hedging instrument into account. When the Taxes hedged item is reported in the balance sheet, the derivative is reported in the balance Income taxes consist of current tax and deferred tax. Taxes are recognized in the sheet at fair value. Income Statement except when the underlying transaction is recognized directly in equity, in which case the accompanying tax effect is recognized in equity. PROPERTY, PLANT, AND EQUIPMENT Current tax is tax to be paid or received that is related to the year in question, ap- Owned Assets plying the tax rates that have been decided or in practice have been decided as of the The Parent Company reports property, plant, and equipment at cost less accumulated balance sheet date; this also includes adjustment of current tax that is attributable to depreciation and any impairment losses in the same way as for the Group, but with an earlier periods. addition for any revaluations. Deferred tax is calculated according to the balance sheet method, on the basis of temporary differences between carrying amounts of assets and liabilities and their Leased Assets values for tax purposes. The following temporary differences are not taken into ac- All of the Parent Company’s leases are reported according to the rules for operational count. For a temporary difference that has arisen when goodwill is fi rst recognized, lease agreements. the fi rst recognition of assets and liabilities that are not business combinations and on the transaction date affect neither accounting profi t, nor taxable profi t. Also not TAXES taken into account are temporary differences attributable to shares in subsidiaries and The Parent Company reports untaxed reserves, including deferred tax liability. However, associated companies that are not expected to reverse in the foreseeable future. The untaxed reserves are reported in their deferred tax and equity portions in the Consoli- valuation of deferred tax is based on how the carrying amounts of assets or liabilities dated Financial Statement. are expected to be realized or settled. Deferred tax is calculated by applying the tax rates and tax rules that have been set or essentially are set as of the closing day. GROUP CONTRIBUTIONS AND SHAREHOLDER CONTRIBUTIONS FOR LEGAL ENTITIES Deferred tax assets from deductible temporary differences and tax loss carryfor- The company reports Group and shareholder contributions in accordance with the wards are only recognized to the extent it is likely that they will be utilized. The value statement issued by the Emerging Issues Task Force of the Swedish Financial Ac- of deferred tax assets is reduced when it is no longer considered likely that they can counting Standards Council. Shareholder contributions are recognized directly against be utilized. shareholders’ equity for the receiver and activated in shares and participations for Any additional income tax arising on dividends is recognized when the dividend is the contributor to the extent that impairment is not necessary. Group contribution is recognized as a liability. recognized in accordance with its fi nancial signifi cance. This means that Group contributions made to reduce the Group’s total taxes are reported directly against retained Contingent Liabilities earnings after deduction for its actual tax effect. A contingent liability is recognized when there is a possible obligation relating to past Group contributions that can be equated with dividends are reported as dividends. events and whose existence is confi rmed only by one or more uncertain future events This means that a contribution received from the Group and its relevant tax effect are or when there is an obligation that is not recognized as a liability or provision as it is reported in the Income Statement. Group contributions and their resultant tax effects not probable that an outfl ow of resources will be required. are recognized directly in retained earnings. The recipient reports Group contributions that can be equated with shareholder Parent Company’s Accounting Principles contributions, taking relevant tax effect into account, directly in retained earnings. The Parent Company has prepared its annual fi nancial statements in accordance The giver reports the Group contribution and its relevant tax effect as an investment with the Swedish Annual Accounts Act (1995:1554) and Swedish Financial Accounting in shares in Group companies to the extent that impairment of the holdings is not Standards Council, recommendation RR 32 Accounting for Legal Entities. RR 32 states necessary. that the Parent Company in the annual fi nancial statements of the legal entity shall apply all IFRS standards and statements adopted by the European Union, to the extent

TELELOGIC 2005 45 Notes

NOTE 2 CLASSIFICATION OF REVENUE NOTE 3 SEGMENT REPORTING

Revenue per signiﬁ cant type of revenue Telelogic is an integrated software company in which all of the Group’s products are sold by all geographical segments. The products are also often sold together and by the same sales organization. The Company’s operations are primarily affected by the Group Parent Company various geographical markets in which the Company operates. This means that the Net sales, SEK thousand 2005 2004 2005 2004 primary basis of division for information about segments comprises three regions: Licensing and Europe including the Middle East and Africa, the Americas, and Asia. The geographical maintenance revenues 1,025,906 854,155 37,030 36,899 distribution is based on where assets are located, which is consistent with where the customers are located. The geographical areas have no internal sales. Royalties - - 79,213 96,179 In the segments’ results, assets and liabilities have included directly attributable Consulting revenues 264,005 185,099 73,417 43,726 items, as well as items that can be allocated to the segments in a reasonable and 1,289,911 1,039,254 189,660 176,804 reliable manner. Allocation of items attributable to product development costs, goodwill amortization, and costs for the Parent Company was not done because it is not possible to make such an allocation in a manner that would provide a true and accurate picture. The segments’ investments in property, plant, and equipment and intangible assets include all investments except for Investments in short-term equipment and equipment of lesser value. Sales are also reported distributed by customer category. Information on assets, liabilities, and investments for secondary segments are not reported for each customer category as it is not possible to perform a reasonable and reliable distribution of these items. CONTINUED NOTE 3 SEGMENT REPORTING

Geographical segment Product development, Group, SEK thousand Americas Asia/Paciﬁ c EMEA Parent Company and other Group 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 External revenues 527,606 394,855 158,496 134,395 603,809 510,004 - - 1,289,911 1,039,254

Operating income 200,632 146,827 54,827 51,013 205,281 186,921 -265,588 -209,598 195,152 175,163 Operating margin 38% 37% 35% 38% 34% 37% - - 15% 17%

Net ﬁ nancial items ------6,550 2,473 6,550 2,473 Taxes ------–36,511 –43,310 –36,511 –43,310 Net income for the year 200,632 146,827 54,827 51,013 205,281 186,921 –295,549 –250,435 165,191 134,326

Assets 254,798 169,195 133,600 106,803 339,814 302,213 1,231,131 567,409 1,959,343 1,145,620 Liabilities 216,306 135,411 55,185 47,009 223,625 217,795 104,426 42,706 599,542 442,921 Cash fl ow from operating activities 205,907 152,539 57,846 52,498 211,147 191,351 –291,772 –243,607 183,128 152,781 Cash fl ow from investing activities –3,195 –3,097 –4,043 –6,533 –4,367 –6,105 –287,214 –28,784 –298,819 –44,519 Cash fl ow from fi nancing activities ------295,340 8,177 295,340 8,177

Investments 3,195 3,097 4,043 6,533 4,367 6,105 371,358 28,660 382,963 44,395 Depreciation and amortization –5,725 –5,712 –3,019 –1,485 –5,866 –4,430 –48,959 –35,654 –63,569 –47,281

Sales by Customer Category Aerospace and Banking and Software and SEK Thousand Telecom Defense Automotive Finance systems Other Group 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 External net sales 306,100 268,381 448,393 358,498 78,620 79,427 115,036 74,000 89,310 76,302 252,452 182,646 1,289,911 1,039,254

46 TELELOGIC 2005 NOTE 4 BUSINESS COMBINATIONS The company is only included as part of the Group’s results. Information about the Income Statement prior to the acquisition cannot be disclosed as this was not audited Acquisition of Popkin and was not prepared in accordance with Telelogic’s accounting principles. In April 2005, Telelogic acquired privately-held Popkin Software, an Enterprise Architecture tools provider. Telelogic identifi ed Popkin as a successful company with EFFECTS OF ACQUISITION a product that is a good fi t with Telelogic’s current product line in modeling, at the The acquisition had the following impact on consolidated assets and liabilities. same time that it expands the line to encompass enterprise architecture. During the year, Telelogic integrated Popkin into the operation. Popkin no longer has a separate Acquired company’s net assets at time of acquisition: income statement because all product families share the same resources in sales, marketing, and administration. The business is only included as part of the Group’s Carrying results. Information about the Income Statement prior to the acquisition cannot be amount in Focal Fair value disclosed as this was not audited and was not prepared in accordance with Telelogic’s Point before the Fair value recognized accounting principles. SEK Thousand acquisition adjustment in the Group Property, plant, EFFECTS OF ACQUISITION and equipment 1,511 1,511 The acquisition had the following impact on consolidated assets and liabilities. Intangible assets 11,606 11,606 Acquired Company’s Net Assets at Time of Acquisition: Accounts receivable and other receivables 1,638 1,638 Carrying Cash and cash equivalents 12,473 12,473 amount in Fair value Interest-bearing liabilities Popkin before Fair value recognized SEK Thousand the acquisition adjustment in the Group Accounts payable and other liabilities –5,674 –3,249 –8,923 Property, plant, and equipment 5,637 5,637 Net identifi able assets and liabilities 9,949 8,357 18,305 Intangible assets 29,639 29,639 Deferred tax assets 100,774 100,774 Consolidated goodwill 96,009 Accounts receivable and other receivables 30,058 30,058 Total purchase 1 Cash and cash equivalents 19,756 19,756 consideration 114,314 Interest-bearing liabilities Cash paid –4,607 Accounts payable and other liabilities –52,092 –10,077 –62,169 Cash (acquired) 12,473 Net identifi able assets Net cash infl ow 7,866 and liabilities 3,359 120,336 123,695 1 The item includes remuneration for legal services amounting to SEK 4,607,000. Consolidated goodwill 198,048

Goodwill arose on acquisition of Focal Point because the acquired customer relations Total purchase did not meet the criteria for recognition as an intangible asset at the time of acquisi- consideration1 321,743 tion. In addition, goodwill consists of the value of the synergistic effects expected when Focal Point’s products are added to Telelogic’s product portfolio. The acquisition price Cash paid –286,458 also included the technical knowledge of the personnel.

Cash (acquired) 19,756 NOTE 5 OTHER OPERATING INCOME Net cash outﬂ ow –266,702

1 The item includes remuneration for legal services amounting to SEK 2,724,000. Parent Company, SEK thousand 2005 2004 Exchange differences - 2,595 Goodwill arose on acquisition of Popkin because the acquired customer relations did not meet the criteria for recognition as an intangible asset at the time of acquisition. - 2,595 In addition, goodwill consists of the value of the synergistic effects expected when Popkin’s products are added to Telelogic’s product portfolio. The acquisition price also included the technical knowledge of the personnel. NOTE 6 OTHER OPERATING EXPENSES

Acquisition of Focal Point Group Parent Company Focal Point has belonged to the Telelogic Group since June. The acquisition was car- SEK thousand 2005 2004 2005 2004 ried out through a public offer to the shareholders of Focal Point to acquire all shares in the company. Payment was made with Telelogic shares (5,720,133) and warrants Amortization and (4,288,890) which, based on the share price on the day of the transaction, correspond- impairment, other –15,742 –1,256 - –16,944 ed with a market capitalization of SEK 109,707,000 with full acceptance of the offer. intangible assets Focal Point is a successful Swedish company with a product that has the potential to –15,742 –1,256 - –16,944 develop even more positively as part of Telelogic. During the year Telelogic integrated Focal Point into the Group. It no longer has a separate income statement because all product families share the same resources in sales, marketing, and administration.

TELELOGIC 2005 47 Notes

NOTE 7 EMPLOYEES AND PAYROLL EXPENSES Wages, Salaries, Other Remuneration, and Social Security Expenses Wages, salaries, Social security Employee Benefi t Costs and remuneration expenses Group, SEK thousand 2005 2004 2005 2004 2005 2004 Wages, salaries, and other remuneration 545,499 451,264 Parent Company, SEK thousand 44,592 41,074 22,966 13,271 Equity compensation benefi ts 3,420 2,070 (pension costs)1 8,222 7,975 (for more information please see note 21) Pension costs, defi ned contribution plans 23,291 19,634 Subsidiary 504,327 412,260 69,245 67,208 Social security contributions 68,920 60,845 (pension costs) 15,069 11,659 641,130 533,813

Average Number of Employees Group total 548,919 453,334 92,211 80,479 2005 men 2004 men (pension costs)2 23,291 19,634

Parent Company 1) Of the Parent Company’s pension costs, SEK 899,000 (1,034,000) pertains to the CEO and the Board of Directors. The Parent Company has no outstanding pension commitments. Sweden 74 74% 57 81% 2) Of the Group’s pension costs, SEK 899,000 (1,034,000) pertains to the CEO and the Board of Directors. The Group Total, Parent Company 74 74% 57 81% has no outstanding pension commitments.

Subsidiary Wages, Salaries, and Other Remuneration Distributed by Country and Among Directors, etc., and Other Employees Sweden 43 79% 19 100% Germany 55 69% 52 73% Board and CEO Other employees UK 162 77% 117 72% SEK thousand 2005 2004 2005 2004 US 286 74% 208 70% Parent company France 38 76% 41 83% Sweden 5,077 4,303 39,515 36,770 Italy 6 33% 3 100% (incentive, etc) 1,585 1,393 - - Japan 27 81% 25 84% Parent Company total 5,077 4,303 39,515 36,770 Ireland 11 73% 14 71% (incentive, etc) 1,585 1,393 - Australia 17 82% 14 86% Netherlands 17 76% 12 83% Subsidiaries in Sweden - 1,040 17,663 8,522 Finland 4 100% 3 100% (incentive, etc) - 387 - - Norway 0 0% 0 0% Subsidiaries abroad 11,718 19,491 474,946 383,208 Spain 10 60% 6 67% (incentive, etc) 3,304 5,646 - - India 118 68% 66 62% Subsidiaries total 11,718 20,531 492,609 391,730 Korea 11 82% 12 75% (incentive, etc) 3,304 6,033 - - China 25 68% 14 64% United Arab Emirates 3 100% 0 0% Group total 16,795 24,834 532,124 428,500 Singapore 8 88% 11 82% (incentive, etc) 4,889 7,426 - - Total, Subsidiaries 841 74% 617 73% Of the salaries and remuneration paid to other employees in the Group, SEK 8,902,000 (SEK 15,816,000) pertain to senior executives other than the CEO and the Board of Total, Group 915 74% 674 74% Directors.

Gender Distribution in Executive Management Percentage of women 2005 2004 Parent Company Board of Directors 14% 17% Other Senior Executives 17% 9% Group Total Board of Directors 14% 17% Other Senior Executives 17% 9%

48 TELELOGIC 2005 Absence Due to Illness NOTE 10 NET FINANCIAL ITEMS Absence due to illness is calculated from January 1, 2005, to December 31, 2005, and pertains to the Parent Company. Total absence due to illness was 277 days of a total of Group, SEK thousand 2005 2004 19,240 days, which corresponds with 1.44%. No consecutive period of absence due to Interest income 8,495 3,410 sickness of 60 days or more occurred during the period. Financial income 8,495 3,410 % 2005 2004 Total absence due to illness as a percentage of regular Interest expenses –1,945 –937 working hours 1.4 0.9 Finance expenses –1,945 –937

Absence due to illness as a percentage of regular Net ﬁ nancial items 6,550 2,473 working hours distributed by gender: Men 1.5 0.8 Parent Company, SEK thousand Women 1.4 1.0 Income from participations in Group companies - 7,598

Absence due to illness as a percentage of regular working hours distributed by age: Interest income 29 or younger 1.8 0.7 Interest income, Group companies 8,617 4,687 30–49 1.5 0.9 Interest income, other 4,078 1,055 50 or older 0.9 0 12,695 5,742

Interest expenses NOTE 8 FEES AND EXPENSES FOR AUDITORS Interest expenses, Group companies –13,381 –12,042

Group Parent Company Interest expenses, other –1,599 –657 SEK thousand 2005 2004 2005 2004 –14,980 –12,699 Alf Svensson, KPMG Auditing 3,009 3,058 650 575 NOTE 11 TAXES Other appointments 1,877 636 1,383 128 Reported in the Income Statement Group Parent Company Other auditors SEK thousand 2005 2004 2005 2004 Auditing 152 160 0 0 Current tax liability Other appointments 1,494 1,263 0 0 Tax liability for the period –17,462 –17,678 –676 –3,546 6,532 5,117 2,033 703 Adjustment of tax attributable Auditing assignments include the auditing of the annual report, bookkeeping, and the to previous year –564 –2,090 - - administration of the Board of Directors and the President, other assignments that the –18,026 –19,768 –676 –3,546 Company’s auditors are requested to perform, as well as advising or other forms of assistance related to ﬁ ndings made in such audits or the execution of other tasks. All other work is classiﬁ ed as “other assignments.” Deferred tax liability Deferred tax for temporary differences 1,480 –2,991 - –725 NOTE 9 OPERATING EXPENSES BY CATEGORY OF EXPENSE Deferred tax related to utilization of previously Group, SEK thousand 2005 2004 capitalized value of tax loss Other external expenses –358,894 –280,320 carryforwards –37,015 –20,551 - –8,751 Personnel costs –672,296 –536,490 Deferred tax on revaluation of the carrying amount of Depreciation, amortization, and impairment –63,569 –47,281 deferred tax assets 17,050 17,050 - –1,094,759 –864,091 –18,485 –23,542 17,050 –9,476

Total recognized tax expense –36,511 –43,310 16,374 –13,022

TELELOGIC 2005 49 Notes

Reconciliation of Effective Tax Recognized Deferred Tax Assets

Group, SEK thousand % 2005 % 2004 Deferred tax assets are classiﬁ ed as follows: Net income 201,702 177,636 Deferred Deferred Tax according to current tax tax asset tax liability Net rate for Parent Company 28.0 –56,477 28.0 –49,738 Group, SEK Effect of other tax rates for the thousand 2005 2004 2005 2004 2005 2004 foreign subsidiaries –14,112 –13,596 Intangible assets 58,624 - 41,891 58,624 –41,891 Non-deductible costs –2,676 –2,391 Value of acquired Non-taxable income 12,496 920 maintenance Increase of loss carryforward agreements - - 779 - –779 - without equivalent capitaliza- Untaxed reserves - - 238 - –238 - tion of deferred tax –25,718 –11,275 Loss carryforward 121,513 131,890 - - 121,513 131,890 Utilization of previously un- capitalized loss carryforward 53,470 31,744 180,137 131,890 1,017 41,891 179,120 89,999 Tax attributable to previous Set-off –1,017 –41,891 –1,017 –41,891 - - years –564 –2,090 Net deferred Foreign tax –1,197 –3,024 tax assets 179,120 89,999 - - 179,120 89,999 Deductible goodwill amortization in the US –5,371 - Unreported Deferred Tax Assets Increase/decrease in temporary differences for which Tax-deductible loss carryforward for which deferred tax assets have not been reported deferred tax was not previ- in the Income Statement and Balance Sheet: ously reported 3,638 6,140

Reported effective tax –36,511 –43,310 Group, SEK thousand 2005 2004 Tax losses 341,383 519,141

Reconciliation of Effective Tax 341,383 519,141

Deferred tax assets are reported for unutilized loss carryforwards to the degree that in Parent Company, all probability they can be expected to be utilized within the foreseeable future. SEK thousand % 2005 % 2004 Recognized amounts are subject to ongoing impairment testing. Nearly all of the Net income 57,096 52,055 Group’s loss carryforwards can be utilized without time limitations. The expected Tax according to current tax earnings of the next few years justify the value of the capitalized loss carryforward. rate for Parent Company 28.0 –15,987 28.0 –14,575 Non-deductible costs –1,301 –3,058 Changes in deferred tax in temporary differences and loss carryforward: Non-taxable income 31 4,196

Increase of loss carryforward Exchange without equivalent capitaliza- Balance Recognized rate differ- Balance tion of deferred tax - - Group, SEK at Jan. 1, Acquisi- in the Income ences for at Dec. 31, Utilization of previously un- thousand 2005 tions Statement the year 2005 capitalized loss carryforward 15,002 - Intangible Tax attributable to previous assets –41,891 91,871 –2,932 11,576 58,624 years - - Value of Coupon tax –676 –1,840 acquired maintenance Increase/decrease in tempo- agreements - –4,983 4,412 –208 –779 rary differences 17,050 - Untaxed Increase/decrease in tem- reserves - –238 - - –238 porary differences for which deferred tax was not previ- Loss carry- ously reported 2,255 2,255 forward 131,890 - –19,965 9,588 121,513

Reported effective tax 16,374 –13,022 89,999 86,650 –18,485 20,956 179,120

Tax was calculated based on the current tax rate in each country.

50 TELELOGIC 2005 Exchange Capitalized Other Balance Recognized rate Balance development Intangible Group, SEK at Jan. 1, Acqui- in the Income differences at Dec. 31, Group, SEK thousand Goodwill costs assets Total thousand 2004 sitions Statement for the year 2004 Opening balance Property, Jan. 1, 2005 174,388 217,766 17,095 409,249 plant, and Business equipment 725 - –725 - - Combinations 294,057 6,090 35,155 335,302 Intangible Assets developed assets –39,625 - –2,266 - –41,891 in-house - 26,030 - 26,030 Loss Exchange rate carryforward 157,314 - –20,551 –4,873 131,890 differences for the 118,414 - –23,542 –4,873 89,999 year 54,883 - 3,760 58,643

Closing balance Dec. 31, 2005 523,328 249,886 56,010 829,224 Exchange Parent Balance Recognized rate Balance Company, SEK at Jan. 1, Acqui- in the Income differences at Dec. 31, Accumulated depre- thousand 2005 sitions Statement for the year 2005 ciation, amortization, and impairment Loss carryforward 49,619 - 17,049 - 66,668 Opening balance Jan. 1, 2004 - –38,431 –13,006 –51,437 49,619 - 17,049 - 66,668 Depreciation, amortization, and impairment for the year - –29,724 –1,784 –31,508 Exchange Parent Balance Recognized rate Balance Exchange rate Company, SEK at Jan. 1, Acqui- in the Income differences at Dec. 31, differences thousand 2004 sitions Statement for the year 2004 for the year - - 21 21 Property, Closing balance plant, and Dec. 31, 2004 - –68,155 –14,769 –82,924 equipment 725 - –725 - - Opening balance Loss Jan. 1, 2005 - –68,155 –14,769 –82,924 carryforward 58,370 - –8,751 - 49,619 Depreciation, 59,095 - –9,476 - 49,619 amortization, and impairment for the year - –30,630 –16,287 –46,917 Exchange rate differences for the year - - –677 –677 NOTE 12 INTANGIBLE ASSETS Closing balance Dec. 31, 2005 - –98,785 –31,733 –130,518 Capitalized Other development Intangible Group, SEK thousand Goodwill costs assets Total Carrying amount

Accumulated As of Jan. 1, 2004 173,196 157,435 1,383 332,014 cost As of Dec. 31, 2004 174,388 149,611 2,326 326,325 Opening balance Jan. 1, 2004 173,196 195,866 14,389 383,451 As of Jan. 1, 2005 174,388 149,611 2,326 326,325 Internally developed As of Dec. 31, 2005 523,328 151,101 24,277 698,706 assets - 21,900 - 21,900 Other investments - - 2,726 2,726 Exchange rate differences for the year 1,192 - –20 1,172

Closing balance Dec. 31, 2004 174,388 217,766 17,095 409,249

TELELOGIC 2005 51 Notes

IMPAIRMENT TEST FOR CASH-GENERATING UNITS Capitailized Other Telelogic is an integrated software company in which all the Group’s products are Parent Company, development Intangible sold by all marketing companies; in other words, the Group only has one business SEK thousand Goodwill costs assets Total segment. The products are also often sold together and by the same sales organiza- Accumulated tion. When testing whether those intangible assets that are not written off over their cost estimated useful life need impairment, the entire Group therefore constitutes a single Opening balance cash-generating unit. Jan. 1, 2004 - - 91,000 91,000 Impairment testing is based on the calculation of value in use. This value is based on cash ﬂ ow calculations for a total of ten years based on an annual growth rate of Other investments - - 2,726 2,726 10%, which corresponds with the current growth rate. The forecast cash ﬂ ow was Closing balance calculated based on present value with a discount rate of 8.4% after tax. The exchange Dec. 31, 2004 - - 93,726 93,726 rate is based on the current listed exchange rate. The calculated value in use exceeds Opening balance the carrying amount of goodwill and other intangible assets by a good margin. Even Jan. 1, 2005 - - 93,726 93,726 a calculation in which the growth rate is set at 0% gives a value in use that is greater than the carrying amount by a good margin. Executive Management therefore deems Investments and that no reasonable potential changes in the assumptions would result in the recover- divestments for the able amount being less than the carrying amount. year ----

Closing balance Dec. 31, 2005 - - 93,726 93,726 NOTE 13 EQUIPMENT, TOOLS, AND INSTALLATIONS

Accumulated SEK thousand Group Parent Company depreciation, Cost amortization, and Opening balance Jan. 1, 2004 187,540 - impairment Acquired though business combinations - - Opening balance Jan. 1, 2004 - - –74,056 –74,056 Transferred at merger - 31,258 Depreciation, Other acquisitions 19,769 1,911 amortization, and Divestments –13,849 –3,666 impairment - - –17,353 –17,353 Exchange differences –8,780 - Closing balance Closing balance Dec. 31, 2004 184,680 29,503 Dec. 31, 2004 - - –91,409 –91,409

Opening balance Jan. 1, 2005 184,680 29,503 Opening balance Jan. 1, 2005 - - –91,409 –91,409 Acquired though business combinations 10,223 - Depreciation, Other acquisitions 14,483 2,356 amortization, and Divestments –10,264 –6,398 impairment - - –545 –545 Exchange differences 22,604 - Closing balance Closing balance Dec. 31, 2005 221,726 25,461 Dec. 31, 2005 - - –91,954 –91,954

Depreciation, amortization, and impairment Carrying amount Opening balance Jan. 1, 2004 –157,918 - As of Jan. 1, 2004 - - 16,944 16,944 Opening balance depreciation, amortization As of Dec. 31, 2004 - - 2,317 2,317 and impairment though business combinations - - Transferred at merger - –29,031 As of Jan. 1, 2005 - - 2,317 2,317 Depreciation, amortization, As of Dec. 31, 2005 - - 1,772 1,772 and impairment for the year –15,773 –943 Divestments 8,367 3,666

Depreciation, Amortization, and Impairment included in following Lines in Exchange differences 8,401 - the Income Statement Closing balance Dec. 31, 2004 –156,923 –26,308 Group Parent Company

SEK thousand 2005 2004 2005 2004 Opening balance Jan. 1, 2005 –156,923 –26,308 Selling expenses ----Opening balance depreciation, amortization Administrative expenses ----and impairment though business combination –3,075 - Product development Depreciation, amortization, expenses 31,175 30,252 545 409 and impairment for the year –16,652 –2,042 Other operating expenses 15,742 1,256 - 16,944 Divestments 8,707 6,189

46,917 31,508 545 17,353 Exchange differences –19,008 - Closing balance Dec. 31, 2005 –186,951 –22,161

52 TELELOGIC 2005 Group Parent Company Dec. 31, Dec. 31, Parent Company, SEK thousand 2005 2004 Carrying amount Long-term receivables January 1, 2004 29,622 0 Opening acquisition values December 31, 2004 27,757 3,195 Opening balance, January 1 124 0 January 1, 2005 27,757 3,195 Purchases 1,061 124 December 31, 2005 34,775 3,300 Sales –124 0

Closing balance December 31 1,061 124 Depreciation, Amortization, and Impairment Included in Following Lines in the Income Statement NOTE 15 ACCOUNTS RECEIVABLE SEK Thousand Group Parent Company 2005 2004 2005 2004 Accounts receivable are recognized after taking into account customer losses that arose during the year totaling SEK 10 million for the Group. Most of this loss arose in Selling expenses 10,793 10,207 123 57 conjunction with payment difﬁ culties on the part of one of the Group’s customers in Administrative expenses 1,941 1,862 656 303 the US market. The Parent Company had no customer losses. Product development expenses 3,918 3,704 1,263 583 NOTE 16 PAYMENTS AND ACCRUED INCOME Other operating expenses ----

16,652 15,773 2,042 943 SEK thousand Group Parent Company Dec. 31, Dec. 31, Dec. 31, Dec. 31, NOTE 14 LONG-TERM RECEIVABLES AND OTHER RECEIVABLES 2005 2004 2005 2004 Rent 4,446 4,552 872 1,047

Dec. 31, Dec. 31, Accrued income 90,108 72,865 26,960 20,444 Group, SEK thousand 2005 2004 Allocated expenses 12,242 8,537 4,156 2,241 Long-term receivables that are noncurrent assets Prepaid expenses Deposits rent 13,559 12,669 pertaining to development project 2,347 3,274 2,347 3,274 Deposits customers 283 - Other items 77 41 86 37 Deposits suppliers 1,088 - Total 109,220 89,269 34,421 27,043 14,930 12,669

Other receivables that are current assets Current deposits 6,480 10,472 NOTE 17 CASH AND CASH EQUIVALENTS Grants 2,678 2,555 The Group’s cash and cash equivalents consist only of cash and bank balances VAT owed 1,916 1,800 amounting to SEK 447,324,000 (249,478,000). In addition to cash and cash equivalents, Personnel-related receivables 340 355 the Group also has an unused line of credit for SEK 566,748,000 (142,973,000). Other 2,934 2,058 14,348 17,240 NOTE 18 SHAREHOLDER’S EQUITY

For changes in shareholders’ equity, please see the statement of changes in equity on Dec. 31, Dec. 31, pages 38–39. Parent Company, SEK thousand 2005 2004 Long-term receivables Group Deposits rent - 124 CAPITAL STOCK AND SHARE PREMIUM Deposits suppliers 1,061 - Ordinary shares Stated in number of shares 2005 2004 1,061 124 Issued per January 1 217,292,782 204,433,472 Other receivables (short-term) Cash issue 18,000,000 - VAT owed 67 485 New issue in conjunction with acquisition 5,720,133 - Other 229 –253 Exercise of warrants 1,745,932 1,130,506 296 232 Conversion of convertible loan 671,257 11,728,804

Issued per 31 December – paid 243,430,104 217,292,782

As of December 31, 2005, registered capital stock was divided into 243,430,104 common shares (217,292,782). Holders of common shares are entitled to a dividend established over time. Share- holders are entitled to vote at the Annual General Meeting with one vote per share.

TELELOGIC 2005 53 Notes

The cash issue carried out during the year pertained to a new issue aimed at Swedish 2005 2004 and international departments outside Telelogic’s existing shareholders at a price that was lower than the share price at the time of the issue. Earnings attributable to shareholders of the Parent Company, basic, SEK thousand 165,191 134,326 OTHER PAID-UP CAPITAL Pertains to paid-up equity from shareholders, including the share premium reserve Weighted average number of outstanding shares, that was transferred to the statutory reserve as of December 31, 2005. As of January basic, in thousands of shares 1, 2006, and in the future, provisions to the share premium reserve will also be recognized as paid-up capital. Total ordinary shares January 1 217,293 204,433 Effect of cash issue 14,250 RESERVES Effect of new issue in conjunction with acquisition 3,299 , Translation Reserve The translation reserve includes exchange rate differences arising in conjunction with Effect of exercise of warrants 707 687 the translation of fi nancial reports from foreign operations that have prepared their Effect of conversion of convertible loan 43 9,617 fi nancial statements in a currency other than the currency in which the consolidated Weighted average number of ordinary shares during fi nancial statements are presented. The Parent Company and the Group present their the year, basic 235,592 214,737 fi nancial reports in Swedish kronor. Moreover, the translation reserve consists of exchange differences that arise during revaluation of liabilities recognized as hedging instruments for a net investment in a foreign business. Earnings per share, diluted Calculation of earnings per share for 2005 is based on earnings attributable to the Parent Company’s ordinary shareholders amounting to 165,389 and to a weighted RETAINED EARNINGS INCLUDING NET INCOME FOR THE YEAR number of outstanding shares during 2005 of 240,448. The two components have Retained earnings including net income for the year includes the aggregate losses of been calculated as follows: the Parent Company and its subsidiaries. Previous provisions to the statutory reserve, excluding the transferred share premium reserve, are included in this equity item. SEK thousand 2005 2004 Earnings attributable to shareholders Parent Company of the Parent Company 165,191 134,326 RESTRICTED FUNDS Restricted funds may not be decreased through distribution of profi ts. Effect of interest on convertible debt instrument 198 108 Earnings attributable to shareholders of the Parent Statutory reserve Company, diluted 165,389 134,434 The purpose of the statutory reserve is to save part of the net profi t that is not used to cover the loss carried forward. Weighted average number of outstanding ordinary Share premium reserve shares, diluted, in thousands of shares When shares are issued at premiums, i.e. when the price of the shares is higher than Weighted average number of ordinary shares their par values, an amount corresponding to the received amount less the par value during the year, basic 235,592 214,737 of the shares is transferred to the share premium reserve. Effect of conversion of convertible debt instrument - 682

Retained earnings Effect of issued stock options 4,856 3,509 Retained earnings consist of the previous year’s non-restricted equity after any Weighted average number of ordinary shares during distribution of proﬁ ts and allocation to the statutory reserve. It comprises Net income the year, diluted 240,448 218,928 for the year when combined with unrestricted shareholders’ equity, i.e. the amount available for dividend payments. Instruments that could have potential dilutive effects and changes after the balance sheet date On December 31, 2005, the company had seven outstanding stock option programs. NOTE 19 EARNINGS PER SHARE The share price for all programs exceeds the exercise price equivalent to total dilution of 2.0% or 4,856 shares. For more information on the Group’s stock option program Basic Diluted please see note 21 and the Telelogic Share, page 30. SEK 2005 2004 2005 2004 Earnings per share 0.70 0.63 0.69 0.61 NOTE 20 INTEREST-BEARING LIABILITIES

Calculation of the numerator and denominator used in the above calculations of earn- For more information about the company’s exposure to interest risk and the risk of ings per share is shown below. exchange rate ﬂ uctuations, please refer to note 25.

Earnings per share, basic Group, SEK thousand 2005 2004 Calculation of earnings per share for 2005 is based on earnings attributable to the Long-term liabilities Parent Company’s ordinary shareholders amounting to 165,191 and to a weighted Convertible debt instruments - 2,447 number of outstanding shares during 2005 of 235,592. The two components have - 2,447 been calculated as follows: Current liabilities Additional purchase consideration Popkin 39,740 - Other 38 226

39,778 226

54 TELELOGIC 2005 NOTE 21 EMPLOYEE BENEFITS Defi ned contribution plans In Sweden the Group has defi ned contribution pension plans for employees that are Defi ned Benefi t Plans fully fi nanced by the companies. Obligations for retirement and family pension for civil servants are secured by insur- Overseas there are defi ned contribution plans that are partly fi nanced by the sub- ance policies provided by Alecta. According to a statement from the Emerging Issues sidiaries and partly covered by fees that the employees pay. Task Force, URA 42 of the Swedish Financial Accounting Standards Council, this is a Payment for these plans takes place on an ongoing basis in accordance with the benefi t plan that comprises several employers. During fi scal year 2005, the company rules of the plan in question. did not have access to the information it needed to report this as a defi ned benefi t plan. Therefore, the pension plan according to ITP and secured through insurance in Share-based payments Alecta has been reported as a defi ned-contribution plan. The year’s fees for pension Telelogic has a number of outstanding stock option programs for the Company’s insurance signed with Alecta were SEK 2,935m (2,851). Alecta’s surplus may be al- employees in keeping with the Company’s stock option policy. located to the policyholders and/or the insured. At the end of 2005 Alecta’s surplus The following table shows outstanding stock option programs as of December 31, (in the form of collective consolidation level) amounted to 128% (128%). The collective 2005. During the year, one program (TO 13) was added. This program will be vested funding ratio is the market value of Alecta’s assets as a percentage of the insurance from 2007 to 2009 with 1/3 per year and presumes that certain criteria are met obligations calculated according to Alecta’s actuarial assumptions, which does not pertaining to growth, profi tability, and cash fl ow. No other allocation has taken place. conform to IAS 19. Exercise occurred during the year corresponding to 1,744,807 shares. TO 8 pertains to warrants, the others pertain to employee options linked to employment and are mainly vested on a straight-line basis over a three-year period.

Change in Number of Options Held by Employees

Parent Company/Group TO 7 TO 8 TO 9 TO 10 TO 11 TO 13 2004 2001/2006 2001/2006 2001/2006 2003/2007 2004/2008 2005/2010 Outstanding at beginning of period 514,200 2,769,425 2,643,008 1,817,000 0 - Issued - - - - 1,900,000 - Exercised –109,900 –635,700 –228,315 –156,591 - - Due –66,300 - –192,034 –256,634 –70,000 -

Outstanding at end of period 338,000 2,133,725 2,222,659 1,403,775 1,830,000 -

2005 Outstanding at beginning of period 338,000 2,133,725 2,222,659 1,403,775 1,830,000 0 Issued - - - - - 3,200,000 Exercised –116,462 –919,640 –525,632 –183,073 - - Due –2,000 - –48,700 –105,336 –213,000 -

Outstanding at end of period 219,538 1,214,085 1,648,327 1,115,366 1,617,000 3,200,000

Information About Outstanding Options as per Balance Sheet Date Parent company/Group TO 7 TO 8 TO 9 TO 10 TO 11 T0 13 Maturity date (year/month/day) Apr. 30, 2006 Apr. 30, 2006 Apr. 30, 2006 Oct. 31, 2007 July. 31, 2008 Jan. 31, 2010 Subscription price per share, SEK 6.30 8.40 8.50 5.15 17.30 17.50 Total payments if shares are issued, SEK 000s 1,383 10,198 14,010 5,744 27,974 56,000 Increase of capital stock with full subscription 2,195 12,140 16,483 11,153 16,170 32,000 Total shares authorized per option 1.00 1.00 1.00 1.00 1.00 1.00

DILUTED The outstanding employee stock option programs can result in no more than 3.6% Total dilution, calculated based on discounted redemption prices, corresponds with dilution (computed as the net increase of shares in the Company as a result of options, 4,856,719 shares, which means that the total number of shares after full dilution is divided by the total number of shares and options). 248,286,823. When considering only those employee stock option programs that have share prices greater than the discounted redemption price as of December 31, 2005, total dilution was 1.6%. An externally-aimed stock option program (TO 12) was added in conjunction with the acquisition of Focal Point AB, in which the outstanding number of options is 4,288,890 (equivalent to 1.7 and 0.35% dilution, respectively).

TELELOGIC 2005 55 Notes

COSTS ACCORDING TO IFRS 2 SHARE-BASED PAYMENTS As of December 31, 2005, the Chief Executive Offi cer had 100,000 employee stock The fair value of services received from employees in return for allocated options is options from program TO 10, which are vested from 2004 to 2006 with continued em- valued on the basis of the fair value of the allocated options. ployment, 100,000 employee stock options from program TO 11, vested from 2005 to The total fair value for TO13, according to the method accepted in the market, is 2007 with continued employment, and 400,000 employee stock options from program calculated at SEK 12,384,000, which with a term of 3.5 years gives an annual cost of TO 13, vested from 2007 to 2009 with continued employment. The employee stock op- SEK 3,538,000. Since the options according to TO13 were allocated in late June 2005, tions were distributed free of charge. The market value of the employee stock options this gives a cost for 2005 of SEK 1,769,000 allocated during the year is estimated at SEK 1,720,000. For more information on the Programs allocated before Nov. 7, 2002 are not covered by IFRS 2 except for infor- preparation and decision-making process for benefi ts to the Chief Executive Offi cer, mation purposes. please see the section on corporate governance, pages 65-67.

OTHER INDIVIDUALS IN EXECUTIVE MANAGEMENT Parent Company/Group, SEK thousand 2005 2004 Five other people in Executive Management received SEK 5,543,000 (9,989,000) in sala- Allocated stock options 2003 (TO 10) 533 467 ry and SEK 3,359,000 (SEK 5,827,000) in bonuses, corresponding with 60.6% (58.3%) of Allocated stock options 2004 (TO 11) 2,213 2,264 base salary. Variable compensation is based on the Group’s growth and performance. For other senior executives, defi ned contribution pension premiums for SEK 1,074,000 Allocated stock options 2005 (TO 13)) 1,769 - (1,536,000) and SEK 30,000 (SEK 30,000) were paid in accordance with special pension Total personnel costs as a result of agreements. Termination by the employer normally requires a period of notice of 6 share-based payment including social security fees 4,515 2,731 months for other individuals in Executive Management. However, 12 months’ advance notice is required for management personnel. Moreover, there is no severance pay. Other Senior Executives had 603,000 warrants as of December 31, 2005 from Senior Management Benefi ts program TO 8, 178,500 employee stock options from program TO 9, which were vested between 2002 and 2005 upon continued employment, 251,669 employee stock options CHIEF EXECUTIVE OFFICER from program TO 10, which were vested between 2004 and 2006 upon continued SEK 2,063,000 (SEK 1,800,000) was paid to the Chief Executive Offi cer as salary, plus employment, 475,000 employee stock options from program TO 11, which were vested a bonus of SEK 1,585,000 (SEK 1,393,000) corresponding to 77% (77%) of base salary. between 2005 and 2007 upon continued employment, and 290,000 employee stock op- The variable compensation is based on the Group’s growth and performance. Pension tions from program TO 13, which were vested between 2007 and 2009 upon continued benefi ts totaled SEK 899,000 (1,034,000). employment. The employee stock options were distributed free of charge. The market The retirement age for the Chief Executive Offi cer is 65. The defi ned contribution value of the warrants allocated during the year is estimated at SEK 1,247,000. For pension amounts to 35.0% of pension-qualifi ed salary up to SEK 2,400,000, and 20% more information on the preparation and decision-making process for benefi ts to thereafter. Termination at the request of the Chief Executive Offi cer requires a period the other individuals in Executive Management, please see the section on corporate of notice of 6 months and the Chief Executive Offi cer is not entitled to severance pay. governance, pages 65–67. In the event of major structural changes, severance pay equivalent to 12 monthly salaries is paid with retained period of notice of 6 months. Termination by the employer requires a period of notice of 12 months and severance pay equivalent to 12 monthly salaries. Other income is not deducted from severance pay.

Compensation and other benefi ts during the year Financial Basic salary Variable Pension Instruments, Other directors’ fees remuneration Other benefi ts expenses etc. compensation Total Chairman of the Board 400 - - - - - 400 Directors (5 people) 750 - - - - - 750 Chief Executive Offi cer 2,063 1,585 - 899 1,720 - 6,267 Other Senior Executives (5 people) 5,438 3,359 105 1,104 1,247 - 11,253

Total 8,651 4,944 105 2,003 2,967 0 18,670

56 TELELOGIC 2005 NOTE 22 PROVISIONS NOTE 23 OTHER LIABILITIES

Dec. 31, Dec. 31, Dec. 31, Dec. 31, Group, SEK thousand 2005 2004 Group, SEK thousand 2005 2004

Provisions that are current liabilities Other long-term liabilities Restructuring expenses 7,793 8,561 Leases 3,385 318

Severance pay 5,994 - 3,385 318 13,787 8,561

Other current liabilities Parent Company, SEK thousand Customer contracts 15,545 12,374 Provisions that are current liabilities Compulsory redemption, Focal Point 3,013 - Restructuring expenses 7,793 - VAT liabilities 20,729 23,552 Severance pay 2,207 - Liabilities pertaining to personnel 5,724 4,509

10,000 - Other 7,019 4,456 52,030 44,891 Group restructuring and severance pay, SEK thousand

Carrying amount, beginning of period 8,561 19,150 NOTE 24 ACCRUED EXPENSES AND PREPAID INCOME Provisions during the period1 13,787 - Amount utilized during the period -8,561 -10,589 Group Parent Company

Carrying amount, end of period 13,787 8,561 Dec. 31, Dec. 31, Dec. 31, Dec. 31, SEK thousand 2005 2004 2005 2004 Maintenance agreements, Parent Company restructuring and prepaid revenue 320,700 235,658 13,169 1,932 severance pay, SEK thousand Vacation pay liability 21,233 16,025 6,622 5,996 Carrying amount, beginning of period - - Commissions, distributors 2,947 773 2,766 760 Provisions during the period1 10,000 - Accrued salaries 44,217 36,900 6,703 4,967 Carrying amount, end of period 10,000 - Social security contributions 10,744 10,385 1,200 1,214 Accrued interest expenses 0808 Payments Other items 42,974 35,045 7,383 6,100 Group, SEK thousand 442,815 334,794 37,843 20,977 Anticipated amount of provision made after more than twelve months - - NOTE 25 FINANCIAL RISKS AND FINANCING POLICIES Parent Company, SEK thousand The Telelogic Group’s fi nancial functions are centralized, and managed from corporate Anticipated amount of provision made after more than headquarters. The Board of Directors has prepared guidelines for the fi nancial func- twelve months - - tion and receives regular progress reports. The local economic units report directly to the central economic and fi nancial function, which allows good management of 1 Provisions made during the year include existing provisions. the Group’s fi nancial exposure, while offering cost advantages. The Group’s fi nancial policy establishes guidelines and rules for fi nancial risk management and for general Restructuring fi nancial operations. SEK 10,000,000 of the provisions pertains to restructuring expenses for the Malmö product division (employee layoffs and relocation of parts of the operation). The Foreign Exchange Risk remaining SEK 3,787,000 pertains to severance pay in subsidiaries. Foreign exchange risk is the risk for fl uctuations in the value of a fi nancial instrument because of changes in exchange rates. Currency rate risks are related to changes to expected and contracted payment fl ows (transaction exposure), revaluation of foreign subsidiaries’ assets and liabilities in foreign currency (translation exposure), and fi nancial exposure in the form of currency risks in the payment fl ows for loans.

TRANSACTION EXPOSURE Telelogic’s sales are primarily handled from the local sales ofﬁ ces. A total of 93% of Telelogic’s sales are in currencies other than SEK. Revenues are therefore considerably exposed to exchange rate ﬂ uctuations. Net income, however, is not subject to the same level of exposure because the sales-related expenses are reported in the same local currencies. The Group’s support and development centers are also geographically dispersed in four different currency areas – Sweden, the UK, the US, and India.

TELELOGIC 2005 57 Notes

Because the Group’s operational organizations are located within the currency areas Credit risk in which the products are sold, the Group’s fl ow exposure is relatively limited. The Credit risk refers to customers who are not able to pay for delivered products or ser- distribution of sales and operating expenses by currency in the table below provides a vices because of fi nancial problems. picture of the Group’s sensitivity to currency fl uctuations in the Income Statement. Telelogic has traditionally had few problems with outstanding accounts receivable because most of our customers are larger, creditworthy companies. Bad debt risk is Revenues Expenses also limited because the maintenance revenues are usually invoiced in advance. Actual credit losses during 2005 totaled SEK 10 million, corresponding to about 0.8% of net SEK 7% 16% sales. The single largest account receivable in the Group does not normally exceed EUR 26% 19% SEK 20 million. GBP 12% 16% Telelogic manages its fi nancial credit risk by only investing its cash and cash equivalents in investments with a low risk profi le, such as bank balances. Telelogic USD 42% 38% does not invest in stocks or bonds. OTHER 13% 11% Fair value of fi nancial instruments Telelogic hedges cash fl ow in the Group, but not income; in other words, when the Fair value of fi nancial assets and liabilities does not deviate from the carrying amount. transactions results in a currency fl ow within the Group; please see hedging of ex- Fair value of derivatives has been measured at market value. Other fi nancial instru- pected currency fl ows below. ments are recognized at amortized cost.

HEDGING OF EXPECTED FUTURE CURRENCY FLOWS The Company’s policy is to hedge 40 to 80% of expected future cash fl ows during the NOTE 26 OPERATIONAL LEASES coming year that are calculated to occur between Telelogic’s different companies in the form of royalties, dividends, and other payment streams. Currency fl ows are Non-cancelable lease payments amount to: limited to a great extent by netting receivables and liabilities each month between all of the Group’s companies. The actual currency fl ows arises in the Parent Company, Group Parent Company and therefore hedging mainly pertains to Swedish kronor in relation to the major currencies, EUR and USD, in the Parent Company. SEK thousand 2005 2004 2005 2004 Only forward contracts were used as hedging instruments in 2005. The hedging Within one year 49,204 40,901 3,916 5,188 measures had a positive effect of SEK 1.6 million on the Group’s earnings for 2005. Between one and fi ve years 104,202 71,801 6,365 11,751 Outstanding hedges as of December 31, 2005 totaled SEK 94.8 million and have an average term of 5 months. SEK 47.4 million of the hedges are denominated in EUR and Longer than fi ve years 20,421 2,464 - - SEK 47.4 million in USD and all are due during 2006. Hedge accounting for cash fl ow Total 173,827 115,166 10,281 16,939 according to IAS 39 is not applied.

TRANSLATION EXPOSURE Minimum lease fees 50,351 48,819 5,057 6,808 Telelogic’s policy is not to hedge currency translation exposure.

Total lease costs 50,351 48,819 5,057 6,808 FINANCIAL EXPOSURE Telelogic’s policy is not to hedge fi nancial exposure in foreign currencies unless All lease agreements in the Group are classifi ed as operating leases. A large portion of fi nancial exposure in a specifi c currency also results in a specifi c currency fl ow during leases pertains to rent and computers. No variable fees are paid. the coming year. As of December 31, 2005, the Group’s only borrowing is the remaining purchase consideration pertaining to the Popkin acquisition of USD 5 million, which carries an NOTE 27 PLEDGED ASSETS AND CONTINGENT LIABILITIES interest rate of 2%. Most of the Group’s cash is in Sweden, which means that excess liquidity is usually taken home to Sweden and the Parent Company. Consequently, Telelogic AB acts as an internal bank and therefore has internal receivables and Group Parent Company liabilities in relation to the subsidiaries in the subsidiaries’ currencies. The internal SEK thousand Dec. 31, Dec. 31, Dec. 31, Dec. 31, receivables are usually netted each month, at which time net exposure in various cur- 2005 2004 2005 2004 rencies arises in the Parent Company. This net exposure is not hedged and therefore the translation differences on internal borrowing have an effect on the Group’s profi ts. Pledged assets The Group’s policy for cash and cash equivalents is to invest the surplus at minimal Chattel mortgages 45,000 45,000 45,000 45,000 risk. Total pledged assets 45,000 45,000 45,000 45,000 Interest risk Interest risk concerns the risk for negative effects on the Group’s earnings as a result Contingent liabilities of changes in interest market rates. As of December 31, the Group had no borrow- Guarantee commitments on ing other than the aforementioned remaining purchase consideration for the Popkin behalf of subsidiary 61,095 24,949 acquisition. Counter obligation to bank guarantee 10,841 5,246 9,649 5,160

Total contingent liabilities 10,841 5,246 70,744 30,109

58 TELELOGIC 2005 NOTE 28 RELATED PARTIES NOTE 29 GROUP COMPANIES

Related party relations Dec. 31, Dec. 31, The Parent Company has a related party relation with its subsidiaries, Parent Company, SEK thousand 2005 2004 please see note 29. Opening acquisition values Summary of related party transactions Opening balance, January 1 2,443,310 2,442,729 Acquisitions 114,314 Liquidation - -6,500 Parent Company, SEK thousand Subsidiary Merged companies 0 -300 2005 2004 Shareholder contributions 1,156 7,381 Sale of services to close relations 111,252 124,683 2,558,780 2,443,310 Liability to related parties December 31 429,061 392,503 Debt receivable, related party per December 31 440,915 222,654 Accumulated impairment losses

Key individuals in Opening balance, January 1 –2,058,210 –2,015,376 Parent Company/Group, SEK thousand management positions Impairment losses for the year - –42,834

2005 2004 –2,058,210 –2,058,210 Purchase of services from related party1 4,107 507

1 Pertains to legal services purchased from law ﬁ rm in which one Director is active. Carrying amount at end of period 500,570 385,100

Transactions with related parties are priced at market rates and regulated in agreements between the parties. Details of Parent Company and Group’s participations in group companies: Dealings with subsidiaries mainly arise through the Group’s liquidity management, which is centrally handled. The Parent Company has guarantee commitments on Dec. 31, 2005 Dec. 31, 2004 behalf of subsidiaries, please see note 27. Carrying Carrying Number amount, SEK amount, SEK Transactions with key individuals in management positions Subsidiaries / Corporate ID / Reg Offi ce of shares thousand thousand Defi ned contribution pension premiums and pensions according to special pension Telelogic Sverige AB, 556510-7389, Malmö, agreement are paid for the Chief Executive Offi cer and other Senior Executives; please Sweden 400,000 500 500 see note 21. The senior executives also participate in the Group’s employee stock option pro- Telelogic Focal Point AB, 556536-3990, gram, please see note 21. Malmö, Sweden 5,870,000 114,314 - Focal Point Partner AB, 556590-7036, Key individuals in senior management positions have received the following Linköping, Sweden - remuneration: Focal Point Americas Inc., San Francisco, USA - SEK thousand 2005 2004 Telelogic Options AB, 556558-9149, Short-term employee benefi ts 15,703 22,609 Malmö, Sweden 1,000 100 100 Share-based payments 2,967 2,242 Telelogic Finland Oy, 1549433-0, 18,670 24,851 Helsingfors, Finland 200 – - Telelogic Norge AS, 979465289, Total remuneration included in “personnel costs”, see note 7: Trondheim, Norway 342,858 121 121 Telelogic Technologies UK Ltd, 1832150, SEK thousand 2005 2004 Maidenhead, UK 10,000 – - Directors 7,417 5,617 Telelogic Doors Ltd, 2936647, Cardiff, UK , Senior executives 11,253 19,234 Real Time Products Ltd, 2139638, 18,670 24,851 Birmingham, UK 22,000 – - Telelogic Ireland Ltd, 255214, Dublin, Ireland 1 – - Telelogic Continuus Ireland Ltd, 274232, Dublin, Ireland 9,000 104 104 Telelogic Deutschland GmbH, 34265, Bielefeld, Germany 1 24,249 24,249 Telelogic France SA, 351994736, Nanterre, France 22,425 5,926 5,926

TELELOGIC 2005 59 Notes

Dec. 31, 2005 Dec. 31, 2004 NOTE 30 CASH FLOW STATEMENT Carrying Carrying Number amount, SEK amount, SEK Dec. 31, Dec. 31, Subsidiaries / Corporate ID / Reg Ofﬁ ce of shares thousand thousand SEK thousand 2005 2004 Telelogic Technologies Toulouse SA, Following sub-components are included in cash and cash 330575705, Toulouse, France 25,000 73,845 73,845 equivalents: Telelogic Netherlands B.V., 30168519, Cash and cash equivalents 447,324 249,478 Utrecht, Netherlands 1 – - Total according to balance sheet 447,324 249,478 Telelogic Popkin BV 32484021, De Meern, Netherlands Total according to cash ﬂ ow statement 447,324 249,478 Telelogic Iberica S.L., B-82855 59 66, Madrid, Spain 301 27 27

Telelogic Italia SrL, 194219, Milano, Italy 20,000 1,326 1,326 Cash and cash equivalents – Parent Company

Nippon Telelogic KK, 0104-01-035618, Following sub-components are included in cash and Tokyo, Japan 600 11,548 11,548 cash equivalents: Telelogic Australia Pty Ltd, 34 089 339 711, Cash and cash equivalents 291,762 106,390 New South Wales, Australia 2 102 102 Total according to balance sheet 291,762 106,390 Telelogic Korea Ltd, 110111-2127896, Seoul, Korea 10,000 415 415 Telelogic Co Ltd, 015250, Beijing, China 1 2,030 874 Total according to cash ﬂ ow statement 291,762 106,390 Telelogic India Pte Ltd, CIN-72200KA2000, Bangalore, India 49,517 – - Interest Paid and Interest Received Telelogic Software Singapore Pte Ltd, 200008786W, Singapore 50,000 – - Group Parent Company Telelogic Holding North America Inc, SEK thousand 2005 2004 2005 2004 3361889, Delaware, USA 1,000 265,963 265,963 Interest received 8,431 3,410 12,525 5,668 Telelogic North America Inc., 2569989, Delaware, USA Interest paid -1,953 -794 -14,963 -12,557 Telelogic Canada Inc, 359017-8, Ontario, Canada Adjustments for Items Not Affecting Cash Flow Telelogic Doors UK Holdings Ltd, 2706134, Oxford, UK Group Parent Company Telelogic UK Ltd, 3951808, Oxford, SEK thousand 2005 2004 2005 2004 UK Depreciation, amortization, Requirements Engineering Ltd, and impairment 63,569 47,281 2,587 18,296 2288111, Oxford, UK Impairment losses 42,834 Eurocom Software Ltd, 2497516, Cardiff Unrealized exchange rate UK differences -16,998 -4,248 VisualSoftware Engineering Ltd, Dividends received from 2861478, Oxford, UK group companies -35,453 Telelogic Popkin Software and Sys- Liquidation loss/gain -14,979 tems Inc., Delaware, USA Capital loss/gain at sale of Telelogic Popkin Holding Company, property, plant, and equipment 1,035 5,482 188 Delaware, USA Costs related to share-based Telelogic Popkin Ltd, 3019814, payment 4,515 2,731 4,515 2,731 Leamington, UK Provisions 4,829 -10,589

500,570 385,100 Other 72 143 57,022 40,800 7,290 13,429 All companies are wholly owned. The following companies were acquired during the year: Telelogic Focal Point AB (including subsidiary Focal Point Partner AB and Focal Point Americas Inc.) Telelogic Popkin Software and Systems Inc. (including subsidiaries Telelogic Popkin Holding Company, Telelogic Popkin Ltd and Telelogic Popkin BV). Telelogic Requirements Management Inc, Telelogic Technologies North America Inc, and Telelogic Doc Express Inc were merged during the year into Telelogic North America Inc. During the year Telelogic Co Ltd received a shareholder contribution of SEK 1,156,000.

60 TELELOGIC 2005 Non-cash transactions NOTE 31 EVENTS AFTER BALANCE SHEET DATE

Group Parent Company No signiﬁ cant events occurred after the balance sheet date. SEK thousand 2005 2004 2005 2004 Conversion of debt to equity 2,497 39,062 2,497 39,062 NOTE 32 CRITICAL ACCOUNTING ESTIMATES

Measurement of deferred tax assets Acquisition of subsidiaries and other business units – Group When calculating the value of the Group’s unutilized loss carryforwards, an assessment was made of future proﬁ ts and the probability that these would be utilized, SEK thousand 2005 2004 please see note 11. Acquired assets and liabilities Measurement of Capitalized Product Development Costs Intangible assets 335,302 - When determining the value of capitalized product development costs, these assets were evaluated for sales trends and future cash ﬂ ows; please see note 12. Property, plant, and equipment 7,148 - Executive Management does not believe that any reasonable potential changes in Deferred tax assets 100,774 - these assumptions could change the view of the aforementioned critical accounting Operating receivables 31,696 - estimates. Cash and cash equivalents 32,229 -

Total assets 507,149 - NOTE 33 INFORMATION ABOUT THE PARENT COMPANY

Telelogic AB (company registration number 556049-9690) is a Swedish public limited Deferred tax liabilities 13,326 - company with its registered ofﬁ ce in Malmö, Sweden. The Parent Company’s shares Current operating liabilities 57,766 - are registered in the Stockholm Stock Exchange. The address to corporate headquar- Total provisions and liabilities 71,092 - ters is Box 4128, 203 12 Malmö. The consolidated accounts for 2005 consist of the Parent Company and its subsidiaries, together referred to as the Group.

Purchase consideration 436,057 - Less: Shares and options -109,707 - Promissory notes -35,285 - Purchase consideration paid -291,065 -

Less: Cash and cash equivalents of acquired units 32,229 -

Impact on cash and cash equivalents -258,836 -

TELELOGIC 2005 61 Notes

NOTE 34 EXPLANATIONS PERTAINING TO THE TRANSITION TO IFRS

These consolidated accounts are the fi rst to have been prepared with full implementa- When preparing the Group’s opening balance sheet, amounts reported according to tion of the IFRS, as can be seen in note 1. previously applied accounting principles were adjusted according to IFRS. Explana- The accounting principles referred to in note 1 have been applied during prepara- tions for how the transition from previous accounting principles to IFRS have affected tion of the consolidated accounts for fi scal 2005 and for the comparative year 2004, the Group’s fi nancial position, fi nancial performance, and cash fl ow can be seen in the as well as for the Group’s opening balance January 1, 2004, except for IAS 32 and 39, following tables and their explanations. which according to the exception in IFRS 1, are only applied to 2005. For more information about application of IAS 32 and 39 beginning on January 1, 2005, please see note 35.

Reconciliation of equity Previously Effect of Previously Effect of applied transition to applied transition to principles IFRS IFRS principles IFRS IFRS SEK thousand Note January 1*, 2004 December 31*, 2004

Assets Intangible assets a 347,562 - 347,562 313,521 12,804 326,325 Property, plant, and equipment 29,622 - 29,622 27,757 - 27,757 Long-term receivables 14,178 - 14,178 12,669 - 12,669 Deferred tax assets c 118,414 - 118,414 89,999 - 89,999

Total noncurrent assets 509,776 - 509,776 443,946 12,804 456,750 Tax assets 1,194 - 1,194 1,366 - 1,366 Accounts receivable 305,309 - 305,309 331,517 - 331,517 Prepaid expenses and accrued income 50,410 - 50,410 89,269 - 89,269 Other receivables 15,028 - 15,028 17,240 - 17,240 Cash and cash equivalents 139,786 - 139,786 249,478 - 249,478

Total current assets 511,727 - 511,727 688,870 - 688,870

Total assets 1,021,503 - 1,021,503 1,132,816 12,804 1,145,620

Equity d

Capital stock 2,044 2,044 2,173 2,173

Other paid-up capital 2,694,636 2,694,636 2,745,079 2,745,079 Other reserves 817,384 -817,384 - 518,647 -551,064 -32,417 Retained earnings including net income for the year -269,210 -1,877,252 -2,146,462 169,075 -2,181,211 -2,012,136

550,218 0 550,218 689,895 12,804 702,699

Liabilities Long-term interest bearing liabilities 42,705 - 42,705 2,447 - 2,447 Other long-term liabilities 946 - 946 318 - 318 Pension provisions 1,037 - 1,037 - - - Other provisions 19,150 - 19,150 8,561 - 8,561

Total long-term liabilities 63,838 - 63,838 11,326 - 11,326 Other short-term interest-bearing liabilities 7,535 - 7,535 7,233 - 7,233 Accounts payable 29,132 - 29,132 33,502 - 33,502 Tax liabilities 5,829 - 5,829 11,175 - 11,175 Other liabilities 47,346 - 47,346 44,891 - 44,891 Accrued expenses and prepaid income 317,605 - 317,605 334,794 - 334,794

Total current liabilities 407,447 - 407,447 431,595 - 431,595

Total liabilities 471,285 - 471,285 442,921 - 442,921

Total equity and liabilities 1,021,503 - 1,021,503 1,132,816 12,804 1,145,620

62 TELELOGIC 2005 NOTES TO RECONCILIATION OF EQUITY Explanations for material adjustments to the 2004 cash fl ow statements The items adjusted in accordance with IFRS do not affect cash fl ow so there are no The effect of deferred tax on the following adjustments is described in note c. essential differences in the cash fl ow statements prepared according to IFRS and the cash fl ow statements prepared according to previous accounting principles. (a) IFRS 3 was applied in the consolidated accounts for all business combinations made beginning on January 1, 2004, the date of transition to IFRS. As of January 1, 2004, goodwill is not amortized. Instead, goodwill is tested annually, or if any indication of a decrease in value is present, for the possible need for impairment. An adjustment was made for impairment of goodwill in 2004, SEK 13,996,000, and the translation difference in goodwill for 2004, SEK 1,192,000, for a total of SEK 12,804,000. NOTE 35 CHANGED ACCOUNTING PRINCIPLES JANUARY 1, 2005

(b) The Group applied IFRS 2 to its current share-based payment program per January 1, 2005 except for share-based payment programs that are regulated with equity instruments that began before November 7, 2002. The Group The new accounting principles implemented with IAS 39 on January 1, 2005, have issued share-based payment regulated with equity instruments during 2004 and 2005. According to the previous accounting principles these share-based payments are carried at actual value. Actual not had any impact on Telelogic’s annual accounts. The Group’s fi nancial assets and value has been adjusted to fair value in accordance with IFRS 2 in order to be consistent with the Group’s accounting principles. liabilities were measured at fair value in the annual accounts as of December 31, The effect of recognizing share-based payment regulated with equity instruments at fair value is an increase 2004. Telelogic does not apply hedge accounting for cash fl ows according to IAS 39. in the cost of sales of SEK 2,731,000 in 2004. Application of IFRS 2 to share-based payment regulated by equity instruments does not affect total shareholders’ equity in the Group. The recognized cost that arises when employ- The Group’s derivatives were measured at fair value in the annual accounts as per ees render the services that the share-based payment is intended to cover is tax deductible when the warrants are exercised by the employees. December 31, 2004. The CEO and the Board of Directors hereby certify that this annual report has been (c) The above changes do not affect deferred tax. prepared in accordance with sound accounting practices for a stock market company. [d] Previously restricted vs unrestricted reserves have been classifi ed by type of capital according to IFRS. Restricted reserves have been transferred to other paid-up capital for the part that pertained to the share premium reserve. The information provided complies with the actual circumstances and nothing of Previously utilized funds for coverage of losses were reversed to retained earnings. material importance has been omitted that could affect the view of the Group and the Company presented in the annual report.

Reconciliation of Net Income for 2004 Effect of Accord- According to transition to ing to Group, SEK thousand Note Sw GAAP IFRS IFRS Licensing and maintenance revenue 854,155 - 854,155 Consulting revenues 185,099 - 185,099 Malmö February 20, 2006 Net sales 1,039,254 1,039,254

Bo Dimert Licensing and maintenance Chairman expenses b –56,286 - -56,286 Consulting expenses –145,878 - –145,878

Gross proﬁ t 837,090 - 837,090 Kjell Duveblad Erik Gabrielson

Selling expenses b –426,667 –1,678 –428,345 Administrative expenses –76,420 -1,700 –78,120 Risto Silander Maria Borelius Product development expenses –154,853 647 –154,206 Other operating expenses a –15,252 13,996 –1,256 Jörgen Centerman Michael Andersson Operating income 163,898 11,265 175,163 Employee Representative

Financial income 3,410 - 3,410 Finance expenses –937 - –937 Brandon Jones Anders Lidbeck Net ﬁ nancial items 2,473 - 2,473 Employee Representative Chief Executive Ofﬁ cer Net income 166,371 - 177,636 Taxes –43,310 - –43,310

Net income for the year 123,061 - 134,326 My audit report was submitted on February 20, 2006 Attributable to: Shareholders of the Parent Alf Svensson Company 123,061 134,326 Authorized Public Accountant Minority shareholding - -

Earnings per share, The annual accounts and consolidated accounts were approved for publication by the basic, (SEK) 0.57 0.06 0.63 Board of Directors on February 20, 2006. Earnings per share, The consolidated and Parent Company’s income statements and balance sheets are diluted (SEK) 0.56 0.05 0.61 subject to approval by the Annual General Meeting on May 2, 2006.

TELELOGIC 2005 63 Audit report

To the Annual General Meeting in Telelogic AB Corporate reg. no. 556049-9690

I have audited the annual accounts, the consolidated accounts, the accounting re- cords and the administration of the Board of Directors and the Chief Executive Offi cer of Telelogic AB for the year 2005. The Board of Directors and the Chief Executive Offi cer are responsible for these accounts and the administration of the company as well as the application of the Annual Accounts Act when preparing the annual accounts, and for the application of international fi nancial reporting standards IFRSs as adopted by the EU and the application of the Annual Accounts Act when preparing the consolidated accounts. My responsibility is to express an opinion on the annual fi nancial statements, the consolidated fi nancial statements, and the administration, based on my audit. I conducted the audit in accordance with generally accepted auditing standards in Sweden. Those standards require that I plan and perform the audit to obtain reasonable, but not absolute, assurance that the annual and consolidated accounts are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the accounts. It also includes an assessment of the accounting policies used and of their application by the Board of Directors and the Chief Executive Offi cer, and of the signifi cant estimates and judgments made by the directors in the preparation of the annual accounts and consolidated accounts as well as an evaluation of the overall presentation of information in the annual accounts and the consolidated accounts. As a basis for my statement on discharge from liability I examined signifi cant decisions, actions taken, and circumstances of the company in order to determine the liability, if any, to the company of any Director or the Chief Executive Offi cer. I also examined whether any Director or the Chief Ex- ecutive Offi cer has, in any other way, acted in contravention of the Companies Act, the Annual Accounts Act, or the Articles of Association. I believe that my audit provides a reasonable basis for my opinion as expressed below. The annual accounts and the consolidated accounts have been prepared in accordance with the Annual Accounts Act and thereby give a true and fair view of the Company’s and the Group’s fi nancial position and results of operations in accordance with generally accepted auditing standards in Sweden. The consolidated accounts have been prepared in accordance with international fi nancial reporting standards IFRSs as adopted by the EU and the Annual Accounts Act and give a true and fair view of the Group’s fi nancial position and results of operations. The administration report is consistent with the other parts of the annual accounts and the consolidated accounts. I recommend to the Annual General Meeting that the income statements and balance sheets of the Parent Company and the Group be adopted, that the profi t of the Parent Company be dealt with in accordance with the proposal in the Board of Direc- tors’ Report, and that the members of the Board of Directors and the Chief Executive Offi cer be discharged from liability for the fi nancial year.

Malmö on February 20, 2006

Alf Svensson Authorized Public Accountant

64 TELELOGIC 2005 Corporate Governance

The Annual General Meeting, the Board of Directors, and the Presi- chairman of the board of Telelogic are members of the nomination dent are responsible for governance of Telelogic in accordance with committee. The composition of the nomination committee was an- the Swedish Companies Act, the Articles of Association, and the nounced in October 2005. Swedish Code of Corporate Governance. This report is not part of the The chairman of the nomination committee was appointed among formal annual report. the shareholder representatives at the statutory meeting. The nomination committee will formulate proposals for the chairman of Annual General Meeting the AGM, the number of Directors, remuneration to Directors and Telelogic’s highest decision-making body is the Annual General auditors, and proposals for Directors, the Chairman of the Board, and Meeting (AGM). All shareholders who are registered in the register where applicable, the auditors. of shareholders and who notify the Company in time are entitled to The nomination committee follows the rules and carries out the take part at the Meeting and may vote for the full number of shares tasks that apply to the nomination committee according to the Swed- they own. Shareholders who cannot be present may engage a repre- ish Code of Corporate Governance (Point 2 in the Code of Corporate sentative. Governance). The nomination committee met fi ve times prior to the The AGM elects the company’s Board of Directors. The tasks of 2006 AGM. The nomination committee does not receive any remu- the AGM include adopting the Company’s Balance Sheet and Income neration. Statement, resolutions on distribution of profi t or treatment of loss from operations, and resolutions to discharge Directors and the Chief Board of Directors and its Rules of Procedure Executive Offi cer from liability for the fi nancial year. The AGM also The Annual General Meeting in April 2005 elected seven regular elects Telelogic’s auditors. Directors, including the company’s President. Additionally, the Telelogic held its most recent Annual General Meeting on April 28, employee organization has appointed two regular members and one 2005 in Malmö. At the meeting, shareholders who participated repre- deputy member to the Board. The Company’s CFO and CTO regularly sented 33.5% of capital and votes. The entire Board of Directors, the participate at board meetings, as do guest speakers, while other Chief Executive Offi cer, and the candidate to be elected to the Board management personnel participate at board meetings as deemed of Directors were all present at the meeting. The Company’s auditors necessary. For more information about Directors, please see pages present were also present. 72–73 about the Board and auditors. During the year, twenty board meetings were held, nine of which Nomination committee were scheduled since the beginning of the year and eleven called to The company has established a nomination committee consisting of decide about acquisitions, new issues, and stock option programs. the Chairman of the Board (convener) and representatives of the four A constituent board meeting was held on April 28, the same day as biggest shareholders as of August 31, 2005, which means that Annika the Annual General Meeting. It was decided at the meeting that Bo Andersson, Fourth National Swedish Pension Fund, chairperson of Dimert would continue as Chairman of the Board. the nomination committee, Mats Tunér, SEB Funds, Peter Rönström, The Board’s work follows an established plan, which is intended to Lannebo funds, Anders Ljungqvist, AMF Pension, and Bo Dimert, meet the Board’s needs for information concerning the organization and the management team’s need for guidelines in carrying out its Detailed information on compensation to the Board of Directors and duties. The Board of Directors has regulated the way in which it oper- management, and the Company’s stock option programs is found in ates in written rules of procedure in which clarifi cations are made of Note 21, on pages 55–56. the division of responsibility between the Board and the CEO, and the guidelines for fi nancial reporting to the board. The rules of procedure Audit Committee are subject to annual review and an update was performed during Prior to the 2004 Annual General Meeting the Board considered the year. establishing an audit committee. However, the Board decided that The Directors were specifi cally selected to be able to effectively auditing issues are of suffi cient importance that the entire Board support and control the work of the Executive Management. In ad- should participate in these matters. The Company’s auditor has dition to the Chief Executive Offi cer and the company’s lawyer, Erik attended several board meetings in connection with events such as Gabrielson, all Directors are independent of the Company and the the release of fi nancial reports, and has reported on his observations Executive Management. All Directors are independent in relation to regarding the audit of the Group. the major shareholders. The question of establishing a separate audit committee is under discussion and will be addressed once again at the 2006 AGM. Remuneration Issues The Chairman of the Board of Directors and the Directors are paid in External Auditing accordance with decisions taken at the Annual General Meeting. The Annual General Meeting appoints the Company’s auditors. The The Board of Directors appoints a remuneration committee 2003 Annual General Meeting resolved that the Company would have (previously called the compensation committee) consisting of its own one auditor and one deputy auditor. The meeting voted to re-elect members that address issues pertaining to terms of employment, certifi ed accountant Alf Svensson, KPMG, for four years, and to elect pension benefi ts and principles for variable salary for the Chief Ex- Eva Meltzig Henriksson, KPMG, as the new deputy auditor for four ecutive Offi cer and the Executive Management group. The remunera- years. tion committee also addresses general terms of employment and The auditor examines the management of the company by the compensation issues that pertain to all employees at the Company, Board and the President as well as the quality of the Company’s such as management of the global stock option programs in accor- fi nancial statements. The auditor reports the results of the audit to dance with the authorization granted at the Annual General Meeting. the shareholders through the audit report, which is presented at the During 2005 the remuneration committee consisted of Maria Bore- Annual General Meeting. In addition the auditor submits a detailed lius, Bo Dimert, chair, and Kjell Duveblad. The committee’s chairman report to the Board of Directors at three meetings during the year. regularly informs the Board of Directors of the committee’s work and More detailed information about compensation to the auditors can the proposals that are submitted for decision by the Board. be found in note 8 on page 49.

Information about the Board of Directors

Employee Year of Remuneration Indepen- stock- Atten- Name Function birth Elected committee dent Shares Warrants options Fee 2005 dance, % Bo Dimert Chairman 1943 2001 Chairman Yes 15,000 50,000 0 400,000 100 Anders Lidbeck President and CEO 1962 1998 No 400,000 0 600,000 – 100

Maria Borelius 1960 2004 Member Yes 8,000 0 0 150,000 100

Kjell Duveblad 1954 1998 Member Yes 600,000 0 0 150,000 100

Jörgen Centerman 1951 2005 Yes000150,000 100

Erik Gabrielson 1962 2002 No 157,336 0 0 150,000 100

Risto Silander 1957 2003 Yes 0 50,000 0 150,000 951 Michael Andersson Employee rep. 1968 2000 No 750 3,000, 0 - 802

Brandon Jones Employee rep. 1975 2002 No 300 3,700 6,000 - 903

1 19 of 20 2 16 of 20; 2 through deputy 3 18 of 20

66 TELELOGIC 2005 President and Chief Executive Offi cer Executive Management meets according to a predetermined agenda The Chief Executive Offi cer, who is also the President, leads the once each month, and more often when deemed appropriate. Execu- Company’s day-to-day operations within the framework established tive Management normally meets with physical presence once each by the Board of Directors. The CEO is responsible for the Board hav- quarter, and through telephone conferencing once each month in the ing access to current information on the Company’s developments, intervals which normally is ensured by standardized monthly reports to all members of the Board in which the Company’s operations and devel- More detailed information on Group management is found on pages opments are addressed. The reports also highlight important issues 74–75. that may require the Board’s attention. Moreover, the CEO keeps the Chairman of the Board constantly informed of operations. At the Internal control and risk management Board meetings, the CEO presents the Company’s developments The Board of Directors is responsible for having effective procedures and submits supporting information for decisions on the issues that and systems in place for the Company’s management and con- require action on the part of the Board of Directors. trol. The CEO is responsible for compliance with these procedures and systems, and ensuring they are implemented throughout the Executive Management organization. The Company has special authorization procedures The CEO heads the Executive Management team and its members for delegating decisions related to expenses and lending. Financial are responsible for operations of their respective business areas. management is centralized and the fi nancial offi cers of all subsidiar- Since September 2005 executive management has consisted of ies report directly to the Group controller or CFO. Business risks in President the various undertakings that the Company enters into are normally handled by the respective subsidiaries. Larger undertakings shall be COO, in charge of sales, marketing, and support approved by the central resources at the main offi ce’s fi nance depart- CTO, in charge of products and research and development ment to ensure that risk levels and entered undertakings are within CFO, in charge of Finance and Administration the Company’s general guidelines.

EVP Business Development Compliance with the Swedish Code of Corporate Governance EVP Corporate Communication, with responsibility for external and In accordance with the Stockholm Stock Exchange requirements, internal information services as well as staff issues. Telelogic complies with the Swedish Code of Corporate Governance. However, Telelogic deviates from the code on a few points which are For a further focus on products and sale includes sedan February listed below in a summary in the following table. 2006 also three EVP with responsibility for the company’s three respectively product areas.

Deviations from the Swedish Code of Corporate Governance

Point in code Contents Explanation for deviation

1. Annual General Meeting 1.2.1 Participate at or monitor the general Remote connection justiﬁ ed by the composition of shareholders The Company does not consider this to be economically feasible. meeting remotely and what is economically feasible.

2. Appointment of Board of Directors 2.2.7 Incentive program Directors shall not receive allotments from share-related or Two of the Directors each have 50,000 warrants, which were is- share price-related incentive programs, which are aimed at sued in 2001. According to current standards no additional incen- management. tive programs will be allotted to the Board.

3. Board of Directors 3.6.2 Special declaration in fi nancial Before the annual report is signed, the CEO and the Board of Di- The Board of Directors believes that this additional declaration is reporting rectors shall submit a separate declaration that the annual report unnecessary, since the signature on the annual report includes was carried out in accordance with accepted accounting practices. this type of declaration. 3.7.2 Internal control report The Board shall report on internal control to the extent that it ap- The format of a specifi c report for this purpose is under discus- plies to the fi nancial reporting that is examined by auditors. sion and will be drawn up during the current fi scal year. 3.8.2 Audit Committee Established by the Board. The matter of establishing an Audit Committee Is under discussion and will be addressed at the 2006 Annual General Meeting.

4. Corporate Management 4.2.2 Policy on remuneration The Remuneration Committee will present proposals for remu- The remuneration committee prepares matters to be decided neration for senior management that will be approved by the by the board of directors. annual general meeting.

TELELOGIC 2005 67 7 Year Summary

SEK million 2005 2004 20031 20021 20011 20001 19991 INCOME STATEMENTS Licensing and maintenance revenues 1,025.9 854.2 763.9 856.2 970.5 569.6 210.4 Consulting and other revenues 264.0 185.1 173.1 264.8 524.5 311.6 108.0 Net sales 1,289.9 1,039.3 937.0 1,121.0 1,495.0 881.2 318.4 Licensing and maintenance expenses -59.9 -56.3 -65.8 -85.0 -113.0 -57.5 -24.5 Consulting and other expenses -205.3 -145.9 -153.4 -229.0 -351.0 -196.5 -61.5 Gross income 1,024.7 837.1 717.8 807.0 1,031.0 627.2 232.4 Selling expenses -527.5 -428.3 -433.2 -494.3 -739.7 -362.8 -137.4 Administrative expenses -94.9 -78.1 -82.8 -111.4 -168.0 -92.2 -34.8 Product development expenses -191.5 -154.2 -175.3 -173.2 -260.9 -171.5 -53.3 Other expenses -15.7 -1.3 -17.9 -94.0 -1,983.9 -50.4 -4.7 Operating income 195.1 175.2 8.5 -65.9 -2,121.6 -49.7 2.2 Net ﬁ nancial items 6.6 2.5 -3.3 -1.7 -2.0 8.1 0.5 Net income 201.7 177.6 5.2 -67.6 -2,123.6 -41.6 2.7 Taxes -36.5 -43.3 -21.3 -33.9 72.4 -7.1 -2.6 Earnings after tax 165.2 134.3 -16.1 -101.5 -2,051.2 -48.7 0.1

BALANCE SHEETS PER DECEMBER 31 Assets Goodwill 523.3 174.4 188.7 238.8 301.3 1,951.1 173.8 Other intangible assets 24.3 2.3 1.4 4.3 7.1 8.8 11.3 Capitalized product development 151.1 149.6 157.4 146.4 75.0 0.0 0.0 Property, plant, and equipment 34.8 27.8 29.6 63.7 124.9 133.8 29.1 Financial assets 14.9 12.6 14.2 151.9 183.5 102.0 57.7 Deferred tax assets 179.1 90.0 118.4 Accounts receivable 458.3 331.5 305.3 290.7 486.3 537.6 144.7 Other current receivables 126.2 107.9 66.6 79.0 139.3 101.0 23.2 Cash and cash equivalents 447.3 249.5 139.8 160.0 128.4 240.8 30.9 Total assets 1,959.3 1,145.6 1,021.5 1,134.8 1,445.8 3,075.1 470.7

Equity 1,359.8 702.7 550.2 627.2 716.2 2,337.2 109.0 Interest-bearing long-term liabilities 0.0 2.4 42.7 46.5 58.0 0.0 0.0 Non interest-bearing long-term liabilities 3.4 0.3 0.9 2.1 78.7 67.1 172.6 Interest-bearing current liabilities 39.8 7.2 7.5 8.8 2.1 4.4 26.5 Accounts payable 42.1 33.5 29.1 45.8 46.8 79.7 26.5 Accrued expenses and prepaid income 442.8 334.8 317.6 332.3 411.6 448.7 87.2 Other non-interest-bearing current liabilities 71.4 64.7 73.4 72.1 132.4 138.0 48.9 Total equity and liabilities 1,959.3 1,145.6 1,021.5 1,134.8 1,445.8 3,075.1 470.7

CASH FLOW STATEMENT Cash ﬂ ow from operating activities 183.1 152.8 34.4 122.4 -219.4 -146.8 -1.8 Investing activities -298.8 -44.5 -41.7 -92.1 -160.7 -648.6 -56.4 Financing activities 295.3 8.2 -1.2 11.5 257.2 1,004.2 79.6 Cash ﬂ ow for the period 179.6 116.4 -8.5 41.8 -122.9 208.8 21.4

Cash and cash equivalents, beginning of period 249.5 139.8 160.0 128.4 240.8 30.9 9.7 Exchange rate differences in cash and cash equivalents 18.2 -6.7 -11.7 -10.2 10.5 1.1 -0.2 Cash and cash equivalents at end of period 447.3 249.5 139.8 160.0 128.4 240.8 30.9

1 The years 1999–2003 are not restated under IFRS. This mainly affects amortization for Goodwill.

68 TELELOGIC 2005 Quarterly Data

2005 2004 SEK thousand Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1 INCOME STATEMENT Licensing and maintenance revenues 310.3 261.1 250.7 203.8 248.3 211.6 205.9 188.4 Consulting and other revenues 73.8 66.3 74.0 49.9 52.7 45.7 45.6 41.1 Net sales 384.1 327.4 324.7 253.7 301.0 257.3 251.5 229.5 Licensing and maintenance expenses -15.8 -15.4 -14.4 -14.3 -15.1 -13.7 -14.1 -13.6 Consulting and other expenses -58.7 -49.9 -58.0 -38.7 -40.2 -35.6 -35.9 -34.1 Gross income 309.6 262.1 252.3 200.7 245.7 208.0 201.5 181.8 Selling expenses -141.8 -137.3 -134.0 -114.4 -113.1 -107.1 -102.9 -105.2 Administrative expenses -25.7 -24.3 -25.1 -19.8 -20.4 -19.4 -20.2 -18.1 Product development expenses -54.4 -48.7 -48.2 -40.2 -39.5 -40.9 -39.2 -34.6 Other expenses -4.4 -5.9 -5.4 0.0 0.0 -0.1 -0.6 -0.6 Operating income 83.3 45.9 39.6 26.3 72.7 40.5 38.6 23.3 Net ﬁ nancial items 1.8 1.2 1.9 1.7 1.3 0.8 0.6 -0.2 Net income 85.1 47.1 41.5 28.0 74.0 41.3 39.2 23.1 Taxes -13.4 -9.9 -8.1 -5.1 -13.1 -11.7 -11.7 -6.8 Earnings after tax 71.7 37.2 33.4 22.9 60.9 29.6 27.5 16.3

BALANCE SHEETS, END OF PERIOD Assets Goodwill 523.3 508.7 512.4 184.0 174.4 190.1 194.6 195.4 Other intangible assets 24.3 28.4 34.7 2.2 2.3 0.0 0.0 0.6 Capitalized product development costs 151.1 151.6 152.1 147.4 149.6 151.9 154.3 156.6 Property, plant, and equipment 34.8 34.9 36.4 28.0 27.8 28.3 29.2 28.7 Financial assets 14.9 14.9 14.3 13.8 12.6 13.6 12.1 12.2 Deferred tax assets 179.1 195.3 196.3 90.0 90.0 95.5 103.5 113.5 Accounts receivable 458.3 345.5 329.7 268.5 331.5 219.4 240.3 263.8 Other current receivables 126.2 137.9 143.2 119.3 107.9 106.7 85.6 81.7 Cash and cash equivalents 447.3 401.0 399.3 617.6 249.5 247.4 232.3 182.1 Total assets 1,959.3 1,818.2 1,818.5 1,470.7 1,145.6 1,052.9 1,051.9 1,034.6

Equity and liabilities Shareholders’ equity 1,359.8 1,257.6 1,226.1 1,041.4 702.7 671.2 650.7 623.6 Interest-bearing long-term liabilities 0.0 2.3 2.4 2.4 2.4 2.7 3.4 3.5 Non interest-bearing long-term liabilities 3.4 3.4 3.7 0.3 0.3 0.6 0.6 0.9 Interest-bearing current liabilities 39.8 38.8 34.6 0.1 7.2 0.1 0.3 0.4 Accounts payable 42.1 27.4 40.9 32.2 33.5 29.2 29.3 33.3 Accrued expenses and prepaid income 442.8 397.3 416.3 334.4 334.8 299.4 314.6 318.7 Other non-interest-bearing current liabilitie 71.4 91.3 94.4 59.9 64.7 49.7 53.0 54.2 Total equity and liabilities 1,959.3 1,818.2 1,818.5 1,470.7 1,145.6 1,052.9 1,051.9 1,034.6

CASH FLOW STATEMENT Operating activities 46.2 13.0 39.9 84.0 14.5 25.7 57.4 55.2 Investing activities -8.8 -11.2 -270.6 -8.2 -14.4 -9.1 -9.4 -11.6 Financing activities 6.2 2.6 1.9 284.6 8.5 1.4 3.9 -5.6 Cash ﬂ ow for the period 43.6 4.4 -228.8 360.4 8.5 18.0 51.9 38.0

Cash and cash equivalents, beginning of period 401.0 399.3 617.6 249.5 247.4 232.3 182.1 139.8 Exchange rate differences in cash and cash equivalents 2.7 -2.7 10.5 7.7 -6.4 -2.9 -1.7 4.3 Cash and cash equivalents at end of period 447.3 401.0 399.3 617.6 249.5 247.4 232.3 182.1

TELELOGIC 2005 69 Key Figures

2005 2004 20031 20021 20011 20001 19991 Margin

Gross margin, % 79.4 80.5 76.6 72.0 69.0 71.2 73.0 Operating margin, % 15.1 16.8 0.9 –5.9 N/A –5.6 0.7 Proﬁ t margin, % 15.6 17.1 0.6 –6.0 N/A –4.7 0.9

Return on capital Return on operating capital, % 27.6 37.9 1.7 –11.3 –154.4 –4.5 3.0 Return on capital employed, % 19.3 27.2 1.7 –8.6 –135.8 –3.2 3.9 Return on equity, % 16.0 21.4 –2.7 –15.1 –134.4 –4.0 0.2

Capital structure Operating capital, SEK million 952.3 462.9 460.7 522.5 647.9 2,100.8 104.7 Capital employed, SEK million 1,399.6 712.4 600.5 682.5 776.3 2,341.6 135.6 Equity, SEK million 1,359.8 702.7 550.2 627.2 716.1 2,337.2 109.0 Interest-bearing net debt, SEK million –407.5 –239.8 –89.6 –104.7 –68.3 –236.4 –4.4 Capital turnover rate, times 1.8 2.3 1.9 1.9 1.1 0.8 4.3 Net debt/equity ratio, times –0.3 –0.3 –0.2 –0.2 –0.1 –0.1 –0.1 Equity/assets ratio, % 69.4 61.3 53.9 55.3 49.5 76.0 23.2

Share data, millions of shares2 Number of shares at end of year, basic 243.4 217.3 204.4 202.8 189.4 125.4 81.2 Number of shares at end of year, diluted 248.3 221.5 220.1 216.9 211.2 132.0 97.5 Average number of shares during the year, basic 235.6 214.7 203.6 198.5 148.5 107.3 76.7 Average number of shares during the year, diluted 240.4 218.9 219.3 212.3 165.5 113.0 92.1 Dilution, % 3 2.0 1.9 7.7 7.0 11.5 5.3 20.1

Earnings per share after full tax, SEK Basic 0.70 0.63 –0.08 –0.51 –13.82 –0.45 0.00 Diluted 0.69 0.61 –0.06 –0.46 –13.82 –0.45 0.00

Equity per share, SEK Basic 5.59 3.23 2.70 3.09 3.78 18.64 1.34 Diluted 5.48 3.17 2.51 2.89 3.39 17.70 1.12

P/E ratio, times Basic 29.1 24.9 neg neg neg neg >100 Diluted 29.6 25.7 neg neg neg neg >100

Share price at year-end, SEK 20.40 15.70 11.50 6.20 8.30 52.50 45.00 Market capitalization at year-end, SEK million 4,966 3,411 2,351 1,258 1,572 6,582 3,654

1 The years 1999–2003 are not restated under IFRS. This mainly affects amortization for Goodwill. 2 Number of shares was adjusted for share split carried out in 1998 and 2000. 3 Estimated according to the Swedish Financial Accounting Standards Council Recommendation RR 18, only taking into account those warrants where the share price exceeded the discounted redemption price as of December 31, as well as conversion of outstanding convertible loans.

70 TELELOGIC 2005 Deﬁ nitions

Key ﬁ gures Deﬁ nition Calculation 2005 SEK million 2005 Operating capital Balance Sheet total minus non interest-bearing debts, as well as cash and bank Total assets 1,959.3 accounts. Average operating capital has been computed as incoming plus outgoing - non interest-bearing liabilities -559.7 operating capital divided by two. - cash and cash equivalents -447.3 Operating capital 952.3

Return on operating capital Operating income as a percentage of average operating capital. Average operating capital 707.6 Operating income 195.1 Return on operating capital, % 27.6

Capital employed Balance sheet total less non interest-bearing liabilities. Average capital employed Total assets 1,959.3 has been calculated as opening and closing capital employed divided by two. - non-interest bearing liabilities –559.7 Capital employed 1,399.6 Average capital employed 1,056.0

Return on capital employed Operating profi t plus fi nancial income expressed as a percentage of average capital Operating income 195.1 employed. + fi nancial income 8.5 203.6 Return on capital employed, % 19.3

Equity Shareholders’ equity at year-end. Calculated as shareholders’ equity plus Equity 1,359.8 shareholders equity’s share of untaxed reserves. Average shareholders’ equity 1,031.3

Return on equity Net income after tax in relation to average shareholders’ equity. Net income 165.2 Average shareholders’ equity 1,031.3 Return on equity, % 16.0

Interest-bearing net debt Interest bearing liabilities less cash and cash equivalents. Interest-bearing liabilities 39.8 - cash and cash equivalents -447.3 Interest-bearing net debt -407.5

Net debt ratio Interest-bearing net debt divided by equity. Interest-bearing net debt -407.5 Equity 1,359.8 Net debt/equity ratio, x -0.3

Capital turnover rate Sales divided by average operating capital. Sales 1,289.9 Average operating capital 707.6 Capital turnover rate, x 1.8

Operating margin Operating income expressed as a percentage of sales Operating income 195.1 Net sales 1,289.9 Operating margin. % 15.1

Profi t margin Income after fi nancial items as % of net sales. Net income 201.7 Net sales 1,289.9 Profi t margin, % 15.6

Gross margin Gross margin as % of net sales. Gross income 1,024.7 Net sales 1,289.9 Gross margin, % 79.4

Equity/assets ratio Equity as a percentage of total assets at year-end. Equity 1,359.8 Total assets 1,959.3 Equity/assets ratio, % 69.4

TELELOGIC 2005 71 Board of Directors

BO DIMERT ANDERS LIDBECK KJELL DUVEBLAD ERIK GABRIELSON Chairman b. 1962 b. 1954 b. 1962 b. 1943 Director since 1998 Director since 1998 Director since 2002 Director since 2001 Principal occupation: President and CEO of Principal occupation: Board consultant Principal occupation: Partner, Vinge Law Principal occupation: Board consultant Telelogic AB. Other directorships: Director for companies Firm. Other directorships: Chairman of Other directorships: Chairman of Creandum such as Anoto, Bure, Cygate, FSAB, Remium Other directorships: Chairman of the Board ipUnplugged AB, IKIVO AB and AddPro AB. Advisor AB and the Swedish Equestrian Fondkommission, Technology Nexus, Teleopti of Storegate AB and Öresund Yacht Club. Director for Advoco AB and the Federation’s Jumping Committee. Director and Chairman of the Board of Tradedoubler. Director for Lifco AB, Elanders AB, Switch- Sweden-America Foundation. for a number of Telelogic’s subsidiaries. Experience: Previously employed at IBM and Core AB and Appium AB. Experience: More than 30 years of experience Experience: Has previously worked at Nokia served as President for Oracle in Sweden, Education: Bachelor of Laws, 1989, Lund in international sales and management at and ICL, including serving as President of as well as regional manager for Oracle in University. IBM, Digital Corporation, and Ericsson. Mr. ICL Direct in Benelux and Vice President of Scandinavia and the Baltic States between Shares: 157,336 Dimert has served as CEO and President of Sales & Marketing for ICL Industry Systems 1993 and 2002. Warrants: 0 Ericsson Inc., and as a Vice President of the Europe. During his term as president at Education: MSc in Business Administration Ericsson Group. Telelogic, the Company launched an IPO and and Economics, 1977, Stockholm School of Convertibles: 0 developed into a global organization. Education: MSc in Business Administration Economics. and Economics, 1967, Stockholm School of Education: MSc in Business Administration Shares: 600,000 Economics. and Economics, 1988, Lund University. Warrants: 0 Shares: 15,000 Shares: 400,000 Convertibles: 0 Warrants: 50,000 Warrants: 0 Convertibles: 0 Employee stock options: 600,000 Convertibles: 0

72 TELELOGIC 2005 Auditors

RISTO SILANDER MARIA BORELIUS JÖRGEN CENTERMAN ALF SVENSSON b. 1957 b.1960 b. 1951 Regular Authorized Public Accountant, Director since 2003 Director since 2004 Director since 2005 KPMG Bohlins AB Principal occupation: Private Investor. Principal occupation: Journalist and Principal occupation: Board consultant Auditor for Telelogic since 1998 Other directorships: Director for i Quesada entrepreneur. Riksdag [Swedish Parliament] Other directorships: Chairman of Dacke b. 1949 AB, Svensk Exportkredit AB, Tornet AB, candidate (m). PMC AB and HMS Networks AB. Director Trygg-Stiftelsen, Endeavour funds Ltd, and Other directorships: Board member of for Micronic Laser Systems AB and Kordab RURIC AB. SWECO, Södra Cell, and Active Biotech. International AB. EVA MELTZIG HENRIKSSON Deputy auditor, KPMG Bohlins AB Experience: Has worked in the ﬁ nance Experience: Borelius runs her own PR and Experience: Over 25 years of experience sector for 20 years, including as CEO of information company. working internationally in sales and ad- Deputy auditor for Telelogic since 2003 Alfred Berg, President of UBS in Stockholm, Education: BA in physical sciences, 1984, ministration at ABB. Served as President b. 1961 and Executive Director at Goldman Sachs Lund University, and Master of Science in of ABB between 2000 and 2002. in London. Journalism, 1986, New York University. Education: MSc in Engineering, 1976, Lund Education: MSc in Business Administration Shares: 8,000 University. and Economics, 1982, Stockholm School of Shares: 0 Economics and New York University. Warrants: 0 Warrants: 0 Shares: 0 Convertibles: 0 Convertibles: 0 Warrants: 50,000 Convertibles: 0

Employee representatives

MICHAEL ANDERSSON BRANDON JONES b. 1968 b. 1975 Director since 2000 Director since 2002 Principal occupation: Principal occupation: Senior Field Application Engineer TAU G2 Support Manager Shares: 750 New position from Feb. 1, 2006 - Warrants: 3,885 Senior Consultant Convertibles: 0 Shares: 300 Employee stock options: 0 Warrants: 3,700 Convertibles: 0 Employee stock options: 6,000

TELELOGIC 2005 73 Executive Management

ANDERS LIDBECK SCOTT RASKIN INGEMAR LJUNGDAHL President and CEO Chief Operation Ofﬁ cer Chief Technology Ofﬁ cer b. 1962 b. 1961 b. 1953 Employed since 1998 Employed since 2001 Employed since 1984 Shares: 400,000 Shares: 0 Shares: 40,000 Warrants: 0 Warrants: 0 Warrants: 0 Employee stock options: 600,000 Employee stock options: 375,000 Employee stock options: 116,667 Convertibles: 0 Convertibles: 0 Convertibles: 0

HÅKAN TJÄRNEMO CATHARINA PAULCÉN HÅKAN RIPPE Chief Financial Ofﬁ cer Executive Vice President Executive Vice President b. 1960 Corporate Communications Business Development Employed since 1998 b. 1973 b. 1968 Shares: 173,128 Employed since 1997 Employed 1999–2002 and since 2004 Warrants: 50,000 Shares: 142,000 Shares: 40,000 Employee stock options: 175,000 Warrants: 100,000 Warrants: 200,000 Convertibles: 0 Employee stock options: 120,000 Employee stock options: 65,000 Convertibles: 0 Convertibles: 0

74 TELELOGIC 2005 After the reorganization carried GREG SIKES out in February 2006, the follow- Executive Vice President ing three people, who are respon- Product Division Enterprise Architecture sible for each of Telelogic’s three and Modeling product divisions,joined the b. 1962 Executive Management Group: Employed 2003 Shares: 3,500 Warrants: 0 Employee stock options: 75,000 Convertibles: 0

JESPER CHRISTENSEN JOACHIM KARLSSON Executive Vice President Executive Vice President Product Division Software Assets Product Division Requirements Management Management b. 1967 b. 1958 Hired by Focal Point in 1997, Telelogic Employed 2000 in 2005 Shares: 0 Shares: 0 Warrants: 0 Warrants: 499 Employee stock options: 215,168 Employee stock options: 0 Convertibles: 0 Convertibles: 0

TELELOGIC 2005 75 Addresses

INTERNATIONAL GERMANY NETHERLANDS UNITED ARAB EMIRATES Distributors: HEADQUARTERS Telelogic Deutschland GmbH Telelogic Netherlands BV Telelogic Abu Dhabi Telelogic AB Otto-Brenner-Strasse 247 Rijnzathe 7 b-3 P.O Box: 39700 Argentina Box 4128 33604 Bielefeld 3454 PV De Meern Street address: Al Otaiba Tower Australia Street address: Kungsgatan 6 Tel: +49 521 145 03 01 Tel: +31 30 666 5530 Sheik Bosnia Herzegovina 203 12 Malmö, Sweden Fax: +49 521 145 03 50 Fax: +31 30 666 1405 Zayed 2nd Street Brazil Tel: +46 40 650 00 00 Abu Dhabi Bulgaria Fax: +46 40 650 65 55 Telelogic Deutschland GmbH RUSSIA Tel: +971 2 633 42 23 Chile Am Söldnermoos 6 Telelogic Rus Fax: +971 2 633 42 29 Colombia AUSTRALIA 85399 Hallbergmoos/ Timura Frunze str. 16, Cyprus Telelogic Australia Pty Ltd. Munich Stroenie 3 UNITED KINGDOM Estonia Level 9, 1 Pacifi c Highway Tel: +49 811 60097 01 119021 Moscow Telelogic UK Ltd. Greece North Sydney NSW 2060 Fax: +49 811 60097 50 Phone: +7 (495) 246 9855, The Parkway One India PO Box 40 245 5078 Broxell Close Iran North Sydney NSW 2059 INDIA Fax: +7 (495) 245 5078 Warwick Israel Tel: +61 2 8908 5200 Telelogic India Pvt.Ltd. CV34 5QF Croatia Fax: +61 2 8920 8544 #.72,“Salarpuria Pearl”, SINGAPORE Tel: +44 1926 474 100 Latvia Civil Station, Telelogic Software Fax: +44 1926 474 101 Lithuania Telelogic Australia Pty Ltd. Residency Road Cross, Singapore Pte Ltd. Malta Level 23, HWT Tower Bangalore -560 025 DBS Building Tower 2 Telelogic UK Ltd. Mauritius 40 City Road Tel: +91 80 25323554 /51124441 6 Shenton Way,#25-11 Northbrook House, Mexico Southbank Vic 3006 Fax: +91 80 25325138 Singapore 068809 Oxford Science Park Nigeria Tel: +61 3 9674 0431 Tel: +65 6225 1361 Oxford, Oxfordshire New Zealand Fax: +61 3 9674 0400 Telelogic India Pvt.Ltd. Fax: +65 6225 2865 OX4 4GA Peru 39/2, 2nd Floor, Sagar Complex, Tel: +44 1865 784 285 Poland CANADA Bannerghatta Road, SPAIN Fax: +44 1865 784 286 Puerto Rico Telelogic North Americas Inc. Bangalore 560 029 Telelogic Spain S.L. Romania 255 Albert Street Tel: +91 80 4199 5800 C/Consuegra 7, Telelogic UK Ltd. Saudi Arabia Suite 600 Planta 1 a letra B 4th Floor, Hanover Building, Serbia Ottawa, Ontario IRELAND 28036 Madrid Rose Street Slovakia K1P 6A9 Telelogic Ireland Ltd. Tel: +34 917 680670 Edinburgh EH2 2NN Slovenia Tel: +1 613 788 3700 Avoca Court,Temple Road Fax: +34 917 660 938 Tel: +44 131 622 3600 South Africa Fax: +1 613 788 3701 Blackrock, Co. Dublin Fax: +44 131 622 3700 Czech Republic Tel: +353 1 209 0150 SWEDEN Hungary CHINA Fax: +353 1 209 0160 Telelogic Sverige AB USA USA Telelogic China Ltd. Årstaängsvägen 21C Telelogic North Americas Inc. Venezuela 301, Tower C1 ITALY 117 43 Stockholm 9401 Jeronimo Road The Towers,Oriental Plaza, Telelogic Italia Srl Tel: +46 40 650 00 00 Irvine, CA 92618 No.1, East Chang An Ave. Centro Direzionale Milano Oltre 2, Fax: +46 8 645 76 38 Tel: +1 949 830 8022 Dong Cheng District, Palazzo Tigli B, Fax: +1 949 830 8023 Beijing 100738 Viale Europa 22 Telelogic Sverige AB Tel: +86 10 8518 5130 20090 Segrate (MI) Repslagaregatan 24 Telelogic North Americas Inc. Fax: +86 10 8518 5136 Tel: +39 02 269 524 64 582 22 Linköping 400 Valley Road, Suite 200 Fax: +39 02 269 524 65 Fax: +46 13 10 41 00 Mount Arlington, NJ 07856 Telelogic China Ltd. Tel: +46 40 650 00 00 Tel: +1 973 770 6400 Room 1909,19th fl oor JAPAN Fax: +1 973 770 6401 1038 Nan Jing West Rd. Telelogic Japan Ltd. Telelogic AB Shanghai 200041 Sumitomo Fudosan Shiba P.O.Box 4128 Telelogic North Americas Inc. Tel: +86 021 52288787 Building NO.2 6F Street address: Kungsgatan 6 11911 Freedom Drive, Suite 1180 Fax: +86 021 52285166 1-5-9 Shiba Minato-ku 203 12 Malmö Reston,VA 20190 Tokyo 105-0014 Tel: +46 40 650 00 00 Tel: +1 703 467 9010 FINLAND Tel: +81 3 5427 8900 Fax: +46 40 650 65 55 Fax: +1 703 467 9009 Telelogic Finland Oy Fax: +81 3 5427 8901 Mikonkatu 8A THAILAND Telelogic North Americas Inc. 00100 Helsinki KOREA Telelogic 1821 Walden Offi ce Square Tel: +358 9 2310 1300 Telelogic Korea Ltd. 23/F, M Thai Tower, Suite 400 Fax: +358 9 2310 1351 Mosan Bldg. 6F All Seasons Place Schaumburg, IL 60173 14-4 Yangjae-Dong 87 Wireless Road, Phatumwan Tel: +1 847 925 2385 FRANCE Seocho-Gu Bangkok, Thailand 10330 Fax: +1 847 925 2384 Telelogic France SA Seoul 137-888 Tel: +662 627 9148 6/8, rue de la Réunion Tel: +82 2 561 8510 Fax: +662 627 9001 Telelogic North America Inc. 91978 Courtaboeuf Cedex Fax: +82 2 561 8520 2 Rector Street Tel: +33 1 64 86 77 77 18th Floor Fax: +33 1 64 86 77 00 New York, NY 10006 Tel: +1 646 346 8500 Fax: +1 646 346 8501

76 In 2005 we expanded our line of products and services. The acquisitions Annual Shareholders’ Meeting 2006 of the FOCAL POINT and SYSTEM ARCHITECT software applications The Annual Shareholders’ Meeting for Telelogic AB will be held at Notice including name, address, phone number, total shares, helped Telelogic offer increasingly extensive process tools. Our vision is 3:00 pm on May 2, 2006, at Börshuset, Skeppsbron 2, Malmö, Sweden. personal ID number or corporate registration number must be to grow additionally and increase sales fi vefold between 2005 and 2009. For those interested, a presentation of the Company’s areas of op- submitted in writing: erations will be given at 2:30 pm. by mail to: Telelogic AB Shareholders whose shares are registered in their own name with attn: Jenny Bothén VPC on the day of record, April 25, and who have notifi ed Telelogic Box 4128 that they intend to participate by 4 pm on April 27, are entitled to par- 203 12 Malmö, Sweden ticipate at the Meeting. Shareholders who wish to be accompanied by by e-mail to: [email protected] Our Five-Year Vision Our Value Proposition Our Customers Our Biggest Customers a maximum of two assistants to the Annual Shareholders’ Meeting must notify Telelogic of this request at the same time. or by fax: +46 (0)40-650 65 55 Telelogic is currently ranked as one of the world’s ten most infl uential fi nances. The IT industry is currently in a consolidation phase and Telelogic’s product portfolio is an inte- Telelogic aims its product line at large Airbus Q Shareholders whose shares are registered in the name of a nomi- Telelogic will send out written confi rmation once notifi cation is companies in software development according to the journal Computer our strategy is to acquire more fi rms. Telelogic must also become grated total solution for ELM marketed global companies that develop complex Alcatel Q Alpine Q nee must request to have their shares temporarily re-registered in registered. Business Review. Analyst fi rms such as Ovum, the Butler Group, and bigger in order to focus on our entire potential customer base, which under the name Telelogic Lifecycle products and IT-based systems. Boeing Q their own names in order to be entitled to participate at the Meeting. If the shareholder intends to participate by proxy, the power of IDC have declared several of Telelogic’s software solutions to be world is already asking for total solutions. We also intend to broaden our Solutions. In a changing world everything is mov- Bombardier QQ leaders, from both a technical perspective and within their respective product offering to keep pace with our customers’ needs. ing at an ever faster pace in response to Shareholders who wish to re-register must inform their nominees in attorney must be submitted to the Company in conjunction with noti- British Aerospace Q good time prior to April 25. fi cation of intent to attend. The Board of Directors’ complete propos- niches. In 2005, our sales increased 24%, stated in Swedish kronor. The Company will focus on organic growth supplemented by This covers: new requests from customers, increased Convergys To retain and secure our position as a global market leader, we strategic acquisitions with the goal of achieving a fi vefold increase global competition, stricter safety and Daimler Chrysler als for the Annual Shareholders’ Meeting may be ordered from the plan to invest heavily in the business in terms of both technology and in operations over the course of fi ve years, beginning in 2005. Requirements Management Solutions environmental regulations, growing Delphi Company as described above. demand for performance, and a never- Deutsche Bank Telelogic DOORS ending fl ow of new technological break- EADS Telelogic FOCAL POINT throughs. Therefore enterprises must Ericsson Federal Reserve deliver new products and services faster, Ford without sacrifi cing quality. In addition, General Electric Q Software Asset Management the organizational structure of compa- General Motors :6 Solutions nies is becoming increasingly complex Hewlett-Packard with staff who are scattered across Telelogic SYNERGY Honeywell Q Our Market: several continents but need to work in Lockheed Martin Q Enterprise Lifecycle Management close collaboration, while key individuals Lucent Q are constantly on the go, and important Motorola Q NEC Enterprise Architecture and functions are outsourced. Q Telelogic’s total market can be described by the Enterprise Lifecycle Nokia Q Modeling Solutions Organizations and companies have Management (ELM) concept. ELM is a software solution that optimizes, Panasonic QQ aligns, and automates the customers’ business processes – from Telelogic SYSTEM ARCHITECT a growing need for software that helps Peugeot them deal with these external and powerful modeling of objectives, structures, and product development Telelogic TAU Philips Q processes to development of advanced systems and software. internal challenges. Telelogic’s software Raytheon Q 6AB EAB The global ELM market consists of all or parts of three segments. supports these central processes. Robert Bosch The ELM market was worth about USD 3 billion in 2004, with an average Sectors of particular interest include Samsung Q Sharp Q annual growth rate estimated at almost 10% over the next fi ve years. Services aerospace and defense, public adminis- Financial Reports and Information Siemens QQ Consulting tration, telecom, automotive, pharma- Texas Instruments QQ ceutical, banking and fi nance, companies Training Toyota that produce medical equipment, and Financial information pertaining to Telelogic for fi scal 2006 will be The Company’s management meets regularly with fi nancial ana- United Technologies Q released on the following dates: lysts, investors, and private shareholders in various locations in software and systems companies. US Department of Defence Q Enterprise Architecture (EA) Vodafone Q April 19, 2006 Interim Report January - March 2006 Sweden and abroad to present Telelogic. Volkswagen May 2, 2006 Decisions from the Annual Shareholders’ Meeting The Company holds a capital market day once or a few times each Application Lifecycle Management (ALM) year for fi nancial market players. July 19, 2006 Interim Report April - June 2006 Aerospace and Defense October 18, 2006 Interim Report July - September 2006 Product Lifecycle Management (PLM) Telecom To obtain fi nancial information about Telelogic AB Banking and Finance January 24, 2007 2006 Year-End Report The fastest way to receive information about Telelogic is online. Software and Systems All fi nancial reports are posted at Telelogic ’s website, Automotive In addition to these scheduled events, Telelogic regularly releases www.telelogic.com, as soon as they are published. Other information to the fi nancial market during the year in several ways: You can also visit the website to register to receive the reports in On the same day that interim reports are published, the manage- printed format by conventional mail, or digital format by e-mail. It ment holds an analyst conference in Stockholm that can be moni- is also possible to subscribe to receive Telelogic’s press releases by tored either by phone or online. e-mail. In conjunction with publication of the Interim Reports, members Sales, SEK million Earnings per share, SEK Cash fl ow, SEK million Number of employees Sales by Region Sales by Product Group Sales by Customer Group Telelogic’s Annual Report and Interim reports in Swedish and from operating activities of corporate management carry out a Road Show in the larger English can be ordered from: fi nancial markets when the report is presented to stockholders 1,500 1.00 200 1,500 and investors. 47% Europe, Middle East 49% Requirements Management 35% Aerospace and Defense Telelogic AB 1,200 0.75 160 1,200 and Africa 26% Software Asset Management 24% Telecom All news and events that may infl uence the share price are pub- Box 4128 41% Americas 25% Enterprise Architecture 9% Banking and Finance 900 0.50 120 900 lished via press releases and simultaneously on the Company’s 203 12 Malmö, Sweden 12% Asia/Pacifi c and Modeling 7% Software and Systems website, www.telelogic.com. The Company’s policy regarding sales Tel: +46 (0)40-650 00 00 600 0.25 80 600 6% Automotive Fax: +46 (0)40-650 65 55 19% Other is to announce all deals greater than SEK 5 million. 300 0.00 40 300 E-mail: [email protected]

0 -0.25 0 0 2003 2004 2005 2003 2004 2005 2003 2004 2005 2003 2004 2005

Note that ﬁ gures from 2003 are not restated to IFRS and therefore are not fully comparable with later years. TELELOGIC 2005 77 Telelogic • Annual Report 2005 CITIGATESTOCKHOLM.COM PRINT: EDITA PHOTO: JANN LIPKA

Signiﬁ cant Events 2005 2 Message from the CEO – First steps taken toward 2005 our ﬁ ve-year vision 3 Mission Annual Report – Mission, Strategy, and Goals 6 – Why 5X5Y? 8

Offering and Market – Telelogic helps customers to meet new challenges 10 – The Market 14

Operations – Selling Telelogic’s Products 16 – Regular Product Updates 20 – Telelogic Out in the World 22 – EMEA 23 – Americas 24 – Asia/Paciﬁ c 25

Employees and Organization – Motivation and Values 26

International Headquarters Box 4128, 203 12 Malmö, Sweden Tel: +46 40 650 00 00 • Fax: +46 40 650 65 55

US Headquarters 9401 Jeronimo Road, Irvine, CA 92618, USA Tel: +1 949 830 8022 • Fax: +1 949 830 8023

Ofﬁ ces in Europe, North and South America, Asia, and Australia Distributors worldwide

[email protected] • www.telelogic.com