Final Results

6 March 2012

SQS Software Quality Systems AG

("SQS" or the "Company")

Results for the year ended 31 December 2011

SQS Software Quality Systems AG (AIM: SQS.L), the world's largest pure play supplier of independent software testing and quality management services, today announces its results for the year ended 31 December 2011 (the "period").

Financial Highlights:

·; Turnover increased by 16.1% to €189.1 million (2010: €162.9 million),

o Exceeding testing services market growth rate forecast to have been 6.5% in 2011 (Source: PAC market study)

·; Gross profit up by 10.7% to €57.7 million (2010: €52.1 million)

·; Gross profit margin* of 30.5% (2010: 32%)

·; Adjusted PBT** down by 16.5% to €7.3 million (2010: €8.7 million)

·; Adjusted earnings per share*** down by 28.0% to €0.18 (2010: €0.25)

·; Much improved operating cash flow of €10.2m (2010: €6.0 million)

·; Net debt as at 31 December 2011 was €9.3 million (31 December 2010: net debt of €4.5 million) (30 June 2011: net debt of €13.8 million)

* adjusted in 2010 to add back €0.4 million accruals for partial retirement due to a change in IFRS accounting rules

** adjusted to add back IFRS effects of €0.1 million pro forma interest on deferred payment milestones for acquisitions and evaluation of pensions and €1.6 million of amortisation on intangible assets of acquired companies. Figures of 2010 adjusted due to changed accounting treatment of actuarial gains/losses on pension obligations.

*** includes effects under ** above and at local GAAP tax rate which is €0.9 million higher than under IFRS because of €0.8 million deferred taxes under IFRS and €0.1 million for a deferred tax income tax asset.

Operational Highlights:

·; Period of investment in revenue growth and transition to a recognised Managed Services supplier successfully completed

·; Managed Services now represents 22% of total revenues (FY 2010: 11%) with order intake exceeding €66.5 million during the year

·; Gross margin of "mature" Managed Services contracts now at 38.4% of revenue (H1 2011: 36.9%)

·; €3 million of overhead costs removed going forward, profit effect visible during 2012

·; Profits impacted by c. €2 million of additional costs incurred in relation to two earlier Managed Services contracts. Both are now at an improved margin contribution.

·; Total staff numbers of 2,073 at period end (31 December 2010: 1,875)

·; Off/Nearshore staff equal to 42% of total consultancy staff at period end (31 Dec 2010: 39%)

·; Normal utilization rate with average billed days per consultant of 186 (FY 2010: 186 billed days)

·; Average managed services contract length of 2.5 years further improving visibility with order backlog of €64 million at YE 2011 (YE 2010: €39 million)

·; Signed largest ever contract worth €20 million over two and a half years

Rudolf van Megen, Chief Executive Officer of SQS, commented: "In line with our stated strategy, 2011 has been a period of top line growth, with a particular emphasis on becoming a recognised Managed Services supplier in our field. This has been a considerable success and SQS is now of the scale and size where it can compete, and win against, the largest systems integrators on major testing services projects for blue-chip companies. Managed Services contracts now account for 22% of total revenues and we have contracted a further €66.5 million of Managed Services orders during 2011.

"By focusing on six key market segments we are now turning our attentions toward profitability, with a strategic focus for 2012 on improving the average price of engagements and margins. Given the ongoing difficulties in the wider economy, we retain our cautious outlook for the IT services industry as a whole. However, with €3 million of headcount costs already removed and an increasing number of Managed Services contracts moving offshore we are confident of improved performance going forward."

 Enquiries:

About SQS

SQS is the world's leading specialist in software quality. This position stems from 30 years of successful consultancy operation. SQS consultants provide solutions for all aspects of quality throughout the software product lifecycle driven by a standardised methodology and deep experience in various industries. Headquartered in Cologne, Germany, the company employs more than 2,100 staff. Along with a strong presence in Germany and the UK, SQS has further subsidiaries in Egypt, Finland, France, India, Ireland, the Netherlands, Norway, Austria, Sweden, Switzerland, South Africa and the US. In addition, SQS maintains a minority stake in a company in Portugal. In 2011, SQS generated revenues of 189.1 million Euros.

With over 5,000 completed projects under its belt, SQS has a strong client base, including half of the DAX 30, nearly a third of the STOXX 50 and 20 per cent of the FTSE 100 companies. These include, among others, Allianz, Beazley, BP, Centrica, Daimler, Deutsche Post, Generali, JP Morgan, Meteor, Reuters and Volkswagen as well as companies from a large number of other industries.

For more information, see www.sqs.com

Chief Executive's Statement

Introduction

2011 has been a period of investment for SQS during which time we have focused on building the size and scale of the Company to better position us to compete for Managed Services projects with the largest multi-national system integrators. This has been a considerable success, with SQS winning larger contracts, including our largest contract ever, worth €20 million over the next two and a half years. These deals are also being won as a result of the SQS brand becoming more visible and better recognised than ever before. As we have now achieved a size close to €200 million in annual revenues and with a number of successful reference projects underway, we would expect to sign ever larger contracts.

Demand for our offerings has increased across all of our core geographies during the year. Revenues increased by 16.1% to €189.1 million (2010: €162.9 million), significantly outperforming the software testing market, which was forecast to grow by just 6.5% during 2011 (Source: PAC market study). SQS has, therefore, continued to increase its leading market share in the provision of independent testing services during 2011.

Profitability was impacted during the year, chiefly as a result of the rapid increase in our Managed Services business to 22% of total revenues (FY 2010: 11%). In the early stages of Managed Services contracts, prior to the bulk of the work being moved off-shore, costs are typically higher and margins lower. However, our growing experience in the provision of such contracts has led us to improve their structure resulting in improved early stage margins and cash flow profile. All contracts signed from H2 2011 onwards have such an improved early stage profile.

In addition, the Company incurred additional costs during the period in relation to investment into a significant cost reduction programme, which is expected to result in savings of €3 million per annum going forward.

Profitability was further impacted during 2011 as the result of additional transition costs of €2 million relating to two earlier Managed Service contracts. The full cost of transitioning these clients to an optimised onshore/offshore delivery model was borne by SQS in these instances. However, contracts are now structured in such a way as to prevent these issues recurring. We remain in discussions with the clients involved regarding the recovery of some of these costs, although recouping a significant proportion now appears unlikely.

Over €42.2 million of revenues were received from Managed Services contracts during the year. Of these, €27.4 million related to contracts now in the mature phase of their life cycle, generating a gross margin of 38.4%. Revenues of €14.8million were received from contracts in the less mature stages of their life cycle (including the above mentioned two earlier contracts which incurred and additional c. €2 million in costs), delivering a lower gross margin of 12.9%.

Of the 1,675 fee earning staff employed by the Company at the end of 2011, 701 were employed in our offshore and near-shore test centres such that the number of staff in these locations has increased to represent 42% of total billable staff numbers (FY 2010: 39%). This increase is in line with our stated strategy to move to a "pyramid structure" in our delivery and enables us to offer lower cost solutions to our clients and thereby continue to increase our market share. All staff taken on during the year (in total 148 new consultants) are now fully trained and fee earning and this is expected to result in improved profitability going forward.

During the year staff utilisation continued at normal levels with the average number of billed days per consultant constant at 186 days (31 December 2010: 186 days).

New Business

New business wins, along with project extensions from existing clients, were numerous during 2011. SQS signed 194 new clients during the year (FY 2010: 137) across a wide variety of sectors, thereby further reducing exposure to economic risk through diversification. A number of these wins were also substantial, examples of which include:

·; Our largest ever contract, worth €20 million over the next two and a half years. The contract is to provide managed testing services to UBS in Switzerland. As part of the deal, up to 30 testing specialists currently employed by the client will be transferring to work under SQS.

·; Selection as a preferred partner by an industrial automation supplier to provide in-the-field testing and maintenance testing services during the roll-out of the supplier's standard package software to its industrial clients. Contracts resulting from this partnership are currently four smaller initial contracts and we are confident that more opportunities will arise as the software is rolled out across the partner's global client base.

·; A large European logistics company, to which SQS will provide Test Management, Test Automation and Functional Testing services in a contract worth €10 million over the next 2 years.

This increase in the number and size of contracts has very much been in keeping with our strategy of building revenues during the year, and to this end 2011 has been highly successful. This strategy was initiated in order to build the scale necessary to bid for, and secure, contracts with large multi-national clients. Clients of this nature are keen to see that service providers have the necessary size and capacity to be able to service large contracts and scale them up at short notice without materially affecting the structure of the providers business. With over 2,000 employees and close to €200m in revenues SQS believes it is now of sufficient size to do this, and the size of the contracts we have won, whilst bidding against some of the world's largest systems integrators, is testament to this.

A number of these significant client wins, which we have thus far delivered successfully, are now being used as flagship references for SQS. This is helping to further build our visibility and brand recognition in the market place as a leading supplier of testing services, such that we are now entering a virtuous circle in which significant client engagements are bringing SQS to the attention of other blue-chip organisations.

Our strategic focus on the sale of Managed Services projects has proven particularly successful during 2011 with 22 Managed Services contracts or contract extensions signed during the period (FY 2010: 22). As a result, the average value and length of our contracts continues to increase, leading to considerable improvements to overall revenue visibility and an associated reduction in exposure to economic uncertainties. Our order backlog of Managed Services contracts currently stands at €63.7 million, with delivery to take place over the next 3 years.

Services and product lines

SQS runs and monitors the major part of its business based on two regional business units. Within these business units SQS offers the following services and product lines.

Professional Services for Business and IT

SQS offers professional services for business and IT in three major phases of the software lifecycle:

·; Business Requirements phase (PLAN):

SQS provides management consultancy for banking, insurance and industrial business processes and helps to initiate resulting IT projects. This service line accounted for 8% of total revenues in the period (FY 2010: 9%), an increase in value of 12% compared with FY 2010.

·; Software Implementation or Development phase (BUILD):

Typically run as an IT project, SQS provides professional testing services and quality management consulting to de-risk IT projects and to help clients increase efficiencies. These services are predominantly provided onsite. This service line accounted for 65% of total revenues in the period (FY 2010: 75%), a decrease in value of 2% compared with FY 2010 mainly due to the strong increase in Managed Services revenues.

·; Maintenance phase (RUN):

SQS provides Managed Testing Services under long term contracts providing regression testing for updates, patches and new releases. Such services typically involve blended offshore / nearshore/ onshore delivery and accounted for 22% of total revenues in the period (FY 2010: 11%). This represents €42.2 million over the year (an increase of 140% compared with FY 2010) leading to significantly improved revenue visibility going forward.

Software Testing Products

Our unique suite of software testing products provide consistent and measurable support for testing services having been developed from our 30 years experience of software testing projects. Our products are fully integrated into our offerings, can be integrated into other market leading tools and are also sold separately to clients. Tools and Maintenance (incl. re-selling of other third party tools) accounted for 3% of total revenues in the period (FY 2010: 3%), representing 31% growth to €5.8 million.

IT Training and Conferences

During the period a total of 6 iqnite® conferences were held in Europe, South Africa and Australia. Revenue from training and conferences represented 2% of total revenues in the period (FY 2010: 2%), representing 12% growth to €4.4 million.

Acquisitions update

0.6 million shares were issued in January 2011 to satisfy deferred consideration obligations with regards to the previous acquisitions of Validate (now SQS Nordics)  and Verisoft (now SQS India).

On 30 June 2011 the earn-out period for Validate came to an end. No final payment was made and no further earn-out payments are expected in relation to the Validate acquisition.

Markets

A recent study from Gartner predicted a 0.7% contraction in the IT market for Western Europe during 2012. Despite this we continue to witness strong momentum in the independent testing market and continue to see moderate revenue growth. We are therefore confident that we will be able to become more selective in our engagements going forward.

During the period we experienced high demand and strong growth across a wide variety of verticals mainly in retail, logistics, insurance, energy & utilities and banking, thereby improving our risk profile through diversification.

Business strategy

Our core strategy is to leverage our leading market position through the continued provision of independent, integrated quality and testing solutions and services. Going forward the company has added the focus on business domains in the industries of financial services, insurance, retail & logistics, telecommunications, energy & utilities and manufacturing. This is in addition to the previous focus on technology service (e.g. testing services, requirements management). Over the past two years this has involved focusing on revenue growth, paying particular attention to expanding our Managed Services business, in order that leading organisations recognise SQS as being of a scale sufficient to be able to successfully execute large, long-term projects.

Typically, large companies are happy to engage testing services providers in projects that are no larger than 5% to 10% of the provider's revenues or client base. Now that SQS has close to €200m in annual revenues and over 2,100 employees it is far easier for us to be employed by large, multi-national organisations on contracts of significant size. These organisations are increasingly recognising that if a contract were to require scaling up to 100 or more employees, SQS has sufficient size and flexibility to easily effect such changes.

In order to rapidly build scale during this time it was necessary for us to undertake some significant projects that were less lucrative in their early stages than we might otherwise have considered. These projects have had a detrimental effect on cash flow and profitability during the years 2010 and 2011 but have proved essential in enabling us to secure other contracts and in providing the desired forward momentum.

The success of this strategy is evident given the significant contracts we have signed during the year, which were won in competition against some of the largest and most prominent systems integrators. We believe the SQS brand is now more visible and better recognised than ever before and, with a number of successful projects underway with excellent reference clients, we expect that the trend towards signing ever larger contracts will continue.

Having therefore reached critical mass in terms of the scale needed to secure large contracts, our strategy for 2012 will be to focus on improving profitability and cash flow. To this end we aim to be increasingly selective in the engagements we undertake, targeting projects that require a greater off-shore/near-shore element, thereby offering more attractive margins.

As has already been mentioned, profitability was impacted during 2011 by additional transition costs of c. €2 million relating to two earlier Managed Service contracts. The projects in question required greater resources to move offshore than had initially been expected, for which additional costs could not be recovered from the client during 2011. However, SQS has since implemented changes to the structure of its contracts to ensure that these problems do not recur. Pricing in the early stages of Managed Services contracts are now time-and-materials based and do not move to an output based pricing model until the project is more mature and the scope is fully understood. This eliminates the risk to SQS of any project overrunning in its early, on-shore stages.

In addition, SQS conducted a significant cost reduction programme during the year, which is expected to result in savings of €3 million per annum going forward. This programme is now complete and the vast majority of the positive effects arising from it will be felt in 2012 and beyond.

In line with our previously stated strategy we will continue to seek to increase the proportion of overall revenues derived from our Managed Services business. Our aim is for Managed Services to account for 40% or more of revenues by 2014 and our performance during 2011, during which contracts of this kind grew to represent 22% of revenues (31 December 2010: 11%) lend us confidence in achieving our goal. Such contracts are over a longer-term than traditional projects, currently an average of 2.5 years, and include protections against early termination and short-term postponement. As a result, these contracts afford us far greater revenue visibility, reduce our exposure to potential economic downturns and allow for greater flexibility and control over project staffing.

It is also our intention to continue our strategy of augmenting the proportion of offshore/nearshore to onshore staff. This allows us to offer our solutions at increasingly competitive prices and margins, enabling us to continue to build market share and use the ongoing pricing pressure within the software testing markets to our advantage. Our considerable offshore resources also give us multi-language and multi time-zone capabilities which has proved highly beneficial in winning a number of contracts where around-the-clock availability and language skills are of concern to the client.

Dividend

Our stated policy is to pay out approximately 30% of the adjusted profit after tax as a dividend. SQS will therefore pay a dividend for the full year of €0.05 (2010: €0.08) per share.

Subject to approval at the shareholder meeting on 30 May 2012, the dividend will be paid on 31 May 2012 to all shareholders on the register at 25 May 2012.

Employees

Investment in employees during the latter half of 2011 was focused on increasing the percentage of overall headcount represented by offshore and nearshore staff rather than on simply expanding headcount. This will enable us to better service the increasing number of Managed Services contracts entering their mature phase. In addition, this has enabled us to reduce our average cost per employee such that we can more effectively address the competitive demands of the market in which we operate. Additionally SQS has removed a projected €3 million in non-billable staff costs during the period, the vast majority of the benefits of which will not be felt until 2012.

As a result of our investments permanent offshore and nearshore test centre consultant headcount grew 19% during the period to 701 at 31 December 2011, (31 December 2010: 591). Test centre consultants now represent 42% of total headcount.

The average number of total permanent consultants employed during the period was 1,656 (FY 2010: 1,366), a rise of 21%. At 31 December 2011 the permanent consultant headcount stood at 1,675, up 1% over the six months (30 June 2011: 1,664) and up 10% in the course of the year (31 December 2010: 1,527).

By the end of the period all new staff members had been fully trained and have been fee generating.

In addition, approx. 230 contractors contributed to revenues in the period representing 14% on top of the total number of fee earning staff (H1 2010: 140, representing 10% on top of total staff).

Our strategy for 2012 in relation to employees, will be to remain focused on margin improvement and, as in the second half of 2011, we will only look to increase headcount in order to service project work already contracted.

On behalf of the Board, I would like to take this opportunity to express our gratitude to all of our staff that contributed to SQS during the period.

Board

Rudolf van Megen has announced his decision to step down after 30 years as a CEO and main board member of SQS Software Quality Systems AG by 30 September 2012.

Diederik Vos will succeed Rudolf van Megen as CEO of SQS and René Gawron will continue as CFO of the Company.

Over the next six months he will hand over his activities to his successor Diederik Vos to safeguard a smooth transition of his present responsibilities.

SQS recognises Rudolf's invaluable achievement as co-founder of the company and as an evangelist who helped to create the world's largest independent software testing services company with close to €200 million in revenues. A huge lifetime achievement.

Rudolf plans to stay actively involved as SQS's largest shareholder, adopting a role in which he can provide maximum benefit to the Company.

Outlook

In line with our stated strategy, 2011 has been a period of top line growth, with a particular emphasis on investment in our Managed Services business. This has been a considerable success and SQS is now of the scale and size where it can compete, and win against, the largest systems integrators on major testing services projects for blue-chip companies. Managed Services contracts now account for 22% of total revenues and we have contracted a further €66.5 million of Managed Services orders in the year to date.

By focusing on six key market segments we are now turning our attentions toward profitability, with a strategic focus for 2012 on improving the average price of engagements and margins. Given the ongoing difficulties in the wider economy, we retain our cautious outlook for the IT services industry as a whole. However, with €3 million of headcount costs already removed and an increasing number of Managed Services contracts moving offshore we are confident of improved performance going forward.

Rudolf van Megen

Chief Executive Officer

6 March 2012 

Financial Review

Summary

Group turnover during the period was up by 16.1% to €189.1 million (FY 2010: €162.9 million).

The business units, which also represent the accounting segments according to IFRS 8, are:

Central Europe Middle East (CEME), which includes the services businesses in the markets of Germany, Switzerland, Austria, Netherlands, France, Luxemburg and Egypt. Furthermore, this segment manages all billable staff that are employed by the aforementioned countries including the German / French-language offshore centre in Egypt.

West Organisation North South (WONS), which includes the services businesses in the markets of the United Kingdom, Ireland, Sweden, Norway, Finland, USA, South Africa and India. Furthermore, this segment manages all billable staff that are employed by the aforementioned countries including the English-language offshore centres in India and South Africa.

The segment "Other" includes software testing products (except re-selling of 3rd party tools) , training & conferences and central group activities such as research and innovation.

Breakdown by business unit

Central Europe Middle East (CEME)

Revenue in CEME, our largest market, amounted to €114.2 million (2010: €96.4 million) in the period, an increase of 18.5%. The improvement in revenue was entirely organic and came from new Managed Services contracts and additional demand for traditional IT project services.

West Organisation North South (WONS)

Our business in predominantly English speaking geographies saw healthy growth during the period with a 13.2% rise in revenues to €68.4 million (2010: €60.4 million). This occurred primarily as the result of a strong surge in demand for our services from the UK, Ireland and India. The majority of the growth came from the retail, utilities & energy and financial services sectors.

Other Business

This segment experienced an increase in revenues in the period of 6.6% to €6.5 million (2010: €6.1 million). The markets for training, conferences and software testing products showed some improvements during the period, after suffering from the 2009 recession in recent years as a late-cycle business. Because SQS software testing products are an integral part of our asset based services methodology and additionally embedded in many managed services contracts, their profit contribution is not fully visible in this segment but is partly included in the CEME and WONS results;

Foreign Exchange

Foreign exchange had a positive impact on the reported revenue for the period but a negative impact on the profit because the Euro weakened against the most important currencies relevant to the SQS business. In total, 45% of the Group's revenue is generated in currencies other than the Euro (2010: 50%). Specifically, 23% (FY 2010: 26%) of Group revenue is generated in Sterling by our UK operation and 12% (FY 2010: 14%) of Group revenue is generated in Swiss Francs by our Swiss operation, the balance of 10% is generated in other currencies. On a constant currency basis, our reported revenues would have been €186,7 million (€189.1 million at reported exchange rate) and we would have recorded adjusted profit before tax €0.2 million better than the reported one of €7.3 million.

Margins and Profitability

Gross profit was up 10.7% to €57.7 million (FY 2010: €52.1 million*) with the gross margin at 30.5% (FY 2010: 32.0%*). The slight decrease in the gross margin was mainly influenced by two earlier managed services contracts with a gross margin of 12.8% (revenue of €13.8 million), that required greater resources to move offshore than had been expected, and for which additional costs could not be recovered from the client during 2011. Also an above average 34.8% increase in contractor revenues at a gross margin of 22.0% (revenue of €24.0 million) contributed to an overall lower margin. Gross margins from our traditional consulting business were at 33.3% (incl. new consultants in training; total revenue of €112.7 million) and gross margins from managed services contracts in a more mature part of their life cycle were at 38.4% (revenue of €27.4 million).

Profitability was also impacted by costs associated with hiring and training new staff to service the growth in revenues, investments in office infrastructure and exchange rate losses. Further investment into setting up operations in France and increasing our sales force in the US.

Adjusted profit before tax** was down by 16.5% to €7.3 million (FY 2010 €8.7 million) with the profit margin moving to 3.8% (FY 2010: 5.3%). The decline has been temporary and resulted from two earlier Managed Services contracts which had longer initiation phases than planned, during which they attracted lower margins and ultimately incurred higher net interest payments.

Adjusted earnings per share*** was down by 18.0% to €0.18 (2010: €0.25).

* adjusted in 2010 to add back €0.4 million accruals for partial retirement due to a change in IFRS accounting rules

** adjusted to add back IFRS effects of €0.1 million pro forma interest on deferred payment milestones for acquisitions and evaluation of pensions and €1.6 million of amortisation on intangible assets of acquired companies. Figures of 2010 adjusted due to changed accounting treatment of actuarial gains/losses on pension obligations.

*** includes effects under ** above and at local GAAP tax rate which is €0.9 million higher than under IFRS because of €0.8 million deferred taxes under IFRS and €0.1 million for a deferred tax income tax asset.

Costs

Adjusted General & Administrative expenses**** totaled €31.2 million (2010: €27.1 million), representing 16.5% of Group revenues (2010: 16.7%). The absolute cost increase resulted chiefly from hiring and training costs, investment in IT and test centre office infrastructure including some improved operational efficiencies in line with the general growth of the Company during the year.

****adjusted to add back IFRS effects on amortisation of intangible assets of acquired companies of €1.6 million. Figures of 2010 adjusted due to changed accounting treatment of actuarial gains/losses on pension obligations.

Sales & Marketing expenses totaled €14.3 million (2010: €13.0 million) representing 7.6% of revenues (2010: 8.0%). Absolute cost increases resulted from adding sales capacity, mainly to support Managed Services, and from additional marketing campaigns undertaken in an effort to improve lead generation.

Research & Development expenses totaled €3.5million (2010: €2.8 million) representing 1.9% of Group revenues (2010: 1.7%). R&D costs resulted from investments in our software testing tools with capitalised R&D of €2.5 million (2010: €3.1 million) and amortisation of €3.0 million (2010: €2.8 million), resulting in a net negative effect of €(0.5)million (2010: net positive effect of €0.3 million). Additionally €1.3 million (2010: €1.4 million) regarding the development of a Managed Services/PractiQ methodology have been capitalised and €0.2 million (2010: €0 million) were amortised, resulting in a net positive effect of €1.0 million (2010: net positive effect of €1.4 million). As all major SQS services have now been productised and most SQS consultants are certified for these products we expect that investment in Managed Services/PractiQ methodology will be lower going forward.

Cash Flow and Balance Sheet

Cash flow from operating activities was €10.2 million (2010: €6.0 million) which represents an adjusted EBIT conversion of 118%. This was better than the conversion rates of adjusted EBIT into operating cash flow seen in previous years and this predominantly resulted from a reduction of working capital and debtor days in the second half of 2011. Debtor days ended above the previous year at 64 (2010: 55) but were significantly reduced from 72 at the end of the first half.

Cash flow from financing activities was €7.3 million (2010: €3.2 million) and includes the payout of a dividend of €(2.2) million in May 2011 (2010: €(1.9) million). Cash outflow from investments was €(8.9) million (2010: €(8.2) million), including €(3.8) million (2010: €(4.5) million) for capitalised R&D on products and Managed Services/PractiQ methodology; €(2.1) million (2010: €(0.9) million) for investments in IT infrastructure, software and SAP relating to the SQS ERP system; and €(2.8) million (2010: €0 million) for investments in the test centre building in Pune, India. There were no cash payments for earn out payments on acquisitions in the last two years. Cash at the year-end was €9.3 million (2010: €4.3 million).

0.6 million shares were issued in January 2011 to satisfy deferred consideration obligations with regards to previous acquisitions (Validate and Verisoft). A further issue of 28,265 shares under a share purchase programme for SQS employees was also carried out in January 2011. . All these transactions were economically settled and accounted for in 2010 but pending on formal entry into the commercial register.

Taxation

The reported tax charge of €1.4 million (2010: €1.6 million) includes current tax expenses of €2.2 million and deferred taxes of €(0.9) million (2010: €(0.4) million). Deferred taxes mostly occurred due to losses in legal entities and resulting tax assets earned by these. The 2011 current tax charge on the adjusted PBT was higher than anticipated partly due to a change in the taxation on profits made in India, where revenue received in the Special Economic Zone (SEZ) in Pune is now subject to an additional 18.5% withholding tax. This withholding tax may be reclaimed after 10 years, subject to an audit by the local tax authorities confirming all SEZ conditions have been fulfilled.

We anticipate a tax rate of 29% for 2012.

 * Figures of 2010 adjusted due to changed accounting treatment of actuarial gains/losses on pension obligations.

International Financial Reporting Standards (IFRS)

The Consolidated Financial Statements of SQS and its subsidiary companies ("SQS Group" or "SQS Konzern") are prepared in conformity with all IFRS Standards (International Financial Reporting Standards) and Interpretations of the IASB (International Accounting Standards Board) approved by the EU Commission and translated into the German language which are to be applied for those financial statements whose reporting period starts on or after 1 January 2011.

The SQS Group Consolidated Financial Statements for the twelve month period ended 31 December 2011 are presented in Euros.

A copy of the SQS Group Consolidated Financial Statements together with a notice of Annual General Meeting to be held at SQS headquarters in Cologne on 30 May 2011 will be posted to shareholders shortly and electronic copies of these documents will also be available from the Company's website at www.sqs.com.

Rene Gawron

Chief Financial Officer

6 March 2012

Notes to the Financial Information

at 31 December 2011

1. Description of business activities

SQS, based in Cologne, Germany, is one of the largest independent European pure play providers of software testing and quality management services by turnover. SQS is independent from software vendors and other IT service suppliers. It can therefore provide unbiased opinions to customers on the software products and projects it is engaged to assess and improve. SQS offers services designed to support the quality of software and IT systems from initial project definition through the development stage and up to final implementation and, thereafter, in relation to ongoing maintenance. For more than thirty years, SQS has been offering a comprehensive range of consulting services for enterprise and technical software systems to its clients who include "blue chip" companies in a variety of sectors, such as financial services, telecommunications, logistics and manufacturing. SQS currently has 24 offices in 13 countries worldwide with 2,073 employees at the end of 2011 (previous year 1,875 employees).

2. Summary of Significant Accounting Policies

Basis of preparation

The Consolidated Financial Statements of SQS and its subsidiary companies ("SQS Group" or "SQS Konzern") are prepared in conformity with all IFRS Standards (International Financial Reporting Standards) and Interpretations of the IASB (International Accounting Standards Board) approved by the EU Commission and translated into the German language which are to be applied for those financial statements whose reporting period starts on or after 1 January 2011.

The Financial Information has been prepared on the historical cost basis. The Financial Information is presented in Euro and amounts are rounded to the nearest thousand (€k) except when otherwise indicated.

Statement of compliance

The Financial Information of SQS and its subsidiaries (the 'SQS Group') has been prepared in accordance with IFRS as adopted for use in the EU.

First-time application of new standards, change in accounting policies and correction of errors

SQS has applied the Standards and Interpretations of the IASB as applicable in the EU which are binding for financial years commencing on or after 1 January 2011. The changes do not have a material effect on the financial statements of SQS Group.

SQS does not apply any further changed or newly passed standards prior to the implementation date stipulated. Further, according to the assessment of SQS, the application of these standards would not have any material effect on the financial statements.

Compared to 2010 the accounting treatment of pension provisions was amended according to the methods prescribed in IAS 19.93A. As a consequence actuarial gains and losses are fully recognized directly in equity and presented in other comprehensive income without affecting the income statement. Management considers this accounting policy to be more relevant to financial statement users as actuarial gains and losses have no impact on the operating activities of SQS group and therefore should not affect consolidated profits presented.

Apart from the voluntary change in accounting for actuarial gains and losses arising from the valuation of pension obligations, the accounting policies adopted are consistent with those of the previous financial year.

In addition, an error concerning the recognition of pension provisions attributable to a subsidiary based in Switzerland has been corrected retrospectively according to IAS 8.42. Pension obligations that formerly have been considered as defined contribution plans are now considered to be defined benefit plans.

Both changes have led to the following retrospective adjustments:

In 2011 the effect is €0.01 on adjusted, unadjusted and diluted earnings per share respectively. For 2010 the effect on earnings per share is nil.

The adoption of the following new and amended IFRS and IFRIC interpretations was mandatory for accounting periods beginning on or after 1 January 2011 and relevant for the financial statements or performance of SQS Group:

IAS 1 Presentation of Financial Statements (Improvements 2010)

The amendment clarifies that an entity may present an analysis of each component of other comprehensive income either in the statement of changes in equity or in the notes to the financial statements.

The following standards and amendments to existing standards have been published and are expected to be mandatory after endorsement by the European Commission for the group's accounting periods beginning on or after 1 July 2011 or later periods, but the group has not early adopted them:

IAS 1 Financial Statement Presentation - Presentation of Items of Other Comprehensive Income (Amendment)

IAS 12 Income Taxes - Recovery of Underlying Assets (Amendment)

IAS 19 Employee Benefits (Amendment)

IAS 27 Separate Financial Statements (as revised in 2011)

IAS 28 Investments in Associates and Joint Ventures (as revised in 2011)

IAS 32 Offsetting Financial Assets and Financial Liabilities (Amendment)

IFRS 1 Severe Hyperinflation and Removal of Fixed Dates for First-Time Adopters (Amendment)

IFRS 7 Financial Instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities (Amendment)

IFRS 9 Financial Instruments: Classification and Measurement

IFRS 10 Consolidated Financial Statements

IFRS 11 Joint Arrangements

IFRS 12 Disclosure of Interests in Other Entities

IFRS 13 Fair Value Measurement

Of these, the following standards may have an impact on the financial statements of SQS AG:

IAS 1 Financial Statement Presentation - Presentation of Items of Other Comprehensive Income - The amendments may influence the presentation of items that are reclassified into profit or loss which have to be separated from items that will never be reclassified.

IFRS 9 Financial Instruments: Classification and Measurement - The standard as issued reflects the first phase of the IASB's work on the replacement of IAS 39. IFRS 9 introduces new requirements for classifying and measuring financial assets and is likely to impact the SQS Group's accounting for its financial assets. This standard is effective for periods beginning on or after 1st January 2013. However, the standard has not yet been endorsed by the EU.

IFRS 13 Fair Value Measurement - The standard establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. This standard becomes effective for annual periods beginning on or after 1 January 2013. The SQS Group is currently assessing the impact that this standard will have on the financial position and performance.

All other new and amended IFRSs and IFRICs will not have any material effect on the financial position or performance of SQS.

Basis of consolidation

The Financial Information comprises the financial statements of SQS Software Quality Systems AG and its subsidiaries as at 31 December each year. Subsidiary company financial statements are prepared on a basis consistent with those of other SQS Group companies. All companies in the SQS Group have the same accounting reference date of 31 December.

All inter-company balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full.

Subsidiaries are consolidated from the date on which control is transferred to the SQS Group and cease to be consolidated from the date on which control is transferred out of the SQS Group. SQS obtains and exercises control through voting rights.

As at 31 December 2011, the Company held interests in the share capital of more than 20 % of the following undertakings (all of those subsidiaries have been consolidated):

At 8th December 2011 SQS has opened a subsidiary in Paris. SQS France SASU is a fully owned subsidiary and was founded by SQS AG.

SQS AG holds 15% of the shares of SQS Portugal Lda with a book value of € nil (previous year € nil).

Foreign currency translation

The Euro (€) is the functional and reporting currency of the Company and its Euroland subsidiaries. For these entities, transactions in foreign currencies are initially recorded in the functional currency at the exchange rates valid at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rate of exchange ruling at the balance sheet date. All differences are taken to the consolidated income statement. Non-monetary items that are measured at historical cost in a foreign currency are translated using the exchange rate as at the date of initial transaction. 

The following subsidiaries have their own functional currency:

At the reporting date, the assets and liabilities of these subsidiaries are translated into Euros at the exchange rate valid at the balance sheet date. As the exchange rate did not fluctuate significantly in 2011, the items of the income statement were translated at the weighted average exchange rate for the year. The exchange differences arising on translation are recognised in other comprehensive income and accumulated in a separate reserve in equity.

On disposal of a foreign entity, the cumulative amount of exchange differences relating to that particular foreign entity are reclassified from equity to profit or loss as a reclassification adjustment when the gain or loss on disposal is recognised.

3. Segmental reporting

SQS Group has two major business units acting as provider for consultancy services in their regions. Both regional business units are operations segments and report their financial information to the group management board of SQS AG as chief decision maker. The third reporting unit includes the Training & Conferences business as well as the Software Testing Products. Both, Training & Conferences (T&C) as well as Software Testing Products (STP) are operating segments according to IFRS 8 as they are reported separately to the management of SQS AG. However, neither T&C nor STP fulfill the quantity thresholds of IFRS 8.13. Therefore the financial information according to T&C and STP has been aggregated under the reporting segment "Other".

Based on this organisational structure SQS Group operates the following three segments:

·; CEME (Central Europe Middle East),

·; WONS (West Organisation North & South),

·; Other (includes STP (Software Testing Products) and T&C (Training & Conferences).

The segments "WONS" and "CEME" represent the business regions as follows:

·; WONS: UKISA (UK, Ireland and South Afrika), SQS Nordic (Sweden, Norway and Finland), SQS India (India, USA),

·; CEME: SQS Germany, SQS Switzerland, SQS Austria, SQS Nederland, SQS Group Management Consulting, SQS Egypt, SQS France.

The segment "Other" includes selling and leasing of Software Testing Products (except re-selling of 3rd party tools) and providing Training as well as hosting of Conferences.

The group management board consisting of CEO (Chief Executive Officer), CFO (Chief Financial Officer) and COO (Chief Operating Officer) monitors the results of the operating segments separately in order to allocate resources and to assess the performance of each segment. Segment performance is evaluated based on operating profit or loss.

Transactions between the segments are made on an arm's length basis. Centrally incurred external costs relating to subsidiaries are recharged to the subsidiaries affected. Cost allocations between the segments are not charged.

Non-profit centres include important functions such as Portfolio Management, Marketing, Finance & Administration, IT, Human Resources, Managed Services Support and Sales Support.

The non-profit centres are allocated to the operating segments as far as they provide direct services to the segments. As far as they provide general services to the whole group their costs are not allocated and shown under 'Non-allocated costs'.

Assets and liabilities relating to the operating segments are not reported because they are not reported to the Group Management Board. Further, group financing (including finance costs and finance income) and income taxes are managed on a group basis and are not allocated to operating segments.

The following tables present revenue and profit information regarding the SQS Group's reportable segments for the years ended 31 December 2011 and 2010.

Additional Information

The following tables present additional information about the revenues from external customers by individual services:

The following revenue information by geographical region is based on the location of the customer. The information disclosed for non-current assets relates to property, plant and equipment, and intangible assets.

4. Expenses

The Consolidated Income Statement presents expenses according to function. Additional information concerning the origin of these expenses, by type of cost, is provided below:

Cost of material

The cost of material included in the cost of sales in the year ended 31 December 2011 amounted to €18,197k (2010: €13,894k). Cost of material relates mainly to the procurement of outside services such as contract software engineers. In addition, certain project-related or internally used hardware and software is shown under cost of material.

Employee benefits expenses

The expenses for retirement benefits include the change in pension accruals and expenses for defined contribution plans such as direct insurance and provident fund costs.

The average numbers of employees in the operating segments of the SQS Group were as follows:

Government grants

Government grants in the amount of €124 (2010: €199k) have been granted for personnel expenses for the additional employees in economically weak regions and have been recognised as income. Of these an amount of €53k (2010: €176k) had not yet been paid to SQS at the reporting date. There are no unfulfilled conditions or contingencies attached to these grants.

Amortisation and Depreciation

Amortisation and depreciation charged in the year ended 31 December 2011 amounted to €7,399k (2010: €7,077k). Of this, €2,991k (2010: €2,833k) was attributable to the amortisation of development costs.

Rentals and leasing

Operating lease costs in connection with office space and equipment in 2011 amounted to €6,290k (2010: €6,261k).

The lease contracts will expire between 2012 and 2015. Some of them can be prolonged or renewed, some allow price alignments.

5. Net finance costs

The net finance costs are comprised as follows:

Finance income results from fixed deposit investments which yield interest income.

Interest expense relates to interest on bank liabilities, finance lease liabilities and bonded loan.

Finance income and costs are stated after foreign exchange rate gains and losses.

6. Taxes on earnings

Deferred income tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. The calculation is based on the tax rates anticipated in the respective countries as at the realisation date. These are essentially based on the statutory provisions applicable or passed by the government at the date of the Financial Statements.

As a basic principle, SQS Software Quality Systems AG in Germany is liable to corporate income tax, the solidarity surcharge and trade tax. The results of the Company are subject to corporate income tax. The German corporate income tax amounts to 15 % (2010: 15%). A 5.5% solidarity surcharge is imposed on corporate income tax. The trade income tax amounts to 15.75% of the taxable income. Consequently the total income tax rate amounts to approximately 30 %.

Consolidated income tax expense is as follows

A reconciliation of income tax applicable to the accounting profit before income tax at the statutory income tax rate to the income tax expense in the income statement is as follows:

Deferred taxes with an amount of €317k (2010: €2k) were charged to other comprehensive income.

In accordance with § 37 KStG (German corporation tax law) SQS has capitalised the corporation tax credit on 31 December 2011 at a present value of €997k (2010: €1,134k). The present value has been discounted using an interest rate of 5.5%. The tax credit will be paid off by six further instalments until 2017.

For the assessment of deferred tax assets and liabilities, SQS Software Quality Systems AG applies a tax rate based on the current tax law in Germany of 30% (2010: 30%) which takes into account corporation tax, the solidarity surcharge and trade tax. For deferred tax assets and liabilities of the overseas subsidiaries, the local tax rates are taken as the basis.

Deferred income tax relates to the following: