Half Yearly Report

Embargoed until 7am

6 September 2011

SQS Software Quality Systems AG

("SQS" or the "Company")

Results for the six months ended 30 June 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 six months ended 30 June 2011 (the "period").

Financial Highlights:

·; Turnover increased by 29% to €95.3 million (H1 2010: €73.9 million),

o testing services market as a whole is forecasted to grow 6.5% in 2011 (Source: PAC market study)

·; Gross profit up by 27% to €28.6 million (H1 2010: €22.6 million)

·; Gross profit margin of 30% (H1 2010: 30.5%)

·; Adjusted* PBT up by 20% to €2.8 million (H1 2010: €2.4 million)

·; Adjusted* EPS up by 50% to €0.09 per share (H1 2010: €0.06 per share)

·; Net debt as at 30 June 2011 was €13.8 million (30 June 2010: net debt of €6.2 million) reflecting increased receivables due to business growth and the payment of the FY 2010 dividend

*adjusted to add back €0.1 million pro forma interest on deferred payment milestones for acquisitions and amortisation on intangible assets of acquired companies of €0.8 million

Operational Highlights:

·; A period of growth and continued investment into Managed Services

·; Gross margin of "mature" Managed Services contracts now at 36.9% of revenue

·; Hired and fully trained an additional 260 new consultancy staff during the period resulting in a billable staff net increase of 137

o Total staff numbers of 2,032 at period end (31 December 2010: 1,875)

o Off/Nearshore staff equal to 37% of total consultancy staff at 30 June 2011 (31 Dec 2010: 37%)

·; Rapid growth in Managed Services representing 19% of total revenues (FY 2010: 11%) with order intake of €35 million in the year to date

·; Average billed days per consultant of 187 (H1 2010: 186 billed days)

·; Average managed services contract length of 2.5 years further improving visibility

·; 163 new clients signed up during the period (H1 2010: 91) including numerous blue-chip clients

·; Operations established in France and expanded in US

Rudolf van Megen, Chief Executive Officer of SQS, commented, "In line with our stated strategy, we have continued to invest in our Managed Services business. This has been a considerable success with Managed Services revenues now accounting for 19% of total sales, up from 11% at the end of 2010. In addition, we have contracted a further €35 million of Managed Services orders in the year to date resulting in significantly improved revenue visibility.

"Although investments made in staff during the first half resulted in increased costs, these consultants are fully billable in the third quarter and are expected to continue to be so going forward, resulting in improved margins. However, given the outlook for the global economy we prudently forecast revenues to remain flat in the second half and consequently expect profits to be at the lower end of expectations."

 Enquiries:

About SQS

SQS is the world's largest pure play supplier of independent software testing and quality management services. SQS consultants design and oversee quality management processes during the software and IT systems life cycle and test the resulting products for errors and omissions.

Headquartered in Cologne, Germany, SQS has approximately 2,000 employees across Europe, Asia, North America and Africa. The Group has a presence in Germany (Cologne, Munich, Frankfurt, Stuttgart, Goerlitz and Hamburg), the UK (London, Woking, Birmingham, Manchester, Belfast), Ireland, the Netherlands, Switzerland, Austria, Sweden, Norway, Finland, France, India, Egypt, the United States and South Africa. SQS also has a minor stake in an operation in Portugal and a partnership operation in Spain.

With more than 5,000 completed projects, SQS has a strong customer base including 20% of the FTSE-100 companies, more than half of the DAX 30 and a third of the STOXX-50. It supports clients in a wide range of industries, including major corporations such as Allianz, Beazley, BP, Centrica, Daimler, Deutsche Post, Generali, JP Morgan, Meteor, Reuters, SEB, Siemens and Volkswagen.

Chief Executive's Statement

Introduction

The first 6 months of 2011 has seen a considerable increase in demand for SQS' offerings across all of its core geographies. Revenues in the period increased to €95.3 million, up 29% on the same period last year (H1 2010: €73.9 million), significantly outperforming the software testing market such that we continue to increase market share.

However, our profitability was impacted in the first half, chiefly as a result of the increase in our managed services business to 19% of total revenues (H1 2010: 7%) which results in lower margins in the early phases. The gross margin was also impacted by one new mid-sized project that required greater resources to move it offshore than had been expected.

Of the €17.9 million of revenues received from managed services contracts in the first half, €8.1 million was received from engagements now in a more mature phase of their life cycle, generating a gross margin of 36.9%. Revenues of €9.8 million were received from managed services contracts in the early stages of their life cycle, delivering a lower gross margin of 14.1%. These developments demonstrate the success of our managed services contracts to deliver above average gross margins once the majority of tasks can be delivered from offsite test centres.

Profitability was also impacted by costs associated with hiring and training the new staff required to service the growth in managed services and other contracts, investments in the IT and test centre office infrastructure and exchange rate losses from inter-company invoicing.

During the period we also continued to invest in SQS PractiQ, our unique asset based methodology. This gives us a number of improved efficiencies including the quicker and more effective training of new employees and higher levels of standardisation and automation within our offshore and nearshore facilities.

All staff taken on in the first half (in total 260 new consultants) are now fully trained and fee earning. This is expected to result in improved profitability in the second half of the year. In addition, SQS does not envisage any further costs relating to new staff being incurred in the second half.

Of the 137 net increase in fee earning staff recruited in the first half, 57 of these have been employed in our offshore and nearshore test centres such that offshore / nearshore test centre staff now represent 37% of total billable staff numbers (H1 2010: 37%). This increase is in line with our stated strategy and enables us to offer solutions to our clients at a more competitive price, enabling us to continue to build market share by using the ongoing pricing pressure within the software testing market to our advantage.

During the period staff utilisation continued at normal levels with the average number of billed days per consultant rising slightly to 187 days (31 December 2010: 186 days).

Operational developments have included increasing our sales force in the US and expanding the market verticals to which we provide our services in the US, beyond that of games testing. In addition, we have won a contract to provide testing services to the French operations of a global insurance company resulting in us opening our first operations in France during HY2 2011. Comprising of 25 staff members by 2012 this represents an additional opportunity to enter the French market.

New Business

We were greatly encouraged by the number of new business wins over the period, having signed 163 new clients (H1 2010: 91) across a wide variety of sectors. It is our strategy to diversify and reduce risk because of the variety of business sectors in which your customers are involved. Independent software testing continues to outperform the overall testing market as organisations are becoming increasingly aware of the superior degree of thoroughness and objectivity provided by testing companies that do not have an inherent interest in the outcome of a project.

Examples of new contract wins include:

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

·; The French operations of a global insurance provider. Worth €5 million over the next 3 years, SQS will provide Test Management, Automation and Functional Testing and is in the process of establishing its first operations in France consisting of up to 25 employees.

·; Three Public Services contracts worth €2.5 million over the next 2 years

·; A leading UK headquartered supermarket chain in a contract worth €0.5 million

·; A leading UK merchandise retailer in a contract worth €1.2 million

Our strategic focus on the sale of Managed Services projects has again proven extremely successful with 11 Managed Services contracts signed during the period (H1 2010: 10). The majority of the new clients in the above list have engaged SQS to provide Managed Services, which are contracted in advance for longer periods than the rolling three to six month contracts typical of our traditional project consultancy business.

As a result, the average value and length of the contracts we are signing continues to increase, resulting in improved visibility and, consequently, reduced exposure to the risks associated with potential economic downturns. Our current order backlog of Managed Services contracts currently stands at €56.5 million, with delivery to take place over the next 3 years.

·; In addition to new clients we also signed a number of contract extensions with existing clients.

Services and product lines 

SQS runs and monitors the major part of its business based on two regional business units. Within these business unit 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:

SQS provides management consulting for banking and insurance business processes and helps to initiate resulting IT projects. This service line accounted for 8% of total revenues in the period (H1 2010: 8%), an increase of 30.1% compared with HY1 2010.

·; Software Implementation or Development phase:

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 67% of total revenues in the period (H1 2010: 79%), an increase of 8.3% compared with HY1 2010.

·; Maintenance phase:

SQS provides Managed Testing Services under long term engagements to provide regression testing for updates, patches and new releases. Such services typically involve blended offshore / onshore delivery and accounted for 19% of total revenues in the period (H1 2010: 7%, FY 2010: 11%). This represents €17.8 million over the period (an increase of 245% compared with HY1 2010) and substantially improves visibility going forward.

Software Testing Products

Our unique suite of software testing products has been developed from nearly 30 years' experience working on software testing projects, culminating in a product set that is able to provide consistent and measurable support for testing services, several components of which can be integrated into other market leading tools. Our products are fully integrated into our offerings and are used by staff in onshore and offshore projects, ensuring seamless interaction between the two.

SQS Software Testing Products are used in our consultancy projects and Managed Services as a part of our asset based consultancy services but they are also sold separately to clients. Tools and Maintenance (incl. other third party tools) accounted for 4% of total revenues in the period (H1 2010: 3%), representing 93% growth to €3.8m for this component of our business.

IT Training and Conferences

During the period a total of 3 iqnite® conferences were held in the cities of Dusseldorf, Vienna and Geneva. Revenue from training and conferences represented 2% of total revenues in the period (H1 2010: 3%), representing 13% growth to €2.1m.

Acquisitions update

On 30 June 2011 the earn-out period for Validate (now SQS Nordics) came to an end and no final payment was made to date and is also not expected to be made. No further earn-out payments are expected in relation to the Validate acquisition.

Markets

A market study published by PAC in 2010 predicted that overall software testing services contracted as part of a development contract will grow by 6.5% in 2011, while software testing services contracted on a stand-alone basis will grow by 11% in 2011.

During the period we saw growth across all of the geographies in which we are present, particularly in our core markets of the UK, Germany and the Nordic regions.

·; Our UK/Irish business experienced strong growth recording an excellent performance during the period and we have continued to add to staff numbers during the period to accommodate that growth. The Irish economy remains weak and growth has been relatively slow. However, we have added 9 consultants at our nearshore test centre operation in Belfast. Our total UK and Ireland based business accounted for 25% of total revenues in the period (H1 2010: 27%).

·; Business in Germany continued to experience solid revenue growth during the period. However, owing to the performance in the other regions, Germany accounted for a smaller percentage of total group revenues at 40% (H1 2010: 45%).

·; During the six months under review our Nordic business (Sweden, Norway, Finland) recorded its fastest rate of growth since acquisition. The Nordic business accounted for 8% of total revenues in the period (H1 2010: 9%).

·; Our operations in Switzerland, Austria and the Netherlands experienced the fastest growth of our core business regions during the period. These regions accounted for 21% of total revenues in the period (H1 2010: 17%).

·; Our overseas operations in the USA, South Africa and India experienced the strongest increase in revenues during the period. These regions accounted for 6% of total revenues in the period (H1 2010: 2%).

During the period we experienced high demand and strong growth in a number of verticals including retail, logistics, insurance, energy & utilities and banking.

Business strategy

Our core strategy is to capitalise on our leading market position through the continued provision of independent, integrated quality and testing solutions services at prices in line with market trends. Through augmenting the proportion of offshore to onshore staff we are able to offer our solutions at increasingly competitive prices, enabling us to continue to build market share and use the ongoing pricing pressure within the software testing markets to our advantage.

As a traditional onshore consultancy supplier, we have the experience and knowledge to understand our clients' requirements regarding the optimal mix of onshore and offshore resources. Furthermore, the multi-language and multi time-zone capabilities afforded us by our offshore test centres has proved beneficial in winning a number of contracts where availability and language skills are of concern to the client.

An additional and important element of our strategy is to increase the proportion of revenues contributed by Managed Services. This involves contracting for a set fee for a defined set of deliverables rather than the day-rate basis of our traditional offerings. Such contracts do not allow clients to terminate or postpone at short notice and tend to be over a longer-term period than traditional project work such that the average length of our Managed Services projects is currently 2.5 years. As a result, these contracts afford us far greater revenue visibility and reduce our exposure to the potential for further economic downturns. They also allow for greater flexibility and control over project staffing.

In 2009 we stated an intention to grow Managed Services revenues to 50% of total revenues within five years, and our performance in the first half of 2011 gives us confidence that this goal is eminently achievable. Revenues from Managed Services contracts grew rapidly during the six months under review to represent 19% of total group revenues (12 months to 31 December 2010: 11%). In addition, we have a considerable pipeline of Managed Services business, such that we expect revenue contribution from this segment to the market to continue to increase significantly going forward. Profit contribution is also expected to increase at an accelerating rate as the majority of costs associated with a Managed Services project are borne at the beginning of the contract and reduce as elements of the workload are progressively moved offshore.

As Managed Services contracts attract higher costs in their early stages our margins have inevitably been impacted by the high growth in this part of our business during the period. These costs relate to bidding expenses, the necessary investment in headcount and the fact that contracts of this kind are serviced almost entirely onshore during their initial stages.

However, margins relating to Managed Services contracts improve significantly over time as a greater proportion of the contracts are moved offshore. At present, Managed Services contracts in their initial phases (currently accounting for €9.8 million of Managed Services revenue) attract average margins of only 14.1%. However, contracts in their mature phases (accounting for €8.1 million of Managed Services revenue) attract average margins of 36.9%. A Managed Services contract is considered mature once a significant element of it is being serviced offshore. As this invariably occurs within the first year of the term of the contract we are confident of appreciable margin improvement from this business segment in the near term and a beneficial impact on profitability has already been witnessed in the third quarter.

Owing to the outlook for the European economy, on which reports have been increasingly negative over the past two months, we have decided to take a more prudent approach to growth during the second half of 2011. We therefore do not envisage increasing staff numbers during the remainder of the year, and, until we have further evidence of an improved outlook for the economy, expect no further costs relating to headcount investment.

Dividend

In accordance with German law, SQS can only pay one dividend in each financial year. We expect to declare a dividend with our final results for the year ending 31 December 2011 in line with our current policy of paying out a fixed proportion of full year earnings.

Employees

Significant investment was made during the period in the continued expansion of our headcount. Staff were taken on to manage the strong business growth we experienced during the period, in particular the extensive Managed Services projects. The high levels of domain and methodology experience and expertise among our onshore consultants enabled us to hire junior consultants. This in turn allowed us to reduce our average cost per employee and to more effectively address our competitive market environment, with its inevitable pressures on pricing.

The average number of permanent consultants employed during the period was 1,618 (H1 2010: 1,249), a rise of 29.8%. At 30 June 2011 the permanent consultant headcount stood at 1,664, up 9% over the six months (31 December 2010: 1,527).

Our permanent offshore and nearshore test centre consultant headcount grew 10% during the period to 623 at 30 June 2011, (31 December 2010: 566). Test centre consultants now represent 37% of total headcount unchanged from the start of the period.

By the end of the period all new staff members had been fully trained and have been fee generating in the second half of the current year.

In addition, approx. 180 contractors contributed to revenues in the period representing 10.8% on top of the total number of fee earning staff (H1 2010: 140, representing 10.5% on top of total staff).

Given the wider economic outlook we are choosing to take a prudent approach to growth during the second half and will be postponing our strategy of increasing headcount during this time.

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.

Outlook

In line with our stated strategy, we have continued to invest in our Managed Services business. This has been a considerable success with Managed Services revenues now accounting for 19% of total sales, up from 11% at the end of 2010. In addition, we have contracted a further €35 million of Managed Services orders in the year to date resulting in significantly improved revenue visibility.

Although investments made in staff during the first half resulted in increased costs, these consultants will be fully billable in the second half resulting in improved margins. However, given the outlook for the global economy we prudently forecast revenues to remain flat in the second half and consequently expect profits to be at the lower end of expectations.

Rudolf van Megen

Chief Executive Officer

6 September 2011

Financial Review

Summary

SQS Group turnover grew by 29.0% to €95.3 million (H1 2010: €73.9 million) during the period.

Due to a change in the internal organisation of SQS, which became effective as of 1 January 2010, we no longer manage the Company by individual countries. Instead we have formed two larger regional entities, which can be roughly delineated by the language predominantly spoken by the resident consultants.

Furthermore, by creating dedicated Managed Services units in each of the two services business units, the new organisation supports the implementation of more blended onshore / offshore delivery.

These service business units form the basis for management to monitor the operating results and to allocate resources.

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, 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, 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 €56.5 million (H1 2010: €44.8 million) in the period, an increase by 26.2%. 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 another strong increase during the period with a 40.4% rise in revenues to €35.7 million (H1 2010: €25.5 million). This occurred primarily as the result of a strong surge in demand for our services from the UK, Nordics, USA and India. The majority of the growth came from the utilities & energy and retail sectors and new managed services contracts in those industries.

Other Business

This segment experienced a decline in revenues in the period of 15.8% to €3.1 million (H1 2010: €3.7 million). While the market for training and conferences has recovered and we grew this segment by 12.8% during the period, our direct revenues for software testing products declined by 22.5% as they are increasingly embedded within our managed services revenues.

Margins and Profitability

Gross profit improved by 26.6% to €28.6 million (H1 2010: €22.6 million), with the gross margin at 30.0% (H1 2010: 30.5%). The slight decrease in the gross margin was mainly influenced by new managed services contracts with a gross margin of 14.1% (revenue of €9.8 million), a 60.8% increase in contractor revenues at a gross margin of 21.8% (revenue of €11.9 million) and net billable staff increase of 137 resulting in €1.8 million of additional salary costs (for a total of c. 260 new hires) for induction courses and non-billable training time. We expect this staff to be fully billable and contributing to margins in the second half of the year. Gross margins from our traditional consulting business were at 33.5% (incl. new consultants in training; total revenue of €59.7 million) and gross margins from managed services contracts in a more mature part of their life cycle were at 36.9% (revenue of €8.0 million). The gross margin was also impacted by one new mid-sized project that required greater resources to it move offshore than had been expected.

Adjusted* profit before tax for the period was €2.8 million (H1 2010: €2.4 million), an increase of 19.7%, with the adjusted profit margin falling to 3.0% (H1 2010: 3.2%). The decline is temporary and partly owed to the seasonality of the business which often requires staff build up and associated costs in the first half of the calendar year to be fully trained and in place for fee earning work in the second half , as well as new managed services contracts having a lower margin in their initiation phase and higher net interest payments.

Adjusted* earnings per share increased to €0.09 (H1 2010: €0.06).

*adjusted to add back €0.1 million pro forma interest on deferred payment milestones for acquisitions and amortisation on intangible assets of acquired companies of €0.8 million

Costs

General & Administrative expenses (before IFRS amortisation on intangible assets of acquired companies with an amount of € 0.8 million ) for the period were €16.0 million (H1 2010: €12.4 million), remaining steady as a proportion of sales at 16.8% (H1: 2010 16.8%). The absolute cost increase resulted chiefly from hiring and training costs, investment in the IT and test centre office infrastructure and exchange rate losses from inter-company invoices.

Sales & Marketing costs for the period were €7.4 million (H1 2010: €6.2 million), decreasing to 7.8% as a proportion of sales (H1 2010: 8.4%). This proportionately lower expense resulted from a higher efficiency of the existing sales team where many new hires had joined during the corresponding 2010 reporting period. The investment in sales staff has paid off demonstrated by strong top line outperformance against the overall IT market.

Research & Development expense in the period was kept broadly flat at €1.7 million (H1 2010: €1.4 million) representing 1.8% (H1 2010: 1.9%) of revenues. These efforts were focused on development of software testing tools and our unique PractiQ methodology.

Cash Flow and Financing

Cash flow from operating activities was €(1.3) million (H1 2010: €(1.5) million). The primary reason for the negative cash flow was an increase in trade receivables of €5.0 million during the period (€1.6 million of trade receivables plus €3.4 million of work in progress) as a result of the strong growth in revenues and the increased contribution from managed services contracts. Debtor days (incl. work in progress) increased to 72 (H1 2010: 62).

Cash flow from investments increased to €(3.8) million (H1 2010 (€(3.0) million) due to investments in a building for our India based offshore test centre and IT equipment to support staff growth and future managed services business.

Cash flow from financing activities increased to €8.5 million (H1 2010: €2.8 million) to fund the  increase in trade receivables and work in progress by €5.0m, the construction of the new test centre building in India (€2.0m) and the planned redemption of a €3.0m bonded loan in March 2012.

Balance Sheet

We closed the period with €6.7 million (30 June 2010: €2.7 million) of cash on the balance sheet and borrowings of €20.5 million (30 June 2010: €8.9 million). The resulting net debt position at the half year end was €(13.8) million (30 June 2010: €(6.2) million). These movements resulted principally from the overall strong increase in revenues leading to an increase in trade receivables incl. work in progress of €5.0 million during the half year, the investment into the new test centre building in India (€2.0m) and the dividend payment of €2.2 million (H1 2010: €1.9million). We typically have a net debt position at the half year but expect to have a significantly reduced net debt position at the full year end.

Taxation

A tax charge of €0.5 million includes current tax expenses of €0.4 million (H1 2010: €0.7 million) and deferred taxes of €0.1 million (H1 2010: (€0.5) million). For the full year, we expect an actual tax rate of 29%.

Foreign Exchange

Approximately 55% of the Group's turnover is generated in Euros. For the conversion of revenues and costs generated in local currencies into Euros, the relevant official average exchange rate for the six-month-period of 2011 was chosen. For the conversion of the balance sheet items from local currency into Euros, the official exchange rate as at 30 June 2011 was used.

Foreign exchange had a minimal €27,000 positive impact on earnings for the period. Had the Pound/Swiss Franc/Indian Rupee/Swedish Krona/Euro exchange rates remained the same as in H1 2010 our non Euro revenues for the period would have been €1.4 million lower, translating to a reduction of €27,000 in PBT.

International Financial Reporting Standards (IFRS)

The Interim Consolidated Financial Statements of SQS and its subsidiary companies ("SQS Group") are prepared in conformity with all IFRS (International Financial Reporting Standards, formerly International Accounting Standards) and Interpretations of the IASB (International Accounting Standards Board) which are mandatory at 30 June 2011, whereas the interim reports are published in an abbreviated form according to IAS 34. The Interim Consolidated Financial Statements have neither been audited nor reviewed.

The SQS Group Consolidated Financial Statements for the six month period ended 30 June 2011 were prepared in accordance with uniform accounting and valuation principles in Euros.

Rene GawronChief Financial Officer6 September 2011

Notes to the Financial Information (unaudited)

At 30 June 2011

1. Summary of Significant Accounting Policies

Basis of preparation

The Interim Consolidated Financial Statements of SQS and its subsidiaries ("SQS Group") are prepared in conformity with all IFRS Standards (International Financial Reporting Standards) and Interpretations of the IASB (International Accounting Standards Board) which are mandatory at 30 June 2011, whereas the interim reports are published in an abbreviated form according to IAS 34. The Interim Consolidated Financial Statements have neither been audited nor reviewed.

The Financial Information has been prepared on the basis of historical costs. The same accounting and valuation method used for the 2010 annual Consolidated Financial Statements was applied. Further information about the Group's accounting principles and policies is provided in the SQS Consolidated Financial Statement at 31st December 2010.

The Financial Information is presented in Euros and amounts are rounded to the nearest thousand (€k) except when otherwise indicated.

Statement of compliance

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

Basis of consolidation

As at 30 June, the Company held interests in the share capital of more than 20 % of the following undertakings:

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

Use of estimates

The preparation of the Interim Financial Statements in compliance with the International Financial Reporting Standards requires the disclosure of assumptions and estimates made by management, which have an effect on the amount and the presentation of the assets and liabilities shown in the statement of financial position, the income and expenditure as well as any contingent items. The actual results may deviate from these estimates.

The main estimates and judgements of the management of SQS refer to:

·; the useful life of intangible assets and property, plant and equipment,

·; the future cash flows and interest rates relating to impairment tests of goodwill,

·; the criteria regarding IAS 38.57 according the capitalisation of development costs,

·; the recoverability of deferred taxes on losses carried forward,

·; the valuation of pension assets and liabilities.

There have been no material changes in estimates compared to the year 2010.

2. Segmental reporting

The SQS Group has two major business units acting as provider for consultancy services in their regions. Both regional business units report their financial information to the management 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 reports the following three operating 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.

The segment "Other" includes two important roles, namely selling and leasing of Software Testing Products and providing Training as well as hosting of Conferences.

2. Segmental reporting (continued)

These profit centres run all revenue and profit generating units as market facing profit centres.

Each profit centre is reportable to the Group Management Board (GMB) in Germany. Each segment has implemented a regional board. The board includes three roles CEO (Chief Executive Officer), CMO (Chief Market Officer), and COO (Chief Operations Officer). Furthermore each segment has Managed Services linked to the regional CEO.

The Group Management Board monitors the operating results of the operating segments separately for the purpose of making decisions about resource allocation and performance assessment. 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 Communication, Finance & Administration, IT, Human Resources, Managed Services Support and Sales Support.

The non-profit Centres are allocated to the segments as far as they do 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'. The assets and liabilities relating to the operating segments are not reported because these are not reported to the Group Management Board. Furthermore, 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 operating segments for the interim period ended 30 June 2011 and 30 June 2010 and for the year ended 31 December 2010, respectively.

2. Segmental reporting (continued)

3. 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 in the interim period ended 30 June 2011 amounted to €9,331k (at mid-year 2010: €5,920k). 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.

3. Expenses (continued)

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.

Amortisation and depreciation

Amortisation and depreciation charged in the interim period ended 30 June 2011 amounted to €3,371k (at mid-year 2010: €3,307k). Of this, €1,289k (at mid-year 2010: €1,190k) was attributable to the amortisation of development costs.

4. 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, bonded loan and liabilities from the purchase of subsidiaries calculated using the effective interest method.

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

5. Income tax expense

The line item includes current tax expenses in the amount of €366k (previous interim period: €733k) and deferred tax expense in the amount of €99k (previous interim period: tax income of €(473)k).

Further information about the recognition and measurement of income tax is provided in the SQS Consolidated Financial Statements at 31 December 2010.

6. Earnings per share

The earnings per share presented in accordance with IAS 33 are shown in the following table:

Undiluted profit per share is calculated by dividing the profit for the six month period attributable to equity shareholders by the weighted average number of shares in issue during the six month period ended 30 June 2011: 27,844,245 (at mid-year 2010: 27,263,419).

Diluted profit per share is determined by dividing the profit for the year attributable to equity shareholders by the weighted average number of shares in issue plus any share equivalents which would lead to a dilution.

The adjusted profit per share is calculated by adjusting the profit after tax for deferred taxes, the interest cost of the purchase obligations and amortisation cost of the acquired customer relationships as part of the business combinations. This adjusted profit after tax divided by the weighted average number of shares in issue during the six month period ended 30 June 2011: 27,844,245 shares, (previous year 27,263,419 shares) shows adjusted earnings per share of €0.09 (at mid-year 2010: €0.06).

7. Intangible assets

The item is comprised as follows:

Development costs were capitalised in the interim period ended 30 June 2011 in the amount of €1,249k (half-year 2010: €1,752k) and amortised over a period of 36 months.

The other development costs relate to the consulting product 'Software Tests as Managed Services'. The estimated useful life of this product covers a period of five years.

The other development costs were capitalised in the interim period in the amount of €542k. Amortisation has started in the second half of 2011.

The amortisation of development costs is included in the costs for research and development.

The amortisation of software and remaining intangible assets as well as impairment losses under IAS 36 are spread over the functional costs in accordance with an allocation key.

8. Property, plant and equipment

The development of property, plant and equipment of the SQS Group is presented as follows:

9. Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and on hand, short-term deposits at banks and debt securities which can be realised in the short term and which earn commercial rates of interest. The carrying amounts are considered to be reasonable approximation of fair value.

10. Bank loans, overdrafts and other loans

The finance liabilities are comprised as follows:

For SQS AG and some subsidiaries bank overdraft agreements are in place.

11. Other current and non-current liabilities

The item is comprised as follows:

11. Other current and non-current liabilities (continued)

The remaining other liabilities comprise trade accruals and other items due in the short term. Their carrying amounts are considered to be reasonable approximation of fair value.

SQS has remaining liabilities from the SQS Nordic purchase as deferred consideration with an amount of €891k (at 31st December 2010: €874k) measured at net present value of the amount payable.

Further SQS has a liability regarding a put option granted to the minority stakeholders of SQS India with an amount of €1,640k (at 31st December 2010: €1,735k) measured on the basis of the formula laid down in the put option contract. Hereof an amount of €1,640k (at 31st December 2010: €1,735k) is non-current.

The loan represents a €3,000k bonded loan. The loan payment is reduced by a discount by €5k. The discount is set off against the loan in accordance with IAS 39.AG 65. The interest rate is agreed with 6.93% p.a. The redemption is due in 2012. The Deutsche Bank AG acts as appointed paying agent. The Deutsche Bank is entitled to assign the bond to a special purpose entity, a trustee thereof, a bank or an insurance company. The interest rate is linked to the rating of the SQS Group following a defined rating system. If the SQS Group improves the rating the interest rate will be decreased. If the rating decreases below a certain bound the creditors have the right to terminate the bonded loan immediately.

12. Other provisions

Other provisions include warranty costs in the amount of €10k (31 December 2010: €11k) and a vacant property provision in the amount of €6k (31 December 2010 €5k).

13. Equity