We studied the effect of isothermal annealing (600–750 °C, 1 to 1000 min) on the microstructure and mechanical properties of SAF 2205 duplex stainless steel. Impact toughness was found to be significantly more affected than hardness by annealing. Annealing at 750 °C for 1000 min resulted in a more than 90% decrease in impact toughness, while hardness only increased by 25%. Tensile strength increased up to 100 MPa, but elongation decreased by more than 50% under the same conditions. Sigma phase formation was minimal at lower temperatures (650 °C and below) but increased significantly at higher temperatures. At 750 °C and 1000 min of annealing, the ferrite content dropped from 50% to 16%. These findings suggest that annealing temperature and time need to be carefully controlled to avoid a reduction in impact toughness and ductility caused by sigma phase precipitation. The harmful effect of sigma phase precipitation on mechanical properties was directly shown.