Letter from Our CEO

To Our Employees, Customers and Shareholders

I am pleased to report that fiscal 2006 was another year of solid growth and achievement for Progress Software, both financially and in strengthening our competitive position through internal development complemented by strategic acquisitions.

Our record of revenue growth and profitability remains among the top in the software industry. For the fiscal year ended November 30, 2006, revenue increased 10% to $447 million from $405 million. On a GAAP basis, operating income decreased 32% to $40.9 million from $60.0 million in fiscal 2005 and diluted earnings per share decreased 39% to 68 cents from $1.12 in fiscal 2005. Non-GAAP operating income increased 4% to $81.4 million from $78.3 million in fiscal 2005 while non-GAAP diluted earnings per share decreased 1% to $1.31 from $1.32 in fiscal 2005. Earnings for 2006 were negatively impacted by higher than usual severance costs and the legal and accounting costs associated with a stock option related investigation and a resulting financial restatement for fiscal years 2005, 2004 and 2003.

On December 19, 2006, the Board of Directors elected Michael Mark, who is currently serving as an independent member of our Board of Directors, as Non-Executive Chairman of the Board of Directors and appointed Chuck Kane, who joined the Board in November, as Chairman of the Audit Committee of our Board of Directors. We welcome both in their new roles in further strengthening our Board.

During fiscal 2006, we continued to make significant progress on our strategic goal of providing a richer and broader portfolio of products to assist business and IT professionals in developing, deploying, integrating and managing critical business applications. In January 2006, we acquired NEON Systems, a leading provider of mainframe data access and integration software, and Actional Corporation, a provider of service-oriented architecture (SOA) management software. In June, we acquired Pantero, the industry's first product to address real-time semantic data integration challenges through a model-driven approach. In October, we acquired OpenAccess Software, a provider of development toolkits for rapid development of ODBC and JDBC drivers as well as ADO.NET and OLE DB providers. We are pleased to welcome all four teams to Progress Software.

The last year has seen increased interest by IT organizations in implementing an SOA —creating reusable plug and play software components—and in purchasing SOA infrastructure products to ensure that the intended benefits of SOA are realized. Through internal development and strategic acquisitions, Progress now offers a portfolio of products in support of SOA, each of which can stand on its own as best-in-class, or can be used together to create an open and scalable SOA foundation.

Progress Software develops and markets its products and services through the Progress OpenEdge Division, the Progress Enterprise Infrastructure Division, the Progress Apama Division, the Progress EasyAsk Division and DataDirect Technologies. Each division provides software infrastructure products for the development, deployment, integration, or management of business applications. However, each targets a particular segment of that market and focuses on maintaining leadership in its segment.

Progress OpenEdge Division

Supporting the latest advancements in SOA development and deployment technology, the OpenEdge® 10.1 product was widely adopted by Progress partners and customers in fiscal 2006. With these SOA capabilities, we believe that the OpenEdge platform will extend its lead as the most productive, flexible and efficient development and deployment platform in the industry. The OpenEdge Division's revenue and profit contribution grew modestly in fiscal 2006 and we expect that trend to continue.

Progress Enterprise Infrastructure Division

The Enterprise Infrastructure Division (EID) is responsible for the development, marketing and sales of our Sonic™, Actional®, ObjectStore® and DataXtend product lines. The DataXtend product line now includes DataXtend Semantic Integrator, formerly Pantero, which was acquired in June, 2006. EID combines the former Sonic Software and Real Time divisions. In fiscal 2006, EID product lines continued their combined double-digit license and total revenue growth, with Sonic products demonstrating particularly strong growth.

In addition, the acquisition of Actional Corporation enabled us to extend our SOA offerings to include system and process-level visibility, as well as policy enforcement, across an entire SOA infrastructure incorporating many different technologies.

With the acquisition of Pantero and the subsequent release of the DataXtend Semantic Integrator product, inconsistencies across data models and data representations can be normalized and their meaning shared across application boundaries—a key issue when implementing an SOA.

Progress Apama Division

The industry's most comprehensive event processing platform enables organizations to transform all forms of event data into real-time business intelligence in applications such as algorithmic trading for financial services, real-time fraud detection and compliance, and real-time supply chains. The Progress Apama platform is the first complex event processing (CEP) system to allow users to monitor, detect and act on rapidly moving streams of events—all within microseconds. And it is the only event processing platform to offer graphical Business Activity Monitoring (BAM) dashboards, a CEP correlation engine, and data stream management services (via an event data store) that together comprise a comprehensive platform for the creation, testing, deployment and management of event processing applications.

In a recent industry report, Philip Howard, Bloor Research Director, wrote, "The Progress Apama platform has several major advantages over nearly all of its rivals: it has the longevity and customer base that can prove its capabilities, and it is a global player. No other supplier can offer all of these qualities together with the performance and breadth of capability that the Apama platform offers."

The initial market focus of the Apama Division has been the financial services market, in which we more than doubled our business in fiscal 2006. With event processing becoming more and more recognized as the key technology for many other real-time application areas, we believe that this division has a very bright future.

DataDirect Technologies

The combination of DataDirect and recently acquired NEON Systems, adding extensive mainframe data access capabilities, creates an unparalleled leader in data connectivity. With NEON, DataDirect also addresses all facets of mainframe integration, including SOA and Web services integration, real-time event processing and transactional integration. DataDirect revenue increased over 70% in fiscal 2006 and, as the market leader in its segment, our expectation is for continued double digit growth.

Progress EasyAsk Division

The EasyAsk Division continues to grow steadily as market demand increases for natural language query solutions that provide access to critical structured and unstructured data across the enterprise. The EasyAsk Division is also enjoying significant success in the eCommerce market, where retailers want to increase conversion rates by offering consumers the ability to find the right products using precise search, navigation and merchandising techniques.

Our Technology Commitment

Progress continues to invest strongly in product development that exploits new advances in software technologies, anticipates market trends and provides business advantage to our partners and customers. We endeavor always to enable our customers to take advantage of emerging technology trends, such as SOA, semantic data integration and event processing, while protecting their investments in existing business applications. We are as committed as ever to helping our partners and customers create the world's best business applications today and into the future.

Our commitment to deliver sustained financial performance continues through the execution of our strategic plan and delivery of industry leading products that meet the mission critical needs of our customers.

I thank all of you for your support during the past year and look forward to your continued support of Progress Software.

Joseph W. Alsop
Co-Founder and CEO