Progress Software - 10-Q quarterly report FY

 

(Mark One)

(Exact name of registrant as specified in its charter)

14 Oak Park
Bedford, Massachusetts 01730
(Address of principal executive offices)(Zip code)
Telephone Number: (781) 280-4000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No þ

As of March 31, 2008, there were 41,528,000 shares of the registrant’s common stock, $.01 par value per share, outstanding.

 

 

See notes to unaudited condensed consolidated financial statements.

See notes to unaudited condensed consolidated financial statements.

See notes to unaudited condensed consolidated financial statements.

We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements and these unaudited financial statements should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2007.

In the opinion of management, we have prepared the accompanying unaudited condensed consolidated financial statements on the same basis as the audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full fiscal year.

In June 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 141R, “Business Combinations” (SFAS 141R). SFAS 141R establishes a framework to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We will apply SFAS 141R to any acquisition after the date of adoption.

On December 1, 2007, we adopted SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159) and have not elected to use fair value measurement on any assets or liabilities under this statement.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS 161) as an amendment to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS 161 requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. SFAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. We are currently evaluating whether adoption of SFAS 161 will have an impact on our consolidated financial statements.

We recognize software license revenue upon shipment of the product or, if delivered electronically, when the customer has the right to access the software, provided that the license fee is fixed or determinable, persuasive evidence of an arrangement exists and collection is probable. We do not consider software license arrangements with payment terms greater than ninety days beyond our standard payment terms to be fixed and determinable and therefore such software license fees are recognized upon due date. We do not license our software with a right of return and generally do not license our software with conditions of acceptance. If an arrangement does contain conditions of acceptance, we defer recognition of the revenue until the acceptance criteria are met or the period of acceptance has passed. We generally recognize revenue for products distributed through application partners and distributors when sold through to the end-user.

We generally sell our software licenses with maintenance services and, in some cases, also with consulting services. For the undelivered elements, we determine vendor-specific objective evidence (VSOE) of fair value to be the price charged when the undelivered element is sold separately. We determine VSOE for maintenance sold in connection with a software license based on the amount that will be separately charged for the maintenance renewal period. We determine VSOE for consulting services by reference to the amount charged for similar engagements when a software license sale is not involved.

We generally recognize revenue from software licenses sold together with maintenance and/or consulting services upon shipment using the residual method, provided that the above criteria have been met. If VSOE of fair value for the undelivered elements cannot be established, we defer all revenue from the arrangement until the earlier of the point at which such sufficient VSOE does exist or all elements of the arrangement have been delivered, or if the only undelivered element is maintenance, then we recognize the entire fee ratably. If payment of the software license fees is dependent upon the performance of consulting services or the consulting services are essential to the functionality of the licensed software, then we recognize both the software license and consulting fees using the percentage of completion method.

We recognize maintenance revenue ratably over the term of the applicable agreement. We generally recognize revenue from services, primarily consulting and customer education, as the related services are performed.

We calculate basic earnings per share using the weighted average number of common shares outstanding. We compute diluted earnings per share on the basis of the weighted average number of common shares outstanding plus the effects of outstanding stock options using the treasury stock method. The following table provides the calculation of basic and diluted earnings per share on an interim basis:

Stock options to purchase approximately 2,564,000 shares and 2,965,000 shares of common stock were excluded from the calculation of diluted earnings per share in the first quarter of fiscal years 2008 and 2007, respectively, because these options were anti-dilutive.

Our stock-based compensation expense reflects the fair value of stock-based awards measured at the grant date, is recognized over the relevant service period, and is adjusted each period for anticipated forfeitures. We estimate the fair value of each stock-based award on the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model incorporates assumptions as to stock price volatility, the expected life of options, a risk-free interest rate and dividend yield.

The following table provides the classification of stock-based compensation as reflected in our consolidated statements of operations:

We provide for income taxes during interim periods based on the estimated effective tax rate for the full fiscal year. We record cumulative adjustments to the tax provision in an interim period in which a change in the estimated annual effective rate is determined. We record valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. We have not provided for U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries, as these earnings have been permanently reinvested or would be principally offset by foreign tax credits.

On December 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (FIN 48). FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with Statement 109, “Accounting for Income Taxes”. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

The total amount of gross unrecognized tax benefits as of December 1, 2007 (the date of adoption of FIN 48) was $4.4 million which was reclassified to non-current liabilities as of February 29, 2008. In addition, as of the date of adoption, $4.3 million of unrecognized benefits would affect our effective tax rate if realized. The adoption of FIN 48 resulted in a nominal decrease to our retained earnings. We recognize interest and penalties related to uncertain tax positions as a component of our provision for income and the gross amount of interest and penalties accrued as of the date of adoption was $0.3 million.  

Domestically, U.S. federal and state taxing authorities are currently examining our income tax returns for years through fiscal 2005. Many issues are at an advanced stage in the examination process, the most significant of which relates to research and development credits. With all domestic audit issues considered in the aggregate, we believe it was reasonably possible that, as of December 1, 2007, the unrecognized tax benefits related to these audits could decrease (whether by payment, release, or a combination of both) in the next 12 months by as much as $1.5 million. Our U.S. federal and, with some exceptions, our state income tax returns have been examined or are closed by statute for all years prior to fiscal 2003, and we are no longer subject to audit for those periods.  

Internationally, tax authorities for certain non-U.S. jurisdictions are also examining returns affecting unrecognized tax benefits. With some exceptions, we are generally no longer subject to tax examinations in non-U.S. jurisdictions for years prior to fiscal 2001.  

We believe that we have adequately provided for any reasonably foreseeable outcomes related to our tax audits and that any settlement will not have a material adverse effect on our consolidated financial position or results of operations. However, there can be no assurances as to the possible outcomes.

On December 1, 2007, we adopted SFAS No. 157 “Fair Value Measurements” (SFAS 157). This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The following table details the fair value measurements within the fair value hierarchy of our financial assets:

We have included our investments related to auction rate securities (ARS), of which $95.3 million are classified as non-current, in the Level 2 category, as there are significant observable inputs associated with these items as discussed below. Our ARS are floating rate securities with longer-term maturities which are marketed by financial institutions with auction reset dates at primarily 28 or 35 day intervals to provide short-term liquidity. The credit ratings for all of our ARS are AAA. The underlying collateral of the ARS consist primarily of municipal bonds, which are insured by monoline insurance companies, with the remainder consisting of student loans, which are supported by the federal government as part of the Federal Family Education Loan Program (FFELP) and by the monoline insurance companies. Beginning in February, auctions for certain of these securities began to fail, which has resulted in higher interest rates being earned on these securities. We will not be able to access these funds until future auctions for these ARS are successful, or until we sell the securities in a secondary market which currently is not active, although there have been instances of redemptions at par to date by municipalities through refinance of new debt. As such, certain of these investments currently lack short-term liquidity and were therefore reclassified as non-current on our February 29, 2008 balance sheet.

Although we have uncertainty with regard to the short-term liquidity of these securities, we continue to believe that the par value represents the fair value of these investments. Our investment firms have received estimated market values from an independent pricing service as of the balance sheet date which carry these investments at par value, due to the overall quality of the underlying investments and the anticipated future market for such investments. Further evidence includes the fact that these securities have redemption features which call for redemption at 100% of par value, the underlying debt primarily consists of securities with a credit rating of A or AA excluding insurance, and that we have the ability to hold these securities to maturity. Based on our cash and short-term investments balance of $224.1 million and expected operating cash flows, we do not anticipate a lack of liquidity associated with our ARS to adversely affect our ability to conduct business, and believe we have the ability to hold the securities throughout the currently estimated recovery period. All such items represent significant other observable inputs which are consistent with a Level 2 assessment.

The components of comprehensive income include net income, foreign currency translation adjustments and unrealized gains and losses on investments. The following table provides the composition of comprehensive income on an interim basis:

In September 2007, the Board of Directors authorized, for the period from October 1, 2007 through September 30, 2008, the purchase of up to 10,000,000 shares of our common stock, at such times that management deems such purchases to be an effective use of cash. We purchased and retired approximately 1,524,000 shares of our common stock for $46.2 million in the first three months of fiscal 2008 as compared to approximately 695,000 shares of our common stock for $19.2 million in the first three months of fiscal 2007.

Goodwill is the amount by which the cost of acquired net assets in a business acquisition exceeded the fair value of net identifiable assets on the date of purchase. Goodwill in certain jurisdictions changes each period due to changes in foreign currency exchange rates. During the first quarter of fiscal 2008, we completed our annual testing for impairment of goodwill and, based on those tests, concluded that no impairment of goodwill existed as of December 15, 2007. For purposes of the annual impairment test, we assigned goodwill of $30.3 million to the OpenEdge and SOA operating segment, $88.2 million to the DataDirect Technologies operating segment, excluding a preliminary allocation of $4.2 million of goodwill related to the Xcalia acquisition which occurred in February 2008, and $30.6 million to the other operating segment. See Note 10 for a description of each operating segment.

At the beginning of fiscal 2008, we reorganized our business into five operating segments. The reorganization resulted in the separation of the DataXtend Division as its own separate operating segment from the Enterprise Infrastructure Division and the combination of the remainder of the Enterprise Infrastructure Division with the OpenEdge Division and which created the OpenEdge and SOA Group. Our principal operating segment conducts business as the OpenEdge and SOA Group. The OpenEdge and SOA Group provides the Progress® OpenEdge platform and the Sonic and Actional product sets, interoperable, best-in-class service infrastructure products used to build, deploy and manage a service-oriented architecture. Another significant operating segment, DataDirect Technologies, provides standards-based data connectivity software. Our other three operating segments include: the DataXtend Division, the Apama Division and the EasyAsk Division.

Segment information is presented in accordance with SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information.” This standard is based on a management approach, which requires segmentation based upon our internal organization and disclosure of revenue and operating income based upon internal accounting methods. Our chief decision maker (CDM) is our Chief Executive Officer.

For fiscal 2008, we have two operating segments which met the requirements for separate disclosure: OpenEdge and SOA Group and DataDirect Technologies. The other three operating segments are below the threshold for separate disclosure and are included in the Other segment. We do not manage our assets, capital expenditures, total other income or provision for income taxes by segment. We managed such items on a company basis.

The following table provides revenue and income from operations from our reportable segments on an interim basis:

We did not include prior year comparisons as it is not practical to restate the fiscal 2007 data into the fiscal 2008 structure or the fiscal 2008 data into the fiscal 2007 structure.

The reconciling items within revenue primarily represent intersegment sales, which are accounted for as if sold under an equivalent arms-length basis arrangement. Amounts included under reconciling items within income from operations represent amortization of acquired intangibles, stock-based compensation and certain unallocated administrative expenses.

Total revenue by significant product line, regardless of which segment generated the revenue, is as follows:

On February 5, 2008, we acquired, through a wholly-owned subsidiary, the stock of Xcalia SA (Xcalia) for an aggregate purchase price of $5.7 million, net of cash acquired. Xcalia is a leader in the development and adoption of service data objects standard and data integration technologies. The purpose of the acquisition was to expand the product offerings within the DataDirect product line. Upon the closing of the transaction, Xcalia became part of our DataDirect Technologies operating segment. We accounted for the acquisition as a purchase, and accordingly, we included the results of operations of Xcalia in our operating results from February 5, 2008, the date of acquisition. Transaction costs related to this acquisition included $0.8 million of direct acquisition costs. We paid the purchase price in cash from available funds.

For this acquisition, we obtained a valuation from an independent appraiser for the amounts assigned to intangible assets. The preliminary allocation of the purchase price as of February 29, 2008 was as follows:

Pro forma financial information has not been presented, as the historical operations of Xcalia are not significant to our consolidated financial statements.

On June 23, 2006, we received written notice that the Enforcement Staff in the Boston, Massachusetts office of the SEC had begun an informal inquiry into our option-granting practices during the period December 1, 1995 through November 30, 2002.  On December 19, 2006, the SEC informed us that it had issued a formal order of investigation into our option-granting practices during the period December 1, 1995 through the present.  We are unable to predict with certainty what consequences may arise from the SEC investigation.   We have already incurred, and expect to continue to incur, significant legal expenses arising from the investigation. If the SEC institutes legal action, we could face significant fines and penalties and be required to take remedial actions determined by the SEC or a court. Although we have filed certain restated financial statements that we believe correct the accounting errors arising from our past option-granting practices, the filing of those financial statements did not resolve the pending SEC inquiry. The SEC has not indicated to us whether it has reviewed our restated financial statements, and any SEC review could lead to further restatements or other modifications of our financial statements.

On August 17, 2006, a derivative complaint styled Arkansas Teacher Retirement System, Derivatively on Behalf of Progress Software Corporation, v. Joseph Alsop et al, Civ. Act. No. 06-CA-11459 RCLwas filed in the United States District Court for the District of Massachusetts by a party identifying itself as one of our shareholders purporting to act on our behalf against our directors and certain of our present and former officers. We were also named as a nominal defendant. The complaint alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, breaches of fiduciary duty, aiding and abetting breaches of fiduciary duty and unjust enrichment arising from the allegedly improper backdating of certain stock option grants. The complaint sought monetary damages, restitution, disgorgement, rescission of stock options, punitive damages and other relief.  A Special Litigation Committee was formed by our Board of Directors to investigate and determine our response to the complaint. On September 25, 2007, the Court, in response to our motion, dismissed the Arkansas Teacher Retirement System complaint on the grounds that the Plaintiff failed to make a proper pre-filing demand upon our Board of Directors, and entered judgment for Defendants.  Also on September 25, 2007, the Board received a demand from the Plaintiff regarding the allegedly improper backdating, which stated that absent Board action the Plaintiff may again seek relief. The Special Litigation Committee has taken the demand under advisement.

On January 16, 2007, another party identifying itself as one of our shareholders purporting to act on our behalf filed a derivative complaint styled Acuna, Derivatively on Behalf of Progress Software Corporation v. Joseph Alsop et al., Civ. Act. No. 07-0157 against our directors and certain of our present and former officers in Massachusetts Superior Court.  We are named as a nominal defendant in this action as well.  The complaint alleges breaches of fiduciary duty, aiding and abetting breaches of fiduciary duty and unjust enrichment arising from the allegedly improper backdating of certain stock option grants.   The complaint seeks monetary damages and disgorgement, among other forms of relief. 

Further, on March 28, 2007, an additional party identifying itself as one of our shareholders purporting to act on our behalf filed a derivative complaint styled White, Derivatively on Behalf Of Nominal Defendant Progress v. Progress Software Corporation et al., Civ 07-01172, in Massachusetts Superior Court.  This complaint involves substantially the same defendants, allegations and demands for relief as the Acuna complaint described above.  On June 26, 2007, theWhite and Acuna cases were consolidated.  The consolidated case has been stayed while the Special Litigation Committee’s investigation is ongoing.

The ultimate outcome of any of these matters could have a material adverse effect on our results of operations.  These matters could divert the attention of our management and harm our business.  In addition, we have incurred, and expect to continue to incur legal expenses arising from these matters, which may be significant, including the advancement of legal expenses to our directors and officers. We have certain indemnification obligations to our directors and officers, and the outcome of derivative or any other litigation may require that we indemnify some or all of our directors and officers for expenses they may incur in defending the litigation and other losses.

We are subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these other claims cannot be predicted with certainty, management does not believe that the outcome of any of these other legal matters will have a material adverse effect on our consolidated financial position or results of operations.

The Private Securities Litigation Reform Act of 1995 contains certain safe harbor provisions regarding forward-looking statements. This Form 10-Q, and other information provided by us or statements made by our directors, officers or employees from time to time, may contain “forward-looking” statements and information, which involve risks and uncertainties. Actual future results may differ materially. Statements indicating that we “expect,” “estimate,” “believe,” “are planning” or “plan to” are forward-looking, as are other statements concerning future financial results, product offerings or other events that have not yet occurred. There are several important factors that could cause actual results or events to differ materially from those anticipated by the forward-looking statements. Such factors include those referenced in Part II, Item 1A of this Form 10-Q under the heading “Risk Factors.” Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized. We also cannot assure you that we have identified all possible issues which we might face. We undertake no obligation to update any forward-looking statements that we make.

We develop, market and distribute software to simplify and accelerate the development, deployment, integration and management of business applications. Our mission is to deliver software products and services that empower partners and customers to improve their development, deployment, integration and management of quality applications worldwide. Our products include development tools, databases, application servers, messaging servers, application management tools, data connectivity products and integration products that enable the highly distributed deployment of responsive applications across internal networks, the Internet and occasionally-connected users. Through our various operating units, we market our products globally to a broad range of organizations in manufacturing, distribution, finance, retail, healthcare, telecommunications, government and many other fields.

We derive a significant portion of our revenue from international operations. In all of fiscal 2007 and the first three months of fiscal 2008, the weakening of the U.S. dollar against most major currencies, primarily the euro and the British pound, positively affected the translation of our results into U.S. dollars.

Our management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We make estimates and assumptions in the preparation of our consolidated financial statements that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. However, actual results may differ from these estimates.

We have identified the following critical accounting policies that require the use of significant judgments and estimates in the preparation of our consolidated financial statements. This listing is not a comprehensive list of all of our accounting policies. For further information regarding the application of these and other accounting policies, see Note 1 in the Notes to Consolidated Financial Statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended November 30, 2007, as well as the notes to our Consolidated Financial Statements included in Item 1 of this Form 10-Q.

Revenue Recognition – Our revenue recognition policy is significant because revenue is a key component affecting results of operations. In determining when to recognize revenue from a customer arrangement, we are often required to exercise judgment regarding the application of our accounting policies to a particular arrangement. For example, judgment is required in determining whether a customer arrangement has multiple elements. When such a situation exists, judgment is also involved in determining whether vendor-specific objective evidence (VSOE) of fair value for the undelivered elements exists. While we follow specific and detailed rules and guidelines related to revenue recognition, we make and use significant management judgments and estimates in connection with the revenue recognized in any reporting period, particularly in the areas described above, as well as collectibility. If management made different estimates or judgments, material differences in the timing of the recognition of revenue could occur.

Allowance for Doubtful Accounts – We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. We establish this allowance using estimates that we make based on factors such as the composition of the accounts receivable aging, historical bad debts, changes in payment patterns, changes to customer creditworthiness and current economic trends. If we used different estimates, or if the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, we would require additional provisions for doubtful accounts that would increase bad debt expense.

Goodwill and Intangible Assets – We had goodwill and net intangible assets of approximately $212 million at February 29, 2008. We assess the impairment of goodwill and identifiable intangible assets on an annual basis and whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. We would record an impairment charge if such an assessment were to indicate that the fair value of such assets was less than the carrying value. Judgment is required in determining whether an event has occurred that may impair the value of goodwill or identifiable intangible assets. Factors that could indicate that an impairment may exist include significant underperformance relative to plan or long-term projections, changes in business strategy, significant negative industry or economic trends or a significant decline in our stock price or in the value of one of our reporting units for a sustained period of time. We utilize cash flow models to determine the fair value of our reporting units. We must make assumptions about future cash flows, future operating plans, discount rates and other factors in our models. Different assumptions and judgment determinations could yield different conclusions that would result in an impairment charge to income in the period that such change or determination was made.

Income Tax Accounting – We had a net deferred tax asset of approximately $26 million at February 29, 2008. We record valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. We consider scheduled reversals of temporary differences, projected future taxable income, ongoing tax planning strategies and other matters in assessing the need for and the amount of a valuation allowance. If we were to change our assumptions or otherwise determine that we were unable to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period that such change or determination was made. On a quarterly basis we provide for income taxes based on the estimated effective tax rate for the full fiscal year.

On December 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (FIN 48). FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with Statement 109, “Accounting for Income Taxes”. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. Management judgment is required for each step. If management made different estimates or judgments, material differences in the amount accrued for uncertain tax positions could occur.

Stock-Based Compensation – We account for stock-based compensation expense in accordance with Statement of Financial Accounting Standards (SFAS) No. 123, “Share-based Payments”, (SFAS 123R). Under SFAS 123R, stock-based compensation expense reflects the fair value of stock-based awards measured at the grant date, is recognized over the relevant service period, and is adjusted each period for anticipated forfeitures. We estimate the fair value of each stock-based award on the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model incorporates assumptions as to stock price volatility, the expected life of options, a risk-free interest rate and dividend yield. Many of these assumptions are highly subjective and require the exercise of management judgment. Our management must also apply judgment in developing an estimate of awards that may be forfeited. If our actual experience differs significantly from our estimates and we choose to employ different assumptions in the future, the stock-based compensation expense that we record in future periods may differ materially from that recorded in the current period.

Investments in Debt Securities – As of February 29, 2008, we had approximately $109.8 million in investments related to auction rate securities (ARS), of which approximately $95.3 million are classified as non-current. Our ARS are floating rate securities with longer-term maturities which are marketed by financial institutions with auction reset dates at primarily 28 or 35 day intervals to provide short-term liquidity. The underlying collateral of the ARS consist primarily of municipal bonds, which are insured by monoline insurance companies, with the remainder consisting of student loans, which are supported by the federal government as part of the Federal Family Education Loan Program (FFELP) and by the monoline insurance companies. The credit ratings for all of our ARS are AAA. Beginning in February, auctions for certain of these securities began to fail, which has resulted in higher interest rates being earned on these securities. We will not be able to access these funds until a future auction for these ARS is successful or until we sell the securities in a secondary market which currently is not active, although there have been instances of redemptions at par by municipalities through refinance of new debt to date. As such, certain of these investments currently lack short-term liquidity and were therefore reclassified as non-current on our February 29, 2008 balance sheet. If the credit rating of either the security issuer or the third-party insurer underlying the investments deteriorates, we may be required to adjust the carrying value of the ARS through an impairment charge.

The following table provides certain income and expense items as a percentage of total revenue, and the percentage change in dollar amounts of such items compared with the corresponding period in the previous fiscal year:

Revenue. Our total revenue increased 6% from $115.2 million in the first quarter of fiscal 2007 to $121.6 million in the first quarter of fiscal 2008. Revenue from each of our major product lines increased in the first quarter of fiscal 2008 as compared to the first quarter of fiscal 2007. Total revenue would have been flat if exchange rates had been constant in the first quarter of fiscal 2008 as compared to exchange rates in effect in the first quarter of fiscal 2007.

Revenue from our Progress OpenEdge product line increased 1% from $81.8 million in the first quarter of fiscal 2007 to $83.0 million in the first quarter of fiscal 2008. Revenue derived from our Enterprise Infrastructure product line increased 25% from $17.1 million in the first quarter of fiscal 2007 to $21.5 million in the first quarter of fiscal 2008. Revenue from our DataDirect product line increased 5% from $16.3 million in the first quarter of fiscal 2007 to $17.1 million in the first quarter of fiscal 2008.

Software license revenue increased 1% from $44.7 million in the first quarter of fiscal 2007 to $45.1 million in the first quarter of fiscal 2008. Software license revenue would have decreased by 3% if exchange rates had been constant in the first quarter of fiscal 2008 as compared to exchange rates in effect in the first quarter of fiscal 2007. The DataDirect and the Enterprise Infrastructure product lines accounted for 43% of software license revenue in the first quarter of fiscal 2008 compared to 39% in the first quarter of fiscal 2007. Software license revenue from direct end users decreased slightly in the first quarter of fiscal 2008 as compared to the first quarter of fiscal 2007.

Maintenance and services revenue increased 8% from $70.5 million in the first quarter of fiscal 2007 to $76.5 million in the first quarter of fiscal 2008. Maintenance revenue increased 10% and professional services revenue

increased 2% in the first quarter of fiscal 2008 as compared to the first quarter of fiscal 2007. Maintenance and services revenue would have increased by 3% if exchange rates had been constant in the first quarter of fiscal 2008 as compared to exchange rates in effect in the first quarter of fiscal 2007. Excluding the impact of changes in exchange rates, the increase in maintenance and services revenue was primarily the result of growth in our installed customer base and renewal of maintenance agreements and an increase in professional services revenue.

Total revenue generated in markets outside North America increased 9% from $65.0 million in the first quarter of fiscal 2007 to $71.1 million in the first quarter of fiscal 2008 and represented 56% of total revenue in the first quarter of fiscal 2007 and 59% of total revenue in the first quarter of fiscal 2008. Total revenue generated in markets outside North America would have represented 56% of total revenue if exchange rates had been constant in the first quarter of fiscal 2008 as compared to the exchange rates in effect in the first quarter of fiscal 2007. Revenue from the three major regions outside North America, consisting of EMEA, Latin America and Asia Pacific, each increased in the first quarter of fiscal 2008 as compared to the first quarter of fiscal 2007.

Cost of Software Licenses. Cost of software licenses consists primarily of costs of product media, documentation, duplication, packaging, electronic software distribution and third-party royalties. Cost of software licenses increased 37% from $1.7 million in the first quarter of fiscal 2007 to $2.3 million in the first quarter of fiscal 2008, and increased as a percentage of software license revenue from 4% to 5%. The dollar increase for the first quarter was primarily due to increased headcount higher royalty expense for products and technologies licensed or resold from third parties. Cost of software licenses as a percentage of software license revenue varies from period to period depending upon the relative product mix.

Cost of Maintenance and Services. Cost of maintenance and services consists primarily of costs of providing customer technical support, education and consulting. Cost of maintenance and services increased 8% from $16.3 million in the first quarter of fiscal 2007 to $17.6 million in the first quarter of fiscal 2008, but remained the same percentage of maintenance and services revenue at 23%. The total dollar amount of expense in fiscal 2008 increased due to higher headcount related costs and higher usage of third-party contractors for service engagements. Our technical support, education and consulting headcount increased by 6% from the end of the first quarter of fiscal 2007 to the end of the first quarter of fiscal 2008.

Amortization of Acquired Intangibles for Purchased Technology. Amortization of acquired intangibles for purchased technology primarily represents the amortization of the value assigned to technology-related intangible assets obtained in business combinations. Amortization of acquired intangibles for purchased technology increased from $2.5 million in the first quarter of fiscal 2007 to $2.7 million in the first quarter of fiscal 2008. The increase was due to amortization expense associated with the acquisition of Xcalia SA in the first quarter of fiscal 2008.

Gross Profit. Our gross profit increased 4% from $94.8 million in the first quarter of fiscal 2007 to $99.0 million in the first quarter of fiscal 2008. The gross profit percentage of total revenue decreased from 83% in the first quarter of fiscal 2007 to 81% in the first quarter of fiscal 2008. The decrease in our gross profit percentage was due to increases in cost of licenses and amortization expense of acquired intangibles for purchased technology as described above.

Sales and Marketing. Sales and marketing expenses increased 3% from $44.6 million in the first quarter of fiscal 2007 to $45.8 million in the first quarter of fiscal 2008, and decreased as a percentage of total revenue from 39% to 38%. The increase in sales and marketing expenses was due to higher average selling costs. Our sales and marketing headcount remained flat from the end of the first quarter of fiscal 2007 to the end of the first quarter of fiscal 2008.

Product Development. Product development expenses decreased slightly from $20.8 million in the first quarter of fiscal 2007 to $20.7 million in the first quarter of fiscal 2008, and decreased as a percentage of revenue from 18% to 17%. The dollar decrease was primarily due to a decrease in stock-based compensation expense included in product development in fiscal 2008 as compared to fiscal 2007. Our product development headcount increased by 3% from the end of the first quarter of fiscal 2007 to the end of the first quarter of fiscal 2008. The increase in headcount is primarily due to the acquisition of Xcalia SA at the end of the first quarter of fiscal 2008.

General and Administrative. General and administrative expenses include the costs of our finance, human resources, legal, information systems and administrative departments. General and administrative expenses decreased 8% from $15.0 million in the first quarter of fiscal 2007 to $13.9 million in the first quarter of fiscal 2008, and decreased as a percentage of revenue from 13% to 11%. The dollar decrease was primarily due to lower professional services fees related to the derivative lawsuits and investigation of our historical stock option grant practices in the first quarter of fiscal 2008 and lower stock-based compensation expense in fiscal 2008 as compared to fiscal 2007. Our administrative headcount decreased 2% from the end of the first quarter of fiscal 2007 to the end of the first quarter of fiscal 2008.

Amortization of Other Acquired Intangibles. Amortization of other acquired intangibles primarily represents the amortization of value assigned to non-technology-related intangible assets obtained in business combinations. Amortization of other acquired intangibles decreased from $2.0 million in the first quarter of fiscal 2007 to $1.4 million in the first quarter of fiscal 2008 due to certain items from previous acquisitions becoming fully amortized.

Income From Operations. Income from operations increased 39% from $12.4 million in the first quarter of fiscal 2007 to $17.1 million in the first quarter of fiscal 2008 and increased as a percentage of total revenue from 11% in the first quarter of fiscal 2007 to 14% in the first quarter of fiscal 2008. The increase in the first quarter of fiscal 2008 as compared to the first quarter of fiscal 2007 was driven by the increase in gross profit of 4% while operating expenses decreased by 1%. This expense decrease was due to lower stock-based compensation, lower professional services fees related to the derivative lawsuits and investigation of our historical stock option grant practices, partially offset by an increase in headcount related expense. Our total headcount increased 1% from the end of the first quarter of fiscal 2007 to the end of the first quarter of fiscal 2008.

Other Income. Other income increased 181% from $1.1 million in the first quarter of fiscal 2007 to $3.1 million in the first quarter of fiscal 2008. The increase was primarily due to an increase in interest income resulting from higher interest rates, including higher interest rates earned on ARS, higher average cash and short-term investment balances, and lower foreign exchange losses.

Provision for Income Taxes. Our effective tax rate was 36.5% in the first quarter of fiscal 2008 as compared to 35.0% in the first quarter of fiscal 2007. The increase in our effective tax rate was due to the expiration of the research and development credit provisions in the federal tax code which has not been renewed. We estimate that our effective tax rate will be approximately 36% for all of fiscal 2008.

At the end of the first quarter of fiscal 2008, our cash and short-term investments totaled $224.1 million. The decrease of $115.4 million since the end of fiscal 2007 resulted primarily from the reclassification of approximately $95.3 million of auction rate securities to non-current investments, purchases of approximately $46.2 million of our common stock, and cash used for acquisitions of $5.7 million, offset by positive cash generated from operations of $19.8 million and proceeds from issuances of common stock of $11.4 million.

In addition to the $224.1 million of cash and short-term investments, we had approximately $95.3 million in investments related to ARS that are classified as non-current. Our ARS are floating rate securities with longer-term maturities which are marketed by financial institutions with auction reset dates at primarily 28 or 35 day intervals to provide short-term liquidity. The underlying collateral of the ARS consist primarily of municipal bonds, which are insured by monoline insurance companies, with the remainder consisting of student loans, which are supported by the federal government as part of the Federal Family Education Loan Program (FFELP) and by the monoline insurance companies. The credit ratings for all of our ARS are AAA. Beginning in February, auctions for these securities began to fail, which has resulted in higher interest rates being earned on these securities. We will not be able to access these funds until a future auction for these ARS is successful, or until we sell the securities in a secondary market which currently is not active, although there have been instances of redemptions at par to date by municipalities through refinance of new debt. As such, these investments currently lack short-term liquidity and were therefore reclassified as non-current on the balance sheet.

Although we have uncertainty with regard to the short-term liquidity of these securities, we continue to believe that the par value represents the fair value of these investments. Our investment firms have received estimated market values from an independent pricing service as of the balance sheet date which carry these investments at par value due to the overall quality of the underlying investments and the anticipated future market for such investments. Further evidence includes the fact that these securities have redemption features which call for redemption at 100% of par value, the underlying debt primarily consists of securities with a credit rating of A or AA excluding insurance, and that we have the ability to hold these securities to maturity. Based on our cash and short-term investments balance of $224.1 million and expected operating cash flows, we do not anticipate a lack of liquidity associated with our ARS to adversely affect our ability to conduct business and believe we have the ability to hold the securities throughout the currently estimated recovery period.

We generated $19.8 million in cash from operations in the first three months of fiscal 2008 as compared to $12.3 million in the first three months of fiscal 2007. The increase in cash generated from operations in the first quarter of fiscal 2008 over the first quarter of fiscal 2007 was primarily due to increased profitability and a lower reduction from working capital uses.

A summary of our cash flows from operations for the first quarters of fiscal years 2008 and 2007 is as follows:

Accounts receivable decreased by $1.5 million from the end of fiscal 2007. Accounts receivable days sales outstanding, or DSO, increased by 6 days to 68 days at the end of the first quarter of fiscal 2008 as compared to 62 days at the end of fiscal 2007 and decreased by 4 days from 72 days at the end of the first quarter of fiscal 2007. The increase in DSO is primarily related to the impact of maintenance renewal billings, as the first quarter of each fiscal year typically has the highest portion of such billings relative to the full year. We target a DSO range of 60 to 80 days.

We purchased property and equipment totaling $2.6 million in the first three months of fiscal 2008 as compared to $6.1 million in the first three months of fiscal 2007. The purchases consisted primarily of computer equipment and software and building and leasehold improvements. The decrease primarily related to higher costs associated with our ongoing ERP implementation in the first three months of fiscal 2007 as compared to the first three months of fiscal 2008.

In September 2007, the Board of Directors authorized, for the period from October 1, 2007 through September 30, 2008, the purchase of up to 10,000,000 shares of our common stock, at such times that we deem such purchases to be an effective use of cash. We purchased and retired approximately 1,524,000 shares of our common stock for $46.2 million in the first three months of fiscal 2008 as compared to approximately 695,000 shares of our common stock for $19.2 million in the first three months of fiscal 2007.

We received $11.4 million in the first three months of fiscal 2008 from the exercise of stock options and the issuance of ESPP shares as compared to $5.7 million in the first three months of fiscal 2007.

We believe that existing cash balances together with funds generated from operations will be sufficient to finance our operations and meet our foreseeable cash requirements (including planned capital expenditures, lease commitments, debt payments, potential cash acquisitions and other long-term obligations) through at least the next twelve months.

Revenue Backlog – Our aggregate revenue backlog at February 29, 2008 was approximately $187 million of which $163 million was included on our balance sheet as deferred revenue, primarily related to unexpired maintenance and

support contracts. At February 29, 2008, the remaining amount of backlog of approximately $24 million was composed of multi-year licensing arrangements of approximately $21 million and open software license orders received but not shipped of approximately $3 million. Our backlog of orders not included on the balance sheet is not subject to our normal accounting controls for information that is either reported in or derived from our basic financial statements.

Our aggregate revenue backlog at February 28, 2007 was approximately $171 million of which $146 million was included on our balance sheet as deferred revenue, primarily related to unexpired maintenance and support contracts. At February 28, 2007, the remaining amount of backlog of approximately $25 million was composed of multi-year licensing arrangements of approximately $23 million and open software license orders received but not shipped of approximately $2 million.

We typically fulfill most of our software license orders within 30 days of acceptance of a purchase order. Assuming all other revenue recognition criteria have been met, we recognize software license revenue upon shipment of the product, or if delivered electronically, when the customer has the right to access the software. Because there are many elements governing when revenue is recognized, including when orders are shipped, credit approval, completion of internal control processes over revenue recognition and other factors, management has some control in determining the period in which certain revenue is recognized. We frequently have open software license orders at the end of the quarter which have not shipped or have otherwise not met all the required criteria for revenue recognition. Although the amount of open software license orders may vary at any time, we generally do not believe that the amount, if any, of such software license orders at the end of a particular quarter is a reliable indicator of future performance. In addition, there is no industry standard for the definition of backlog and there may be an element of estimation in determining the amount. As such, direct comparisons with other companies may be difficult or potentially misleading.

We include standard intellectual property indemnification provisions in our licensing agreements in the ordinary course of business. Pursuant to our product license agreements, we will indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally business partners or customers, in connection with certain patent, copyright or other intellectual property infringement claims by third parties with respect to our products. Other agreements with our customers provide indemnification for claims relating to property damage or personal injury resulting from the performance of services by us or our subcontractors. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been insignificant. Accordingly, the estimated fair value of these indemnification provisions is immaterial.

See discussion regarding legal and other regulatory matters in Part II, Item 1. – Legal Proceedings.

Our only significant off-balance sheet commitments relate to operating lease obligations. We have no “off-balance sheet arrangements” within the meaning of Item 303(a)(4) of Regulation S-K. Future annual minimum rental lease payments are detailed in Note 10 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended November 30, 2007.

In June 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 141R, “Business Combinations” (SFAS 141R). SFAS 141R establishes a framework to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We will apply SFAS 141R to any acquisition after the date of adoption.

On December 1, 2007, we adopted SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159) and have not elected to use fair value measurement on any assets or liabilities under this statement.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS 161) as an amendment to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS 161 requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. SFAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. We are currently evaluating whether adoption of SFAS 161 will have an impact on our consolidated financial statements.

We are exposed to a variety of risks, including changes in interest rates affecting the return on our investments and foreign currency fluctuations. We have established policies and procedures to manage our exposure to fluctuations in interest rates and foreign currency exchange rates.

Exposure to market rate risk for changes in interest rates relates to our investment portfolio. We have not used derivative financial instruments in our investment portfolio. We place our investments with high-quality issuers and have policies limiting, among other things, the amount of credit exposure to any one issuer. We seek to limit default risk by purchasing only investment-grade securities. In addition, we have classified all of our debt securities as available for sale. This classification reduces the income statement exposure to interest rate risk if such investments are held until their maturity date because changes in fair value due to market changes in interest rates are recorded on the balance sheet in accumulated other comprehensive income. Based on a hypothetical 10% adverse movement in interest rates, the potential losses in future earnings, fair value of risk-sensitive instruments and cash flows are immaterial. See discussion concerning ARS in Liquidity and Capital Resources.

We use derivative instruments to manage exposures to fluctuations in the value of foreign currencies, which exist as part of our on-going business operations. Certain assets and forecasted transactions are exposed to foreign currency risk. Our objective for holding derivatives is to eliminate or reduce the impact of these exposures. We periodically monitor our foreign currency exposures to enhance the overall effectiveness of our foreign currency hedge positions. Principal currencies hedged include the euro, British pound, Brazilian real, Japanese yen and Australian dollar. We do not enter into derivative instruments for speculative purposes, nor do we hold or issue any derivative instruments for trading purposes. We enter into certain derivative instruments that may not be designated as hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133). Although these derivatives do not qualify for hedge accounting, we believe that such instruments are closely correlated with the underlying exposure, thus managing the associated risk. The gains or losses from changes in the fair value of such derivative instruments that are not accounted for as hedges are recognized in earnings.

We use foreign currency option contracts that are not designated as hedging instruments under SFAS 133, to hedge a portion of forecasted international intercompany revenue for up to one year in the future. There were outstanding foreign currency option contracts with a fair value of $0.6 million (and a notional value of $129.6 million) at February 29, 2008. Major U.S. multinational banks are counterparties to the option contracts. We also use forward contracts that are not designated as hedging instruments under SFAS 133 to hedge the impact of the variability in exchange rates on accounts receivable and collections denominated in certain foreign currencies. We generally do not hedge the net assets of our international subsidiaries. The unrealized gains (losses) of our outstanding foreign currency forward contracts were $(0.6) million and $(0.1) million at February 29, 2008 and February 28, 2007, respectively.

The foreign exchange exposure from a 10% movement of currency exchange rates would have a material impact on our revenue and net income. Based on a hypothetical 10% adverse movement in all foreign currency exchange rates, our revenue would be adversely affected by approximately 5% and our net income would be adversely affected by approximately 20% (excluding any offsetting positive impact from our ongoing hedging programs), although the actual effects may differ materially from the hypothetical analysis.

The table below details outstanding forward contracts, which mature in ninety days or less, at February 29, 2008 where the notional amount is determined using contract exchange rates:

(a) Evaluation of disclosure controls and procedures. Our management, including the chief executive officer and the chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide a reasonable level of assurance that the information required to be disclosed in the reports filed or submitted by us under the Securities Exchange Act of 1934 was recorded, processed, summarized and reported within the requisite time periods.

(b) Changes in internal control over financial reporting. No changes in our internal control over financial reporting occurred during the quarter ended February 29, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

On June 23, 2006, we received written notice that the Enforcement Staff in the Boston, Massachusetts office of the SEC had begun an informal inquiry into our option-granting practices during the period December 1, 1995 through November 30, 2002.  On December 19, 2006, the SEC informed us that it had issued a formal order of investigation into our option-granting practices during the period December 1, 1995 through the present.  We are unable to predict with certainty what consequences may arise from the SEC investigation.   We have already incurred, and expect to continue to incur, significant legal expenses arising from the investigation. If the SEC institutes legal action, we could face significant fines and penalties and be required to take remedial actions determined by the SEC or a court. Although we have filed certain restated financial statements that we believe correct the accounting errors arising from our past option-granting practices, the filing of those financial statements did not resolve the pending SEC inquiry. The SEC has not indicated to us whether it has reviewed our restated financial statements, and any SEC review could lead to further restatements or other modifications of our financial statements.

On August 17, 2006, a derivative complaint styled Arkansas Teacher Retirement System, Derivatively on Behalf of Progress Software Corporation, v. Joseph Alsop et al, Civ. Act. No. 06-CA-11459 RCLwas filed in the United States District Court for the District of Massachusetts by a party identifying itself as one of our shareholders purporting to act on our behalf against our directors and certain of our present and former officers. We were also named as a nominal defendant. The complaint alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, breaches of fiduciary duty, aiding and abetting breaches of fiduciary duty and unjust enrichment arising from the allegedly improper backdating of certain stock option grants. The complaint sought monetary damages, restitution, disgorgement, rescission of stock options, punitive damages and other relief.  A Special Litigation Committee was formed by our Board of Directors to investigate and determine our response to the

complaint. On September 25, 2007, the Court, in response to our motion, dismissed the Arkansas Teacher Retirement System complaint on the grounds that the Plaintiff failed to make a proper pre-filing demand upon our Board of Directors, and entered judgment for Defendants.  Also on September 25, 2007, the Board received a demand from the Plaintiff regarding the allegedly improper backdating, which stated that absent Board action the Plaintiff may again seek relief. The Special Litigation Committee has taken the demand under advisement.

On January 16, 2007, another party identifying itself as one of our shareholders purporting to act on our behalf filed a derivative complaint styled Acuna, Derivatively on Behalf of Progress Software Corporation v. Joseph Alsop et al., Civ. Act. No. 07-0157 against our directors and certain of our present and former officers in Massachusetts Superior Court.  We are named as a nominal defendant in this action as well.  The complaint alleges breaches of fiduciary duty, aiding and abetting breaches of fiduciary duty and unjust enrichment arising from the allegedly improper backdating of certain stock option grants.   The complaint seeks monetary damages and disgorgement, among other forms of relief. 

Further, on March 28, 2007, an additional party identifying itself as one of our shareholders purporting to act on our behalf filed a derivative complaint styled White, Derivatively on Behalf Of Nominal Defendant Progress v. Progress Software Corporation et al., Civ 07-01172, in Massachusetts Superior Court.  This complaint involves substantially the same defendants, allegations and demands for relief as the Acuna complaint described above.  On June 26, 2007, theWhite and Acuna cases were consolidated.  The consolidated case has been stayed while the Special Litigation Committee’s investigation is ongoing.

The ultimate outcome of any of these matters could have a material adverse effect on our results of operations.  These matters could divert the attention of our management and harm our business.  In addition, we have incurred, and expect to continue to incur legal expenses arising from these matters, which may be significant, including the advancement of legal expenses to our directors and officers. We have certain indemnification obligations to our directors and officers, and the outcome of derivative or any other litigation may require that we indemnify some or all of our directors and officers for expenses they may incur in defending the litigation and other losses.

We are subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these other claims cannot be predicted with certainty, management does not believe that the outcome of any of these other legal matters will have a material adverse effect on our consolidated financial position or results of operations.

We operate in a rapidly changing environment that involves certain risks and uncertainties, some of which are beyond our control. You should carefully review and consider the information regarding certain factors that could materially affect our business, financial condition or future results set forth under Part II, Item 1A (Risk Factors) in our Annual Report on Form 10-K for the period ending November 30, 2007. No material changes have occurred since the period ending November 30, 2007 to the risk factors previously presented, other than the addition of the following:

Funds associated with certain of our auction rate securities may not be accessible in the short term, and we may be required to adjust the carrying value of these securities through an impairment charge. As of February 29, 2008, we had approximately $95.3 million in investments related to auction rate securities (ARS) that are classified as non-current. Our ARS are floating rate securities with longer-term maturities which are marketed by financial institutions with auction reset dates at primarily 28 or 35 day intervals to provide short-term liquidity. Beginning in February 2008, auctions for these securities began to fail, which has resulted in higher interest rates being earned on these securities, but the investments lack short-term liquidity. While we do not currently anticipate the lack of liquidity of the ARS to adversely affect our ability to conduct business, we will not be able to access these funds until a future auction for these ARS is successful or until we sell the securities in a secondary market, which currently is not active. In addition, if the credit rating of either the security issuer or the third-party insurer underlying the investments deteriorates, we may be required to adjust the carrying value of the ARS through an impairment charge.

Items 2(a) and 2(b) are not applicable.

(c) Stock Repurchases

See the section titled “Corporate Governance-Policies Governing Director Nominations” in our definitive proxy statement filed on March 24, 2008 with the Securities and Exchange Commission with regard to certain changes in the procedures by which security holders may recommend nominees to our Board of Directors.

The following exhibits are filed or furnished as part of this quarterly report on Form 10-Q:

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PROGRESS SOFTWARE CORPORATION
(Registrant)