Pegasystems Inc – IPO: ‘424B4’ on 7/19/96

As of:  Friday, 7/19/96   ·   Accession #:  950146-96-1178   ·   File #:  333-03807

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Initial Public Offering (IPO):  Prospectus   —   Rule 424(b)(4)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424B4       Pega Systems Inc. Form 424B4                          68    382K 

Document Table of Contents

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                                                Filed Pursuant to Rule 424(b)(4)
                                                       Registration No. 333-3807

3,400,000 Shares  
[Pegasystems Inc. Logo]   
Common Stock  
(par value $.01 per share)  
------------- 

Of the 3,400,000 shares of Common Stock offered hereby, 2,700,000 are     
being sold by Pegasystems Inc. ("Pegasystems" or the "Company") and 700,000     
shares are being sold by the Selling Stockholders. See "Principal and Selling   
Stockholders." The Company will not receive any of the proceeds from the sale   
of shares by the Selling Stockholders.                                          

Prior to this offering, there has been no public market for the Common    
Stock of the Company. For factors considered in determining the initial public  
offering price, see "Underwriting."                                             

See "Risk Factors" beginning on page 5 for certain considerations relevant
to an investment in the Common Stock.                                           

The Common Stock has been approved for quotation on the Nasdaq National Market  
under the symbol "PEGA."                                                        

-------------   

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND    
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES   
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE      
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY     
IS A CRIMINAL OFFENSE.                                                          

-------------   

                                                                [Download Table]


            Initial Public  Underwriting  Proceeds to  Proceeds to Selling
            Offering Price  Discount (1)  Company (2)     Stockholders    
                                                                          
Per Share  $12.00            $0.84        $11.16         $11.16           
Total (3)  $40,800,000       $2,856,000   $30,132,000    $7,812,000       


-------------                                                                   

(1) The Company and the Selling Stockholders have agreed to indemnify the       
 Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."                             

(2) Before deducting expenses of the offering payable by the Company,           
estimated to be $600,000.                                               

(3) The Company has granted to the Underwriters an option for 30 days to        
 purchase up to an additional 510,000 shares at the initial offering price
per share, less the underwriting discount, solely to cover              
over-allotments, if any. If such option is exercised in full, the total 
initial public offering price, underwriting discount and proceeds to    
  Company will be $4,629,000, $3,284,000  and $35,823,600, respectively. See
"Underwriting."                                                         

-------------   

The shares offered hereby are offered by the several Underwriters, as       
specified herein, subject to receipt and acceptance by them and subject to      
their right to reject any order in whole or in part. It is expected that        
delivery of the shares of Common Stock offered hereby will be made at the       
offices of Goldman, Sachs & Co., New York, New York, on or about July 24,       
1996.                                                                           

Goldman, Sachs & Co.                                                            
Cowen & Company                                                             
Montgomery Securities                                                   

-------------   

 The date of this Prospectus is July 18, 1996.

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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR            
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE         
COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE         
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ     
NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH              
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.                     

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P. 24--Illustration omitted:                                                    

Illustration, set over a map of the world, of the Company's three-tier,         
client/server environment. A central server is connected to three satellite     
servers, with rules and code replicated on all servers.                         

Foldout: Illustration omitted:                                                  

Illustration of the Pegasystems' "service backbone." A circle, revolving around 
customers, is divided into six segments corresponding to the customer service   
management functions supported by the Company's products, each segment          
containing labeled icons representing examples of such functions. In the        
"receiving" segment are icons representing computer inbound faxes, PegaView-ACE 
and Internet connections, high speed computer network links and shows computer  
screens demonstrating PegaView-ACE and Internet access; in the "reporting"      
segment, icons representing productivity, service and quality management,       
relational database interfaces and opportunity analysis; in the "resolving"     
segment, icons representing advisor checklists, system-driven processing and    
multi-currency accounting; in the "responding" icon, outbound faxes, internet   
electronic mail and personalized letters and automated followups; in the        
"researching" segment, icons representing on-line disks, micrographics and      
virtual archive opticals and tapes; and in the "routing" segment, prioritization
and queuing, rule-driven workflow, electronic baskets and clustered work.       

Inside cover: Illustration omitted:                                             

Illustration of dispersed departments of an organization interacting with       
customers contacting the organization through various means, each such          
department connected to the organization's integrated service backbone, which is
represented by a circle divided into six segments corresponding to the customer 
management functions supported by the Company's products support (receiving,    
reporting, resolving, responding, researching and routing).                     

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed   
information and the Consolidated Financial Statements and Notes thereto         
appearing elsewhere in this Prospectus. Investors should carefully consider     
the information set forth under the heading "Risk Factors."                     

The Company   

Pegasystems develops customer service management software to automate     
customer interactions across transaction-intensive enterprises. Many of the     
world's largest banks, mutual funds and credit card organizations use the       
Company's solutions to integrate, automate, standardize and manage a broad      
array of mission-critical customer service activities, including account        
set-up, record retrieval, correspondence, disputes, investigations and          
adjustments. The Company's systems can be used by thousands of concurrent       
users to manage customer interactions and to generate billions of dollars a     
day in resulting transactions. Work processes initiated by the Company's        
systems are driven by a highly adaptable "rule base" defined by the             
user-organization for its specific needs. The rule base facilitates a high      
level of consistency in customer interactions, yet drives different processes   
depending on the customer profile or the nature of the request. The Company's   
open, multi-tier, client/server systems operate on a broad variety of           
platforms, including UNIX, Windows/NT and IBM/MVS. The Company offers           
consulting, training and support services to facilitate the use of its          
solutions.                                                                      

Intensifying competition is forcing businesses to reduce costs while      
focusing on customer service management as an important means of                
differentiation. Due to the volume and precise nature of their transactions,    
it is especially critical for financial services organizations to implement     
cost-effective systems to manage customer interactions accurately and           
efficiently. The Company's solutions provide a service backbone that drives     
intelligent processing and seamlessly integrates an organization's              
geographically dispersed and product specific service operations and isolated   
computer systems. By bridging these "islands of automation" within large        
organizations, the Company's solutions increase the efficiency of service       
representatives and enable organizations to address multiple customer needs     
during a single contact.                                                        

The Company's objective is to become the leading provider of              
mission-critical client/server customer service management software to          
organizations performing a high volume of complex interactions with demanding   
customers. To achieve this objective, the Company is pursuing a number of       
strategies, including expanding its marketing to additional business units      
within its existing customers; leveraging its relationships and expertise       
with large financial services organizations to penetrate the medium-sized       
financial services market; targeting markets outside of financial services      
which have similar customer service management needs; and developing standard   
product templates to facilitate the more rapid implementation of its            
solutions.                                                                      

The Company markets its software and services primarily through a direct  
sales force which consisted of six people as of April 30, 1996. The Company     
intends to increase substantially the size of its sales force, which will be    
necessary if the Company is to achieve significant revenue growth in the        
future.                                                                         

The Company was incorporated in the Commonwealth of Massachusetts in April
1983 and has been profitable in each quarter since the first quarter of 1985.   

The Company's principal executive offices are located at 101 Main Street, 
Cambridge, Massachusetts 02142, and its telephone number is (617) 374-9600.     

Pegasystems, PegaCARD, PegaCLAIMS, PegaSHARES, PegaTRACE, PegaINDEX,      
PegaPRISM, PegaREELAY, PegaSEARCH, PegaVIEW-ACE, PegaSTAR, Integrated Service   
Backbone, Service Excellence Through Automation, and Virtual Archive are        
trademarks of the Company. This Prospectus also includes trademarks of          
companies other than the Company.                                               

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The Offering

                                                        [Enlarge/Download Table]

                                                                                                     

Common Stock offered by the Company                2,700,000 shares                                  
Common Stock offered by the Selling Stockholders      700,000 shares                                 
Common Stock to be outstanding after the offering  26,290,800 shares (1)                             
Use of proceeds by the Company                     For general corporate purposes, including working 
                                                   capital, product development, capital expenditures
                                                   and possible acquisitions. See "Use of Proceeds." 
Nasdaq National Market symbol                      PEGA                                              


-------------                                                                   

(1) Based on the number of shares of Common Stock outstanding on May 13,        
 1996, plus 100,800 shares of Common Stock issuable upon exercise of stock
options to be exercised immediately prior to the closing of this        
offering. Excludes 2,308,200 shares of Common Stock issuable upon       
exercise of stock options outstanding as of May 13, 1996, at a weighted 
average exercise price of $2.60 per share, of which options to purchase 
487,950 shares were then exercisable. See "Capitalization" and          
"Management--Stock Plans."                                              

Summary Consolidated Financial Data   
(in thousands, except per share data)   

                                                        [Enlarge/Download Table]


                                                                        Three Months  
                                                                           Ended      
                                          Year ended December 31,        March 31,    
                                         --------------------------   ----------------
                                         1993      1994      1995      1995     1996  
                                         ------    ------    ------    -----   -------
                                                                                      
Consolidated Statement of Income                                                      
  Data:                                                                               
Total revenue                          $10,212   $16,263   $22,247  $ 4,005    $ 4,941
Income from operations                     793     2,236     3,257        3        451
License interest income                  1,305     1,457     1,486      370        368
Net income                               1,233     2,193     2,878      224        481
Net income per common and common                                                      
  equivalent share                     $  0.05   $  0.09   $  0.11  $  0.01    $  0.02
Weighted average number of common and                                                 
  common equivalent shares                                                            
  outstanding                           24,231    24,102    25,551   25,600     25,505

                                                                [Download Table]


                                           March 31, 1996     
                                       -----------------------
                                                 As Adjusted  
                                       Actual          (1)    
                                       ------   --------------
                                                              
Consolidated Balance Sheet Data:                              
Cash and cash equivalents             $ 2,644      $30,807    
Working capital                         6,952       35,845    
Long-term license installments, net    11,444       11,444    
Total assets                           26,555       54,718    
Long-term debt                            672         --      
Stockholders' equity                   15,136       44,701    

-------------                                                                   

(1) Gives effect to (i) the sale of the 2,700,000 shares of Common Stock        
offered by the Company hereby at the initial public offering price      
of $12.00 per share, after deducting the estimated underwriting discount
and offering expenses payable by the Company, and gives effect to the   
anticipated application of the net proceeds therefrom, and (ii) the     
exercise of stock options to purchase 100,800 shares of Common Stock at 
an exercise price of approximately $0.33 per share, which exercise will 
occur immediately prior to the closing of this offering. See "Use of    
Proceeds" and "Capitalization."                                         

Unless otherwise indicated herein, all information in this Prospectus (i) has   
been adjusted to give effect to a 15-for-1 split of the outstanding Common      
Stock, in the form of a stock dividend, effective December 9, 1994, (ii) has    
been adjusted to give effect to the amendment and restatement of the Company's  
Articles of Organization (the "Restated Articles") providing for, among other   
things, the creation of a new undesignated class of Preferred Stock, (iii) has  
been adjusted to give effect to a 3-for-1 split of the outstanding Common Stock,
in the form of a stock dividend, effective July 10, 1996, and (iv) assumes no   
exercise of the Underwriters' over-allotment option. See "Description of        
Capital Stock" and "Underwriting."                                              

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RISK FACTORS

In addition to the other information contained in this Prospectus, the    
following risk factors should be carefully considered in evaluating an          
investment in the Common Stock offered by this Prospectus.                      

Potential Fluctuations in Quarterly Results; Seasonality                        

The Company's revenue and operating results have varied considerably in   
the past, and are likely to vary considerably in the future. Such               
fluctuations may be particularly pronounced because a significant portion of    
the Company's revenue in any quarter is attributable to product acceptances     
or license renewals by a relatively small number of customers, and reflects     
the Company's policy of recognizing license fee revenue upon product            
acceptance or license renewal in an amount equal to the present value of the    
total committed license payments due during the initial license term or         
renewal period, as the case may be. Product acceptance is preceded by an        
implementation period, typically ranging from three to six months but in some   
cases significantly longer, and by a lengthy sales cycle. The Company's sales   
cycle is subject to a number of significant risks over which the Company has    
little or no control, including customers' budgeting constraints and internal   
authorization reviews. Product implementation may be delayed for a variety of   
reasons including unforeseen technical problems and changes dictated by the     
customer in the scope or schedule of the implementation. Other factors          
contributing to fluctuations in the Company's revenue and operating results     
include changes in the level of operating expenses, demand for the Company's    
products and services, the introduction of new products and product             
enhancements by the Company and its competitors, competitive conditions in      
the industry and general economic conditions. The Company budgets its product   
development and other expenses anticipating future revenue. If revenue falls    
below expectations, the Company's business, operating results and financial     
condition are likely to be materially and adversely affected because only a     
small portion of the Company's expenses vary with its revenue. As a result,     
the Company believes that period-to-period comparisons of its operating         
results are not necessarily meaningful and should not be relied upon to         
predict future performance. There can be no assurance that the Company will     
be able to maintain profitability on an annual or quarterly basis.              

The Company's business has experienced and may continue to experience     
significant seasonality. In recent years the Company has recognized a greater   
percentage of its revenue in its third and fourth quarters than in the first    
and second quarters due to the Company's sales commission structure and the     
impact of that structure on the timing of product acceptances and license       
renewals by customers. This pattern is reinforced by the Company's              
maintenance contracts, which entitle customers to, among other things, a        
fixed number of hours of service per calendar year. Once the annual allotment   
of service hours is exhausted, customers pay for additional services on an      
hourly basis, typically resulting in higher services revenue in the Company's   
second, third and fourth quarters.                                              

Due to the foregoing factors, it is likely that in some future quarters   
the Company's operating results will fall below the expectations of the         
Company, market analysts and investors. In such event, the price of the         
Company's Common Stock would likely be materially and adversely affected. See   
"Management's Discussion and Analysis of Financial Condition and Results of     
Operations."                                                                    

Dependence on New Products; Rapid Technological Change; Product Development     
and Implementation Risks                                                        

The market for customer management software and related consulting and    
training services is subject to rapid technological change, changing customer   
needs and preferences, frequent new product introductions, and evolving         
programming languages and industry standards that may render existing           
products and services obsolete. The Company's position in its current market    
or other markets that it may enter could be eroded rapidly by product           
advances. The life cycles of the Company's products are difficult to            
estimate, and the Company's growth and future performance will depend in part   
upon its ability to enhance existing products, and to develop and introduce     
new products that keep pace with technological advancements, meet changing      
customer requirements, respond to competitive products, and achieve market      
acceptance. The Company's product development efforts require and are           
expected to continue to require substantial investments by the Company for      
research, refinement and testing, and there can be no assurance that the        
Company will have the resources sufficient to make such investments. The        
Company has in the past experienced developmental delays, and there can be no   
assurance that the                                                              

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Company will not experience difficulties which would delay or prevent the       
successful development, introduction or implementation of new or enhanced       
products. In addition, there can be no assurance that such products will meet   
the requirements of the marketplace and achieve market acceptance, or that      
the Company's current or future products will conform to changing industry      
requirements. If the Company is unable for technological or other reasons to    
develop, introduce or implement new or enhanced products in a timely and        
effective manner, the Company's business, operating results and financial       
condition could be materially and adversely affected.                           

Products as complex as the Company's may contain errors that may be       
detected at any point in the products' life cycles. In the past, the Company    
has discovered certain errors in its products and has experienced shipping      
delays while such errors were corrected. Such errors have also required the     
Company to ship corrected products to existing customers. There can be no       
assurance that errors will not be found in the future resulting in the loss     
of, or delay in, market acceptance and/or sales and revenue, diversion of       
development resources, injury to the Company's reputation, or increased         
service and warranty costs, any of which could have a material adverse effect   
on the Company's business, operating results and financial condition. See       
"Business--Products" and "--Product Development."                               

Computing Platform Shift; Compatibility with Third Party Relational Databases   

The majority of large financial services organizations have traditionally 
used IBM MVS or Digital Equipment Corporation VMS systems for transaction       
processing. Increasingly, however, such organizations are migrating towards     
more open UNIX and Windows/NT server operating systems to meet their            
transaction processing requirements. Responding to this trend, and while        
continuing to support its core IBM and Digital Equipment Corporation            
platforms, the Company commenced efforts in 1992 to evolve versions of its      
products to use the C++ programming language and run on a variety of open       
platforms. In December 1995, for the first time one of the new C++ versions     
of the Company's products was used in production by a customer of the           
Company. The Company has since shipped new C++ versions of its products for     
use on RS 6000/AIX and Windows/NT platforms and has brought two RS 6000/AIX     
C++ systems into initial production use. The Company is actively working with   
customers to bring additional installations of these products into              
production. There can be no assurance that the new versions of the Company's    
products will meet the requirements of the marketplace and achieve market       
acceptance, or that organizations will not migrate to other computing           
platforms not supported by the Company. Moreover, there can be no assurance     
that, notwithstanding the benefits of the new versions of the Company's         
products, some of the Company's existing customers may choose not to migrate    
to UNIX and Windows/NT systems. In such event, the Company may be required to   
support both the old and new versions of its products, which could have a       
material adverse effect on its business, operating results and financial        
condition.                                                                      

The Company believes that the compatibility of customer service management
software systems with popular relational databases is an important factor in    
the purchase decision of many organizations. Consequently, the Company          
recently developed (and will shortly ship) Windows/NT and RS 6000/AIX           
versions of its software capable of storing work items in Oracle relational     
databases, and is working to develop similar capabilities for other versions    
of its software with other third party relational databases, such as            
Microsoft's SQL Server. There can be no assurance that the Company will not     
experience difficulties which would delay or prevent the successful             
development or introduction of these additional capabilities. Any such          
difficulty could have a material and adverse effect on the Company's            
business, operating results and financial condition. See "Business--Product     
Development."                                                                   

Dependence on the Financial Services Market; Industry Consolidation             

The Company has derived all of its revenue to date from customers in the  
financial services market, and the Company's future growth depends, in large    
part, upon increased sales to this market. The financial condition of the       
Company's customers and their willingness to pay for the Company's products     
and services are affected by competitive pressures, decreasing operating        
margins within the industry, currency fluctuations, active geographic           
expansion and deregulation. The Company believes that its customers'            

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purchasing patterns are somewhat discretionary. As a result, demand for the     
Company's products and services could be affected by the condition of the       
financial services market or a deterioration in economic or market conditions   
generally.                                                                      

The financial services market is undergoing intense domestic and          
international consolidation. In recent years, several customers of the          
Company have been merged or consolidated out of independent existence, and      
there is no assurance that the Company will not experience declines in          
revenue occasioned, in whole or in part, by future mergers or consolidations.   
Any decline in the demand for the Company's products would have a material,     
adverse effect on the Company's business, operating results and financial       
condition. See "Business--Customers."                                           

Uncertainty of Growth into other Markets                                        

As part of its growth strategy the Company is exploring the possibility of
applying its technology to the customer service management requirements of      
markets other than financial services, such as insurance, medical, utilities    
and retail. The Company believes that in connection with such efforts it will   
be necessary for the Company to hire additional personnel with expertise in     
these other markets. There can be no assurance that the Company will be         
successful in adapting its technology to these other markets or in attracting   
and retaining personnel with the necessary industry expertise. The inability    
of the Company to penetrate these other markets could have a material adverse   
effect on its business, operating results and financial condition. See          
"Business--Business Strategy."                                                  

Risks of Customer License Non-Renewal                                           

To date, a substantial majority of the Company's licenses have been       
renewed upon expiration. Revenue attributable to license renewals accounted     
for 32%, 26% and 28% of the Company's total revenue in 1993, 1994 and 1995,     
respectively, and in each period was attributable to a relatively small         
number of customers. There can be no assurance that a substantial majority of   
the Company's customers will continue to renew expiring licenses; any such      
non-renewal would require the Company to obtain revenue from other sources in   
order to achieve its revenue targets. A decrease in the Company's license       
renewal rate without offsetting revenue from other sources would have a         
material adverse effect on the Company's business, results of operations and    
financial condition. See "Management's Discussion and Analysis of Financial     
Condition and Results of Operations," "Business--Customers" and Notes 1 and 8   
of Notes to Consolidated Financial Statements.                                  

Control by Existing Stockholders                                                

Upon completion of this offering, Alan Trefler, the Company's President   
and a member of its Board of Directors, will own approximately 84% of the       
Company's outstanding Common Stock (83% if the over- allotment option granted   
to the Underwriters is exercised in full). As of May 13, 1996, there were       
outstanding options to purchase 2,409,000 shares of the Company's Common        
Stock, of which options to purchase 588,750 shares were then exercisable.       
Assuming the exercise of all such outstanding options, Mr. Trefler would own    
approximately 77% of the outstanding Common Stock (76% if the over-allotment    
option granted to the Underwriters is exercised in full). There can be no       
assurance that any such stock options will be exercised. Accordingly, Mr.       
Trefler will be able to control the Company through his ability to determine    
the outcome of elections of the Company's directors, amend the Company's        
Restated Articles of Organization and Restated By-laws and take certain other   
actions requiring the vote or consent of stockholders of the Company. This      
concentration of ownership may have the effect of delaying or preventing a      
change in control of the Company. See "Principal and Selling Stockholders."     

Dependence on Key Personnel                                                     

The Company's future success depends to a significant extent on Mr.       
Trefler, its other executive officers and certain technical, managerial,        
consulting, sales and marketing personnel. The loss of the services of any of   
these individuals or group of individuals could have a material adverse         
effect on the Company's business, operating results and financial condition.    
None of the Company's executive officers has entered into an employment         
contract with the Company, although each is subject to a non-disclosure and     
non-competition agreement with the Company. The Company does not have, and is   
not contemplating                                                               

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securing, any significant amount of key-man life insurance on any of its        
executive officers or other key employees. The Company believes that its        
future success also will depend significantly upon its ability to attract,      
motivate and retain additional highly skilled technical, managerial,            
consulting, sales and marketing personnel. In particular, delays in hiring      
and training qualified sales personnel would adversely affect the Company's     
operating results due to the substantial time period between the                
identification of new customers and the successful implementation and           
acceptance of the Company's products by those customers. Because developing,    
selling and maintaining the Company's products requires extensive knowledge     
of computer hardware and operating systems, programming languages and           
application software, the number of qualified potential employees is limited.   
Moreover, competition for such personnel is intense, and there can be no        
assurance that the Company will be successful in attracting and retaining the   
personnel it requires to continue to grow and operate profitably.               

Intense Competition                                                             

The market for customer service management software and related consulting
and training services is relatively new, intensely competitive and highly       
fragmented. The Company encounters significant competition from internal        
information systems departments of potential or existing customers that         
develop custom software. The Company also competes with companies that target   
the customer interaction or workflow markets, and professional services         
organizations that develop custom software in conjunction with rendering        
consulting services. Such competitors vary in size and in the scope and         
breadth of products and services offered. The Company anticipates increased     
competition for market share and pressure to reduce prices and make sales       
concessions, which could materially and adversely affect the Company's          
business, operating results and financial condition.                            

Many of the Company's competitors have greater resources than the Company,
and may be able to respond more quickly and efficiently to new or emerging      
technologies, programming languages or standards, or to changes in customer     
requirements or preferences. Many of the Company's competitors can devote       
greater managerial or financial resources than the Company can to develop,      
promote and distribute customer service management software products and        
provide related consulting and training services. There can be no assurance     
that the Company's current or future competitors will not develop products or   
services which may be superior in one or more respects to the Company's or      
which may gain greater market acceptance. Some of the Company's competitors     
have established or may establish cooperative arrangements or strategic         
alliances among themselves or with third parties, thus enhancing their          
abilities to compete with the Company. It is likely that new competitors will   
emerge and rapidly acquire market share. There can be no assurance that the     
Company will be able to compete successfully against current or future          
competitors or that the competitive pressures faced by the Company will not     
materially and adversely affect its business, operating results and financial   
condition. See "Business--Competition."                                         

Management of Growth                                                            

The growth in the size, geographic scope and complexity of the Company's  
business and the expansion of its product offerings and customer base have      
placed and are expected to continue to place a significant strain on the        
Company's management, operations and capital needs. The Company's continued     
growth, if any, will require it to hire, train and retain many employees both   
in the United States and abroad, particularly additional sales and financial    
personnel, and will also require the Company to enhance its financial and       
managerial controls and reporting systems. There is no assurance that the       
Company can manage its growth effectively or that the Company will be able to   
attract and retain the necessary personnel to meet its business challenges.     
If the Company is unable to manage its growth effectively, the Company's        
business, operating results and financial condition could be materially and     
adversely affected. See "Business--Business Strategy" and "--Sales and          
Marketing."                                                                     

Risks Associated with International Operations; Currency and Other Risks        

Sales to customers headquartered outside of the United States represented 
approximately 24% and 10% of the Company's total revenue in 1994 and 1995,      
respectively. The Company, in part through its wholly-owned subsidiary based    
in the United Kingdom, markets products and renders consulting and training     
services to customers based in Canada, the United Kingdom, France,              
Switzerland, Ireland and                                                        

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Luxembourg. The Company is in negotiations with potential customers based in    
other foreign countries, and may establish a physical presence in continental   
Europe, Australia or elsewhere in the Pacific Rim. The Company believes that    
its continued growth will necessitate expanded international operations         
requiring a diversion of managerial attention and financial resources. The      
Company anticipates hiring additional personnel to accommodate international    
growth, and the Company may also enter into agreements with local               
distributors, representatives or resellers. If the Company is unable to do      
one or more of these things in a timely manner, the Company's growth, if any,   
in its foreign operations will be restricted, and the Company's business,       
operating results and financial condition could be materially and adversely     
affected.                                                                       

In addition, there can be no assurance that the Company will be able to   
maintain or increase international market demand for its products. Most of      
the Company's international sales are denominated in U.S. dollars.              
Accordingly, any appreciation of the value of the U.S. dollar relative to the   
currencies of those countries in which the Company distributes its products     
may place the Company at a competitive disadvantage by effectively making its   
products more expensive as compared to those of its competitors.                

Additional risks inherent in the Company's international business         
activities generally include unexpected changes in regulatory requirements,     
increased tariffs and other trade barriers, the costs of localizing products    
for local markets and complying with local business customs, longer accounts    
receivable patterns and difficulties in collecting foreign accounts             
receivable, difficulties in enforcing contractual and intellectual property     
rights, heightened risks of political and economic instability, the             
possibility of nationalization or expropriation of industries or properties,    
difficulties in managing international operations, potentially adverse tax      
consequences (including restrictions on repatriating earnings and the threat    
of "double taxation"), enhanced accounting and internal control expenses, and   
the burden of complying with a wide variety of foreign laws. There can be no    
assurance that one or more of these factors will not have a material adverse    
effect on the Company's foreign operations, and, consequentially, the           
Company's business, operating results and financial condition. See              
"Management's Discussion and Analysis of Financial Condition and Results of     
Operations" and "Business--Sales and Marketing."                                

Dependence upon Proprietary Rights; Risks of Infringement                       

The Company's success is heavily dependent upon its ability to protect its
proprietary technology. To protect its proprietary rights, the Company relies   
on a combination of copyright, trademark and trade secret laws, as well as      
confidentiality agreements. The Company also has one United States patent       
application pending. However, existing patent, copyright, trademark and trade   
secret laws afford only limited protection. In addition, many countries' laws   
do not protect the Company's proprietary rights to the same extent as do the    
laws of the United States. Accordingly, there can be no assurance that the      
Company will be able to protect its proprietary rights against unauthorized     
third party copying, use or exploitation, any of which could have a material    
adverse effect on the Company's business, operating results and financial       
condition.                                                                      

Attempts may be made to copy or reverse engineer aspects of the Company's 
products, or to obtain, use or exploit information or methods which the         
Company deems proprietary. Additionally, there can be no assurance that the     
Company's customers and others will not develop products which infringe upon    
the Company's rights, or that compete with the Company's products. Policing     
the use of the Company's products is difficult and expensive, and there is no   
assurance that such efforts would prove effective. Litigation or other action   
may be necessary in the future to enforce the Company's proprietary rights,     
to seek and confirm patent protection for the Company's technologies, or to     
determine the validity and scope of the proprietary rights of others. The       
Company expects that its software products may increasingly be subject to       
claims as the number of products and competitors in the Company's markets       
grows and the functionality of such products overlaps. Such litigation or       
proceedings, whether or not meritorious, could result in substantial costs      
and diversions of resources and management's attention, and could have a        
material adverse impact on the Company's business, operating results and        
financial condition. See "Business--Intellectual Property and Licenses."        

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Reliance on Certain Relationships                                               

The Company has a number of third party relationships that are significant
to its sales, marketing and support activities and product development          
efforts. The Company relies upon relational database management systems         
applications and development tool vendors, software and hardware vendors, and   
consultants to provide marketing and sales opportunities for the Company's      
direct sales force, and strengthen its product offerings through the use of     
industry-standard tools and utilities. The Company's strategy in entering       
into these relationships is to keep pace with the technological and marketing   
developments of major software vendors, and to acquire technical assistance     
for the Company's product development efforts. There can be no assurance that   
these companies, most of which have significantly greater financial and         
marketing resources than the Company, will not develop or market software       
products which compete with the Company's products in the future or will not    
otherwise discontinue their relationships with or support of the Company. The   
failure of the Company to maintain its existing relationships, or to            
establish new relationships in the future, because of a divergence of           
interests, acquisition of one or more of these third parties, or for any        
other reason, could have a material adverse effect on the Company's business,   
results of operations and financial condition.                                  

Product Liability; Warranty Claims                                              

The Company's license agreements with its customers typically contain     
provisions intended to limit the nature and extent of the Company's liability   
for product liability claims or claims arising from breaches of warranties.     
There is no assurance that such limitations would withstand judicial scrutiny   
or that they would bind a party not in direct privity with the Company.         
Furthermore, some of the Company's licenses with its customers are governed     
by laws other than those of the United States, and there is no assurance that   
purported limitations on liability would be enforced were foreign law to        
govern. Although the Company has not experienced any material product           
liability claims to date, the license and support of products by the Company    
and the incorporation of third party products and components may entail the     
risk of such claims. A product liability suit or action claiming a breach of    
warranty, whether or not meritorious, could result in substantial costs and a   
diversion of management's attention and the Company's resources, which costs    
and diversion could have a material adverse effect on the Company's business,   
operating results and financial condition. Additionally, a suit alleging a      
product defect or a breach of an express or implied warranty, if successful,    
may also have an adverse precedential effect on other or future actions.        

Lack of Prior Dividends; No Plans to Pay Dividends in the Foreseeable Future    

The Company has never declared or paid cash dividends and does not        
anticipate paying cash dividends in the foreseeable future. The Company's       
current bank line prohibits payment of dividends without the bank's consent.    

Immediate and Substantial Dilution                                              

Purchasers of shares of Common Stock offered hereby will suffer an        
immediate and substantial dilution in the net tangible book value of $10.31     
per share of the Common Stock from the initial public offering price. See       
"Dilution" and "Capitalization."                                                

Potential Adverse Effects of Anti-Takeover Provisions; Possible Issuance of     
Preferred Stock                                                                 

The Company's Restated Articles of Organization (the "Restated Articles") 
and Restated By-Laws contain provisions that may make it more difficult for a   
third party to acquire, or discourage acquisition bids for, the Company. The    
Restated Articles and Restated By-Laws provide that a stockholder seeking to    
have business conducted at a meeting of stockholders must give notice to the    
Company not less than 90 days prior to the scheduled meeting. The Restated      
By-Laws further provide that a special stockholders meeting may be called by    
the president or the Board of Directors or upon the request of stockholders     
holding at least 40% of the voting power of the Company. The Restated           
Articles and Restated By-Laws provide for a classified Board of Directors,      
and for the removal of directors only for cause upon the affirmative vote of    
the holders of a majority of the shares entitled to vote. Moreover, upon        
completion of this offering, the Company will be subject to an anti-takeover    
provision of the Massachusetts General Laws which prohibits, subject to         
certain exceptions, a holder of 5% or more of the outstanding voting stock of   
a corporation from engaging in certain transactions with the corporation,       
including a merger or stock                                                     

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or asset sale. These provisions could limit the price that certain investors    
might be willing to pay in the future for shares of the Company's Common        
Stock and may have the effect of preventing changes in the management of the    
Company. In addition, shares of the Company's Preferred Stock may be issued     
in the future without further stockholder approval and upon such terms and      
conditions, and having such rights, privileges and preferences, as the Board    
of Directors may determine. The rights of the holders of Common Stock will be   
subject to, and may be adversely affected by, the rights of any holders of      
Preferred Stock that may be issued in the future. The issuance of Preferred     
Stock, while providing desirable flexibility in connection with possible        
acquisitions and other corporate purposes, could have the effect of making it   
more difficult for a third party to acquire, or discouraging a third party      
from acquiring, a majority of the outstanding voting stock of the Company.      
The Company has no present plans to issue any shares of Preferred Stock. See    
"Description of Capital Stock."                                                 

Shares Eligible for Future Sale                                                 

Sales of substantial amounts of shares of Common Stock in the public      
market following this offering could adversely affect the market price of the   
Common Stock. On the date of this Prospectus, in addition to the 3,400,000      
shares offered hereby, 12,000 shares of Common Stock will be eligible for       
future sale in the public market pursuant to Rule 144(k) under the Securities   
Act of 1933, as amended (the "Securities Act"). Beginning 90 days after the     
date of this Prospectus, an additional 139,500 shares will become eligible      
for sale in the public market, pursuant to Rules 144 and 701 under the          
Securities Act. Upon the expiration of lock-up agreements between certain       
stockholders of the Company and the representatives of the Underwriters 180     
days after the date of this Prospectus, an additional 22,739,300 shares will    
become eligible for sale in the public market, subject to the provisions of     
Rule 144 under the Securities Act. The representatives of the Underwriters      
may waive some or all of the provisions of such lock-up agreements on a         
case-by-case or general basis, all without notice to the Company, its           
stockholders or any market on which the Common Stock may then be trading. See   
"Shares Eligible for Future Sale" and "Underwriting."                           

Shortly after the date of this Prospectus, the Company intends to file a  
Form S-8 registration statement under the Securities Act registering            
approximately 5,750,000 shares of Common Stock issuable under the Company's     
stock plans. As of May 13, 1996, giving effect to the exercise of options for   
the purchase of 100,800 shares immediately prior to the closing of this         
offering, options to purchase a total of 2,308,200 shares were outstanding      
(of which 487,950 were then exercisable) and 3,341,000 shares were reserved     
for future issuance under such stock plans. See "Shares Eligible for Future     
Sale."                                                                          

No Prior Trading Market; Potential Volatility of Stock Price                    

Prior to this offering, there has been no public market for the Company's 
Common Stock, and there can be no assurance that an active trading market       
will develop or be sustained after this offering. The initial public offering   
price negotiated between the Company, the Selling Stockholders and the          
representatives of the Underwriters may not be indicative of prices that will   
prevail in the trading market. See "Underwriting" for a discussion of the       
factors considered in determining the initial public offering price.            
The market price of the Company's Common Stock could be subject to wide         
fluctuations in response to quarter-to-quarter variations in operating          
results, the gain or loss of significant contracts, announcements of            
technological developments or new products by the Company and its               
competitors, changes in earnings estimates by analysts, market conditions in    
the industry and general economic conditions. In addition, the stock market     
has experienced volatility that has particularly affected the market prices     
for the stock of many technology companies and that often has been unrelated    
to the operating performance of such companies. These market fluctuations may   
adversely affect the market price of the Company's Common Stock. See            
"Underwriting."                                                                 

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USE OF PROCEEDS 

The net proceeds to the Company from the sale of the 2,700,000 shares of  
Common Stock offered by the Company pursuant to this offering are estimated to  
be $29,532,000 ($35,223,600 if the Underwriters' over-allotment option is       
exercised in full), after deducting the estimated underwriting discount and     
offering expenses payable by the Company. The principal purposes of this        
offering are to increase the Company's equity capital, to create a public market
for the Common Stock, to increase the visibility of the Company in the          
marketplace and to facilitate future access by the Company to public equity     
markets.                                                                        

The Company anticipates using the net proceeds from this offering to repay
the Company's existing bank indebtedness and for general corporate purposes.    
At March 31, 1996, the Company's bank indebtedness consisted of four term       
promissory notes in the aggregate principal amount of $1,402,000, which are     
due December 1996 ($155,000), November 1997 ($211,000), June 1998 ($885,000)    
and December 1998 ($151,000). Interest accrues on such loans at the bank's      
prime rate (8.25% at March 31, 1996) plus 0.5% per annum. The proceeds of       
such loans were used by the Company primarily to acquire capital equipment.     

The Company may seek acquisitions of businesses, products and technologies
that are complementary to those of the Company, and a portion of the net        
proceeds may be used for such acquisitions. While the Company engages from      
time to time in discussions with respect to potential acquisitions, the         
Company has no plans, commitments or agreements with respect to any such        
acquisitions as of the date of this Prospectus, and there can be no assurance   
that any such acquisitions will be made. Pending such uses, the Company         
intends to invest the net proceeds from this offering in short-term,            
investment-grade, interest-bearing securities.                                  

DIVIDEND POLICY   

The Company has never declared or paid any cash dividends on its Common   
Stock and does not anticipate paying any cash dividends in the foreseeable      
future. The Company currently intends to retain future earnings to fund the     
development and growth of its business. The Company's current loan agreement    
with a bank prohibits the payment of dividends without the bank's consent.      

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CAPITALIZATION

The following table sets forth the capitalization of the Company as of    
March 31, 1996 and as adjusted to give effect to the sale of 2,700,000 shares   
of Common Stock offered by the Company hereby at the initial public offering    
price of $12.00 per share and the receipt and application of the proceeds       
therefrom, after deducting the estimated underwriting discount and offering     
expenses payable by the Company. See "Use of Proceeds." This information        
should be read in conjunction with the Company's Consolidated Financial         
Statements and the Notes thereto appearing elsewhere in this Prospectus.        

                                                                [Download Table]


                                                            March 31, 1996    
                                                         ---------------------
                                                                    Adjusted  
                                                          Actual       (1)    
                                                          ------   -----------
                                                         (in thousands except 
                                                          share-related data) 
                                                                              
Long-term debt, less current maturities                 $   672         --    
Stockholders' equity                                                          
 Common Stock, $.01 par value, 45,000,000 shares                              
  authorized, 23,490,000 shares issued and                                    
  outstanding (actual); and 26,290,800 shares issued                          
  and outstanding (as adjusted) (2) (3)                     235      $   263  
Additional paid-in capital                                  106       29,643  
Deferred compensation                                       (86)         (86) 
Retained earnings                                        15,003       15,003  
Cumulative foreign currency translation adjustment         (122)        (122) 
                                                        -------      -------- 
  Total stockholders' equity                             15,136       44,701  
                                                        -------      -------- 
   Total capitalization                                 $15,808      $44,701  
                                                        =======      ======== 

-------------                                                                   

(1) Adjusted to give effect to the sale of 2,700,000 shares of Common Stock     
offered by the Company hereby at the initial public offering price      
of $12.00 per share, after deducting the estimated underwriting discount
and offering expenses payable by the Company, and the anticipated       
application of the net proceeds therefrom.                              

(2) Includes 100,800 shares of Common Stock issuable upon exercise of stock     
options to be exercised immediately prior to the closing of this        
offering.                                                               

(3) Excludes 2,308,200 shares of Common Stock issuable pursuant to the          
exercise of options outstanding at May 13, 1996, of which options to    
purchase 487,950 shares were then exercisable. See "Management--Stock   
Plans."                                                                 

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DILUTION

The net tangible book value of the Company at March 31, 1996 was          
$14,814,418 or $0.63 per share of Common Stock, after giving effect to the      
anticipated exercise of options to purchase 100,800 shares of Common Stock      
immediately prior to the closing of this offering. Net tangible book value      
per share is equal to the Company's total tangible assets less total            
liabilities, divided by the total number of shares of Common Stock              
outstanding. Net tangible book value dilution per share represents the          
difference between the amount per share paid by purchasers of shares of         
Common Stock in the offering made hereby and the net tangible book value per    
share of Common Stock immediately after completion of this offering. After      
giving effect to the sale by the Company of the 2,700,000 shares of Common      
Stock offered hereby at the initial public offering price of $12.00             
per share, and after deducting the estimated underwriting discount and          
offering expenses, the pro forma net tangible book value of the Company as of   
March 31, 1996 would have been $44,346,418 or $1.69 per share of Common         
Stock. This represents an immediate increase in such pro forma net tangible     
book value of $1.06 per share to existing stockholders and an immediate         
dilution of $10.31 per share to new investors purchasing shares in this         
offering. The following table illustrates this per share dilution:              

                                                        [Enlarge/Download Table]

                                                                                     
Initial public offering price per share                                        $12.00
 Net tangible book value per share as of March 31, 1996                 $0.63        
 Increase per share attributable to new investors                       $1.06        
                                                                        -----        
Pro forma net tangible book value per share as of March 31, 1996 after               
  offering                                                                       1.69
                                                                               ------
Net tangible book value dilution per share to new investors                    $10.31
                                                                               ======

The following table summarizes on a pro forma basis as of March 31, 1996, 
the number of shares of Common Stock purchased from the Company, the total      
consideration paid to the Company and the average price paid per share by       
existing stockholders and by new investors:                                     

                                                        [Enlarge/Download Table]

                                 Shares Purchased     Total Consideration                
                                -------------------   --------------------               
                                                                            Average Price
                                 Number     Percent     Amount     Percent     Per Share 
                                --------    -------   ----------   -------  -------------
                                                                                         
Existing stockholders (1) (2)  23,590,800      90%   $   107,728      0.3%      $0.005   
New investors (1)               2,700,000      10     32,400,000     99.7       $12.00   
                               ----------     ---    -----------    -----       ------   
Total                          26,290,800     100%   $32,507,728    100.0%               
                               ==========     ===    ===========    =====                

-------------                                                                   

(1) Sales by Selling Stockholders in this offering will reduce the number of    
shares of Common Stock held by existing stockholders to 22,890,800      
shares, or 87% of the total number of shares of Common Stock to be      
outstanding after this offering (85% if the Underwriters' over-allotment
option is exercised in full), and will increase the number of shares of 
Common Stock held by new investors to 3,400,000, or 13% of the total    
number of shares to be outstanding (3,910,000 shares or 15% if the      
 Underwriters' over-allotment option is exercised in full). See "Principal
and Selling Stockholders."                                              
(2) Includes 100,800 shares of Common Stock issuable upon exercise of stock     
 options to be exercised immediately prior to the closing of this offering
at an exercise price of approximately $0.33 per share.                  

As of May 13, 1996, there were options outstanding to purchase 2,409,000  
shares of Common Stock under the Company's 1994 Long-Term Incentive Plan at a   
weighted average exercise price of $2.51 per share, of which options to         
purchase 588,750 shares were then exercisable. To the extent any such options   
are exercised (other than those referred to in note (2) to the above table),    
there will be further dilution to the new investors. In addition, on May 13,    
1996, the Company's Board of Directors adopted the 1996 Non- Employee           
Director Stock Option Plan (the "Director Plan") and the 1996 Employee Stock    
Purchase Plan (the "Stock Purchase Plan"); and 250,000 shares and 500,000       
shares have been reserved for issuance under the Director Plan and the Stock    
Purchase Plan, respectively. The issuance of shares under these plans is not    
reflected in the preceding tables. See "Management--Stock Plans."               

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data at December 31, 1994 and 1995 and
for the three years ended December 31, 1995, are derived from consolidated      
financial statements of Pegasystems Inc., which have been audited by Ernst &    
Young LLP, independent auditors. The selected consolidated financial data at    
December 31, 1991 and 1992 and for each of the two years ended December 31,     
1992, are derived from consolidated financial statements of the Company         
audited by Ernst & Young LLP but not included in this Prospectus. The           
selected consolidated financial data presented below at and for the three       
months ended March 31, 1995 and 1996 are derived from the Company's unaudited   
financial statements also appearing herein and which, in the opinion of         
management, include all adjustments, consisting only of normal recurring        
adjustments, necessary for a fair presentation of the results for the           
unaudited interim periods. The results of operations for the three months       
ended March 31, 1996 are not necessarily indicative of the results that may     
be expected for the full year or for any future period. The data presented      
below should be read in conjunction with the consolidated financial             
statements, related notes and other financial information included herein.      
See "Management's Discussion and Analysis of Financial Condition and Results    
of Operations."                                                                 

                                                        [Enlarge/Download Table]


                                                                                        Three Months  
                                                                                           Ended      
                                                 Year Ended December 31,                 March 31,    
                                       --------------------------------------------   ----------------
                                       1991     1992     1993      1994      1995      1995     1996  
                                       -----    -----    ------    ------    ------    -----   -------
                                                   (in thousands, except per share data)              
                                                                                                      
Consolidated Statement of Income                                                                      
  Data:                                                                                               
Total revenue                       $ 7,784  $ 8,963   $10,212   $16,263   $22,247  $ 4,005    $ 4,941
Income from operations                1,858    1,944       793     2,236     3,257        3        451
License interest income                 987    1,220     1,305     1,457     1,486      370        368
Net income                            1,791    1,867     1,233     2,193     2,878      224        481
Net income per share                $  0.07  $  0.08   $  0.05   $  0.09   $  0.11  $  0.01    $  0.02
Weighted average common and common                                                                    
  equivalent shares outstanding      24,471   24,471    24,231    24,102    25,551   25,600     25,505

                                                        [Enlarge/Download Table]

                                                                                   March  
                                                     December 31,                  31,    
                                       -----------------------------------------  --------
                                       1991     1992     1993     1994     1995    1996   
                                       -----    -----    -----    -----    -----  --------
                                                               (in thousands)             
                                                                                          
Consolidated Balance Sheet Data:                                                          
Cash and cash equivalents            $    80  $   336  $   435  $   456  $   511  $ 2,644 
Working capital                        1,904    3,428    4,231    4,441    4,393    6,952 
Long-term license installments, net    5,512    6,319    6,782    9,135   13,399   11,444 
Total assets                          11,992   14,387   17,057   20,787   25,876   26,555 
Long-term debt                           108      118      458      450      816      672 
Stockholders' equity                   6,576    8,444    9,676   11,872   14,674   15,136 

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS   

The following discussion of the financial condition and results of        
operation of the Company should be read in conjunction with the Company's       
Consolidated Financial Statements and Notes thereto, and the other financial    
information included elsewhere in this Prospectus.                              

Overview                                                                        

The Company was founded in April 1983 to develop, market and support      
customer management software solutions for financial services organizations.    
Product development began immediately and by the end of the year the Company    
had secured its first customer. The Company has been profitable in each         
fiscal quarter since the first quarter of 1985.                                 

The Company's revenue is derived from two sources: software license fees  
and services revenue. License fees, which have historically represented the     
majority of the Company's total revenue, are generally payable on a monthly     
basis under license agreements which typically have a five-year term and are    
subject to renewal at the customer's option for an additional fixed period.     
Such license agreements are generally non-cancellable, although some may be     
terminated by the licensee for a fee prior to the expiration of the initial     
term but after a minimum specified period. The Company's licenses generally     
provide for annual license fee increases (the "inflation adjustments") based    
on recognized inflation indexes (sometimes subject to maximums). The Company    
believes that both it and its customers derive substantial benefits from the    
recurring fee model because it encourages the Company to be responsive to       
customer needs and provides the Company with additional revenue opportunities   
through license renewals.                                                       

License revenue is recognized upon product acceptance. In the case of     
license renewals, revenue is recognized upon execution of the renewal           
agreement or if, as is generally the case, renewal is automatic unless the      
customer gives notice of termination, at the expiration of the period during    
which the customer has the right to terminate. The inflation adjustments are    
recognized ratably over the months to which they apply. In accordance with      
Statement of Position No. 91-1 issued by the American Institute of Certified    
Public Accountants, the amount of software license revenue recognized upon      
product acceptance or license renewal is equal to the present value of the      
payments due during the minimum initial or renewal term, as the case may be,    
plus the present value of any early termination fee. In 1993, 1994 and 1995     
and the three months ended March 31, 1996, the discount rate for purposes of    
the present value calculation was 7%. In the future, the Company intends to     
establish the discount rate quarterly based on the Company's then current       
marginal borrowing rate, reduced, with respect to licenses which provide for    
inflation adjustments, by 1.5%, reflecting the Company's estimate of the        
benefit of future inflation adjustments during the minimum license term. The    
imputed interest portion of the license fees, which is reported as license      
interest income in the Company's consolidated statements of income, is          
recognized over the minimum initial or the renewal term, as the case may be.    
To date, a substantial majority of the Company's software licenses have been    
renewed upon expiration. License renewals accounted for 32%, 26%, 28% and 25%   
of total revenue in 1993, 1994, 1995 and the three months ended March 31,       
1996, respectively. The fact that a significant portion of the Company's        
revenue is derived from the renewal of license agreements with fixed            
expiration dates assists the Company in anticipating future revenue.            

The Company's services revenue is comprised of fees for implementation,   
consulting, maintenance and training services. All software license customers   
are required to enter into a maintenance contract requiring the customer to     
pay a monthly maintenance fee over the term of the related license agreement    
equal to approximately 18% of the license fee. Maintenance fees are             
recognized ratably over the term of the maintenance agreement. The Company's    
software license agreements typically require the Company to provide a          
specified level of implementation services for a fixed fee, typically with      
additional implementation services available at an hourly rate.                 
Implementation fees are payable upon the achievement of specified milestones.   
The Company generally recognizes implementation as well as consulting and       
training fees as the services are provided.                                     

In accordance with generally accepted accounting principles, the Company  
has capitalized certain software development costs which it has typically       
amortized over two years. No such costs, however, were                          

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capitalized in 1995 or in the three months ended March 31, 1996. At March 31,   
1996, the Company carried $354,000 of capitalized software development costs.   
These costs will be fully amortized by the end of 1996. As a result, the        
Company expects that its cost of software license revenue will be lower in      
1997 than in 1996.                                                              

The Company's export revenue has fluctuated considerably in the past due  
to the fact that such revenue has been largely attributable to a small number   
of product acceptances during a given period. The Company's export revenue      
increased from $1.0 million in 1993 to $3.9 million in 1994 due primarily to    
product acceptance by a single customer in Ireland in 1994, the year in which   
the Company organized its subsidiary in the United Kingdom. Export revenue      
declined to $2.3 million in 1995 due to the lack of large product acceptances   
during the year.                                                                

Substantially all of the Company's contracts are denominated in U.S.      
dollars, although several are denominated in British pounds sterling. The       
Company expects that in the future more of its contracts will be denominated    
in foreign currencies. The Company has not experienced any significant          
foreign exchange gains or losses, and the Company does not expect that          
foreign currency fluctuations will have a significant effect on either its      
revenue or costs in the near term.                                              

Results of Operations                                                           

The following table sets forth, for the periods indicated, certain items  
in the Company's consolidated statement of income reflected as a percentage     
of total revenue:                                                               

                                                                [Download Table]


                                                        Three Months 
                                    Year Ended             Ended     
                                   December 31,          March 31,   
                               ---------------------   --------------
                               1993    1994    1995    1995     1996 
                               ----    ----    ----    ----   ------ 
                                                                     
Revenue:                                                             
 Software license              63.1%   59.4%   60.8%   55.2%    51.0%
 Services                      36.9    40.6    39.2    44.8     49.0 
                              -----   -----   -----   -----    ----- 
  Total revenue               100.0   100.0   100.0   100.0    100.0 
                              -----   -----   -----   -----    ----- 
Cost of revenue:                                                     
 Cost of software license      12.2     6.6     2.9     4.8      2.4 
 Cost of services              21.8    23.3    27.7   31.2      28.4 
                              -----   -----   -----  -----     ----- 
  Total cost of revenue        34.0    29.9    30.6   36.0      30.8 
                              -----   -----   -----  -----     ----- 
  Gross margin                 66.0    70.1    69.4   64.0      69.2 
                              -----   -----   -----  -----     ----- 
Operating expenses:                                                  
 Research and development      36.9    33.5    31.7   35.9      32.5 
 Sales and marketing           13.2    16.2    16.1   19.9      19.7 
 General and administrative     8.2     6.7     6.9    8.2       7.8 
                              -----   -----   -----  -----     ----- 
  Total operating expenses     58.3    56.4    54.7   64.0      60.0 
                              -----   -----   -----  -----     ----- 
Income from operations          7.7    13.7    14.7    0.0       9.2 
License interest income        12.8     9.0     6.7    9.2       7.4 
Other interest income           0.3     0.1     0.1    0.2       0.2 
Interest expense               (0.3)   (0.3)   (0.5)  (0.4)     (0.8)
                              -----   -----   -----  -----     ----- 
Income before provision for                                          
  income taxes                 20.5    22.5    21.0    9.0      16.0 
Provision for income taxes      8.4     9.0     7.9    3.4       6.3 
                              -----   -----   -----   ----     ----- 
Net income                     12.1%   13.5%   13.1%   5.6%      9.7%
                              =====   =====   =====   ====     ===== 

Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995 

Revenue                                                                   

Total revenue for the three months ended March 31, 1996 (the "1996        
Period") increased 23.4% to $4.9 million from $4.0 million for the three        
months ended March 31, 1995 (the "1995 Period"). The increase                   

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was primarily due to an increase in services revenue, and to a lesser extent,   
an increase in software license revenue.                                        

Software license revenue for the 1996 Period increased 14.1% to $2.5      
million from $2.2 million for the 1995 Period. The increase in software         
license revenue was primarily attributable to software license agreement        
renewals, the licensing of standard product templates, and inflation-based      
increases in monthly license fees.                                              

Services revenue for the 1996 Period increased 34.8% to $2.4 million from 
$1.8 million for the 1995 Period. The increase in services revenue was          
primarily attributable to increased demand for consulting and implementation    
services, and to a lesser extent, increased maintenance revenue from a larger   
installed product base.                                                         

Revenue from customers headquartered outside of the United States for the 
1996 Period increased 398% to $1.3 million from $250,000 in the 1995 Period     
due largely to the expanded operations of the Company's office in the United    
Kingdom.                                                                        

Cost of Revenue                                                           

Cost of software license consists of amortization expense related to      
capitalized software development costs, royalty payments to third party         
software vendors and costs of product media, duplication and packaging. Cost    
of software license for the 1996 Period decreased 38.0% to $118,000 from        
$191,000 for the 1995 Period, and decreased as a percentage of total revenue    
from 4.8% for the 1995 Period to 2.4% for the 1996 Period. As a percentage of   
software license revenue, cost of software license decreased from 8.6% for      
the 1995 Period to 4.7% for the 1996 Period. Such decreases were due to         
decreased amortization expense related to capitalized software development      
costs.                                                                          

Cost of services consists primarily of the costs of providing             
implementation, consulting, maintenance and training services. Cost of          
services for the 1996 Period increased 12.5% to $1.4 million from $1.2          
million for the 1995 Period mainly due to increased staffing in the Company's   
Reengineering and Client Services group in the United Kingdom and in the        
Company's domestic regional offices. Cost of services as a percentage of        
total revenue declined from 31.2% for the 1995 Period to 28.4% for the 1996     
Period, and declined as a percentage of services revenue from 69.5% for the     
1995 Period to 58.0% for the 1996 Period, in both cases due to the growth in    
the Company's total revenue and increased utilization of service personnel.     

Operating Expenses                                                        

Research and development expenses consist primarily of the cost of        
personnel and equipment needed to conduct the Company's research and            
development efforts. Research and development expenses for the 1996 Period      
increased 11.4% to $1.6 million from $1.4 million for the 1995 Period. The      
modest increase in research and development expenses reflected the              
substantial completion in December 1995 of the Company's efforts to develop     
versions of its products based on the C++ programming language. As a            
percentage of total revenue, research and development expenses declined from    
35.9% for the 1995 Period to 32.5% for the 1996 Period due to the growth in     
the Company's total revenue.                                                    

Sales and marketing expenses for the 1996 Period increased 22.2% to       
$974,000 from $797,000 for the 1995 Period. As a percentage of total revenue,   
sales and marketing expenses decreased slightly from 19.9% for the 1995         
Period to 19.7% for the 1996 Period. Such increases were attributable to the    
hiring of additional direct sales personnel, increased sales commission         
payments attributable to higher sales, and investments in marketing             
materials. The Company's license agreements, by providing for the payment of    
license fees in installments over the term of the agreement, have               
historically limited the Company's working capital and consequently its         
ability to invest in sales and marketing. With the proceeds of this offering,   
the Company intends to increase substantially its sales and marketing           
spending.                                                                       

General and administrative expenses consist primarily of the salaries of  
the Company's executive, administrative and financial personnel, and            
associated expenses. General and administrative expenses for the 1996 Period    
increased 19.0% to $389,000 from $327,000 for the 1995 Period due to staff      
growth. Such expenses declined slightly as a percentage of total revenue from   
8.2% for the 1995 Period to 7.8% for the 1996 Period due to the growth in the   
Company's total revenue.                                                        

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License Interest Income                                                         

License interest income represents the portion of all license fees due    
under software license agreements which was not recognized upon product         
acceptance or license renewal. License interest income for the 1996 Period      
and the 1995 Period remained constant at $370,000.                              

Provision for Income Taxes                                                

The provisions for federal, state and foreign taxes were $137,000 and     
$311,000 for the 1995 Period and the 1996 Period, respectively. The effective   
tax rates were 38% for the 1995 Period and 39% for the 1996 Period. The         
increase in the effective tax rate was primarily due to the reduced             
availability of research and development tax credit carryforwards. At March     
31, 1996, the Company had $440,000 in research and development tax credit       
carryforwards available to offset future federal taxable income.                

Year Ended December 31, 1995 Compared to Year Ended December 31, 1994           

Revenue                                                                   

Total revenue for 1995 increased 36.8% to $22.2 million from $16.3 million
for 1994 due primarily to an increase in software license revenue, and to a     
lesser extent, an increase in services revenue.                                 

Software license revenue for 1995 increased 40.0% to $13.5 million from   
$9.7 million in 1994 due to increased product acceptances and license           
renewals.                                                                       

Services revenue for 1995 increased 32.1% to $8.7 million from $6.6       
million in 1994 primarily due to an increase in the amount of implementation    
and consulting services provided, and to a lesser extent, increases in the      
billing rates of the personnel providing these services and an increase in      
training revenue.                                                               

Cost of Revenue                                                           

Cost of software license for 1995 decreased 40.9% to $640,000 from $1.1   
million for 1994, and decreased as a percentage of total revenue from 6.6%      
for 1994 to 2.9% for 1995. As a percentage of software license revenue, cost    
of software license decreased from 11.1% for 1994 to 4.7% for 1995. Such        
decreases were due to reduced amortization of capitalized software              
development costs.                                                              

Cost of services for 1995 increased 62.5% to $6.2 million from $3.8       
million for 1994 and increased as a percentage of total revenue from 23.3%      
for 1994 to 27.7% for 1995. Cost of services as a percentage of total           
services revenue increased from 57.4% for 1994 to 70.7% for 1995. Such          
increases were due to the hiring of additional personnel to provide             
implementation and consulting services to support the Company's growing         
customer base.                                                                  

Operating Expenses                                                        

Research and development expenses for 1995 increased 29.8% to $7.1 million
from $5.4 million for 1994 as a result of increased efforts by the Company to   
develop versions of its products capable of running on multiple UNIX            
platforms in a client/server environment. As a percentage of total revenue,     
research and development expenses declined from 33.5% for 1994 to 31.7% for     
1995 due to the growth in the Company's total revenue.                          

Sales and marketing expenses for 1995 increased 36.6% to $3.6 million from
$2.6 million for 1994 due to the hiring of additional sales and marketing       
personnel, increased sales commission payments and increased investment in      
trade shows and other sales and marketing efforts. As a percentage of total     
revenue, sales and marketing expenses decreased slightly from 16.2% for 1994    
to 16.1% for 1995 due to growth in the Company's total revenue.                 

General and administrative expenses for 1995 increased 41.2% to $1.5      
million from $1.1 million for 1994 due to increased management recruiting       
costs, the establishment of two new regional offices in Chicago and             
Dallas/Fort Worth and the relocation of the Company's United Kingdom office.    
General and administrative expenses were 6.9% of total revenue in 1995 and      
6.7% in 1994.                                                                   

License Interest Income                                                   

License interest income for 1995 and 1994 remained constant at $1.5       
million.                                                                        

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Provision for Income Taxes                                                      

The provisions for federal, state and foreign taxes were $1.5 million and 
$1.8 million for 1994 and 1995, respectively. The effective tax rates were      
40% for 1994 and 38% for 1995. The decrease in the effective tax rate was       
primarily due to increased availability of research and development tax         
credits. See Note 7 of Notes to Consolidated Financial Statements.              

Year Ended December 31, 1994 Compared to Year Ended December 31, 1993           

Revenue                                                                   

Total revenue for 1994 increased 59.2% to $16.3 million from $10.2 million
for 1993. In January 1994, the Company organized Pegasystems Limited, a         
wholly-owned subsidiary based in the United Kingdom. In its first year of       
operation, Pegasystems Limited introduced the Company's products into           
Ireland, France and Luxembourg. Financial results for 1994 and subsequent       
years reflect the consolidated earnings of Pegasystems Inc. and Pegasystems     
Limited.                                                                        

Software license revenue represented 59.4% and 63.1% of total revenue for 
1994 and 1993, respectively. Software license revenue for 1994 increased        
49.8% to $9.7 million from $6.4 million for 1993. The increase in software      
license revenue in 1994 was primarily attributable to increased product         
acceptances by customers headquartered outside of the United States. The        
Company's software license revenue from customers headquartered outside of      
the United States was $3.1 million, or 32.5% of software license revenue, and   
$0.7 million, or 10.8% of software license revenue, in 1994 and 1993,           
respectively.                                                                   

Services revenue for 1994 increased 75.3% to $6.6 million from $3.8       
million for 1993 primarily due to the increased amount of implementation and    
consulting services provided to a widening customer base. Following a focused   
internal reengineering effort which began in 1993 and continued into 1994,      
the Company redeveloped its strategy for new customer implementations leading   
to greater services revenue from more effective and timely implementations      
and the creation of standard training courses.                                  

Cost of Revenue                                                           

Cost of software license decreased 13.5% to $1.1 million for 1994 from    
$1.2 million for 1993 and decreased as a percentage of total revenue from       
12.2% for 1993 to 6.6% for 1994. As a percentage of software license revenue,   
cost of software license decreased from 19.3% for 1993 to 11.1% for 1994.       
Such decreases were due to reduced amortization of capitalized software         
development costs.                                                              

Cost of services for 1994 increased 70.3% to $3.8 million from $2.2       
million for 1993 and increased as a percentage of total revenue from 21.8%      
for 1993 to 23.3% for 1994. Such increases were due to the costs associated     
with establishing the Company's United Kingdom office in January 1994 and       
with developing new training facilities in Cambridge, Massachusetts and San     
Francisco, California. Cost of services as a percentage of total services       
revenue decreased from 59.2% for 1993 to 57.4% for 1994 due to increased        
utilization of service personnel.                                               

Operating Expenses                                                        

Research and development expenses for 1994 increased 44.4% to $5.4 million
from $3.8 million for 1993 primarily as a result of efforts by the Company to   
develop versions of its products capable of running on multiple UNIX            
platforms in a client/server environment. As a percentage of total revenue,     
research and development expenses declined to 33.5% for 1994 from 36.9% for     
1993 due to growth in the Company's total revenue.                              

Sales and marketing expenses for 1994 increased 94.7% to $2.6 million from
$1.4 million for 1993, representing 16.2% and 13.2% of total revenue in the     
respective years. Such increases reflected the establishment of a sales         
operation in the United Kingdom and increased sales commission payments.        

General and administrative expenses for 1994 increased 30.8% to $1.1      
million from $830,000 for 1993 due to overhead associated with the expansion    
of the Company's headquarters in Cambridge, Massachusetts, relocation of the    
regional office in San Francisco, California, and the establishment of          

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operations in the United Kingdom. General and administrative expenses as a      
percentage of total revenue declined slightly to 6.7% for 1994 from 8.2% for    
1993 due to the growth in the Company's total revenue.                          

License Interest Income                                                   

License interest income for 1994 increased 11.6% to $1.5 million from $1.3
million in 1993 primarily due to the prepayment by one customer in 1994 of      
certain monthly software license fees.                                          

Provision for Income Taxes                                                

The provisions for federal, state and foreign taxes were $860,000 and $1.5
million for 1993 and 1994, respectively. The effective tax rates were 41% for   
1993 and 40% for 1994. The decrease in the effective tax rate was primarily     
due to the use of certain tax credits. See Note 7 of Notes to Consolidated      
Financial Statements.                                                           

Quarterly Operating Results                                                     

The following tables set forth certain unaudited consolidated financial   
information for each of the four quarters in 1995 and for the first quarter     
of 1996. In management's opinion, this unaudited quarterly information has      
been prepared on the same basis as the audited consolidated financial           
statements and includes all adjustments (consisting only of normal recurring    
adjustments) necessary for a fair presentation of the information for the       
quarters presented, when read in conjunction with the audited consolidated      
financial statements and notes thereto included elsewhere in this Prospectus.   
The Company believes that quarter-to-quarter comparisons of its financial       
results are not necessarily meaningful and should not be relied upon as an      
indication of future performance.                                               

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                                                        [Enlarge/Download Table]


                                                            Three Months Ended                    
                                       -----------------------------------------------------------
                                        March      June      September      December              
                                         31,        30,         30,            31,       March 31,
                                         1995      1995         1995          1995          1996  
                                        -------    ------    -----------    ----------   ---------
                                                  (in thousands except percentage data)           
                                                                                                  
Consolidated Statement of Income Data:                                                            
Revenue:                                                                                          
 Software license                      $ 2,209    $ 2,581     $ 3,624        $ 5,114       $2,520 
 Services                                1,796      2,113       2,032          2,778        2,421 
                                       -------    -------     -------        -------       ------ 
  Total revenue                          4,005      4,694       5,656          7,892        4,941 
                                       -------    -------     -------        -------       ------ 
Cost of revenue:                                                                                  
 Cost of software license                  191        190         127            127          118 
 Cost of services                        1,249      1,404       1,605          1,903        1,405 
                                       -------    -------     -------        -------       ------ 
  Total cost of revenue                  1,440      1,594       1,732          2,030        1,523 
                                       -------    -------     -------        -------       ------ 
Gross profit                             2,565      3,100       3,924          5,862        3,418 
                                       -------    -------     -------        -------       ------ 
Operating expenses:                                                                               
 Research and development              $ 1,438     $1,640      $1,871         $2,112       $1,604 
 Sales and marketing                       797        867         878          1,050          974 
 General and administrative                327        380         381            453          389 
                                       -------    -------     -------        -------       ------ 
  Total operating expenses               2,562      2,887       3,130          3,615        2,967 
                                       -------    -------     -------        -------       ------ 
Income from operations                       3        213         794          2,247          451 
                                       -------    -------     -------        -------       ------ 
License interest income                    370        368         384            364          368 
Other interest income                        6          4           6              0           12 
Interest expense                           (18)       (17)        (33)           (50)         (39)
                                       -------    -------     -------        -------       ------ 
Income before provision for income                                                                
  taxes                                    361        568       1,151          2,561          792 
Provision for income taxes                 137        216         437            973          311 
                                       -------    -------     -------        -------       ------ 
Net income                             $   224     $  352      $  714         $1,588       $  481 
                                       =======    =======     =======        =======       ====== 
Percent of Total Revenue:                                                                         
Revenue:                                                                                          
 Cost of software license                 55.2%      55.0%       64.1%          64.8%        51.0%
 Cost of services                         44.8       45.0        35.9           35.2         49.0 
                                       -------    -------     -------        -------       ------ 
  Total revenue                          100.0      100.0       100.0          100.0        100.0 
Cost of revenue:                                                                                  
 Software license                          4.8        4.1         2.2            1.6          2.4 
 Services                                 31.2       29.9        28.4           24.1         28.4 
                                       -------    -------     -------        -------       ------ 
  Total cost of revenue                   36.0       34.0        30.6           25.7         30.8 
                                       -------    -------     -------        -------       ------ 
  Gross margin                            64.0       66.0        69.4           74.3         69.2 
                                       -------    -------     -------        -------       ------ 
Operating expenses:                                                                               
 Research and development                 35.9       34.9        33.1           26.8         32.5 
 Sales and marketing                      19.9       18.5        15.5           13.3         19.7 
 General and administrative                8.2        8.1         6.7            5.7          7.8 
                                       -------    -------     -------        -------       ------ 
  Total operating expenses                64.0       61.5        55.3           45.8         60.0 
                                       -------    -------     -------        -------       ------ 
Income from operations                     0.0        4.5        14.1           28.5          9.2 
License interest income                    9.2        7.8         6.8            4.6          7.4 
Other interest income                      0.2        0.1         0.1            0.0          0.2 
Interest expense                          (0.4)      (0.3)       (0.6)          (0.7)        (0.8)
                                       -------    -------     -------        -------       ------ 
Income before provision for income                                                                
  taxes                                    9.0       12.1        20.4           32.4         16.0 
Provision for income taxes                 3.4        4.6         7.8           12.3          6.3 
                                       -------    -------     -------        -------       ------ 
Net income                                 5.6%       7.5%       12.6%          20.1%         9.7%
                                       =======    =======     =======        =======       ====== 

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The Company's business has experienced and is expected to continue to           
experience significant seasonality. In recent years the Company has             
recognized a greater percentage of its revenue in its third and fourth          
quarters than in its first and second quarters due to the Company's sales       
commission structure and the impact of that structure on the timing of          
product acceptances and license renewals by customers. This pattern is          
reinforced by the Company's maintenance contracts, which entitle customers      
to, among other things, a fixed number of hours of service per calendar year.   
Once the annual allotment of service hours is exhausted, customers pay for      
additional services on an hourly basis, typically resulting in higher           
services revenue in the Company's second, third and fourth quarters.            

Cost of software license declined in each of the quarters shown above due 
to decreasing amortization expense relating to capitalized software             
development costs. No software development costs were capitalized in 1995 or    
the first quarter of 1996.                                                      

The increase in total operating expenses in the fourth quarter of 1995    
reflected primarily an adjustment for bad debt exposure which developed in such 
quarter.                                                                        

Three Months Ended June 30, 1996                                                

The Company expects that its total revenue for the three months ended June
30, 1996 (the "1996 Second Quarter") will be approximately $6.4 million, an     
increase of 37% from the Company's total revenue for the three months ended June
30, 1995 (the "1995 Second Quarter") of $4.7 million. Software license revenue  
is expected to increase 50% to approximately $3.9 million in the 1996 Second    
Quarter from $2.6 million for the 1995 Second Quarter, while services revenue is
expected to increase 21% to approximately $2.6 million for the 1996 Second      
Quarter from $2.1 million for the 1995 Second Quarter. The Company anticipates  
that its net income will increase 157% to approximately $900,000 for the 1996   
Second Quarter from $352,000 for the 1995 Second Quarter.                       

Liquidity and Capital Resources                                                 

The Company historically has satisfied its cash requirements through cash 
generated from operations and borrowings. The Company's approach of charging    
license fees payable in installments over the term of its licenses has          
historically deferred the receipt of cash and limited the availability of       
working capital.                                                                

Net cash provided by operating activities for the years ended December 31,
1993, 1994, 1995, and the three months ended March 31, 1996 was $1.6 million,   
$1.5 million, $830,000 and $2.6 million, respectively. During each of these     
periods, these sources of cash were used to support the Company's working       
capital requirements.                                                           

The Company used $890,000, $1.1 million, $1.4 million and $220,000 of net 
cash during 1993, 1994, 1995, and the three months ended March 31, 1996,        
respectively, to purchase property and equipment, primarily computer hardware   
and software, to support the Company's growing employee base and new regional   
office and training facilities. The Company's capital commitments consist       
primarily of operating leases for office space and equipment. At December 31,   
1995, the Company's commitments under noncancellable operating leases for       
office space and equipment with terms in excess of one year totalled $1.0       
million, $1.1 million and $1.1 million for 1996, 1997 and 1998, respectively.   
The Company's total payments under such leases was $800,000, $860,000 and       
$1.1 million for 1993, 1994 and 1995, respectively. See Note 6 of Notes to      
Consolidated Financial Statements.                                              

The Company has a $5.0 million revolving credit line, which expires June  
30, 1997, and four term loans from the same bank in the aggregate principal     
amount of $1.4 million at March 31, 1996, which are due December 1996           
($155,000), November 1997 ($211,000), June 1998 ($885,000) and December 1998    
($151,000). The term loans are secured by certain fixed assets of the           
Company; the revolving credit line is unsecured. At March 31, 1996, the         
Company had no borrowings under its revolving credit line. The Company          
intends to use a portion of the proceeds from this offering to repay the four   
term loans in full. The Company's credit agreement prohibits the payment of     
dividends, has profitability requirements and requires maintenance of           
specified levels of tangible net worth and certain financial ratios. See Note   
4 of Notes to Consolidated Financial Statements.                                

   In 1993, the Company recorded bad debt expense in the amount of $326,000 as a
result of certain specifically identified accounts receivable relating primarily
to services rendered by the Company. The Company recorded no bad debt expense in
1994. In 1995, the Company recorded bad debt expense in the amount of $793,000  
as a result of indications in the fourth quarter of the year that certain       
receivables relating primarily to services rendered by the Company would not be 
collected in full. The receivables with respect to which bad debt expense was   
recorded in 1993 and 1995 related primarily to maintenance and installation     
services provided by the Company. At the time such services were rendered (and  
the resulting revenue was recognized) there was no significant uncertainty      
regarding the acceptance thereof and the collectibility of the related          
receivables was probable.                                                       

The Company believes that the net proceeds from this offering together    
with cash generated by operations and availability under its bank credit        
facility will be sufficient to fund the Company's operations for at least one   
year following the completion of this offering. However, there can be no        
assurance that additional capital beyond the amounts currently forecasted by    
the Company will not be required or that                                        

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any such required additional capital will be available on reasonable terms,     
if at all, at such time as required by the Company.                             

Inflation                                                                       

Inflation has not had a significant impact on the Company's operating     
results to date, nor does the Company expect it to have a significant impact    
in the future due to the fact that the Company's license and maintenance fees   
are typically subject to annual increases based on recognized inflation         
indexes.                                                                        

Significant Customers                                                           

In 1993, First Interstate Bank and Fidelity Investments accounted for     
approximately 12.9% and 12.3%, respectively, of the Company's total revenue.    
In 1994, Chemical Bank accounted for approximately 16.8% of the Company's       
total revenue. In 1995, Citibank, Household Credit Services and Chemical Bank   
accounted for approximately 16.2%, 14.9% and 12.6%, respectively, of the        
Company's total revenue. During the three months ended March 31, 1996,          
Fidelity Investments, Bank of America and Cedel accounted for approximately     
25.3%, 11.7% and 10.5%, respectively, of the Company's total revenue.           

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BUSINESS

Pegasystems develops customer service management software to automate     
customer interactions across transaction-intensive enterprises. Many of the     
world's largest banks, mutual funds and credit card organizations use the       
Company's solutions to integrate, automate, standardize and manage a broad      
array of mission-critical customer service activities, including account        
set-up, record retrieval, correspondence, disputes, investigations and          
adjustments. The Company's systems can be used by thousands of concurrent       
users to manage customer interactions and to generate billions of dollars a     
day in resulting transactions. Work processes initiated by the Company's        
systems are driven by a highly adaptable "rule base" defined by the             
user-organization for its specific needs. The rule base facilitates a high      
level of consistency in customer interactions, yet drives different processes   
depending on the customer profile or the nature of the request. The Company's   
open, multi-tier, client/server systems operate on a broad variety of           
platforms, including UNIX, Windows/NT and IBM/MVS. The Company offers           
consulting, training and support services to facilitate the use of its          
solutions.                                                                      

Industry Background                                                             

Intensifying competition is forcing businesses to reduce costs while      
focusing on customer service management as an important means of                
differentiation. Many types of businesses are increasingly recognizing          
customer interactions as a critical opportunity to solidify and expand          
customer relationships. Due to the volume and precise nature of their           
transactions, it is especially critical for financial services organizations    
to implement cost-effective systems to manage customer interactions             
accurately and efficiently.                                                     

Providing high quality, cost-effective customer service management is     
complex. Organizations with global operations must be able to manage customer   
interactions in different languages, time zones, currencies and regulatory      
environments. The challenge is magnified as the product offerings of an         
organization increase and organizations are combined. Work processes            
occasioned by a single customer interaction often involve multiple              
departments within an organization, which may have different priorities and     
service standards, and may involve a variety of different computer systems.     
Customers may contact an organization through various means, including          
telephone, facsimile, the Internet or in person. The organization must be       
able to respond in a timely, accurate and consistent fashion or risk customer   
defection.                                                                      

Historically, in attempting to meet demand for new customer management    
software systems, organizations have faced a choice between building custom     
systems or purchasing third party systems. Building custom systems or           
modifying third party systems can be slow and costly and has often led to       
isolated, departmentalized solutions. Traditional third party systems are       
often inflexible, requiring organizations to conform their work processes to    
the system, rather than vice-versa. Neither custom nor third party solutions    
have generally accommodated an organization's need to evolve or expand          
operations without significant programming effort. Moreover, neither has had    
the high volume transaction processing or integration capabilities necessary    
to support the comprehensive customer interaction requirements of large         
organizations. Today, organizations need flexible, scalable customer service    
management solutions that can be implemented on an enterprise-wide basis to     
facilitate consistent, cost-effective customer service management.              

A 1995 report of the Aberdeen Group, Inc., a market research firm,        
estimates the size of the customer interaction software market at $1.7          
billion in 1996, and projects that it will grow to $2.7 billion by 1998. Of     
this market, the share held by independent software vendors is estimated at     
$540 million in 1996, growing to $925 million in 1998. The total market, as     
defined by the Aberdeen Group, includes software supporting customer service,   
internal help desks, field and telesales automation, order entry, sales or      
product configuration, service dispatching and quality assurance.               

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The Pegasystems Solution                                                        

The Company's solutions integrate, automate, standardize and manage on an 
enterprise-wide basis a broad array of mission-critical customer interactions   
for financial services organizations, including account set- up, record         
retrieval, correspondence, disputes, investigations and adjustments.            
Pegasystems' solutions provide a service backbone that drives intelligent       
processing and seamlessly integrates an organization's geographically           
dispersed and product specific service operations and isolated computer         
systems. By bridging these "islands of automation" within large                 
organizations, the Company's solutions increase the efficiency of service       
representatives and enable organizations to address multiple customer needs     
during a single contact.                                                        

The Company's customer service management solutions offer the following   
advantages:                                                                     

Flexibility and Consistency. The Company's solutions are based on rules   
defined by the user- organization which drive various types of processing       
depending on such factors as the content of the customer request, the profile   
of the customer, the organization's policies and procedures and the authority   
or qualifications of the customer service representative. By modifying its      
rule base, an organization can evolve its processing to address the             
competitive requirements of its business without costly and time consuming      
reprogramming. Significantly, the rule base feature of the Company's systems    
permits an organization to establish consistent standards yet interact          
differently with different segments of its customer base and thereby "mass      
customize" its services.                                                        

Scalability and Robust Functionality. The scalability of the Company's    
multi-tier client/server architecture allows an organization to add branches    
or departments easily to new or existing servers without performance            
degradation. Organizations currently entrust the Company's systems with the     
storage and management of data relating to hundreds of millions of financial    
transactions. The Company's systems can be used by more than 4,000 concurrent   
users to manage customer interactions and to process accurately and securely    
transactions involving billions of dollars a day that result from those         
interactions.                                                                   

Ease-of-Use. The Company's client software application, PegaVIEW-ACE,     
increases the effectiveness and productivity of customer service                
representatives by providing them with a flexible graphical user interface      
and processing capabilities that leverage the power of client/server desktop    
computers. The Company's solutions allow customer service representatives to    
focus on delivering superior customer service, rather than on mastering the     
protocols and procedures of multiple applications.                              

Integration Capabilities. The Company's open architecture permits its     
solutions to be integrated with a wide variety of other applications and        
technologies, including industry standard relational database management        
systems, advanced telephony equipment and diverse storage media (including      
magnetic, optical, tape and microfilm). The Company's solutions also support    
the message formats of major financial transaction networks such as the SWIFT   
international funds network, the Federal Reserve's Fedwire system and the       
VISA and MasterCard networks.                                                   

Multi-Platform Server Support. The Company's solutions feature a common   
software code base which, in addition to facilitating maintenance and           
enhancement development efforts, simplifies the support of multiple             
platforms. The Company's solutions are designed to run on a broad range of      
computer operating systems including IBM's MVS/CICS and AIX/UNIX systems,       
Digital Equipment Corporation's VMS and UNIX systems, Microsoft's Windows/NT    
system and Sun Microsystems' Solaris UNIX system.                               

Improved Efficiency of Customer Service Representatives. Pegasystems'     
solutions actually perform work, rather than simply track a customer service    
representative's tasks. Variable data elements (for example, date, amount,      
customer, account) automatically route service requests and invoke system       
processes, depending on an organization's rule base. This feature allows        
customer service representatives to focus on revenue enhancing opportunities,   
such as cross-selling, and other matters requiring personal attention. When     
service representative involvement is required during a customer interaction,   
the Company's solutions provide pertinent, consolidated information to guide    
the service representative. Savings are realized through reduced talk time,     
fewer manual processes and less rework.                                         

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Business Strategy                                                               

Pegasystems' objective is to become the leading provider of               
mission-critical client/server customer service management software to          
organizations performing a high volume of complex interactions with demanding   
customers. To achieve this objective, the Company is pursuing the following     
strategies:                                                                     

Leverage Strength in Financial Services Market. Pegasystems provides      
customer service management solutions to many of the largest financial          
services organizations in the world. The Company is seeking to expand its       
business with these organizations through a sales group focused on marketing    
the Company's products and services to other business operations of these       
organizations. The Company is also leveraging its relationships and expertise   
with large financial services organizations to penetrate the medium-sized       
financial services market.                                                      

Target Other Markets. Pegasystems believes that the insurance, medical,   
utilities, retail and other markets have similar customer service management    
needs and that the Company's core technology is readily adaptable to these      
additional markets. The Company is exploring these additional markets, and if   
appropriate, expects to develop the necessary industry specific extensions of   
its core technology and hire or otherwise gain access to personnel with         
expertise in such markets.                                                      

Increase Sales and Support Efforts. Pegasystems intends to establish      
additional sales and support offices and to increase significantly its          
domestic and international direct sales forces. In addition, the Company        
plans to explore relationships with financial transaction processors and        
consulting firms through which the Company's products can be distributed and    
implemented.                                                                    

Develop Standard Product Templates. The Company recently commenced        
licensing standard product templates that give organizations an advanced        
starting point for configuring their work processes. The Company intends to     
continue to develop and market standard product templates for financial         
services organizations, including templates for outbound telemarketing,         
collections and account set-up. The Company believes that these templates       
will facilitate more rapid implementation of the Company's solutions and will   
be a cost-effective way to address the needs of smaller organizations.          

Reduce Implementation Time. The Company is continuing to refine its       
PegaSTAR consulting methodology, an approach to the reengineering of an         
organization's work processes that facilitates more rapid implementation of     
the Company's customer management systems and continued evolution of such       
systems by an organization's personnel after initial implementation. This       
methodology complements the Company's standard product templates in reducing    
the time required to implement the Company's systems.                           

Maintain Technological Leadership Position. Pegasystems is continuing to  
develop and invest in its technology. Current development efforts include       
integration of additional databases and support of emerging technical and       
workflow standards.                                                             

Technology                                                                      

The Company's technology is designed to optimize the performance of       
mission-critical, customer service management processes over a variety of       
computer platforms, networks and databases. Pegasystems' solutions have the     
following key technological attributes:                                         

"Any-Call, Any-Time, Anywhere" Information Management. Effective customer 
response requires up-to-date information about the customer relationship,       
regardless of how, why, when or where the customer contacts the organization.   
Pegasystems' customer service management systems centralize core customer       
information to facilitate global access.                                        

Multi-tier, Dynamic Distributed Processing. Although the Company's systems
are currently used primarily in a two-tier client/server environment, they      
are also designed to run in an advanced, highly scalable three-tier             
environment. In traditional three-tier client/server environments, the user     
interface, the application code, and the data are segregated onto separate      
tiers. In the Pegasystems three-tier client/server environment, the             
application code, the rule base and selected data are replicated on both the    
central and satellite tiers so that processing may occur on either the          
central server or the distributed satellite servers to minimize network         
traffic and enhance performance. The rule base determines the optimal           
location for processing to occur based on the nature of the work required and   
the data involved. Rule base changes are replicated across the organization's   
central and satellite servers to facilitate consistent processing by all        
parts of the organization.                                                      

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Distributed Processing Environment

[Graphic Representation of Pegasystems Worldwide                                
Platform Processing Environment]                                                

Satellite Server                                                                
Code                                                                            
Rules                                                                           

Central Server                                                                  
Code                                                                            
Rules                                                                           
Work Item Data                                                                  

Satellite Server                                                                
Code                                                                            
Rules                                                                           

Satellite Server                                                                
Code                                                                            
Rules                                                                           

Inherited Workflow. Pegasystems solutions maintain organizational         
consistency while providing the flexibility needed for mass customization.      
The rule base of the Company's systems may be defined so that certain           
processes are standardized across an organization while others may be           
superseded or supplemented by "local" rules tailored to the specific            
requirements of groups within the organization.                                 

Resiliency. Fallback options are provided to deal with hardware or network
failure. For example, in a three-tier environment, the PC client can bypass a   
failed satellite server and connect directly to the central server. The         
Company is presently working to enhance its systems so that should a failure    
occur at the central server, each satellite server's replicated code and rule   
base could support continued processing, with "store and forward"               
capabilities to automatically re-synchronize the central server when it         
resumes operation.                                                              

Platform Independence. Recognizing that organizations often use a variety 
of computer platforms, Pegasystems provides technology alternatives by          
supporting a range of mainframes, minicomputers, PC networks and interface      
devices. While the Company offers its advanced Windows-based PegaVIEW-ACE       
application for the desktop, the Company's server applications can also drive   
"dumb terminals", allowing organizations to preserve their investments in       
legacy networks.                                                                

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Pegasystems Platform Options

[Graphic of Pegasystems Platform Options]                                       

                                                        [Enlarge/Download Table]


    Desktop        Local       Distributed            Global            Central          
                 Networks   Satellite Servers        Networks           Servers          
                                                                                         
    Windows       TCP/IP         IBM AIX              TCP/IP           IBM MVS           
                                   UNIX                                  CICS            

   Windows 95      LU6.2         DEC Open             LU6.2             IBM AIX          
                                   VMS                                    UNIX           

   Windows NT    Pathworks      Microsoft           Pathworks           DEC Open     Data
                                Windows NT                                VMS            

      OS/2        Novell      SUN Solaris(1)          Novell         SUN Solaris(1)  Data
                    IPX            UNIX                IPX                UNIX           

    IBM 3270        IBM          DEC UNIX              IBM              DEC UNIX     Data
"Dumb Terminal"  VTAM LU2                            VTAM LU2                            

Character-Based    Async         IBM MVS              Async          Windows NT          
"Dumb Terminal"                    CICS                                                  

  Netscape(1)    Microsoft       HP/UX(2)              SNA              HP/UX(2)         
     Motif          DDE            UNIX                                   UNIX           

  Netscape(1)    Procedure     (1) Shipping in Q3, 1996                                  
    Windows        Call        (2) Availability planned in Q4, 1996                      


Internet and Intranet Access. Pegasystems' solutions use the              
Internet-based HTML (Hypertext Markup Language) to define display attributes    
for its PegaVIEW-ACE graphical user interface, leveraging logic and             
presentation rules between PegaVIEW-ACE and Internet/Intranet workflows.        
Pegasystems' rules dynamically create HTML forms, menus and displays, thereby   
facilitating interaction with the Internet. Pegasystems is a Netscape           
Development partner and supports the Netscape Commerce Server interface.        

Interfacing With Other Systems. Pegasystems' open architecture permits    
integration with a wide variety of other applications and networks, including   
relational databases, legacy systems accessed through IBM 3270 emulation, and   
messaging protocols. The Company offers a Universal Application Programming     
Interface (API) that allows an organization's custom software to be             
integrated with the Company's applications without the need to modify the       
Company's core application code. Pegasystems' solutions also integrate with     
other applications, accounting systems and imaging products. The Company's      
systems support the message formats of major financial transaction networks,    
such as the SWIFT international funds network, the Federal Reserve's Fedwire    
system and the VISA and MasterCard networks.                                    

Storage Options. Data storage flexibility is important to the Company's   
customers, and the Company's software uses an innovative object-oriented        
approach that dynamically maps data according to the type of workflow.          
Versions of the Company's systems designed to run on Windows/NT can store       
customer service request data in Microsoft's SQL Server relational database,    
and the Company has developed similar compatibility in the Windows/NT and RS    
6000/AIX environments for databases from Oracle Corporation.                    

Products                                                                        

The Company's products employ a consistent architecture and support the   
following customer service management functions:                                

Receiving. Organizations receive service requests by telephone, mail,     
facsimile, or personal contact. Customer service representatives enter          
details of incoming requests into PegaVIEW-ACE, the                             

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Company's easy-to-use, graphical user interface. Alternatively, electronic      
service requests received from various networks and systems, such as the        
SWIFT network, Fedwire system, and the VISA and MasterCard networks are         
entered directly into the Company's system. The Company's systems also          
support direct electronic access by customers through PCs, Internet browsers    
and voice response units. In all cases, the service request automatically       
initiates appropriate processing.                                               

Routing. As processing steps are completed, the Company's systems         
categorize and queue the request either for automatic or manual processing.     
Productivity-based load leveling and dynamic prioritization ensure high         
performance and responsiveness. As work is processed, each service              
representative's "work-list" is automatically updated in real time. The         
systems monitor each service request for conformance to the organization's      
timeliness standards, automatically increasing priority and generating          
warnings based on the service standards of the organization.                    

Researching. The Company's systems determine when more information is     
needed, where to locate it, and how to retrieve it from databases or other      
repositories. Pegasystems' rule-driven processing automatically extracts        
relevant data, directs it to the customer service representative or customer,   
links it to the work, and keeps it readily accessible. The Company's systems    
can access information from multiple data sources, whether maintained by the    
Company's systems or third party systems.                                       

Responding. The Company's systems facilitate communications by an         
organization with its customers by combining user-defined templates and         
specific customer information to create personalized correspondence. When       
appropriate, service representatives may further refine message content         
before forwarding by mail, facsimile or electronic transmission, and may        
attach images of statements, checks and other data. Follow-up communications    
are automatically composed, customized and sent. Sensitive correspondence can   
be queued for online review before release, and the systems create a            
permanent audit trail of all customer communications.                           

Resolving. Concluding a piece of work involves application of the         
organization's rules for resolving a request or stepping the customer service   
representative through the process when human judgment is required.             
Resolution also includes the creation of transactions, transmission to          
production systems, management of financial adjustments, posting of service     
charges, updating of general ledger accounts and synchronization of multiple    
item requests.                                                                  

Reporting. Data automatically collected by the Company's systems enables  
an organization to analyze service representative efficiency and determine      
needs for service representative training or changes to work processes. The     
Company's systems produce reports, graphical output and feeds to spreadsheets   
illustrating the volume and status of customer requests, the productivity of    
customer service representatives and service levels with specific customers.    

The Company offers a number of different products, each with components   
and features designed to address particular business areas, but all sharing     
core technology and adaptable rule-driven processing:                           

PegaCARD manages credit and debit card customer service operations by     
supporting a wide variety of interactions with cardholders and merchants,       
including simple inquiries (for example, balances or credit limits), customer   
requests (address changes, additional cards, credit line increases) and         
problem management (disputes, chargebacks, fraud, financial adjustments,        
penalties). Automated features include processing of electronic chargeback      
messages and images from the MasterCard and VISA networks. PegaCARD allows      
service representatives to move seamlessly among multiple back-end accounting   
systems without having to be familiar with the different protocols of each      
system.                                                                         

PegaCLAIMS manages corporate and wholesale banking customer service by    
supporting a broad spectrum of customer interactions, including inquiries       
(product terms, rates), customer requests (account data changes, duplicate      
copies), and problem management (research, financial adjustments). PegaCLAIMS   
processes customer service interactions relating to money transfers,            
securities movement and control, global custody, trade services, foreign        
exchange and cash management, and features electronic message routing, SWIFT    
processing and interbank financial compensation management.                     

PegaSHARES manages customer service for transfer agents, brokers, dealers,
shareholder servicers and mutual fund managers by supporting inquiries (share   
balances, net asset values, transactions), customer                             

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requests (account changes, copies of statements) and problem resolution         
(incorrect purchases, monetary adjustments). Automated features include share   
transfer accounting, literature fulfillment and securities processing           
compliance.                                                                     

PegaTRACE facilitates retail banking and check clearing customer service  
by processing inquiries (account balances, fees), customer requests (copies     
of statements, account transfers) and problem management (research, financial   
adjustments). PegaTRACE securely manages the suspense accounts that major       
organizations use to control the flow of accounting entries. Additional         
features include integration with check clearing systems, suspense ledger       
management, multi-debit/credit adjustments, and electronic check presentment    
(ECP) interfaces.                                                               

PegaSEARCH and PegaINDEX manage high volumes of archived data, such as    
check information, contained on multiple types of storage media including       
magnetic disk, optical disk and magnetic tape silos. These systems are          
designed for organizations that process tens of millions of checks per day      
and require seven years of archived check data.                                 

PegaPRISM and PegaREELAY are used by customer service representatives to  
retrieve images, view them on a PC and correlate them with specific customer    
service requests. PegaREELAY is a specialized image retrieval product that      
automates request processing of reel microfilm.                                 

PegaVIEW-ACE (the Advanced Client Environment) is a graphical client      
application designed for use with the Company's server applications to          
increase the effectiveness and productivity of customer service                 
representatives. PegaVIEW-ACE organizes customer data to facilitate service     
representative effectiveness and supports graphical methods to view and enter   
information.                                                                    

Product Pricing                                                                 

The Company's systems are licensed to organizations under agreements      
requiring the payment of fees, typically in monthly installments, over the      
term of the agreement. The amount of the license fee is based on various        
factors, including the number of concurrent users, the functionality of the     
system, the number of servers on which product is installed, and the scope of   
business usage. Typical recent individual system licenses have provided for     
the payment of monthly installments of between $5,000 and $50,000. Some         
organizations receive discounts for licensing multiple systems. The monthly     
license payments generally begin once a system is installed and accepted. The   
term of such licenses is typically five years, subject to automatic renewal     
at the organization's option.                                                   

Services                                                                        

Pegasystems' Reengineering and Client Services Group, which as of April   
30, 1996 was comprised of 50 people located in the Company's six offices,       
provides consulting, training and customer support.                             

Consulting Services. The Company works with its customers during and after
system installation to reengineer customer workflows to leverage the            
capabilities of the Company's systems. Using an installation approach based     
on its PegaSTAR (the Pegasystems Structured Technique for Analysis and          
Reengineering) methodology, the Company's consultants assist customers in six   
major areas--analysis, data collection, process definition, configuration,      
piloting and measurement. The Company encourages team building and transfer     
of knowledge from its consultants to an organization's staff through an         
interactive co-production methodology. Pegasystems and its customers work       
together to design, document and tailor the system's rule base to the           
customer's organization. Pegasystems' goal is to empower its customers'         
staffs with the knowledge and confidence to operate, refine and evolve their    
systems.                                                                        

Training. The Company offers training programs for those persons within   
the customer organization responsible for evolving the rules that drive the     
various processes related to customer interactions. Pegasystems also            
organizes periodic user group meetings enabling customers to exchange ideas,    
learn about product directions and influence Pegasystems' development           
process.                                                                        

Maintenance and Support. Pegasystems provides comprehensive maintenance   
and support services, which may include 24 hours a day, 7 days a week           
customer service, periodic preventative maintenance, documentation updates      
and new software releases.                                                      

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Each organization which licenses the Company's systems is required to           
enter into a maintenance contract providing for the payment to the Company of   
a monthly maintenance fee over the term of the related license agreement        
equal to approximately 18% of the license fee. The Company's maintenance        
agreements typically obligate Pegasystems to provide up to a specified number   
of hours of consulting and support. Organizations seeking additional            
consulting and support services are generally charged an incremental fee        
ranging between $90 and $170 per hour.                                          

Customers                                                                       

Pegasystems provides robust and scalable customer service management      
solutions that can support thousands of concurrent users based in multiple      
countries, speaking different languages, and working with different             
currencies. A representative list of the Company's major customers and the      
uses to which they apply the Company's products is shown below:                 

Advanta Services Corporation -- Credit card operations, including         
telephony center, correspondence generation, dispute and chargeback             
processing.                                                                     

Banco Popular de Puerto Rico -- Retail service center automation, check   
research and consumer loan inquiry and service.                                 

Bank of America -- Retail/check customer service and research, automation 
of branch support centers. Institutional funds transfer and foreign exchange    
customer service for U.S. and European operations. Credit and debit card        
correspondence, dispute and chargeback service processing.                      

Bank of Ireland -- Retail/check clearings and research, automation of     
branch support centers, and exception/credit item review and verification.      

Banque Nationale de Paris -- Institutional funds transfer service,        
research and archive.                                                           

Barclays Bank -- Institutional funds transfer and foreign exchange        
customer service for international operations. Credit card (merchant and        
individual) service including telephony center, correspondence, dispute and     
chargeback processing.                                                          

Cedel Bank -- Global custody and securities movement and control customer 
service.                                                                        

Citibank -- Global funds transfer and foreign exchange customer service.  
Check-related customer service and research. Domestic MasterCard service        
including image integration, correspondence, dispute and chargeback             
processing.                                                                     

Colonial Group -- Mutual fund customer service supporting telephony center
and correspondence.                                                             

Federal Reserve Banks of Boston and San Francisco -- Check processing     
customer service, suspense ledger management, research, adjustment and          
archive.                                                                        

Fidelity Investments -- Mutual fund customer service supporting telephony 
center and correspondence.                                                      

First National Bank of Chicago -- Retail/check customer service and       
research. Wholesale banking, funds transfer, check, corporate lockbox and       
interbank compensation service for global operations.                           

Franklin/Templeton -- Mutual fund customer service supporting telephony   
center, correspondence and research.                                            

Household Credit Services -- Credit card service including telephony      
center, correspondence, dispute and chargeback processing. Private label        
customer service for major retailers.                                           

Marine Midland -- Institutional funds transfer customer service.          

Mellon Bank -- Retail/check customer service, research and archive.       
Wholesale, institutional, cash management, and corporate lockbox customer       
service.                                                                        

Prudential Securities -- "All-in-one" account support and service for     
brokerage, credit, and clearing transactions.                                   

Trans Union Corporation -- Credit bureau data-management customer service 
for institutional customers and real estate property appraisal processing.      

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Sales and Marketing                                                             

The Company markets its software and services primarily through a direct  
sales force. As of April 30, 1996, the Company's sales force consisted of       
four people located in the Company's Cambridge, Massachusetts headquarters,     
and two people based in the Company's United Kingdom office. The Company        
intends to increase substantially the size of its sales force, which will be    
necessary if the Company is to achieve significant revenue growth in the        
future. Competition for qualified sales personnel is intense and there can be   
no assurance that the Company will be able to attract such personnel. If the    
Company is unable to hire additional qualified sales personnel on a timely      
basis, the Company's business, operating results and financial condition        
could be materially and adversely affected. See "Risk Factors-- Dependence on   
Key Personnel."                                                                 

In the future, the Company may market and sell its products through value 
added resellers (VARs) and systems integrators. There can be no assurance,      
however, that the Company will be able to attract and retain VARs and system    
integrators that will be able to market and sell the Company's products         
effectively.                                                                    

To support its sales force, the Company conducts marketing programs which 
include trade shows, public relations and seminars. Sales leads are also        
generated by the Company's consulting staff.                                    

In 1993, 1994 and 1995, international sales represented 10%, 24% and 10%, 
respectively, of the Company's total revenue. See "Management's Discussion      
and Analysis of Financial Condition and Results of Operations--Results of       
Operations."                                                                    

Product Development                                                             

Since its inception, the Company has made substantial investments in      
product development. The Company believes that its future performance depends   
on its ability to maintain and enhance its current products and develop new     
products. The Company's product development priorities include (1) developing   
the capability of the Company's systems to operate with additional third        
party relational databases such as Oracle; (2) developing standard              
Application Programming Interfaces that allow other client workstation and      
server applications to interoperate with the Company's systems; and (3)         
enhancing existing interfaces between the Company's systems and popular         
applications such as e-mail, spreadsheets and Lotus Notes.                      

In 1993, 1994, 1995 and the three months ended March 31, 1996, the        
Company's research and development expenses were approximately $3.8 million,    
$5.4 million, $7.1 million and $1.6 million, respectively.                      

Competition                                                                     

The customer service management software market is intensely competitive  
and subject to rapid change. Competitors vary in size and in the scope and      
breadth of the products and services offered. The Company encounters            
competition primarily from internal information systems departments of          
potential or current customers that develop custom software. The Company also   
competes with: (1) software companies that target the customer interaction or   
workflow markets such as Remedy Corporation, Scopus Technology, Inc. and The    
Vantive Corporation; (2) companies that target specific service areas such as   
DST Systems Inc. and First Data Corp.; and (3) professional services            
organizations such as Andersen Consulting that develop custom software in       
conjunction with rendering consulting services. In addition, the Company        
expects additional competition from other established and emerging companies,   
including Oracle Corporation and SAP AG, as the market continues to develop     
and expand. Increased competition may result in price reductions, less          
beneficial contract terms, reduced gross margins and loss of market share,      
any of which could materially and adversely affect the Company's business,      
operating results and financial condition.                                      

The Company believes that the principal competitive factors affecting its 
market include product features such as adaptability, scalability, ability to   
integrate with other products and technologies, functionality and               
ease-of-use, the timely development and introduction of new products and        
product enhancements, as well as product reputation, quality, performance,      
price, customer service and support, and the vendor's reputation. Although      
the Company believes that its products currently compete favorably              

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with regard to such factors, there can be no assurance that the Company can     
maintain its competitive position against current and potential competitors.    

Many of the Company's competitors have greater resources than the Company,
and may be able to respond more quickly and efficiently to new or emerging      
technologies, programming languages or standards, or to changes in customer     
requirements or preferences. Many of the Company's competitors can devote       
greater managerial or financial resources than the Company can to develop,      
promote and distribute customer service management software products and        
provide related consulting, training and support services. There can be no      
assurance that the Company's current or future competitors will not develop     
products or services which may be superior in one or more respects to the       
Company's or which may gain greater market acceptance. Some of the Company's    
competitors have established or may establish cooperative arrangements or       
strategic alliances among themselves or with third parties, thus enhancing      
their abilities to compete with the Company. It is likely that new              
competitors will emerge and rapidly acquire market share. There can be no       
assurance that the Company will be able to compete successfully against         
current or future competitors or that the competitive pressures faced by the    
Company will not materially and adversely affect its business, operating        
results and financial condition. See "Risk Factors--Intense Competition."       

Intellectual Property and Licenses                                              

The Company relies primarily on a combination of copyright, trademark and 
trade secrets laws, as well as confidentiality agreements to protect its        
proprietary rights. The Company also has one patent application pending in      
the United States relating to the architecture of the Company's systems.        
While the Company believes that its pending patent application relates to a     
patentable invention, there can be no assurance that such patent application    
or any future patent application will be granted or that any patent relied      
upon by the Company in the future will not be challenged, invalidated or        
circumvented or that rights granted thereunder will provide competitive         
advantages to the Company. Moreover, despite the Company's efforts to protect   
its proprietary rights, unauthorized parties may attempt to copy aspects of     
the Company's products or to obtain the use of information that the Company     
regards as proprietary. In addition, the laws of some foreign countries do      
not protect the Company's proprietary rights to as great an extent as do the    
laws of the United States. There can be no assurance that the Company's means   
of protecting its proprietary rights will be adequate or that the Company's     
competitors will not independently develop similar technology.                  

The Company is not aware that any of its products infringes the           
proprietary rights of third parties. There can be no assurance, however, that   
third parties will not claim infringement by the Company with respect to        
current or future products. The Company expects that software product           
developers will increasingly be subject to infringement claims as the number    
of products and competitors in the Company's industry segment grows and the     
functionality of products in different industry segments overlaps. Any such     
claims, with or without merit, could be time-consuming, result in costly        
litigation, cause product shipment delays or require the Company to enter       
into royalty or licensing agreements. Such royalty or licensing agreements,     
if required, may not be available on terms acceptable to the Company or at      
all, which could have a material adverse effect upon the Company's business,    
operating results and financial condition.                                      

From time to time, the Company licenses software from third parties for   
use with its products. The Company believes that no such license agreement to   
which it is presently a party is material and that if any such license          
agreement were to terminate for any reason, the Company would be able to        
obtain a license or otherwise acquire other comparable technology or software   
on terms and on a timetable that would not be materially adverse to the         
Company.                                                                        

Employees                                                                       

As of April 30, 1996, the Company had a total of 160 employees, of whom   
135 were based in the United States and 25 were based in the United Kingdom.    
Of the total, 73 were in research and development, 50 were in consulting and    
customer support, 15 were in sales and marketing, six were in market strategy   
and delivery and 16 were in administration and finance. The Company's future    
performance depends in significant part upon the continued service of its key   
technical, sales and marketing and senior management personnel and its          
continuing ability to attract and retain highly qualified                       

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technical, sales and marketing and managerial personnel. Competition for such   
personnel is intense and there can be no assurance that the Company will be     
successful in attracting or retaining such personnel in the future. None of     
the Company's employees is represented by a labor union or is subject to a      
collective bargaining agreement. The Company has not experienced any work       
stoppages and considers its relations with its employees to be good. See        
"Risk Factors--Dependence on Key Personnel."                                    

Facilities                                                                      

Pegasystems' principal administrative, sales, marketing, support, and     
research and development operations are located in a 35,000 square foot         
leased facility in Cambridge, Massachusetts. The lease for this facility        
expires in March 1997, subject to the Company's option to extend the term for   
up to eight additional years. The Company also leases offices in New York,      
New York, Chicago, Illinois, Dallas, Texas, San Francisco, California and       
Reading, United Kingdom pursuant to leases expiring between March 1997 and      
July 2006. The Company believes that additional or alternative space will be    
available in the future on commercially reasonable terms as needed.             

Legal Proceedings                                                               

The Company is not a party to any material pending litigation or other    
legal proceedings.                                                              

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MANAGEMENT

Executive Officers and Directors                                                

The executive officers and directors of the Company and their ages are as 
follows:                                                                        

                                                                [Download Table]

Name                     Age                       Position                  
----                     ---                       --------                  
                                                                             
Alan Trefler                40     President, Clerk and Director             
Clifford R. Balzer          45     Vice President of Reengineering and Client
                                   Services                                  
Eugene A. Bonte             45     Vice President of Market Strategy and     
                                   Delivery                                  
Joseph J. Friscia           41     Vice President of Sales and Marketing     
Kenneth W. Olson            46     Vice President of Technical Development   
Michael R. Pyle             41     Vice President of Applications Development
Ira Vishner                 42     Vice President of Corporate Services,     
                                   Treasurer, Chief Financial Officer and    
                                   Director                                  
Edward A. Maybury(1)(2)     56     Director                                  
Edward B. Roberts(1)        60     Director                                  
Leonard A.                  43     Director                                  
  Schlesinger(2)                                                             
Thomas E. Swithenbank       51     Director                                  

-------------                                                                   

(1) Member of Audit Committee                                                   

(2) Member of Compensation Committee                                            

Alan Trefler, a founder of the Company, has served as President and Clerk 
and has been a director since the Company's organization in 1983. Prior         
thereto, he managed an electronic funds transfer product for TMI Systems        
Corporation, a software and services company. Mr. Trefler holds a degree in     
economics and computer science from Dartmouth College.                          

Clifford R. Balzer joined the Company in December 1995 as Vice President  
of Reengineering and Client Services. From January through November 1995, he    
was a Senior Consultant for Arthur D. Little, a research and consulting firm.   
From July 1990 through January 1995, Mr. Balzer was employed as a Director of   
U.S. Consulting by DMR Group, Inc., an international consulting firm. Mr.       
Balzer holds a B.A. from Kansas Wesleyan University and an M.B.A. from          
Fordham University.                                                             

Eugene A. Bonte joined the Company in April 1996 as Vice President of     
Market Strategy and Development. He was a founder of Object Design, Inc., a     
developer of object database management systems and tools, where he served as   
Vice President from August 1988 through September 1995 and was responsible,     
at different times, for marketing, corporate development and product            
management. Mr. Bonte holds a B.A. from The Johns Hopkins University and an     
M.B.A. from the Harvard Business School.                                        

Joseph J. Friscia joined the Company in 1984 to establish its New York    
office and has served as Vice President of Sales and Marketing since 1987.      
Prior to joining the Company, he worked as a money transfer operations          
manager with Bankers Trust Company and J. Henry Schroder Bank and Trust         
Company. Mr. Friscia holds a B.A. from Long Island University and an M.B.A.     
from Adelphi University.                                                        

Kenneth W. Olson, a founder of the Company, has served as Vice President  
of Technical Development since 1983. Prior thereto, he managed the              
development of specialized computer systems for large-volume transaction        
processing for TMI Systems Corporation. Mr. Olson holds an S.B. in Humanities   
and Sciences from the Massachusetts Institute of Technology.                    

Michael R. Pyle joined the Company in 1985 as an application development  
manager and has been Vice President of Applications Development since 1990.     
Mr. Pyle holds a B.C.S. from the CS College in                                  

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London. Prior to joining the Company, Mr. Pyle worked in Europe and the         
United States developing and deploying large-scale communications systems for   
the financial and commercial sectors.                                           

Ira Vishner, a founder of the Company, has served as Vice President of    
Corporate Services, Treasurer and Chief Financial Officer of the Company        
since 1983 and has been a director since 1994. Prior to 1983, he worked in      
the executive offices of TMI Systems Corporation where he was responsible for   
corporate planning, financial analysis and product marketing. Mr. Vishner       
holds an S.B. in Mathematics from the Massachusetts Institute of Technology.    

Edward A. Maybury has been a director of the Company since its            
organization in 1983. Since July 1991, he has served as a director, and from    
July 1991 through May 1993 was the President and Chief Executive Officer, of    
Creative Systems, Inc., a software and services company. Prior thereto, Mr.     
Maybury was the Chief Executive Officer of Data Architect Systems, Inc., a      
software and services company.                                                  

Edward B. Roberts has been a director of the Company since June 1996.     
Since 1961, he has been a Professor of Management of Technologies at the        
Massachusetts Institute of Technology. He was co-founder and chairman, from     
1963 until June 1995, of Pugh-Roberts Associates, Inc., an international        
management consulting firm specializing in strategic planning and technology    
management. In addition, Dr. Roberts co-founded and is a director of Medical    
Information Technology, Inc., a provider of hospital information systems. Dr.   
Roberts is also a director of Advanced Magnetics, Inc., a medical imaging       
company, and Selfcare, Inc., a manufacturer of home medical diagnostic          
products, and is a general partner of Zero Stage Capital, a venture capital     
firm.                                                                           

Leonard A. Schlesinger has been a director of the Company since June 1996.
He has been a Professor of Business Administration at the Harvard Business      
School since 1988, where he is chairman of the Service Management Group, an     
interdisciplinary faculty group that focuses on customer service. Professor     
Schlesinger is also a director of Limited, Inc., a clothing retailer, and       
Borders Group, Inc., a book and movie store chain.                              

Thomas E. Swithenbank has been a director of the Company since June 1996. 
Since 1990, he has been President and Chief Executive Officer of Harte-Hanks    
Data Technologies, a computer software and servicing company specializing in    
database marketing systems. Prior thereto, Mr. Swithenbank was President of     
International Data Corporation, a world-wide computer marketing consulting      
firm. Mr. Swithenbank has an A.B. from Harvard University and an M.B.A. from    
the Harvard Business School.                                                    

Classes of Directors                                                            

Following this offering, the Board of Directors will be divided into three
classes, each of whose members will serve for a staggered three-year term.      
Messrs. Swithenbank and Trefler will serve in the class whose term expires in   
1997; Messrs. Maybury and Schlesinger will serve in the class whose term        
expires in 1998; and Messrs. Roberts and Vishner will serve in the class        
whose term expires in 1999. Upon the expiration of the term of a class of       
directors, directors within such class will be elected for a three-year term    
at the annual meeting of stockholders in the year in which such term expires.   

Executive Officers                                                              

Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve until the next annual meeting of the Board of         
Directors and until their successors have been duly elected and qualified.      
There are no family relationships among any of the executive officers or        
directors of the Company.                                                       

Board Committees                                                                

The Company's Board of Directors has established an Audit Committee and a 
Compensation Committee. The Audit Committee is responsible for nominating the   
Company's independent accountants for approval by the Board of Directors,       
reviewing the scope, results and costs of the audit with the Company's          
independent accountants and reviewing the financial statements of the           
Company. Messrs. Maybury and Roberts are currently the members of the Audit     
Committee. The Compensation Committee is responsible for recommending           
compensation and benefits for the executive officers of the Company to the      
Board of Directors and for administering the Company's stock plans. Messrs.     
Maybury and Schlesinger are currently the members of the Compensation           
Committee.                                                                      

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Director Compensation                                                           

Each non-employee director of the Company receives $1,000 for every Board 
or committee meeting attended. The Company also reimburses non-employee         
directors for expenses incurred in attending Board meetings. In addition,       
non-employee directors of the Company will receive stock options under the      
1996 Non-Employee Director Stock Option Plan. See "Management--Stock Plans."    
No other compensation is paid to directors for attending Board or committee     
meetings. Messrs. Maybury, Roberts, Schlesinger and Swithenbank are currently   
the non-employee directors of the Company.                                      

Executive Compensation                                                          

The following table sets forth all compensation awarded to, earned by or  
paid for services rendered to the Company in all capacities during the year     
ended December 31, 1995 by (i) the Company's Chief Executive Officer and (ii)   
the four most highly compensated other executive officers who received annual   
compensation in excess of $100,000 (collectively, the "Named Executive          
Officers"):                                                                     

Summary Compensation Table  

                                                        [Enlarge/Download Table]

                                                  Annual Compensation (1)             
                                                  -----------------------             
                                                                           All Other  
Name and Principal Position                      Salary       Bonus      Compensation 
----------------------------------------------    -------    ---------   -------------
                                                                                      

Alan Trefler, President                         $171,250     $23,545(2)       --      
Joseph J. Friscia, Vice President of Sales and                                        
  Marketing                                      124,583      24,154(3)       --      
Michael R. Pyle, Vice President of                                                    
  Applications Development                       102,083      23,044(2)       --      
Ira Vishner, Vice President of Corporate                                              
  Services, Treasurer and Chief Financial                                             
  Officer                                        100,500      16,892(2)   $ 8,483(4)  
Kenneth W. Olson, Vice President of Technical                                         
  Development                                     98,083      13,118(2)    30,000(4)  

-------------                                                                   

(1) In accordance with the rules of the Securities and Exchange Commission,     
 other compensation in the form of perquisites and other personal benefits
has been omitted because the aggregate amount of such perquisites and   
other personal benefits constituted less than the lesser of $50,000 or  
10% of the total of annual salary and bonuses for each of the Named     
Executive Officers for 1995.                                            

(2) The amounts presented are bonuses earned between July 1994 and June 1995,   
and paid in 1995. Bonuses, if any, for the period from July 1995 through
June 1996 have not yet been determined.                                 

(3) The amount presented is bonus earned in 1995 and paid in February 1996.     
 Mr. Friscia earned a bonus of $66,650 in 1994, which was paid in February
1995.                                                                   

(4) Represents payments in lieu of paid days off.                               

Option Grants                                                                   

No stock options or stock appreciation rights ("SARs") were granted to any
of the Named Executive Officers during 1995.                                    

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Year-End Option Table                                                           

The following table sets forth certain information concerning the number  
and value of unexercised stock options held by each of the Named Executive      
Officers as of December 31, 1995. No SARs or stock options were exercised       
during 1995.                                                                    

Year-End Option Values  

                                                                [Download Table]


                         Number of Shares                                    
                            Underlying               Value of Unexercised    
                       Unexercised Options         In-the-Money Options at   
                         at Year-End (1)                 Year-End (2)        
                   ---------------------------  -----------------------------
Name               Exercisable   Unexercisable  Exercisable     Unexercisable
----               -----------   -------------  -----------     -------------
                                                                             
Alan Trefler            --             --            --              --      
Joseph J. Friscia    180,000       216,000 (3)   $2,101,200      $2,521,440  
Michael R. Pyle      151,200       172,800 (3)    1,765,008       2,017,152  
Ira Vishner             --             --            --              --      
Kenneth W. Olson        --             --            --              --      


-------------                                                                   

(1) The exercise price for each of the unexercised options included in the      
above table is approximately $0.33 per share.                           

(2) There was no public trading market for the Common Stock as of December      
31, 1995. Accordingly, as permitted by the rules of the Securities and  
 Exchange Commission, these values have been calculated on the basis of an
 assumed market value equal to the initial public offering price of $12.00
per share.                                                              

(3) These options vest in equal installments on December 29, 1996, 1997, 1998   
and 1999.                                                                       

Merit Payment Program                                                           

The Company frequently awards merit payments to its employees as part of a
performance assessment process, under which employees may be awarded cash       
payments based upon individual performance. All employees are eligible to       
receive merit payments. Historically, the Company's supervisors have been       
responsible for recommending the amount of merit payment for each of the        
employees under their direct review. These recommendations are then reviewed    
by the Board of Directors to promote consistency among departments. Awards of   
merit payments are made at the discretion of supervisors and the Board of       
Directors, based upon their opinions of employees' respective contributions     
to the Company. Awards have generally been made in connection with annual       
employee reviews.                                                               

Sales Compensation                                                              

In addition to base salary, the Company pays commissions to its sales     
personnel based on the attainment of annual sales quotas, monthly fees          
generated during the period from July 1 through June 30 of each year, and       
cash received by the Company from new accounts within one year after the        
initial signing of a contract with a customer.                                  

Stock Plans                                                                     

1994 Long-Term Incentive Plan                                                 

The Company's 1994 Long-Term Incentive Plan (the "1994 Plan") was adopted 
by the Board of Directors on November 23, 1994, and approved by the             
stockholders on April 21, 1995. The 1994 Plan provides for the issuance of a    
maximum of 5,000,000 shares of Common Stock pursuant to the grant of            
incentive stock options ("ISOs") to employees and nonqualified stock options    
("NSOs"), stock appreciation rights ("SARs"), restricted stock or long-term     
performance awards to employees, consultants, directors and officers of the     
Company. Long-term performance awards may be made in cash or in stock, must     
be awarded in connection with a performance period of at least two years, and   
are based on performance objectives determined by the Compensation Committee.   
At April 30, 1996, the Company had 161 employees eligible to participate in     
the 1994 Plan and options to purchase 2,409,000 were outstanding. To date, no   
restricted stock, SARs or long-term performance awards have been granted        
under the 1994 Plan.                                                            

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The 1994 Plan is administered by the Compensation Committee of the Board        
of Directors (the "Compensation Committee"). Subject to the provisions of the   
1994 Plan, the Compensation Committee has the authority to select the           
optionees or SAR, long-term performance award or restricted stock recipients    
and determine the terms of the options, SARs, long-term performance awards or   
restricted stock granted, including: (i) the number of shares or SARs; (ii)     
the option exercise terms; (iii) the amount of awards; (iv) the exercise or     
purchase price (which in the case of an incentive stock option cannot be less   
than the market price of the Common Stock as of the date of grant); (v) the     
type and duration of transfer or other restrictions; and (vi) the time and      
form of payment for restricted stock and upon exercise of options. Generally,   
an option is not transferable by the optionholder except by will or by the      
laws of descent and distribution. No option may be exercised following          
termination for cause or voluntary termination, or more than three months       
following involuntary termination. Upon termination due to death, an option     
is exercisable for a maximum of one year after such termination, and upon       
termination due to disability, the option is exercisable for a maximum of two   
years after such termination.                                                   

Federal Income Tax Consequences. The following is a brief description of  
the federal income tax consequences related to options awarded under the 1994   
Plan.                                                                           

ISOs. A participant who receives an ISO will recognize no taxable income  
for regular federal income tax purposes upon either the grant or the exercise   
of such ISO. However, when a participant exercises an ISO, the difference       
between the fair market value of the shares purchased and the option price of   
those shares will be includible in determining the participant's alternative    
minimum taxable income.                                                         

If the shares are retained by the participant for at least one year from  
date of exercise and two years from date of grant of the option, gain will be   
taxable to the participant, upon sale of the shares acquired upon exercise of   
the ISO, as a long-term capital gain. In general, the adjusted basis for the    
shares acquired upon exercise will be the option price paid with respect to     
such exercise. The Company will not be entitled to a tax deduction upon the     
exercise of an ISO.                                                             

If the shares are sold within a period of one year from the date of       
exercise or two years from the date of grant of the ISO, the participant will   
be required to recognize ordinary income equal to the difference between the    
option price and the lesser of the fair market value of the shares on the       
date of exercise or the amount realized on the sale or exchange of the shares   
and the Company will be entitled to a tax deduction of an equal amount. Any     
additional gain will be treated as long-term capital gain if the shares are     
held for more than one year prior to the sale and as short-term capital gain    
if the shares are held for a shorter period. If the participant sells the       
stock for less than the option price, the participant will recognize a          
capital loss equal to the difference between the sale price and the option      
price. The loss will be a long- term capital loss if the shares are held for    
more than one year prior to the sale and short-term if the shares are held      
for a shorter period.                                                           

NSOs. A participant will not recognize taxable income for federal income  
tax purposes at the time an NSO is granted. However, the participant will       
recognize compensation taxable as ordinary income at the time of exercise for   
all shares which are not subject to a substantial risk of forfeiture. The       
amount of such compensation will be the difference between the option price     
and the fair market value of the shares on the date of exercise of the          
option. The Company will be entitled to a deduction for federal income tax      
purposes at the same time and in the same amount as the participant is deemed   
to have recognized compensation income with respect to shares received upon     
exercise of the NSO. The participant's basis in the shares will be adjusted     
by adding the amount so recognized as compensation to the purchase price paid   
by the participant for the shares.                                              

The participant will recognize gain or loss when he or she disposes of    
shares obtained upon exercise of an NSO in an amount equal to the difference    
between the selling price and the participant's tax basis in such shares.       
Such gain or loss will be treated as long-term or short-term capital gain or    
loss, depending upon the holding period.                                        

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1996 Non-Employee Director Stock Option Plan                                    

The 1996 Non-Employee Director Stock Option Plan (the "Director Plan") was
adopted by the Board of Directors on May 13, 1996 and approved by the           
stockholders on June 26, 1996. The Director Plan provides for the grant of      
options for the purchase of up to 250,000 shares of Common Stock of the         
Company. To date, no options have been granted under the Director Plan.         

The Director Plan is administered by the Compensation Committee and       
provides that each person who becomes a director of the Company after May 13,   
1996, and who is not also an employee of the Company will receive upon          
initial election to the Board of Directors an option to purchase 30,000         
shares of Common Stock vesting in equal annual installments over five years.    
The exercise price for all options granted under the Director Plan will be      
equal to the market price of the Common Stock as of the date of grant.          
Options may not be assigned or transferred except by will or by the laws of     
descent and distribution and are exercisable, only to the extent vested,        
within 90 days after the optionee ceases to serve as a director of the          
Company (except that if a director dies or becomes disabled while he or she     
is serving as a director of the Company, the option is exercisable until the    
earlier of the scheduled expiration date of the option or one year from the     
date of death or disability).                                                   

Federal Income Tax Consequences. All options granted under the Director   
Plan are NSOs. See the discussion concerning the 1994 Plan above for a          
description of the federal income tax consequences of NSOs.                     

1996 Employee Stock Purchase Plan                                             

The 1996 Employee Stock Purchase Plan (the "Stock Purchase Plan") was     
adopted by the Board of Directors on May 13, 1996 and approved by the           
stockholders on June 26, 1996. An aggregate of 500,000 shares of Common Stock   
are reserved for issuance pursuant to this plan.                                

The Stock Purchase Plan is administered by the Compensation Committee. All
employees of the Company whose customary employment is in excess of 20 hours    
per week and more than five months per year, other than those employees who     
own 5% or more of the stock of the Company, are eligible to participate in      
the Stock Purchase Plan. As of April 30, 1996, approximately 135 of the         
Company's employees would have been eligible to participate in the Stock        
Purchase Plan. The Stock Purchase Plan will be implemented by one or more       
offerings of such duration as the Compensation Committee may determine,         
provided that no offering period may be longer than 27 months. An eligible      
employee participating in an offering will be able to purchase Common Stock     
at a price equal to the lesser of: (i) 85% of its fair market value on the      
date the right was granted, or (ii) 85% of its fair market value on the date    
the right was exercised. Payment for Common Stock purchased under the Stock     
Purchase Plan will be through regular payroll deduction or lump sum cash        
payment, or both, as determined by the Compensation Committee. The maximum      
value of Common Stock an employee may purchase during an offering period is     
10% of the employee's base salary during such period, calculated on the basis   
of the employee's compensation rate on the date the employee elects to          
participate in that offering.                                                   

To date, there have been no offerings under the Stock Purchase Plan and no
shares of Common Stock have been issued thereunder.                             

Federal Income Tax Consequences. The Stock Purchase Plan is intended to   
qualify as an "employee stock purchase plan" as defined in Section 423 of the   
Internal Revenue Code of 1986, as amended (the "Code") which provides that an   
employee will not realize any federal tax consequences when such employee       
joins the Stock Purchase Plan, or when an offering ends and such employee       
receives shares of the Company's Common Stock. An employee must, however,       
recognize income or loss on the difference, if any, between the price at        
which he or she sells the shares and the price he or she paid for them. If      
any employee has owned shares purchased under the plan for more than one        
year, disposes of them at least two years after the date the offering           
commenced, and the market price of the shares on the date of sale is equal to   
or less than the purchase price under the Stock Purchase Plan, he or she will   
recognize a long-term capital loss in the amount equal to the price paid over   
the sale price. If an employee has owned shares for more than one year, more    
than two years has elapsed from the date the offering commenced, and the        
market price of the shares on the date of sale is higher than the purchase      
price under the Stock Purchase Plan, the employee must recognize ordinary       
income in an amount equal to the lesser of (i) the fair market value of the     
shares on the day the offering                                                  

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commenced over the price paid, or (ii) the excess of the amount actually        
received for the shares over the purchase price. Any further gain would be      
treated as long-term capital gain.                                              

If an employee sells shares purchased under the Stock Purchase Plan prior 
to holding them for more than one year or prior to two years from the date      
the offering commenced, he or she must recognize ordinary income in the         
amount of the difference between the price he or she paid and the market        
price of the shares on the date of purchase and the Company will receive an     
expense deduction for the same amount. The employee will recognize a capital    
gain or loss on the difference between the sale price and the market price on   
the date of purchase. The Company will not be entitled to a tax deduction       
upon either the purchase or sale of shares under the Stock Purchase Plan if     
the holding period requirements set forth above are met. The Stock Purchase     
Plan is not qualified under Section 401(a) of the Code.                         

401(k) Plan                                                                   

In December 1989, the Company adopted a tax-qualified employee savings and
retirement plan (the "401(k) Plan") covering all of the Company's domestic      
employees upon commencement of employment and attainment of the age of 18.      
Participants may elect to contribute to the 401(k) Plan up to the lesser of     
the statutorily prescribed annual limit ($9,500 in 1996) or 20% of their        
total pre-tax compensation. The 401(k) Plan permits, but does not require,      
the Company to make additional matching contributions on behalf of              
participants. The 401(k) Plan is intended to qualify under Section 401 of the   
Code so that contributions by employees or by the Company to the 401(k) Plan,   
and income earned on plan contributions, are not taxable to employees until     
withdrawn from the 401(k) Plan, and so that contributions by the Company, if    
any, will be deductible by the Company when made. Participants are fully        
vested in their deferred salary contributions, and Company contributions, if    
any, vest 20% after three years and an additional 20% on each anniversary       
thereof. The administrator of the 401(k) Plan, at the direction of each         
participant, invests the plan assets of such participant among various          
investment options. Participants have the option of obtaining loans from the    
401(k) Plan secured by their account balances.                                  

Vacation Policy                                                                 

The Company generally provides its employees with a flexible vacation and 
paid time off policy. This policy provides that employees are given one block   
of paid days off for all uses, including vacation, sick days, personal days     
and holidays. The number of paid days off given to each employee per year       
varies according to each employee's length of service with the Company.         
Unused paid days off are carried over from year to year. Employees are          
generally entitled to payment in cash for the value of unused paid days off.    
The Company retains the right to repurchase paid days off in excess of thirty   
at the end of any quarter from employees who have accumulated more than         
thirty paid days off.                                                           

Compensation Committee Interlocks and Insider Participation                     

In 1995, decisions concerning compensation of executive officers were made
by the Board of Directors which included Mr. Trefler, the President of the      
Company, and Mr. Vishner, a Vice President and the Chief Financial Officer of   
the Company. The Company recently established a Compensation Committee of its   
Board of Directors, which currently consists of Messrs. Maybury and             
Schlesinger. No executive officer of the Company has served as a director or    
member of the compensation committee (or other committee serving an             
equivalent function) of any other entity, whose executive officers served as    
a director of the Company.                                                      

CERTAIN TRANSACTIONS  

The Company has adopted a policy whereby all future transactions between  
the Company and its officers, directors, principal stockholders and their       
affiliates will be on terms no less favorable to the Company than could be      
obtained from unrelated third parties and will be approved by a majority of     
the disinterested members of the Company's Board of Directors. No such          
transactions are currently being considered.                                    

The Company borrowed $230,000 from its President, Alan Trefler, in order  
to increase the Company's working capital and to fund operations. This loan,    
which was evidenced by a note renewed in January 1993 and bore interest at a    
rate of 8.5% per annum, was repaid in full by the Company in 1995.              

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PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding beneficial   
ownership of the Company's Common Stock as of May 13, 1996, and as adjusted     
for the sale of the shares of Common Stock offered hereby, by: (i) each         
person who is known by the Company to own beneficially more than 5% of the      
Common Stock, (ii) each director and Named Executive Officer of the Company,    
(iii) all directors and executive officers of the Company as a group, and       
(iv) each Selling Stockholder. Unless otherwise indicated below, to the         
knowledge of the Company, all persons listed below have sole voting and         
investment power with respect to their shares of Common Stock, except to the    
extent authority is shared by spouses under applicable law.                     

                                                                [Download Table]

                                                                  Shares to be     
                             Shares Beneficially               Beneficially Owned  
                                Owned Prior to                 After Offering (1)  
                                 Offering (1)                          (2)         
                              -------------------             ---------------------
                                                    Number                         
                                                      of                           
                             Number of              Shares    Number of            
Name                           Shares    Percent    Offered     Shares     Percent 
--------------------------   ----------  -------    -------   ----------   --------
                                                                                   
Alan Trefler                22,488,000     95.7%   385,900   22,102,100      84.1% 
Joseph J. Friscia (3)          234,000       *      90,000      144,000        *   
Michael R. Pyle (4)            151,200       *      64,800       86,400        *   
Ira Vishner                    346,500      1.5     69,300      277,200       1.1  
Kenneth W. Olson               450,000      1.9     90,000      360,000       1.4  
Edward A. Maybury               --          --        --         --           --   
Edward B. Roberts               --          --        --         --           --   
Leonard A. Schlesinger          --          --        --         --           --   
Thomas E. Swithenbank           --          --        --         --           --   
All directors and                                                                  
  executive officers as a                                                          
  group (11 persons) (5)    23,669,700     99.4    700,000   22,969,700      86.6  

-------------                                                                   

* Less than 1% of the outstanding Common Stock.                                 

(1) The number of shares of Common Stock deemed outstanding prior to the        
 offering includes (i) 23,490,000 shares of Common Stock outstanding as of
May 13, 1996 and (ii) shares issuable pursuant to outstanding options   
 held by the respective person or group which are currently exercisable or
which will be exercisable within 60 days of May 13, 1996, as set forth  
 below. The number of shares of Common Stock deemed outstanding after this
offering includes (i) 2,700,000 shares which are being offered for sale 
by the Company in this offering and (ii) 100,800 shares issuable upon   
exercise of stock options to be exercised immediately prior to the      
closing of this offering.                                               

(2) Assumes no exercise of the Underwriters' over-allotment option.             

(3) Shares beneficially owned prior to offering includes 180,000 shares of      
Common Stock subject to stock options exercisable within 60 days of May 
13, 1996, 36,000 of which shares will be issued upon the exercise of    
options immediately prior to the closing of this offering; shares to be 
beneficially owned after offering consists solely of shares of Common   
Stock subject to stock options exercisable within 60 days of May 13,    
1996.                                                                   

(4) Consists solely of shares of Common Stock subject to stock options          
exercisable within 60 days of May 13, 1996, 64,800 of which shares will 
be issued upon the exercise of options immediately prior to the closing 
of this offering.                                                       

(5) Shares beneficially owned prior to offering includes 331,200 shares of      
Common Stock subject to stock options exercisable within 60 days of May 
13, 1996, 100,800 of which shares will be issued upon the exercise of   
options immediately prior to the closing of this offering; shares to be 
 beneficially owned after offering includes 230,400 shares of Common Stock
subject to stock options exercisable within 60 days of May 13, 1996.    

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DESCRIPTION OF CAPITAL STOCK

  The authorized capital stock of the Company consists of 45,000,000 shares of
Common Stock, $.01 par value per share, and 1,000,000 shares of preferred stock,
$.01 par value per share (the "Preferred Stock"), which may be issued in one or 
more series.                                                                    

Common Stock                                                                    

As of May 13, 1996, there were 23,490,000 shares of Common Stock          
outstanding and held of record by twelve stockholders. Based upon the number    
of shares outstanding as of that date and giving effect to (i) the issuance     
of the 2,700,000 shares of Common Stock offered by the Company hereby, and      
(ii) the exercise of options to purchase 100,800 shares of Common Stock         
anticipated to occur immediately prior to the closing of this offering, there   
will be 26,290,800 shares of Common Stock outstanding upon the closing of       
this offering.                                                                  

Holders of Common Stock are entitled to one vote for each share held on   
all matters submitted to a vote of stockholders and do not have cumulative      
voting rights. Accordingly, holders of a majority of the shares of Common       
Stock entitled to vote in any election of directors may elect all of the        
directors standing for election. Holders of Common Stock are entitled to        
receive ratably such dividends, if any, as may be declared by the Board of      
Directors out of funds legally available therefor, subject to any               
preferential dividend rights of outstanding Preferred Stock. Upon the           
liquidation, dissolution or winding up of the Company, the holders of Common    
Stock are entitled to receive ratably the net assets of the Company available   
after the payment of all debts and other liabilities and subject to the prior   
rights of any outstanding Preferred Stock. Holders of the Common Stock have     
no preemptive, subscription, redemption or conversion rights. The outstanding   
shares of Common Stock are, and the shares offered by the Company in this       
offering will be, when issued and paid for, fully paid and nonassessable. The   
rights, preferences and privileges of holders of Common Stock are subject to,   
and may be adversely affected by, the rights of the holders of shares of any    
series of Preferred Stock which the Company may designate and issue in the      
future. Upon the closing of this offering, there will be no shares of           
Preferred Stock outstanding.                                                    

Preferred Stock                                                                 

The Board of Directors is authorized, subject to certain limitations      
prescribed by law, without further stockholder approval, to issue from time to  
time up to an aggregate of 1,000,000 shares of Preferred Stock in one or more   
series and to fix or alter the designations, preferences, rights and any        
qualifications, limitations or restrictions of the shares of each such series   
thereof, including the dividend rights, dividend rates, conversion rights,      
voting rights, terms of redemption (including sinking fund provisions),         
redemption price or prices, liquidation preferences and the number of shares    
constituting any series or designations of such series. The issuance of         
Preferred Stock may have the effect of delaying, deferring or preventing a      
change of control of the Company. The Company has no present plans to issue any 
shares of Preferred Stock. See "Risk Factors--Potential Adverse Effects of      
Anti-Takeover Provisions; Possible Issuance of Preferred Stock."                

Massachusetts Law and Certain Provisions of the Company's Restated Articles     
of Organization and Restated By-Laws                                            

Following this offering, the Company expects that it will have more than  
200 stockholders, thus making it subject to Chapter 110F of the Massachusetts   
General Laws, an anti-takeover law. In general, this statute prohibits a        
publicly held Massachusetts corporation from engaging in a "business            
combination" with an "interested stockholder" for a period of three years       
after the date of the transaction in which the person becomes an interested     
stockholder, unless (i) the interested stockholder obtains the approval of      
the Board of Directors prior to becoming an interested stockholder, (ii) the    
interested stockholder acquires 90% of the outstanding voting stock of the      
corporation (excluding shares held by certain affiliates of the corporation)    
at the time it becomes an interested stockholder, or (iii) the business         
combination is approved by both the Board of Directors and the holders of       
two-thirds of the outstanding voting stock of the corporation (excluding        
shares held by the interested stockholder). An "interested stockholder" is a    
person who, together with affiliates and associates, owns (or at any time       
within the prior three years did own)                                           

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5% or more of the outstanding voting stock of the corporation. A "business      
combination" includes a merger, a stock or asset sale, and certain other        
transactions resulting in a financial benefit to the interested stockholder.    

   The Company's Restated Articles of Organization (the "Restated Articles") and
the Restated By-Laws (the "Restated By-Laws") provide for a classified board of 
directors consisting of three classes as nearly equal in size as possible. See  
"Management--Executive Officers and Directors." In addition, the Restated       
Articles and Restated By-Laws provide that directors may be removed only for    
cause by the affirmative vote of the holders of a majority of the shares issued 
outstanding and entitled to vote. Under the Restated Articles and Restated      
By-Laws, any vacancy, however occurring, including a vacancy resulting from an  
enlargement of the Board, may only be filled by a vote of a majority of the     
directors then in office. The classification of the Board of Directors and the  
limitations on the removal of directors and filling of vacancies could have the 
effect of making it more difficult for a third party to acquire, or of          
discouraging a third party from acquiring, control of the Company.              

The Restated By-Laws include a provision excluding the Company from the   
applicability of Massachusetts General Laws Chapter 110D, entitled              
"Regulation of Control Share Acquisitions". In general, this statute provides   
that any stockholder of a corporation subject to this statute who acquires      
20% or more of the outstanding voting stock of a corporation may not vote       
such stock unless the stockholders of the corporation so authorize. The Board   
of Directors may amend the Company's Restated By-Laws at any time to subject    
the Company to this statute prospectively.                                      

The Restated By-Laws also require that a stockholder seeking to have any  
business conducted at a meeting of stockholders give notice to the Company      
not less than 90 days prior to the scheduled meeting. The notice from the       
stockholder must describe the proposed business to be brought before the        
meeting and include information about the stockholder making the proposal,      
any beneficial owner on whose behalf the proposal is made and any other         
stockholder known to be supporting the proposal. The Restated By- Laws          
further provide that a special stockholders meeting may be called by the        
president or the Board of Directors or upon the request of stockholders         
holding at least 40% of the voting power of the Company. These provisions may   
discourage another person or entity from making a tender offer for the          
Company's Common Stock, because such person or entity, even if it acquired a    
majority of the outstanding shares, would be able to take action as a           
stockholder (such as electing new directors or approving a merger) only at a    
duly called stockholders meeting.                                               

The Restated By-Laws provide that the directors, officers, employees and  
certain other agents of the Company shall be indemnified by the Company to      
the fullest extent authorized by Massachusetts law, as it now exists or may     
in the future be amended, against all expenses and liabilities reasonably       
incurred in connection with service for or on behalf of the Company. In         
addition, the Restated Articles provide that the directors of the Company       
will not be personally liable for monetary damages to the Company for           
breaches of their fiduciary duty as directors, unless they violated their       
duty of loyalty to the Company or its stockholders, acted in bad faith,         
knowingly or intentionally violated the law, authorized illegal dividends or    
redemptions or derived an improper personal benefit from their action as        
directors.                                                                      

Transfer Agent and Registrar                                                    

The transfer agent and registrar for the Company's Common Stock is Fleet  
National Bank.                                                                  

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SHARES ELIGIBLE FOR FUTURE SALE 

Upon the closing of this offering, the Company will have an aggregate of  
26,290,800 shares of Common Stock outstanding, assuming no exercise of the      
Underwriters' over-allotment option and no exercise of outstanding options to   
purchase Common Stock other than the options to purchase 100,800 shares to be   
exercised immediately prior to the closing of this offering by certain          
Selling Stockholders. Of these shares, the 3,400,000 shares sold in this        
offering are freely tradable without restriction or further registration        
under the Securities Act of 1933, as amended (the "Securities Act"), except     
that any shares held by "affiliates" of the Company, as that term is defined    
in Rule 144 under the Securities Act ("Rule 144"), may generally only be sold   
in compliance with the limitations of Rule 144 described below.                 

The remaining 22,890,800 shares of Common Stock are deemed "Restricted    
Securities" as defined under Rule 144. Restricted Securities may be sold in     
the public market only if registered or if they qualify for an exemption from   
registration under Rules 144, 144(k) or 701 promulgated under the Securities    
Act, which rules are summarized below. Subject to the executive officers and    
directors of the Company entering into lock-up agreements described below and   
the provisions of Rules 144, 144(k) and 701, additional shares will be          
available for sale in the public market (subject in the case of shares held     
by affiliates to compliance with certain volume restrictions) as follows: (i)   
12,000 shares will be available for immediate sale in the public market on      
the date of this Prospectus, (ii) 139,500 shares will be eligible for sale 90   
days after the date of this Prospectus and (iii) 22,739,300 shares will be      
eligible for sale upon the expiration of lock-up agreements 180 days after      
the date of this Prospectus.                                                    

In general, under Rule 144 as currently in effect, a person (or persons   
whose shares are aggregated), including an affiliate, who has beneficially      
owned shares for at least two years is entitled to sell, within any             
three-month period commencing 90 days after the date of this Prospectus, a      
number of shares that does not exceed the greater of (i) 1% of the then         
outstanding shares of Common Stock (approximately 262,000 shares immediately    
after this offering) or (ii) the average weekly trading volume in the Common    
Stock during the four calendar weeks preceding the date on which notice of      
such sale is filed, subject to certain restrictions. In addition, a person      
who is not deemed to have been an affiliate of the Company at any time during   
the 90 days preceding a sale and who has beneficially owned the shares          
proposed to be sold for at least three years would be entitled to sell such     
shares under Rule 144(k) without regard to the requirements described above.    
To the extent that shares were acquired from an affiliate of the Company,       
such stockholder's holding period for the purpose of effecting a sale under     
Rule 144 commences on the date of transfer from the affiliate. The Securities   
and Exchange Commission has recently proposed to reduce the two- and            
three-year holding periods under Rule 144 to one and two years, respectively.   
If enacted, such modifications will have material effect on the timing of       
when certain shares of Common Stock become eligible for resale.                 

Rule 701 promulgated under the Securities Act provides that shares of     
Common Stock acquired pursuant to written plans such as the 1994 Plan may be    
resold by persons other than affiliates, beginning 90 days after the date of    
this Prospectus, subject only to the manner of sale provisions of Rule 144,     
and by affiliates, beginning 90 days after the date of this Prospectus,         
subject to all provisions of Rule 144 except its two-year minimum holding       
period.                                                                         

Shortly after the date of this Prospectus, the Company intends to file a  
Form S-8 registration statement under the Securities Act to register all        
shares of Common Stock issuable under the 1994 Plan, the Director Plan and      
the Stock Purchase Plan (collectively, the "Stock Plans"). See                  
"Management--Stock Plans." Such registration statement is expected to become    
effective immediately upon filing, and shares covered by that registration      
statement will thereupon be eligible for sale in the public markets, subject    
to Rule 144 limitations applicable to affiliates.                               

Prior to this offering, there has not been any public market for the      
Common Stock of the Company, and no prediction can be made as to the effect,    
if any, that market sales of shares of Common Stock or the availability of      
shares for sale will have on the market price of the Common Stock prevailing    
from time to time. Nevertheless, sales of substantial amounts of Common Stock   
in the public market could adversely affect the market price of the Common      
Stock and could impair the Company's future ability to raise capital through    
the sale of its equity securities.                                              

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Except to the extent they have agreed to sell shares in the offering, all       
directors and officers, who hold in the aggregate 23,338,500 shares of Common   
Stock and options to purchase 906,000 shares of Common Stock, have agreed,      
pursuant to agreements with the representatives of the Underwriters, that       
they will not, without the prior written consent of the representatives of      
the Underwriters, sell or otherwise dispose of any shares of Common Stock or    
options to acquire shares of Common Stock during the 180-day period following   
the date of this Prospectus.                                                    

The Company has agreed not to sell or otherwise dispose of any shares of  
Common Stock during the 180-day period following the date of the Prospectus,    
except the Company may issue, and grant options to purchase, shares of Common   
Stock under the Stock Plans. In addition, the Company may issue shares of       
Common Stock in connection with any acquisition of another company if the       
terms of such issuance provide that such Common Stock shall not be resold       
prior to the expiration of the 180-day period referenced in the preceding       
sentence.                                                                       

LEGAL MATTERS   

The validity of the shares of Common Stock offered by this Prospectus will
be passed upon for the Company and the Selling Stockholders by Choate, Hall &   
Stewart, Boston, Massachusetts. Certain legal matters in connection with the    
offering will be passed upon for the Underwriters by Hale and Dorr, Boston,     
Massachusetts.                                                                  

EXPERTS   

The consolidated financial statements of Pegasystems Inc., at December 31,
1994 and 1995 and for each of the three years in the period ended December      
31, 1995, appearing in this Prospectus and Registration Statement have been     
audited by Ernst & Young LLP, independent auditors, as set forth in their       
report thereon appearing elsewhere herein and are included in reliance upon     
such report given upon the authority of such firm as experts in accounting      
and auditing.                                                                   

ADDITIONAL INFORMATION  

The Company has filed with the Securities and Exchange Commission (the    
"Commission") a Registration Statement on Form S-1 under the Securities Act     
with respect to the shares of Common Stock offered hereby. As permitted by      
the rules and regulations of the Commission, this Prospectus omits certain      
information contained in the Registration Statement. For further information    
with respect to the Company and the Common Stock offered hereby, reference is   
hereby made to the Registration Statement and to the exhibits and schedules     
filed therewith. Statements contained in this Prospectus as to the contents     
of any agreement or other document filed as an exhibit to the Registration      
Statement are not necessarily complete, and in each instance reference is       
made to the copy of such agreement filed as an exhibit to the Registration      
Statement, each such statement being qualified in all respects by such          
reference. The Registration Statement, including the exhibits and schedules     
filed therewith, may be inspected without charge at the Commission's Public     
Reference Room, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.       
20549, and at the Commission's regional offices located at Seven World Trade    
Center, 13th Floor, New York, New York 10048 and at Northwest Atrium Center,    
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of the     
Registration Statement may be obtained from the Commission from its Public      
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, upon         
payment of prescribed fees.                                                     

The Company intends to distribute to its stockholders annual reports      
containing financial statements audited by its independent accountants and      
will make available copies of quarterly reports for the first three quarters    
of each fiscal year containing unaudited financial statements.                  

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PEGASYSTEMS INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS  

                                                        [Enlarge/Download Table]

                                                                                        Page
                                                                                        ----
                                                                                            
Report of Independent Auditors                                                           F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and                            
  as of March 31, 1996 (unaudited)                                                       F-3
Consolidated Statements of Income for the years ended December 31, 1993, 1994 and           
  1995 and for the three months ended March 31, 1995 and 1996 (unaudited)                F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993,      
  1994 and 1995 and for the three months ended March 31, 1996 (unaudited)                F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994           
  and 1995 and for the three months ended March 31, 1995 and 1996 (unaudited)            F-6
Notes to Consolidated Financial Statements                                               F-7

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REPORT OF INDEPENDENT AUDITORS

The Board of Directors                                                          
Pegasystems Inc.                                                                

We have audited the accompanying consolidated balance sheets of           
Pegasystems Inc. as of December 31, 1994 and 1995 and the related               
consolidated statements of income, stockholders' equity, and cash flows for     
each of the three years in the period ended December 31, 1995. These            
financial statements are the responsibility of the Company's management. Our    
responsibility is to express an opinion on these financial statements based     
on our audits.                                                                  

We conducted our audits in accordance with generally accepted auditing    
standards. Those standards require that we plan and perform the audit to        
obtain reasonable assurance about whether the financial statements are free     
of material misstatement. An audit includes examining, on a test basis,         
evidence supporting the amounts and disclosures in the financial statements.    
An audit also includes assessing the accounting principles used and             
significant estimates made by management, as well as evaluating the overall     
financial statement presentation. We believe that our audits provide a          
reasonable basis for our opinion.                                               

In our opinion, the consolidated financial statements referred to above   
present fairly, in all material respects, the consolidated financial position   
of Pegasystems Inc. at December 31, 1994 and 1995, and the consolidated         
results of its operations and its cash flows for each of the three years in     
the period ended December 31, 1995, in conformity with generally accepted       
accounting principles.                                                          

ERNST & YOUNG LLP                                                               
Boston, Massachusetts                                                           
May 6, 1996, except for Notes 10 and 11,                                        
as to which the date is July 10, 1996.                                          

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PEGASYSTEMS INC.

CONSOLIDATED BALANCE SHEETS   

                                                                [Download Table]


                                                      December 31,                
                                                     ----------------             
                                                                        March 31, 
                                                     1994      1995        1996   
                                                     ----      ----     --------- 
                                                                       (unaudited)
                                                         (in thousands except     
                                                         share-related data)      
                                                                                  
                      Assets                                                      
Current assets:                                                                   
Cash and cash equivalents                          $   456   $   511     $ 2,644  
Trade and installment accounts receivable, net of                                 
  allowance for doubtful accounts of $0 and $434                                  
  at December 31, 1994 and 1995, respectively,                                    
  and $434 at March 31, 1996                         8,315     8,896       9,628  
Prepaid expenses and other assets                      204       425         342  
                                                   -------   -------     -------  
    Total current assets                             8,975     9,832      12,614  
Long-term license installments, net                  9,135    13,399      11,444  
Equipment and improvements, net                      1,564     2,172       2,143  
Software development costs, net                      1,113       473         354  
                                                   -------   -------     -------  
    Total assets                                   $20,787   $25,876     $26,555  
                                                   =======   =======     =======  
       Liabilities and Stockholders' Equity                                       
Current liabilities:                                                              
Accounts payable and accrued expenses              $ 1,991   $ 1,747     $   970  
Deferred revenue                                       139       114         803  
Current portion of long-term debt                      378       782         730  
Deferred income taxes                                1,976     2,796       3,159  
Note payable to stockholder                             50      --          --    
                                                   -------   -------     -------  
    Total current liabilities                        4,534     5,439       5,662  
Deferred income taxes                                3,931     4,947       5,085  
Long-term debt                                         450       816         672  
Stockholders' equity:                                                             
Preferred stock, $.01 par value, 1,000,000 shares                                 
  authorized; no shares issued and outstanding        --        --          --    
Common stock, $.01 par value, 45,000,000 shares                                   
  authorized, 23,490,000 shares issued and                                        
  outstanding                                          235       235         235  
Additional paid-in-capital                              15       106         106  
Deferred compensation                                 --         (91)        (86) 
Retained earnings                                   11,644    14,522      15,003  
Cumulative foreign currency translation                                           
  adjustment                                           (22)      (98)       (122) 
                                                   -------   -------     -------  
                                                    11,872    14,674      15,136  
                                                   -------   -------     -------  
    Total liabilities and stockholders' equity     $20,787   $25,876     $26,555  
                                                   =======   =======     =======  

See accompanying notes.   

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PEGASYSTEMS INC.

CONSOLIDATED STATEMENTS OF INCOME   

                                                        [Enlarge/Download Table]


                                                                        Three Months Ended    
                                     Year Ended December 31,                 March 31,        
                                -----------------------------------   ----------------------- 
                                  1993         1994         1995         1995         1996    
                                ---------    ---------    ---------    ---------   ---------- 
                                                                            (unaudited)       
                                          (in thousands except share-related data)            
                                                                                              
Revenue                                                                                       
  Software license                $6,448       $9,662      $13,528      $2,209         $2,520 
  Services                         3,764        6,601        8,719       1,796          2,421 
                              ----------   ----------   ----------   ---------    ----------- 
   Total Revenue                  10,212       16,263       22,247       4,005          4,941 
Cost of Revenue                                                                               
  Cost of software license         1,242        1,075          635         191            118 
  Cost of services                 2,227        3,791        6,161       1,249          1,405 
                              ----------   ----------   ----------   ---------    ----------- 
   Total cost of revenue           3,469        4,866        6,796       1,440          1,523 
                              ----------   ----------   ----------   ---------    ----------- 
Gross profit                       6,743       11,397       15,451       2,565          3,418 
Operating expenses                                                                            
  Research and development         3,766        5,440        7,061       1,438          1,604 
  Sales and marketing              1,350        2,629        3,592         797            974 
  General and administrative         834        1,092        1,541         327            389 
                              ----------   ----------   ----------   ---------    ----------- 
   Total operating expenses        5,950        9,161       12,194       2,562          2,967 
                              ----------   ----------   ----------   ---------    ----------- 
Income from operations               793        2,236        3,257           3            451 
License interest income            1,305        1,457        1,486         370            368 
Other interest income                 27           21           16           6             12 
Interest expense                     (32)         (56)        (118)        (18)           (39)
                              ----------   ----------   ----------   ---------    ----------- 
Income before provision for                                                                   
  income taxes                     2,093        3,658        4,641         361            792 
Provision for income taxes           860        1,465        1,763         137            311 
                              ----------   ----------   ----------   ---------    ----------- 
  Net income                      $1,233       $2,193       $2,878        $224           $481 
                              ==========   ==========   ==========   =========    =========== 
Net income per common and                                                                     
  common equivalent share           $.05         $.09         $.11        $.01           $.02 
                              ==========   ==========   ==========   =========    =========== 
Weighted average number of                                                                    
  common and common                                                                           
  equivalent shares                                                                           
  outstanding                 24,231,000   24,102,000   25,551,000  25,600,000     25,505,000 
                              ==========   ==========   ==========  ==========     ========== 

See accompanying notes.   

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PEGASYSTEMS INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY   

                                                        [Enlarge/Download Table]

                                      Common Stock                                                                    
                                    ------------------                                                                
                                                                                             Cumulative               
                                                                                              Foreign                 
                                     Number             Additional                            Currency       Total    
                                       of                 Paid-in    Deferred     Retained  Translation  Stockholders'
                                     Shares    Amount     Capital  Compensation   Earnings   Adjustment      Equity   
                                    ---------  ------    --------  ------------   --------   ----------  -------------
(in thousands except for share-related data)                                                                          
                                                                                                                      
Balance at December 31, 1992       22,500,000    $225       --        --         $ 8,218        --         $ 8,443    
Exercise of stock options             117,000       1       --        --            --          --               1    
Net income                             --         --        --        --           1,233        --           1,233    
                                   ----------    ----       ---       ---        -------      -----        -------    
Balance at December 31, 1993       22,617,000     226       --        --           9,451        --           9,677    
Exercise of stock options             873,000       9       $15       --            --          --              24    
Foreign currency translation                                                                                          
  adjustment                           --         --        --        --            --        $ (22)           (22)   
Net income                             --         --        --        --           2,193        --           2,193    
                                   ----------    ----       ---       ---        -------      -----        -------    
Balance at December 31, 1994       23,490,000     235        15       --          11,644        (22)        11,872    
Foreign currency translation                                                                                          
  adjustment                           --         --        --        --            --          (76)           (76)   
Issuance of stock options              --         --         91      $(91)          --          --             --     
Net income                             --         --        --        --           2,878        --           2,878    
                                   ----------    ----       ---       ---        -------      -----        -------    
Balance at December 31, 1995       23,490,000     235       106       (91)         14,522        (98)        14,674   
Foreign currency translation                                                                                          
  adjustment                           --         --        --        --            --          (24)           (24)   
Amortization of deferred                                                                                              
  compensation                         --         --        --          5           --          --               5    
Net income (unaudited)                 --         --        --        --             481        --             481    
                                   ----------    ----       ---       ---        -------      -----        -------    
Balance at March 31, 1996                                                                                             
  (unaudited)                      23,490,000    $235       $106     $(86)       $15,003      $(122)       $15,136    
                                   ==========    ====       ====      ===        =======      =====        =======    

See accompanying notes.   

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PEGASYSTEMS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS   

                                                        [Enlarge/Download Table]


                                                                                Three Months  
                                                                                   Ended      
                                                  Year Ended December 31,        March 31,    
                                                 --------------------------   ----------------
                                                 1993      1994      1995      1995     1996  
                                                 ------    ------    ------    -----   -------
                                                                                (unaudited)   
                                                                (in thousands)                
                                                                                              
Operating activities                                                                          
 Net income                                    $ 1,233   $ 2,193   $ 2,878   $  224    $  481 
 Adjustments to reconcile net income to  net                                                  
  cash provided (used) by operating                                                           
   activities:                                                                                
  Provision for deferred income taxes              629       961     1,836      103       501 
  Depreciation and amortization                  1,536     1,511     1,455      309       374 
  Provision for doubtful accounts                  326       --        793     --        --   
  Change in operating assets and liabilities:                                                 
   Decrease (increase) in trade and                                                           
     installment accounts receivable            (2,149)   (3,988)   (5,638)     722     1,223 
   Decrease (increase) in prepaid expenses                                                    
     and other assets                             (121)      (16)     (221)     (41)       83 
   Decrease (increase) in inventory               (215)      215      --       --        --   
   Increase (decrease) in accounts payable                                                    
     and accrued expenses                            8       971      (244)    (623)     (777)
   Increase (decrease) in deferred revenue         333      (336)      (25)     416       689 
                                               -------   -------   -------   ------    ------ 
     Net cash provided by operating                                                           
       activities                                1,580     1,511       834    1,110     2,574 
Investing activities                                                                          
   Purchase of equipment and improvements         (888)   (1,131)   (1,423)    (370)     (221)
  Software development costs                    (1,060)     (297)     --       --        --   
                                               -------   -------   -------   ------    ------ 
     Net cash used in investing activities      (1,948)   (1,428)   (1,423)    (370)     (221)
Financing activities                                                                          
 Repayment of note payable to shareholder         --        (180)      (50)    --        --   
 Proceeds from issuance of long-term debt          710       380     1,345     --        --   
 Repayments of long-term debt                     (243)     (263)     (575)     (95)     (196)
 Exercise of stock options                        --          23      --       --        --   
                                               -------   -------   -------   ------    ------ 
 Net cash provided (used) by financing                                                        
   activities                                      467       (40)      720      (95)     (196)
 Effect of exchange rate on cash                  --         (22)      (76)      (5)      (24)
                                               -------   -------   -------   ------    ------ 
 Net increase in cash                               99        21        55      640     2,133 
 Cash and equivalents at beginning of year         336       435       456      456       511 
                                               -------   -------   -------   ------    ------ 
 Cash and equivalents at end of period         $   435   $   456   $   511   $1,096    $2,644 
                                               =======   =======   =======   ======    ====== 
Supplemental Disclosure of Cash Flow                                                          
  Information:                                                                                
 Cash paid during period:                                                                     
  Interest                                     $    32   $    56   $   119   $   18    $   39 
                                               =======   =======   =======   ======    ====== 
  Income taxes                                 $   553   $   135   $   315   $   92    $   13 
                                               =======   =======   =======   ======    ====== 

See accompanying notes.   

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PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  
December 31, 1995   

1. SIGNIFICANT ACCOUNTING POLICIES                                              

Business                                                                        

Pegasystems Inc. (the Company) was incorporated on April 21, 1983, and    
develops customer service management software used by large,                    
transaction-intensive organizations to automate and manage their customer       
interactions. Customers of the Company include large banks and credit card      
processors and mutual fund companies. The Company also offers consulting,       
training and maintenance and support services to facilitate the installation    
and use of its solutions.                                                       

The environment of rapid technological change and intense competition     
which is characteristic of the software development industry results in         
frequent new products and evolving industry standards. The Company's            
continued success depends upon its ability to enhance current products and      
develop new products on a timely basis which keep pace with the changes in      
technology and competitors' innovations.                                        

International revenue is subject to various risks including imposition of 
government controls, export license requirements, political and economic        
conditions and instability, trade restrictions, currency fluctuations,          
changes in taxes, difficulties in staffing and managing international           
operations, and high local wage scales and other operating costs and            
expenses.                                                                       

Principles of Consolidation                                                     

The consolidated financial statements include the accounts of the Company 
and its wholly-owned subsidiary, Pegasystems Limited. All intercompany          
accounts and transactions have been eliminated in consolidation.                

Foreign Currency Translation                                                    

The translation of assets and liabilities of the Company's foreign        
subsidiary is made at year-end rates of exchange, while revenue and expense     
accounts are recorded at the average rates of exchange. The resulting           
translation adjustments are excluded from net income and are charged or         
credited to "Cumulative foreign currency translation adjustment" included as    
part of stockholder's equity. Realized and unrealized exchange gains or         
losses from transaction adjustments are reflected in operations and are not     
material.                                                                       

Revenue Recognition                                                             

The Company recognizes revenue in accordance with Statement of Position   
91-1, Software Revenue Recognition, issued by the American Institute of         
Certified Public Accountants. Specifically, revenue from software licenses is   
recognized upon product acceptance pursuant to noncancelable license            
agreements, and is based on management's assessment that the collectibility     
risk on the long-term license installments is low. Upon acceptance, the         
Company has no significant vendor obligations. The Company accrues the          
estimated cost of warranty and product returns in the period in which product   
revenue is recognized; historically these amounts have not been material. In    
the case of license renewals, revenue is recognized upon execution of the       
renewal license agreement or if, as is generally the case, renewal is           
automatic unless the customer gives notice of termination, at the expiration    
of the period during which the customer has the right to terminate.             
Maintenance fees are recognized ratably over the term of the maintenance        
agreement. The Company recognizes implementation as well as consulting and      
training fees as the services are provided.                                     

Software license revenue represents the present value of future payments  
under noncancelable license agreements which provide for payment in             
installments typically over a five-year period. A portion of the revenue from   
each agreement is recognized as interest income over the term of the            
agreement.                                                                      

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PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)   
December 31, 1995   

1. SIGNIFICANT ACCOUNTING POLICIES (Continued)                                  

The discount rate in effect for 1993, 1994, 1995 and for the three months       
ended March 31, 1996 was 7%. The trade and installment accounts receivable      
recorded on the balance sheet are net of $3,477,000, $3,937,000 and             
$3,887,000 as of December 31, 1994 and 1995, and March 31, 1996,                
respectively, which represents the imputed interest portion of future           
payments due under the Company's license agreements. Deferred revenue           
represents payments from customers, primarily for maintenance services, which   
are recognized as revenue as the related services are performed.                

Cash and Cash Equivalents                                                       

Cash and cash equivalents are stated at cost, which approximates market,  
and consist of short-term, highly liquid investments with original maturities   
of less than three months.                                                      

Concentration of Credit Risk                                                    

Financial instruments that potentially subject the Company to             
concentration of credit risk consist primarily of trade accounts receivable     
and long-term license installments. The Company records long-term license       
installments in accordance with its revenue recognition policy which results    
in receivables from customers, primarily large financial service                
organizations with strong credit ratings.                                       

Interim Financial Statements                                                    

The consolidated balance sheet at March 31, 1996, the consolidated        
statements of income and consolidated statements of cash flows for the three    
months ended March 31, 1995 and 1996 and the consolidated statement of          
stockholders' equity for the three months ended March 31, 1996 are unaudited,   
but, in the opinion of management, include all adjustments (consisting of       
normal recurring adjustments) necessary for a fair presentation of results      
for these interim periods. The results of operations for the three months       
ended March 31, 1996 are not necessarily indicative of results to be expected   
for the entire year.                                                            

Equipment and Improvements                                                      

Equipment and improvements are recorded at cost. Depreciation is computed 
using the straight-line method over the estimated useful lives of the assets    
which are three years for equipment and five years for furniture and            
fixtures. Leasehold improvements are amortized over the life of the lease.      

Software Development Costs                                                      

In compliance with Statement of Financial Accounting Standards (SFAS) No. 
86, Accounting for the Costs of Computer Software to be Sold, Leased, or        
Otherwise Marketed, certain software development costs are capitalized in the   
accompanying consolidated balance sheets. Capitalization of software            
development costs begins upon the establishment of technological feasibility,   
defined by the Company as a working model or an operative version of the        
computer software product that is completed in the same language and is         
capable of running on all of the platforms as the product to be ultimately      
marketed. During 1994, the Company capitalized $297,000 of software costs. No   
costs were capitalized during 1995 or the three months ended March 31, 1996.    

Amortization of capitalized software development cost is included in costs
of software license revenue and is provided on a straight-line basis of two     
years, which approximates the estimated useful life of the software as it       
relates to the Company's sales. The straight line amortization is not           
materially different from the amortization computed using the current period    
revenues as a percent of total expected product revenues. Total amortization    
expense charged to operations was $1,242,000, $1,075,000, $635,000 and          
$118,000 during 1993, 1994 and 1995 and the three months ended March 31,        
1996, respectively.                                                             

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PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)   
December 31, 1995   

1. SIGNIFICANT ACCOUNTING POLICIES (Continued)                                  

Net Income Per Share                                                            

Net income per common and common equivalent share is computed using the   
weighted average number of common and dilutive common equivalent shares         
outstanding during each period, assuming the exercise of stock options into     
common stock under the treasury stock method. Stock issued after May 14, 1995   
and common stock issuable pursuant to stock options granted after May 14,       
1995 have been reflected as outstanding for all of 1993, 1994 and 1995, using   
the treasury stock method. Fully diluted earnings per common share are not      
presented as they are not materially different from primary earnings per        
common share. Dilutive common equivalent shares consist of stock options        
(using the treasury stock method and using the assumed initial public           
offering price). Net income per share also reflects a fifteen- for-one stock    
split effective December 9, 1994, and a three-for-one stock split effective     
on the effective date of the Form S-1 registration statement.                   

Stock Options                                                                   

The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the estimated fair market value of the shares   
at the date of the grant. The Company accounts for stock option grants in       
accordance with APB Opinion No. 25 "Accounting for Stock Issued to              
Employees," and intends to continue to do so. Accordingly, the Company          
recognizes no compensation expense for stock option grants.                     

Use of Estimates                                                                

The preparation of the financial statements in conformity with generally  
accepted accounting principles requires management to make estimates and        
assumptions that affect the reported amounts of assets and liabilities at the   
date of the financial statements and the reported amounts of revenue and        
expenses during the reporting period. Some of the areas where estimates are     
utilized included allowance for bad debts, capitalized software, income         
taxes, revenue and various accrued expenses. Actual results could differ from   
those estimates.                                                                

2. EQUIPMENT AND IMPROVEMENTS                                                   

The cost and accumulated depreciation of equipment and improvements       
consist of the following:                                                       

                                                                [Download Table]

                                     December 31,   
                                   -----------------
                                    (in thousands)  
                                    1994      1995  
                                    -----   --------
                                                    
Equipment                         $1,435    $ 2,186 
Furniture and fixtures               630        863 
Leasehold improvements               202        434 
                                  ------    ------- 
                                   2,267      3,483 
Less accumulated depreciation       (703)    (1,311)
                                  ------    ------- 
Equipment and improvements, net   $1,564    $ 2,172 
                                  ======    ======= 

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PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)   
December 31, 1995   

3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES                                        

Accounts payable and accrued expenses consist of the following:           

                                                                [Download Table]

                                      December 31,  
                                     ---------------
                                     (in thousands) 
                                      1994     1995 
                                     -----    ------
                                                    
Trade accounts payable              $  744    $  557
Employee compensation and                           
  benefits                             508       568
Accrued income taxes                   253       -- 
Other                                  486       622
                                    ------    ------
                                    $1,991    $1,747
                                    ======    ======

4. DEBT AND OTHER FINANCIAL INSTRUMENTS                                         

Long-term debt consists of the following:                                 

                                                                [Download Table]

                                                             December 31, 
                                                             -------------
                                                                  (in     
                                                              thousands)  
                                                            1994     1995 
                                                            ----     ---- 
                                                                          
Note payable to bank, with monthly payments of $3,750                     
  plus interest through December 15, 1995                   $ 45      --  
Note payable to bank, with monthly payments of $17,222                    
  plus interest through December 1, 1996                     413    $  207
Note payable to bank, with monthly payments of $10,556                    
  plus interest through December 1, 1997                     370       243
Note payable to bank, with monthly payments of $32,778                    
  plus interest through June 28, 1998                        --        983
Note payable to bank, with monthly payments of $4,583                     
  plus interest through December 28, 1998                    --        165
                                                            ----    ------
                                                             828     1,598
Less current portion                                         378       782
                                                            ----    ------
                                                            $450    $  816
                                                            ====    ======

The notes bear interest at the bank's prime rate (6% at December 31, 1993 
and 8.5% at December 31, 1994 and 1995) plus 1/2%. The notes are secured by     
all computer equipment and furniture and fixtures of the Company. Maturities    
of these notes are $782,000 in 1996, $564,000 in 1997 and $252,000 in 1998.     

The Company has a line of credit with a bank allowing for borrowings up to
$2,500,000 at the prime rate. The line expires June 1, 1996. The Company had    
no drawings against the line of credit at December 31, 1995 and 1994.           
Borrowings are subject to various covenants which call for a specified level    
of working capital and net worth, maintenance of certain financial ratios and   
restrictions on the payments of dividends.                                      

The Company had a note payable of $50,000 to the president at December 31,
1994, which was repaid in full during 1995. The interest rate on the note was   
8.5% in 1994 and 1995.                                                          

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PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)   
December 31, 1995   

4. DEBT AND OTHER FINANCIAL INSTRUMENTS (Continued)                             

Financial instruments outstanding at December 31, 1995 are as follows:    

                                                                [Download Table]

                              Carrying     Fair  
                               Amount     Value  
                               -------   --------
                                (in thousands)   
                                                 
Assets                                           
 Cash and cash equivalents     $  511     $  511 
Liabilities                                      
 Notes payable to bank        ($1,598)   ($1,598)


The fair value of the long-term debt approximates the carrying amount due 
to the variable interest rate of the debt.                                      

5. EMPLOYEE BENEFIT PLANS                                                       

Stock Option Plan                                                               

The Company adopted an incentive stock option plan effective July 29, 1983
(the 1983 Plan). Key employees, as selected by the Board of Directors of the    
Company, were granted options to purchase the Company's common stock at a       
price, which in the Board of Directors' opinion, reflected fair value on the    
date of the grant. The 1983 plan expired in 1993. At December 31, 1995, no      
options issued under this plan were outstanding.                                

Long-Term Incentive Plan                                                        

During the year ended December 31, 1994, the Company adopted a Long-Term  
Incentive Plan (the 1994 Plan) to provide incentives to employees, directors    
and consultants through opportunities to purchase stock through incentive       
stock options and through options which do not qualify as incentive stock       
options.                                                                        

In addition to options, eligible participants under the 1994 Plan may be  
granted stock appreciation rights, restricted stock and long-term performance   
awards. A maximum of 2,400,000 shares are reserved for issuance under the       
plan. Shares equal to 2% of the outstanding shares at the start of each         
fiscal year shall be reserved for granting of replacement options; however,     
this may not cause the maximum shareholder dilution caused by the Plan to       
exceed the 2,400,000 shares of stock reserved for issuance under the plan.      

The option price per share is to be determined at the date of grant. For  
incentive stock options, the option price may not be less than 100% of the      
fair market value of the Company's common stock at the grant date. Incentive    
stock options granted to a person having greater than 10% of the voting power   
of all classes of stock must have an exercise price of at least 110% of fair    
market value of the Company's common stock.                                     

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PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)   
December 31, 1995   

5. EMPLOYEE BENEFIT PLANS (Continued)                                           

Stock option activity is summarized as follows:                           

                                                        [Enlarge/Download Table]

                                                                                  March 31,  
                                                    December 31,                    1996     
                                          1993          1994          1995       (unaudited) 
                                        ----------    ----------    ----------  -------------
                                                                                             
Outstanding options at beginning of                                                          
  period                               1,494,000     1,269,000     1,671,750      1,924,500  
 Granted                                   --        1,635,750       335,250         24,000  
 Exercised                              (117,000)     (873,000)       --             --      
 Canceled                               (108,000)     (360,000)      (82,500)       (25,500) 
                                      ----------    ----------    ----------     ----------  
Outstanding at end of period           1,269,000     1,671,750     1,924,500      1,923,000  
                                      ==========    ==========    ==========     ==========  
Price range of outstanding options     $.01-$.69     $.33-$.69     $.33-$.39     $.33-$6.00  
                                      ==========    ==========    ==========     ==========  
Exercisable at end of period           1,216,125       396,000       605,850        600,750  
                                      ==========    ==========    ==========     ==========  
Available for grant at end of period       --          764,250       475,500        477,000  
                                      ==========    ==========    ==========     ==========  

 In December 1995, the Company granted options to purchase 335,250 shares of
Common Stock at an exercise price of $.39 per share. The Company recorded an    
increase to additional paid-in-capital and a corresponding charge to deferred   
compensation in the amount of $90,518 to recognize the aggregate difference     
between the deemed fair value for accounting purposes of the stock options at   
the date of grant and the exercise price. The deferred compensation will be     
amortized over the option vesting period of five years.                         

6. LEASES                                                                       

The Company leases certain equipment and office space under noncancelable 
operating leases. Future minimum rental payments required under the operating   
leases with noncancelable terms in excess of one year at December 31, 1995      
are as follows:                                                                 

                                                                [Download Table]

Year ended December 31,        (in thousands)
                                             
1996                               $1,016    
1997                                1,090    
1998                                1,090    
1999                                  579    
                                   ------    
    Total                          $3,775    
                                   ======    

Total rent expense under operating leases was approximately $800,000,     
$863,000, and $1,100,000 for the years ended December 31, 1993, 1994 and        
1995, respectively.                                                             

7. INCOME TAXES                                                                 

Income before income taxes consists of the following:                     

                                                                [Download Table]

              1993     1994     1995 
              ----     ----     ---- 
                  (in thousands)     
                                     
Domestic    $2,093   $3,512    $4,318
Foreign          0      146       323
            ------   ------    ------
Total       $2,093   $3,658    $4,641
            ======   ======    ======

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PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)   
December 31, 1995   

7. INCOME TAXES (Continued)                                                     

The provision (benefit) for income taxes for the years ended December 31, 
1993, 1994 and 1995 consisted of the following:                                 

                                                                [Download Table]

                    1993     1994     1995  
                    ----     ----     ----  
                         (in thousands)     
                                            
Current:                                    
 Federal            $180   $  297    $ (107)
 State                51      176       (39)
 Foreign             --        31        73 
                    ----   ------     ----- 
   Total current     231      504       (73)
Deferred:                                   
 Federal             449      691     1,563 
 State               180      270       273 
                    ----   ------    ------ 
   Total deferred    629      961     1,836 
                    ----   ------    ------ 
                    $860   $1,465    $1,763 
                    ====   ======    ====== 

The effective income tax rate differed from the statutory federal income  
tax rate due to:                                                                

                                                                [Download Table]

                                              1993    1994     1995 
                                              ----    ----     ---- 
                                                                    
Statutory federal income tax rate             34.0%   34.0%    34.0%
State income taxes, net of federal benefit     7.3     7.3      5.8 
Permanent differences                          1.5     2.0      0.7 
Tax credits                                   (1.7)   (3.3)    (2.5)
                                              ----    ----     ---- 
   Effective income tax rate                  41.1%   40.0%    38.0%
                                              ====    ====     ==== 

At December 31, 1993, 1994 and 1995, the Company had research and         
development credit carryforwards of approximately $495,000, $421,000 and        
$440,000, respectively, available to offset future federal taxable income.      
These carryforward amounts generally expire from 2004 to 2008. In addition,     
as of December 31, 1993, 1994 and 1995, the Company had available alternative   
minimum tax (AMT) credit carryforwards of approximately $194,000. The           
carryforward period for the AMT credit is unlimited.                            

Deferred income taxes at December 31, 1994 and 1995 reflect the net tax   
effects of temporary differences between the carrying amounts of assets and     
liabilities for financial statement purposes and the amounts used for tax       
purposes. Significant components of the Company's deferred tax liabilities      
and assets as of December 31, 1994 and 1995 are as follows:                     

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PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)   
December 31, 1995   

7. INCOME TAXES (Continued)                                                     

                                                                [Download Table]

                                        December 31,    
                                      1994       1995   
                                      ----       ----   
                                       (in thousands)   
                                                        
Deferred tax liabilities:                               
 Software revenue                   $(6,924)    $(9,303)
 Capitalized software                  (501)       (213)
 Depreciation                          --          (142)
 Other                                 --           (41)
                                     ------      -------
   Total deferred tax                                   
  liabilities                        (7,425)     (9,699)
Deferred tax assets:                                    
 Deferred state taxes                   590         729 
 License fees                           119         119 
 Vacation accrual                        64         109 
 Other                                  133         274 
 Tax credits                            612         725 
                                    -------     ------- 
   Total deferred tax assets          1,518       1,956 
                                    -------     ------- 
   Net deferred tax liabilities      (5,907)     (7,743)
   Less current portion              (1,976)     (2,796)
                                    -------     ------- 
                                    $(3,931)    $(4,947)
                                    =======     ======= 

8. SIGNIFICANT CUSTOMERS                                                        

During 1993 the Company had two customers that accounted for 12.9% and    
12.3%, respectively, of the Company's consolidated revenue. In 1994 one         
customer accounted for 16.8% of the Company's consolidated revenue. This        
customer also accounted for 12.6% of the Company's 1995 consolidated revenue.   
Additionally, in 1995 two other customers accounted for 16.2% and 14.9%,        
respectively, of the Company's consolidated revenue.                            

9. INTERNATIONAL OPERATIONS                                                     

The Company's export sales from the United States are as follows:         

                                                                [Download Table]

                   1993     1994     1995 
                   ----     ----     ---- 
                       (in thousands)     
                                          
United Kingdom   $  488   $1,515    $1,343
Ireland               0    1,288       355
Canada               58    1,008       114
Switzerland         469       49       125
France                0       25       297
Other                 0       47       100
                 ------   ------    ------
Total            $1,015   $3,932    $2,334
                 ======   ======    ======

10. RECAPITALIZATION AND STOCK SPLIT                                            

During the year ended December 31, 1994, the Company increased the number 
of shares authorized from 600,000 shares of $.01 par value common stock to 9    
million shares of $.01 par value common stock.                                  

On December 9, 1994, the Company's Board of Directors declared a          
fifteen-for-one split of shares of $.01 par value common stock effected in      
the form of a dividend. This dividend resulted in 7,830,000                     

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PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)   
December 31, 1995   

10. RECAPITALIZATION AND STOCK SPLIT (Continued)                                

shares of common stock being issued and outstanding after the split. The par    
value of the additional shares of common stock issued in connection with the    
stock split was credited to common stock and a like amount was charged to       
additional paid-in capital to the extent available, and the remainder to        
retained earnings.                                                              

  On July 10, 1996, the Company increased the number of shares of common stock
authorized from 9 million to 45 million shares. The Company's Board of Directors
approved a three-for-one stock split in the form of a stock dividend effective  
on July 10, 1996.                                                               

The financial statements give effect to both stock splits for all periods 
presented.                                                                      

The Board of Directors is authorized, subject to certain limitations      
prescribed by law, without further stockholder approval, to issue from time to  
time up to an aggregate 1,000,000 shares of Preferred Stock in one or more      
series and to fix or alter the designations, preferences, rights and any        
qualifying limitations or restrictions of the shares of each such series        
thereof, including the dividend rights, dividend rates, conversion rights,      
voting rights, terms of redemptions (including sinking fund provisions),        
redemption price or prices, liquidation preferences and the number of shares    
constituting any shares or designations of such series.                         

11. SUBSEQUENT EVENTS                                                           

1996 Non-Employee Director Stock Option Plan The 1996 Non-Employee        
Director Stock Option Plan (the "Director Plan") was adopted by the Board of    
Directors on May 13, 1996. The Director Plan provides for the grant of          
options for the purchase of up to 250,000 shares of common stock of the         
Company. To date, no options have been granted under the Director Plan.         

The Director Plan is administered by the Compensation Committee and       
provides that each person who becomes a director of the Company after May 13,   
1996 and who is not also an employee of the Company will receive upon his       
initial election to the Board of Directors, an option to purchase 30,000        
shares of common stock vesting in equal annual installments over five years.    
The exercise price per share for all options granted under the Director Plan    
will be equal to the market price of the common stock as of the date of         
grant. Options may not be assigned or transferred except by will or by the      
laws of descent and distribution and are exercisable, only to the extent        
vested, within 90 days after the optionee ceases to serve as a director of      
the Company (except that if a director dies or becomes disabled while he or     
she is serving as a director of the Company, the option is exercisable until    
the earlier of the scheduled expiration date of the option or one year from     
the date of death or disability).                                               

1996 Employee Stock Purchase Plan The 1996 Employee Stock Purchase Plan   
(the "Stock Purchase Plan") was adopted by the Board of Directors on May 13,    
1996. An aggregate of 500,000 shares of common stock are reserved for           
issuance pursuant to this plan.                                                 

The Stock Purchase Plan is administered by the Compensation Committee. All
employees of the Company whose customary employment is in excess of 20 hours    
per week and more than five months per year, other than those employees who     
own 5% or more of the stock of the Company, are eligible to participate in      
the Stock Purchase Plan. The Stock Purchase Plan will be implemented by one     
or more offerings of such duration as the Compensation Committee may            
determine, provided that no offering period may be longer than 27 months. An    
eligible employee participating in an offering will be able to purchase         
common stock at a price equal to the lesser of: (i) 85% of its fair market      
value on the date the right was granted, or (ii) 85% of its fair market value   
on the date the right was exercised. Payment for common stock purchased under   
the Stock Purchase Plan will be through regular payroll deduction or lump sum   
cash payment, or both, as determined by the Compensation Committee. The         
maximum value of common stock an employee may purchase during an offering       
period is 10% of the employee's base salary                                     

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PEGASYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)   
December 31, 1995   

11. SUBSEQUENT EVENTS (Continued)                                               

during such period, calculated on the basis of the employee's compensation      
rate on the date the employee elects to participate in that offering.           

To date, there have been no offerings under the Stock Purchase Plan and no
shares of common stock have been issued thereunder.                             

Line of Credit The Company's bank line of credit was increased to $5      
million and extended until June 30, 1997.                                       

1994 Long Term Incentive Plan On May 13, 1996, the Company approved an    
increase in the number of shares issuable under the 1994 Long-Term Incentive    
Plan from 2,400,000 to 5,000,000.                                               

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UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the    
Company and the Selling Stockholders have agreed to sell to each of the         
Underwriters named below, and each of such Underwriters, for whom Goldman,      
Sachs & Co., Cowen & Company and Montgomery Securities are acting as            
representatives, has severally agreed to purchase from the Company and the      
Selling Stockholders, the respective number of shares of Common Stock set       
forth opposite its name below:                                                  

                                                                [Download Table]


                                                Number of
                                                Shares of
                                                 Common  
   Underwriter                                    Stock  
   -----------                                  ---------
                                                         
Goldman, Sachs & Co.                             733,334 
Cowen & Company                                  733,333 
Montgomery Securities                            733,333 
Adams, Harkness & Hill, Inc.                     200,000 
Alex. Brown & Sons Incorporated                  200,000 
Hambrecht & Quist LLC                            200,000 
Edward D. Jones & Co.                            200,000 
Morgan Stanley & Co. Incorporated                200,000 
Robertson, Stephens & Company LLC.               200,000 
                                                ---------
    Total                                       3,400,000
                                                =========

Under the terms and conditions of the Underwriting Agreement, the         
Underwriters are committed to take and pay for all of the shares offered        
hereby, if any are taken.                                                       

The Underwriters propose to offer the shares of Common Stock in part      
directly to the public at the initial public offering price set forth on the    
cover page of this Prospectus and in part to certain securities dealers at      
such price less a concession of $0.45 per share. The Underwriters may allow,    
and such dealers may reallow, a concession not in excess of $0.10 per share     
to certain brokers and dealers. After the shares of Common Stock are released   
for sale to the public, the offering price and other selling terms may from     
time to time be varied by the representatives.                                  

The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 510,000     
additional shares of Common Stock to cover over- allotments, if any. If the     
Underwriters exercise their over-allotment option, the Underwriters have        
severally agreed, subject to certain conditions, to purchase approximately      
the same percentage thereof that the number of shares to be purchased by each   
of them, as shown in the foregoing table, bears to the 3,400,000 shares of      
Common Stock offered.                                                           

The Company and the Selling Stockholders have agreed that, subject to     
certain exceptions, during the period beginning from the date of this           
Prospectus and continuing to and including the date 180 days after the date     
of the Prospectus, they will not offer, sell, contract to sell or otherwise     
dispose of any shares of Common Stock or of any other securities of the         
Company (other than pursuant to stock plans existing on the date of this        
Prospectus) which are substantially similar to the shares of Common Stock or    
which are convertible or exchangeable into securities which are substantially   
similar to the shares of Common Stock without the prior written consent of      
the representatives, except for the shares of Common Stock offered in           
connection with the offering.                                                   

The representatives of the Underwriters have informed the Company that    
they do not expect sales to accounts over which the Underwriters exercise       
discretionary authority to exceed five percent of the total number of shares    
of Common Stock offered hereby.                                                 

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  Prior to the offering, there has been no public market for the shares of
Common Stock. The initial public offering price was negotiated among the Company
and the representatives. Among the factors considered in determining the initial
public offering price of the Common Stock, in addition to prevailing market     
conditions, were the Company's historical performance, estimates of business    
potential and earnings prospects for the Company, an assessment of the Company's
management and the consideration of the above factors in relation to market     
valuation of companies in related businesses.                                   

The Company and the Selling Stockholders have agreed to indemnify the     
several Underwriters against certain liabilities, including liabilities under   
the Securities Act.                                                             

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Picture of Pegasus, the winged horse of mythology, flying out of a computer     
terminal screen, against a background of stars.                                 

Service Excellence                                                              
Through Automation                                                              

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================================================================================

No person has been authorized to give any information or to make any        
representations other than those contained in this Prospectus, and, if given    
or made, such information or representations must not be relied upon as         
having been authorized. This Prospectus does not constitute an offer to sell    
or the solicitation of an offer to buy any securities other than the            
securities to which it relates or an offer to sell or the solicitation of an    
offer to buy such securities in any circumstances in which such offer or        
solicitation is unlawful. Neither the delivery of this Prospectus nor any       
sale made hereunder shall, under any circumstances, create any implication      
that there has been no change in the affairs of the Company since the date      
hereof or that the information contained herein is correct as of any time       
subsequent to its date.                                                         

-------------   

TABLE OF CONTENTS   

                                                                [Download Table]

                                                 Page  
                                               --------
                                                       
Prospectus Summary                                 3   
Risk Factors                                       5   
Use of Proceeds                                   12   
Dividend Policy                                   12   
Capitalization                                    13   
Dilution                                          14   
Selected Consolidated Financial Data              15   
Management's Discussion and Analysis of Fi-            
  nancial Condition and Results of Operations     16   
Business                                          25   
Management                                        36   
Certain Transactions                              42   
Principal and Selling Stockholders                43   
Description of Capital Stock                      44   
Shares Eligible for Future Sale                   46   
Legal Matters                                     47   
Experts                                           47   
Additional Information                            47   
Index to Consolidated Financial Statements       F-1   
Underwriting                                     U-1   

Through and including August 12, 1996 (the 25th day after the date of this  
Prospectus), all dealers effecting transactions in the Common Stock, whether    
or not participating in this distribution, may be required to deliver a         
Prospectus. This is in addition to the obligation of dealers to deliver a       
Prospectus when acting as Underwriters and with respect to their unsold         
allotments or subscriptions.                                                    

3,400,000 Shares  

PEGASYSTEMS INC.  

Common Stock  
(par value $.01 per share)  

-------------   

[Pegasystems Inc. Logo]   
-------------   

Goldman, Sachs & Co.  

Cowen & Company   

Montgomery Securities   

Representatives of the Underwriters   

================================================================================

Dates Referenced Herein   and   Documents Incorporated by Reference

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