UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31,June 30, 2010

or

For the transition period from            to            

Commission File Number: 1-11859

PEGASYSTEMS INC.

(Exact name of Registrant as specified in its charter)

(617) 374-9600

(Registrant’s telephone number including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes  ¨      No  ¨

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

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

There were 37,022,810approximately 37,120,066 shares of the Registrant’s common stock, $.01 par value per share, outstanding on April 12,July 30, 2010.

PEGASYSTEMS INC.

Index to Form 10-Q

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS

(in thousands, except per share amounts)

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

See notes to unaudited condensed consolidated financial statements.

PEGASYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation

The Company has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S.”) for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2009.

In the opinion of management, the Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year 2010.

Correction of Statement of Cash Flow

After the issuance of our March 31, 2010 interim financial statements, management identified an error in the presentation of currency transaction losses on foreign currency denominated cash and cash equivalents within the statement of cash flows. These losses should have been presented as a reconciling item within cash flows from operating activities and included within theEffect of exchange rate on cash and cash equivalents in the statement of cash flows. The impact of the applicable line items within the condensed consolidated statement of cash flows for the three months ended March 31, 2010 is as follows:

The effect of the presentation error has no impact on the reported cash and cash equivalents, total changes in cash flows for the period, the condensed consolidated statement of operations or condensed consolidated balance sheet. This matter did not have a material impact on the 2009, 2008, or 2007 consolidated financial statements, or any interim period within those years.

As the Company has concluded that these adjustments are immaterial to the March 31, 2010 interim financial statements, these adjustments will be prospectively reflected in applicable condensed consolidated statement of cash flows reported in the Company’s Form 10-Q for the quarter ended March 31, 2011.

Acquisition-related costs

Acquisition-related costs are expensed as incurred and include costs to effect an impending or completed acquisition and direct and incremental costs associated with an acquisition. During the first quartersix months of 2010, acquisition-related costs were primarily legal and advisory fees, finder’slegal, tax consulting and valuation fees and due diligence costs associated with ourthe Company’s acquisition of Chordiant Software, Inc. (“Chordiant”).Chordiant. See Note 11 “Subsequent Event”5 “Acquisition, Goodwill and Intangibles” for further discussion of the acquisition.

Restructuring costs

Restructuring costs include severance and related benefit costs for the reduction of personnel during the second quarter of 2010 related to the Chordiant acquisition. See Note 8 “Accrued Restructuring Costs” for further detail.

2.	FAIR VALUE MEASUREMENTS

Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determinedparticipants based on assumptions that market participants would use in pricing an asset or liability. As a basis for consideringclassifying such assumptions, a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value, was established as follows: (Level 1) observable inputs such as quoted prices in active markets for identical assets or liabilities; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company measures certain financial assets at fair value, consisting of the Company’sits marketable securities and cash equivalents.

The fair value hierarchy of the Company’s cash equivalents and marketable securities at fair value isand classifies them as follows:

					Fair Value Measurements at Reporting Date Using
(in thousands)		December 31, 2009			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)
Cash equivalents		$	9,880		$	9,880		$	—
Marketable securities:
Municipal bonds		$	112,723		$	27,152		$	85,571
Government sponsored enterprise bonds			19,560			—			19,560
Corporate bonds			6,513			6,513			—
Total marketable securities:		$	138,796		$	33,665		$	105,131

Unbilled trade accounts receivable relate to services earned under time and material arrangements, maintenance and license arrangements that had not been invoiced as of March 31,June 30, 2010 and December 31, 2009, respectively.

Chordiant Acquisition

On April 21, 2010, the Company acquired all of the outstanding shares of common stock of Chordiant, a leading provider of customer relationship management (“CRM”) software and services with a focus on improving customer experiences through decision technology. The aggregate purchase price for Chordiant was approximately $160.3 million consisting of $156.8 million in cash and stock options with a fair value of $3.5 million. The Company issued approximately 241,000 stock options as replacement of outstanding Chordiant stock options at the date of the closing. The majority of the fair value of these stock options was recorded as purchase price based on the portion of the awards related to pre-combination services. The compensation expense associated with the portion of the replacement awards related to post-combination services totaled $0.2 million and will be recognized as compensation expense over the remaining service period. As of June 30, 2010, the Company incurred direct incremental expenses associated with the transaction of $4.9 million.

The Company believes the acquisition will expand its global customer base and provide complementary solutions. Chordiant clients will be able to incorporate Pegasystems process automation to enhance their experience in their existing call center and marketing solutions. Pegasystems’ clients will benefit from Chordiant’s decision management solutions and extensive CRM assets. In addition, the Company believes the combination of the two companies will expand the partner network and provide incremental business opportunity growth.

The operations of Chordiant are included in our operating results from the date of acquisition. For the three and six months ended June 30, 2010, $7.8 million of revenue was directly attributable to Chordiant operations. Due to the rapid integration of the sales force and operations of Chordiant, it will become increasingly difficult to separately identify revenue from arrangements attributable to Chordiant.

The valuation of the acquired intangible assets and assumed liabilities is preliminary. The Company is currently in the process of investigating the facts and circumstances existing as of the acquisition date in order to finalize its valuation and establish the related tax basis. As a result of the preliminary purchase price allocation, the Company recognized approximately $48.6 million of goodwill, which is primarily due to the expected synergies of the combined entities and the workforce in place. The goodwill created by the transaction is nondeductible for tax purposes. A summary of the preliminary purchase price allocation for the acquisition of Chordiant is as follows:

The valuation of the assumed deferred maintenance revenue liability was based on the Company’s contractual commitment to provide post-contract customer support to Chordiant customers. The fair value of this assumed liability was based on the cost plus a reasonable margin to fulfill these service obligations. The majority of the deferred revenue is expected to be recognized in the next 12 months. The valuation of the acquired intangible assets is inherently subjective and relies on significant unobservable inputs. The valuation assumptions take into consideration the Company’s estimates of contract renewal, technology attrition and revenue growth projections. The preliminary allocations of the purchase price consideration to tangible and intangible assets acquired were based on our estimates and assumptions that are still subject to change.

The preliminary values for specifically identifiable intangible assets, by major asset class, are as follows:

Pro forma Information

The following unaudited pro forma financial information presents the combined results of operations of the Company and Chordiant as if the acquisition had occurred on January 1, 2010 and 2009, respectively, after giving effect to certain pro forma adjustments. The pro forma adjustments reflected herein include only those adjustments that are directly attributable to the Chordiant acquisition, factually determinable, and expected to have a continuing impact on the Company. These pro forma adjustments include a reduction of historical Chordiant revenue for fair value adjustments related to acquired deferred revenue and deferred costs, a net increase in amortization expense to eliminate historical amortization of Chordiant intangible assets and to record amortization expense for the $90.4 million of acquired identifiable intangibles, and a decrease in interest income as a result of the cash paid for the acquisition. The unaudited pro forma financial information does not reflect any adjustments for anticipated synergies resulting from the acquisition and is not necessarily indicative of the operating results that would have actually occurred had the transaction been consummated as of January 1, 2010 and 2009, respectively. The preliminary allocations of the purchase price consideration to tangible and intangible assets acquired and liabilities assumed herein were based upon preliminary valuations and our estimates and assumptions are still subject to change.

Goodwill and Intangibles

The Company operates in one operating segment. The following table presents the change in the carrying amount of goodwill:

Amortized intangible assets consist of the following:

Amortization expense for all of the acquired intangibles was approximately $2.0 million during both the second quarter and first six months of 2010, of which approximately $1.1 million was included in cost of software licenses and approximately $0.9 million was included in operating expenses. Amortization expense was de minimis in 2009.

The increase in deferred maintenance revenue is primarily due to our acquisition of Chordiant. See Note 5 “Acquisition, Goodwill, and Intangibles” for further discussion of the acquired assets and assumed liabilities from the acquisition.

5.8.	DEFERRED REVENUEACCRUED RESTRUCTURING COSTS

During the second quarter of 2010, in connection with the Company’s integration plan of Chordiant, the Company recorded $6.1 million of severance and related benefit costs for the reduction of approximately 50 personnel in redundant roles, primarily in general and administrative functions. These restructuring costs are all cash obligations of which approximately $3.9 million is expected to be paid in the next 12 months and the remaining $1.1 million by the end of the second quarter of 2012. The Company expects to incur an additional $0.4 million in severance costs during the third quarter of 2010. In connection with the Company’s evaluation of its combined facilities, the Company approved a plan to eliminate one redundant facility. As a result, the Company expects to incur approximately $1.3 million in restructuring expenses by the end of 2010, representing future lease payments and demising costs, net of estimated sublease income and costs for this identified facility. These exit costs will be recognized when the Company ceases to use the leased facility, which is expected to occur by the end of 2010.

A summary of the restructuring activity during the second quarter of 2010 is as follows:

The Company’s principal administrative, sales, marketing, support, and research and development operations are located in a leased facility in Cambridge, Massachusetts. The lease for this facility expires in 2013, subject to the Company’s option to extend for two additional five-year periods. The Company also leases space for its other offices under non-cancelable operating leases that expire on various dates through 2014.

As of June 30, 2010, the Company’s future minimum rental payments required under operating leases with non-cancelable terms in excess of one year were as follows:

As of June 30, 2010, the Company did not have any additional unconditional purchase obligations.

In connection with the acquisition of Chordiant, the Company assumed an agreement with Ness Technologies Inc., Ness USA, Inc. and Ness Technologies India, Ltd. (collectively, “Ness”) that expires December 31, 2011. Pursuant to this agreement, Ness provides technical product support, sustaining engineering function, product testing services, product development services and other identified technical and consulting services to customers acquired from Chordiant. If the Company terminates the Ness agreement for convenience, it may be required to pay a termination fee of approximately $0.4 million.

Yue vs. Chordiant Software, Inc.

On January 2, 2008, Chordiant and certain of its officers and one other employee were named in a complaint filed in the United States District Court for the Northern District of California (the “Court”) by Dongxiao Yue under the caption Dongxiao Yue (“Plaintiff”) v. Chordiant Software, Inc. et al. Case No. CV 08-0019 (N.D. Cal.). The complaint alleged that the Company’s Marketing Director (“CMD”) software product infringed copyrights in certain software marketed by Netbula LLC. On May 14, 2010, a jury awarded the Plaintiff approximately $1.4 million, which was accrued in the assumed Chordiant liabilities and included in accrued expenses in the consolidated balance sheet as of June 30, 2010. This judgment was approved by the Court on August 3, 2010, following the conclusion of various post-trial motions filed by the parties. The Company has not yet determined whether it will file an appeal in this matter.

10.  COMPREHENSIVE (LOSS) INCOME

Comprehensive (loss) income includes the Company’s net (loss) income plus the results of certain stockholders’ equity changes not reflected in the unaudited condensed consolidated statements of income.operations. The components of comprehensive (loss) income are as follows:

11.  STOCK-BASED COMPENSATION

For the second quarter and first quartersix months of 2010 and 2009, stock-based compensation expense was reflected in the Company’s unaudited condensed consolidated statements of incomeoperations as follows:

During the first quartersix months of 2010, the Company issued approximately 251,000395,000 shares to its employees under the Company’s share-based compensation plans.

During the first quarter of 2010, the Company granted Additional options to purchase approximately 46,000 restricted stock units (“RSUs”)241,000 shares were issued as replacement awards in connection with the election by employees to receive 50%acquisition of their 2010 target incentiveChordiant. The compensation under the Company’s Corporate Incentive Compensation Plan (the “CICP”) in the form of RSUs instead of cash. The total stock-based compensation of approximately $1.6 millionexpense associated with this RSU grantthe portion of the replacement awards related to post-combination services totaled $0.2 million and will be recognized as compensation expense, in accordance with the accelerated recognition model over one year.the remaining service period.

As of March 31,June 30, 2010, the Company had approximately $7.8$7.1 million of unrecognized stock-based compensation expense related to all unvested RSUs and unvested stock options that is expected to be recognized over a weighted-average period of 2.12 years.

8.	EARNINGS PER SHARE

12.  NET (LOSS) EARNINGS PER SHARE

Basic (loss) earnings per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding options, RSUs, and warrants, using the treasury stock method and the average market price of our common stock during the applicable period. Certain shares related to some of our outstanding stock options and RSUs were excluded from the computation of diluted earnings per share because they were antidilutive in the periods presented, but could be dilutive in the future.

13.  INCOME TAXES

The Company accounts for income taxes at each interim period using its estimated annual effective tax rate. The provision for income taxes represents current and future amounts owed for federal, state, and foreign taxes.

During the second quarter and first quartersix months of 2010, and 2009, wethe Company recorded provisionsa benefit of $2.4$3.3 million and $3.8$0.9 million, respectively, on a pre-tax loss of $11.5 million and $5.2 million, respectively, which resulted in an effective tax rate of 38.8%28.9% and 30.4%16.9%, respectively.

The increase in our effective tax rate for the first quarter of 2010 compared to the first quarter of 2009 was due to the geographic mix of income expected to be earned in higher tax jurisdictions in 2010 and the recording ofCompany recorded a discrete item related to the nondeductible portion of acquisition-related costs incurred in the second quarter and first quartersix months of 2010 associated with the Chordiant acquisition, which reduced the tax benefit for the second quarter and first six months of 2010 by 2.9% and 13.5%, respectively.

The Company is in the process of evaluating its tax position related to the assets acquired and liabilities assumed from the Chordiant acquisition. These nondeductible acquisition-related costs accounted for 5.5%The valuation of the assets acquired and liabilities assumed, including the measurement of the acquired net operating losses (“NOLs”), is preliminary and is subject to change until the Company has gathered all of the relevant factors that existed at the acquisition date. We are finalizing the determination of the acquired tax basis and measurement of valuation allowances and uncertain tax positions. There were no significant changes in our first quarter 2010uncertain tax rate.positions other than what may arise from the Chordiant acquisition since December 31, 2009.

Our effective tax rate during the second quarter and first quartersix months of 2009 was below the statutory federal income tax rate primarily due to the investment in tax-exempt municipal bonds and the benefit from the SEZ India tax holiday.

10.14.  GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS

The Company operates in one operating segment—rules-based Business Process Management (“BPM”) software. The Company derives substantially all of its revenue from the sale and support of one group of similar products and services. Substantially all of the Company’s assets are located within the U.S. The Company derived its revenue from the following geographic areas (sales outside the U.S. are principally through export from the U.S.):

There were no customers accounting for more than 10% of the Company’s trade receivables, net of allowances.total revenue. The following table summarizes the Company’s concentration of credit risk associated with customers accounting for 10% or more than 10% of the Company’s total revenueoutstanding trade receivables, and short and long-term license installments:

11.    SUBSEQUENT EVENT

On April 21, 2010, the Company acquired Chordiant, a leading provider of customer relationship management (“CRM”) software and services. The purchase price for Chordiant was approximately $109 million in cash, net of approximately $47.8 million of cash acquired. In addition, the Company issued approximately 236,000 stock options in exchange for outstanding Chordiant stock options at the date of the closing. The majority of the fair value of these stock options will be recorded as additional purchase price. The remaining fair value of these stock options will be recognized as stock-based compensation expense over the requisite service period. The Company is in the process of preparing an allocation of the purchase price to the fair value of assets acquired and liabilities assumed, but currently expects that a substantial portion of the Chordiant purchase price will ultimately be allocated to intangible assets, and that such assets are likely to include acquired core technology, customer related assets and goodwill. As of March 31, 2010, the Company incurred direct incremental expenses associated with the transaction of $1.5 million and expects to incur an additional $2.2 million.

The Company believes the acquisition will expand its global customer base and provide complementary solutions. Chordiant clients will be able to incorporate Pegasystems process automation to enhance their experience in their existing foundation and marketing solutions. Pegasystems’ clients will benefit from Chordiant’s decision management solutions and extensive CRM assets. In addition, the Company believes the combination of the two companies will expand the partner network and provide incremental business opportunity growth.

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains or incorporates forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management’s beliefs and assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “could,” “estimate,” “may,” “target,” “project,” or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict.

We encourage you to carefully review the risk factors we have identified in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2009. We believe these risk factors, among other factors could cause our actual results to differ materially from the forward-looking statements we make. We do not intend to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Our products and services

We develop and license rules-based BPM software and provide professional services, maintenance, and training related to our software. We focus our sales efforts on target accounts, which are companies or divisions within companies, and are typically large organizations that are among the leaders in their industry. Our strategy is to sell initial licenses to these target accounts that are focused on a specific purpose or area of operations, rather than selling large enterprise licenses. This strategy allows our customers to quickly realize business value from our software and limits their initial investment. Once a customer has realized this initial value, we work with the customer to identify opportunities for follow-on sales.

Our license revenue is primarily derived from sales of our PegaRULES Process Commander (“PRPC”) software and related solution frameworks. PRPC is a comprehensive platform for building and managing BPM applications that unifies business rules and business processes. Our solution frameworks are built on the capabilities of PRPC and are purpose- or industry -specificindustry-specific collections of best practice functionality to allow organizations to quickly implement new customer-facing practices and processes, bring new offerings to market, and provide customized or specialized processing. These products often require less implementation assistance than prior generations of our software products. In many cases this has resulted in a shorter sales process and implementation period. PRPC and related solution frameworks can be used by a broad range of customers within financial services, insurance and healthcare markets, as well as other markets, such as life sciences and government.

As a result of our acquisition of Chordiant Software, Inc. (“Chordiant”) and its customer experience management solutions, we acquired additional products that enable customers to maximize customer lifetime value through a suite of industry-leading technologies (Chordiant Decision Management, Chordiant Foundation Server, and Chordiant Marketing Director solutions). We expect to provide new releases of these products that include functional enhancements and improvements. We intend to remain a leader in the use of decision management to improve multi-channel customer experiences, provide better cross-sell/up-sell and aid customer retention. Our intent in this area is to make definition and deployment of decision strategies even easier by leveraging our thin-client design environment and our flexible, Build for Change ® configuration capabilities.

We also offer SmartPaaS, which is our platform-as-a service offering that allows customers to create PRPC applications using an internet-based infrastructure. This offering enables our customers to immediately build their applications in a secure environment while minimizing their infrastructure and hardware costs.

Our customers typically request professional services and training to assist them in implementing our products. Almost all of our customers also purchase maintenance on our products, which includes rights to upgrades and new releases, incident resolution and technical assistance. Professional services are provided directly by us and through our network of partners. By utilizingdeveloping alliances with these partners, we have increased the supply of skilledmulti-skilled service consultants that can assist our customers.

Business overview

Our total revenue grew by 20% inincreased 29% and 25%, respectively, during the second quarter and first quartersix months of 2010 compared to the first quarter ofsame periods in 2009, primarily because of the increase in maintenance and professional services and maintenance revenues associated with a higher number of license arrangements executed in 2009.2009 and $7.8 million of revenue directly attributable to the Chordiant operations. Due to the rapid integration of the sales force and operations of Chordiant, it will become increasingly difficult to separately identify revenue from arrangements attributable to Chordiant in future periods. We used $6.3 million in cash from operations during the first six months of 2010 and generated approximately $4.8 million and $13.9$29.4 million in cash from operations in the first quartersix months of 2009. The primary components of cash used in operations during the first six months of 2010 were a $4.3 million net loss, and 2009, respectively.an increase in working capital requirements due to a $12.5 million increase in accounts receivable influenced by the timing of customer billings.

Through the first half of 2010, the value of new license arrangements in Europe and Asia was higher than in the first half of 2009. During the same period the value of new license arrangements in the financial services, insurance and government industries was higher than in the first half of 2009. The total value of new license arrangements in the first quarterhalf of 2010 in the healthcare industry was less than the same period in 2009. Overall, the aggregate value of new license arrangements in the first half of 2010 was higher in Europe and Asiaslightly lower than in 2009. Historically, new license arrangements executed in the second half of the year are significantly higher than the first quarter of 2009. However, in North America, the value was lower, primarily due to one large arrangement included in the first quarter of 2009 that was executed in 2008, but had a contingency that did not expire until the first quarter of 2009.half.

We believe these results reflect our ability to quickly and successfully deliver our versatile Build for Change ® technology to Fortune ® 500 customers across industries and international borders, allowing these customers to reduce operating costs and increase revenues after a short implementation period. These operational efficiencies experienced by our customers are part of the strong value proposition our technology provides to our customers.

We believe that the ongoing challenges for our business include continuingour ability to continue to drive revenue growth, despite increased competition, continuingcontinue to expand our expertise in new and existing industries, remain a leader in the decision management market, and maintainingmaintain our leadership position in the BPM market.

To address these challenges, during the first quartersix months of 2010, we:

Chordiant Acquisition

On April 21, 2010, we acquired all of the outstanding common stock of Chordiant, a leading provider of customer relationship management (“CRM”) software and services.services with a focus on improving customer experiences through decision technology. The aggregate purchase price for Chordiant was approximately $109$160.3 million consisting of $156.8 million in cash net of approximately $47.8 million of cash acquired. In addition, we issued approximately 236,000and stock options in exchange for outstanding Chordiant stock options at the date of the closing. The majority of thewith a fair value of these stock options will be recorded as additional purchase price. The remaining fair value of these stock options will be recognized as stock-based compensation expense over the requisite service period. We are in the process of preparing an allocation of the purchase price to the fair value of assets acquired and liabilities assumed, but currently expect that a substantial portion of the Chordiant purchase price will ultimately be allocated to intangible assets, and that such assets are likely to include acquired core technology, customer related assets and goodwill. As of March 31, 2010, we incurred direct incremental expenses associated with the transaction of $1.5 million and expect to incur an additional $2.2$3.5 million.

We believe the acquisition will expand our global customer base and provide complementary solutions. Chordiant clients will be able to incorporate Pegasystems process automation to enhance their experience inthe functionality of their existing foundationcall center and marketing solutions. OurPegasystems’ clients will benefit from Chordiant’s decision management solutions and extensive CRM assets.experience. In addition, we believe the combination of the two companies will expand the partner network and provide incremental business opportunity growth. Both organizations share a vision of transforming multi-channel CRM through decisioning and process automation. The combination of Pegasystems and Chordiant will be able to deliver next-generation CRM that provides end-to-end customer experience functionality across organizations. We will focus our research and development efforts to deliver on this vision. We have gained significant expertise and knowledge via the Chordiant personnel who have been integrated with our existing resources.

The valuation of the acquired intangible assets and assumed liabilities is preliminary. The Company is currently in the process of investigating the facts and circumstances existing as of the acquisition date in order to finalize its valuation and establish the related tax basis.

During the second quarter of 2010, in connection with our integration plan, we recorded $6.1 million of severance and related benefit costs for the reduction of approximately 50 personnel in redundant roles across multiple functions, primarily general and administrative functions. These restructuring costs are all cash costs and are expected to be paid by the end of the second quarter of 2012. We expect to incur an additional $0.4 million in severance costs during the third quarter of 2010. In connection with our evaluation of our combined facilities, we approved a plan to eliminate one redundant facility. As a result, we expect to incur approximately $1.3 million in restructuring expenses during the third quarter of 2010, representing future lease payments and demising costs, net of estimated sublease income for the identified facility. These exit costs will be recognized when we cease to use the leased facility, which is expected to occur by the end of 2010. In addition to these restructuring costs, during the second quarter of 2010, we recorded $1.1 million in compensation and related benefits relating to Chordiant employees who are

in transitional rolls and offices that Chordiantwe expect to close. We expect these operating expenses to be approximately $0.4 million in the third quarter of 2010 and zero in the fourth quarter of 2010 as the transitional rolls end and the offices will contribute recurring revenue and profit to our operating results.be closed.

Critical accounting policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon the condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.” GAAP”) and the rules and regulations of the SEC for interim financial reporting. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience, knowledge of current conditions and beliefs of what could occur in the future given available information.

There have been no changes into our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009. 2009, other than as follows:

Goodwill and Intangible Assets

Goodwill represents the residual purchase price paid in a business combination after all identified assets and liabilities have been recorded. Goodwill is not amortized, but is tested annually for impairment by the use of a fair value model at a reporting unit level. If the fair value of the reporting unit is less than its carrying amount, we would determine the implied fair value of the goodwill and evaluate if it is impaired.

We evaluate our intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. In evaluating potential impairment of these assets, we specifically consider whether any indicators of impairment are present, including, but not limited to:

If indicators of impairment are present, we compare the estimated undiscounted cash flows that the specific asset is expected to generate to its carrying value. These estimates involve significant subjectivity. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value.

Valuation of Goodwill and Acquired Intangible Assets

In connection with our acquisition of Chordiant and as a result of the preliminary purchase price allocation, we recorded $90.4 million of intangible assets, relating principally to customer related intangible assets and acquired technology, and $48.6 million of goodwill. The valuation of the acquired intangible assets and assumed liabilities is preliminary. The valuation process used to calculate the values assigned to these acquired intangible assets is complex and involves significant estimation relative to our financial projections. The principal component of the valuation process is the determination of discounted future cash flows, which are based on a number of estimates and assumptions. There is inherent uncertainty involved with this estimation process. The estimates and assumptions that are most sensitive include, but are not limited to:

For more information regarding our critical accounting policies, we encourage you to read the discussion contained in Item 7 under the heading “Critical Accounting Policies and Estimates” and Note 2. “Significant Accounting Policies” included in the notes to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2009.

Results of Operations

n/m – not meaningful

We continue to experience an increase in demand for our software products and related services, which we believe is due to the strong value proposition, short implementation period, and variety of licensing terms we offer our customers. Our success is also due to the growth in the BPM sector and our position as leader in that sector.this market space.

The increaseincreases in gross profit wasduring the second quarter and first six months of 2010 compared to the same periods in 2009 were primarily due to the increaseincreases in software license and maintenance revenue, and to a slightly lesser extent, the increase in professional services revenue.

The decreasedecreases in income before provision for income taxes wasduring the second quarter and first six months of 2010 compared to the same periods in 2009 were primarily due to the higher growth rate of our operating expenses, incremental expenses related to the Chordiant acquisition and the resulting restructuring costs, lower software license revenue as a percentage of total revenue aand foreign currency transaction losses in 2010 as opposed to foreign currency gains in 2009.

The increase in operating expenses during the second quarter and first six months of 2010 included $6.5 million increase in sellingof incremental Chordiant operating expenses.

Our loss before benefit for income taxes was primarily attributable to the $5.5 million and marketing expenses, a $2.5 million increase in research and development expenses, $1.5 million of acquisition-related costs, and a $2.3$7.7 million increase in foreign exchangecurrency transaction losses.losses during the second quarter and first six months of 2010, respectively, compared to the same periods in 2009.

A change in the number or size of high value license arrangements, or a change in the mix between perpetual and term licenses, can cause our revenues to fluctuate materially from quarter to quarter. The revenue growth rate achieved in any historical period is not necessarily indicative of the results expected for future periods.

Revenue