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 x 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 ~~37,865,884~~37,906,098 shares of the Registrant’s common stock, $.01 par value per share, outstanding on ~~April 25,~~July 30, 2012.


		As of March 31, 2012		As of December 31, 2011			As of June 30, 2012		As of December 31, 2011
*ASSETS*	*ASSETS*					*ASSETS*
Current assets:
Cash and cash equivalents		$	33,473	$	60,353		$	54,827	$	60,353
Marketable securities			54,587		51,079			48,037		51,079

Total cash, cash equivalents, and marketable securities			88,060		111,432			102,864		111,432
Trade accounts receivable, net of allowance of $1,256 and $926			106,852		98,293
Trade accounts receivable, net of allowance of $1,165 and $926								92,542		98,293
Deferred income taxes			9,829		9,826			9,827		9,826
Income taxes receivable			8,270		7,545			10,035		7,545
Other current assets			5,989		4,865			5,512		4,865

Total current assets			219,000		231,961			220,780		231,961
Property and equipment, net			18,852		14,458			28,175		14,458
Long-term deferred income taxes			43,100		43,286			43,581		43,286
Long-term other assets			2,676		2,186			1,782		2,186
Intangible assets, net			66,564		69,369			63,787		69,369
Goodwill			20,451		20,451			20,451		20,451

Total assets		$	370,643	$	381,711		$	378,556	$	381,711


*LIABILITIES AND STOCKHOLDERS’ EQUITY*	*LIABILITIES AND STOCKHOLDERS’ EQUITY*					*LIABILITIES AND STOCKHOLDERS’ EQUITY*
Current liabilities:
Accounts payable		$	6,069		10,899		$	7,405		10,899
Accrued expenses			20,565		18,336			21,597		18,336
Accrued compensation and related expenses			18,340		39,170			26,240		39,170
Deferred revenue			80,568		73,840			79,358		73,840

Total current liabilities			125,542		142,245			134,600		142,245
Income taxes payable			9,590		9,547			9,633		9,547
Long-term deferred revenue			13,609		15,367			11,898		15,367
Other long-term liabilities			7,013		5,796			10,813		5,796

Total liabilities			155,754		172,955			166,944		172,955

Commitments and contingencies
Stockholders’ equity:
Preferred stock, 1,000 shares authorized; no shares issued and outstanding			—		—			—		—
Common stock, 70,000 shares authorized; 37,854 shares and 37,712 issued and outstanding			379		377
Common stock, 100,000 shares and 70,000 shares authorized; 37,890 shares and 37,712 shares issued and outstanding								379		377
Additional paid-in capital			131,564		129,701			133,057		129,701
Retained earnings			79,951		77,029			76,547		77,029
Accumulated other comprehensive income			2,995		1,649			1,629		1,649

Total stockholders’ equity			214,889		208,756			211,612		208,756

Total liabilities and stockholders’ equity		$	370,643	$	381,711		$	378,556	$	381,711



	Three Months Ended March 31,				Three Months Ended June 30,						Six Months Ended June 30,
	2012		2011		2012			2011			2012			2011
Revenue:
Software license	$	35,943	$	33,462	$	30,999		$	34,645		$	66,942		$	68,107
Maintenance		30,845		27,448		34,495			28,294			65,340			55,742
Professional services		44,379		41,450		39,562			40,579			83,941			82,029

Total revenue		111,167		102,360		105,056			103,518			216,223			205,878

Cost of revenue:
Cost of software license		1,599		1,674		1,579			1,631			3,178			3,305
Cost of maintenance		3,609		3,374		3,718			3,260			7,327			6,634
Cost of professional services		36,326		34,968		34,690			35,506			71,016			70,474

Total cost of revenue		41,534		40,016		39,987			40,397			81,521			80,413

Gross profit		69,633		62,344		65,069			63,121			134,702			125,465

Operating expenses:
Selling and marketing		38,395		34,036		41,188			37,208			79,583			71,244
Research and development		19,004		15,133		18,901			15,696			37,905			30,829
General and administrative		6,315		7,132		7,664			6,839			13,979			13,971
Acquisition-related costs		—		338		—			144			—			482
Restructuring costs		—		141		—			—			—			141

Total operating expenses		63,714		56,780		67,753			59,887			131,467			116,667

Income from operations		5,919		5,564
Foreign currency transaction gain		740		1,016
(Loss) income from operations						(2,684	)		3,234			3,235			8,798
Foreign currency transaction (loss) gain						(841	)		173			(101	)		1,189
Interest income, net		111		86		94			91			205			177
Other (expense) income, net		(839)		28
Other income (expense), net						263			(167	)		(576	)		(139	)

Income before provision for income taxes		5,931		6,694
Provision for income taxes		1,874		1,963
(Loss) income before (benefit) provision for income taxes						(3,168	)		3,331			2,763			10,025
(Benefit) provision for income taxes						(901	)		1,058			973			3,021

Net income	$	4,057	$	4,731
Net (loss) income					$	(2,267	)	$	2,273		$	1,790		$	7,004


Earnings per share

(Loss) earnings per share:
Basic	$	0.11	$	0.13	$	(0.06	)	$	0.06		$	0.05		$	0.19


Diluted	$	0.10	$	0.12	$	(0.06	)	$	0.06		$	0.05		$	0.18


Weighted-average number of common shares outstanding
Basic		37,756		37,276		37,865			37,405			37,812			37,341
Diluted		38,889		38,803		37,865			38,851			38,931			38,828

Cash dividends declared per share	$	0.03	$	0.03	$	0.03		$	0.03		$	0.06		$	0.06


	Three Months Ended March 31,				Six Months Ended June 30,
	2012		2011		2012			2011
Operating activities:
Net income	$	4,057	$	4,731	$	1,790		$	7,004
Adjustment to reconcile net income to cash (used in) provided by operating activities:
Adjustment to reconcile net income to cash provided by operating activities:
Excess tax benefits from exercise or vesting of equity awards		(1,622)		(1,077)		(2,225	)		(4,011	)
Deferred income taxes		214		142		(305	)		(83	)
Depreciation and amortization		4,525		4,011		8,635			8,228
Stock-based compensation expense		2,852		2,535		5,838			4,400
Foreign currency transaction loss		395		66		460			377
Other		382		87		753			414
Change in operating assets and liabilities:
Trade accounts receivable		(8,130)		(28,221)		5,795			(15,790	)
Income taxes receivable and other current assets		(156)		(399)		(942	)		1,547
Accounts payable and accrued expenses		(25,800)		(7,011)		(14,203	)		(2,761	)
Deferred revenue		4,696		17,223		2,037			18,395
Other long-term assets and liabilities		813		(202)		4,894			(500	)

Cash used in operating activities		(17,774)		(8,115)
Cash provided by operating activities						12,527			17,220

Investing activities:
Purchase of marketable securities		(10,479)		(9,026)		(11,760	)		(25,361	)
Matured and called marketable securities		6,780		4,738		14,207			7,738
Sale of marketable securities						—			1,047
Investment in property and equipment		(4,267)		(1,090)		(14,949	)		(3,563	)

Cash used in investing activities		(7,966)		(5,378)		(12,502	)		(20,139	)

Financing activities:
Issuance of common stock for share-based compensation plans		293		356		707			1,707
Excess tax benefits from exercise or vesting of equity awards		1,622		1,077		2,225			4,011
Dividend payments to shareholders		(1,132)		(1,118)		(2,272	)		(2,238	)
Common stock repurchases for tax withholdings for net settlement of equity awards		(2,072)		(1,517)		(2,851	)		(3,569	)
Common stock repurchases under share repurchase programs		(814)		(1,032)		(2,526	)		(2,084	)

Cash used in financing activities		(2,103)		(2,234)		(4,717	)		(2,173	)

Effect of exchange rate on cash and cash equivalents		963		952		(834	)		948

Net decrease in cash and cash equivalents		(26,880)		(14,775)		(5,526	)		(4,144	)
Cash and cash equivalents, beginning of period		60,353		71,127		60,353			71,127

Cash and cash equivalents, end of period	$	33,473	$	56,352	$	54,827		$	66,983

~~The Company~~Pegasystems Inc. (together with its subsidiaries, “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, 2011.

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 2012.

Disclosures About Offsetting Assets and Liabilities:In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, “Balance Sheet (Topic 210): Disclosures About Offsetting Assets and Liabilities”, which creates new disclosure requirements regarding the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. Certain disclosures of the amounts of certain instruments subject to enforceable master netting arrangements or similar agreements would be required, irrespective of whether the entity has elected to offset those instruments in the statement of financial position. This ASU is effective for the Company on January 1, 2013 with retrospective application required. The adoption of this standard will not impact the Company’s financial position or results of operations as this accounting standard only requires enhanced disclosure.


(in thousands)	March 31, 2012								June 30, 2012
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value

Marketable securities:
Municipal bonds	$	35,071		101		(5)	$	35,167	$	30,624		82		(8	)	$	30,698
Corporate bonds		15,358		65		(4)		15,419		15,286		55		(2	)		15,339
Government sponsored enterprise bonds		4,000		1		—		4,001		2,000		—		—			2,000

Marketable securities	$	54,429		167		(9)	$	54,587	$	47,910		137		(10	)	$	48,037


(in thousands)	December 31, 2011
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value

Marketable securities:
Municipal bonds	$	27,968		74		(2	)	$	28,040
Corporate bonds		15,058		16		(34	)		15,040
Government sponsored enterprise bonds		8,001		2		(4	)		7,999

Marketable securities	$	51,027		92		(40	)	$	51,079

The Company considers debt securities with maturities of three months or less from the purchase date to be cash equivalents. Interest is recorded when earned. All of the Company’s investments are classified as available-for-sale and are carried at fair value with unrealized gains and losses recorded as a component of accumulated other comprehensive income, net of related income taxes.

As ~~March 31,~~of June 30, 2012, remaining maturities of marketable debt securities ranged from ~~May~~July 2012 to December 2014, with a weighted-average remaining maturity of approximately 1512 months.

The Company uses forward foreign currency contracts to manage its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated accounts receivable and cash. The U.S. operating company invoices most of its foreign customers in foreign currencies, which results in cash and receivables held at the end of the reporting period denominated in these foreign currencies. Since the U.S. operating company’s functional currency is the U.S. dollar, the Company recognizes a foreign currency transaction gain or (loss) on the foreign currency denominated cash and accounts receivable held by the U.S. operating company in its consolidated statements of income when there are changes in the foreign currency exchange rates versus the U.S. dollar. The Company is primarily exposed to changes in the value of the Euro and British pound relative to the U.S. dollar. The forward foreign currency contracts utilized by the Company are not designated as hedging instruments and as a result, the Company records the fair value of these contracts at the end of each reporting period in its consolidated balance sheet as other current assets for unrealized gains and accrued expenses for unrealized losses, with any fluctuations in the value of these contracts recognized in other (expense) income, net, in its consolidated statement of income. However, the fluctuations in the value of these forward foreign currency contracts partially offset the gains and losses from the remeasurement or settlement of the foreign currency denominated accounts receivable and cash held by the U.S. operating company, thus partly mitigating the volatility. Generally, the Company enters into forward foreign currency contracts with terms not greater than 90 days.

During the first ~~quarter~~six months of 2012, the Company entered into and settled forward foreign currency contracts to sell 11€27.2 million ~~Euros~~ and 12£23 million ~~British pounds~~ and receive in exchange ~~$32.8~~$71.4 million. During the first six months of 2011, the Company entered into and settled forward foreign currency contracts to sell €17 million and £12 million and receive in exchange $44 million. As of ~~March 31,~~June 30, 2012 and December 31, 2011, the Company did not have any forward foreign currency contracts outstanding. During the second quarter and first ~~quarter~~six months of 2012, the change in the fair value of the Company’s forward foreign currency contracts recorded in other income (expense) ~~income,~~, net, was a ~~net~~gain of $0.2 million and a loss of ~~$0.8~~$0.6 million, respectively. During the second quarter and first six months of 2011, the change in the fair value of the Company’s forward foreign currency contracts recorded in other income (expense), net, was a loss of $0.2 million.

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 based on assumptions that market participants would use in pricing an asset or liability. As a basis for classifying the fair value measurements, a three-tier fair value hierarchy, which classifies the fair value measurements based on 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) significant other observable inputs that are observable either directly or indirectly; and (Level 3) significant 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 records its marketable securities at fair value.

The Company’s investments classified within Level 1 of the fair value hierarchy are valued using quoted market prices. The Company’s investments classified within Level 2 of the fair value hierarchy are valued based on matrix pricing compiled by third party pricing vendors, using observable market inputs such as interest rates, yield curves, and credit risk.

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


			Fair Value Measurements at Reporting Date Using						Fair Value Measurements at Reporting Date Using
(in thousands)	March 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		June 30, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Money market funds	$	495	$	495	$	—	$	2,825	$	2,825	$	—


Marketable securities:
Government sponsored enterprise bonds	$	4,001	$	—	$	4,001	$	2,000	$	—	$	2,000
Corporate bonds		15,419		14,411		1,008		15,339		14,333		1,006
Municipal bonds		35,167		10,831		24,336		30,698		10,669		20,029

Total marketable securities	$	54,587	$	25,242	$	29,345	$	48,037	$	25,002	$	23,035


			Fair Value Measurements at Reporting Date Using						Fair Value Measurements at Reporting Date Using
(in thousands)	December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Money market funds	$	3,067	$	3,067	$	—	$	3,067	$	3,067	$	—


Marketable securities:
Municipal bonds	$	28,040	$	6,110	$	21,930	$	28,040	$	6,110	$	21,930
Corporate bonds		15,040		15,040		—		15,040		15,040		0
Government sponsored enterprise bonds		7,999		2,001		5,998		7,999		2,001		5,998

Total marketable securities	$	51,079	$	23,151	$	27,928	$	51,079	$	23,151	$	27,928

Assets not recorded at fair value on a recurring basis, such as property and equipment, and intangible assets, are recognized at fair value when they are impaired. During the first ~~quarter~~six months of 2012 and 2011, the Company did not recognize any nonrecurring fair value measurements from impairments.


(in thousands)	March 31, 2012		December 31, 2011		June 30, 2012			December 31, 2011
Trade accounts receivable	$	74,846	$	77,123	$	67,635		$	77,123
Unbilled trade accounts receivable		33,262		22,096		26,072			22,096

Total accounts receivable		108,108		99,219		93,707			99,219

Allowance for doubtful accounts		—		(31)		—			(31	)
Allowance for sales credit memos		(1,256)		(895)		(1,165	)		(895	)

Total allowance		(1,256)		(926)		(1,165	)		(926	)

	$	106,852	$	98,293	$	92,542		$	98,293

Unbilled trade accounts receivable relate to services earned under time and material arrangements, and maintenance and license arrangements that had not been invoiced as of ~~March 31,~~June 30, 2012 and December 31, 2011, respectively.

There were no changes in the carrying amount of goodwill during the first ~~quarter~~six months of 2012.

Intangible assets are recorded at cost and are amortized using the straight-line method over their estimated useful life, which range from ~~four~~5 to ~~nine~~9 years.


(in thousands)	Cost		Accumulated Amortization			Net Book Value		Cost		Accumulated Amortization			Net Book Value
As of March 31, 2012
As of June 30, 2012
Customer related intangibles	$	44,355	$	(9,446	)	$	34,909	$	44,355	$	(10,678	)	$	33,677
Technology		43,446		(11,810	)		31,636		43,446		(13,351	)		30,095
Trade name		248		(248	)		—		248		(248	)		—
Technology designs		490		(490	)		—		490		(490	)		—
Non-compete agreements		100		(81	)		19		100		(85	)		15
Intellectual property		1,400		(1,400	)		—		1,400		(1,400	)		—

Total	$	90,039	$	(23,475	)	$	66,564	$	90,039	$	(26,252)		$	63,787


	Cost		Accumulated Amortization			Net Book Value		Cost		Accumulated Amortization			Net Book Value
As of December 31, 2011
Customer related intangibles	$	44,355	$	(8,214	)	$	36,141	$	44,355	$	(8,214	)	$	36,141
Technology		43,446		(10,269	)		33,177		43,446		(10,269	)		33,177
Trade name		248		(248	)		—		248		(248	)		—
Technology designs		490		(463	)		27		490		(463	)		27
Non-compete agreements		100		(76	)		24		100		(76	)		24
Intellectual property		1,400		(1,400	)		—		1,400		(1,400	)		—

Total	$	90,039	$	(20,670	)	$	69,369	$	90,039	$	(20,670)		$	69,369

For the second quarter and first ~~quarter~~six months of 2012 and 2011, amortization of intangibles was reflected in the Company’s unaudited condensed consolidated statements of income as follows:


	Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2012		2011		2012		2011		2012		2011

Cost of software license	$	1,568	$	1,571	$	1,540	$	1,571	$	3,108	$	3,142
Selling and marketing		1,232		1,232		1,232		1,232		2,464		2,464
General and administrative		5		67		5		26		10		93

Total amortization expense	$	2,805	$	2,870	$	2,777	$	2,829	$	5,582	$	5,699

Amortization of intangibles is estimated to be recorded over their remaining useful lives as follows:


(in thousands) As of March 31,	Future estimated amortization expense
(in thousands) As of June 30,			Future estimated amortization expense
Remainder of 2012	$	8,332	$	5,554
2013		11,095		11,095
2014		9,489		9,489
2015		8,688		8,688
2016		8,688		8,688
2017		8,688		8,688
2018 and thereafter		11,584		11,585

	$	66,564	$	63,787


(in thousands)	March 31, 2012		December 31, 2011		June 30, 2012		December 31, 2011
Other taxes	$	2,867	$	2,759	$	3,242	$	2,759
Restructuring		404		626		416		626
Professional fees		1,209		1,146		778		1,146
Income taxes		1,314		1,954		1,178		1,954
Professional services partners fees		850		120		490		120
Short-term deferred rent		1,491		1,428		1,675		1,428
Self-insurance health and dental claims		1,583		1,931		1,119		1,931
Dividends payable		1,136		1,132		1,137		1,132
Employee reimbursable expenses		1,394		897		1,923		897
Construction in process		1,927		—		2,081		—
Other		6,390		6,343		7,558		6,343

	$	20,565	$	18,336	$	21,597	$	18,336


(in thousands)	March 31, 2012		December 31, 2011		June 30, 2012		December 31, 2011
Software license	$	14,026	$	15,005	$	12,642	$	15,005
Maintenance		60,012		50,916		59,972		50,916
Professional services and other		6,530		7,919		6,744		7,919

Current deferred revenue		80,568		73,840		79,358		73,840

Software license		12,378		13,532		11,307		13,532
Maintenance and professional services		1,231		1,835		591		1,835

Long-term deferred revenue		13,609		15,367		11,898		15,367

	$	94,177	$	89,207	$	91,256	$	89,207

During 2010, in connection with the Company’s integration plan of Chordiant, the Company recorded $6.5 million of severance and related benefit costs, which were paid by the end of the first quarter of 2012.

Also, in connection with the Company’s evaluation of its combined facilities, the Company eliminated space within one facility and recognized $1.6 million of restructuring expenses, representing future lease payments and demising costs, net of estimated sublease income for this space. The lease expires at the end of 2013.

A summary of the restructuring activity during the first ~~quarter~~six months of 2012 is as follows:


(in thousands)	Personnel			Facilities			Total			Personnel			Facilities			Total
Balance as of December 31, 2011	$	243		$	800		$	1,043		$	243		$	800		$	1,043
Cash payments		(243	)		(63	)		(306	)		(243	)		(160	)		(403	)

Balance as of March 31, 2012	$	—		$	737		$	737
Balance as of June 30, 2012										$	—		$	640		$	640


(in thousands)	March 31, 2012		December 31, 2011		June 30, 2012		December 31, 2011
Reported as:
Accrued expenses	$	404	$	626	$	416	$	626
Other long-term liabilities		333		417		224		417

	$	737	$	1,043	$	640	$	1,043

For the second quarter and first ~~quarter~~six months of 2012 and 2011, stock-based compensation expense was reflected in the Company’s unaudited condensed consolidated statements of income as follows:


	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2012			2011			2012			2011			2012			2011

Cost of revenue	$	977		$	797
Cost of services							$	884		$	553		$	1,861		$	1,350
Operating expenses		1,875			1,738			2,102			1,312			3,977			3,050

Total stock-based compensation before tax		2,852			2,535		$	2,986		$	1,865		$	5,838		$	4,400
Income tax benefit		(876	)		(886	)		(990	)		(613	)		(1,866	)		(1,499	)

During the first ~~quarter~~six months of 2012, the Company issued approximately ~~170,000~~237,000 shares to its employees under the Company’s share-based compensation plans.

During the first ~~quarter~~six months of 2012, the Company granted approximately ~~102,000~~122,000 restricted stock units (“RSUs”) with a total fair value of ~~$2.9~~$4.2 million. Approximately 52,000 RSUs were issued in connection with the election by employees to receive 50% of their 2012 target incentive 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 $1.9 million associated with this RSU grant will be recognized over one year.

As of ~~March 31,~~June 30, 2012, the Company had approximately ~~$13.9~~$12 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to all unvested RSUs and unvested stock options that is expected to be recognized over a weighted-average period of ~~2.2~~2.1 years.

Basic 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.


	Three Months Ended March 31,				Three Months Ended June 30,					Six Months Ended June 30,
(in thousands, except per share amounts)	2012		2011		2012			2011		2012		2011
*Basic*
Net income	$	4,057	$	4,731
Net (loss) income					$	(2,267	)	$	2,273	$	1,790	$	7,004


Weighted-average common shares outstanding		37,756		37,276		37,865			37,405		37,812		37,341


Earnings per share, basic	$	0.11	$	0.13
(Loss) earnings per share, basic					$	(0.06	)	$	0.06	$	0.05	$	0.19


*Diluted*
Net income	$	4,057	$	4,731
Net (loss) income					$	(2,267	)	$	2,273	$	1,790	$	7,004


Weighted-average common shares outstanding, basic		37,756		37,276		37,865			37,405		37,812		37,341
Weighted-average effect of dilutive securities:
Stock options		865		1,281		—			1,201		849		1,241
RSUs		267		243		—			242		269		242
Warrants		1		3		—			3		1		4

Effect of assumed exercise of stock options, warrants and RSUs		1,133		1,527		—			1,446		1,119		1,487

Weighted-average common shares outstanding, diluted		38,889		38,803		37,865			38,851		38,931		38,828


Earnings per share, diluted	$	0.10	$	0.12
(Loss) earnings per share, diluted					$	(0.06	)	$	0.06	$	0.05	$	0.18


Outstanding options and RSUs excluded as impact would be antidilutive		65		24		1,146			31		54		27

The Company develops and licenses its rules-based software solutions and provides professional services, maintenance, and training related to its software. The Company derives substantially all of its revenue from the sale and support of one group of similar products and ~~services –~~ services—software that provides business process solutions in the enterprise applications market. To assess performance, the Company’s chief operating decision maker primarily reviews financial information on a consolidated basis. Therefore, the Company has determined it operates in one ~~segment —~~ segment—Business Process Solutions.

The Company’s international revenue is from sales to customers based outside of the U.S. The Company derived its revenue from the following geographic areas:


	Three Months Ended March 31,								Three Months Ended June 30,								Six Months Ended June 30,
(Dollars in thousands)	2012				2011				2012				2011				2012				2011
U.S.	$	55,692	50	%	$	51,912	51	%	$	61,239	58	%	$	59,411	57	%	$	116,931	54	%	$	111,323	54	%
United Kingdom		18,138	16	%		19,895	19	%		18,329	18	%		22,738	22	%		36,467	17	%		42,633	21	%
Europe, other		14,558	13	%		20,497	20	%		12,686	12	%		10,956	11	%		27,244	13	%		31,453	15	%
Other		22,779	21	%		10,056	10	%		12,802	12	%		10,413	10	%		35,581	16	%		20,469	10	%

	$	111,167	100	%	$	102,360	100	%	$	105,056	100	%	$	103,518	100	%	$	216,223	100	%	$	205,878	100	%

The following table summarizes the Company’s concentration of credit risk associated with ~~customer’s~~customers accounting for 10% or more of the Company’s total revenue and outstanding trade receivables.


	Three Months Ended March 31,						Three Months Ended June 30,					Six Months Ended June 30,
(Dollars in thousands)	2012			2011			2012			2011		2012		2011
Total Revenue	$	111,167		$	102,360		$	105,056		$	103,518	$	216,223	$	205,878
Customer A		11	%		—	%		10	%		—		—		—


	As of March 31,			As of December 31,			As of June 30,			As of December 31,
(Dollars in thousands)	2012			2011			2012			2011
Trade receivables, net of allowances	$	106,852		$	98,293		$	92,542		$	98,293
Customer A		13	%		—	%		10	%		—
Customer B		13	%		14	%		—			14	%

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains or incorporates forward-looking statements within the meaning of ~~section 27A of~~ the Private Securities Litigation Reform Act of ~~1933~~1995. These statements include, but are not limited to, statements about our future financial performance and ~~section 21E~~business plans, the adequacy of our liquidity and capital resources, the ~~Securities Exchange Act~~continued payment of ~~1934.~~quarterly dividends by the Company, and the timing of recognizing revenue under existing term license agreements. 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~~ Important factors that could cause actual future activities and results to ~~carefully review~~differ include, among others, variation in demand for our products and services and the ~~risk~~difficulty in predicting the completion of product acceptance and other factors ~~we have identified~~affecting the timing of license revenue recognition, the ongoing uncertainty and volatility in the global financial markets related to the European sovereign debt crisis, the ongoing consolidation in the financial services and healthcare markets, reliance on third party relationships, the potential loss of vendor specific objective evidence for our professional services, and management of the Company’s growth. These risks are described more completely in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, ~~2011. We believe these risk factors, among other factors, could cause our actual results to differ materially from the forward-looking statements we make.~~2011 and in Item 1A of Part II of this Quarterly Report on Form 10-Q. We do not intend to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

We develop, market, license, and support software, which allows organizations to build, deploy, and change enterprise applications easily and quickly. Our unified software platform includes all the necessary elements and technologies to build enterprise applications in a fraction of the time it would take with competitive disjointed architectures, by directly capturing business objectives, automating programming, and automating work. Our customers use our software to improve their customer service and the customer experience, generate new business, and enhance productivity and profitability. We also provide professional services, maintenance, and training related to our software.

We focus our sales efforts on target accounts, which are large companies or divisions within companies and typically leaders in their industry. ~~We also focus our sales efforts on existing and targeted new industries.~~ Our strategy is to sell ~~initial~~a series of smaller licenses that are focused on a specific ~~purpose~~purposes or ~~area~~areas of operations, rather than selling large enterprise licenses. ~~Once a customer has realized the value of our software, 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 business process management (“BPM”) applications that unifies business rules and business processes. Our solution frameworks, built on the capabilities of PRPC, are purpose or industry-specific collections of best practice functionality, which allow organizations to quickly

implement new customer-facing practices and processes, bring new offerings to market, and provide customized or specialized processing. Our products are simpler, easier to use and often result in shorter implementation periods than competitive enterprise software products. PRPC and related solution frameworks can be used by a broad range of customers within financial services, insurance, healthcare, communications, energy, and government ~~markets, as well as other markets such as energy and media.~~markets.

~~We develop and license~~Our solution frameworks products include customer relationship management (“CRM”) software, which enables unified predictive decisioning and analytics and optimizes the overall customer experience. Our decision management products and capabilities are designed to manage processes so that all actions optimize the outcome based on business objectives. We continue to invest in the development of new products and intend to remain a leader in BPM, CRM, and decision management.

We also offer Pega Cloud, a service offering that allows customers to ~~optionally~~ create and/or run Pega applications using an Internet-based infrastructure. This offering enables our customers to immediately build, test, and deploy their applications in a secure cloud environment while minimizing their infrastructure and hardware costs. Revenue from our Pega Cloud offering is included in professional services revenue.

We offer training for our staff, customers, and partners at our regional training facilities, at third party facilities in numerous other locations, and at customer sites. Beginning in 2012, we ~~will also be offering~~offer training online through Pega Academy, which ~~will provide~~provides an alternative way to learn our software in a virtual environment quickly and easily. We expect that this online training will help expand the number of trained experts at a faster pace, but at a lower average price per class.

Our total revenue during the second quarter of 2012 was slightly higher compared to the same period in 2011. Our total revenue increased 9%5% during the first ~~quarter~~six months of 2012 compared to the first six months of 2011. License revenue decreased 11% and 2% during the second quarter and first six months of ~~2011 and reflects revenue growth~~2012, respectively, compared to the same periods in ~~each of software license, maintenance, and professional services revenue.~~2011. Maintenance revenue increased ~~12%~~22% during the second quarter of 2012 and 17% during the first six months of 2012 compared to the same periods in 2011 primarily due to the ~~increase~~growth in the aggregate value of the installed base of our software. During the first ~~quarter~~six months of 2012, we ~~used approximately$17.8~~generated approximately $12.5 million in cash from operations and ended the quarter with ~~$88.1~~$102.9 million in cash, cash equivalents, and marketable securities.

We believe that the ongoing challenges for our business include our ability to drive revenue growth despite the deteriorating European economic conditions, expand our expertise in new and existing industries, remain a leader in CRM and the decision management market, and ~~maintain our leadership position~~continue being the leader in the BPM market.

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 in our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011. 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, 2011.


	Three Months Ended March 31,				Increase (Decrease)					Three Months Ended June 30,					Increase (Decrease)					Six Months Ended June 30,				Increase (Decrease)
(Dollars in thousands)	2012		2011							2012			2011							2012		2011
Total revenue	$	111,167	$	102,360	$	8,807		9	%	$	105,056		$	103,518	$	1,538		1	%	$	216,223	$	205,878	$	10,345		5	%
Gross profit		69,633		62,344		7,289		12	%	$	65,069		$	63,121	$	1,948		3	%	$	134,702	$	125,465	$	9,237		7	%
Total operating expenses		63,714		56,780		6,934		12	%	$	67,753		$	59,887	$	7,866		13	%	$	131,467	$	116,667	$	14,800		13	%
Income from operations		5,919		5,564		355		6	%
Income before provision for income taxes	$	5,931	$	6,694	$	(763	)	(11	)%
(Loss) income from operations										$	(2,684	)	$	3,234	$	(5,918	)	(183	)%	$	3,235	$	8,798	$	(5,563	)	(63	)%
(Loss) income before (benefit) provision for income taxes										$	(3,168	)	$	3,331	$	(6,499	)	(195	)%	$	2,763	$	10,025	$	(7,262	)	(72	)%

The aggregate value of license arrangements executed during the second quarter and first ~~quarter~~six months of 2012 was ~~slightly higher~~significantly lower than in the ~~first quarter~~same periods of 2011. ~~We continue~~The aggregate value of license arrangements executed fluctuates quarter to ~~experience demand for our software products~~quarter. During the first six months of 2012 and ~~related services due to the strong value proposition, short implementation period,~~2011, approximately 67% and ~~variety~~52%, respectively, of ~~licensing models we offer our~~license arrangements were executed with existing customers.

The ~~increase~~increases in gross profit ~~was~~were primarily due to increases in maintenance revenue.

The increases in operating expenses were primarily due to the ~~increase in license and maintenance revenue.~~

~~The increase in operating expenses was primarily due to the increase~~increases in selling and marketing and research and development expenses associated with higher headcount.

The ~~decrease~~decreases in income before provision for income taxes ~~was~~were primarily due to our operating expenses increasing faster than our revenue during the second quarter and first six months of 2012 compared to the same periods in 2011. During the first six months of 2012, the decrease was also due to a $1$1.2 million foreign currency transaction gain recorded in the first ~~quarter~~six months of 2011. See Note 4 “Derivative Instruments” in the notes to the accompanying unaudited condensed consolidated financial statements for further discussion.


	Three Months Ended March 31,								Increase (Decrease)					Three Months Ended June 30,								Increase (Decrease)					Six Months Ended June 30,								Increase (Decrease)
(Dollars in thousands)	2012				2011									2012				2011									2012				2011
*Software license revenue*

*License revenue*
Perpetual licenses	$	20,419	57	%	$	23,571	70	%	$	(3,152	)	(13	)%	$	13,030	42	%	$	20,710	60	%	$	(7,680	)	(37	)%	$	33,449	50	%	$	44,281	65	%	$	(10,832	)	(24	)%
Term licenses		13,739	38	%		9,891	30	%		3,848		39	%		9,169	30	%		6,927	20	%		2,242		32	%		22,908	34	%		16,818	25	%		6,090		36	%
Subscription		1,785	5	%		—	—	%		1,785		n/m			8,800	28	%		7,008	20	%		1,792		26	%		10,585	16	%		7,008	10	%		3,577		51	%

Total software license revenue	$	35,943	100	%	$	33,462	100	%	$	2,481		7	%
Total license revenue														$	30,999	100	%	$	34,645	100	%	$	(3,646	)	(11	)%	$	66,942	100	%	$	68,107	100	%	$	(1,165	)	(2	)%

~~The aggregate value of license arrangements executed during the first quarter of 2012 was slightly higher than in the first quarter of 2011.~~ A change in the mix between perpetual and term license arrangements executed in a period varies based on customer ~~needs, which~~needs. This may cause our revenues to vary materially quarter to ~~quarter. A~~quarter as a higher proportion of term license arrangements would cause our license revenue to be recognized over longer periods.

~~While~~ The mix shifted to a higher proportion of term licenses executed in the second quarter and first six months of 2012 compared to the same periods in 2011. As a result, perpetual license revenue decreased while the aggregate value of ~~perpetual license arrangements executed~~payments due under term licenses increased in the second quarter to $158.9 million from $154.2 million at the end of the first quarter of ~~2012 was slightly higher than in the first quarter of 2011, perpetual license revenue was lower because~~2012. In addition, some of our perpetual license arrangements

include extended payment terms and others include additional rights of use that delay the recognition of revenue to future periods. The aggregate value of payments due under these perpetual and certain subscription licenses was ~~$56.3~~$48.8 million as of ~~March 31,~~June 30, 2012 compared to ~~$31.2~~$44.7 million as of ~~March 31,~~June 30, 2011. See the table of future cash receipts by year from these perpetual licenses and certain subscription licenses on page 23.

We recognize revenue for our term license arrangements over the term of the agreement as payments become due or earlier if prepaid. The ~~increase~~increases in term license revenue ~~was~~were primarily due to the significant value of term license arrangements executed during the fourth quarter of ~~2011, partially offset by lower prepayments during the first quarter of 2012.~~2011. As a result of the significant increase in new term license arrangements executed during 2011, the aggregate value of payments due under these term licenses grew to ~~$154.2~~$158.9 million as of ~~March 31,~~June 30, 2012 compared to ~~$85.8~~$85.9 million as of ~~March 31,~~June 30, 2011. The aggregate value of future payments due under non-cancellable term licenses as of ~~March 31,~~June 30, 2012 includes ~~$25.9~~$17.1 million of term license payments that we expect to recognize as revenue during the remainder of 2012. Our term license revenue for the remainder of 2012 could be higher than ~~$25.9~~$17.1 million as we complete new term license agreements in 2012 or if we receive prepayments ~~from~~under existing term license agreements. See the table of future cash receipts by year from these term licenses on page 23.

Subscription revenue primarily consists of the ratable recognition of license, maintenance and bundled services revenue on perpetual license arrangements that include a right to unspecified future products. Subscription revenue does not include revenue from our Pega Cloud offerings. The timing of scheduled payments under customer arrangements ~~determines~~may limit the amount of revenue that can be recognized in a reporting period. Consequently, our subscription revenue may vary quarter to quarter.

The ~~increase~~increases in ~~maintenance~~subscription revenue ~~was~~were primarily due to the ~~increase~~revenue recognized in the second quarter and first six months of 2012 on two arrangements for which revenue recognition criteria had not been met for the same periods in 2011.

The increases in maintenance revenue were primarily due to the growth in the aggregate value of the installed base of our ~~software.~~


	Three Months Ended March 31,								Increase				Three Months Ended June 30,								Increase (Decrease)					Six Months Ended June 30,								Increase
(Dollars in thousands)	2012				2011								2012				2011									2012				2011
*Professional services revenue*
Consulting services	$	42,419	96	%	$	39,729	96	%	$	2,690	7	%
Consulting Services													$	37,857	96	%	$	38,838	96	%	$	(981	)	(3	)%	$	80,276	96	%	$	78,567	96	%	$	1,709	2	%
Training		1,960	4	%		1,721	4	%		239	14	%		1,705	4	%		1,741	4	%		(36	)	(2	)%		3,665	4	%		3,462	4	%		203	6	%


Total Professional services	$	44,379	100	%	$	41,450	100	%	$	2,929	7	%	$	39,562	100	%	$	40,579	100	%	$	(1,017	)	(3	)%	$	83,941	100	%	$	82,029	100	%	$	1,912	2	%

Professional services are primarily consulting services related to new license implementations. The increase in consulting services revenue for the first six months of 2012 compared to the same period in 2011 was primarily due to the recognition of revenue ~~related to~~on three large ~~projects.~~projects during the first quarter of 2012. The ~~increase~~decrease in ~~training~~consulting services revenue ~~was primarily due~~during the second quarter of 2012 compared to ~~an increase~~the same period in ~~customer and partner alliance training.~~

~~The increase in software license and maintenance gross profit~~2011 was primarily due to the ~~increase~~completion of work on several large time and material projects. Our consulting services revenue may fluctuate quarter to quarter based on customer operational requirements and budget availability, the number of license arrangements executed, and the mix of services performed by us or our enabled partners. We expect our consulting services revenue will be higher in the third quarter of 2012.


	Three Months Ended June 30,						Increase (Decrease)					Six Months Ended June 30,						Increase
(Dollars in thousands)	2012			2011								2012			2011
*Gross Profit*
Software license	$	29,420		$	33,014		$	(3,594	)	(11	)%	$	63,764		$	64,802		$	(1,038	)	(2	)%
Maintenance		30,777			25,034			5,743		23	%		58,013			49,108			8,905		18	%
Professional services		4,872			5,073			(201	)	(4	)%		12,925			11,555			1,370		12	%

Total gross profit	$	65,069		$	63,121		$	1,948		3	%	$	134,702		$	125,465		$	9,237		7	%

Total gross profit %		62	%		61	%							62	%		61	%
Software license gross profit %		95	%		95	%							95	%		95	%
Maintenance gross profit %		89	%		88	%							89	%		88	%
Professional services gross profit %		12	%		13	%							15	%		14	%

Gross profit percent for each of software license, ~~and~~ maintenance ~~revenue.~~

~~The increase in~~and professional services ~~gross profit percent~~ was ~~primarily due~~consistent in the second quarter and first six months of 2012 compared to the ~~recognition of revenue related to three large projects.~~same periods in 2011.


										Three Months Ended June 30,				Increase (Decrease)					Six Months Ended June 30,				Increase
(Dollars in thousands)	Three Months Ended March 31,				Increase					2012		2011							2012		2011
	2012		2011
*Amortization of intangibles:*
Cost of software license	$	1,568	$	1,571	$	(3	)	—		$	1,540	$	1,571	$	(31	)	(2	)%	$	3,108	$	3,142	$	(34	)	(1	)%
Selling and marketing		1,232		1,232		—		—			1,232		1,232		—		—	%		2,464		2,464		—		—	%
General and administrative		5		67		(62	)	(93	)%
General and Administrative											5		26		(21	)	(81	)%		10		93		(83	)	(89	)%

Total amortization expense										$	2,777	$	2,829	$	(52	)	(2	)%	$	5,582	$	5,699	$	(117	)	(2	)%
	$	2,805	$	2,870	$	(65	)	(2	)%

The decrease in amortization expense was due to the ~~Chordiant~~ trade name intangible asset being fully amortized in ~~2011.~~2011 and the technology designs intangible asset being fully amortized in the first quarter of 2012.


	Three Months Ended March 31,						Increase				Three Months Ended June 30,						Increase				Six Months Ended June 30,						Increase
(Dollars in thousands)	2012			2011							2012			2011							2012			2011
*Selling and marketing*
Selling and marketing	$	38,395		$	34,036		$	4,359	13	%	$	41,188		$	37,208		$	3,980	11	%	$	79,583		$	71,244		$	8,339	12	%
As a percent of total revenue		35	%		33	%						39	%		36	%						37	%		35	%
Selling and marketing headcount		489			390			99	25	%
Selling and marketing headcount at June 30																						514			410			104	25	%

Selling and marketing expenses include compensation, benefits, and other headcount-related expenses associated with our selling and marketing personnel as well as advertising, promotions, trade shows, seminars, and other programs. Selling and marketing expenses also include the amortization of customer related intangibles.

We continue to ~~increase~~create additional sales capacity by increasing sales headcount to target new accounts in ~~new and~~ existing industries, as well as to expand coverage in new industries and ~~across expanded geographies and to create additional sales capacity for future periods.~~geographies. The increase in selling and marketing expenses during the second quarter of 2012 compared to the same period in 2011 was primarily due to a ~~$3.9~~$6.2 million increase in compensation and benefit expenses associated with higher headcount, partially offset by a $2.4 million decrease in commission expense associated with the lower value of license arrangements executed in the second quarter of 2012 compared to the second quarter of 2011.

The increase in selling and marketing expenses during the first six months of 2012 compared to the same period in 2011 was primarily due to a ~~$0.4~~$10.1 million increase in compensation and benefit expenses associated with higher headcount, partially offset by a $2.1 million decrease in commission ~~expense.~~expense associated with the lower value of license arrangements executed during the first six months of 2012 compared to the same period in 2011.


	Three Months Ended March 31,						Increase				Three Months Ended June 30,						Increase				Six Months Ended June 30,						Increase
(Dollars in thousands)	2012			2011							2012			2011							2012			2011
*Research and development*
Research and development	$	19,004		$	15,133		$	3,871	26	%	$	18,901		$	15,696		$	3,205	20	%	$	37,905		$	30,829		$	7,076	23	%
As a percent of total revenue		17	%		15	%						18	%		15	%						18	%		15	%
Research and development headcount		531			411			120	29	%
Research and development headcount at June 30																						599			423			176	42	%

Research and development expenses include compensation, benefits, contracted services, and other headcount-related expenses associated with research and development. The increase in headcount reflects the growth in our Indian research facility. The increase in offshore headcount lowered our average compensation expense per employee.

The ~~increase~~increases in research and development expenses ~~was~~during the second quarter and first six months of 2012 compared to the same periods in 2011 were primarily due to ~~a $2.4 million increase~~increases in compensation and benefit expenses associated with higher headcount ~~a $0.2~~of approximately $2 million ~~increase in contractor expenses,~~ and ~~a $0.9~~$4.6 million, ~~increase~~respectively, and increases in rent and rent related expenses associated with the build-out of our world-wide ~~facilities.~~facilities of $0.7 million and $1.6 million, respectively.


	Three Months Ended March 31,						Increase (Decrease)					Three Months Ended June 30,						Increase				Six Months Ended June 30,						Increase
(Dollars in thousands)	2012			2011								2012			2011							2012			2011
*General and administrative*
General and administrative	$	6,315		$	7,132		$	(817	)	(11	)%	$	7,664		$	6,839		$	825	12	%	$	13,979		$	13,971		$	8	—	%
As a percent of total revenue		6	%		7	%							7	%		7	%						6	%		7	%
General and administrative headcount		220			189			31		16	%
General and administrative headcount at June 30																							240			198			42	21	%

General and administrative expenses include compensation, benefits, and other headcount-related expenses associated with ~~the~~ finance, legal, corporate governance, and other administrative headcount. It also includes accounting, legal, and other administrative fees. The general and administrative headcount includes employees in human resources, information technology and corporate services departments whose costs are allocated to the rest of the Company’s functional departments.

The ~~decrease~~increase in general and administrative expenses during the second quarter of 2012 compared to the same period in 2011 was primarily due to a $1.1 million decrease in accounting, tax consulting and legal fees, a $0.4 million decrease in contractor services expenses primarily due to the completion of post-implementation support for our accounting system, partially offset by a $0.6$0.9 million increase in compensation ~~and benefits~~ associated with higher headcount.

As a result of our lease arrangement for our new office headquarters, we expect to cease use of our current headquarter offices in the second half of 2012. Accordingly, in June 2011, we revised the remaining useful lives of certain leasehold improvements and furniture and fixtures and recorded incremental depreciation expense of approximately $0.1 million and $0.2 million during the second quarter and first ~~quarter~~six months of ~~2012.~~2012, respectively. We recorded approximately $1.5 million and $3 million of rent expense under the new lease arrangement during the second quarter and first six months of 2012, respectively. For the second quarter of ~~2012. We~~2012, we recorded approximately ~~$0.4~~$0.5 million of this rent and depreciation in cost of services and approximately $1.1 million in operating expenses.

~~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~~ For the first ~~quarter~~six months of ~~2011, the $0.3~~2012, we recorded approximately $0.9 million ~~acquisition-related costs were primarily legal fees associated with acquired litigation related to Chordiant.~~

~~Restructuring costs were exit costs related to the Company’s elimination~~ of ~~space within a redundant facility.~~this rent and depreciation in cost of services and approximately $2.3 million in operating expenses.

The following table summarizes stock-based compensation expense included in our unaudited condensed consolidated statements of income:


											Three Months Ended June 30,						Increase (Decrease)				Six Months Ended June 30,						Increase
(Dollars in thousands)	Three Months Ended March 31,						Increase				2012			2011							2012			2011
	2012			2011

Cost of services	$	977		$	797		$	180	23	%	$	884		$	553		$	331	60	%	$	1,861		$	1,350		$	511	38	%
Operating expenses		1,875			1,738			137	8	%		2,102			1,312			790	60	%		3,977			3,050			927	30	%

Total stock-based compensation before tax		2,852			2,535		$	317	13	%		2,986			1,865			1,121	60	%		5,838			4,400			1,438	33	%

Income tax benefit		(876	)		(886	)						(990	)		(613	)						(1,866	)		(1,499	)

The ~~increase~~increases in stock-based compensation expense during the second quarter and first ~~quarter~~six months of 2012 ~~was~~compared to the same periods in 2011 were primarily due to the higher value of the annual periodic equity grant ~~a higher number of employees electing to receive 50% of their annual incentive compensation in RSUs under our Corporate Incentive Compensation Plan,~~ and ~~an increase in~~ the ~~value~~timing of the annual ~~executive award as a result~~board of ~~an increase~~directors equity grant, which for 2012 occurred in the ~~value of the awards granted and one additional executive member receiving an award in the first~~second quarter of 2012, as compared to 2011, which occurred in the ~~first~~third quarter of 2011.

We hold foreign currency denominated accounts receivable and cash in our U.S. operating company where the functional currency is the U.S. dollar. As a result, these receivables and cash are subject to foreign currency transaction gains and losses when there are changes in exchange rates between the U.S. dollar and foreign currencies. The fluctuations in foreign currency transaction gains and losses were primarily due to the changes in the value of the British pound and Euro relative to the U.S. dollar during the second quarter and first ~~quarter~~six months of 2012 and 2011.

Beginning in the second quarter of 2011, we enter into forward foreign currency contracts to manage our exposure to changes in foreign currency exchange rates affecting the foreign currency denominated accounts receivable and cash held by our U.S. operating company. We have not designated these forward foreign currency contracts as hedging instruments and as a result, we record the fair value of the outstanding contracts at the end of the reporting period in our consolidated balance sheet, with any fluctuations in the value of these contracts recognized in other income (expense) ~~income,~~, net. The fluctuations in the value of these forward foreign currency contracts recorded in other income (expense) ~~income,~~, net, partially offset in net income the gains and losses from the remeasurement or settlement of the foreign currency denominated accounts receivable and cash held by the U.S. operating company recorded in foreign currency transaction gain.

~~During the first quarter of 2012, total foreign currency transaction gains were $0.7 million.~~ The total change in the fair value of our forward foreign currency contracts recorded in other ~~(expenses)~~ income (expense), net, during the second quarter and first six months of 2012 was a ~~net~~gain of $0.2 million and a loss of ~~$0.8 million. The impact on net income~~$0.6 million, respectively. During the second quarter and first six months of 2011, the total change in the fair value of the ~~losses recorded on the~~Company’s forward foreign currency contracts ~~and the foreign currency transaction gains~~recorded in other income (expense), net, was a ~~net~~ loss of ~~approximately $0.1 million for the first quarter of 2012.~~$0.2 million.

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 ~~first~~second quarter of 2012 and 2011, we recorded ~~provisions~~a benefit of ~~$1.9~~$0.9 million and $2a provision of $1.1 million, respectively, which resulted in an effective tax rate of ~~31.6%~~28.4% and ~~29.3%~~31.8%, respectively. During the first six months of 2012 and 2011, we recorded provisions of $1 million and $3 million, respectively, which resulted in an effective tax rate of 35.2% and 30.1%, respectively.

Our effective tax ~~rate during the first quarter of 2012 and 2011~~rates were below the statutory federal income tax rate primarily due to the benefit related to the current period domestic production activities and the benefit from the SEZ India tax holiday.


	Three Months Ended March 31,						Six Months Ended June 30,
(in thousands)	2012			2011			2012			2011
Cash (used in) provided by
Cash provided by (used in)
Operating activities	$	(17,774	)	$	(8,115	)	$	12,527		$	17,220
Investing activities		(7,966	)		(5,378	)		(12,502	)		(20,139	)
Financing activities		(2,103	)		(2,234	)		(4,717	)		(2,173	)
Effect of exchange rate on cash		963			952			(834	)		948

Net decrease in cash and cash equivalents	$	(26,880	)	$	(14,775	)	$	(5,526	)	$	(4,144	)


	As of March 31, 2012			As of December 31, 2011
Total cash, cash equivalents, and marketable securities	$	88,060		$	111,432

The decrease in cash, cash equivalents, and marketable securities was primarily due to ~~$17.8 million cash used in operating activities that was largely due to payments of annual incentive compensation during the first quarter of 2012.~~lower net income. We believe that our current cash, cash equivalents, and cash flow from operations in 2012 will be sufficient to fund our operations and our share repurchase program for at least the next 12 months.

In June 2011, we entered into a lease arrangement for our new office headquarters in Cambridge, Massachusetts commencing on July 1, 2011 and terminating on December 31, 2023, subject to our option to extend for two additional five-year periods. We will continue to pay our monthly rent under the lease for our ~~current~~existing offices in Cambridge, Massachusetts, through the remaining term of that lease, which is scheduled to expire on May 31, 2013. We invested approximately ~~$1.7~~$0.1 million in the first ~~quarter~~six months of 2012 net of our landlord tenant improvement allowance, and we expect to invest approximately ~~$9.8~~$11.3 million in the remainder of 2012, net of our landlord tenant improvement allowance, for furniture, fixtures, IT equipment, and leasehold improvements for our new office headquarters.

We evaluate acquisition opportunities from time to time, which if pursued, could require use of our funds. Approximately ~~$29.2~~$41.9 million of our cash and cash equivalents is held in our foreign subsidiaries. If it became necessary to repatriate these funds, we may be required to pay U.S. tax, net of any applicable foreign tax credits, upon repatriation. We consider the earnings of our foreign subsidiaries to be permanently reinvested and, as a result, U.S. taxes on such earnings are not provided. It is impractical to estimate the amount of U.S. tax we could have to pay upon repatriation due to the complexity of the foreign tax credit calculations and because we consider our earnings permanently reinvested. There can be no assurance that changes in our plans or other events affecting our operations will not result in materially accelerated or unexpected expenditures.

The primary components of cash ~~used in~~provided by operating activities during the first ~~quarter~~six months of 2012 were net income of $1.8 million, a ~~$25.8~~$5.8 million decrease in accounts ~~payable~~receivable due to higher collections, and ~~accrued expenses~~a $2.0 million increase in deferred revenue.

The primary components of cash provided by operating activities during the first six months of 2011 were an $18.4 million increase in deferred revenue primarily ~~related to~~resulting from the ~~payment~~difference in timing of ~~incentive compensation, an $8.1~~billings and revenue recognition for annual maintenance and for a customer arrangement executed in the second quarter of 2011, and $7 million of net income, partially offset by a $15.8 million increase in accounts receivable related to ~~the timing of billings, partially offset by a $4.7 million increase in deferred revenue.~~

~~The primary components of cash used in operating activities during the first quarter of 2011 were a $28.2 million increase in accounts receivable related to the timing of~~ billings and the increase in revenue, a $7 million decrease in accounts payable and accrued expenses primarily related to the payment of incentive compensation, partially offset by a $17.2 million increase in deferred revenue and a $0.9 million increase in net income.revenue.

Total contractual future cash receipts due from our existing license agreements was approximately ~~$210.4~~$207.7 million as of ~~March 31,~~June 30, 2012 compared to ~~$117~~$130.6 million as of ~~March 31,~~June 30, 2011. The future cash receipts due as of ~~March 31,~~June 30, 2012 are summarized as follows:


As of March 31,(in thousands)	Contractual payments for term licenses not recorded on the balance sheet (1)		Other contractual license payments not recorded on the balance sheet (2)		Total
As of June 30,(in thousands)							Contractual payments for term licenses not recorded on the balance sheet(1)		Other contractual license payments not recorded on the balance sheet(2)		Total
Remainder of 2012	$	25,866	$	21,487	$	47,353	$	17,083	$	12,856	$	29,939
2013		38,347		10,430		48,777		40,668		11,754		52,422
2014		35,081		7,551		42,632		38,346		7,544		45,890
2015		30,325		7,320		37,645		33,755		7,320		41,075
2016 and thereafter		24,570		9,471		34,041		29,056		9,359		38,415

Total	$	154,189	$	56,259	$	210,448	$	158,908	$	48,833	$	207,741

During the first ~~quarter~~six months of 2012, ~~cash used~~we invested $14.9 million primarily in ~~investing activities was primarily~~leasehold improvements for ~~purchases of marketable debt securities of $10.5 million, partially offset by the proceeds received from maturing marketable debt securities of $6.8 million.~~our U.S. and India offices.

During the first ~~quarter~~six months of 2011, cash used in investing activities was primarily for purchases of marketable debt securities of $9$25.4 million, partially offset by the proceeds received from ~~maturing~~the sales and maturities of marketable debt securities of ~~$4.7~~$8.8 million.

Cash used in financing activities during the first ~~quarter~~six months of 2012 and 2011 was primarily for repurchases of our common stock and the payment of our quarterly dividend. Since 2004, our Board of Directors has approved annual stock repurchase programs that have authorized the repurchase in the aggregate of up to $86.3 million of our common stock. Purchases under these programs have been made on the open market.

The following table is a summary of our repurchase activity under all of our repurchase programs during the first ~~quarter~~six months of 2012 and 2011:


	Three Months Ended March 31,										Six Months Ended June 30,
	2012					2011					2012					2011
(Dollars in thousands)	Shares		Amount			Shares		Amount			Shares		Amount			Shares		Amount
Prior year authorization as of January 1,			$	13,963				$	13,237				$	13,963				$	13,237
Repurchases paid		25,613		(765	)		28,042		(1,012	)		76,471		(2,477	)		56,530		(2,064	)
Repurchases unsettled		1,770		(66	)							1,452		(46	)				—

Authorization remaining as of March 31,			$	13,132				$	12,225
Authorization remaining as of June 30,													$	11,440				$	11,173

In addition to the share repurchases made under our repurchase programs, we net settled the majority of our employee stock option exercises and RSU vesting, which resulted in the withholding of shares to cover the option exercise price and the minimum statutory tax withholding obligations.

During the first ~~quarter~~six months of 2012 and 2011, option and RSU holders net settled stock options and vested RSUs representing the right to purchase a total of ~~219,000~~321,000 shares and ~~135,000~~394,000 shares, respectively, of which only ~~130,000~~187,000 shares and ~~85,000~~237,000 shares, respectively, were issued to the option and RSU holders and the balance of the shares were surrendered to us to pay for the exercise price and the applicable taxes. During the first ~~quarter~~six months of 2012 and 2011, instead of receiving cash from the equity holders, we withheld shares with a value of ~~$2.0~~$2.8 million and ~~$1.5~~$3.5 million, respectively, for withholding taxes and ~~$1.1~~$1.8 million and ~~$0.4~~$2.4 million, respectively, for the exercise price. The value of share repurchases and shares withheld for net settlement of our employee stock option exercises and vesting of RSUs offset the proceeds received under our various share-based compensation plans during the first ~~quarter~~six months of 2012 and 2011.

The Company declared a cash dividend of $0.03 per share for each quarter in the first ~~quarter~~six months of 2012 and 2011, and paid cash dividends of ~~$1.1~~$2.3 million in ~~both~~ the first ~~quarter~~six months of 2012 and $2.2 million in the first six months of 2011. It is our current intention to pay a quarterly cash dividend of $0.03 per share to shareholders of record as of the first trading day of each quarter, however, the Board of Directors may terminate or modify this dividend program at any time without notice.

Market risk represents the risk of loss that may affect us due to adverse changes in financial market prices and rates. Our market risk exposure is primarily related to fluctuations in foreign exchange rates. We enter into forward foreign currency contracts to partially mitigate our exposure to the fluctuations in foreign exchange rates. See Note 4 “Derivative Instruments” in the notes to the accompanying unaudited condensed consolidated financial statements for further discussion.

There were no significant changes to our quantitative and qualitative disclosures about market risk during the first ~~quarter~~six months of 2012. Please refer to Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk included in our Annual Report on Form 10-K for the year ended December 31, 2011 for a more complete discussion of our market risk exposure.

Our management, with the participation of our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of ~~March 31,~~June 30, 2012. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of ~~March 31,~~June 30, 2012.

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the quarter ended ~~March 31,~~June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We encourage you to carefully consider the risk factors identified in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011. These risk factors could materially affect our business, financial condition and future results and could cause our actual business and financial results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q or elsewhere by management from time to time. ~~There~~Except as described below, there have been no material changes during the first ~~quarter ended March 31,~~six months of 2012 to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

The ongoing uncertainty and volatility in the global financial markets related to the European sovereign debt crisis may adversely affect the Company’s operating results.

Global financial markets continue to experience disruptions, including increased volatility, and diminished liquidity and credit availability. In particular, developments in Europe have created uncertainty with respect to the ability of certain European countries to continue to service their sovereign debt obligations. This debt crisis and related European financial restructuring efforts may cause the value of the Euro to deteriorate, reducing the purchasing power of our European customers and reducing the translation of Euro based revenues into U.S. dollars. For the first six months of 2012, approximately 11% of our revenues were derived from countries which use the Euro as their primary currency. In the event that one or more countries were to replace the Euro with their legacy currency, then the Company’s sales in and to such countries, or Europe generally, would likely be adversely affected until stable exchange rates were established. In addition, the European crisis is contributing to instability in global credit markets. If global economic and market conditions, or economic and financial market conditions in Europe, the United States or other key markets, remain uncertain, persist, or deteriorate further, our customers may respond by suspending, delaying or reducing their expenditures, which may adversely affect our cash flows and results of operations.

The following table sets forth information regarding our repurchases of our common stock during the ~~first~~second quarter of 2012:

In January 2012, a former stockholder of 1mind Corporation (“1mind”) exercised a warrant to purchase 2,464 shares of our common stock, which was originally issued as part of the consideration for our acquisition of 1mind in 2002. In accordance with the net exercise provisions of this warrant, we withheld 78 shares of our common stock to cover the exercise price of the warrant, which shares were valued at $2,094 based on the average closing price of our common stock over the ten consecutive trading days ending on the third trading day prior to the exercise date, and issued 2,386 shares of our common stock. The issuance of these shares was made in reliance on an exemption from registration provided by Regulation D under the Securities Act of 1933.

The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed or furnished, as the case may be, as part of this report and such Exhibit Index is incorporated herein by reference.

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


101 Main Street Cambridge, MA		02142-1590
*(Address of principal executive offices)*		*(Zip Code)*


Large accelerated filer x	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨
		(Do not check if smaller reporting company)


		Page
Part I—Financial Information
Item 1.	Financial Statements:
	Unaudited Condensed Consolidated Balance Sheets at ~~March 31,~~June 30, 2012 and December 31, 2011		3
	Unaudited Condensed Consolidated Statements of Income for the three and six months ended ~~March 31,~~June 30, 2012 and 2011		4
	Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and six months ended ~~March 31,~~June 30, 2012 and 2011		5
	Unaudited Condensed Consolidated Statements of Cash Flows for the ~~three~~six months ended ~~March 31,~~June 30, 2012 and 2011		6
	Notes to Unaudited Condensed Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		1615
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		24
Item 4.	Controls and Procedures		2524
Part II—Other Information
Item 1A.	Risk Factors		25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		25
Item 6.	Exhibits		26
SIGNATURE			27



	Three Months Ended March 31,
	2012		2011
Net income:	$	4,057	$	4,731
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities, net of tax		72		(16)
Foreign currency translation adjustments		1,274		1,288

Total other comprehensive income		1,346		1,272

Comprehensive income	$	5,403	$	6,003


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Programs (1)		Approximate Dollar Value of Shares That May Yet Be Purchased Under Publicly Announced Share Repurchase Programs (in thousands) (1)
1/1/12-1/31/12		13,742	$	27.60		13,742	$	13,584
2/1/12-2/29/12		6,527		28.85		6,527		13,396
3/1/12-3/31/12		7,114		37.00		7,114		13,132

Total		27,383	$	30.34


(Dollars in thousands)	Three Months Ended March 31,					Change
	2012			2011
Foreign currency transaction gain	$	740		$	1,016	$	(276	)	(27	)%
Interest income, net		111			86		25		29	%
Other (expense) income, net		(839	)		28		(867	)	n/m

Non-operating income and expenses, net	$	12		$	1,130	$	(1,118	)	(99	)%


	As of June 30, 2012		As of December 31, 2011
Total cash, cash equivalents, and marketable securities	$	102,864	$	111,432


	Pegasystems Inc.

Date: ~~May 3,~~August 9, 2012	By:	/s/ CRAIG DYNES
		Craig Dynes
		Senior Vice President, Chief Financial Officer
		(principal financial officer)


Exhibit No.		Description

3.1		Amendment to Restated Articles of Organization of the Registrant. (filed herewith)

31.1		Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer. (filed herewith)

31.2		Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer. (furnished herewith)

32		Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer and the Chief Financial Officer. (furnished herewith)

101		The following materials from Pegasystems Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~March 31,~~June 30, 2012, formatted in XBRL (Extensible Business Reporting Language): ~~(I)~~(i) the Unaudited Condensed Consolidated Balance Sheets (ii) the Unaudited Condensed Consolidated Statements of Income, (iii) the Unaudited Condensed Consolidated Statements of Comprehensive Income (iv) the Unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to the Unaudited Condensed Consolidated Financial Statements. *