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 ~~37,936,149~~37,936,265 shares of the Registrant’s common stock, $.01 par value per share, outstanding on ~~April 25,~~July 29, 2013


	As of		As of		As of		As of

	March 31, 2013		December 31, 2012		June 30, 2013		December 31, 2012
*ASSETS*
Current assets:
Cash and cash equivalents	$	123,731	$	77,525	$	103,845	$	77,525
Marketable securities		57,124		45,460		69,966		45,460

Total cash, cash equivalents, and marketable securities		180,855		122,985		173,811		122,985
Trade accounts receivable, net of allowance of $1,134 and $963		70,513		134,066
Trade accounts receivable, net of allowance of $1,184 and $963						94,527		134,066
Deferred income taxes		10,252		10,202		10,152		10,202
Income taxes receivable		4,774		6,261		7,726		6,261
Other current assets		5,735		5,496		6,204		5,496

Total current assets		272,129		279,010		292,420		279,010
Property and equipment, net		29,747		30,827		29,262		30,827
Long-term deferred income taxes		49,163		49,292		49,492		49,292
Long-term other assets		1,618		1,680		1,712		1,680
Intangible assets, net		55,455		58,232		52,682		58,232
Goodwill		20,451		20,451		20,451		20,451

Total assets	$	428,563	$	439,492	$	446,019	$	439,492

*LIABILITIES AND STOCKHOLDERS’ EQUITY*
Current liabilities:
Accounts payable	$	2,233		3,330	$	2,911	$	3,330
Accrued expenses		15,267		15,534		20,295		15,534
Accrued compensation and related expenses		18,848		40,715		28,352		40,715
Deferred revenue		104,608		95,546		98,702		95,546

Total current liabilities		140,956		155,125		150,260		155,125
Income taxes payable		13,707		13,551		13,860		13,551
Long-term deferred revenue		16,029		18,719		20,383		18,719
Other long-term liabilities		16,482		15,618		17,164		15,618

Total liabilities		187,174		203,013		201,667		203,013

Commitments and contingencies
Stockholders’ equity:
Preferred stock, 1,000 shares authorized; no shares issued and outstanding		—		—		—		—
Common stock, 100,000 shares authorized; 37,951 shares and 37,945 shares issued and outstanding		380		379
Common stock, 100,000 shares authorized; 37,957 shares and 37,945 shares issued and outstanding						380		379
Additional paid-in capital		137,591		138,576		137,589		138,576
Retained earnings		102,276		94,349		105,840		94,349
Accumulated other comprehensive income		1,142		3,175		543		3,175

Total stockholders’ equity		241,389		236,479		244,352		236,479

Total liabilities and stockholders’ equity	$	428,563	$	439,492	$	446,019	$	439,492


	Three Months Ended March 31,				Three Months Ended June 30,					Six Months Ended June 30,
	2013		2012		2013		2012			2013		2012
Revenue:
Software license	$	43,209	$	35,943	$	40,206	$	30,999		$	83,415	$	66,942
Maintenance		36,322		30,845		37,937		34,495			74,259		65,340
Professional services		36,715		44,379		39,172		39,562			75,887		83,941

Total revenue		116,246		111,167		117,315		105,056			233,561		216,223

Cost of revenue:
Cost of software license		1,583		1,599
Cost of maintenance		3,735		3,609
Cost of professional services		32,335		36,326
Software license						1,576		1,579			3,159		3,178
Maintenance						3,772		3,718			7,507		7,327
Professional services						32,530		34,690			64,865		71,016

Total cost of revenue		37,653		41,534		37,878		39,987			75,531		81,521

Gross profit		78,593		69,633		79,437		65,069			158,030		134,702

Operating expenses:
Selling and marketing		39,270		38,395		45,346		41,188			84,616		79,583
Research and development		19,576		19,004		19,761		18,901			39,337		37,905
General and administrative		6,796		6,315		7,277		7,664			14,073		13,979

Total operating expenses		65,642		63,714		72,384		67,753			138,026		131,467

Income from operations		12,951		5,919
Foreign currency transaction (loss) gain		(1,890)		740
Income (loss) from operations						7,053		(2,684)			20,004		3,235
Foreign currency transaction loss						(437)		(841)			(2,327)		(101)
Interest income, net		118		111		135		94			253		205
Other income (expense), net		839		(839)
Other (expense) income, net						(94)		263			745		(576)

Income before provision for income taxes		12,018		5,931
Provision for income taxes		2,949		1,874
Income (loss) before provision for income taxes						6,657		(3,168	)		18,675		2,763
Provision (benefit) for income taxes						1,954		(901	)		4,903		973

Net income	$	9,069	$	4,057
Net income (loss)					$	4,703	$	(2,267	)	$	13,772	$	1,790

Earnings per share:
Basic	$	0.24	$	0.11
Diluted	$	0.23	$	0.10
Earnings (loss) per share:
Basic and Diluted					$	0.12	$	(0.06	)	$	0.36	$	0.05

Weighted-average number of common shares outstanding
Basic		37,947		37,756		37,949		37,865			37,948		37,812
Diluted		38,788		38,889		38,749		37,865			38,769		38,931
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,
	2013		2012		2013		2012
Operating activities:
Net income	$	9,069	$	4,057	$	13,772	$	1,790
Adjustment to reconcile net income to cash provided by (used in) operating activities:
Adjustment to reconcile net income to cash provided by operating activities:
Excess tax benefits from exercise or vesting of equity awards		(725)		(1,622)		(1,718)		(2,225)
Deferred income taxes		56		214		(273)		(305)
Depreciation and amortization		4,727		4,686		9,419		8,976
Stock-based compensation expense		3,432		2,852		6,713		5,838
Foreign currency transaction loss		219		395		2,327		101
Other non-cash items		1,241		1,713		2,250		2,938
Change in operating assets and liabilities:
Trade accounts receivable		63,200		(8,130)		37,336		6,146
Income taxes receivable and other current assets		1,604		(156)		(1,031)		(952)
Accounts payable and accrued expenses		(23,799)		(25,861)		(10,051)		(14,153)
Deferred revenue		6,811		4,696		5,166		2,037
Other long-term assets and liabilities		211		(618)		370		2,336

Cash provided by (used in) operating activities		66,046		(17,774)
Cash provided by operating activities						64,280		12,527

Investing activities:
Purchase of marketable securities		(15,779)		(10,479)		(32,690)		(11,760)
Matured and called marketable securities		3,750		6,780		8,540		14,207
Investment in property and equipment		(1,195)		(4,267)		(1,972)		(14,949)

Cash used in investing activities		(13,224)		(7,966)		(26,122)		(12,502)

Financing activities:
Issuance of common stock for share-based compensation plans		271		293		801		707
Excess tax benefits from exercise or vesting of equity awards		725		1,622		1,718		2,225
Dividend payments to shareholders		—		(1,132)		(1,142)		(2,272)
Common stock repurchases for tax withholdings for net settlement of equity awards		(1,611)		(2,072)		(2,780)		(2,851)
Common stock repurchases under share repurchase programs		(3,512)		(814)		(7,275)		(2,526)

Cash used in financing activities		(4,127)		(2,103)		(8,678)		(4,717)

Effect of exchange rate on cash and cash equivalents		(2,489)		963		(3,160)		(834)

Net increase (decrease) in cash and cash equivalents		46,206		(26,880)		26,320		(5,526)
Cash and cash equivalents, beginning of period		77,525		60,353		77,525		60,353

Cash and cash equivalents, end of period	$	123,731	$	33,473	$	103,845	$	54,827

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 U.S. 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, 2012.

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 2013.


(in thousands)	March 31, 2013								June 30, 2013
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value

Municipal bonds	$	35,961		57		(9)	$	36,009	$	38,222		34		(43)	$	38,213
Corporate bonds		19,804		73		(12)		19,865		30,282		42		(71)		30,253
Certificates of deposit		1,253		—		(3)		1,250		1,504		—		(4)		1,500

	$	57,018		130		(24)	$	57,124	$	70,008		76		(118)	$	69,966

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 of ~~March 31,~~June 30, 2013, remaining maturities of marketable debt securities ranged from ~~June~~July 2013 to ~~July~~August 2015, with a weighted-average remaining maturity of approximately 1213 months.

The Company uses foreign currency forward contracts (“forward contracts”) to manage its exposure to changes in foreign currency ~~exchange rates associated with its foreign currency~~ denominated accounts receivable, intercompany payables 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 receivableprimarily held by the U.S. operating ~~company in its consolidated statements of operations when there are changes~~company. The Company has been primarily exposed to the fluctuation 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 and Euro relative to the U.S. dollar. More recently, the Company has experienced increased levels of exposure to the Australian dollar and India rupee, for which it expects to use forward contracts in future periods.

The ~~foreign currency~~ forward 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, ~~(expense),~~ net, in its consolidated statement of operations. ~~However, the fluctuations in the value of these foreign currency~~These forward contracts ~~partially offset the gains and losses from the remeasurement~~have 90 day terms or settlement of the foreign currency denominated accounts receivable, intercompany payables, and cash held by the U.S. operating company, thus partly mitigating the volatility. Generally, the Company enters into foreign currency forward contracts with terms not greater than 90 days.less.

During the first quarter of 2013, the Company entered into and settled foreign currency forward contracts to sell €16 million and £19 million and receive $50.8 million. During the first quarter of 2012, the Company entered into and settled foreign currency forward contracts to sell €11.0 million and £12.0 million and receive $32.8 million. As of ~~March 31,~~June 30, 2013 and December 31, 2012, the Company did not have any ~~foreign currency~~ forward contracts outstanding.

During the second quarter and first ~~quarter~~six months of 2013 and 2012, the Company entered into forward contracts with notional values as follows:

During the second quarter and first six months of 2013 and 2012, the total change in the fair value of the Company’s ~~foreign currency~~ forward contracts recorded in other (expense) income, ~~(expense),~~ net, was ~~a gain of $0.8 million and a loss of $0.8 million, respectively.~~as follows:

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 Company does not have any investments classified within Level 3 of the fair value hierarchy.

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, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		June 30, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Money market funds	$	589	$	589	$	—	$	1,638	$	1,638	$	—


Marketable securities:
Municipal bonds	$	36,009	$	15,186	$	20,823	$	38,213	$	15,099	$	23,114
Corporate bonds		19,865		19,865		—		30,253		30,253		—
Certificate of deposits		1,250		—		1,250		1,500		—		1,500

Total marketable securities	$	57,124	$	35,051	$	22,073	$	69,966	$	45,352	$	24,614

Assets ~~not~~ recorded at fair value on a ~~recurring~~nonrecurring 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 2013 and 2012, the Company did not recognize any impairments on its assets measured at fair value on a nonrecurring basis.


(in thousands)	March 31, 2013			December 31, 2012		June 30, 2013		December 31, 2012
Trade accounts receivable	$	58,278		$	112,106	$	76,411	$	112,106
Unbilled trade accounts receivable		13,369			22,923		19,300		22,923

Total accounts receivable		71,647			135,029		95,711		135,029

Allowance for sales credit memos		(1,134)			(963)		(1,184)		(963)

	$	70,513		$	134,066	$	94,527	$	134,066
			��

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, 2013 and December 31, 2012, respectively.

There were no changes in the carrying amount of goodwill during the first ~~quarter~~six months of 2013.

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


(in thousands)	Cost		Accumulated Amortization		Net Book Value		Cost		Accumulated Amortization		Net Book Value
As of March 31, 2013
As of June 30, 2013
Customer related intangibles	$	44,355	$	(14,374)	$	29,981	$	44,355	$	(15,607)	$	28,748
Technology		43,446		(17,972)		25,474		43,446		(19,512)		23,934
Other intangibles		2,238		(2,238)		—		2,238		(2,238)		—

Total	$	90,039	$	(34,584)	$	55,455	$	90,039	$	(37,357)	$	52,682

For the second quarter and first ~~quarter~~six months of 2013 and 2012, amortization of intangibles was reflected in the Company’s unaudited condensed consolidated statements of operations as follows:


	Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2013		2012		2013		2012		2013		2012
Cost of software license	$	1,541	$	1,568	$	1,541	$	1,540	$	3,082	$	3,108
Selling and marketing		1,232		1,232		1,232		1,232		2,464		2,464
General and administrative		4		5		—		5		4		10

Total amortization expense	$	2,777	$	2,805	$	2,773	$	2,777	$	5,550	$	5,582

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


(in thousands) As of June 30, 2013	Future estimated amortization expense
Remainder of 2013	$	5,546
2014		9,489
2015		8,688
2016		8,688
2017		8,688
2018 & thereafter		11,583

	$	52,682


(in thousands)	March 31, 2013		December 31, 2012		June 30, 2013		December 31, 2012
Other taxes	$	2,434	$	2,711	$	2,637	$	2,711
Restructuring		333		441
Employee reimbursable expenses						1,812		879
Self-insurance health and dental claims						1,452		1,707
Royalty fees						1,376		1,686
Dividends payable						1,139		—
Short-term deferred rent						907		1,111
Professional fees		1,524		1,157		833		1,157
Income taxes		821		1,167		787		1,167
Professional services partners fees		334		256
Short-term deferred rent		1,004		1,111
Self-insurance health and dental claims		1,043		1,707
Dividends payable		1,142		—
Employee reimbursable expenses		1,708		879
Restructuring						224		441
Other		4,924		6,105		9,128		4,675

	$	15,267	$	15,534	$	20,295	$	15,534


(in thousands)	March 31, 2013		December 31, 2012		June 30, 2013		December 31, 2012
Software license	$	17,358	$	24,303	$	17,760	$	24,303
Maintenance		73,718		62,144		69,890		62,144
Professional services and other		13,532		9,099		11,052		9,099

Current deferred revenue		104,608		95,546		98,702		95,546

Software license		13,501		15,407		18,595		15,407
Maintenance and professional services		2,528		3,312		1,788		3,312

Long-term deferred revenue		16,029		18,719		20,383		18,719

	$	120,637	$	114,265	$	119,085	$	114,265

Following the acquisition of Chordiant in 2010 and 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 of 2013 is as follows:~~

For the second quarter and first ~~quarter~~six months of 2013 and 2012, stock-based compensation expense was reflected in the Company’s unaudited condensed consolidated statements of operations as follows:


	Three Months Ended March 31,				Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2013		2012		2013			2012			2013			2012
Cost of services	$	1,173	$	977	$	1,014		$	884		$	2,187		$	1,861
Operating expenses		2,259		1,875		2,267			2,102			4,526			3,977

Total stock-based compensation before tax	$	3,432	$	2,852	$	3,281		$	2,986		$	6,713		$	5,838
Income tax benefit		(1,103)		(876)		(944	)		(990	)		(2,047	)		(1,866	)

During the first ~~quarter~~six months of 2013, the Company issued approximately ~~138,000~~255,000 shares to its employees and 14,000 shares to its non-employee directors under the Company’s share-based compensation plans.

During the first ~~quarter~~six months of 2013, the Company granted approximately ~~77,000~~97,000 restricted stock units (“RSUs”) with a total fair value of ~~$2.1~~approximately $2.6 million. Approximately 59,000 RSUs were issued in connection with the election by employees to receive 50% of their 2013 target incentive compensation under the Company’s Corporate Incentive Compensation Plan (the “CICP”) in the form of RSUs instead of cash. Stock-based compensation of approximately $1.7 million associated with this RSU grant will be recognized over a one year period beginning aton the grant date.

As of ~~March 31,~~June 30, 2013, the Company had approximately ~~$17.7~~$14.7 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 ~~2.3~~2.2 years.

Basic earnings per share is computed using the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per share is computed using the weighted-average number of common shares outstanding during the applicable 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)	2013		2012		2013		2012		2013		2012
*Basic*
Net income	$	9,069	$	4,057
Net income (loss)					$	4,703	$	(2,267)	$	13,772	$	1,790

Weighted-average common shares outstanding		37,947		37,756		37,949		37,865		37,948		37,812

Earnings per share, basic	$	0.24	$	0.11
Earnings (loss) per share, basic					$	0.12	$	(0.06)	$	0.36	$	0.05


*Diluted*
Net income	$	9,069	$	4,057
Net income (loss)					$	4,703	$	(2,267)	$	13,772	$	1,790

Weighted-average common shares outstanding, basic		37,947		37,756		37,949		37,865		37,948		37,812
Weighted-average effect of dilutive securities:
Stock options and warrants		654		866		617		—		636		850
RSUs		187		267		183		—		185		269

Effect of assumed exercise of stock options, warrants and RSUs		841		1,133		800		—		821		1,119

Weighted-average common shares outstanding, diluted		38,788		38,889		38,749		37,865		38,769		38,931

Earnings per share, diluted	$	0.23	$	0.10
Earnings (loss) per share, diluted					$	0.12	$	(0.06)	$	0.36	$	0.05

Outstanding options and RSUs excluded as impact would be antidilutive		61		65		108		1,146		202		54

The Company develops and licenses its rules-based software solutions and provides professional and cloud 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 – 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 — 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)	2013			2012
(Dollars in thousands)							2013				2012				2013				2012
U.S.	$	68,142	59%	$	55,692	50%	$	62,313	53	%	$	61,239	58	%	$	130,455	56	%	$	116,931	54	%
United Kingdom		15,439	13%		18,138	16%		21,228	18	%		18,329	18	%		36,667	16	%		36,467	17	%
Europe, other		19,985	17%		17,285	16%		21,279	18	%		14,930	14	%		41,264	17	%		32,215	15	%
Other		12,680	11%		20,052	18%		12,495	11	%		10,558	10	%		25,175	11	%		30,610	14	%

	$	116,246	100%	$	111,167	100%	$	117,315	100	%	$	105,056	100	%	$	233,561	100	%	$	216,223	100	%

~~There were no customers~~Customers accounting for 10% or more of the Company’s total revenue ~~during the first quarter of 2013~~ or outstanding trade receivables, net, were as ~~of March 31, 2013.~~

There was one customer accounting for 10% or more of the Company’s total revenue during the first quarter of 2012 and one customer accounting for 10% or more of the Company’s outstanding trade receivables, net, as of December 31, 2012, as listed below.follows:


	Three Months Ended March 31,				Three Months Ended June 30,						Six Months Ended June 30,

(Dollars in thousands)	2013		2012		2013			2012			2013			2012
Total Revenue	$	116,246	$	111,167	$	117,315		$	105,056		$	233,561		$	216,223
Customer A		—%		11%		—	%		10	%		—	%		—	%


	As of March 31,		As of December 31,		As of June 30,		As of December 31,
(Dollars in thousands)	2013		2012		2013		2012
Trade receivables, net of allowances	$	70,513	$	134,066	$	94,527	$	134,066
Customer B		—%		10%		—%		10%

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 the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements about our future financial performance and business plans, the adequacy of our liquidity and capital resources, the continued payment of 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. Important factors that could cause actual future activities and results to differ include, among others, variation in demand for our products and services and the difficulty in predicting the completion of product acceptance and other factors affecting the timing of license revenue recognition, the ongoing uncertainty and volatility in the global financial markets, 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, 2012 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 enables our customers 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. We also provide consulting services, cloud service offerings, 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. Our strategy is to sell a series of licenses that are focused on a specific purpose or area of operations, rather than to sell a large enterprise license.

Our license revenue is primarily derived from sales of our ~~PRPC~~PegaRULES Process Commander^® (“PRPC”) software and related solution frameworks. PRPC is a comprehensive platform for building and managing ~~BPM~~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~~across markets including financial services, insurance, healthcare, communications, life sciences, energy and ~~government markets.~~government.

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 our customers to immediately build, test, and deploy their Pega applications in a secure cloud environment while minimizing their infrastructure and hardware costs. Revenue from our Pega Cloud offering is included in consulting services revenue.

We offer training for our staff, customers, and partners at our regional training facilities, at third party facilities, and at customer sites. We also offer training online through Pega Academy, which 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.

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, 2012. 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 2.2 “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, 2012.


	Three Months Ended March 31,				Increase			Three Months Ended June 30,				Increase			Six Months Ended June 30,				Increase
(Dollars in thousands)	2013		2012					2013		2012					2013		2012
Total revenue	$	116,246	$	111,167	$	5,079	5%	$	117,315	$	105,056	$	12,259	12%	$	233,561	$	216,223	$	17,338	8%
Gross profit	$	78,593	$	69,633	$	8,960	13%	$	79,437	$	65,069	$	14,368	22%	$	158,030	$	134,702	$	23,328	17%
Total operating expenses	$	65,642	$	63,714	$	1,928	3%	$	72,384	$	67,753	$	4,631	7%	$	138,026	$	131,467	$	6,559	5%
Income from operations	$	12,951	$	5,919	$	7,032	119%
Income before provision for income taxes	$	12,018	$	5,931	$	6,087	103%
Income (loss) from operations								$	7,053	$	(2,684)	$	9,737	n/m	$	20,004	$	3,235	$	16,769	518%
Income (loss) before provision for income taxes								$	6,657	$	(3,168)	$	9,825	n/m	$	18,675	$	2,763	$	15,912	576%

The aggregate value of new license arrangements executed during the second quarter and first ~~quarter~~six months of 2013 ~~was lower~~were higher than in the ~~first quarter of~~same periods in 2012 due to ~~two particularly large~~a larger number and larger average value of license arrangements executed in the ~~first~~second quarter of 2013 than in the second quarter of 2012. The aggregate value of new license arrangements executed fluctuates quarter to quarter. During the first ~~quarter~~six months of 2013 and 2012, approximately ~~56%~~64% and ~~17%~~67%, respectively, of the value of new license arrangements were executed with ~~new~~existing customers. ~~The increase in the value of license arrangements with new customers was due to our success in winning new target accounts.~~

The increase in gross profit was primarily due to an increase in license and maintenance revenue, partially offset by lower consulting services gross profit associated with lower consulting services revenue as a result of more customers becoming enabled and our partners leading more implementation projects.

~~The increase in income from operations was primarily due to a 13% increase in gross profit partially offset by a 3% increase in operating expenses.~~

During the first quarter of 2013 and 2012, we recorded a $1.9 million foreign currency transaction loss and a $0.7 million foreign currency transaction gain, respectively, primarily as a result of the fluctuation in the British Pound and Euro relative to the U.S. dollar during those periods. See Note 3 “Derivative Instruments” in the notes to the accompanying unaudited condensed consolidated financial statements for further discussion on our use of foreign currency forward contracts.

The mix between perpetual and term license arrangements executed in a particular period varies based on customer needs. A change in the mix between perpetual and term license arrangements executed may cause our revenues to vary materially from period to period. The ~~increase~~increases in perpetual license revenue ~~was~~were primarily due to ~~a higher number of large~~several larger value perpetual arrangements executed during the first ~~quarter~~six months of 2013 and the fourth quarter of 2012 than during the same periods in 2012 and 2011. ~~Some~~However, some of our perpetual license arrangements include extended payment terms or additional rights of use that result in the recognition of revenue over longer periods.

The ~~increase~~increases in term license revenue ~~was~~were primarily due to revenue recognized on ~~new~~ term license arrangements executed in 2012. A higher proportion of term license arrangements executed would result in more license revenue being recognized over longer periods as payments become due or earlier if prepaid. The aggregate value of payments due under noncancellable term licenses grew to ~~$204.4~~$201.2 million as of ~~March 31,~~June 30, 2013 compared to ~~$154.2~~$158.9 million as of ~~March 31,~~June 30, 2012. We expect to recognize ~~$40.6~~$27.5 million of the ~~$204.4~~$201.2 million as revenue during the remainder of 2013 in addition to new term license agreements we may complete or prepayments we may receive ~~for~~from existing term license agreements. See the table of future cash receipts on page 22.

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.~~offerings, which is included in consulting services. The timing of scheduled payments under customer arrangements may limit the amount of revenue recognized in a reporting period. Consequently, our subscription revenue may vary quarter to quarter. The ~~decrease~~decreases in subscription revenue ~~was~~were primarily due to ~~a prepayment~~revenue recognized ~~as revenue~~ in the ~~fourth~~second quarter of ~~2012.~~2012 for a large payment that became due.


								Three Months Ended June 30,				Increase			Six Months Ended June 30,				Increase
	Three Months Ended March 31,				Increase
(Dollars in thousands)	2013		2012					2013		2012					2013		2012
*Maintenance revenue*

Maintenance	$	36,322	$	30,845	$	5,477	18%	$	37,937	$	34,495	$	3,442	10%	$	74,259	$	65,340	$	8,919	14%

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

Three Months Ended
March 31,
             (Decrease)


(Dollars in thousands)

            2013



            2012






Professional services revenue


Consulting services
   $       35,041       95%         $ 42,419       96%       $ (7,378)               (17)%
Training
   1,674       5%         1,960       4%       (286)       (15)%




Total Professional services


$

36,715





100%





$

44,379





100%





$

(7,664)





(17)%

~~Professional~~Consulting services ~~are primarily consulting services related to new license implementations.~~includes revenue from our Pega Cloud offerings. The decrease in consulting services revenue during the first six months of 2013 compared to the same period in 2012 was primarily the result of more customers becoming enabled and our partners leading more implementation projects. If this trend continues, our consulting services revenue may ~~be lower~~continue to decrease in future periods. The decreases in our training revenue were primarily due to the increased adoption of our Pega Academy self-service online training by our partners, which has a lower average price per student, as well as delayed scheduled training.


	Three Months Ended March 31,				Increase (Decrease)			Three Months Ended June 30,				Increase			Six Months Ended June 30,				Increase (Decrease)
(Dollars in thousands)	2013		2012					2013		2012					2013		2012
*Gross Profit*
Software license	$	41,626	$	34,344	$	7,282	21%	$	38,630	$	29,420	$	9,210	31%	$	80,256	$	63,764	$	16,492	26%
Maintenance		32,587		27,236		5,351	20%		34,165		30,777		3,388	11%		66,752		58,013		8,739	15%
Professional services		4,380		8,053		(3,673)	(46)%		6,642		4,872		1,770	36%		11,022		12,925		(1,903)	(15)%

Total gross profit	$	78,593	$	69,633	$	8,960	13%	$	79,437	$	65,069	$	14,368	22%	$	158,030	$	134,702	$	23,328	17%

Total gross profit %		68%		63%					68%		62%					68%		62%
Software license gross profit %		96%		96%					96%		95%					96%		95%
Maintenance gross profit %		90%		88%					90%		89%					90%		89%
Professional services gross profit %		12%		18%					17%		12%					15%		15%

The ~~decrease~~increases in gross profit were primarily due to increases in license and maintenance revenue.

The increase in professional services gross profit percent during the second quarter of 2013 compared to the same period in 2012 was primarily due to lower ~~revenue~~on-boarding time and expenses associated with reduced hiring as ~~a result~~more of ~~the increased number of customer~~our customers became enabled and ~~partner~~more implementation projects were led ~~implementations and costs incurred on a project during the first quarter of 2013 for which the corresponding revenue will be recognized in future quarters.~~by our partners.


	Three Months Ended March 31,				Increase			Three Months Ended June 30,				Increase			Six Months Ended June 30,				Increase
(Dollars in thousands)	2013		2012					2013		2012					2013		2012
*Selling and marketing*
Selling and marketing		$ 39,270		$ 38,395		$ 875	2%	$	45,346	$	41,188	$	4,158	10%	$	84,616	$	79,583	$	5,033	6%
As a percent of total revenue		34%		35%					39%		39%					36%		37%
Selling and marketing headcount at March 31,		512		489		23	5%
Selling and marketing headcount at June 30,																539		514		25	5%

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.

The increase in selling and marketing expenses during the second quarter of 2013 compared to the same period in 2012 was primarily due to a ~~$2.7~~$1.4 million increase in compensation and benefit expenses associated with higher headcount, ~~partially offset by~~ a ~~$0.9~~$1.7 million ~~decrease~~increase in commission expense associated with the ~~lower~~higher value of new license arrangements executed and ~~$1.2~~a $1.4 million ~~of lower~~increase in sales meeting and PegaWORLD expenses.

The increase in selling and marketing expenses during the first six months of 2013 compared to the same period in 2012 was primarily due to a $4.3 million increase in compensation and benefit expenses associated with higher headcount and a $0.8 million increase in commission expense associated with the higher value of new license arrangements executed.


	Three Months Ended June 30,				Increase			Six Months Ended June 30,				Increase
(Dollars in thousands)	2013		2012					2013		2012
*Research and development*
Research and development	$	19,761	$	18,901	$	860	5%	$	39,337	$	37,905	$	1,432	4%
As a percent of total revenue		17%		18%					17%		18%
Research and development headcount at June 30,									792		599		193	32%

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~~India research facility as we have been replacing contractors with employees. The increase in offshore headcount lowered our average compensation expense per employee.

The increase in research and development expenses during the second quarter of 2013 compared to the same period in 2012 was primarily due to a ~~$2.2~~$2.5 million increase in compensation and benefit expenses associated with higher headcount, partially offset by a ~~$1.4~~$1.1 million decrease in contractor expenses associated with our hiring employees to replace contractors, and a $0.5 million decrease in rent and rent related expenses.

The increase in research and development expenses during the first six months of 2013 compared to the same period in 2012 was primarily due to a $4.8 million increase in compensation and benefit expenses associated with higher headcount, partially offset by a $2.4 million decrease in contractor expenses associated with our hiring employees to replace contractors, and a $1 million decrease in rent and rent related expenses.


	Three Months Ended March 31,				Increase			Three Months Ended June 30,				(Decrease)			Six Months Ended June 30,				Increase
(Dollars in thousands)	2013		2012					2013		2012					2013		2012
*General and administrative*
General and administrative		$ 6,796		$ 6,315		$ 481	8%	$	7,277	$	7,664	$	(387)	(5)%	$	14,073	$	13,979	$	94	2%
As a percent of total revenue		6%		6%					6%		7%					6%		6%
General and administrative headcount at March 31,		245		220		25	11%
General and administrative headcount at June 30,																248		240		8	3%

General and administrative expenses include compensation, benefits, and other headcount-related expenses associated with 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 Company’s other functional departments.

The ~~increase~~decrease in general and administrative expenses during the second quarter of 2013 compared to the same period in 2012 was primarily due to a ~~$0.4~~$0.3 million decrease in professional fees, a $0.3 million decrease in contractor expenses, partially offset by a $0.3 million increase in ~~professional fees.~~compensation and benefit expenses.

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

~~The increase in stock-based compensation expense was primarily due to the higher value of the annual periodic equity grant.~~

We hold foreign currency denominated accounts receivable, intercompany payables, and cash in our U.S. operating company where the functional currency is the U.S. dollar. As a result, these receivables, intercompany payables, and cash are subject to foreign currency transaction gains and losses when there are changes in exchange rates between the U.S. dollar and the 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 first quarter of 2013 and 2012.

~~We enter into foreign currency~~use forward contracts to manage our exposure to changes in foreign currency ~~exchange rates affecting the foreign currency~~ denominated accounts receivable, intercompany payables, and cash primarily held by our U.S. operating company. We have not designated these ~~foreign currency~~ forward 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 (expense) income, ~~(expense),~~ net. The fluctuations in the value of these ~~foreign currency~~ forward contracts recorded in other (expense) income, ~~(expense),~~ net, partially offset in net income, the gains and losses from the remeasurement or settlement of the foreign currency denominated accounts receivable, intercompany payables, and cash held by the U.S. operating company recorded in foreign currency transaction ~~(loss) gain.~~loss.

We have been primarily exposed to the fluctuation in the British pound and Euro relative to the U.S. dollar. More recently, we have experienced increased levels of exposure to the Australian dollar and India rupee, for which we expect to use forward contracts in future periods. See Note 3 “Derivative Instruments” in the notes to the accompanying unaudited condensed consolidated financial statements for discussion on our use of forward contracts.

The total change in the fair value of our forward ~~foreign currency~~ contracts recorded in other (expense) income, ~~(expense),~~ net, during the second quarter and first ~~quarter~~six months of 2013 was a loss of $0.1 million and a gain of $0.7 million, respectively. The total change in the fair value of our foreign currency forward contracts recorded in other (expense) income, net, during the second quarter and first six months of 2012 was a gain of ~~$0.8~~$0.2 million and a loss of ~~$0.8~~$0.6 million, respectively.

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 2013 and 2012, we recorded a tax provision of ~~$2.9~~$2.0 million and ~~$1.9~~a tax benefit of $0.9 million, respectively, which resulted in an effective tax rate of ~~24.5%~~29.4% and ~~31.6%~~28.4%, respectively. During the first six months of 2013 and 2012, we recorded a provision of $4.9 million and $1.0 million, respectively, which resulted in an effective tax rate of 26.3% and 35.2%, respectively. The decrease in our effective tax rate during the first six months of 2013 compared to the same period in 2012 was primarily due to a $0.8 million tax benefit related to our 2012 research and experimentation credit recognized in the first quarter of 2013 as a result of the American Taxpayer Relief Act of 2012 that was signed into law in January 2013.


	Three Months Ended March 31,				Six Months Ended June 30,
(in thousands)	2013		2012		2013		2012
Cash provided by (used in)
Cash provided by (used in):
Operating activities	$	66,046	$	(17,774)	$	64,280	$	12,527
Investing activities		(13,224)		(7,966)		(26,122)		(12,502)
Financing activities		(4,127)		(2,103)		(8,678)		(4,717)
Effect of exchange rate on cash		(2,489)		963		(3,160)		(834)

Net increase (decrease) in cash and cash equivalents	$	46,206	$	(26,880)	$	26,320	$	(5,526)


	As of March 31, 2013		As of December 31, 2012		As of June 30, 2013		As of December 31, 2012
Total cash, cash equivalents, and marketable securities	$	180,855	$	122,985	$	173,811	$	122,985

The increase in cash and cash equivalents was primarily due to the significant increase in cash provided by operating activities associated with our strong accounts receivable collections during the first ~~quarter~~six months of 2013, which were generated from our significant arrangements executed in the fourth quarter of 2012. We believe that our current cash, cash equivalents, and cash flow from operations will be sufficient to fund our operations, our dividend payments and our share repurchase program for at least the next 12 months.

We evaluate acquisition opportunities from time to time, which if pursued, could require use of our funds. Approximately ~~$48.3~~$48 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 ~~driver~~drivers of cash provided by operating activities during the first ~~quarter~~six months of 2013 ~~was~~were net income of $13.8 million and a ~~$63.2~~$37.3 million decrease in accounts receivable due to our significant collections.

The primary drivers of cash ~~used in~~provided by operating activities during the first ~~quarter~~six months of 2012 were net income of $1.8 million, a ~~$25.9~~$6.1 million decrease in ~~accounts payable and accrued expenses primarily related to the payment of incentive compensation and an $8.1 million increase in~~ account receivable ~~related~~due to ~~the timing of billings, partially offset by~~higher collections, and a ~~$4.7~~$2.0 million increase in deferred revenue.

Total contractual future cash receipts due from our existing license agreements was approximately ~~$243.3~~$235.3 million as of ~~March 31,~~June 30, 2013 compared to ~~$210.4~~$207.7 million as of ~~March 31,~~June 30, 2012. The future cash receipts due as of ~~March 31,~~June 30, 2013 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 2013	$	40,630	$	14,413	$	55,043	$	27,466	$	11,533	$	38,999
2014		57,701		11,357		69,058		59,857		16,323		76,180
2015		49,618		3,054		52,672		51,732		3,054		54,786
2016		39,929		5,868		45,797		41,736		3,128		44,864
2017 and thereafter		16,487		4,261		20,748		20,424		—		20,424

Total	$	204,365	$	38,953	$	243,318	$	201,215	$	34,038	$	235,253

During the first ~~quarter~~six months of 2013, cash used in investing activities was primarily for purchases of marketable debt securities of ~~$15.8 million and purchases of $1.2 million in computer equipment and leasehold improvements for our U.S. and India offices.~~

~~During the first quarter of 2012, cash used in investing activities was primarily for purchases of marketable debt securities of $10.5~~$32.7 million, partially offset by the proceeds received from the ~~sales and~~ maturities of marketable debt securities of ~~$6.8 million and our investment~~$8.5 million.

During the first six months of ~~$4.3~~2012, we invested $14.9 million in leasehold improvements ~~and computer equipment~~ for the build-out of our U.S. and India offices.

Cash used in financing activities during the first ~~three~~six months of 2013 and 2012 was primarily for repurchases of our common stock and ~~for the first quarter of 2012, the payment of our quarterly dividend. Our Board of Directors authorized the acceleration of the payment of the fourth quarter~~ dividend ~~to be paid in December 2012 rather than in January 2013. Therefore, there was no dividend payment in the first quarter of 2013.~~payments. Since 2004, our Board of Directors has approved annual stock repurchase programs that have authorized the repurchase in the aggregate of up to $92.4 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 2013 and 2012:


	Six Months Ended June 30,
	2013				2012
(Dollars in thousands)	Shares		Amount		Shares		Amount

Prior year authorization as of January 1,			$	14,793			$	13,963
Repurchases paid		256,219		(7,199)		76,471		(2,477)
Repurchases unsettled		157		(5)		1,452		(46)

Authorization remaining as of June 30,			$	7,589			$	11,440

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 2013 and 2012, option and RSU holders net settled stock options and vested RSUs representing the right to purchase a total of ~~209,000~~366,000 shares and ~~219,000~~321,000 shares, respectively, of which only ~~120,000~~201,000 shares and ~~130,000~~187,000 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 2013 and 2012, instead of receiving cash from the equity holders, we withheld shares with a value of ~~$1.6~~$2.8 million and $2$2.8 million, respectively, for withholding taxes, and ~~$0.8~~$2.0 million and ~~$1.1~~$1.8 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 2013 and 2012.

We declared a cash dividend of ~~$0.03~~$0.06 per share in the first ~~quarter~~six months of 2013 and 2012. We paid cash dividends of $1.1 million and $2.3 million in the first ~~quarter~~six months of ~~2012.~~2013 and 2012, respectively. Our Board of Directors authorized the acceleration of the payment of the fourth quarter 2012 dividend to be paid in December 2012 rather than in January 2013. Therefore, there was no dividend payment in the first quarter of 2013. It is our current intention to pay a quarterly cash dividend of $0.03 per share, 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 foreign currency forward contracts to partially mitigate our exposure to the fluctuations in foreign exchange rates. See Note 3 “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 2013. 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, 2012 for a more complete discussion of our market risk exposure.

Our management, with the participation of our Chief Executive Officer, or CEO, and Chief Accounting Officer, or CAO, 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, 2013. 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 CAO concluded that our disclosure controls and procedures were effective as of ~~March 31,~~June 30, 2013.

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, 2013 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, 2012. 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 have been no material changes during the first ~~quarter~~six months of 2013 to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.

The following table sets forth information regarding our repurchases of our common stock during the ~~first~~second quarter of 2013:

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.

*Pursuant to Rule 406T of Regulation S-T, these interactive data files shall not be deemed “filed” for purpose of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.


x		Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

		For the quarterly period ended ~~March 31,~~June 30, 2013

or

¨		Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

		For the transition period from to


Massachusetts		04-2787865
*(State or other jurisdiction of* *incorporation or organization)*		*(IRS Employer* *Identification No.)*

One Rogers Street Cambridge, MA		02142-1209
*(Address of principal executive offices)*		*(Zip Code)*


		Page
Part I—Financial Information

Item 1.	Financial ~~Statements:~~Statements (Unaudited):

	~~Unaudited~~ Condensed Consolidated Balance Sheets as of ~~March 31,~~June 30, 2013 and December 31, 2012		3

	~~Unaudited~~ Condensed Consolidated Statements of Operations for the three and six months ended ~~March 31,~~June 30, 2013 and 2012		4

	~~Unaudited~~ Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended ~~March 31,~~June 30, 2013 and 2012		5

	~~Unaudited~~ Condensed Consolidated Statements of Cash Flows for the ~~three~~six months ended ~~March 31,~~June 30, 2013 and 2012		6

	Notes to ~~Unaudited~~ Condensed Consolidated Financial Statements		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		23

Item 4.	Controls and Procedures		23

Part II—Other Information

Item 1A.	Risk Factors		24

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		24

Item 6.	Exhibits		25

SIGNATURE			26


	Three Months Ended March 31,
(in thousands)	2013		2012
Net income	$	9,069	$	4,057
Other comprehensive income (loss), net of tax:
Unrealized gain on securities		37		72
Foreign currency translation adjustments		(2,070)		1,274

Total other comprehensive (loss) income		(2,033)		1,346

Comprehensive income	$	7,036	$	5,403


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2013		2012		2013		2012
Net income (loss)	$	4,703	$	(2,267)	$	13,772	$	1,790
Other comprehensive loss:
Unrealized (loss) gain on securities, net of tax		(182)		(25)		(145)		47
Foreign currency translation adjustments		(417)		(1,341)		(2,487)		(67)

Total other comprehensive loss		(599)		(1,366)		(2,632)		(20)

Comprehensive income (loss)	$	4,104	$	(3,633)	$	11,140	$	1,770


(in thousands)	December 31, 2012
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value

Municipal bonds	$	30,488		48		(10)	$	30,526
Corporate bonds		14,853		83		(2)		14,934

	$	45,341		131		(12)	$	45,460


	Notional Amount
	Three Months Ended June 30,				Six Months Ended June 30,
Foreign currency (in thousands)	2013		2012		2013		2012
Euro	€	16,500	€	16,200	€	32,500	€	27,200
British pound	£	14,500	£	11,000	£	33,500	£	23,000


	Change in Fair Value in USD
	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2013		2012		2013		2012
(Loss) gain included in other (expense) income, net	$	(95)	$	244	$	743	$	(596)


(in thousands) As of March 31, 2013	Future estimated amortization expense
Remainder of 2013	$	8,318
2014		9,489
2015		8,688
2016		8,688
2017		8,688
2018 & thereafter		11,584

	$	55,455


~~(in thousands)~~	~~Facilities~~
~~Balance as of December 31, 2012 in accrued expenses~~	$	~~441~~
~~Cash payments~~		~~(108)~~

~~Balance as of March 31, 2013 in accrued expenses~~	$	~~333~~


	Three Months Ended June 30,						Increase (Decrease)			Six Months Ended June 30,						Increase (Decrease)

(Dollars in thousands)	2013			2012						2013			2012

*License revenue*

Perpetual licenses	$	24,647	61%	$	13,030	42%	$	11,617		$	51,007	61%	$	33,449	50%	$	17,558

Term licenses		13,230	33%		9,169	30%		4,061			28,910	35%		22,908	34%		6,002

Subscription		2,329	6%		8,800	28%		(6,471)			3,498	4%		10,585	16%		(7,087)


Total license revenue	$	40,206	100%	$	30,999	100%	$	9,207	30%	$	83,415	100%	$	66,942	100%	$	16,473	25%


	Three Months Ended March 31,						(Decrease)

(Dollars in thousands)	2013			2012

*Professional services revenue*

Consulting services	$	35,041	95%	$	42,419	96%	$	(7,378)	(17)%

Training		1,674	5%		1,960	4%		(286)	(15)%


Total Professional services	$	36,715	100%	$	44,379	100%	$	(7,664)	(17)%


	Three Months Ended March 31,				Change
(Dollars in thousands)	2013		2012
Foreign currency transaction (loss) gain	$	(1,890)	$	740	$	(2,630)	n/m
Interest income, net		118		111		7	6%
Other income (expense), net		839		(839)		1,678	n/m

Non-operating (loss) income, net	$	(933)	$	12	$	(945)	n/m


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)
1/1/2013 - 1/31/2013		10,282	$	23.44		10,282	$	14,552

2/1/2013 - 2/28/2013		8,463		24.02		8,463		14,349

3/1/2013 - 3/31/2013		113,100		28.19		113,100		11,160

Total		131,845	$	27.56


	Pegasystems Inc.

~~Date May 6,~~Date: August 8, 2013	By:	/s/ EFSTATHIOS KOUNINIS
		Vice President of Finance and Chief Accounting Officer

		(principal accounting officer)


Exhibit No.		Description

~~10.1~~		~~2013 Section 16 Officer/FLT Member Corporate Incentive Compensation Plan. (Filed as Exhibit 99.1 to the Registrant’s February 21, 2013 Form 8-K and incorporated herein by reference.)~~

~~10.2~~		~~2013 Executive Officers Base Salaries and Target Bonus Payments. (Filed as Exhibit 99.2 to the Registrant’s February 21, 2013 Form 8-K and incorporated herein by reference.)~~

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

31.2		Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Accounting Officer.

32		Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer and the Chief Accounting Officer.



101		The following materials from Pegasystems Inc.’s Quarterly Report on Form 10-Q for the quarter and six months ended ~~March 31~~June 30, 2013 formatted in XBRL (Extensible Business Reporting Language): (i) the Unaudited Condensed Consolidated Balance Sheets (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) (iv) the Unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to the Unaudited Condensed Consolidated Financial Statements. *