


                                Pegasystems Inc.



                          1994 Long-Term Incentive Plan

                     As Amended and Restated on May __, 1996
                    =========================================



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                                Pegasystems Inc.

                          1994 Long-Term Incentive Plan
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<TABLE>
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SECTION                      CONTENTS                                                 PAGE
- -------                      --------                                                 -----
   <S>                       <C>                                                       <C>
    1.                       Purpose; Definitions                                       1

    2.                       Administration                                             4

    3.                       Stock Subject to Plan                                      5

    4.                       Eligibilitiy                                               7

    5.                       Stock Options                                              7

    6.                       Stock Appreciation Rights                                 13

    7.                       Restricted Stock                                          15

    8.                       Long-Term Performance Awards                              17

    9.                       Amendments and Termination                                19

   10.                       Unfunded Status of Plan                                   20

   11.                       General Provisions                                        21

   12.                       Effective Date of Plan                                    22

   13.                       Term of Plan                                              22

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SECTION 1.  Purpose; Definitions.

        The name of this Plan is the Pegasystems Inc. 1994 Long-Term Incentive
Plan (the "Plan"). The purpose of the Plan is to provide incentives: (a) to
employees of Pegasystems Inc. (the "Corporation") by providing them with
opportunities to purchase stock in the Corporation pursuant to options granted
hereunder which qualify as Incentive Stock Options under Section 422 of the
Internal Revenue Code of 1986; (b) to directors (whether or not employees),
employees and consultants of the Corporation by providing them with
opportunities to purchase stock in the Corporation pursuant to options granted
hereunder which do not qualify as Incentive Stock Options under Section 422 of
the Internal Revenue Code of 1986, and otherwise to participate in shareholder
value which has been created.

        For the purposes of the Plan, the following terms shall be defined as
set forth below:

        a.    "Award" means any Option, Stock Apreciation Right, Restricted
              Stock or Long-Term Award granted under this Plan.

        b.    "Board" means the Board of Directors of the Corporation.

        c.    "Cause" means a felony conviction of a Participant or the failure
              of a Participant to contest prosecution for a felony, or a
              Participant's willful misconduct or dishonesty, any of which is
              directly and materially harmful to the business or reputation of
              the Corporation.

        d.    "Code" means the Internal Revenue Code of 1986, as amended from
              time to time, and any successor thereto.

        e.    "Committee" means a Compensation Committee of the Board, if such
              Committee has been appointed by the Board and has been authorized
              to administer the Plan. Such Committee will consist of two or more
              members of the Board. In the event the Corporation registers any
              class of any equity security pursuant to Section 12 of the
              Securities Exchange Act of 1934, as amended (the "Exchange Act"),
              each member of the Committee shall be a "Disinterested Person" as
              defined below. All references herein to the Committee shall mean
              the Board if there is no Committee so appointed. 


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              From time to time the Board may increase the size of the Committee
              and appoint additional members thereof, remove members (with or
              without cause), and appoint new members in substitution thereof,
              fill vacancies however caused, or remove all members of the
              Committee and thereafter directly administer the Plan.

        f.    "Corporation" means Pegasystems Inc., a corporation organized
              under the laws of the Commonwealth of Massachusetts, or any
              successor organization.

        g.    "Disability" means permanent and total disability as determined
              under the Corporation's long-term disability program.

        h.    "Disinterested Person" shall have the meaning set forth in Rule
              16b-3(c)(2)(i) as promulgated by the Securities and Exchange
              Commission under the Exchange Act, or any successor definition
              adopted by the Securities and Exchange Commission.

        i.    "Early Retirement" means that a Participant has attained the
              consent of the Committee to retire prior to having attained age 60
              or qualifies for early retirement pursuant to the early retirement
              provisions as set forth in a pension plan of the Corporation in
              which the Optionee is a participant.

        j.    "Fair Market Value" means, as of any given date, the mean of the
              highest and lowest quoted selling prices of the Stock on the
              exchange on which the Corporation's shares are listed for trading
              (consolidated trading) or, if no such sale occurs on the exchange
              on such date, the fair market value of the Stock as determined by
              the Committee in good faith based on the best available facts and
              circumstances at the time.

        k.    "Incentive Stock Option" means any Stock Option intended to be and
              designated as an "Incentive Stock Option" within the meaning of
              Section 422 of the Code.

        l.    "Insider" means a Participant who is subject to the requirements
              of the Rules (as defined below).

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        m.    "Long-Term Performance Award" or "Long-Term Award" means an award
              made pursuant to Section 8 below that is payable in cash and/or
              Stock (including Restricted Stock) in accordance with the terms of
              the grant, based on Corporation, business unit and/or individual
              performance over a period of at least two years.

        n.    "Non-Qualified Stock Option" means any Stock Option that is not an
              Incentive Stock Option.

        o.    "Normal Retirement" means retirement of a Participant from active
              employment with the Corporation and any subsidiary or affiliate
              after either having attained age 60 or pursuant to the normal
              retirement provisions of an applicable pension plan of the
              Corporation.

        p.    "Option" means any Incentive Stock Option or Non-Qualified Stock
              Option to purchase shares of Stock (including Restricted Stock, if
              the Committee so determines) granted pursuant to Section 5 below.

        q.    "Optionee" means a Participant who is the recipient of any
              Incentive Stock Option or Non-Qualified Stock Option under this
              Plan.

        r.    "Participant" means anyone to whom an Award is granted pursuant to
              the Plan.

        s.    "Plan" means the Pegasystems Inc. 1994 Long-Term Incentive Plan,
              as hereinafter amended form time to time.

        t.    "Restricted Stock" means an award of shares of Stock that is
              subject to restrictions pursuant to Section 7 below.

        u.    "Retirement" means Normal or Early Retirement.

        v.    "Rules" means Section 16 of the Securities Exchange Act of 1934,
              as amended (the "Exchange Act") and the regulations promulgated
              thereunder.


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        w.    "Securities Broker" means the registered securities broker
              acceptable to the Corporation who agrees to effect the cashless
              exercise of an Option pursuant to Section 5(m) hereof.

        x.    "Stock" means the Common Stock, $.01 par value per share, of the
              Corporation.

        y.    "Stock Appreciation Right" means the right, pursuant to an award
              granted under Section 6 below, to surrender to the Corporation all
              (or a portion) of a Stock Option in exchange for an amount equal
              to the difference between (i) the Fair Market Value (or such
              lesser ceiling as may be specified in the option grant), as of the
              date such Stock Option (or such portion thereof) is surrendered,
              of the shares of Stock covered by such Stock Option (or such
              portion thereof), and (ii) the aggregate exercise price of such
              Stock Option (or such portion thereof).

SECTION 2.  Administration

        The Plan shall be administered by the Committee.

        The Committee shall have the authority to grant to eligible
Participants, pursuant to the terms of the Plan: (i) Stock Options, (ii) Stock
Appreciation Rights, (iii) Restricted Stock and/or (iv) Long-Term Performance
Awards.

        In particular, the Committee shall have the authority:

        (i)   to select the Participants to whom Stock Options, Stock
              Appreciation Rights, Restricted Stock and Long-Term Performance
              Awards may from time to time be granted hereunder.

        (ii)  to determine whether and to what extent Incentive Stock Options,
              Non-Qualified Stock Options, Stock Appreciation Rights, Restricted
              Stock and Long-Term Performance Awards, or any combination
              thereof, are to be granted hereunder;



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        (iii) to determine the number of shares to be covered by each such award
              granted hereunder;

        (iv)  to determine the terms and conditions, not inconsistent with the
              terms of the Plan, of any award granted hereunder including, but
              not limited to, the share price and any restriction or limitation,
              or any vesting acceleration or forfeiture waiver regarding any
              Stock Option or other award and/or the shares of Stock relating
              thereto, based on such factors as the Committee shall determine,
              in its sole discretion;

        (v)   to determine whether and under what circumstances a Stock Option
              may be settled in cash or stock, including Restricted Stock under
              Section 5(k);

        (vi)  to determine whether and under what circumstances a Stock Option
              may be exercised without a payment of cash under Section 5(1); and

        (vii) to determine whether, to what extent and under what circumstances
              Stock and other amounts payable with respect to an award under
              this Plan shall be deferred either automatically or at the
              election of the Participant.

        The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable; to interpret the terms and provisions of the
Plan and any award issued under the Plan (and any agreements relating thereto);
and to otherwise supervise the administration of the Plan.

        All decisions made by the Committee pursuant to the provisions of the
Plan shall be final and binding on all persons, including the Corporation and
Plan Participants.

SECTION 3.  Stock Subject to the Plan

        (a)   Stock Subject to Plan. The stock to be subject or related to
              awards under the Plan shall be shares of the Corporation's Stock
              and may be either authorized and unissued or held in the treasury
              of the Corporation. The maximum number of shares of Stock
              authorized with respect to the grant of awards under the Plan,
              subject to adjustment in accordance with paragraph 3(c) below,
              shall be up to 5,000,000 shares of Stock; any or all of such
              

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              5,000,000 shares of Stock may be granted for awards of Incentive
              Stock Options.

              In addition, shares equal to 2% of Stock outstanding shares at
              the start of each Fiscal Year shall each year be reserved
              exclusively for the granting of replacement Options under Section
              5(e) below to all Participants. Such additional authorization of
              Stock for the granting of replacement Options shall not, at any
              time, cause the maximum shareholder dilution caused by the Plan
              to exceed the 5,000,000 shares of Stock authorized for grant
              under the Plan.

              Notwithstanding the foregoing, no individual shall receive, over
              the term of the Plan, more than an aggregate of 30% of the shares
              authorized for grant under the Plan, including shares subject to
              replacement Options awarded under the Plan.

        (b)   Unused, Forfeited and Reacquired Shares. The shares related to the
              unexercised or undistributed portion of any terminated, expired or
              forfeited Award for which no material benefit was received by a
              Participant (i.e. dividends) shall be made available for
              distribution in connection with future awards under the plan to
              the extent permitted to receive exemptive relief pursuant to the
              Rules. Any shares made available for distribution in connection
              with future awards under this Plan pursuant to this paragraph (b)
              shall be in addition to the shares available pursuant to paragraph
              (a) of this Section 3.

        (c)   Other Adjustments. In the event of any merger, reorganization,
              consolidation, recapitalization, Stock dividend, or other change
              in corporate structure affecting the Stock, such substitution or
              adjustment shall be made in the aggregate number of shares
              reserved for issuance under the Plan, in the number and option
              price of shares subject to outstanding Options granted under the
              Plan and in the number and price of shares subject to other Awards
              made under the Plan, as may be determined to be appropriate by the
              Committee in its sole discretion, provided that the number of
              shares subject to any award shall always be a whole number. Such
              adjusted option price shall also be used to determine the amount
              payable by the Corporation upon 

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              the exercise of any Stock Appreciation Right associated with any 
              Stock Option.


SECTION 4.     Eligibility

        Directors (whether or not employees of the Corporation), consultants and
employees of the Corporation who are responsible for or who contribute to the
management, growth and/or profitability of the Corporation and/or any Subsidiary
(as defined below) or affiliate of the Corporation are eligible to be granted
Awards under the Plan.

SECTION 5      Stock Options

        Stock Options may be granted alone, in addition to or in tandem with
other awards granted under the Plan. Any Stock Option granted under the Plan
shall be in such form as the Committee may from time to time approve.

        Stock Options granted under the Plan may be of two types: (i) Incentive
Stock Options and (ii) Non-Qualified Stock Options.

        With the exception of Optionees who are either (i) consultants or (ii)
directors who are not also employees of the corporation, who shall not be
eligible to receive Incentive Stock Options, the Committee shall have the
authority to grant any Optionee Incentive Stock Options, Non-Qualified Stock
Options, or both types of Stock Options (in each case with or without Stock
Appreciation Rights). To the extent that any Stock Option does not qualify as an
Incentive Stock Option, it shall constitute a separate Non-Qualified Stock
Option.

        Anything in the Plan to the contrary notwithstanding, no term of this
Plan relating to Incentive Stock Options shall be interpreted, amended or
altered, nor shall any discretion or authority granted under the Plan be so
exercised, so as to disqualify the Plan under Section 422 of the Code, or,
without the consent of the Optionee(s) affected, to disqualify any Incentive
Stock Option under such Section 422.

        Options granted under the Plan shall be subject to the following terms
and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem
appropriate:

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        (a)   Option Price. The option price per share of Stock purchasable
              under a Stock Option shall be determined by the Committee at the
              time of grant, but for Non-Qualified Stock Options shall not be
              less than 50% of the Fair Market Value of the Stock at the time of
              grant, and for Incentive Stock Options shall be not less than 100%
              of the Fair Market Value of the Stock at the time of grant.
              However, any Incentive Stock Option granted to any Optionee who,
              at the time the Option is granted, owns more than 10% of the
              voting power of all classes of stock of the Corporation or of a
              Parent or Subsidiary corporation, shall have an exercise price no
              less than 110% of Fair Market Value per share on date of the
              grant. The term "Parent" and "Subsidiary" as used herein shall
              mean "parent corporation" and "subsidiary corporation" as those
              terms are defined in Section 424 of the Code.

        (b)   Option Term. The term of each Stock Option shall be fixed by the
              Committee, but no Incentive Stock Option or Non-Qualified Stock
              Option shall be exercisable more than ten years after the date the
              Option is granted. However, any Option granted to any Optionee who
              at the time the Option is granted owns more than 10% of the voting
              power of all classes of Stock of the Corporation or of a Parent or
              Subsidiary corporation may not have a term of more than five
              years. No Option may be exercised by any person after expiration
              of the term of the Option.

        (c)   Exercisability. Stock Options shall be exercisable at such time or
              times and subject to such terms and conditions as shall be
              determined by the Committee at or after grant, provided, however,
              that, except as provided in Section 5(g), unless otherwise
              determined by the Committee at or after grant, no Stock Option
              shall be exercisable during the six months following the date of
              the granting of the Option. If the Committee provides, in its
              discretion, that any Stock Option is exercisable only in
              installments, the Committee may waive such installment exercise
              provisions at any time at or after grant in whole or in part,
              based on such factors as the Committee shall determine, in its
              sole discretion.

        (d)   Method of Exercise. Subject to whatever installment exercise
              provisions apply under Section 5(c), Stock Options may be
              exercised in whole or in part at any time and from time to time
              during the Option period, by giving 

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              written notice of exercise to the Corporation specifying the 
              number of shares to be purchased.

              Such notice shall be accompanied by payment in full of the
              purchase price, either by certified or bank check, or such other
              instrument as the Committee may accept. As determined by the
              Committee, in its sole discretion, at or after grant, payment in
              full or in part may also be made in the form of unrestricted
              Stock already owned by the Optionee or, in the case of the
              exercise of a Non-Qualified Stock Option or Restricted Stock
              subject to an award hereunder (based, in each case, on the Fair
              Market Value of the Stock on the date the Option is exercised, as
              determined by the Committee), provided, however, that, in the
              case of an Incentive Stock Option, the right to make a payment in
              the form of already owned shares may be authorized only at the
              time the Option is granted.

              The Committee, in its sole discretion, may at the time of grant
              or such later time as it determines, permit payment of the Option
              exercise price of a Non-Qualified Stock Option to be made in
              whole or in part in the form of Restricted Stock. If such payment
              is permitted, then such Restricted Stock (and any replacement
              shares relating thereto) shall remain (or be) restricted in
              accordance with the original terms of the Restricted Stock award
              in question, and any additional Stock received upon the exercise,
              shall be subject to the same forfeiture restrictions, unless
              otherwise determined by the Committee, in its sole discretion, at
              or after grant.

              If payment of the Option exercise price of a Non-Qualified Option
              is made in whole or in part in the form of unrestricted stock
              already owned by the Participant, the Corporation may require
              that the stock be owned by the Participant for a period of six
              months or longer so that such payment would not result in a
              pyramid exercise.

              No shares of Stock shall be issued until full payment therefor
              has been made. An Optionee shall generally have the rights to
              dividends or other rights of a shareholder with respect to shares
              subject to the Option when the Optionee has given written notice
              of exercise, has paid in full for such shares, and, if requested,
              has given the representation described in Section 11(a).

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        (e)   Replacement Options. If an Option granted pursuant to the Plan may
              be exercised by an Optionee by means of a stock-for-stock swap
              method of exercise as provided in 5(d) above, then the Committee
              may, in its sole discretion , at the time of the original Option
              grant or at such subsequent time during the term of such Option as
              the Committee, in its sole discretion, shall deem appropriate,
              authorize the Participant to automatically receive a replacement
              Option pursuant to this part of the Plan. This replacement Option
              shall cover a number of shares determined by the Committee, but in
              no event more than the number of shares equal to the difference
              between the number of shares covered by the original Option
              exercised and the net shares received by the Participant from such
              exercise. The exercise price of the replacement Option shall equal
              the then current Fair Market Value, and with a term not to exceed
              ten years.

              The Committee shall have the right, in its sole discretion and at
              any time, to discontinue the automatic grant of replacement
              Options if it determines the continuance of such grants to no
              longer be in the best interest of the Corporation.

        (f)   Non-transferability of Options. No Stock Option shall be
              transferable by the Optionee otherwise than by will or by the laws
              of descent and distribution, and all Stock Options shall be
              exercisable, during the Optionee's lifetime, only by the Optionee.

        (g)   Termination by Reason of Death. Subject to Section 5(j), if an
              Optionee's employment by the Corporation and any Subsidiary or
              affiliate terminates by reason of death, any Stock Option held by
              such Optionee may thereafter be exercised, to the extent then
              exercisable or on such accelerated basis as the Committee may
              determine at or after grant, by the legal representative of the
              estate or by the legatee of the Optionee under the will of the
              Optionee, for a period of one year (or such shorter period as the
              Committee may specify at grant) from the date of such death or
              until the expiration of the stated term of such Stock Option,
              whichever period is the shorter.

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        (h)   Termination by Reason of Disability. Subject to Section 5(k), if
              an Optionee's employment by the Corporation and any Subsidiary or
              affiliate terminates by reason of Disability, any Stock Option
              held by such Optionee may thereafter be exercised by the Optionee,
              to the extent it was exercisable at the time of termination, or on
              such accelerated basis as the Committee may determine at or after
              grant, for a period of two years (or such shorter period as the
              Committee may specify at grant) from the date of such termination
              of employment or until the expiration of the stated term of such
              Stock Option, whichever period is the shorter; provided, however,
              that if the Optionee dies within such two-year period (or such
              shorter period as the Committee shall specify at grant), any
              unexercised Stock Option held by such Optionee shall, at the sole
              discretion of the Committee, thereafter be exercisable to the
              extent to which it was exercisable at the time of death for a
              period of twelve months from the date of such death or until the
              expiration of the stated term of such Stock Option, whichever
              period is the shorter. In the event of termination of employment
              by reason of Disability, if an Incentive Stock Option is exercised
              after the expiration of the exercise periods that apply for
              purposes of Section 422 of the Code, such Stock Option will
              thereafter be treated as a Non-Qualified Stock Option.

        (i)   Termination by Reason of Retirement. Subject to Section 5(j), if
              an Optionee's employment by the Corporation terminates by reason
              of Normal or Early Retirement, any Stock Option held by such
              Optionee may thereafter be exercised by the Optionee, to the
              extent it was exercisable at the time of such Retirement or on
              such accelerated basis as the Committee may determine at or after
              grant, for a period of two years (or such shorter period as
              Committee may specify at grant) from the date of such termination
              of employment or the expiration of the stated term of such Stock
              Option, whichever period is the shorter; provided, however, that,
              if the Optionee dies within such two-year period, any unexercised
              Stock Option held by such Optionee shall, at the sole discretion
              of the Committee, thereafter be exercisable, to the extent to
              which it was exercisable at the time of death, for a period of
              twelve months from the date of such death or until the expiration
              of the stated term of such Stock Option, whichever period is the
              shorter. In the event of termination of employment by reason of
              Retirement, if an Incentive Stock Option is exercised after the
              expiration of the exercise 

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              periods that apply for purposes of Section 422 of the Code, such 
              Stock Option will thereafter be treated as a Non-Qualified Stock 
              Option.

        (j)   Other Termination. Unless otherwise determined by the Committee at
              or after grant, if an Optionee's employment by the Corporation
              terminates for any reason other than death, Disability or Normal
              or Early Retirement, the Stock Option shall thereupon terminate,
              except that such Stock Option may be exercised for the lesser of
              three months or the balance of such Stock Option's term if the
              Optionee is involuntarily terminated by the Corporation without
              Cause.

        (k)   Incentive Stock Option Limitations. To the extent required for
              "Incentive Stock Option" status under Section 422 of the Code, the
              aggregate Fair Market Value (determined as of the time of grant)
              of the Stock with respect to which Incentive Stock Options granted
              after 1986 are exercisable for the first time by the Optionee
              during any calendar year under the Plan and/or any other Option
              plan of the Corporation (within the meaning of Section 424 of the
              Code) after 1986 shall not exceed $100,000.

              To the extent (if any) permitted under Section 422 of the Code,
              if (i) a Participant's employment with the Corporation is
              terminated by reason of death, Disability or Retirement and (ii)
              the portion of any Incentive Stock Option that is otherwise
              exercisable during the post-termination period specified under
              Section 5(g), (h) or (i), applied without regard to this Section
              5(k), is greater than the portion of such Option that is
              exercisable as an "Incentive Stock Option" during such
              post-termination period under Section 422, such post-termination
              period shall automatically be extended (but not beyond the
              original Option term) to the extent necessary to permit the
              Optionee to exercise such Incentive Stock Option.

        (l)   Cash-out of Option; Settlement of Spread Value in Restricted
              Stock. On receipt of written notice to exercise, the Committee
              may, in its sole discretion, elect to cash out all or part of the
              portion of the Option(s) to be exercised by paying the Optionee an
              amount, in cash or stock, equal to the excess of the Fair Market
              Value of the Stock over the option price (the "Spread Value") on
              the effective date of such cash-out.


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              In addition, if the Option agreement so provides at grant or is
              amended (with the Optionee's consent) after grant and prior to
              exercise to so provide, the Committee may require that all or
              part of the shares to be issued with respect to the Spread Value
              of an exercised Option take the form of Restricted Stock, which
              shall be valued on the date of exercise on the basis of the Fair
              Market Value of such Restricted Stock determined without regard
              to the forfeiture restrictions involved.

        (m)   Cashless Exercise. To the extent permitted under the applicable
              laws and regulations under Section 16 of the Securities Exchange
              act of 1934, as amended, and the Rules promulgated thereunder, and
              with the consent of the Committee, the Corporation agrees to
              cooperate in a "cashless exercise" of an Option. The cashless
              exercise shall be effected by the Participant delivering to the
              Securities Broker instructions to sell a sufficient number of
              shares of Common Stock to cover the costs and expenses associated
              therewith.

SECTION 6.  Stock Appreciation Rights

        (a)   Grant and Exercise. Stock Appreciation Rights may be granted in
              conjunction with all or part of any Stock Option granted under the
              Plan. In the case of a Non-Qualified Stock Option, such rights may
              be granted either at or after the time of the grant of such Stock
              Option. In the case of an Incentive Stock Option, such rights may
              be granted only at the time of the grant of such Stock Option.

              A Stock Appreciation Right or applicable portion thereof granted
              with respect to a given Stock Option shall terminate and no
              longer be exercisable upon the termination or exercise of the
              related Stock Option, except that, unless otherwise determined by
              the Committee, in its sole discretion, at the time of grant, a
              Stock Appreciation Right granted with respect to less than the
              full number of shares covered by a related Stock Option shall not
              be reduced until the number of shares covered by an exercise or
              termination of the related Stock Option exceeds the number of
              shares not covered by the Stock Appreciation Right.

              A Stock Appreciation Right may be exercised by an Optionee, in
              accordance with Section 6(b), by surrendering the applicable
              portion of the 


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              related Stock Option. Upon such exercise and
              surrender, the Optionee shall be entitled to receive an amount
              determined in the manner prescribed in Section 6(b). Stock
              Options which have been so surrendered, in whole or in part,
              shall no longer be exercisable to the extent the related Stock
              Appreciation Rights have been exercised.

        b.    Term and Conditions. Stock Appreciation Rights shall be subject to
              such terms and conditions, not inconsistent with the provisions of
              the Plan, as shall be determined from time to time by the
              Committee, including the following:

              (i)   Stock Appreciation Rights shall be exercisable only at such
                    time or times and to the extent that the Stock Options to
                    which they relate, if any, shall be exercisable in
                    accordance with the provisions of Section 5 and this Section
                    6 of the Plan; provided, however, that any Stock
                    Appreciation Right granted subsequent to the grant of the
                    related Stock Option shall not be exercisable during the
                    first six months of its term, except that this special
                    limitation shall not apply in the event of death or
                    Disability of the Optionee prior to the expiration of the
                    six-month period.

              (ii)  Upon the exercise of a Stock Appreciation Right, an Optionee
                    shall be entitled to receive up to, but not more than, an
                    amount in cash and/or shares of Stock equal in value to the
                    excess of the Fair Market Value of one share of Stock over
                    the Option price per share or such lesser amount as
                    specified in the grant agreement, multiplied by the number
                    of shares in respect of which the Stock Appreciation Right
                    shall have been exercised, with the Committee having the
                    right to determine the form of payment.

              (iii) Stock Appreciation Rights shall be transferable only when
                    and to the extent that the underlying Stock Option would be
                    transferable under Section 5(f) of the Plan.

              (iv)  Upon the exercise of a Stock Appreciation Right, the Stock
                    Option or part thereof to which such Stock Appreciation
                    Right is related shall be deemed to have been exercised for
                    the purpose of the limitation set forth in Section 3 of the
                    Plan on the number of shares of Stock to be 


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                    issued under the Plan, but only to the extent of the number
                    of shares issued under the Stock Appreciation Right at the
                    time of exercise based on the value of the Stock
                    Appreciation Right at such time.

              (v)   A Stock Appreciation Right granted in connection with an
                    Incentive Stock Option may be exercised only if and when the
                    market price of the Stock subject to the Incentive Stock
                    Option exceeds the exercise price of such Stock Option.

SECTION 7.     Restricted Stock

        (a)   Administration. Shares of Restricted Stock may be issued either
              alone or in addition to other awards granted under the Plan. The
              Committee shall determine the Participants to whom, and the time
              or times at which, grants of Restricted Stock will be made, the
              number of shares to be awarded, the price (if any) to be paid by
              the recipient of Restricted Stock (subject to Section 7(b)), the
              time or times within which such awards may be subject to
              forfeiture, and all other conditions of the awards.

              The Committee may condition the grant of Restricted Stock upon
              the attainment of specified performance goals or such other
              factors as the Committee may determine, in its sole discretion.

              The provisions of Restricted Stock awards need not be the same
              with respect to each recipient.

        (b)   Awards and Certificates. The prospective recipient of a
              Restricted Stock award shall not have any rights with respect to
              such award, unless and until such recipient has executed an
              agreement evidencing the award and has delivered a fully executed
              copy thereof to the Corporation, and has otherwise complied with
              the applicable terms and conditions of such award.

              (i)    The purchase price for shares of Restricted Stock shall
                     not be less than what prevailing law may require.

              (ii)   Awards of Restricted Stock must be accepted within a
                     period of 60 days (or such shorter period as the Committee
                     may specify at grant) 


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              after the award date, by executing a Restricted Stock Award
              Agreement and paying whatever price (if any) is required under
              Section 7(b)(i).

              (iii)  Each Participant receiving a Restricted Stock award shall
                     be issued a stock certificate in respect of such shares of
                     Restricted Stock. Such certificate shall be registered in
                     the name of such Participant, and shall bear an
                     appropriate legend referring to the terms, conditions, and
                     restrictions applicable to such award, substantially in
                     the following form:

                          "The transferability of this certificate and the
                          shares of stock represented hereby are subject to the
                          terms and conditions (including forfeiture) of the
                          Pegasystems Inc. 1994 Long-Term Incentive Plan and an
                          Agreement entered into between the registered owner
                          and Pegasystems Inc. Copies of such Plan and or
                          Agreement are on file in the offices of Pegasystems
                          Inc. 101 Main Street, Cambridge, MA 02142-1590
                          Attention: Vice President, Corporate Services.

              (iv)   The Committee shall require that the stock certificates
                     evidencing such shares be held in custody by the
                     Corporation until the restrictions thereon shall have
                     lapsed, and that, as a condition of any Restricted Stock
                     award, the Participant shall have delivered a stock power,
                     endorsed in blank, relating to the Stock covered by such
                     award.

        (c)   Restrictions and Conditions. The shares of Restricted Stock
              awarded pursuant to this Section 7 shall be subject to the
              following restrictions and conditions:

              (i)    Subject to the provisions of this Plan and the award
                     agreement, during a period set by the Committee commencing
                     with the date of such award (the "Restriction Period"), the
                     Participant shall not be permitted to sell, transfer,
                     pledge, assign or otherwise encumber shares of Restricted
                     Stock awarded under the Plan. Within these limits, the
                     Committee, in its sole discretion, may provide for the
                     lapse of such restrictions in installments and may
                     accelerate or waive such 


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                     restrictions in whole or in part, based on service, 
                     performance and/or such other factors or
                     criteria as the Committee may determine, in its sole
                     discretion.

              (ii)   Except as provided in this paragraph (ii) and Section
                     7(c)(i), the Participant shall have, with respect to the
                     shares of Restricted Stock, all of the rights of a
                     shareholder of the Corporation, including the right to vote
                     the shares, and the right to receive any cash dividends.
                     The Committee, in its sole discretion, as determined at the
                     time of award, may permit or require the payment of cash
                     dividends to be deferred and, if the Committee so
                     determines, reinvested in additional Restricted Stock to
                     the extent shares are available under Section 3.

              (iii)  Subject to the applicable provisions of the award agreement
                     and this Section 7, upon termination of a Participant's
                     employment with the Corporation for any reason during the
                     Restriction Period, all shares still subject to restriction
                     shall be forfeited by the Participant.

              (iv)   In the event of hardship or other special circumstances of
                     a Participant whose employment with the Corporation is
                     involuntarily terminated (other than for Cause), the
                     Committee may, in its sole discretion, waive in whole or
                     in part any or all remaining restrictions with respect to
                     such Participant's shares of Restricted Stock, based on
                     such factors as the Committee may deem appropriate.

              (v)    If and when the Restriction Period expires without a prior
                     forfeiture of the Restricted Stock subject to such
                     Restriction Period, the certificates for such shares shall
                     be delivered to the Participant promptly.

SECTION 8.     Long Term Performance Awards

         (a)  Awards and Administration. Long Term Performance Awards may be
              awarded either alone or in addition to other awards granted under
              the Plan. The Committee shall determine the nature, length and
              starting date of the performance period (the "Performance Period")
              for each Long Term Performance Award, which shall be at least two
              years, and shall determine the performance objectives to be used
              in valuing Long Term Performance Awards 


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              and determining the extent to which such Long Term Performance
              Awards have been earned. Performance objectives may vary from
              Participant to Participant and between groups of Participants and
              shall be based upon such Corporation, business unit and/or
              individual performance factors and criteria as the Committee may
              deem appropriate, including, but not limited to, earnings per
              share or return on equity. Performance Periods may overlap and
              Participants may participate simultaneously with respect to Long
              Term Performance Awards that are subject to different Performance
              Periods and/or different performance factors and criteria.

              At the beginning of each Performance Period, the Committee shall
              determine for each Long Term Performance Award subject to such
              Performance Period the range of dollar values or number of shares
              of Stock to be awarded to the Participant at the end of the
              Performance Period if and to the extent that the relevant
              measure(s) of performance for such Long Term Performance Award is
              (are) met. Such dollar values or number of shares of Stock may be
              fixed or may vary in accordance with such performance and/or
              other criteria as may be specified by the Committee, in its sole
              discretion.

        (b)   Adjustment of Awards. In the event of special or unusual events
              or circumstances affecting the application of one or more
              performance objectives to a Long Term Performance Award, the
              Committee may revise the performance objectives and/or underlying
              factors and criteria applicable to the Long Term Performance
              Awards affected, to the extent deemed appropriate by the
              Committee, in its sole discretion, to avoid unintended windfalls
              or hardship.

        (c)   Termination of Employment. Unless otherwise provided in the
              applicable award agreement(s), if a Participant terminates
              employment with the Corporation during a Performance Period
              because of death, Disability or Retirement, such Participant
              shall be entitled to a payment with respect to each outstanding
              Long Term Performance Award at the end of the applicable
              Performance Period:

              (i)    based, to the extent relevant under the terms of the
                     award, upon the Participant's performance 


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                     for the portion of such Performance Period ending on the
                     date of termination and the performance of the applicable
                     business unit(s) for the entire Performance Period, and

              (ii)   prorated where deemed appropriate by the Committee, for
                     the portion of the Performance Period during which the
                     Participant was employed by the Corporation, all as
                     determined by the Committee, in its sole discretion.

              However, the Committee may provide for an earlier payment in
              settlement of such award in such amount and under such terms and
              conditions as the Committee deems appropriate.

              If a Participant terminates employment with the Corporation
              during a Performance Period for any other reason, then such
              Participant shall not be entitled to any payment with respect to
              the Long Term Performance Awards subject to such Performance
              Period, unless the Committee shall otherwise determine, in its
              sole discretion.

         (d)  Form of Payment. The earned portion of a Long Term Performance
              Award may be paid currently or on a deferred basis with such
              interest or earnings equivalent as may be determined by the
              Committee, in its sole discretion. Payment shall be made in the
              form of cash or whole shares of Stock, including Restricted Stock,
              either in a lump sum payment or in annual installments commencing
              as soon as practicable after the end of the relevant Performance
              Period, all as the Committee shall determine at or after grant. If
              and to the extent a Long Term Performance Award is payable in
              Stock and the full amount of such value is not paid in Stock, then
              the shares of Stock representing the portion of the value of the
              Long Term Performance Award not paid in Stock shall again become
              available for award under the Plan.

SECTION 9.     Amendments and Termination

        The Board may amend, alter, or discontinue the Plan at any time and from
time to time, but no amendment, alteration, or discontinuation shall be made
which would impair the rights of an Optionee or Participant with respect to a
Stock Option, Stock Appreciation Right, Restricted Stock or Long Term
Performance Award which has been granted under the Plan, without the Optionee's
or Participant's consent, or which, 


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without the approval of the Corporation's stockholders obtained within 12 months
before or after the Board adopts a resolution authorizing any of the following
amendments, would:

         (a)  except as expressly provided in this Plan, increase the total
              number of shares reserved for the purpose of the Plan;

         (b)  decrease the Option price of any Stock Option to less than 50% of
              the Fair Market Value on the date of grant;

         (c)  change the employees or class of employees eligible to participate
              in the Plan; or

         (d)  extend the maximum Option period under Section 5(b) of the Plan.

        The Committee may amend the terms of any Stock Option or other award
theretofore granted, prospectively or retroactively, but, subject to Section 3
above, no such amendment shall impair the rights of any holder without the
holder's consent. The Committee may also substitute new Stock Options for
previously granted Stock Options, including previously granted Stock Options
having higher Option prices.

        Subject to the above provisions, the Committee shall have broad
authority to amend the Plan to take into account changes in applicable tax laws
and accounting rules, as well as other developments.

SECTION 10.  Unfunded Status of Plan

        The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
Participant or Optionee by the Corporation, nothing contained herein shall give
any such Participant or Optionee any rights that are greater than those of a
general creditor of the Corporation. In its sole discretion, the Board may
authorize the creation of trusts or other arrangements to meet the obligations
created under the Plan to deliver Stock or payments in lieu of or with respect
to awards hereunder, provided, however, that, unless the Board otherwise
determines with the consent of the affected Participant, the existence of such
trusts or other arrangements is consistent with the "unfunded" status of the
Plan.


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SECTION 11.  General Provisions

         (a)  The Committee may require each person purchasing shares pursuant
              to a Stock Option under the Plan to represent to and agree with
              the Corporation in writing that the Optionee or Participant is
              acquiring the shares without a view to distribution thereof. The
              certificates for such shares may include any legend which the
              Committee deems appropriate to reflect any restrictions on
              transfer.

              All certificates for shares of Stock or other securities delivered
              under the Plan shall be subject to such stock-transfer orders and
              other restrictions as the Committee may deem advisable under the
              rules, regulations, and other requirements of the Exchange Act,
              any stock exchange upon which the Stock is then listed, and any
              applicable federal or state securities law, and the Committee may
              cause a legend or legends to be put on any such certificates to
              make appropriate reference to such restrictions.

         (b)  Nothing contained in this Plan shall prevent the Board of
              Directors from adopting other or additional compensation
              arrangements, subject to stockholder approval if such approval is
              required; and such arrangements may be either generally applicable
              or applicable only in specific cases.

         (c)  The adoption of the Plan shall not confer upon any employee of the
              Corporation any right to continued employment with the
              Corporation, as the case may be, nor shall it interfere in any way
              with the right of the Corporation to terminate the employment of
              any of its employees at any time.

         (d)  No later than the date as of which an amount first becomes
              includible in the gross income of the Participant for Federal
              income tax purposes with respect to any award under the Plan, the
              Participant shall pay to the Corporation, or make arrangements
              satisfactory to the Committee regarding the payment of, any
              Federal, state, or local taxes of any kind required by law to be
              withheld with respect to such amount. Unless otherwise determined
              by the Committee, the minimum required withholding obligations may
              be settled with Stock, including Stock that is part of the award
              that gives rise to the withholding requirement. The obligations of
              the Corporation under the Plan shall be conditional on such
              payment or arrangements and the Corporation shall, to the extent
              permitted by law, have the right to deduct any such taxes from any
              payment of any kind otherwise due to the Participant.

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         (e)  At the time of grant, the Committee may provide in connection with
              any grant made under this Plan that the shares of Stock received
              as a result of such grant shall be subject to a right of first
              refusal, pursuant to which the Participant shall be required to
              offer to the Corporation any shares that the Participant wishes to
              sell, with the price being the then Fair Market Value of the
              Stock, subject to such other terms and conditions as the Committee
              may specify at the time of grant.

         (f)  Shares may be subject to a repurchase right by the Corporation
              which the Corporation shall have the right to exercise from time
              to time as may be set forth in a grant agreement for an award
              granted under this Plan.

         (g)  The reinvestment of dividends in additional Restricted Stock (or
              in other types of Plan awards) at the time of any dividend payment
              shall only be permissible if sufficient shares of Stock are
              available under Section 3 for such reinvestment (taking into
              account then outstanding Stock Options and other Plan awards).

         (h)  The Committee shall establish such procedures as it deems
              appropriate for a Participant to designate a beneficiary to whom
              any amounts payable in the event of the Participant's death are to
              be paid.

         (i)  The Plan and all awards made and actions taken thereunder shall be
              governed by and construed in accordance with the laws of the
              Commonwealth of Massachusetts.

SECTION 12.  Effective Date of Plan

        The Plan shall be effective on the date it is approved by a vote of the
holders of a majority of the total outstanding Stock.

SECTION 13.  Term of Plan

        No Stock Option, Stock Appreciation Right, Restricted Stock or Long Term
Performance Award shall be granted pursuant to the Plan on or after the tenth
anniversary of the date of stockholder approval, but awards granted prior to
such tenth anniversary may extend beyond that date.


ds1-263101


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