



                                Pegasystems Inc.


                          1994 Long-Term Incentive Plan

                     As Amended and Restated on May 13, 1996



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                                Pegasystems Inc.

                          1994 Long-Term Incentive Plan

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SECTION             CONTENTS                                   PAGE
- -------             --------                                   -----

    1.              Purpose; Definitions                          1

    2.              Administration                                4

    3.              Stock Subject to Plan                         5

    4.              Eligibility                                   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                           20

   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 Appreciation 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. From time to
               time the Board may increase the size of the Committee and appoint
               additional members thereof, remove members (with or without

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               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).

        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

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               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 from 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.

        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.

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        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;

        (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

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               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 (after giving effect to
               a 3-for-1 stock split in the form of a stock dividend to be
               effective on July 10, 1996); any or all of such 5,000,000
               shares of Stock may be granted for awards of Incentive Stock
               Options.


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


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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:

        (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

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


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               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).

        (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


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               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.

        (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


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               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 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


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               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.

               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.


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        (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 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.


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     b. Terms 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 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


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               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) 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


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               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 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,


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               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 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


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         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 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.


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               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, 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;


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        (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.

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.


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               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.

        (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


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               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.


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