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Response Letter to SEC

 October 25, 2005

 VIA EDGAR AND FACSIMILE (202-772-9210)

 Securities and Exchange Commission

 Division of Corporation Finance

 100 F Street, N.E.

 Washington, D.C. 20549

 Attn.: Brad Skinner, Accounting Branch Chief

RE:
Pegasystems Inc.

 Response to Comment Letter dated
September 19, 2005

 Regarding Form 10-K for Fiscal Year Ended December 31, 2004

 Filed February 25, 2005 and

 Form 10-Q
for Fiscal Quarter Ended June 30, 2005

 Filed July 29, 2005

 File No. 001-11859

 Ladies and Gentlemen:

 On behalf of Pegasystems Inc. (the “Company”), I am responding to the comments of the Staff (the “Staff”) of the Securities and Exchange
Commission (the “Commission”) as set forth in your letter dated September 19, 2005 (the “Comment Letter”) to Mr. Christopher Sullivan, Chief Financial Officer and Treasurer of the Company, with respect to
the Company’s Annual Report on Form 10-K, which was filed with the Commission on February 25, 2005 (the “Form 10-K”), and the Company’s Quarterly Report on Form 10-Q, which was filed with the Commission on
July 29, 2005 (the “Form 10-Q”). Hard copies of this letter are also being delivered under separate cover to Christine Davis and Marc Thomas of the Commission.

 The responses and supplementary information set forth below have been organized in the same manner in which the Commission’s comments
were organized in the Comment Letter.

 Form 10-K for the Fiscal Year
Ended December 31, 2004

 Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations

 Results of Operations, page 12

1.
In the discussion of your results of operations, you refer to various factors that have impacted results without quantifying the impact of each factor. For example, you refer to
several factors that contributed to the increase in selling and marketing expenses in fiscal 2004, but give no indication as to the relative impact of each factor. Explain to us how you considered Section III.D of SEC Release No. 33-6835.

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 The Company believes that its disclosure in the Management’s Discussion and Analysis
(“MD&A”) section of the Form 10-K generally meets the requirements of Section III.D of SEC Release No. 33-6835, in that the Company identified and quantified many of the factors underlying its results of operations for the
relevant periods. For example, the $16.1 million decrease in the Company’s license gross margins and the $14.2 million improvement in service margins are explained by quantifying the impact of each factor contributing to the change in results
from the prior year.

 After consideration of the
Commission’s comments, the Company believes that the Operating Expenses, Selling and Marketing and General and Administrative sections of MD&A can be further detailed to include more precise quantifications of the leading factors underlying
the changes. The Company will include additional disclosure in its future filings with the Commission consistent with this response.

2.
You disclose that perpetual license revenues in 2003 and 2004 decreased due to the restructured agreement with FDR. Please tell us more about your agreement with FDR. Tell us how
the agreement was “restructured” and explain how the change in the agreement affected your revenue recognition.

 The Overview and Results of Operations sections of the Form 10-K disclose that license revenues in 2004 decreased from 2003 due to an anticipated $10.6
million decline in license revenue associated with the restructured First Data Resources (“FDR”) 2002 agreement. In 1997, the Company originally entered into a term software license and support agreement with FDR, granting to FDR the right
to use the Company’s software and new products and the exclusive right to market, distribute and sublicense the Company’s software and new products to FDR customers and prospects in the credit card market. The agreement was restructured in
the first quarter of 2002, to change the existing term license to a perpetual license without exclusive rights in the credit card market. The Company had been recognizing the revenue under the original FDR agreement ratably over the term of that
agreement. Under the terms of the restructured FDR agreement, the Company recognized $10.6 million of perpetual license revenue in 2003.

 As the Company disclosed in its Form 10-K for 2003 and 2004, “Under the terms of the perpetual license agreement entered into during the first
quarter of 2002, when we restructured our license agreement with FDR, FDR made monthly payments through December 2003. We recognized revenue under the FDR agreement, through the third quarter of 2003.” The Company recognized this revenue under
the restructured agreement as the license payments became non-cancelable, which was three months in advance of receipts of payments, because while FDR had the contractual right to

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terminate the agreement, FDR was required to provide the Company with at least three months advance notice. The Company recognized no further license revenue
from FDR in 2004, although it continued to earn maintenance revenue.

 The restructured FDR agreement was filed as Exhibit 10.1 to the Company’s Form 10-Q for the first quarter of 2002 and as Exhibit 10.9 to the Form 10-K.

 Liquidity and Capital Resources, page 18

3.
You disclose that you fund your operations primarily through cash flow from operations yet your discussion of operating cash flow is limited. When preparing the discussion and
analysis of operating cash flows, you should address material changes in the underlying drivers that affect these cash flows. These disclosures should also include a discussion of the underlying reasons for changes in working capital items that
affect operating cash flows. Please tell us how you considered the guidance in Section IV.B.1 of SEC Release 33-8350.

 The Company has reviewed the requirements of Section IV.B.1 of SEC Release 33-8350 and will include additional disclosure in its future filings with the
Commission regarding the underlying drivers that affect changes in operating cash flow.

 Financial Statements

 Management Report on
Internal Control Over Financial Reporting, page 31

4.
 We note that as of December 31, 2004 you identified certain deficiencies in internal control over financial reporting and that your management was in the
process of remediating these deficiencies. Item 4 in your Form 10-Q filed for the period ended March 31, 2005 provided no discussion nor referenced any deficiencies in internal control. Tell us in greater detail the nature of the
deficiencies you identified as of year end, including how these deficiencies were identified, what remedial procedures were implemented and when you no longer considered the concerns to be considered deficiencies in internal control over

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financial reporting. Further, address why you determined these deficiencies did not rise to the level of a material weakness.

 In connection with the assessment of the Company’s internal control over
financial reporting as of December 31, 2004, a number of significant deficiencies were identified which were not remediated in sufficient time to ensure that modified controls were operating effectively. These significant deficiencies were as
follows:

•

Insufficient segregation of duties in the disbursements area, including controls over the initiation of wire transfers;

•

Insufficient documentation in the disbursements area;

•

Errors in financial reporting and financial statement preparation, relating to the grouping of accounts in the statement of cash flows, the classification of short term investments
in the financial statement footnotes, and the timing of future collections of license installment receivables in the financial statement footnotes, each of which was discovered and corrected prior to the filing of the 2004 financial statements;

•

Insufficient documentation supporting the write-off of fixed assets;

•

Insufficient controls over fixed assets and fixed asset disposition;

•

Insufficient technical review and supervision of tax decisions and insufficient formal documentation of tax planning, strategies and positions; and

•

Accounting for one lease of office space that was not in accordance with GAAP.

These significant deficiencies were identified through three means: self-testing of controls conducted by the Company’s staff; the annual audit of
internal control over financial reporting conducted by the Company’s independent auditors; and normal management of daily operations. For each significant deficiency, the Company evaluated the cause of the deficiency and its resulting impact.
The Company also applied “A Framework for Evaluating Control Exceptions and Deficiencies” developed by representatives of leading US accounting firms, to evaluate whether each exception constituted a deficiency, a significant deficiency or
a material weakness. As part of this evaluation, the Company was able to identify other effective controls that provided assurance that the noted significant deficiencies did not materially impact the effectiveness of the Company’s overall
internal control over financial reporting. As a result of this evaluation, the Company concluded that no material weaknesses in internal control over financial reporting existed as of December 31, 2004.

 The Company has been taking actions to remediate the identified significant
deficiencies in numerous ways. The Company modified its procedures, increased staff in the accounting area and conducted training to reinforce its controls and procedures.

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The Company has concluded that these remediation efforts did not constitute a change in internal control over financial reporting that materially affected,
or was reasonably likely to materially affect, the Company’s internal control over financial reporting.

5.
Explain in detail how, in light of the deficiencies noted, you were able to conclude that your disclosure controls and procedures and your internal controls over financial
reporting were effective.

 As mentioned in
the Company’s response to Question 4 above, the Company applied “A Framework for Evaluating Control Exceptions and Deficiencies” developed by representatives of leading US accounting firms, to evaluate whether each exception
identified as of December 31, 2004 constituted a deficiency, a significant deficiency or a material weakness, either individually or in the aggregate when considered with other similar deficiencies. A number of significant deficiencies were
identified, as detailed in the Company’s response to Question 4 above. The Company also followed its quarterly self-assessment process to evaluate its disclosure controls and procedures as well as its internal control over financial reporting.
As part of this evaluation, the Company was able to identify other effective controls that provided assurance that the noted significant deficiencies did not materially impact the effectiveness of the Company’s disclosure controls and
procedures or overall internal control over financial reporting.

 Notes
to Consolidated Financial Statements

 Significant Accounting
Policies

 Revenue Recognition, page 38

6.
Your policy indicates that you recognize revenue from perpetual and term licenses upon customer acceptance, provided that no significant obligations or contingencies exist.
Please tell us about these acceptance provisions and any other revenue-related contingencies such as rights of return, stock rotation rights, price protection, and warranties. Describe the material terms of any such contingencies and describe their
impact on your revenue recognition policy.

 The Company’s standard license terms provide that the software is accepted upon delivery. Some of the Company’s license agreements, however, provide that acceptance does not occur until the successful completion of the
customer’s evaluation or

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testing or production use of applications developed by the customer for which the Company’s software provides the base functionality. The trend in the
Company’s acceptance terms has been increasingly towards acceptance on delivery or following limited evaluation or testing activities. In circumstances where acceptance does not occur upon delivery, the Company requires evidence that the
applicable acceptance event has occurred prior to the recognition of revenue.

 The Company reduces license revenue to reflect estimates of the fair values of potential concessions, such as disputed services, when revenue is initially recorded. The Company typically has not provided price
protection or stock rotation rights, as it derives very limited revenue from resellers. The Company has, in a small number of instances, provided limited rights of return or cancellation. The Company records allowances for estimates of potential
credit memos and sales returns when the related revenue is recorded. These estimates are based on historical analyses of credit memo data, current economic trends, and experience with customer disputes, products, customer industry and other factors.
These estimated amounts are deferred or reserved until the related elements of the agreement are completed and provided to the customer or the dispute is resolved.

 The Company warrants that its software products will conform to documented specifications. The services required to remedy
any breach of this warranty are typically covered by the obligations of the Company under maintenance support agreements. Nearly all customers using our software have active maintenance support agreements. As a result, we have not experienced
significant claims related to software warranties beyond the scope of maintenance support which the Company is already obligated to provide, and consequently the Company has not established reserves for warranty obligations.

 The Company will include additional disclosure in its future filings with the
Commission consistent with this response.

7.
You disclose that when license fees are not fixed or determinable some license fees are accounted for on a subscription basis. Please explain your reference to “subscription
basis.” In this regard, please tell us whether these agreements include unspecified additional software products. See paragraph 49 of SOP 97-2.

 As the Company noted in the Significant Accounting Policies section of the Form 10-K, in certain circumstances where term
license fees are not fixed or determinable, the revenue from these term license arrangements is recognized as payments become due over the term of the license. In this context, the Company has referred to “subscription basis” as meaning

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recognized over the term of the agreement as payments become due, or ratably over the term of the agreement when payments are made in advance. The Company
applies this accounting to term license agreements with a term of less than twelve months and term license agreements with bundled maintenance for the entire term such that an annual renewal rate for the post contract support (PCS) in these types of
arrangements cannot be established and the bundled element must be recognized ratably over the term of the agreement in accordance with SOP 97-2 paragraph 12 and paragraphs 56-62. These arrangements do not include unspecified additional software
products.

 The Company will clarify this disclosure to remove
the reference to the subscription basis of accounting in its future filings with the Commission consistent with this response.

8.
It appears that your arrangements may involve multiple elements. Please describe to us all eleme