UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 _______________
 
 FORM
10-K
 
  þ
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the fiscal year ended December 31, 2008or⁭
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934For
      the transition period
      from              toCommission
      file number: 0-24347
 
 _______________
 
 The
Ultimate Software Group, Inc.
 (Exact
name of Registrant as specified in its charter)
 Delaware
              65-0694077(State
      or other jurisdiction of
              (I.R.S.
      Employerincorporation
      or organization)
              Identification
      No.)2000
      Ultimate Way,
              33326Weston,
      FL
              (Zip
      Code)(Address
      of principal executive offices)
 
 Registrant’s
telephone number, including area code:
 (954)
331-7000
 
 Securities
registered pursuant to Section 12(b) of the Act:
 
 Title of Each Class:
              Name of Each Exchange on which
      Registered:Common
      Stock, par value $.01 per share
              The
      Nasdaq Stock Market LLC
 
 Securities
registered pursuant to Section 12(g) of the Act:
 
 None
 
 Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.  Yes  ̈     No
þ
 
 Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.  Yes   ̈    No
þ
 
 Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes þ     No
 ̈
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  ̈
 
 Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definitions of “large accelerated filer”, “accelerated
filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.  (Check one):
 
 Large
accelerated filer  þ                                                                                                             Accelerated
filer   ̈
 
 Non-accelerated
filer   ̈
(Do not check if a smaller reporting company)  Smaller reporting
company  ̈
 
 Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act).  Yes  ̈     No
þ
 
 The
aggregate market value of Common Stock, par value $.01 per share, held by
non-affiliates of the Registrant, based upon the closing sale price of such
shares on the NASDAQ Global Select Market on June 30, 2008 was approximately
$879.8 million.
 
 As of
February 18, 2009, there were 24,292,397 shares of the Registrant’s Common
Stock, par value $.01, outstanding.
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 
 Portions
of the Registrant’s Proxy Statement for the 2009 Annual Meeting of Stockholders
are incorporated by reference into Part III of this Annual Report on Form
10-K.
   
 THE
      ULTIMATE SOFTWARE GROUP, INC.INDEXPage(s)Forward-Looking
      Statements
                                                              1PART
      IItem
      1.
                                                              Business
                                                              1Item
      1A.
                                                              Risk Factors
                                                              8Item
      1B.
                                                              Unresolved Staff
Comments
                                                              13Item
      2.
                                                              Properties
                                                              14Item
      3.
                                                              Legal Proceedings
                                                              15Item
      4.
                                                              Submission of Matters to a Vote of Security
      Holders
                                                              15PART
      IIItem
      5.
                                                              Market for the Registrant’s Common Equity,
      Related Stockholder Matters, and Issuer Purchases of Equity
      Securities
                                                              15Item
      6.
                                                              Selected Financial Data
                                                              18Item
      7.
                                                              Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
                                                              19Item
      7A.
                                                              Quantitative and Qualitative Disclosures about
      Market Risk
                                                              31Item
      8.
                                                              Financial Statements and Supplementary
      Data
                                                              32Item
      9.
                                                              Changes in and Disagreements With Accountants on
      Accounting and Financial Disclosure
                                                              57Item
      9A.
                                                              Controls and Procedures
                                                              57Independent Registered Public Accounting Firm’s
      Report on Internal Control over Financial
    Reporting
                                                              58Item
      9B.
                                                              Other Information
                                                              59PART
      IIIItem
      10.
                                                              Directors, Executive Officers and Corporate
      Governance
                                                              59Item
      11.
                                                              Executive Compensation
                                                              61Item
      12.
                                                              Security Ownership of Certain Beneficial Owners
      and Management and Related Stockholder Matters
                                                              61Item
      13.
                                                              Certain Relationships and Related Transactions, and
      Director Independence
                                                              61Item
      14.
                                                              Principal Accountant Fees and
    Services
                                                              61PART
      IVItem
      15.
                                                              Exhibits and Financial Statement
      Schedules
                                                              62Signatures
                                                              65
  i
  
 FORWARD-LOOKING
STATEMENTS
 
 This
Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (the
“Form 10-K”) of The Ultimate Software Group, Inc. and subsidiaries (“Ultimate”
or the “Company”) may contain certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements represent the Company’s expectations or beliefs, including, but not
limited to, statements concerning the Company’s operations and financial
performance and condition. Words such as “anticipates,” “expects,” “intends,”
“plans,” “believes,” “seeks,” “estimates,” and similar expressions are intended
to identify such forward-looking statements. These forward-looking statements
are not guarantees of future performance and are subject to certain risks and
uncertainties that are difficult to predict. The Company’s actual results could
differ materially from those contained in the forward-looking statements due to
risks and uncertainties associated with fluctuations in the Company’s quarterly
operating results, concentration of the Company’s product offerings, development
risks involved with new products and technologies, competition, the Company’s
contractual relationships with third parties, contract renewals with business
partners, compliance by our customers with the terms of their contracts with us,
and other factors disclosed in the Company’s filings with the Securities and
Exchange Commission.  Other factors that may cause such differences
include, but are not limited to, those discussed in this Form 10-K, including
the risk factors set forth in Item 1A. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
 
 UltiPro®
and Intersourcing® and their related designs are registered trademarks of
Ultimate in the United States. This Form 10-K also includes names, trademarks,
service marks and registered trademarks and service marks of companies other
than Ultimate.
 
 PART I
 
 Item
1.  Business
 
 Overview
 
 The
Ultimate Software Group, Inc. and subsidiaries (“Ultimate” or the “Company”)
designs, markets, implements and supports human resources (“HR”), payroll and
talent management solutions principally in the United States and
Canada.
 
 Ultimate’s
UltiPro software (“UltiPro”) is a comprehensive Internet-based solution designed
to deliver the functionality businesses need to manage the complete employment
life cycle from recruitment to retirement. The solution includes feature sets
for talent acquisition and onboarding, HR management and compliance, benefits
management and online enrollment, payroll, performance management, salary
planning and budgeting, reporting and analytical decision-making tools, time and
attendance, and a self-service Web portal for executives, managers,
administrators, and employees.
 
 Ultimate
believes that UltiPro helps customers streamline HR and payroll processes to
significantly reduce administrative and operational costs, while also empowering
them to manage the talent in their workforce more
strategically.  Designed for the Internet, UltiPro enables users of
its customers to analyze workforce trends for better decision making, find
critical information quickly and perform routine business activities
efficiently.
 
 UltiPro
is available as two solution suites based on company size.  UltiPro
Enterprise (“Enterprise”) was developed to address the needs of large and very
large companies (700 or more employees
and including companies as large as 15,000 employees and larger) and is
delivered either through software-as-a-service (“SaaS”) or an on-premise
solution.  UltiPro Workplace (“Workplace”) was developed for companies
in the mid-market (200 to 700 employees) and is delivered exclusively through
SaaS.  UltiPro Workplace provides medium-sized and smaller companies
with nearly all the features that larger Enterprise companies have with UltiPro,
plus a bundled services package. Since many companies in this market do not have
information technology (“IT”) staff on their premises to help with system
issues, UltiPro Workplace is designed to give these customers a high degree of
convenience by handling system setup, business rules, and other situations for
customers “behind the scenes.”
 
 Ultimate’s
SaaS offering of UltiPro, branded “Intersourcing” (the “Intersourcing
Offering”), provides on-line access to comprehensive human capital management
functionality for organizations that need to simplify the IT support
requirements of their business applications. Ultimate has found that
Intersourcing is attractive to companies that want to focus on their core
competencies to increase sales and profits. Through the Intersourcing Offering,
Ultimate supplies and manages the hardware, infrastructure, ongoing maintenance
and backup services for its customers.  Customer systems are managed
at two data centers, one located in the Miami, Florida area and the other in the
Atlanta, Georgia area.
 
 As part
of its comprehensive HR, payroll and talent management solutions, Ultimate
provides implementation and training services to its customers as well as
support services, which have been certified by the Support Center Practices
Certification program for ten consecutive annual evaluations.  UltiPro
leverages the Microsoft technology platform, which is recognized in the industry
as a cost-effective, reliable and scalable platform.
 
 UltiPro
is marketed primarily through the Company’s Enterprise and Workplace direct
sales teams.  Ultimate had more than 1,700 customers as of the end of
2008.  Based on December 2008 market data from Dun & Bradstreet,
Ultimate estimates its approximate market share to be 6 percent in the over 700
employee space, and 2 percent in the 200 to 700 employee space.
 
 Ultimate is a Delaware corporation
formed in April 1996 to assume the business and operations of The Ultimate
Software Group, Ltd. (the “Partnership”), a limited partnership founded in 1990.
During August 2006, the Company formed a wholly-owned subsidiary, The Ultimate
Software Group of Canada, Inc., to accommodate future operations in
Canada.  In October 2006, the Company acquired 100% of the common
stock of a United Kingdom (“UK”) company and its wholly-owned U.S. subsidiary
(collectively,  “RTIX”), now known as The Ultimate Software Group UK
Limited. As a result of this acquisition (the “RTIX Acquisition”), the Company
expanded its business operations to the UK, principally with respect to research
and development activities and support for the acquired customer base of
RTIX.  There were no material assets or revenues in either Canada or
the UK as of or for the year ended December 31, 2008.  Ultimate’s
headquarters is located at 2000 Ultimate Way, Weston, Florida 33326 and its
telephone number is (954) 331-7000.
 
 Revenue
Sources
 
  Ultimate
has two primary revenue sources:  recurring revenues and services
revenues.  In addition, Ultimate has marketed UltiPro on a perpetual
license basis since its inception, through which it has recognized license
revenues.  For 2006, 2007 and 2008, license revenues, as a percentage
of total revenues, represented 10.7%, 9.6% and 6.3%,
respectively.  Ultimate has made the business decision to cease
selling its on-site UltiPro solutions on a perpetual license basis effective
April 1, 2009, although the Company will continue to sell on-site UltiPro
solutions on a subscription basis (which is priced and billed to customers on a
per-employee-per-month (“PEPM”) basis).
  Recurring
revenues consist of subscription revenues recognized from the Company’s
Intersourcing SaaS offerings of UltiPro and maintenance revenues.
 
 a)
              Subscription
      revenues are principally derived from upfront or setup fees and PEPM fees
      earned from the Intersourcing Offering and from sales of hosting services
      on a stand-alone basis to customers who already own a perpetual license
      (“Base Hosting”). To the extent there are upfront fees associated with the
      Intersourcing Offering and Base Hosting, subscription revenues are
      recognized ratably over the minimum term of the related contract upon the
      delivery of the product and services, which is when the customer processes
      its first live payroll using UltiPro (also referred to as going
      “Live”).  Ongoing PEPM fees from the Intersourcing Offering and
      Base Hosting are recognized as subscription revenues as the services are
      delivered when the customer goes
Live.
 b)
              Maintenance
      revenues are derived from maintaining, supporting, and providing periodic
      updates of the Company’s software. Maintenance and support fees are
      generally priced as a percentage of the initial license fee for the
      underlying products.  Maintenance revenues are recognized
      ratably over the service period, generally one year.  Annual
      maintenance renewal fees which occur subsequent to the initial contract
      period are also recognized ratably over the related service period.
      Currently, the Company’s retention rate for annual renewal maintenance
      contracts is 96%, which is consistent with historical
      experience.
  Services
revenues include revenues from fees charged for the implementation of the
Company’s solutions and training of customers in the use of the Company’s
products, fees for other services, including the provision of payroll-related
forms and the printing of Form W-2’s for certain customers, as well as certain
reimbursable out-of-pocket expenses.  Revenues from implementation
services comprise the majority of total services revenues.  Revenues
from implementation consulting services and training services are recognized as
these services are performed, to the extent the pricing for such services is on
a time and materials basis (which is principally the case).  Other
services are recognized as the product is shipped or as the services are
rendered, depending on the specific terms of the related
arrangement.
  Fees
related to services sold on a fixed-fee basis (which have historically
represented less than 10% of total services revenues per annum) are recognized
using the percentage of completion accounting method, which involves the use of
estimates.  Percentage of completion is measured at each reporting
date based on hours incurred to date compared to total estimated hours to
complete the implementation job.  If a sufficient basis to measure the
progress towards completion does not exist, revenue is recognized when the
project is completed or when the Company receives final acceptance from the
customer.
  License
revenues include revenues from software license agreements for UltiPro, sold on
a perpetual basis and entered into between the Company and its customers, in
which the license fees are non-cancellable. In Ultimate’s financial statements,
license revenues are recognized upon the delivery of the related software
product when all significant contractual obligations have been
satisfied.  Until such delivery, the Company records amounts received
when contracts are signed as customer deposits, which are included with deferred
revenues in the consolidated balance sheets.  The Company has decided
to discontinue selling UltiPro on a perpetual license basis, beginning April 1,
2009.
 
 1
 Table of Contents
 The
percentage contribution for each of the Company’s sources of revenues was as
follows:
 
 For
      the Years Ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006Revenues:Recurring
                            
                            
                            59.7
                            %
                            
                            
                            57.5
                            %
                            
                            
                            55.7
                            %Services
                            
                            
                            34.0
                            
                            
                            
                            32.9
                            
                            
                            
                            33.6License
                            
                            
                            6.3
                            
                            
                            
                            9.6
                            
                            
                            
                            10.7Total
      revenues
                            
                            
                            100.0
                            %
                            
                            
                            100.0
                            %
                            
                            
                            100.0
                            %
 
 Features
of UltiPro
 
 UltiPro
is a comprehensive Internet-based solution designed to deliver the functionality
businesses need to manage the complete employment life cycle from recruitment to
retirement. The solution includes feature sets for talent acquisition and
onboarding, HR management and compliance, benefits management and online
enrollment, payroll, performance management, salary planning and budgeting,
reporting and analytical decision-making tools, time and attendance, and a
self-service Web portal for executives, managers, administrators, and
employees.  UltiPro offers the following features to its
customers:
 
 Web
Portal.  UltiPro includes a Web workforce portal that can serve
as a company’s communications hub and the central gateway for business
activities. It provides functionality for everyone in the customer’s
organization, not just the human resources department.  Ultimate
believes that UltiPro’s Web portal can increase administrative efficiencies by
providing immediate access to reporting, staff management processes and business
intelligence to management over the Internet and can reduce operating costs by
eliminating the need for organizations to print and distribute paper
communications, handbooks, forms, and paychecks.
 
 Feature-Rich, Highly Configurable,
Built-in Functionality.  Based upon UltiPro’s built-in and
integrated functionality and its ability to be configured extensively to the
customer’s specific business needs, the Company has found that UltiPro minimizes
the need for its customers to make extensive customizations or changes to source
code, facilitates streamlined management of the total employment cycle, enables
organizations to minimize the time invested in burdensome HR/payroll
administrative activities, and provides strategic HR management reports and
tools.
 
 Flexible, Rapid System Setup and
Configuration.  UltiPro has been designed to minimize the time
and effort required to set up and configure the system to address individual
company needs.  UltiPro delivers an extensive amount of functionality
“out-of-the-box” that can be configured to meet customers’ various business
models, so that few customizations are required by the typical customer.
Ultimate has a proven track record for implementing UlitPro’s feature-sets
rapidly and for setting up the system for delivery as software-as-a-service for
those customers who have selected that model.  The Company’s service
teams for on-premise implementations of UltiPro and for SaaS setup are
experienced professionals, the majority of whom are long tenured, who help
companies to select the most appropriate options and configure UltiPro to align
with customers’ business requirements.
 
 Reduced Total Cost of
Ownership.  Ultimate believes that the UltiPro solution
provides cost saving opportunities for its customers and that UltiPro is
competitively priced. In addition, the Company believes that its current
practices in implementing the UltiPro solution result in a cost savings for
customers when compared with implementations of other similar solutions in the
industry. A customer may also reduce the administrative and information
technology support costs associated with the organization’s HR, benefits and
payroll functions over time. Tight integration helps to reduce administrative
costs by facilitating accurate information processing and reporting, and
reducing discrepancies, errors and the need for time-consuming adjustments. In
addition, administrative costs can be reduced by providing an organization with
greater access to information and control over reporting.
 
 Leveraging of Leading
Technologies.  Ultimate has consistently focused on identifying
leading technologies and integrating them into its products. The primary
characteristics of Ultimate’s technology are:
  §
              Leading-edge
      service-oriented-architecture (“SOA”) technology platform built using
      Microsoft.NET 3.0 framework.
  §
              Multi-tenancy
      (multiple companies can reside on one server).  The multi-tenant
      model allows each application component to run on a separate farm of
      load-balanced servers while still providing database isolation that
      customers demand. Ultimate’s multi-tenant site registry functions similar
      to “yellow pages” to manage tenant location and isolation within the
      site.
 
 §
              Connecting
      UltiPro via Web Services.  Through Web Services, Ultimate
      exposes appropriate surface areas of UltiPro to integrate with other
      applications and data services easily and
  securely.
 
 Rich End-User Experience and Ease of
Use and Navigation.  Ultimate designs its products to be
user-friendly and to simplify the complexities of managing employees and
complying with government regulations in the HR, payroll, and talent management
areas. UltiPro uses familiar Internet navigation techniques, which the Company
believes make its portal convenient and easy to use. A customer’s executives,
managers, administrators and employees have Web access to manage payroll and
employee functions, run reports or find answers to routine
questions.  The Company refers to this easy navigation as “two clicks
to anywhere.”
 
 Comprehensive Customer Services and
Industry-Specific Expertise.  Ultimate believes it provides the
highest quality customer services, including on-demand hosting services,
professional implementation services, knowledge management (or training)
services and ongoing product and customer support services. Ultimate’s customer
support center has received the Support Center Practices (“SCP”) Certification
for the tenth consecutive year. The SCP program was created by the Service &
Support Professionals Association (“SSPA”) and a consortium of information
technology companies to create a recognized quality certification for support
centers. SCP Certification quantifies the effectiveness of customer support
based upon relevant performance standards and represents best practices within
the technology support industry according to the SSPA. Recognizing the
importance of issuing timely updates that reflect changes in tax and other
regulatory laws, Ultimate employs a dedicated research team to track
jurisdictional tax changes to the more than 12,000 tax codes included in UltiPro
as well as changes in other employee-related regulations.
 
 2
 Table of Contents
 UltiPro—Functionality
and Optional Features
 
 UltiPro’s
core functionality includes, but is not limited to, a Web portal, human
resources management, benefits administration, payroll administration, tax
management, manager self-service, employee self-service, UltiPro business
intelligence, and other key features such as, but not limited to, System
Administration Tools and Enterprise Integration Tools that deliver the ability
to interface with third-party applications and providers.
 
 In
addition to UltiPro’s core HR/payroll functionality, the Company’s customers
have the option to purchase a number of additional features on a PEPM basis,
which are available to enhance the functionality of UltiPro’s core features
based on certain business needs of the customers.  These optional
UltiPro features currently include (i) the talent management suite of products;
(ii) benefits enrollment; (iii) time, attendance and scheduling; (iv) time
management; (v) tax filing; (vi) wage attachments; and (vii) other optional
features (collectively, UltiPro “Optional Features”) , which are described
below.
 
 Differences
between features available to UltiPro Enterprise and UltiPro Workplace are
specified below.  Unless otherwise specified, features are included in
both the Enterprise and Workplace offerings.
  UltiPro’s
Core HR/Payroll
Functionality
 
 UltiPro’s core HR/payroll
functionality includes, but is not limited to, the following:
 
 UltiPro’s Web Portal.
UltiPro’s Web portal can act as the gateway to business activities for a
company’s executives, management team, HR/payroll staff, administrators, and
employees.  Ultimate believes that UltiPro’s portal allows its
customers to improve service to their employees through better communications
and to save time because managers and administrators can complete hundreds of
common employee-related tasks, including administering benefits, managing staff
and accessing reporting and business intelligence in real time, from one central
location. UltiPro also enables companies to provide on-demand access to company
and personal information for their employees over the Web.
 
 Human
Resources.  UltiPro tracks HR-related information including
employment history, performance, job and salary information, career development,
and health and wellness programs. In addition, UltiPro facilitates the recording
and tracking of key information for government compliance and reporting,
including under the Consolidated Omnibus Budget Reconciliation Act (COBRA), the
Health Insurance Portability & Accountability Act (HIPAA), regulations
implemented by the Occupational Safety & Health Administration (OSHA),
workers’ compensation regulations, the Family Medical Leave Act (FMLA), and
Equal Employment Opportunity (EEO) laws. UltiPro also enables compliance with
HIPPA confidentiality requirements for protecting sensitive data such as
employee social security numbers.
 
 Benefits Administration.
UltiPro allows companies to match all of the health, welfare, dental, vision,
and other benefits that their organizations offer employees, and to set up and
administer benefit plans and employee and employer contributions, and it enables
employees to check benefit options and coverage from the UltiPro portal. UltiPro
eliminates the need for duplicate rules, duplicate data entry, and
reconciliation reporting because it stores details for deductions and benefit
plans in one common table. This includes rules for coverage, premium and
employer match computations, and eligibility and participation
determinations.  UltiPro also allows companies to maintain and
administer paid time off benefits, such as vacation (including calculating
benefit accrual amounts), track leave time taken, and facilitate the response to
employee leave requests.
 
 Payroll
Administration.  UltiPro’s payroll engine handles hundreds of
payroll-related computations intended to minimize the customer’s need for side
calculations or additional programming. For example, UltiPro delivers complex
wage calculations such as average pay rates for overtime calculations, shift
premiums, garnishments and levy calculations. With UltiPro, a company’s central
payroll department, remote offices or multiple divisions can process payroll
with specific processing steps based on the exact needs of the organization, and
can manage this process through a “payroll gateway,” an easy-to-use dashboard of
payroll tasks and status, within the UltiPro portal.
 
 Manager
Self-Service.Authorized managers have self-service access to
staff information such as salary, compensation history, key dates and emergency
contacts, with reporting and workforce analysis tools to facilitate
decision-making.  A customer’s managers can view and update staff
information, manage department activities, post job openings, leverage
recruiting and hiring tools, and perform queries on workforce
data.  UltiPro’s document management features can be used to house and
categorize employee-related documents such as drivers’ licenses, consent forms,
and completed Form I-9s with required identification.  Administrators
and managers have the ability to attach Microsoft Word documents, PDFs, JPEG
files, spreadsheets, or any other file types supported by Microsoft Internet
Explorer to employee files.  The documents can be grouped and sorted
to individual requirements, as necessary.
 
 Employee
Self-Service.  UltiPro Employee Self-Service gives a customer’s
employees immediate security-protected access to view their own paycheck details
and benefits summaries, frequently used forms and company
information.  They can also update personal information such as
address, phone number, emergency contacts and skills; change preferences such as
direct deposit accounts and benefits selections; make routine requests such as
asking for vacation time; and enroll in training.
 
 UltiPro Business
Intelligence.  Using UltiPro Business Intelligence tools,
customers can provide their managers and executives with Web access to a library
of hundreds of workforce-related reports, workforce analytics and point-in-time
reporting, and role-specific dashboards of key human capital metrics, without
installing reporting software on users’ personal computers or writing custom
reports. With UltiPro Business Intelligence, users can run and print
pre-formatted reports for the executive team or run instant queries on the Web
for answers to routine questions. UltiPro Business Intelligence also delivers
pre-packaged dashboards for a quick overview of relevant metrics as well as
workforce analytics to enable managers to evaluate workforce trends
strategically on topics such as compensation, turnover and
overtime.
 
 Other Key
Features.  UltiPro includes system administration tools such as
configuration options, role-based security, built-in conditional workflow,
flexible business rules, and an easy-to-use content management tool. Built-in
conditional workflow enables users to authorize HR/payroll staff, managers, or
supervisors to make updates on the Web through more than 125 pre-defined, highly
configurable workflow processes to expedite business activities such as hiring
an employee or inputting a salary increase. System administration was designed
for the non-technical user to administer UltiPro’s roles-based security,
built-in conditional workflow, and system business rules, as well as to enable
system administrators to post company communications, link to external Web sites
from the UltiPro portal, and, through UltiPro’s Color Palette feature, select
the colors of UltiPro’s Web pages to match the customer’s own company image.
Enterprise Integration Tools are also included to provide the ability to
interface with third-party applications and providers such as general ledger,
tax filing services, time clocks, banks, 401(k) and benefits providers, check
printing services and unemployment management services.
 
 3
 Table of Contents
  UltiPro’s
Optional Features
 
 UltiPro’s Optional Features
include, but are not limited to, the following products, which are supplemental
to UltiPro’s core HR/payroll functionality:
 
 UltiPro Talent Management(“UTM”)is
a suite of add-on products comprised of Recruitment, Onboarding, Performance
Management, Salary Planning and Budgeting, and Time and Labor Management, which
are sold individually or as a product suite.
 
 a)  Recruitment.
UltiPro Recruitment delivers a “one-stop shopping” solution for companies to
recruit and hire the most qualified candidates. By automating the entire
recruiting and applicant tracking process, UltiPro Recruitment enables hiring
managers, recruiters, and HR staff to track and manage all recruitment tasks
such as posting open jobs, reviewing resumes, screening candidates, and
scheduling interviews from the central UltiPro portal.
 
 b)  Onboarding.  UltiPro
Onboarding, which has an expected general release in early 2009, is a
comprehensive Web-based tool that provides employers the ability to automate the
process of bringing a new employee into an organization. Employees can be given
a “welcome” package online as part of a step-by-step process that is built into
UltiPro Onboarding and is easily configurable by the customer. It includes such
activities as: obtaining required government and procedural paperwork, including
electronic signatures and document storage; provisioning necessary equipment and
job-specific tools such as office location, computer equipment, and uniforms;
ensuring enrollment in necessary training programs; and instilling the company’s
core values and business objectives.
 
 c)  Performance
Management. UltiPro Performance Management helps companies maximize
talent development and improve employee satisfaction by automating and enhancing
the performance process and using competency-based employee development.
UltiPro’s performance management streamlines the processes of evaluating
performance and completing performance reviews, performing competency
assessments, identifying top performers for succession planning, and tracking
and executing coaching and development plans.
 
 d)  Salary Planning and
Budgeting. UltiPro Salary Planning and Budgeting facilitates salary
increase administration by delivering the tools and information managers need to
make effective decisions regarding future compensation for individuals and/or an
entire team. Highly configurable, UltiPro Salary Planning and Budgeting makes it
easy for companies to tie the salary-increase process and business rules into
the solution. Working online, managers can rapidly review their salary budgets
and guidelines, and determine the best way to allocate pay increases to their
employees within their approved budget. Once managers decide on the allocations,
they can submit pay increases for processing with no manual calculations or
spreadsheets required.
  Benefits Enrollment. With
Benefits Enrollment, employees can review their benefit choices and make
selections on the Web during defined open enrollment periods. Benefits
administrators can set up enrollment sessions over the Web and use tools to
monitor the enrollment progress. Benefits Enrollment also guides employees
through all of the benefit and personal information changes necessary as a
result of a life event such as getting married, having a baby or
moving.  UltiPro also facilitates the electronic feeds required for
insurance carriers and plan administrators, reducing the need for manual
reporting of employee census information, participant coverage, and billing
reconciliation.
 
 Time, Attendance, and Scheduling
(available to prospective customers in the Enterprise market).Through a
strategic partnership with Infor Corporation (formerly Workbrain Corporation),
Ultimate has the right to market and distribute Infor’s time and labor
management product, referred to as Infor Express, to prospective customers as
part of the UltiPro solution. Ultimate has rebranded Infor Express as UltiPro
Time and Attendance, marketing the components as UltiPro Time and Attendance,
UltiPro Leave Management, and UltiPro Workforce Scheduling (collectively,
“UTA”). Ultimate is the single-source contact for customer implementations and
ongoing solution support for UTA. UTA is Web-based and integrated with UltiPro’s
payroll, HR, and benefits functionality. UltiPro Time and Attendance tracks time
and attendance labor metrics and supports a variety of time-capture mechanisms.
UltiPro Leave Management includes all of the functionality required to
effectively track and manage employee leave. UltiPro Workforce Scheduling
features industry-specific employee scheduling options to ensure that
organizations in different environments deploy employees in an efficient and
legislatively compliant manner.
 
 Time Management (available to the
Workplace market).UltiPro Time Management, a proprietary solution,
delivers the functionality and flexibility needed to manage employee time and
attendance efficiently and provides Web access to real-time employee time and
labor information. UltiPro Time Management provides companies the tools to
proactively prevent issues that negatively impact business performance, such as
employee coverage gaps, labor law violations, and excess labor spending. Fully
integrated scheduling, time and attendance, and leave management capabilities
reduce payroll expenditures and streamline payroll and workforce management
processes.
  Tax Filing. UltiPro Tax
Filing protects businesses against tax filing errors through the use of
professionals specializing in tax filing. With UltiPro Tax Filing, companies
meet all Federal, state, and local payroll tax filing obligations quickly and
easily. The integrated UltiPro solution saves payroll staff time by eliminating
the administrative burdens associated with tax filing. UltiPro Tax Filing
deposits federal, state, and local tax payments with over 10,000 tax agencies
via electronic funds transfer or check and files monthly, quarterly, and annual
tax returns.
  Wage Attachments. For
organizations required to process third-party payments on behalf of their
employees for items such as child support, tax levies, and creditor
garnishments, UltiPro Wage Attachments enables these companies to effectively
streamline and manage the payment process. UltiPro Wage Attachments eliminates
the burden associated with payments to third parties by utilizing the
information entered and calculated in UltiPro, so there is no need to manage
payment processing and to analyze varying disbursement schedules for multiple
jurisdictions. Ultimate ensures that each third-party payment is made according
to the appropriate payment method and reaches its required destination within
the designated timeframe.
  Other Optional
Features.  Ultimate offers a number of additional HR and
payroll-related services to extend the value of UltiPro, including business
continuity services, test environment services, W-2 print services,
pre-employment screening, paycheck modeling, unemployment management, employment
verification services, employee assistance, health and wellness, and work/life
balance programs.
  4
 Table of Contents
 Technology
 
 Ultimate
seeks to provide its clients with optimum performance, user experience, advanced
functionality, and ease of scalability and access to information through the use
of leading Internet-standard technologies. The UltiPro solution was designed to
leverage cutting-edge technologies such as Web 2.0, social software, XML
standards, and Web Services that use open standards to provide customers with a
cost-effective platform for performing critical business functions rapidly over
the Web and allowing different systems to communicate with one
another.
 
 The use
of Microsoft technology helps Ultimate deliver what it believes to be a highly
deployable and manageable payroll and talent management solution that includes
the following key technological features:
 
 Microsoft.NET framework, Web 2.0
Features, and Social Networking Integration.The newest
version of UltiPro, built on the .NET development platform, allows UltiPro to
leverage a contemporary Web framework that provides a common, reusable page
foundation for a consistent user experience.  The .NET framework also
enables Ultimate to develop and release enhanced features more rapidly. The
latest version of UltiPro also takes advantage of Web 2.0 technologies for
increased user interactivity, such as “sticky” personal user preferences, and
social networking integration that provides value for human capital management
in areas such as recruitment and mentoring.  For example, UltiPro on
the .NET platform includes social networking integration to sites such as
“LinkedIn,” where candidates for open positions can provide a link to their
professional profile and other details relevant to job applications, enabling HR
and hiring managers to more quickly identify qualified candidates.
 
 Internet-Based Technologies and
Integration.  Ultimate supports cutting-edge Web technologies
and Internet/extranet connectivity to increase access to and usability of its
applications. In 2002, Ultimate moved to Web services architecture that allows
business logic to be called and executed over standard network protocols, such
as HTTP or TCP/IP. UltiPro has an open architecture that supports open
integration standards, including XML, HR-XML, SOAP, WSDL, AJAX, COM, including
real-time messaging through COM-based Web services.  UltiPro’s Web
Services architecture is scalable to adapt to the business needs of companies of
any size. The solution includes enterprise integration tools that enable
customers to exchange data with third-party providers via imports, exports or
Web services.
 
 Distributed Process
Management. The technical architecture UltiPro uses to enable Web
Services capabilities is called UltiPro Distributed Process Management (“DPM”).
This unique platform incorporates leading technologies such as Microsoft Message
Queuing (MSMQ), XML, SOAP, and WSDL to create a distributed processing framework
that is Internet-enabled for performing business functions on the Web portal and
allowing different enterprise systems to talk to one another over the Internet.
UltiPro’s DPM was designed to automate and distribute HR and payroll processes,
for example, processing payroll or generating reports, across multiple servers
to reduce the amount of time and manual work required. This means that commonly
requested services, such as running a report or running steps in the payroll
process, can be initiated from the Web. These requests are automatically routed
to a separate process application server to ensure efficient processing and load
balancing. Ultimate believes that the DPM framework makes UltiPro highly
scalable to accommodate a high volume of processing requests cost-effectively
for companies that run hundreds or even thousands of payrolls.
 
 Application
Framework.  Ultimate has designed certain aspects of its system
using a multi-tiered architecture in order to enhance the system’s speed,
flexibility, scalability and maintainability. When an application’s logic
resides only on a client workstation, a user’s ability to process high volume
data transactions is limited. When the logic resides only on a server, the
user’s interactive capabilities are reduced. To overcome such limitations,
Ultimate built more separation into the application design. The UltiPro
application consists of several core components in a layered architecture that
leverages Microsoft technology. UltiPro’s multi-layered architecture, including
an operating system layer, business logic layer, presentation layer and user
interface layer, makes it easier to update and maintain UltiPro, as well as
integrate UltiPro with other enterprise systems. The Company believes that
UltiPro’s application framework provides a highly extensible set of services
that can scale depending on the customer’s business size. In addition, UltiPro
was built using a data-driven, object-oriented application framework that
enhances the development and usability of the solution. Object-oriented
programming features code reusability and visual form/object inheritance, which
decrease the time and cost of developing and fully implementing a new system.
With object-oriented programming, system updates do not overwrite prior
customizations to the system because custom changes are sub-classed objects that
reside “outside” the core program.
 
 Business Intelligence
Tools.  In addition to providing an extensive library of
standard reports that offer flexibility and ease of use, Ultimate extends what
users can do with employee data by embedding business intelligence tools from
Cognos Corporation, a third-party provider (“Cognos”). In addition to offering
sophisticated data query and report authoring, these tools enable users to apply
on-line analytical processing to multidimensional data cubes, allowing users to
explore data on employees graphically and statistically from diverse angles.
Ultimate maintains a link between Cognos’ report catalog and UltiPro’s data
dictionary, eliminating the necessity for users to create and maintain ad hoc
reporting catalogs. A Cognos Web Package is delivered to UltiPro customers to
allow users to access reports and conduct data queries from a Web
browser.
 
 
 Intersourcing
Offering
 
 Ultimate’s
Intersourcing Offering, provides on-line access to comprehensive human capital
management functionality for organizations that need to simplify the IT support
requirements of their business applications. Through the Intersourcing Offering,
Ultimate provides the hardware, infrastructure, ongoing maintenance and backup
services for its customers at two data centers located in the Miami, Florida and
Atlanta, Georgia areas.  Both data centers are owned and operated by
Quality Technology Services (“QTS”).  QTS is one of the largest
privately held providers of data center facilities and management services in
the United States.
 
 The
primary types of hosting arrangements are the sale of services as a part of the
Intersourcing Offering for both the Enterprise market and the Workplace
market.  Hosting services, typically available in a shared
environment, provide Web access to UltiPro, including comprehensive human
capital management functionality for organizations that need to simplify the IT
support requirements of their business applications and are priced on a PEPM
basis.  In the shared environment, Ultimate provides an infrastructure
with applicable servers shared among many customers who use a Web browser to
access the application software through the related data center.
 
 The
Intersourcing Offering is designed to provide an appealing pricing structure to
customers who prefer to minimize the initial cash outlay associated with typical
capital expenditures.  Intersourcing customers purchase the right to
use UltiPro on an ongoing basis for a specific term in a shared or dedicated
hosted environment and the arrangement can typically be renewed after its
initial term has expired.  The pricing for the Intersourcing Offering,
including both the hosting element as well as the right to use UltiPro, is on a
PEPM basis.
 
 Significant
Transaction
 
 Ultimate
and Ceridian Corporation (“Ceridian”) signed an agreement in 2001, as
subsequently amended, granting Ceridian a non-exclusive license to use UltiPro
as part of an on-line offering for Ceridian to market primarily to businesses
with less than 500 employees (the “Original Ceridian Agreement”). During
December 2004, RSM McGladrey Employer Services (“RSM”), a former business
service provider (“BSP”) of Ultimate, acquired Ceridian’s product and existing
base of small and mid-size business customers throughout the United States (the
“RSM Acquisition”).  The financial terms of the Original Ceridian
Agreement did not change as a result of the RSM Acquisition. Subsequent to the
RSM Acquisition, Ceridian continued to be financially obligated to pay, and did
pay, Ultimate minimum fees pursuant to the terms of the Original Ceridian
Agreement.  The Original Ceridian Agreement was terminated by Ceridian
pursuant to its terms on March 9, 2008.  During its term, Ceridian
paid the aggregate minimum $42.7 million which was due under the Original
Ceridian Agreement on a cumulative basis since the inception of the
arrangement.    The amount of subscription revenues
recognized under the Original Ceridian Agreement during the year ended December
31, 2008 was $1.5 million (through the effective date of the termination of the
Original Ceridian Agreement) and $7.7 million for each of the years ended
December 31, 2007 and 2006.
 
 5
 Table of Contents
 Research
and Development Activities
 
 Ultimate
incurs research and development expenses, consisting primarily of software
development personnel costs, in the normal course of its
business.  Such research and development expenses are for enhancements
and future betterments to the Company’s existing products and for the
development of new products. During 2008, 2007 and 2006, the Company spent $37.5
million, $29.9 million and $24.3 million, respectively, on research and
development activities.  During 2008, $0.8 million of research and
development expenses were capitalized for the Onboarding product which handles
certain human resources functionality for new hires of a company, and has an
expected general release early in 2009.  During 2007 and 2006, $1.7
million and $1.8 million, respectively, of research and development expenses
were capitalized for the development of UltiPro Canadian HR/payroll (“UltiPro
Canada”) functionality.  UltiPro Canada was built from the existing
product infrastructure of UltiPro (e.g., using UltiPro’s source code and
architecture).  UltiPro Canada was designed to provide HR/payroll
functionality, which includes the availability of Canadian tax rules, as well as
Canadian human resources functionality, taking into consideration labor laws in
Canada and including changes to the language where necessary (i.e., English to
French).  Capitalization of software costs for UltiPro Canada extended
from the fourth fiscal quarter of 2005, when technological feasibility (as
defined by Statement of Financial Accounting Standards (“SFAS”) No. 86,
“Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed” (“SFAS No. 86”)) was attained until the fourth fiscal quarter of 2007,
when UltiPro Canada was available for general release to Ultimate’s
customers.
  Customer
Services
 
 Ultimate
believes that delivering quality customer services provides the Company with a
significant opportunity to differentiate itself in the marketplace and is
critical to the comprehensive solution. Ultimate provides its customers services
in two broad categories: (i) professional services and (ii) customer support
services and product maintenance.  Additionally, Ultimate provides
hosting services as a part of the Intersourcing Offering.  These
services include, but are not limited to, purchasing and supporting hardware and
system software; installing new versions of UltiPro; and backing up customer
data.
 
 Professional
Services.  Ultimate’s professional services include
implementation, customer relationship management and knowledge management (or
training) services. Ultimate believes that its implementation services are
differentiated from those of other vendors by speed, predictability and
completeness. The Company believes that its successful record with rapid
implementations is due to its standardized methodology, long-tenured
consultants, the large amount of delivered product functionality, and
comprehensive conversion and integration tools.
 
 Ultimate
has an experienced team of functional and technical consultants that are
dedicated to assisting customers with rapid deployments. In addition, Ultimate
provides its customers with the opportunity to participate in formal training
programs conducted by its knowledge management services team, as well as online
and on-demand training. Training programs are designed to increase customers’
ability to use the full functionality of the product, thereby maximizing the
value of customers’ investments. Courses are designed to align with the stages
of implementation and to give attendees hands-on experience with UltiPro.
Trainees learn such basics as how to enter new employee information, set up
benefit plans and generate standard reports, as well as more complex processes
such as defining company rules, configuring the system and creating custom
reports. The Company maintains training facilities in Atlanta, Georgia;
Schaumburg, Illinois; Dallas, Texas; and at its headquarters in Weston, Florida.
In addition to offering classes at these facilities, the Company conducts
Web-based training and on-site training at remote locations. After customers
have gone Live on UltiPro and have been turned over to the Company’s customer
support and maintenance program, the Company assigns a customer relationship
manager (“CRM”) to the account to assist customers on an ongoing basis with
special projects, including enhancing their existing systems, managing upgrades
and writing custom reports. These services, like most of the Company’s
professional services, are typically billed on a time and materials
basis.  The CRM team also focuses a large portion of its time on
customer retention, which is an important aspect of the Company’s long-term
business model.
 
 Customer Support and
Maintenance.  Ultimate offers comprehensive and on-going
maintenance services and technical support.  These services have
historically been purchased by all of its customers, as the Company has
maintained a customer retention rate of 96% since its inception. Ultimate’s
customer support center has received the SCP Certification sponsored by the
Service Strategies Corporation (SSC) for the tenth consecutive year. This
certification recognizes companies that “deliver exceptional service and support
to their customers.” Ultimate’s customer support services include: software
updates that reflect tax and other legislative changes; a named customer service
representative (“NSR”); telephone support 24 hours a day, 7 days a week;
unlimited access to the Company’s employee tax center on the Web; seminars on
year-end closing procedures; and periodic newswire emails. In addition, the
Company’s customer support services team maintains a support Web site for its
customers where customers can submit inquiries and service requests as well as
search a knowledge base of information for instant answers to questions, holds
an annual national user conference and enables Ultimate professionals to attend
smaller, user-organized user group meetings on a routine basis throughout the
United States.
 
 Customers
 
 As of
December 31, 2008, Ultimate provided its UltiPro solutions to more than 1,700
customers. Ultimate’s customers represent a wide variety of industries,
including manufacturing, food services, sports, technology, finance, insurance,
retail, real estate, transportation, communications, healthcare and other
services.  No customer accounted for more than 10% of total revenues
in any of the years 2008, 2007 or 2006.
 
 Sales
and Marketing
 
 Ultimate
markets and sells its products and services primarily through its direct sales
force.
 
 Ultimate’s
direct sales force includes business development vice presidents, directors and
managers who have defined territories, typically geographic. The sales cycle
begins with a sales lead generated through a national, corporate marketing
campaign or a territory-based activity. In one or more on-site visits,
phone-based sales calls, or Web demonstrations, sales managers work with
application and technical sales consultants to analyze prospective client needs,
demonstrate the Company’s UltiPro solutions and, when required, respond to
requests for proposals (“RFPs”). The sale is finalized after customers complete
their internal sign-off procedures and the terms of the contract are negotiated
and signed.
 
 With a
sale of the Intersourcing Offering for the Enterprise market, the agreement
typically requires PEPM fees based on company size, one-time upfront (or setup)
fees priced on a per-employee basis, hourly charges for implementation and
per-day training rates.  Typical payment terms include a deposit at
the time the contract is signed for all or a portion of the setup fees and
ongoing PEPM payments on specific payment dates designated in the contract,
usually tied to the Live date. Payment for implementation and training services
under the contract is typically made as such services are provided.
 
 With a
sale of the Intersourcing Offering for the Workplace market, the agreement
generally requires PEPM fees based on company size and, typically, a one-time
upfront (or setup) fee, priced on a per employee basis, to cover bundled
services, which generally include implementation and training services. Typical
payment terms include a deposit at the time the contract is signed for all or a
portion of the upfront fees and ongoing PEPM payments on specific payment dates
designated in the contract, usually tied to the Live date.
 
 With a
perpetual license sale, the terms of the Company’s sales contract typically
include a license agreement for the product, an annual maintenance agreement
(which is subject to annual renewal typically after a 12-month period), per-day
training rates and hourly charges for implementation services. Typical payment
terms include a deposit at the time the contract is signed and additional
payments on specific payment dates designated in the contract. Payment for
implementation and training services under the contract is typically made as
such services are provided. New perpetual license sales will no longer be
available after March 31, 2009.
 
 6
 Table of Contents
 Ultimate
supports its sales force with a comprehensive marketing program that includes
public relations, advertising, direct mail, trade shows, seminars and workshops,
email marketing, and Web marketing. Working closely with the direct sales force,
customers and strategic partners, the marketing team defines positioning
strategies and develops a well-defined plan for implementing these strategies.
Marketing services include market surveys and research, overall campaign
management, creative development, production control, demand generation, results
analysis, and communications with field offices, customers and marketing
partners.
  Intellectual
Property Rights
 
 Ultimate’s
success is dependent, in part, on its ability to protect its proprietary
technology. The Company relies on a combination of copyright, trademark and
trade secret laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect its proprietary rights. The Company does
not have any patents or patent applications pending, and existing copyright,
trademark and trade secret laws afford only limited protection. Accordingly,
there can be no assurance that the Company will be able to protect its
proprietary rights against unauthorized third-party copying or use, which could
materially adversely affect the Company’s business, operating results and
financial condition.
 
 Despite
the Company’s efforts to protect its proprietary rights, attempts may be made to
copy or reverse engineer aspects of the Company’s products or to obtain and use
information that the Company regards as proprietary. Moreover, there can be no
assurance that others will not develop products that perform comparably to the
Company’s proprietary products. Policing the unauthorized use of the Company’s
products is difficult. Litigation may be necessary in the future to enforce the
Company’s intellectual property rights, to protect the Company’s trademarks,
copyrights or trade secrets or to determine the validity and scope of the
proprietary rights of others. Such litigation could result in substantial costs
and diversion of resources and could have a material adverse effect on the
Company’s business, operating results and financial condition.
 
 As is
common in the software industry, the Company from time to time may become aware
of third-party claims of infringement by the Company’s products of third-party
proprietary rights. While the Company is not currently subject to any such
claim, the Company’s software products may increasingly be subject to such
claims as the number of products and competitors in the Company’s industry
segments grows and the functionality of products overlaps and as the issuance of
software patents becomes increasingly common. Any such claim, with or without
merit, could result in significant litigation costs and require the Company to
enter into royalty and licensing agreements, which could have a material adverse
effect on the Company’s business, operating results and financial condition.
Such royalty and licensing agreements, if required, may not be available on
terms acceptable to the Company or at all.
 
 Competition
 
 The
market for the Company’s products is highly competitive. The Company’s products
compete primarily on the basis of technology, delivered functionality and
price/performance.
 
 Ultimate’s
competitors in the Enterprise market include (i) large service bureaus,
primarily Automatic Data Processing Inc. (“ADP”) and, to a lesser extent,
Ceridian; and (ii) companies, such as PeopleSoft/Oracle, Lawson, Kronos, and
Workday that offer human resource management and payroll (“HRMS/payroll”)
software products for use on mainframes, client/server environments and/or Web
servers.  In the Workplace market Ultimate’s competitors include
payroll service providers such as Paychex that service companies on the smaller
end of the mid-market.  Many of Ultimate’s competitors or potential
competitors have significantly greater financial, technical and marketing
resources than the Company. As a result, they may be able to respond more
quickly to new or emerging technologies and to changes in customer requirements,
or to devote greater resources to the development, promotion and sale of their
products than can the Company. In addition, current and potential competitors
have established or may establish cooperative relationships among themselves or
with third parties to increase the ability of their products to address the
needs of the Company’s prospective customers.
 
 Product
Liability
 
 Software
products such as those offered by Ultimate frequently contain undetected errors
or failures when first introduced or as new versions are released. Testing of
the Company’s products is particularly challenging because it is difficult to
simulate the wide variety of computing environments in which the Company’s
customers may deploy these products. Despite extensive testing, the Company from
time to time has discovered defects or errors in products. There can be no
assurance that such defects, errors or difficulties will not cause delays in
product introductions and shipments, result in increased costs and diversion of
development resources, require design modifications or decrease market
acceptance or customer satisfaction with the Company’s products or result in
claims by customers against the Company. In addition, there can be no assurance
that, despite testing by the Company and by current and potential customers,
errors will not be found after commencement of commercial shipments, resulting
in loss of or delay in market acceptance, which could have a material adverse
effect upon the Company’s business, operating results and financial
condition.
 
 Backlog
 
 Backlog
consists of Intersourcing and Base Hosting services sold under signed contracts
for which the services have not yet been delivered.  At December 31,
2008, the Company had backlog of $99.1 million compared to $77.7 million as of
December 31, 2007.  The Company expects to fill approximately $85.6
million of the backlog during 2009.  The Company does not believe that
backlog is a meaningful indicator of sales that can be expected for any future
period.  There can be no assurance that backlog at any point in time
will translate into revenue in any subsequent period.
 
 Employees
 
 As of
December 31, 2008, Ultimate employed 933 persons, including 121 in sales and
marketing, 161 in research and development, 72 in product strategy, 311 in
solution deployment and training, 228 in shared services including Intersourcing
and customer support, and 40 in the HR, finance, and legal
groups.  The Company believes that its relationships with employees
are good, and that belief is validated by The Great Place to Work® Institute,
Inc.’s selection of Ultimate as the #1 Best Place to Work in America among
medium-sized companies in June 2008, as well as one of the 25 best medium-sized
companies to work for in America in 2007, 2006, and 2005.  However,
competition for qualified personnel in the Company’s industry is generally
intense and the management of the Company believes that its future success will
depend, in part, on its continued ability to attract, hire and retain qualified
personnel.
 
 Available
Information
 
 The
Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, proxy statements and amendments to those reports and any
registration statements, including but not limited to registration statements on
Form S-3, are available free of charge on the Company’s Internet website at
www.ultimatesoftware.com
as soon as reasonably practicable after such reports are electronically filed
with the Securities and Exchange Commission (“SEC”). Information contained on
Ultimate’s website is not part of this report.  You may record and
copy any materials we file with the SEC at the SEC’s Public Reference Room at
100 F Street, NE, Washington, DC 20549.  You may obtain information on
the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.  The SEC also maintains an internet site that contains
the reports, proxy and information statements and other information regarding us
that we file with the SEC.  You can access the SEC’s website at www.sec.gov.
 
 7
 Table of Contents
 Item
1A.                      Risk Factors
 
 The
Company operates in a rapidly changing and dynamic business environment that
involves risk and uncertainty.  The following discussion is a
description of risks and uncertainties associated with our business that could
cause, or contribute to causing, actual results to differ materially from
expectations.  These are not all of the risks we face.  We
may be adversely affected by risks not currently known or that we currently
consider to be immaterial.
 
 We
may be adversely affected by substantial quarterly fluctuations in our revenues
and operating results.
  Our
quarterly revenues and operating results have varied significantly in the past
and are likely to vary substantially from quarter to quarter in the future. Our
quarterly operating results may fluctuate as a result of a number of factors,
including:
   •            Increased
expenses from one quarter to another (especially as they relate to product
development, sales and marketing or the use of third-party
consultants);
   •            Spending
patterns of our customers;
   •            Timing
of our product releases:
   •            Increased
competition;
   •            A
drop in the near-term demand for our products, particularly in relation to
implementation consulting services; and
   •            Announcements
of new products by Ultimate or by our competitors.
   We
establish our expenditure levels based upon our expectations as to future
revenues, which, subsequent to March 31, 2009, will be comprised primarily of
recurring revenues and services revenues.  If revenue levels are below
expectations, particularly services revenues which are more subject to
variations between periods than recurring revenues, expenses can be
disproportionately high in a particular period. For example, while sales
production could be at our level of expectations, depending on the spending
patterns of our customers including the timing in which they begin the
implementation of UltiPro and the extent to which they use Ultimate’s resources,
the immediate reported total revenues could be lower than expected.
  In
addition, for the first fiscal quarter of 2009, which includes the period
through which the Company will continue to sell perpetual licenses, a variation
in the mix of revenues (i.e., a shift from expected license unit sales to
Intersourcing unit sales), could cause reported total revenues to be lower than
expected and expenses to be disproportionately high. This is based on the method
of accounting for Intersourcing sales, which recognizes the revenue over the
initial contract term when the customer goes Live as compared to a license sale,
for which (if all relevant accounting requirements are met) we typically
recognize the entire license fee upon delivery.
  Our
operating results for previous fiscal quarters are not necessarily indicative of
our operating results for the full fiscal years or for any future periods,
particularly in light of the expected elimination of license revenues after
March 31, 2009. We believe that, due to the underlying factors for quarterly
fluctuations, quarter-to-quarter comparisons of our operations are not
necessarily meaningful and that such comparisons should not be relied upon as
indications of future performance.
  Due
to the method of accounting for Intersourcing sales, a change in the period of
the time from contract date to the Live date (“Time to Live”) could negatively
impact the amount of recurring revenues recognized in a reporting
period.
 
 Sales
production, as it pertains to sales of Intersourcing units, is not reflected in
recurring revenues and related variable costs in the Company’s consolidated
statements of operations until the related customer goes Live. In its internal
business model, the Company makes certain assumptions, among other things, with
respect to future sales production, revenue growth, variable costs, personnel
costs and other operating expenses.
 
 The
Company’s expectations for recurring revenue growth are typically established
based on combinations of actual Intersourcing sales production (for those units
that have been previously sold but have not yet gone Live, or Backlog) and
expected future Intersourcing sales production, together with expectations as to
the Time to Live. Estimates for Time to Live are usually based on (i) specific
estimates (for certain Backlog sales) provided by our field personnel, which
estimates include factors and assumptions that are not within the control of our
field personnel; and (ii) estimates for Time to Live for other Intersourcing
sales (including Backlog sales without specific estimates at that point in
time), as well as expected sales which are typically based on assumptions
derived from our historical Time to Live periods, which were adjusted in July
2008, and prospectively, based on management’s assessment of Time to Live for
Backlog sales at that point in time. Factors that could impact the Time to Live
include, but are not limited to, customer size (as larger customers may have
longer implementations, tend to go Live on more UltiPro features and have more
interface and integration requirements), or the number of complementary products
sold in addition to UltiPro to a single customer, which in some cases involve
customers’ desires to go Live on all products at once, as compared to UltiPro
first, followed by complementary products.
 
 To the
extent there are changes in the underlying assumptions which drive the Company’s
expected revenue growth from Intersourcing sales, which include, but are not
limited to, actual sales production achieved and changes in Time to Live, our
recurring revenues, as reported in our consolidated statements of operations,
could differ materially from levels we expected to achieve.
 
 Our
stock price has experienced high volatility, may continue to be volatile and may
decline.
 
 The
trading price of our Common Stock has fluctuated widely in the past and may do
so in the future, as a result of a number of factors, many of which are outside
our control, such as:
 
 §
              The
      volatility inherent in stock prices within the sector within which we
      conduct business;
 §
              The
      volume of trading in our Common Stock, including sales upon exercise of
      outstanding options;
 §
              Failure
      to achieve earnings expectations;
 §
              Changes
      in our earnings estimates by
analysts;
 §
              Variations
      in our actual and anticipated operating results, including, but not
      limited to, prospective financial guidance provided by Ultimate to our
      investors and research analysts;
and
 §
              The
      announcement of a merger or
acquisition.
 
 8
 Table of Contents
 Stock
markets have experienced extreme price and volume fluctuations that have
affected the market prices of many technology and computer software companies,
particularly Internet-related companies. Such fluctuations have often been
unrelated or disproportionate to the operating performance of these companies.
These broad market fluctuations could adversely affect the market price of our
Common Stock.
  Further,
securities class action litigation has often been brought against companies that
experience periods of volatility in the market prices of their securities.
Securities class action litigation could result in substantial costs and a
diversion of our management’s attention and resources.
  We
have incurred operating losses in the past and may incur operating losses in the
future.
  We have
incurred operating losses in the past and we may incur operating losses in the
future. As of December 31, 2008, our accumulated deficit is approximately $53.3
million.  If our future total revenues do not grow at a higher rate
than that of our total expenses, our future operating results could be
negatively impacted.  Recent revenue growth should not be considered
as indicative of our future performance, particularly with respect to the recent
economic environment and the potential impact on our revenue streams, as our
subscription revenues from our Intersourcing Offering are largely impacted by
the employee growth or contraction of our existing customer base and customer
spending patterns have a significant impact on our services revenues with
respect to both the timing and extent of our services they purchase, combined
with the Company’s business decision to eliminate sales of perpetual license
agreements for the UltiPro on-site solutions after March 31, 2009 (and thereby
eliminate prospective license revenues derived from any such agreements that may
have been entered into after such date).
  Adverse
changes in general economic or political conditions could adversely affect our
operating results.
   As our
business has grown, we have become increasingly subject to the risks arising
from adverse changes in domestic and global economic and political
conditions.  For example, the U.S. economy has recently been weakened
due to many factors, including the credit market crisis, reduced credit
availability, bank failures, slower economic activity, bankruptcies, increased
unemployment, adverse business conditions, concerns about inflation and fear of
a recession.  If weakness in the economies of the U.S. and other
countries persists, many customers may delay or reduce technology
purchases.  This could result in reductions in sales of our products,
longer sales cycles, slower adoption of new technologies, increased price
competition, customers purchasing fewer services or Optional Features than they
have in the past, customers requesting longer payment terms, customers failing
to pay amounts due and slower collections of accounts receivable.  In
addition, increased unemployment could result in decreases to our recurring
revenues from our existing customer base as we price our ongoing recurring
revenues on a PEPM basis. Any of these events would likely harm our business,
results of operations, financial condition and cash flow from
operations.
   Our
failure to maintain and increase acceptance of UltiPro, which accounts for
substantially all of our revenues, could cause a significant decline in our
revenues.
   Currently,
the UltiPro solutions, including the UltiPro core product and Optional Features
and related services account for substantially all of our revenues. Our future
success depends on maintaining and increasing acceptance of UltiPro,
particularly the Intersourcing Offering and related services. Any decrease
in the demand for UltiPro would have a material adverse effect on our business,
operating results and financial condition.
   A
systems failure or other service interruption at either of the data centers
managed by QTS and used for our hosting services could result in substantial
expense to us, loss of customers and claims by our customers for damages caused
by any losses they incur.
   We offer
hosting services, which include hardware, infrastructure, ongoing maintenance
and back-up services, to our customers at two data centers both owned and
operated by QTS—one in the Atlanta, Georgia area and another one in the Miami,
Florida area.
   These
hosting services, which are provided as part of our Intersourcing Offering, must
be able to be reliably operated on a 24 hours per day, seven days per week basis
without interruption or data loss. The success of the Intersourcing Offering
depends on our ability to protect the infrastructure, equipment and customer
data files against damage from:
   §
              Human
      error;
   §
              Natural
      disasters;
   §
              Power
      loss or telecommunication failures;
   §
              Sabotage
      or other intentional acts of vandalism;
and
   §
              Unforeseen
      interruption or damages experienced in moving hardware to a new
      location.
  9
 Table of Contents
 We
perform a daily backup of our customer data which is stored offsite of the data
centers. However, the occurrence of one of the above listed events or other
unanticipated problems at either of the data centers could:
   §
              Result
      in interruptions in the services we provide to our customers, during which
      time our customers may be unable to retrieve their
  data;
   §
              Require
      us to spend substantial amounts of money replacing existing equipment
      and/or purchasing services from an alternative data
  center;
   §
              Cause
      existing customers to cancel their
contracts;
   §
              Cause
      our customers to seek damages for losses incurred;
  or
   §
              Make
      it more difficult for us to attract new
  customers.
   If
our direct sales force is not successful, we may be unable to achieve
significant revenue growth in the future.
   We sell
our products and services primarily through a direct sales force.  Our
ability to achieve significant revenue growth in the future will depend upon the
success of our direct sales force and our ability to adapt our sales efforts to
address the evolving markets for our products. If our direct sales force does
not perform as expected, our revenues could suffer.
   If
we are not able to successfully recruit personnel, our revenues could be
negatively affected.
   Our
ability to achieve significant revenue growth in the future will also depend on
our success in recruiting, training and retaining sufficient sales, marketing,
professional services, product development and other personnel.
   Rapid
technological changes and the introduction of new products and enhancements by
new or existing competitors could undermine our current market
position.
   The
market for our products is characterized by rapid technological advancements,
changes in customer requirements, frequent new product introductions and
enhancements and changing industry standards. The life cycles of our products
are difficult to estimate. Rapid technological changes and the introduction of
new products and enhancements by new or existing competitors could undermine our
current market position. Our growth and future success will depend, in part,
upon our ability to:
   §
              Enhance
      our current products and introduce new products in order to keep pace with
      products offered by our
competitors;
   §
              Adapt
      to technological advancements and changing industry standards;
      and
   §
              Expand
      the functionality of our products to address the increasingly
      sophisticated requirements of our
customers.
   We may
not have sufficient resources to make the necessary investments and we may
experience difficulties that could delay or prevent the successful development,
introduction or marketing of new products or enhancements. In addition, our
products or enhancements may not meet the increasingly sophisticated customer
requirements of the marketplace or achieve market acceptance at the rate we
expect, or at all. Any failure by us to anticipate or respond adequately to
technological advancements, customer requirements and changing industry
standards, or any significant delays in the development, introduction or
availability of new products or enhancements, could undermine our current market
position.
   Our
current and future competitors include companies with greater financial,
technical and marketing resources than we have and if we are unable to compete
successfully with other businesses in our industry or with in-house systems
developed by potential customers, our profitability will be adversely
affected.
   Our
future success will depend significantly upon our ability to increase our share
of our target market, to maintain and increase our recurring revenues from new
and existing customers and to sell additional products, product enhancements,
maintenance and support services and training and consulting services to
existing and new customers. The human resource management and payroll market is
intensely competitive. Our competitors include:
   §
              Large
      service bureaus, primarily ADP and, to a lesser extent,
      Ceridian;
   §
              A
      number of companies, such as PeopleSoft/Oracle, Lawson, Kronos, and
      Workday that offer HRMS/payroll software products for use on mainframes,
      client/server environments and/or Web servers; and, in the UltiPro
      Workplace market, (iii) payroll service providers such as Paychex that
      service companies on the smaller end of the mid-market;
  and
   §
              The
      internal payroll/human resources departments of potential customers which
      use custom-written software.
  10
 Table of Contents
 Our
competitors may develop products that are superior to our products or achieve
greater market acceptance. Many of our competitors or potential competitors have
significantly greater financial, technical and marketing resources than we do.
As a result, they may be able to respond more quickly to new or emerging
technologies and to changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than we can.
We believe that existing competitors and new market entrants will attempt to
develop in-house systems that will compete with our products. We may be unable
to compete successfully against current or future competitors. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address the needs of our prospective customers. Accordingly,
it is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share.
   The
loss of the services of one or more of our key employees could negatively affect
our ability to implement our business strategy.
   Our
success depends to a significant extent upon a limited number of members of
senior executive management and other key employees, including Scott Scherr, our
Chairman of the Board of Directors, President and Chief Executive Officer. We do
not have employment contracts with any of our key personnel other than a
confidentiality agreement with Mr. Scherr. The loss of the services of one
or more of our key employees could have a material adverse effect upon us. In
addition, uncertainty created by turnover of our key employees could cause
further turnover of our employees.
  The
potential growth of our business and expansion of our customer base may place a
significant strain on our management and operations and we may be unable to
manage that growth and expansion successfully.
   We expect
to increase research and development, professional services, sales and marketing
and administrative operations as and when appropriate to accommodate our growth
plans. Accordingly, our future operating results will depend on the ability of
our management and other key employees to continue to implement and improve our
systems for operations, financial control and information management and to
recruit, train, manage and retain our employee base. We cannot be certain that
we will be able to manage any future growth successfully.
   Our
business relies heavily on the products of Microsoft, which may not always be
compatible with our products, and we may be required to spend significant
capital if businesses adopt alternative technologies that are incompatible with
our products.
   Our
software products are designed primarily to operate with Microsoft Corporation
(“Microsoft”) technologies and our strategy requires that our products and
technology be compatible with new developments in Microsoft technology. Although
we believe that Microsoft technologies are currently widely utilized by
businesses of all sizes, we cannot be certain that businesses will continue to
adopt such technologies as anticipated, will migrate from older Microsoft
technologies to newer Microsoft technologies or will not adopt alternative
technologies that are incompatible with our products. As a result, we may be
required to develop new products or improve our existing products to be
compatible with different technologies that may be used by our customers. We
cannot be certain we will be able to adapt our product to any technologies other
than Microsoft’s.
   If
our third-party software is not adequately maintained or updated, our sales
could be materially adversely affected.
   Our
products utilize certain software of third-party software developers from whom
we have either purchased a perpetual license or the underlying source code of
such software. Although we believe that there are alternatives for these
products, any significant interruption in the availability of such third-party
software could have a material adverse impact on our sales unless and until we
can replace the functionality provided by these products. Additionally, we are,
to a certain extent, dependent upon such third parties’ abilities to enhance
their current products, to develop new products on a timely and cost-effective
basis and to respond to emerging industry standards and other technological
changes. We may be unable to replace the functionality provided by the
third-party software currently offered in conjunction with our products in the
event that such software becomes obsolete or incompatible with future versions
of our products or is otherwise not adequately maintained or
updated.
   If
we are unable to release annual or periodic updates on a timely basis to reflect
changes in tax laws and regulations or other regulatory provisions applicable to
our products, the market acceptance of our products may be adversely affected
and our revenues could decline.
   Our
products are affected by changes in tax laws and regulations and generally must
be updated annually or periodically to maintain their accuracy and
competitiveness. We cannot be certain that we will be able to release these
annual or periodic updates on a timely basis in the future. Failure to do so
could have a material adverse effect on market acceptance of our products. In
addition, significant changes in tax laws and regulations or other regulatory
provisions applicable to our products could require us to make a significant
investment in product modifications, which could result in significant
unexpected costs to us.
   11
 Table of Contents
 If
we are unable to protect our proprietary rights against unauthorized third-party
copying or use, our revenues or our methods of doing business could be
negatively impacted.
   Our
success is dependent in part on our ability to protect our proprietary rights.
We rely on a combination of copyright, trademark and trade secret laws, as well
as confidentiality agreements and licensing arrangements, to establish and
protect our proprietary rights. We do not have any patents or patent
applications pending, and existing copyright, trademark and trade secret laws
afford only limited protection. As a result, we cannot be certain that we will
be able to protect our proprietary rights against unauthorized third-party
copying or use. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or reverse engineer aspects of our
products or to obtain and use information that we regard as proprietary. In
addition, others may develop products that perform comparably to our proprietary
products. Policing the unauthorized use of our products is
difficult.
   Litigation
may be necessary in the future to enforce our intellectual property rights, to
protect our trademarks, copyrights or trade secrets or to determine the validity
and scope of the proprietary rights of others; such litigation may be expensive
and divert the attention of management.
   Litigation
may be necessary in the future to enforce our intellectual property rights, to
protect our trademarks, copyrights or trade secrets or to determine the validity
and scope of the proprietary rights of others. Any litigation could result in
substantial costs and diversion of resources and management
attention.
   As is
common in the software industry, from time to time we may become aware of
third-party claims of infringement by our operations or products of third-party
proprietary rights. While we are not currently aware of any such claim, our
software products may increasingly be subject to such claims as the number of
products and competitors in our industry grows, as the functionality of products
overlaps and as the issuance of software patents becomes increasingly common.
Any such claims, with or without merit, can be time consuming and expensive to
defend, cause product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to us, or at all.
  Defects
and errors in our software could affect market acceptance of our
products.
   Software
products such as those offered by us frequently contain undetected errors or
failures when first introduced or as new versions are released. Testing of our
products is particularly challenging because it is difficult to simulate the
wide variety of computing environments in which our customers may use these
products. Despite extensive testing, from time to time we have discovered
defects or errors in our products. Defects and errors may:
   §
              Cause
      delays in product introductions and
shipments;
   §
              Result
      in increased costs and diversion of development
  resources;
   §
              Require
      design modifications; or
   §
              Decrease
      market acceptance of, or customer satisfaction with, our
      products.
  
  Despite
testing by us and by current and potential customers, errors may be found after
commencement of commercial shipments, which may result in loss of or delay in
market acceptance.
   Our
software products may be vulnerable to break-ins and similar disruptive
problems; addressing these issues may be expensive and require a significant
amount of our resources.
   We have
included security features in our products that are intended to protect the
privacy and integrity of customer data. Despite the existence of these security
features, our software products may be vulnerable to break-ins and similar
disruptive problems. Addressing these evolving security issues may be expensive
and require a significant amount of our resources.
   The
sale and support of software products and the performance of related services by
us entail the risk of product liability claims, which could significantly affect
our financial results.
   Customers
use our products in connection with the preparation and filing of tax returns
and other regulatory reports. If any of our products contain errors that produce
inaccurate results upon which users rely, or cause users to misfile or fail to
file required information, we could be subject to liability claims from users.
Our license agreements with our customers typically contain provisions intended
to limit our exposure to such claims, but such provisions may not be effective
in limiting our exposure. Contractual limitations we use may not be enforceable
and may not provide us with adequate protection against product liability claims
in certain jurisdictions. A successful claim for product or service liability
brought against us could result in substantial cost to us and divert
management’s attention from our operations.
  12
 Table of Contents
 Anti-takeover
provisions in our certificate of incorporation and by-laws and under our Amended
and Restated Rights Agreement and Delaware law and our Change in Control Bonus
Plans could substantially increase the cost to acquire us or prevent or delay a
change in control and, as a result, negatively impact our stockholders and the
price of our Common Stock.
   We have
taken a number of actions that could have the effect of discouraging a takeover
attempt. For example, we have adopted an Amended and Restated Rights Agreement
that would cause substantial dilution to a stockholder, and substantially
increase the cost paid by a stockholder, who attempts to acquire us on terms not
approved by our Board of Directors. This could prevent us from being acquired.
Our Board of Directors is divided into three classes, each of whose members
serve for a staggered three-year term. This may prevent a stockholder from
gaining control of our Board of Directors quickly.
   In
addition, our certificate of incorporation grants our Board of Directors the
authority to fix the rights, preferences and privileges of and issue up to
2,500,000 shares of preferred stock without stockholder approval. Although we
have no present intention to issue shares of preferred stock, such an issuance
could have the effect of making it more difficult and less attractive for a
third-party to acquire a majority of our outstanding voting stock. Preferred
stock may also have other rights, including economic rights senior to our common
stock, which could have a material adverse effect on our stock
price.
  We are
also subject to the anti-takeover provisions of Section 203 of Delaware
General Corporation Law. This section provides that a corporation may not engage
in any business combination with any interested stockholder (as defined in that
section) during the three-year period following the time that a stockholder
became an interested stockholder.  This provision could have the
effect of delaying or preventing a change in control of our
company.
 
 We have
adopted two Amended and Restated Change in Control Bonus Plans. One plan
provides for the payment of cash amounts to our three named executive officers,
Scott Scherr, Marc D. Scherr and Mitchell K. Dauerman, upon a “change in
control” of Ultimate. The other plan provides for the payment of cash amounts in
the event of a “change in control” to our employees, other than named executive
officers, designated by the Compensation Committee of our Board of Directors. A
“change in control” would occur if more than 50% of our Common Stock were
acquired by a person or entity other than Ultimate or a subsidiary or employee
benefit plan of ours. There are other conditions that could result in a change
in control event such as a sale or transfer of all or substantially all of our
assets or business. The aggregate amount of payment that may be made to all
participants under the two Amended and Restated Change in Control Bonus Plans
may be as much as 6% of the gross consideration received by us or our
stockholders in a change in control transaction. The Change in Control Bonus
Plans could substantially increase the cost to acquire us.
 
 The
growth of the international operations of our business subjects us to additional
risks associated with foreign operations.
 
 International
operations are subject to risks associated with operating outside of the United
States.  Our international operations are new.  During the
fourth fiscal quarter of 2006, we began operating in the UK (through the
acquisition of a foreign subsidiary) and Canada (through the formation of a
wholly-owned Canadian subsidiary).  The financial impact of our
international operations to our overall business has been insignificant to
date.  However, over time, those international operations may grow and
increase their significance to our business.  Sales to international
customers subject us to a number of risks, including foreign currency
fluctuations, unexpected changes in regulatory requirements for software,
international economic and political instability, compliance with multiple,
conflicting, and changing governmental laws and regulations, difficulty in
staffing and managing foreign operations, international tax laws, potentially
weaker protection for our intellectual property than in the United States, and
difficulties in enforcing such rights abroad.  If sales to any of our
customers outside of the United States are delayed or cancelled because of any
of the above factors, our revenue may be negatively impacted.
 
 Our
international operations also increase our exposure to international laws and
regulations. If we are unable to comply with foreign laws and regulations, which
are often complex and subject to variation and unexpected changes, we could
incur unexpected costs and potential litigation.
  If
our goodwill or amortizable intangible assets become impaired we may be required
to record a significant charge to earnings.
 
 Under
generally accepted accounting principles, we review our amortizable intangible
assets for impairment when events or changes in circumstances indicate the
carrying value may not be recoverable.  Goodwill is required to be
tested for impairment at least annually.  Factors that may be
considered in circumstances indicating that the carrying value of our goodwill
or amortizable intangible assets may not be recoverable include a reduction in
our market capitalization (as a result of a decline in our stock price) to a
level below our consolidated stockholders’ equity as of the applicable balance
sheet date, declining future cash flows, and slower growth rates in our
industry.  We may be required to record a significant charge to
earnings in our financial statements during the period in which any impairment
of our goodwill or amortizable intangible assets is determined, resulting in a
negative impact on our results of operations.
 
 Changes
in, or interpretations of, accounting principles could result in unfavorable
accounting changes.
 
 We
prepare our consolidated financial statements in conformity with U.S. generally
accepted accounting principles and accompanying accounting pronouncements,
implementation guidelines, and interpretations.  Changes in these
rules or their interpretation could significantly change our reported results
and may even retroactively affect previously reported
transactions.  Our accounting principles that recently have been or
may be affected by changes in accounting principles include, but are not limited
to:  software revenue recognition; accounting for stock-based
compensation; accounting for income taxes; and accounting for business
combinations and related goodwill.
 
 Changes
in, or interpretations of, tax rules and regulations may adversely affect our
effective tax rates.
 
 Unanticipated
changes in our tax rates could affect our future results of
operations.  Our future effective tax rates could be unfavorably
affected by changes in tax laws or the interpretation of tax laws, or by changes
in the valuation of our deferred tax assets and liabilities.  In
addition, we are subject to the examination of our income tax returns by the
Internal Revenue Service and other domestic and foreign tax
authorities.  We regularly assess the likelihood of outcomes resulting
from these examinations to determine the adequacy of our provision for income
taxes.  There can be no assurance that these potential examinations
will not have an adverse effect on our operating results and financial
position.
 Item
1B.                      Unresolved
Staff Comments
 
 None.
  13
 Table of Contents
 Item
2.                      Properties
 
 As of December 31, 2008, Ultimate’s
corporate headquarters, and its principal administrative, development, customer
support, finance, marketing and information technology operations were located
in Weston, Florida.  The Company’s principal facilities are described
below:
 
 Size
                    
                    LeaseLocation
                    
                    (sq.
      ft.)
                    
                    Termination
                    
                    General
      UseWeston,
      FL – HQ
                    
                    39,872
                    
                    1/31/2017
                    
                    Research
      and DevelopmentWeston,
      FL – HQ
                    
                    21,392
                    
                    1/31/2018
                    
                    Executive
      Management and Customer SupportAtlanta,
      GA  (1)
                    
                    24,609
                    
                    7/31/2013
                    
                    Professional
      Services and Customer SupportWeston,
      FL – HQ (2)
                    
                    5,000
                    
                    Owned
                    
                    Information
      Technology and Hosting ServicesWeston,
      FL – HQ (3)
                    
                    9,000
                    
                    12/31/2008
                    
                    Professional
      Services and Research and DevelopmentWeston,
      FL – HQ (4)
                    
                    30,000
                    
                    5/31/2015
                    
                    Sales
      Administration, Marketing, Professional Services and
    FinanceSchaumburg,
      Illinois (5)
                    
                    7,861
                    
                    6/30/2014
                    
                    Administration
      and TrainingToronto,
      Ontario  (6)
                    
                    2,251
                    
                    9/30/2009
                    
                    Professional
      Services and Customer SupportHarrogate,
      North Yorkshire, England  (7)
                    
                    5,063
                    
                    2/20/2010
                    
                    UK
      Operations, primarily Research and Development, and Customer
      Support
  
 (1)
              During
      the second fiscal quarter of 2006, the Company entered into a 79-month
      lease agreement with Galleria 600 LLC, in Atlanta, Georgia.  The
      Company moved a portion of its service and support operations into this
      building in August 2006.  In August 2006, the Company amended
      the lease to expand the premises by 10,300 square feet, extend the lease
      term to 2013 and increase the monthly rental
  amount.
 (2)
              In
      December 2004, the Company purchased, with available cash, all the
      available square footage of a building adjacent to its main headquarters
      buildings that serves as an extension of the Company’s corporate
      headquarters.
 (3)
              In
      August 2005, the Company entered into a five-year lease agreement for a
      fourth headquarters building located in Weston, Florida near the other
      three locations. The Company moved a portion of its operations into this
      building in April 2006 and terminated this lease in December
      2008.
 (4)
              In
      January 2008, the Company entered into an 84-month lease agreement for a
      fifth headquarters building located in Weston, Florida within a short
      distance of the other four headquarters locations.  The Company
      moved a portion of its operations into this building in June 2008. After
      this move, the Company modified the general use of the remaining four
      headquarters locations.
 (5)
              During
      the fourth quarter of 2008, the Company entered into a 65 month lease
      agreement for office space in Schaumburg, Illinois to accommodate general
      office space and training
facilities.
 (6)
              During
      the third fiscal quarter of 2006, the Company entered into a three-year
      lease agreement for office space in Toronto, Ontario, to accommodate
      future growth into Canada.
 (7)
              As
      part of the RTIX Acquisition in the fourth fiscal quarter of 2006, the
      Company assumed a five-year lease for office space used for the UK
      operations.
 In
addition, the Company presently leases office space for its sales operations in
Albany, New York; Atlanta, Georgia; Dallas, Texas; Detroit, Michigan; Millburn,
New Jersey; Nashville, Tennessee; Ridgeland, Mississippi; Lee’s Summit,
Missouri; Troy, Michigan; Ann Arbor, Michigan; and Overland Park, Kansas. Sales
operations in other locations are not supported by leased office
space.  The Company believes that its existing facilities are suitable
and adequate for its current operations for the next 12 months. The Company
further believes that suitable space will be available as needed to accommodate
any expansion of its operations on commercially reasonable terms.
 
 14
 Table of Contents
 Item
3.                      Legal
Proceedings
 
 From time
to time, the Company is involved in litigation relating to claims arising out of
its operations in the normal course of business. The Company is not currently a
party to any legal proceedings the adverse outcome of which, individually or in
the aggregate, could reasonably be expected to have a material adverse effect on
the Company’s operating results or financial condition.
 
 Item
4.                      Submission
of Matters to a Vote of Security Holders
 
 No
matters were submitted to a vote of security holders during the fourth quarter
of 2008.
  PART
II
 
 Item
5.                      Market
for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
 
 Market
Information.  The following table sets forth, for the periods
indicated, the high and low sales prices of the Company’s Common Stock, as
quoted on the NASDAQ Global Select Market (“NASDAQ”).
 
 
 
 2008
                            
                            
                            2007High
                            
                            
                            Low
                            
                            
                            High
                            
                            
                            LowFirst
      Quarter
                            
                            $
                            32.40
                            
                            
                            $
                            25.20
                            
                            
                            $
                            28.30
                            
                            
                            $
                            21.79Second
      Quarter
                            
                            
                            41.68
                            
                            
                            
                            29.73
                            
                            
                            
                            30.27
                            
                            
                            
                            25.68Third
      Quarter
                            
                            
                            37.25
                            
                            
                            
                            23.12
                            
                            
                            
                            36.50
                            
                            
                            
                            26.56Fourth
      Quarter
                            
                            
                            26.82
                            
                            
                            
                            10.70
                            
                            
                            
                            36.63
                            
                            
                            
                            30.50
 
 
 As of
February 15, 2008, the Company had approximately 135 holders of record,
representing approximately 3,710 stockholder accounts.
 
 The
Company has never declared or paid any cash dividends on its capital stock and
does not anticipate paying any cash dividends in the foreseeable future. The
Company currently intends to retain future earnings to fund the development and
growth of its business. The payment of dividends in the future, if any, will be
at the discretion of the Board of Directors.
 
 15
 Table of Contents
 Securities Authorized for Issuance
Under Equity Compensation Plans.
 
 The
following table summarizes the securities authorized for issuance under the
Company’s equity compensation plans as of December 31, 2008:
 
 Equity Compensation Plan
      Information(
      a )
                        
                        
                        
                        (
      c )Number
      of
                        
                        
                        
                        Number
      of SecuritiesSecurities
      to be
                        
                        (
      b )
                        
                        Remaining
      Available forIssued
      upon
                        
                        Weighted
      – Average
                        
                        Future
      Issuance underExercise
      of
                        
                        Exercise
      Price of
                        
                        Equity
      CompensationOutstanding
                        
                        Outstanding
                        
                        Plans
      (ExcludingOptions,
      Warrants
                        
                        Options,
      Warrants
                        
                        Securities
      Reflected inPlan
      Category
                        
                        and
      Rights
                        
                        and
      Rights
                        
                        Column
      ( a )Equity
      compensation plans approvedby
      security holders
                        
                        5,009,935
                        
                        $
      16.86
                        
                        934,921Equity
      compensation plans not approvedby
      security holders
                        
                        –
                        
                        –
                        
                        –Total
                        
                        5,009,935
                        
                        $
      16.86
                        
                        934,921
   Performance
Graph.  The following graph compares the cumulative total
stockholder returns on the Company’s Common Stock for the five year period
covering December 31, 2003-December 31, 2008, on an annual basis, with the
cumulative total return of The Nasdaq Composite Index and the RDG Software
Composite Index for the same period.
 
 
 16
 Table of Contents
 
 Purchases
of Equity Securities by the Issuer.On October 30, 2000,
the Company announced that its Board of Directors authorized the repurchase of
up to 1,000,000 shares of the Company’s outstanding Common Stock (the “Stock
Repurchase Plan”).
 
 On
February 6, 2007, the Company’s Board of Directors extended the Stock Repurchase
Plan by authorizing the repurchase of up to 1,000,000 additional shares of the
Company’s issued and outstanding Common Stock.
 
 On
February 5, 2008, the Company’s Board of Directors extended the Stock Repurchase
Plan further by authorizing the repurchase of up to 1,000,000 additional shares
of the Company’s Common Stock.
 
 As
of December 31, 2008, the Company had purchased 2,533,575 shares of the
Company’s Common Stock under the Stock Repurchase Plan, with 466,425 shares
available for repurchase in the future.  The details of Common Stock
repurchases for the twelve months ended December 31, 2008 are as
follows:
  
 Total
      Cumulative Number of
                                        Maximum
      Number ofShares
      Purchased as Part
                                        Shares
      That May YetTotal
      Number of
                                        Average
      Price
                                        Of
      Publicly Announced
                                        Be
      Purchased Under thePeriod
                                        Shares Purchased (1)
                                        Paid per Share
                                        Plans or Programs
                                        Plans or ProgramsJanuary
      1 – 31, 2008
                                        –
                                        –
                                        –
                                        547,625February
      1 – 29, 2008
                                        334,500
                                        28.32
                                        1,786,875
                                        1,213,125
      (2)March
      1 – 31, 2008
                                        –
                                        –
                                        1,786,875
                                        1,213,125April
      1 – 30, 2008
                                        –
                                        –
                                        1,786,875
                                        1,213,125May
      1 – 31, 2008
                                        220,200
                                        34.97
                                        2,007,075
                                        992,925June
      1 – 30, 2008
                                        13,300
                                        37.50
                                        2,020,375
                                        979,625July
      1 – 31, 2008
                                        –
                                        –
                                        2,020,375
                                        979,625August
      1 – 31, 2008
                                        155,100
                                        25.90
                                        2,175,475
                                        824,525September
      1 – 30, 2008
                                        –
                                        –
                                        2,175,475
                                        824,525October
      1 – 31, 2008
                                        –
                                        –
                                        2,175,475
                                        824,525November
      1 – 30, 2008
                                        358,100
                                        13.97
                                        2,533,575
                                        466,425December
      1 – 31, 2008
                                        –
                                        –
                                        2,533,575
                                        466,425Total
                                        1,081,200
                                        $  23.48
                                        2,533,575
                                        466,425(1)  All
      shares were purchased through the publicly announced Stock Repurchase Plan
      in open-market transactions.(2)
      On February 5, 2008, the Company announced that its Board of Directors
      authorized the repurchase of up to 1,000,000 additional shares of the
      Company’s Common Stock pursuant to the Stock Repurchase
    Plan.
 
  17
 Table of Contents
  Item
6.                      Selected
Financial Data
 
 The
following selected consolidated financial data is qualified by reference to and
should be read in conjunction with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and the Company’s Consolidated
Financial Statements and Notes thereto included elsewhere in this Form 10-K. The
statements of operations data presented below for each of the years in the
three-year period ended December 31, 2008 and the balance sheet data as of
December 31, 2008 and 2007 have been derived from the Company’s Consolidated
Financial Statements included elsewhere in this Form 10-K.
 
 Years Ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006
                            
                            
                            2005
                            
                            
                            2004(In
      thousands, except per share data)Statements
      of Operations Data:Revenues:Recurring
                            
                            $
                            106,681
                            
                            
                            $
                            87,017
                            
                            
                            $
                            63,935
                            
                            
                            $
                            50,259
                            
                            
                            $
                            39,049Services
                            
                            
                            60,627
                            
                            
                            
                            49,857
                            
                            
                            
                            38,617
                            
                            
                            
                            27,894
                            
                            
                            
                            24,924License
                            
                            
                            11,264
                            
                            
                            
                            14,590
                            
                            
                            
                            12,259
                            
                            
                            
                            10,450
                            
                            
                            
                            8,055Total
      revenues
                            
                            
                            178,572
                            
                            
                            
                            151,464
                            
                            
                            
                            114,811
                            
                            
                            
                            88,603
                            
                            
                            
                            72,028Cost
      of revenues:Recurring
                            
                            
                            29,754
                            
                            
                            
                            22,798
                            
                            
                            
                            17,875
                            
                            
                            
                            13,740
                            
                            
                            
                            11,961Services
                            
                            
                            50,106
                            
                            
                            
                            40,327
                            
                            
                            
                            30,256
                            
                            
                            
                            21,410
                            
                            
                            
                            18,448License
                            
                            
                            1,795
                            
                            
                            
                            1,659
                            
                            
                            
                            1,389
                            
                            
                            
                            709
                            
                            
                            
                            993Total
      cost of revenues
                            
                            
                            81,655
                            
                            
                            
                            64,784
                            
                            
                            
                            49,520
                            
                            
                            
                            35,859
                            
                            
                            
                            31,402Gross
      profit
                            
                            
                            96,917
                            
                            
                            
                            86,680
                            
                            
                            
                            65,291
                            
                            
                            
                            52,744
                            
                            
                            
                            40,626Operating
      expenses:Sales
      and marketing
                            
                            
                            47,193
                            
                            
                            
                            36,479
                            
                            
                            
                            29,382
                            
                            
                            
                            21,783
                            
                            
                            
                            20,630Research
      and development
                            
                            
                            36,738
                            
                            
                            
                            28,162
                            
                            
                            
                            22,471
                            
                            
                            
                            19,999
                            
                            
                            
                            18,317General
      and administrative
                            
                            
                            17,623
                            
                            
                            
                            14,434
                            
                            
                            
                            10,648
                            
                            
                            
                            8,131
                            
                            
                            
                            6,806Total
      operating expenses
                            
                            
                            101,554
                            
                            
                            
                            79,075
                            
                            
                            
                            62,501
                            
                            
                            
                            49,913
                            
                            
                            
                            45,753Operating
      income (loss)
                            
                            
                            (4,637
                            )
                            
                            
                            7,605
                            
                            
                            
                            2,790
                            
                            
                            
                            2,831
                            
                            
                            
                            (5,127
                            )Other
      income (expense):Interest
      expense
                            
                            
                            (279
                            )
                            
                            
                            (214
                            )
                            
                            
                            (195
                            )
                            
                            
                            (225
                            )
                            
                            
                            (182
                            )Interest
      and other income
                            
                            
                            860
                            
                            
                            
                            6,002
                            
                            
                            
                            1,538
                            
                            
                            
                            819
                            
                            
                            
                            285Total
      other income (expense), net
                            
                            
                            581
                            
                            
                            
                            5,788
                            
                            
                            
                            1,343
                            
                            
                            
                            594
                            
                            
                            
                            103Income
      (loss) before income taxes
                            
                            
                            (4,056
                            )
                            
                            
                            13,393
                            
                            
                            
                            4,133
                            
                            
                            
                            3,425
                            
                            
                            
                            (5,024
                            )Income
      tax benefit, net
                            
                            
                            1,159
                            
                            
                            
                            19,736
                            
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            –Net
      income (loss)
                            
                            $
                            (2,897
                            )
                            
                            $
                            33,129
                            
                            
                            $
                            4,133
                            
                            
                            $
                            3,425
                            
                            
                            $
                            (5,024
                            )Net
      income (loss) per share – Basic (1)
                            
                            $
                            (0.12
                            )
                            
                            $
                            1.34
                            
                            
                            $
                            0.17
                            
                            
                            $
                            0.15
                            
                            
                            $
                            (0.23
                            )Net
      income (loss) per share – Diluted (1)
                            
                            $
                            (0.12
                            )
                            
                            $
                            1.24
                            
                            
                            $
                            0.15
                            
                            
                            $
                            0.13
                            
                            
                            $
                            (0.23
                            )Weighted
      average number of shares outstanding:Basic
      (1)
                            
                            
                            24,588
                            
                            
                            
                            24,701
                            
                            
                            
                            23,853
                            
                            
                            
                            23,040
                            
                            
                            
                            21,743Diluted
      (1)
                            
                            
                            24,588
                            
                            
                            
                            26,722
                            
                            
                            
                            26,978
                            
                            
                            
                            26,288
                            
                            
                            
                            21,743Balance
      Sheet Data:
                            
                            As of December 31,2008
                            
                            
                            2007
                            
                            
                            2006
                            
                            
                            2005
                            
                            
                            2004Cash
      and cash equivalents
                            
                            $
                            17,200
                            
                            
                            $
                            17,462
                            
                            
                            $
                            16,734
                            
                            
                            $
                            17,731
                            
                            
                            $
                            14,766Investments
      in marketable securities
                            
                            
                            5,805
                            
                            
                            
                            18,418
                            
                            
                            
                            16,286
                            
                            
                            
                            15,035
                            
                            
                            
                            10,544Total
      assets
                            
                            
                            147,257
                            
                            
                            
                            135,156
                            
                            
                            
                            93,530
                            
                            
                            
                            69,581
                            
                            
                            
                            52,546Deferred
      revenue
                            
                            
                            63,494
                            
                            
                            
                            51,708
                            
                            
                            
                            42,969
                            
                            
                            
                            33,031
                            
                            
                            
                            28,476Long-term
      borrowings, including capital lease obligations
                            
                            
                            1,519
                            
                            
                            
                            2,311
                            
                            
                            
                            1,610
                            
                            
                            
                            1,828
                            
                            
                            
                            1,231Stockholders’
      equity
                            
                            
                            51,072
                            
                            
                            
                            60,978
                            
                            
                            
                            31,022
                            
                            
                            
                            23,546
                            
                            
                            
                            13,524
 (1)
              See
      Note 8 of the Notes to Consolidated Financial Statements for information
      regarding the computation of net income (loss) per
  share.
 
 
 18
 Table of Contents
 Item
7.                      Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
 
 Our
Management’s Discussion and Analysis of Financial Condition and Results of
Operations provides information we believe is relevant to an assessment and
understanding of our results of operations and financial
condition.  This discussion should be read in conjunction with our
Consolidated Financial Statements and Notes that are included in this Form
10-K.  Also, the discussion of Critical Accounting Estimates in this
section is an integral part of the analysis of our results of operations and
financial condition.
 
 Executive
Summary
 
 The
Ultimate Software Group, Inc. and subsidiaries (“Ultimate” or the “Company”)
designs, markets, implements and supports human resources (“HR”), payroll and
talent management solutions principally in the United States and
Canada.
 
 Ultimate’s
UltiPro software (“UltiPro”) is a comprehensive Internet-based solution designed
to deliver the functionality businesses need to manage the complete employment
life cycle from recruitment to retirement. The solution includes feature-sets
for talent acquisition and onboarding, HR management and compliance, benefits
management and online enrollment, payroll, performance management, salary
planning and budgeting, reporting and analytical decision-making tools, time and
attendance, and a self-service Web portal for executives, managers,
administrators, and employees.
 
 Ultimate’s
software-as-a-service (“SaaS”) offering, branded “Intersourcing” (the
“Intersourcing Offering”), provides on-line access to comprehensive human
capital management functionality for organizations that need to simplify the
information technology (“IT”) support requirements of their business
applications. Through the Intersourcing Offering, Ultimate provides the
hardware, infrastructure, ongoing maintenance and backup services for its
customers at two data centers located in the Miami, Florida and Atlanta, Georgia
areas.  Both data centers are owned and operated by a third-party,
Quality Technology Services (“QTS”). QTS is one of the largest privately-held
providers of data center facilities and management services in the United
States.
 
 UltiPro
is available as two solution suites based on company size.  UltiPro
Enterprise (“Enterprise”) was developed to address the needs of large and very
large companies (700 or more employees and including companies as large as
15,000 employees and larger) and is delivered as either SaaS or an on-premise
solution.  UltiPro Workplace (“Workplace”) was developed for companies
in the mid-market (200 to 700 employees) and is delivered exclusively as
SaaS.  UltiPro Workplace provides medium-sized and smaller companies
with nearly all the features that larger Enterprise companies have with UltiPro,
plus a bundled service package. Since many companies in this market do not have
IT staff on their premises to help with system issues, UltiPro Workplace is
designed to give these customers a high degree of convenience by handling system
setup, business rules, and other situations for customers “behind the
scenes.”  UltiPro is marketed primarily through the Company’s
Enterprise and Workplace direct sales teams.
 
 In
addition to UltiPro’s core HR/payroll functionality, the Company’s customers
have the option to purchase a number of additional features on a
per-employee-per-month (or “PEPM”) basis, which are available to enhance the
functionality of UltiPro’s core features based on certain business needs of the
customers.  These optional UltiPro features currently include (i) the
talent management suite of products; (ii) benefits enrollment; (iii) time,
attendance and scheduling; (iv) time management, (v) tax filing; (vi) wage
attachments; and (vii) other optional features (collectively, UltiPro “Optional
Features”). All Optional Features are individually priced solely on a
subscription basis with some of the Optional Features available to both
Enterprise and Workplace customers while others are available exclusively to
either Enterprise or Workplace customers, based on the needs of the respective
customers, including their employee size and the complexity of their HR/payroll
environment.
 
 Ultimate
has two primary revenue sources:  recurring revenues and services
revenues.  Intersourcing revenues and maintenance revenues are the
primary components of recurring revenues in the Company’s audited consolidated
statements of operations.  The majority of services revenues are
derived from implementation services and, to a lesser extent, training services.
In addition to recurring revenues and services revenues, Ultimate has marketed
UltiPro on a perpetual license basis since its inception, through which it has
recognized license revenues.  For 2006, 2007 and 2008, license
revenues, as a percentage of total revenues, represented 10.7%, 9.6% and 6.3%,
respectively.
 
 Effective
April 1, 2009, Ultimate will discontinue selling its on-site UltiPro solutions
on a perpetual license basis, although the Company will continue to sell on-site
UltiPro solutions on a subscription basis (which is priced and billed to
customers on a PEPM basis). After the elimination of new sales of perpetual
licenses, the variable costs associated with licenses, such as sales
commissions, will also be eliminated. However, there will remain certain fixed
third-party costs that were formerly allocated to costs of license revenues (in
proportion to their contribution to the total sales mix) which will be shifted
to costs of recurring revenues. As perpetual license agreements are sold, annual
maintenance contracts (priced as a percentage of the related license fee)
accompany those agreements.  Maintenance contracts typically have a
one-year term with annual renewal periods thereafter.  The Company has
historically maintained a customer retention rate for its renewal maintenance
agreements of 96% and does not foresee its decision to discontinue new sales of
perpetual license agreements to materially affect its future maintenance
revenues (as they relate to existing license customers).
 
 As
Intersourcing units are sold, the recurring revenue backlog associated with
Intersourcing grows, enhancing the predictability of future revenue
streams.  Intersourcing sales include a one-time upfront (or setup)
fee, priced on a per-employee basis, and ongoing monthly fees, priced on a PEPM
basis.  Revenue recognition for Intersourcing is triggered when the
related customer processes its first payroll (or goes “Live”).  When
an Intersourcing customer goes Live, the related upfront fees are recognized as
recurring subscription revenues ratably over the term of the related contract
(typically 24 months) and the Company begins recognizing the associated ongoing
monthly PEPM fees.
 
 In
connection with the Company’s business strategy, an internal financial metric
used by the Company in measuring financial performance is new annual recurring
revenues (“ARR”).  ARR represent the expected one-year value from (i)
new Intersourcing sales (including prorated one-time fees); (ii) maintenance
revenues related to new software license sales; and (iii) recurring revenues
from additional sales to Ultimate’s existing customer base.
 
 New ARR
attributable to sales during 2008 were $41.3 million as compared to $31.1
million for 2007.  The main contributors to the increase in new ARR
were new sales of the Company’s Intersourcing Offering, including sales of
UltiPro Enterprise and UltiPro Workplace (including prorated one-time
fees).
 
  19
  Critical
Accounting Estimates
  The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles in the United States (“GAAP”) requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
  Revenue
Recognition
 
 Sources
of revenue for the Company are as follows:
  1)
              Recurring
      revenues, which include:
  o
              Subscription
      revenues generated from sales of the right to use UltiPro through
      Intersourcing, which includes Hosting Services (defined below), with the
      relevant elements as follows:
  §
              Upfront
      one-time fees priced on a per-employee basis;
  and
  §
              Monthly
      subscription revenues, priced on a PEPM
basis.
  o
              Maintenance
      revenues generated from maintaining, supporting and providing periodic
      updates for the Company’s UltiPro solutions sold under software license
      agreements:
  §
              Renewal
      maintenance associated with perpetual license agreements sold in prior
      periods and related to an existing customer
  base;
  §
              First
      year maintenance associated with new perpetual license agreements or those
      which are still in the initial contract period (see discussion below
      regarding the cessation of future perpetual license sales effective April
      1, 2009);
  o
              Subscription
      revenues generated from sales of services to host the UltiPro application
      (“Hosting Services”) in conjunction with sales of perpetual licenses of
      UltiPro;
  o
              Subscription
      revenues generated from sales of Hosting Services on a stand-alone basis
      to customers who already own a perpetual license (“Base
      Hosting”);
  o
              Subscription
      revenues generated from the Original Ceridian Agreement (an agreement
      signed in 2001, subsequently amended and terminated on March 9, 2008,
      granting Ceridian Corporation a non-exclusive license to use UltiPro as
      part of an on-line offering to market primarily to businesses with less
      than 500 employees); and, to a lesser
extent;
  o
              Subscription
      revenues generated from PEPM fees related to sales of UltiPro by
      independent business service providers
  (“BSP’s”).
  
 2)
              Sales
      of services including implementation of the Company’s UltiPro solutions
      (representing the majority of services revenues), training (also known as
      knowledge management) and other services, including the provision of
      payroll-related forms and the printing of Form W-2’s for certain
      customers;
  3)
              Sales
      of perpetual licenses for UltiPro:
  o
              Effective
      April 1, 2009, Ultimate will discontinue selling its on-site UltiPro
      solutions on a perpetual license basis, although the Company will continue
      to sell on-site UltiPro solutions on a subscription basis (or on a PEPM
      basis).
  
  20
  Recurring
Revenues
   Sales
Generated from the Intersourcing Offering
  Subscription
revenues generated from the Intersourcing Offering are recognized in accordance
with Emerging Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with
Multiple Deliverables” (“EITF No. 00-21”) as a services arrangement since the
customer is purchasing the right to use UltiPro rather than licensing the
software on a perpetual basis. Fair value of multiple elements in Intersourcing
arrangements is assigned to each element based on the guidance provided by EITF
No. 00-21.
  The
elements that typically exist in Intersourcing arrangements include Hosting
Services, the right to use UltiPro, maintenance of UltiPro (i.e., product
enhancements and customer support) and professional services (i.e.,
implementation services and training in the use of UltiPro).  The
pricing for Hosting Services, the right to use UltiPro and maintenance of
UltiPro is bundled (the “Bundled Elements”).  Since these three
Bundled Elements are components of recurring revenues in the consolidated
statements of operations, allocation of fair values to each of the three
elements is not necessary and they are not reported separately.  Fair
value for the Bundled Elements, as a whole, is based upon evidence provided by
the Company’s pricing for Intersourcing arrangements sold
separately.  The Bundled Elements are provided on an ongoing basis and
represent undelivered elements under EITF No. 00-21; they are recognized on a
monthly basis as the services are performed, once the customer processes its
first live payroll (i.e., goes “Live”).
  Implementation
and training services (the “Professional Services”) provided for Intersourcing
arrangements are typically priced on a time and materials basis and are
recognized as services revenue in the consolidated statements of operations as
the services are performed.  Under EITF No. 00-21, fair value is
assigned to service elements in the arrangement based on their relative fair
values, using the prices established when the services are sold on a stand-alone
basis.  Fair value for Professional Services is based on the
respective Implementation Valuation (defined below) and Training Valuation
(defined below).  If evidence of the fair value of one or more
undelivered elements does not exist, the revenue is deferred and recognized when
delivery of those elements occurs or when fair value can be
established.
  The
Company believes that applying EITF No. 00-21 to Intersourcing arrangements as
opposed to applying American Institute of Certified Public Accountants (“AICPA”)
Statement of Position (“SOP”) 97-2, “Software Revenue Recognition” (“SOP 97-2”),
is appropriate given the nature of the arrangements whereby the customer has no
right to the UltiPro license.
  Sales
of Base Hosting Services
 
 Subscription
revenues generated from Base Hosting are recognized in accordance with EITF No.
00-3, “Application of AICPA Statement of Position 97-2 to Arrangements that
Include the Right to Use Software Stored on Another Entity’s Hardware” (“EITF
No. 00-3”), which provides guidance as to the application of SOP 97-2 to hosting
arrangements that include a license right to the software.  The
elements that typically exist for Base Hosting arrangements include Hosting
Services and implementation services.  Base Hosting is different than
Intersourcing arrangements in that the customer already owns a perpetual license
and is subsequently adding Hosting Services or is purchasing a perpetual license
for UltiPro together with Hosting Services, whereas, with Intersourcing, the
customer is purchasing the right to use (not license) UltiPro together with
Hosting Services.  Implementation services provided for Base Hosting
arrangements, whereby the customer already owns a perpetual license, are less
than those provided for Intersourcing arrangements since UltiPro is already
implemented in these Base Hosting arrangements and only needs to be transitioned
to a hosted environment.  Fair value for Hosting Services is based on
the Hosting Valuation (defined below). The fair value for implementation
services is based on the Implementation Valuation in accordance with guidelines
provided by SOP 97-2.
 Revenue
Recognition for Elements included in Recurring Revenues
  Recurring
revenues include subscription revenues and maintenance revenues.
  Subscription revenuesare principally derived from PEPM fees earned through the Intersourcing
Offering, Base Hosting and, to a lesser extent, the BSP sales channel, as well
as revenues generated from the Original Ceridian Agreement (which terminated
March 9, 2008).
  To the
extent there are upfront (or setup) fees associated with the Intersourcing
Offering, Base Hosting or the BSP sales channel, subscription revenues are
recognized ratably over the minimum term of the related contract upon the
delivery of the product and services.  In the cases of Intersourcing
and Base Hosting sales, delivery of the services is when the customer processes
its first payroll (or goes “Live”), at which time amortization of the upfront
fees commences and extends until the end of the initial contract
period.  In the case of BSP channel sales, amortization of the upfront
fee typically commences when the contract is signed, which is when the BSP’s
rights under the agreement begin, continuing until the initial contract term
ends.  Ongoing PEPM fees from the Intersourcing Offering, Base Hosting
and the BSP sales channel are recognized as subscription revenue as the services
are delivered, typically on a monthly basis.
  Subscription
revenues from the Original Ceridian Agreement of $1.5 million were recognized in
2008 through the agreement’s termination date on March 8, 2008.  For
each of the years ended December 31, 2007 and 2006, $642,000 per month (or $7.7
million per year) of subscription revenues was recognized.
  Subscription
revenues generated from the BSP sales channel include both the right to use
UltiPro and maintenance.  The BSP is charged a fee on a PEPM
basis.  Revenue is recognized on a PEPM basis as the services are
provided to the underlying customer.  To the extent the BSP pays the
Company a one-time upfront fee, the Company accounts for such fee by recognizing
it as subscription revenue over the minimum term of the related
agreement.
  Maintenance revenues
are derived from maintaining, supporting and providing periodic updates for the
Company’s software.  Maintenance and support fees are generally priced
as a percentage of the initial license fee for the underlying
products.  Maintenance services provided to customers include product
updates and technical support services.  Product updates are included
in general releases to the Company’s customers and are distributed on a periodic
basis.  Such updates may include, but are not limited to, product
enhancements, payroll tax updates, additional security features or bug fixes.
All features provided in general releases are unspecified upgrade rights. To the
extent specified upgrade rights or entitlements to future products are included
in a multi-element arrangement, revenue is recognized upon delivery provided
fair value for the elements exists.  In multi-element arrangements
that include a specified upgrade right or entitlement to a future product, if
fair value does not exist for all undelivered elements, revenue for the entire
arrangement is deferred until all elements are delivered or when fair value can
be established. Maintenance revenues are recognized ratably over the service
period, generally one year.  Annual maintenance renewal fees which
occur subsequent to the initial contract period are also recognized ratably over
the related service period.
  21
 Table of Contents
 Services
Revenues
  Sales
of Services, including Implementation and Training Services, and Related Revenue
Recognition
  Services revenues
include revenues from fees charged for the implementation of the Company’s
software products and training of customers in the use of such products, fees
for other services, including services provided to BSP’s, the provision of
payroll-related forms and the printing of Form W-2’s for certain customers, as
well as certain reimbursable out-of-pocket expenses.  Revenues for
implementation consulting and training services are recognized as services are
performed to the extent the pricing for such services is on a time and materials
basis. Other services are recognized as the product is shipped or as the
services are rendered depending on the specific terms of the
arrangement.
  Arrangement
fees related to fixed-fee implementation services contracts are recognized using
the percentage of completion accounting method, which involves the use of
estimates.  Percentage of completion is measured at each reporting
date based on hours incurred to date compared to total estimated hours to
complete.  If a sufficient basis to measure the progress towards
completion does not exist, revenue is recognized when the project is completed
or when the Company receives final acceptance from the customer.
  The
Company recognizes revenue in accordance with the Securities Exchange Commission
(“SEC”) Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial
Statements” (“SAB No. 101”) and the SEC Staff Accounting Bulletin No. 104,
“Revenue Recognition” (“SAB No. 104”). Management believes the Company is
currently in compliance in all material aspects with the current provisions set
forth in SOP 97-2, SOP 98-9 “Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions” (“SOP 98-9”), EITF No. 00-21,
EITF No. 00-3, SAB No. 101 and SAB No. 104.
 
 License
Revenues
  Sales
of Perpetual Licenses for UltiPro Sold With or Without Hosting
Services
  Sales of
perpetual licenses for UltiPro and sales of perpetual licenses for UltiPro in
conjunction with Hosting Services are multiple-element arrangements that involve
the sale of software and consequently fall under the guidance of SOP 97-2 for
revenue recognition.
 
  The
Company licenses software under non-cancelable license agreements and provides
services including maintenance, implementation consulting and training services.
In accordance with the provisions of SOP 97-2, license revenues are generally
recognized when (1) a non-cancelable license agreement has been signed by both
parties, (2) the product has been shipped, (3) no significant vendor obligations
remain and (4) collection of the related receivable is considered
probable.  To the extent any one of these four criteria is not
satisfied, license revenue is deferred and not recognized in the audited
consolidated statements of operations until all such criteria are
met.
 
 For
multiple-element software arrangements, each element of the arrangement is
analyzed and the Company allocates a portion of the total fee under the
arrangement to the elements based on vendor-specific objective evidence of fair
value of the element (“VSOE”), regardless of any separate prices stated within
the contract for each element. Fair value for the elements of multiple-element
software arrangements is considered to be the price a customer would be required
to pay when the element is sold separately.
 
 The
Residual Method (as defined below) is used to recognize revenue when a license
agreement includes one or more elements to be delivered at a future date and
VSOE of the fair value of all undelivered elements exists.  The fair
value of the undelivered elements is determined based on the historical evidence
of stand-alone sales of these elements to customers.  Undelivered
elements in a license arrangement typically include maintenance, implementation
and training services (the “Standard Undelivered Elements”).  The fair
value for maintenance fees is based on the price of the services sold
separately, which is determined by the annual renewal rate historically and
consistently charged to customers (the “Maintenance
Valuation”).  Maintenance fees are generally priced as a percentage of
the related license fee.  The fair value for implementation services
is based on standard pricing (i.e., rate per hour charged to customers for
implementation services), for stand-alone sales of implementation services (the
“Implementation Valuation”).  The fair value for training services is
based on standard pricing (i.e., rate per training day charged to customers for
class attendance), taking into consideration stand-alone sales of training
services through year-end seminars and historically consistent pricing for such
services (the “Training Valuation”).  Under the residual method (the
“Residual Method”), the fair value of the undelivered elements is deferred and
the remaining portion of the arrangement fee attributable to the delivered
element, the license fee, is recognized as license revenue.  If VSOE
for one or more undelivered elements does not exist, the revenue is deferred on
the entire arrangement until the earlier of the point at which (i) such VSOE
does exist or (ii) all elements of the arrangement have been
delivered.
  Perpetual
licenses of UltiPro sold without Hosting Services typically include a license
fee and the Standard Undelivered Elements.  Fair value for the
Standard Undelivered Elements is based on the Maintenance Valuation, the
Implementation Valuation and the Training Valuation.  The delivered
element of the arrangement, the license fee, is accounted for in accordance with
the Residual Method.
  Perpetual
licenses of UltiPro sold with Hosting Services typically include a license fee,
the Standard Undelivered Elements and Hosting Services.  Fair value
for the Standard Undelivered Elements is based on the Maintenance Valuation, the
Training Valuation and the Implementation Valuation.  Hosting Services
are delivered to customers on a PEPM basis over the term of the related customer
contract (“Hosting PEPM Services”).  Upfront fees charged to customers
represent fees for the hosting infrastructure, including hardware costs,
third-party license fees and other upfront costs incurred by the Company in
relation to providing such services (“Hosting Upfront Fees”).  Hosting
PEPM Services and Hosting Upfront Fees (collectively, “Hosting Services”)
represent undelivered elements in the arrangement since their delivery is over
the course of the related contract term.  The fair value for Hosting
Services is based on standard pricing (i.e., rate charged PEPM), taking into
consideration stand-alone sales of Hosting Services through the sale of such
services to existing customers (i.e., those who already own the UltiPro
perpetual license at the time Hosting Services are sold to them) and
historically consistent pricing for such services (the “Hosting
Valuation”).  The delivered element of the arrangement, the license
fee, is accounted for in accordance with the Residual Method.
  The
Company’s customer contracts are non-cancelable agreements.  The
Company does not provide for rights of return or price protection on its
software.  The Company provides a limited warranty that its software
will perform in accordance with user manuals for varying periods, which are
generally less than one year from the contract date.  The Company’s
customer contracts generally do not include conditions of
acceptance.  However, if conditions of acceptance are included in a
contract or uncertainty exists about customer acceptance of the software,
license revenue is deferred until acceptance occurs.
  Effective
April 1, 2009, Ultimate will discontinue selling its on-site UltiPro solutions
on a perpetual license basis, although the Company will continue to sell on-site
UltiPro solutions on a subscription basis (which is priced and billed to
customers on a PEPM basis).
  22
 Table of Contents
 Income
Taxes
 
 The Company makes certain estimates and
judgments in determining income tax expense for financial statement
purposes.  These estimates and judgments occur in the calculation of
certain tax assets and liabilities, which arise from differences in the timing
of recognition of revenue and expense for tax and financial statement
purposes.
 
 The Company assesses the likelihood
that it will be able to recover its deferred tax assets.  Management
considers all available evidence, both positive and negative, including
historical levels of income, expiration of net operating loss carryforwards,
expectations and risks associated with estimates of future taxable income and
ongoing prudent and feasible tax planning strategies as well as current tax laws
and interpretation of current tax laws in assessing the need for a valuation
allowance.  If recovery is not likely, we record a valuation allowance
against the deferred tax assets that we estimate will not ultimately be
recoverable.  The available positive evidence at December 31, 2008
included, among other factors, three years of cumulative historical operating
profits and a projection of future financial and taxable income.  As a
result of our analysis of all available evidence, both positive and negative, at
December 31, 2008, it was considered more likely than not that a full valuation
allowance for deferred tax assets was not required.
 
 As of December 31, 2008, the Company
believes it is more likely than not that the amount of the deferred tax assets
recorded on the balance sheet will ultimately be recovered.  However,
should there be a change in the Company’s ability to recover the deferred tax
assets, the tax provision would increase in the period in which it is determined
that recovery is not probable.
 
 Stock-Based
Compensation
 
 The
Company’s Amended and Restated 2005 Equity and Incentive Plan (the “Plan”)
authorizes the grant of options to non-employee directors, officers and
employees of the Company to purchase shares of the Company’s Common Stock
(“Options”).  The Plan also authorizes the grant to such persons of
restricted and non-restricted shares of Common Stock, stock appreciation rights,
stock units and cash performance awards (collectively, the
“Awards”).  Prior to the adoption of the Plan, options to purchase
shares of Common Stock were issued under the Company’s Nonqualified Stock Option
Plan (the “Prior Plan”).
 
 The Plan
provides broad discretion to the Compensation Committee of the Board of
Directors to create appropriate equity incentives for directors, officers and
employees of the Company.  The Plan is intended to attract and retain
talented employees and align employee and stockholder
interests.  Effective January 1, 2006, the Company adopted the fair
value recognition provisions of Statement of Financial Accounting Standards
(“SFAS”) No. 123R, “Share-Based Payment” (“SFAS No. 123R”), using the
modified-prospective transition method. Under this transition method,
compensation was recognized beginning January 1, 2006 and includes (a)
compensation expense for all share-based employee compensation arrangements
granted prior to, but not yet vested as of, January 1, 2006, based on the grant
date fair value estimated in accordance with the original provisions of SFAS No.
123 “Share-Based Payment”, and (b) compensation expense for all share-based
employee compensation arrangements granted subsequent to January 1, 2006, based
on the grant-date fair value estimated in accordance with the provisions of SFAS
No. 123R (revised 2004), “Share-Based Payment”.  In accordance with
SFAS No. 123R, the Company capitalizes the portion of stock-based compensation
attributed to internally developed software.
 
 For
purposes of calculating and accounting for stock-based compensation expense in
accordance with SFAS No. 123R, the Company makes a computation of expected
volatility, based upon historical volatility and the expected term of the
option.  The expected term is based on the historical exercise
experience under the share-based plans of the underlying award (including
post-vesting employment termination behavior) and represents the period of time
the share-based awards are expected to be outstanding.  The interest
rate is based on the U.S. Treasury yield in effect at the time of grant for a
period commensurate with the estimated expected life. Pursuant to implementing
SFAS No. 123R effective January 1, 2006, the Company is required to estimate
forfeitures at the time of grant and revise those estimates in subsequent
periods if actual forfeitures differ from those estimates.  The
weighted-average forfeiture rate is based on historical data.
  The
following table sets forth the stock-based compensation (“SBC”) expense
resulting from share-based arrangements that is recorded in the Company’s
consolidated statements of operations for the periods indicated (in
thousands):
 
 For
      the Years Ended December 31,2008
                          
                          
                          2007
                          
                          
                          2006Cost
      of recurring revenues
                          
                          $
                          871
                          
                          
                          $
                          635
                          
                          
                          $
                          394Cost
      of services revenues
                          
                          
                          1,988
                          
                          
                          
                          1,542
                          
                          
                          
                          874Cost
      of license revenues
                          
                          
                          12
                          
                          
                          
                          5
                          
                          
                          
                          6Sales
      and marketing
                          
                          
                          7,389
                          
                          
                          
                          4,617
                          
                          
                          
                          2,967Research
      and development
                          
                          
                          1,570
                          
                          
                          
                          985
                          
                          
                          
                          620General
      and administrative
                          
                          
                          3,626
                          
                          
                          
                          2,388
                          
                          
                          
                          1,385Total
      SBC
                          
                          $
                          15,456
                          
                          
                          $
                          10,172
                          
                          
                          $
                          6,246
 
 Included
in capitalized software in the Company’s consolidated balance sheet at December
31, 2008 and 2007 was $30 thousand and $42 thousand, respectively, in
stock-based compensation expense related to capitalized software during the
fiscal years then ended.  This amount would have otherwise been
charged to research and development expense for the years ended December 31,
2008 and 2007.
 
 23
 Table of Contents
 Results
of Operations
 
 The
following table sets forth the consolidated statements of operations data of the
Company, as a percentage of total revenues, for the periods
indicated.
 
 For
      the Years Ended December 31,2008
                          
                          
                          2007
                          
                          
                          2006Revenues:Recurring
                          
                          
                          59.7
                          %
                          
                          
                          57.5
                          %
                          
                          
                          55.7
                          %Services
                          
                          
                          34.0
                          
                          
                          
                          32.9
                          
                          
                          
                          33.6License
                          
                          
                          6.3
                          
                          
                          
                          9.6
                          
                          
                          
                          10.7Total
      revenues
                          
                          
                          100.0
                          
                          
                          
                          100.0
                          
                          
                          
                          100.0Cost
      of revenues:Recurring
                          
                          
                          16.7
                          
                          
                          
                          15.1
                          
                          
                          
                          15.6Services
                          
                          
                          28.0
                          
                          
                          
                          26.6
                          
                          
                          
                          26.4License
                          
                          
                          1.0
                          
                          
                          
                          1.1
                          
                          
                          
                          1.2Total
      cost of revenues
                          
                          
                          45.7
                          
                          
                          
                          42.8
                          
                          
                          
                          43.2Gross
      profit
                          
                          
                          54.3
                          
                          
                          
                          57.2
                          
                          
                          
                          56.8Operating
      expenses:Sales
      and marketing
                          
                          
                          26.4
                          
                          
                          
                          24.1
                          
                          
                          
                          25.5Research
      and development
                          
                          
                          20.6
                          
                          
                          
                          18.6
                          
                          
                          
                          19.6General
      and administrative
                          
                          
                          9.9
                          
                          
                          
                          9.5
                          
                          
                          
                          9.3Total
      operating expenses
                          
                          
                          56.9
                          
                          
                          
                          52.2
                          
                          
                          
                          54.4Operating
      income (loss)
                          
                          
                          (2.6
                          )
                          
                          
                          5.0
                          
                          
                          
                          2.4Other
      income (expense), netInterest
      expense and other
                          
                          
                          (0.1
                          )
                          
                          
                          (0.1
                          )
                          
                          
                          (0.1
                          )Other
      income, net
                          
                          
                          0.5
                          
                          
                          
                          4.0
                          
                          
                          
                          1.3Total
      other income, net
                          
                          
                          0.4
                          
                          
                          
                          3.9
                          
                          
                          
                          1.2Income
      (loss) before income tax
                          
                          
                          (2.2
                          )
                          
                          
                          8.9
                          
                          
                          
                          3.6Benefit
      (provision) for income taxes
                          
                          
                          0.6
                          
                          
                          
                          13.0
                          
                          
                          
                          –Net
      income (loss)
                          
                          
                          (1.6
                          )%
                          
                          
                          21.9
                          %
                          
                          
                          3.6
                          %
 
  Comparison
of Fiscal Years Ended December 31, 2008 and 2007
 
 Revenues
 
 The
Company’s revenues are derived from recurring revenues, services revenues and,
to a lesser extent, license revenues.  See “Revenue Recognition”
(above) for further discussion of the Company’s revenue sources and its method
of accounting for each of them.
 
 Total
revenues, consisting of recurring, services and license revenues, increased
17.9% to $178.6 million for 2008 from $151.5 million for 2007.
 
 Recurring
revenues increased 22.6% to $106.7 million for 2008 from $87.0 million for
2007.  The increases in recurring revenues for 2008 were primarily due
to increases in subscription revenues from the Intersourcing Offering and, to a
lesser extent, maintenance revenues, partially offset by a decrease in
subscription revenues from the Original Ceridian Agreement, as described
below:
 
 a)
              Intersourcing
      revenues increased 48.5% for 2008, primarily due to the continued growth
      of the Intersourcing Offering, which comprised the majority of unit sales.
      The increase in Intersourcing revenues is based on the revenue impact of
      incremental units that have gone Live since December 31, 2007, including
      the UltiPro core product and, to a lesser extent, Optional Features of
      UltiPro.  Intersourcing revenues from the UltiPro Workplace
      solution in 2008 also contributed to the year-over-year growth,
      particularly since this solution was introduced after September 30,
      2007.  Recognition of recurring revenues for Intersourcing sales
      commences upon the Live date. The Company’s twelve month retention rate of
      97% for existing Intersourcing customers also contributed to the growth in
      Intersourcing revenues when combined with incremental revenues resulting
      from additional customers going Live in 2008 as compared to
      2007.
  b)
              Maintenance
      revenues from license sales increased 9.0% due to cumulative net increases
      in the customer base subsequent to December 31, 2007 due to incremental
      license sales since such date.  Maintenance revenues are
      recognized over the initial term of the related license contract, which is
      typically 12 months, and then on a monthly recurring basis thereafter as
      the maintenance contracts renew annually.  The Company’s twelve
      month retention rate of 96% for existing customers’ annual maintenance
      renewals during 2008, combined with the annual price increases, also
      contributed to the increase in maintenance
  revenues.
  c)
              The
      impact on recurring revenues of units sold under the Intersourcing
      Offering has been a gradual increase from one period to the next, based on
      the incremental effect of revenue recognition of the Intersourcing fees
      over the terms of the related contracts as sales in backlog go
      Live.
  d)
              Subscription
      revenues decreased 58.0% in 2008.  This decrease was primarily
      due to the termination of the Original Ceridian Agreement effective March
      9, 2008, at which time the related revenue recognition ended. In 2008,
      revenue recognized under Original Ceridian Agreement, amounted to $1.5
      million as compared to $7.7 million in
2007.
  Services
revenues increased 21.6% to $60.6 million for 2008 from $49.9 million for 2007
primarily as a result of an increase in implementation revenues, which was
primarily due to additional billable hours, a higher net rate per hour and, to a
lesser extent, increased implementation revenues recognized for the new
Workplace sales.  The additional billable hours stemmed from an
increase in the number of revenue-generating consultants (as the Company hired
more implementation personnel to accommodate the increased sales growth) as well
as additional hours worked by third-party implementation partners (or
“IPs”).  The net rate per hour for 2008 was higher than that for 2007
as the blended rate on a time and materials basis increased. Implementation
revenues from UltiPro Workplace increased primarily as a result of the increased
volume in UltiPro Workplace sales (as compared to 2007 which did not have a full
year of Workplace unit sales).
 
 License
revenues decreased 22.8% to $11.3 million for 2008 from $14.6 million for
2007.  The decrease in 2008 was principally due to a lower number of
units sold with more unit sales concentrated in the Intersourcing
Offering.
  24
 Table of Contents
 Cost
of Revenues
 
 Cost of
revenues consists of the cost of recurring, services and license revenues. Cost
of recurring revenues consists of costs to provide maintenance and technical
support to the Company’s customers, the cost of providing periodic updates and
the cost of subscription revenues, including amortization of capitalized
software. Cost of services revenues primarily consists of costs to provide
implementation services and training to the Company’s customers and, to a lesser
degree, costs related to sales of payroll-related forms, costs associated with
certain reimbursable out-of-pocket expenses, discussed below, and costs to
support additional services provided to BSPs.  Cost of license
revenues primarily consists of fees payable to third parties for software
products distributed by the Company. UltiPro includes third-party software for
enhanced report writing purposes and for time and attendance functionality
(“UTA”).  When UltiPro units are sold, customers pay the Company on a
per user basis for the license rights to the third-party report writing software
and for the add-on product, UTA.
 
 Cost of
recurring revenues increased 30.5% to $29.8 million for 2008 from $22.8 million
for 2007.  The $7.0 million increase in cost of recurring revenues for
the year (which included SBC expense of $0.9 million in 2008 as compared to $0.6
million in 2007), was primarily due to increases in both Intersourcing costs and
maintenance costs as described below:
  a)  The
      increase in Intersourcing costs was principally due to the growth in
      Intersourcing operations associated with increased sales, including higher
      operating costs such as depreciation and amortization of related computer
      equipment supporting the hosting operations, increased third-party royalty
      fees for UTA sales, increased labor costs and increased hosting data
      center costs.  In addition, there was increased amortization for
      UltiPro Canadian HR/payroll (“UltiPro Canada”) due to the general release
      of UltiPro Canada in the fourth quarter of 2007 and the resulting
      commencement of the amortization of the capitalized costs at that time as
      compared to a full year’s amortization in
2008.
  
 b)  The
      increase in maintenance costs was primarily related to increased labor
      costs commensurate with the growth in the number of customers
      served.
  Cost of
services revenues increased 24.2% to $50.1 million for 2008 from $40.3 million
for 2007.  The $9.8 million increase in costs of services revenues
(which included stock-based compensation expense of $2.0 million in 2008 as
compared to $1.5 million in 2007) was primarily due to increased implementation
costs.  The increase in implementation costs was mainly attributable
to labor costs associated with growing the implementation infrastructure
(predominantly billable consultants) to accommodate the overall growth in unit
sales and, to a lesser extent, increased costs for third-party IP’s which
correlate with the increased implementation revenues generated from the work
performed by IP’s.
  Cost of
license revenues increased by $0.1 million, or 8.2% to $1.8 million for 2008
from $1.7 million in 2007.  This slight increase was principally due
to increased amortization for UltiPro Canada due to the general release of
UltiPro Canada in the fourth quarter of 2007 and the resulting commencement of
the amortization of the capitalized costs.
 
 Sales
and Marketing
 
 Sales and
marketing expenses consist primarily of salaries and benefits, sales
commissions, travel and promotional expenses, and facility and communication
costs for direct sales offices, as well as advertising and marketing costs.
Sales and marketing expenses increased 29.4% to $47.2 million for 2008 from
$36.5 million for 2007.  The $10.7 million increase for the year
(which included stock-based compensation expense of $7.4 million in 2008 as
compared to $4.6 million for 2007) was primarily due to increased labor and
related costs attributable to hiring additional direct sales force personnel
(particularly for the Company’s Workplace sales organization) and higher sales
commissions principally related to increased Intersourcing sales. Marketing
expenses associated with the investment in the Workplace solution also increased
in comparison to 2007.  The overall increase was partially offset by
lower commissions on license sales which correlate to the decrease in license
revenues.  Commissions on license sales are recognized when the
license revenues are recognized, which is typically when the product is
shipped.  Commissions on Intersourcing sales are amortized over the
initial contract term (typically 24 months) commencing on the Live date, which
corresponds with the commencement of Intersourcing revenue
recognition.
 
 Research
and Development
 
 Research
and development expenses consist primarily of software development personnel
costs. Research and development expenses increased 30.5% to $36.7 million in
2008 from $28.2 million in 2007.  The increases in research and
development expenses during 2008 (including $1.6 million in 2008 as compared to
$1.0 million in 2007 of SBC expense) was principally due to higher labor costs
related to the ongoing development of UltiPro and complementary products,
including the impact of increased personnel costs (predominantly from additional
headcount) and increased third-party consulting costs, and, to a lesser extent,
a net reduction in capitalized labor costs. Capitalization of costs for UltiPro
Canada ended in November 2007 (upon its general release) and certain labor costs
were capitalized in 2008 in relation to a new product offering referred to as
Onboarding which is a product that handles certain human resources functionality
for new hires of a company, and has an expected general release in the first
quarter of 2009.
  General
and administrative
  General
and administrative expenses consist primarily of salaries and benefits of
executive, administrative and financial personnel, as well as external
professional fees and the provision for doubtful accounts. General and
administrative expenses increased 22.1% to $17.6 million for 2008 from $14.4
million for 2007.  The increase for 2008 (which included SBC expense
of $3.6 million in 2008 as compared to $2.4 million in 2007 and $0.2 million of
amortization of acquired intangibles in both 2008 and 2007) was primarily due to
increased labor and related costs (resulting from additional personnel costs to
support the Company’s growth).
  Interest
and Other Expense
 
 Interest
and other expense increased $65 thousand, or 30.4%, to $279 thousand for 2008
from $214 thousand for 2007.
  Interest
and Other Income, net
 
 Interest
and other income, net, decreased to $0.8 million for 2008 from $6.0 million for
2007 primarily because in 2007, the Company received a non-recurring cash
settlement fee of $4.4 million, net of related costs, resulting from the early
termination in 2007 of a multi-year business arrangement with one of our BSP’s
that decided to exit the payroll business (the “Non-Recurring
Settlement”).  In addition, in 2008, the Company had a decrease in
interest income due to less cash, cash equivalents and marketable securities and
a decrease in interest rates.
 
 25
 Table of Contents
 Income
Tax Benefit, net
 
 The
income tax benefit decreased by 94.1% during the year ended December 31, 2008
due to the fact that in 2007, the Company recorded an income tax benefit of
$19.9 million primarily related to the release of the valuation allowance
against deferred tax assets, partially offset by a provision for income tax of
$115 thousand.  Net operating loss carryforwards available at December
31, 2008, expiring at various times from 2011 through the year 2028 and which
are available to offset future taxable income, approximated $73.9 million. The
timing and levels of future profitability may result in the expiration of net
operating loss carryforwards before utilization. Additionally, utilization of
such net operating losses may be limited as a result of cumulative ownership
changes in the Company’s equity instruments.
 
 The
Company recognized $20.9 million of deferred tax assets, net of deferred tax
liabilities as of December 31, 2008.  If estimates of taxable income
are decreased, a valuation allowance may need to be provided for some or all
deferred tax assets, which will cause an increase in income tax
expense.
 
 Comparison
of Fiscal Years Ended December 31, 2007 and 2006
 
 Revenues
 
 Total
revenues, consisting of recurring, services and license revenues, increased
31.9% to $151.5 million for 2007 from $114.8 million for 2006.
 
 Recurring
revenues increased 36.1% to $87.0 million for 2007 from $63.9 million for
2006.  The increases in recurring revenues for 2007 were primarily due
to increases in Intersourcing revenues and maintenance revenues.
 
 a)
              Intersourcing
      revenues increased 69.1% primarily due to the continued growth of the
      recurring revenues generated from previously sold Intersourcing units
      which went Live after December 31, 2006.  Recognition of
      recurring revenues for Intersourcing unit sales commences upon Live
      date.
 
 b)
              Maintenance
      revenues increased 15.1% due to additional maintenance generated from
      incremental license sales since December 31, 2006.  Maintenance
      revenues are recognized over the initial term of the related license
      contract, which is typically 12 months, and then on a recurring basis
      thereafter (on a monthly basis ratably over the term of the respective
      renewal period).  The Company’s high retention rate of
      approximately 96% for existing customers’ annual maintenance renewals in
      2007 combined with the annual price increases that typically accompany
      renewals also contributed to the increase in maintenance
      revenues.
 
 Services
revenues increased 29.1% to $49.9 million for 2007 from $38.6 million for 2006
primarily as a result of an increase of $10.4 million in implementation revenues
and a $1.2 million increase in training revenues.  The increase in
implementation revenues in 2007 was primarily due to more billable hours
generated from our billable consultants (including the impact of hiring
additional billable consultants during the year) and, to a lesser extent, from
the increased use of IP’s. These additional billable hours stemmed from an
increase in unit sales (particularly Intersourcing and certain add-on products),
partially offset by a lower net rate per hour. The increase in training revenues
was attributable to increased classroom attendance and Web-based training, also
tied to increased unit sales.
 
 License
revenues increased 19.0% to $14.6 million for 2007 from $12.3 million for
2006.  The increase in 2007 was principally due to a higher average
selling price due to increased sales of UTA, an add-on product introduced in
2006.
  Cost
of Revenues
 
 Cost of
recurring revenues increased 27.5% to $22.8 million for 2007 from $17.9 million
for 2006.  The increase in the cost of recurring revenues for 2007,
was primarily due to the increases in both Intersourcing costs and maintenance
costs.
 
 a)
              The
      increase in the Intersourcing costs was principally due to the growth in
      Intersourcing operations and increased sales (including increased labor
      costs and higher operating costs such as depreciation and amortization of
      related computer equipment supporting the operations and costs associated
      with the operations of the Company’s two data centers), an increase in the
      amortization of the purchased source code of the integrated online
      recruitment/talent acquisition solution that Ultimate has offered its
      customers since April 2005 (“Recruitment”) (which began amortizing in
      2007), and an increase in royalty fees and annual maintenance fees paid to
      the third-party provider of UTA (tied to increased
  sales).
  
 b)
              The
      increase in maintenance costs was primarily related to increased labor
      costs commensurate with the growth in the number of customers
      served.
  Cost of
services revenues increased 33.3% to $40.3 million for 2007 from $30.3 million
for 2006.   The increase in cost of services revenues for 2007,
was primarily due to an increase in implementation labor costs and IP
costs.  In response to the need to implement more units (resulting
from increased unit sales of UltiPro and add-on products), during 2007, the
Company hired additional implementation personnel comprised of
revenue-generating, or “billable,” consultants and certain related managerial
personnel. In addition, the Company increased its use of IPs to assist in
handling the increased demand for implementing UltiPro and add-on
products.
 
 Cost of
license revenues increased 19.4% to $1.7 million for 2007 from $1.4 million for
2006.  The increase in cost of license revenues for 2007 was
principally due to higher royalties paid to third-party vendors for products
sold in conjunction with UltiPro.
 
 Sales
and Marketing
 
 Sales and
marketing expenses increased 24.2% to $36.5 million for 2007 from $29.4 million
for 2006. The $7.1 million increase in 2007 was principally due to increased
sales commissions of $1.8 million and other additional labor costs (including a
$1.7 million increase of stock-based compensation in 2007), partly attributable
to hiring additional sales personnel.  Included in sales and marketing
expenses was stock-based compensation expense of $4.6 million in 2007 as
compared to $3.0 million in 2006.  Sales commissions increased
primarily from Intersourcing revenues, correlating with the growth in that
revenue source.  Increased sales commissions also resulted from a
higher percentage of sales being made by salespeople in the direct sales force
whose performance placed them at higher commission rates than in the prior
year.
 
 26
 Table of Contents
 Research
and Development
 
 Research
and development expenses increased 25.3% to $28.2 million in 2007 from $22.5
million in 2006.  Excluding the impact of capitalized labor costs
associated with the development of UltiPro Canada, which totaled $1.7 million
for 2007, research and development expenses increased $5.6 million in comparison
to 2006, principally due to higher labor costs, related to an increase in
headcount and, to a lesser extent, an increase in third-party consulting
costs.  Included in research and development expenses was stock-based
compensation expense of $1.0 million in 2007 as compared to $0.6 million in
2006.
  In
accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed” (“SFAS No. 86”), the Company began
capitalizing certain research and development personnel costs for the
development of UltiPro Canada functionality in November 2005, when technological
feasibility was attained.  UltiPro Canada was built from the existing
product infrastructure of UltiPro (e.g., using UltiPro’s source code and
architecture).  UltiPro Canada provides HR/payroll functionality which
includes the availability of Canadian tax rules, as well as Canadian human
resources functionality, taking into consideration labor laws in Canada and
including changes to the language where necessary (i.e., English to
French).  The Company has capitalized additional research and
development costs relative to the UltiPro Canada project through its general
release, which occurred during the fourth quarter of 2007, at which time
capitalization ceased under SFAS No. 86 guidelines. The Company capitalized a
total of $1.7 million in 2007, as compared to $1.8 million in 2006, relative to
UltiPro Canada. The amortization of UltiPro Canada, as well as other capitalized
software that has reached the general release stage, is charged to the related
cost of revenues (or primarily cost of recurring revenues).
  General
and Administrative
 
 General
and administrative expenses increased 35.6% to $14.4 million for 2007 from $10.6
million for 2006.  The increase for 2007 was primarily due to
increased labor costs attributable to hiring additional personnel to support the
Company’s growth and annual merit increases, an increase in the provision for
doubtful accounts and an increase in accounting and legal expenses related to
compliance with new accounting and legal requirements.  Also, included
in general and administrative expenses was stock-based compensation expense of
$2.4 million in 2007, as compared to $1.4 million in 2006, and amortization of
intangible assets of $0.2 million in 2007 as compared to $54 thousand in
2006.
  Interest
Expense
 
 Interest
expense increased 9.7% to $214 thousand for 2007 from $195 thousand for 2006
primarily due to an increase in payments of capital lease obligations from
additional capital leases entered into during 2007.  There were no
borrowings made in 2007.
 
 Interest
and Other Income, net
 
 Interest
and other income, net, increased significantly to $6.0 million for 2007 from
$1.5 million for 2006 primarily due to the Non-Recurring Settlement, a
non-recurring cash settlement fee of $4.4 million, net of related costs,
resulting from the early termination of a multi-year business arrangement with
one of our BSP’s that decided to exit the payroll business.
 
 Income
Tax Benefit, net
 
 During
the year ended December 31, 2007, the Company recorded an income tax benefit of
$19.9 million primarily related to the release of the valuation allowance
against deferred tax assets, partially offset by a provision for income tax of
$115 thousand as compared to no provision or benefit for Federal, state or
foreign income taxes for the year ended December 31, 2006, due to the operating
losses and operating loss carryforwards from prior periods incurred in the
respective periods.
  27
 Table of Contents
 Quarterly
Results of Operations
  The
following table sets forth certain unaudited quarterly results of operations for
each of the quarters in the years ended December 31, 2008 and 2007. In
management’s opinion, this unaudited information has been prepared on the same
basis as the audited consolidated financial statements and includes all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the information for the quarters presented. This
information should be read in conjunction with the Company’s Consolidated
Financial Statements and Notes thereto, included elsewhere in this Form
10-K.
 
 The
Company’s quarterly revenues and operating results have varied significantly in
the past and are likely to vary substantially from quarter to quarter in the
future. The Company’s operating results may fluctuate as a result of a number of
factors, including, but not limited to, increased expenses (especially as they
relate to product development, sales and marketing and the use of third-party
consultants), timing of product releases, increased competition, variations in
the mix of revenues, announcements of new products by the Company or its
competitors and capital spending patterns of the Company’s customers. The
Company establishes its expenditure levels based upon its expectations as to
future revenues, and, if revenue levels are below expectations, expenses can be
disproportionately high. A drop in near term demand for the Company’s products
could significantly affect both revenues and profits in any quarter. Operating
results achieved in previous fiscal quarters are not necessarily indicative of
operating results for the full fiscal years or for any future periods. As a
result of these factors, there can be no assurance that the Company will be able
to maintain profitability on a quarterly basis. The Company believes that, due
to the underlying factors for quarterly fluctuations, quarter-to-quarter
comparisons of its operations are not necessarily meaningful and that such
comparisons should not be relied upon as indications of future
performance.
 
 Quarters
      Ended
                                                      
                                                      Dec.
      31, 2008
                                                      
                                                      
                                                      Sep.
      30, 2008
                                                      
                                                      
                                                      Jun.
      30, 2008
                                                      
                                                      
                                                      Mar.
      31, 2008
                                                      
                                                      
                                                      Dec.
      31, 2007
                                                      
                                                      
                                                      Sep.
      30, 2007
                                                      
                                                      
                                                      Jun.
      30, 2007
                                                      
                                                      
                                                      Mar.
      31, 2007(In
      thousand, except per share amount)(Unaudited)Revenues:Recurring
                                                      
                                                      $
                                                      28,870
                                                      
                                                      
                                                      $
                                                      26,738
                                                      
                                                      
                                                      $
                                                      25,377
                                                      
                                                      
                                                      $
                                                      25,696
                                                      
                                                      
                                                      $
                                                      24,297
                                                      
                                                      
                                                      $
                                                      22,174
                                                      
                                                      
                                                      $
                                                      21,075
                                                      
                                                      
                                                      $
                                                      19,471Services
                                                      
                                                      
                                                      18,340
                                                      
                                                      
                                                      
                                                      15,002
                                                      
                                                      
                                                      
                                                      13,165
                                                      
                                                      
                                                      
                                                      14,120
                                                      
                                                      
                                                      
                                                      14,084
                                                      
                                                      
                                                      
                                                      12,312
                                                      
                                                      
                                                      
                                                      11,274
                                                      
                                                      
                                                      
                                                      12,187License
                                                      
                                                      
                                                      2,482
                                                      
                                                      
                                                      
                                                      2,172
                                                      
                                                      
                                                      
                                                      2,957
                                                      
                                                      
                                                      
                                                      3,653
                                                      
                                                      
                                                      
                                                      3,761
                                                      
                                                      
                                                      
                                                      3,337
                                                      
                                                      
                                                      
                                                      2,608
                                                      
                                                      
                                                      
                                                      4,884Total
      revenues
                                                      
                                                      
                                                      49,692
                                                      
                                                      
                                                      
                                                      43,912
                                                      
                                                      
                                                      
                                                      41,499
                                                      
                                                      
                                                      
                                                      43,469
                                                      
                                                      
                                                      
                                                      42,142
                                                      
                                                      
                                                      
                                                      37,823
                                                      
                                                      
                                                      
                                                      34,957
                                                      
                                                      
                                                      
                                                      36,542Cost
      of revenues:Recurring
                                                      
                                                      
                                                      8,300
                                                      
                                                      
                                                      
                                                      7,927
                                                      
                                                      
                                                      
                                                      7,002
                                                      
                                                      
                                                      
                                                      6,525
                                                      
                                                      
                                                      
                                                      6,189
                                                      
                                                      
                                                      
                                                      5,630
                                                      
                                                      
                                                      
                                                      5,480
                                                      
                                                      
                                                      
                                                      5,499Services
                                                      
                                                      
                                                      15,476
                                                      
                                                      
                                                      
                                                      12,751
                                                      
                                                      
                                                      
                                                      10,580
                                                      
                                                      
                                                      
                                                      11,299
                                                      
                                                      
                                                      
                                                      10,888
                                                      
                                                      
                                                      
                                                      10,066
                                                      
                                                      
                                                      
                                                      9,081
                                                      
                                                      
                                                      
                                                      10,292License
                                                      
                                                      
                                                      440
                                                      
                                                      
                                                      
                                                      463
                                                      
                                                      
                                                      
                                                      464
                                                      
                                                      
                                                      
                                                      428
                                                      
                                                      
                                                      
                                                      633
                                                      
                                                      
                                                      
                                                      352
                                                      
                                                      
                                                      
                                                      265
                                                      
                                                      
                                                      
                                                      409Total
      cost of revenues
                                                      
                                                      
                                                      24,216
                                                      
                                                      
                                                      
                                                      21,141
                                                      
                                                      
                                                      
                                                      18,046
                                                      
                                                      
                                                      
                                                      18,252
                                                      
                                                      
                                                      
                                                      17,710
                                                      
                                                      
                                                      
                                                      16,048
                                                      
                                                      
                                                      
                                                      14,826
                                                      
                                                      
                                                      
                                                      16,200Gross
      profit
                                                      
                                                      
                                                      25,476
                                                      
                                                      
                                                      
                                                      22,771
                                                      
                                                      
                                                      
                                                      23,453
                                                      
                                                      
                                                      
                                                      25,217
                                                      
                                                      
                                                      
                                                      24,432
                                                      
                                                      
                                                      
                                                      21,775
                                                      
                                                      
                                                      
                                                      20,131
                                                      
                                                      
                                                      
                                                      20,342Operating
      expenses:Sales
      and marketing
                                                      
                                                      
                                                      11,645
                                                      
                                                      
                                                      
                                                      12,483
                                                      
                                                      
                                                      
                                                      11,236
                                                      
                                                      
                                                      
                                                      11,829
                                                      
                                                      
                                                      
                                                      10,214
                                                      
                                                      
                                                      
                                                      9,040
                                                      
                                                      
                                                      
                                                      8,442
                                                      
                                                      
                                                      
                                                      8,783Research
      and development
                                                      
                                                      
                                                      8,648
                                                      
                                                      
                                                      
                                                      9,912
                                                      
                                                      
                                                      
                                                      9,299
                                                      
                                                      
                                                      
                                                      8,879
                                                      
                                                      
                                                      
                                                      7,221
                                                      
                                                      
                                                      
                                                      7,107
                                                      
                                                      
                                                      
                                                      6,663
                                                      
                                                      
                                                      
                                                      7,171General
      and administrative
                                                      
                                                      
                                                      4,225
                                                      
                                                      
                                                      
                                                      4,697
                                                      
                                                      
                                                      
                                                      4,405
                                                      
                                                      
                                                      
                                                      4,296
                                                      
                                                      
                                                      
                                                      4,089
                                                      
                                                      
                                                      
                                                      3,645
                                                      
                                                      
                                                      
                                                      3,253
                                                      
                                                      
                                                      
                                                      3,447Total
      operating expenses
                                                      
                                                      
                                                      24,518
                                                      
                                                      
                                                      
                                                      27,092
                                                      
                                                      
                                                      
                                                      24,940
                                                      
                                                      
                                                      
                                                      25,004
                                                      
                                                      
                                                      
                                                      21,524
                                                      
                                                      
                                                      
                                                      19,792
                                                      
                                                      
                                                      
                                                      18,358
                                                      
                                                      
                                                      
                                                      19,401Operating
      income (loss)
                                                      
                                                      
                                                      958
                                                      
                                                      
                                                      
                                                      (4,321
                                                      )
                                                      
                                                      
                                                      (1,487
                                                      )
                                                      
                                                      
                                                      213
                                                      
                                                      
                                                      
                                                      2,908
                                                      
                                                      
                                                      
                                                      1,983
                                                      
                                                      
                                                      
                                                      1,773
                                                      
                                                      
                                                      
                                                      941Interest
      expense and other
                                                      
                                                      
                                                      (97
                                                      )
                                                      
                                                      
                                                      (42
                                                      )
                                                      
                                                      
                                                      (61
                                                      )
                                                      
                                                      
                                                      (79
                                                      )
                                                      
                                                      
                                                      (53
                                                      )
                                                      
                                                      
                                                      (61
                                                      )
                                                      
                                                      
                                                      (53
                                                      )
                                                      
                                                      
                                                      (47
                                                      )Other
      income, net
                                                      
                                                      
                                                      104
                                                      
                                                      
                                                      
                                                      177
                                                      
                                                      
                                                      
                                                      222
                                                      
                                                      
                                                      
                                                      357
                                                      
                                                      
                                                      
                                                      400
                                                      
                                                      
                                                      
                                                      433
                                                      
                                                      
                                                      
                                                      4,774
                                                      
                                                      
                                                      
                                                      395Total
      other income, net
                                                      
                                                      
                                                      7
                                                      
                                                      
                                                      
                                                      135
                                                      
                                                      
                                                      
                                                      161
                                                      
                                                      
                                                      
                                                      278
                                                      
                                                      
                                                      
                                                      347
                                                      
                                                      
                                                      
                                                      372
                                                      
                                                      
                                                      
                                                      4,721
                                                      
                                                      
                                                      
                                                      348Income
      (loss) before provision for income taxes
                                                      
                                                      
                                                      965
                                                      
                                                      
                                                      
                                                      (4,186
                                                      )
                                                      
                                                      
                                                      (1,326
                                                      )
                                                      
                                                      
                                                      491
                                                      
                                                      
                                                      
                                                      3,255
                                                      
                                                      
                                                      
                                                      2,355
                                                      
                                                      
                                                      
                                                      6,494
                                                      
                                                      
                                                      
                                                      1,289Income
      tax benefit (expense), net
                                                      
                                                      
                                                      (350
                                                      )
                                                      
                                                      
                                                      1,135
                                                      
                                                      
                                                      
                                                      575
                                                      
                                                      
                                                      
                                                      (201
                                                      )
                                                      
                                                      
                                                      19,851
                                                      
                                                      
                                                      
                                                      –
                                                      
                                                      
                                                      
                                                      (85
                                                      )
                                                      
                                                      
                                                      (30
                                                      )Net
      income (loss)
                                                      
                                                      $
                                                      615
                                                      
                                                      
                                                      $
                                                      (3,051
                                                      )
                                                      
                                                      $
                                                      (751
                                                      )
                                                      
                                                      $
                                                      290
                                                      
                                                      
                                                      $
                                                      23,106
                                                      
                                                      
                                                      $
                                                      2,355
                                                      
                                                      
                                                      $
                                                      6,409
                                                      
                                                      
                                                      $
                                                      1,259Weighted
      average shares outstanding:Basic
                                                      
                                                      
                                                      24,389
                                                      
                                                      
                                                      
                                                      24,613
                                                      
                                                      
                                                      
                                                      24,670
                                                      
                                                      
                                                      
                                                      24,682
                                                      
                                                      
                                                      
                                                      24,742
                                                      
                                                      
                                                      
                                                      24,764
                                                      
                                                      
                                                      
                                                      24,713
                                                      
                                                      
                                                      
                                                      24,527Diluted
                                                      
                                                      
                                                      25,567
                                                      
                                                      
                                                      
                                                      24,613
                                                      
                                                      
                                                      
                                                      24,670
                                                      
                                                      
                                                      
                                                      26,460
                                                      
                                                      
                                                      
                                                      26,803
                                                      
                                                      
                                                      
                                                      27,692
                                                      
                                                      
                                                      
                                                      27,571
                                                      
                                                      
                                                      
                                                      27,383Net
      earnings (loss) per shareBasic
                                                      
                                                      $
                                                      0.03
                                                      
                                                      
                                                      $
                                                      (0.12
                                                      )
                                                      
                                                      $
                                                      (0.03
                                                      )
                                                      
                                                      $
                                                      0.12
                                                      
                                                      
                                                      $
                                                      0.93
                                                      
                                                      
                                                      $
                                                      0.10
                                                      
                                                      
                                                      $
                                                      0.26
                                                      
                                                      
                                                      $
                                                      0.05Diluted
                                                      
                                                      $
                                                      0.02
                                                      
                                                      
                                                      $
                                                      (0.12
                                                      )
                                                      
                                                      $
                                                      (0.03
                                                      )
                                                      
                                                      $
                                                      0.11
                                                      
                                                      
                                                      $
                                                      0.86
                                                      
                                                      
                                                      $
                                                      0.09
                                                      
                                                      
                                                      $
                                                      0.23
                                                      
                                                      
                                                      $
                                                      0.05
 
 28
 Table of Contents
 Liquidity
and Capital Resources
 
 In recent
years, the Company has funded operations from cash flows generated from
operations and, to a lesser extent, equipment financing and borrowing
arrangements.
 
 As of
December 31, 2008, the Company had $23.0 million in cash, cash equivalents and
total investments in marketable securities, reflecting a net decrease of $12.9
million since December 31, 2007.  This $12.9 million decrease was
mainly due to the use of $21.5 million in cash for Common Stock repurchases (net
of proceeds from the issuance of Common Stock from stock option exercises)
during 2008 which were made pursuant to the Company’s previously announced Stock
Repurchase Plan, an increase in capital expenditures, including cash purchases
of property and equipment, and principal payments on financed equipment,
totaling $14.9 million and increased capitalized software costs of $2.2 million,
partially offset by cash generated from operations of $25.8 million during
2008.
  Net cash
provided by operating activities was $25.8 million for 2008 as compared to $29.1
million for 2007.  The $3.3 million decrease was primarily due to less
cash generated from operations, increased accounts receivable and increased
prepaid expenses, partially offset by increased accounts
payable.  Included in the 2007 cash generated from operations, was a
non-recurring settlement fee of $4.3 million, net of related costs and income
taxes, resulting from the early termination of a multiyear business arrangement
with one of the Company’s business partners that decided to exit the payroll
business.
  Net cash
used in investing activities was $7.7 million for 2008 as compared to $11.3
million for 2007.  The $3.6 million decrease from 2007 was primarily
attributable to an increase in cash provided from the maturities of marketable
securities (net of purchases) of $14.8 million, partially offset by an increase
in purchases of client fund securities (from the Company’s UltiPro Tax Filing
offering) of $5.9 million, an increase in cash purchases of property and
equipment of $4.8 million and, to a lesser extent, an increase in capitalized
software costs of $0.6 million.
 
 Net cash
used in financing activities was $18.4 million for 2008 as compared to $17.2
million for 2007. The $1.2 million increase in net cash used in financing
activities was primarily related to a $7.2 million increase in repurchases of
Common Stock pursuant to the Company’s Stock Repurchase Plan (including a
decrease in proceeds from the issuance of Common Stock from stock option
exercises), partially offset by an increase of $5.9 million of customer fund
obligations from the Company’s UltiPro Tax Filing offering.
  Days
sales outstanding (“DSO”), calculated on a trailing three-month basis, as of
December 31, 2008 and December 31, 2007, were 71 days and 76 days,
respectively.  The decrease in DSO’s of 5 days compared to December
31, 2007 was primarily a function of increased revenues and stronger accounts
receivable collections.
 
 Deferred
revenues were $63.5 million at December 31, 2008, as compared to $51.7 million
at December 31, 2007.  The increase of $11.8 million in deferred
revenues for 2008 was primarily due to increased Intersourcing unit sales and,
to a lesser extent, increases in deferred services and deferred
maintenance.  Substantially all of the total balance in deferred
revenues is related to future recurring revenues, including deferred revenues
related to Intersourcing.
 
 The
Company had a credit facility (the “Credit Facility”) with Silicon Valley Bank,
which was secured by the Company’s eligible accounts receivable. The Credit
Facility was comprised of a revolving line of credit (the “Revolver”) and an
equipment term loan (the “Equipment Loan”). The Credit Facility’s Revolver
expired on May 27, 2006. Based upon the strength and consistency of the cash
flow position as well as management’s expectations for the next twelve months,
the Company chose not to renew the Credit Facility upon its
expiration.  The Credit Facility’s Equipment Loan did not have any
future borrowing capacity after May 27, 2006. The balance under the Equipment
Loan as of December 31, 2007, $0.3 million, was paid in full by December 31,
2008.
  The
Company believes that cash and cash equivalents, investments in marketable
securities and cash generated from operations will be sufficient to fund its
operations for at least the next 12 months. This belief is based upon, among
other factors, management’s expectations for future revenue growth, controlled
expenses and collections of accounts receivable.
  The
Company did not have any material commitments for capital expenditures as of
December 31, 2008.
  Off-Balance
Sheet Arrangements
 
 The Company does not have any
off-balance sheet arrangements (as that term is defined in applicable SEC rules)
that are reasonably likely to have a current or future material effect on the
Company’s financial condition, results of operations, liquidity, capital
expenditures or capital resources.
 
 29
 Table of Contents
 Contractual
Obligations
 
 As of
December 31, 2008, the Company’s outstanding contractual cash obligations were
as follows (in thousands):
 
 Payments
      Due by PeriodTotal
                    
                    
                    Less
      Than 1 Year
                    
                    
                    1-3
      Years
                    
                    
                    4-5
      Years
                    
                    
                    More
      than 5 YearsCapital
      lease obligations (1)
                    
                    $
                    3,711
                    
                    
                    $
                    2,133
                    
                    
                    $
                    1,578
                    
                    
                    $
                    —
                    
                    
                    $
                    —Other
      long-term obligations (2)
                    
                    
                    23,991
                    
                    
                    
                    3,713
                    
                    
                    
                    7,093
                    
                    
                    
                    5,950
                    
                    
                    
                    7,235Purchase
      obligations (3)
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Other
      long-term liabilities (4)
                    
                    
                    320
                    
                    
                    
                    320
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Total
      contractual cash obligations
                    
                    $
                    28,022
                    
                    
                    $
                    6,166
                    
                    
                    $
                    8,671
                    
                    
                    $
                    5,950
                    
                    
                    $
                    7,235_________________________
 
 (1)
              The
      Company leases certain equipment under non-cancelable agreements, which
      are accounted for as capital leases and expire at various dates through
      2010. See Note 15 of the Notes to Consolidated Financial Statements for
      information regarding capital lease
obligations.
  (2)
              Included
      in other long-term obligations were the Company’s leases for corporate
      office space and certain equipment under non-cancelable operating lease
      agreements expiring at various dates and a software maintenance
      agreement.  See Note 18 of the Notes to Consolidated Financial
      Statements for information regarding operating lease
      obligations.  The software maintenance agreement is a 36-month
      agreement beginning July 21, 2008 and ending on August 1, 2011 with 36
      monthly payments.
  (3)
              Purchase
      orders or contracts for the purchase of goods and services are not
      included in the table above.  The Company is not able to
      determine the aggregate amount of such purchase orders that represent
      contractual obligations, as purchase orders may represent authorizations
      to purchase rather than binding agreements.  The Company does
      not have significant agreements for the purchase of goods or services
      specifying minimum quantities or set
prices.
  (4)
              As
      of December 31, 2008, the Company had an outstanding balance related to
      the long-term installment loan agreement that was entered into during 2007
      with a third-party vendor to acquire computer software, of which, $0.3
      million is payable on or before September 1,
  2009.
 30
 Item
7A.                      Quantitative
and Qualitative Disclosures about Market Risk
  In the
ordinary course of its operations, the Company is exposed to certain market
risks, primarily interest rate risks, foreign currency risk and risks that are
either non-financial or non-quantifiable, such as political, economic, tax,
other regulatory or credit risks, are not included in the following assessment
of the Company’s market risks.
 
 Interest Rate Risk.The
Company is subject to financial market risks, including changes in interest
rates and in the valuations of its investment portfolio.  Changes in
interest rates could impact the Company’s anticipated interest income from
interest-bearing cash accounts, or cash equivalents and investments in
marketable securities.  The Company manages market risks, including
interest rate risks, in accordance with its investment guideline objectives,
including:
 
 ·
              Maximum
      safety of principal;
 ·
              Maintenance
      of appropriate liquidity for regular cash
needs;
 ·
              Maximum
      yields in relationship to guidelines and market
  conditions;
 ·
              Diversification
      of risks; and
 ·
              Fiduciary
      control of all investments.
 
 The
Company targets its fixed income investment portfolio to have maturities of 24
months or less.  Investments are held to enhance the preservation of
capital and not for trading purposes.
 
 Cash
equivalents consist of money market accounts with original maturities of less
than three months. Short-term investments include obligations of U.S. government
agencies and corporate debt securities.  Corporate debt securities
include commercial paper which must carry minimum short-term ratings of P-1 by
Moody’s Investor Service, Inc. (“Moody’s”) and A-1 by Standard & Poor’s
Ratings Service, a Division of The McGraw-Hill Companies, Inc.
(“S&P”).  Other corporate debt obligations must carry a minimum
rating of A-2 by Moody’s or A by S&P.  Asset-backed securities
must carry a minimum AAA rating by Moody’s and S&P with a maximum average
life of two years at the time of purchase.
 
 As of
December 31, 2008, total investments in available-for-sale marketable securities
were $5.8 million.
 
 As of
December 31, 2008, virtually all of the investments in the Company’s portfolio
were at fixed rates (with a weighted average interest rate of 2.3% per
annum).
  To
illustrate the potential impact of changes in interest rates, the Company has
performed an analysis based on its December 31, 2008 unaudited condensed
consolidated balance sheet and assuming no changes in its investments. 
Under this analysis, an immediate and sustained 100 basis point increase in the
various base rates would result in a decrease in the fair value of the Company’s
total portfolio of approximately $14 thousand over the next 12 months.  An
immediate and sustained 100 basis point decrease in the various base rates would
result in an increase of the fair value of the Company’s total portfolio of
approximately $14 thousand over the next 12 months.
 
 Foreign Currency
Risk.  The Company has foreign currency risks related to its
revenue and operating expenses denominated in currencies other than the U.S.
dollar.  Management does not believe movements in the foreign
currencies in which the Company transacts business will significantly affect
future net earnings.
  31
 Table of Contents
  
 
 Item
8.                      Financial
Statements and Supplementary Data
 
 INDEX
 
 Page(s)Report of Independent Registered Public Accounting
      Firm
                33Consolidated Balance Sheets as of December 31, 2008 and
      2007
                34Consolidated Statements of Operations for the
      Years Ended
                  December 31,
      2008, 2007 and 2006
                35Consolidated Statements of Stockholders’ Equity and
      Comprehensive Income
                  (Loss) for the Years
      Ended December 31, 2008, 2007 and 2006
                36Consolidated Statements of Cash Flows for the
      Years Ended
                  December 31, 2008,
      2007 and 2006
                37Notes to Consolidated Financial
      Statements
                38
  32
 Table of Contents
  
 Report of Independent Registered Public Accounting
Firm
 
 The Board
of Directors and Stockholders
 The
Ultimate Software Group, Inc.:
 
 We have
audited the accompanying consolidated balance sheets of The Ultimate Software
Group, Inc. and subsidiaries (the “Company”) as of December 31, 2008
and 2007, and the related consolidated statements of operations, stockholders’
equity and comprehensive income (loss), and cash flows for each of the years in
the three-year period ended December 31, 2008. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of
December 31, 2008 and 2007 and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2008, in conformity with U.S. generally accepted accounting
principles.
 
 As
discussed in Note 21 to the consolidated financial statements, the Company
changed its method of quantifying errors in 2006.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over
financial reporting as of December 31, 2008, based on criteria established
in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), and our report dated March 2, 2009,
expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
 
 /s/ KPMG
LLP
 KPMG
LLP
 
 March 2,
2009
 Miami,
Florida
 Certified
Public Accountants
 33
 Table of Contents
  THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 
 As of December 31,2008
                    
                    
                    2007(In
      thousands, except share data)ASSETSCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    17,200
                    
                    
                    $
                    17,462Short-term
      investments in marketable securities
                    
                    
                    5,805
                    
                    
                    
                    17,120Accounts
      receivable, net of allowance for doubtful accounts of $700for
      2008 and 2007
                    
                    
                    38,302
                    
                    
                    
                    34,658Prepaid
      expenses and other current assets
                    
                    
                    16,011
                    
                    
                    
                    9,801Deferred
      tax assets, net
                    
                    
                    3,533
                    
                    
                    
                    3,516Total
      current assets before funds held for customers
                    
                    
                    80,851
                    
                    
                    
                    82,557Funds
      held for customers
                    
                    
                    5,863
                    
                    
                    
                    –Total
      current assets
                    
                    
                    86,714
                    
                    
                    
                    82,557Property
      and equipment, net
                    
                    
                    22,984
                    
                    
                    
                    18,238Capitalized
      software, net
                    
                    
                    5,642
                    
                    
                    
                    3,631Goodwill
                    
                    
                    2,906
                    
                    
                    
                    4,063Long-term
      investments in marketable securities
                    
                    
                    –
                    
                    
                    
                    1,298Other
      assets, net
                    
                    
                    11,668
                    
                    
                    
                    9,365Long-term
      deferred tax assets, net
                    
                    
                    17,343
                    
                    
                    
                    16,004Total
      assets
                    
                    $
                    147,257
                    
                    
                    $
                    135,156LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                    
                    $
                    7,200
                    
                    
                    $
                    3,528Accrued
      expenses
                    
                    
                    12,701
                    
                    
                    
                    11,405Current
      portion of deferred revenue
                    
                    
                    54,687
                    
                    
                    
                    43,262Current
      portion of capital lease obligations
                    
                    
                    2,034
                    
                    
                    
                    2,002Current
      portion of long-term debt
                    
                    
                    320
                    
                    
                    
                    572Total
      current liabilities before customer funds obligations
                    
                    
                    76,942
                    
                    
                    
                    60,769Customer
      funds obligations
                    
                    
                    5,863
                    
                    
                    
                    –Total
      current liabilities
                    
                    
                    82,805
                    
                    
                    
                    60,769Deferred
      revenue, net of current portion
                    
                    
                    8,807
                    
                    
                    
                    8,446Deferred
      rent
                    
                    
                    3,054
                    
                    
                    
                    2,652Capital
      lease obligations, net of current portion
                    
                    
                    1,519
                    
                    
                    
                    1,991Long-term
      debt, net of current portion
                    
                    
                    –
                    
                    
                    
                    320Total
      liabilities
                    
                    
                    96,185
                    
                    
                    
                    74,178Commitments
      and contingencies (Note 18)
                    
                    
                    –
                    
                    
                    
                    –Stockholders’
      equity:Series
      A Junior Participating Preferred Stock, $.01 par value, 500,000
      shares
                      authorized,
      no shares issued
                    
                    
                    –
                    
                    
                    
                    –Preferred
      Stock, $.01 par value, 2,000,000 shares
                      authorized,
      no shares issued
                    
                    
                    –
                    
                    
                    
                    –Common
      Stock, $.01 par value, 50,000,000 shares authorized, 26,796,169
      and
                      26,219,789
      shares issued in 2008 and 2007, respectively
                    
                    
                    268
                    
                    
                    
                    262Additional
      paid-in capital
                    
                    
                    164,574
                    
                    
                    
                    143,913Accumulated
      other comprehensive loss
                    
                    
                    (1,002
                    )
                    
                    
                    (18
                    )Accumulated
      deficit
                    
                    
                    (53,268
                    )
                    
                    
                    (50,371
                    )110,572
                    
                    
                    
                    93,786Treasury
      stock, at cost, 2,533,575 and 1,452,375 shares in 2008 and 2007,
      respectively
                    
                    
                    (59,500
                    )
                    
                    
                    (32,808
                    )Total
      stockholders’ equity
                    
                    
                    51,072
                    
                    
                    
                    60,978Total
      liabilities and stockholders’ equity
                    
                    $
                    147,257
                    
                    
                    $
                    135,156
 The
accompanying Notes to Consolidated Financial Statements
 are an
integral part of these financial statements.
 
 34
 Table of Contents
 THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 
 For the Years Ended December
      31,2008
                      
                      
                      2007
                      
                      
                      2006(In thousands, except per share
      amounts)Revenues:Recurring
                      
                      $
                      106,681
                      
                      
                      $
                      87,017
                      
                      
                      $
                      63,935Services
                      
                      
                      60,627
                      
                      
                      
                      49,857
                      
                      
                      
                      38,617License
                      
                      
                      11,264
                      
                      
                      
                      14,590
                      
                      
                      
                      12,259Total
      revenues
                      
                      
                      178,572
                      
                      
                      
                      151,464
                      
                      
                      
                      114,811Cost
      of revenues:Recurring
                      
                      
                      29,754
                      
                      
                      
                      22,798
                      
                      
                      
                      17,875Services
                      
                      
                      50,106
                      
                      
                      
                      40,327
                      
                      
                      
                      30,256License
                      
                      
                      1,795
                      
                      
                      
                      1,659
                      
                      
                      
                      1,389Total
      cost of revenues
                      
                      
                      81,655
                      
                      
                      
                      64,784
                      
                      
                      
                      49,520Gross
      profit
                      
                      
                      96,917
                      
                      
                      
                      86,680
                      
                      
                      
                      65,291Operating
      expenses:Sales
      and marketing
                      
                      
                      47,193
                      
                      
                      
                      36,479
                      
                      
                      
                      29,382Research
      and development
                      
                      
                      36,738
                      
                      
                      
                      28,162
                      
                      
                      
                      22,471General
      and administrative
                      
                      
                      17,623
                      
                      
                      
                      14,434
                      
                      
                      
                      10,648Total
      operating expenses
                      
                      
                      101,554
                      
                      
                      
                      79,075
                      
                      
                      
                      62,501Operating
      income (loss)
                      
                      
                      (4,637
                      )
                      
                      
                      7,605
                      
                      
                      
                      2,790Other
      income (expense):Interest
      expense and other
                      
                      
                      (279
                      )
                      
                      
                      (214
                      )
                      
                      
                      (195
                      )Interest
      and other income, net
                      
                      
                      860
                      
                      
                      
                      6,002
                      
                      
                      
                      1,538Total
      other income, net
                      
                      
                      581
                      
                      
                      
                      5,788
                      
                      
                      
                      1,343Income
      (loss) before benefit for income taxes
                      
                      
                      (4,056
                      )
                      
                      
                      13,393
                      
                      
                      
                      4,133Benefit
      for income taxes
                      
                      
                      1,159
                      
                      
                      
                      19,736
                      
                      
                      
                      –Net
      income (loss)
                      
                      $
                      (2,897
                      )
                      
                      $
                      33,129
                      
                      
                      $
                      4,133Net
      income (loss) per share:Basic
                      
                      $
                      (0.12
                      )
                      
                      $
                      1.34
                      
                      
                      $
                      0.17Diluted
                      
                      $
                      (0.12
                      )
                      
                      $
                      1.24
                      
                      
                      $
                      0.15Weighted
      average shares outstanding:Basic
                      
                      
                      24,588
                      
                      
                      
                      24,701
                      
                      
                      
                      23,853Diluted
                      
                      
                      24,588
                      
                      
                      
                      26,722
                      
                      
                      
                      26,978
 
 
 
 
 
 
 The
accompanying Notes to Consolidated Financial Statements
 are an
integral part of these financial statements.
 35
 Table of Contents
 THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND
COMPREHENSIVEINCOME (LOSS)
 (In
thousands)
 Common
      Stock
                                            
                                            
                                            Additional
      Paid -in Capital
                                            
                                            
                                            Accumulated
      Other Comprehensive
                                              (Loss) Income
                                            
                                            
                                            Accumulated
                                              Deficit
                                            
                                            
                                            Treasury Stock
                                            
                                            
                                            Total
      Stockholders’
                                              EquityShares
                                            
                                            
                                            Amount
                                            
                                            
                                            Shares
                                            
                                            
                                            AmountBalance,
      December 31, 2005
                                            
                                            
                                            23,786
                                            
                                            
                                            $
                                            238
                                            
                                            
                                            $
                                            110,245
                                            
                                            
                                            $
                                            (31
                                            )
                                            
                                            $
                                            (85,852
                                            )
                                            
                                            
                                            258
                                            
                                            
                                            $
                                            (1,054
                                            )
                                            
                                            $
                                            23,546SAB
      108 cumulative adjustment (Note 21)
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (1,781
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (1,781
                                            )Adjusted
      balance, January 1, 2006
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (87,633
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            21,765Net
      income
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            4,133
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            4,133Unrealized
      gain on investments in
                                              marketable
      securities available-for-sale
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            33
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            33Unrealized
      loss on foreign exchange
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (1
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (1
                                            )Comprehensive
      income
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            4,165Repurchase
      of Common Stock
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            451
                                            
                                            
                                            
                                            (9,797
                                            )
                                            
                                            
                                            (9,797
                                            )Issuances
      of Common Stock from exercisesof
      stock options and warrants
                                            
                                            
                                            1,317
                                            
                                            
                                            
                                            13
                                            
                                            
                                            
                                            8,589
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            8,602Non-cash
      stock-based compensation expensefor
      stock options and restricted stock
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            6,287
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            6,287Balance,
      December 31, 2006
                                            
                                            
                                            25,103
                                            
                                            
                                            
                                            251
                                            
                                            
                                            
                                            125,121
                                            
                                            
                                            
                                            1
                                            
                                            
                                            
                                            (83,500
                                            )
                                            
                                            
                                            709
                                            
                                            
                                            
                                            (10,851
                                            )
                                            
                                            
                                            31,022Net
      income
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            33,129
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            33,129Unrealized
      loss on investments in
                                              marketable
      securities available-for-sale
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            (13
                                            )
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            (13
                                            )Unrealized
      loss on foreign exchange
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (6
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (6
                                            )Comprehensive
      income
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            33,110Repurchase
      of Common Stock
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            743
                                            
                                            
                                            
                                            (21,957
                                            )
                                            
                                            
                                            (21,957
                                            )Issuances
      of Common Stock from exercisesof
      stock options and warrants
                                            
                                            
                                            1,117
                                            
                                            
                                            
                                            11
                                            
                                            
                                            
                                            8,578
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            8,589Non-cash
      stock-based compensation expense for
      stock options and restricted stock
                                            
                                            _______
                                            
                                            
                                            _______
                                            
                                            
                                            
                                            10,214
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            10,214Balance,
      December 31, 2007
                                            
                                            
                                            26,220
                                            
                                            
                                            
                                            262
                                            
                                            
                                            
                                            143,913
                                            
                                            
                                            
                                            (18
                                            )
                                            
                                            
                                            (50,371
                                            )
                                            
                                            
                                            1,452
                                            
                                            
                                            
                                            (32,808
                                            )
                                            
                                            
                                            60,978Net
      loss
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            (2,897
                                            )
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            (2,897
                                            )Unrealized
      gain on investments in
                                              marketable
      securities available-for-sale
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            15
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            15Unrealized
      gain on foreign exchange
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (999
                                            )
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (999
                                            )Comprehensive
      loss
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            (3,881
                                            )Repurchase
      of Common Stock
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            1,082
                                            
                                            
                                            
                                            (26,692
                                            )
                                            
                                            
                                            (26,692
                                            )Issuances
      of Common Stock from exercisesof
      stock options and warrants
                                            
                                            
                                            576
                                            
                                            
                                            
                                            6
                                            
                                            
                                            
                                            5,175
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            5,181Non-cash
      stock-based compensation expense for
      stock options and restricted stock
                                            
                                            _____–_
                                            
                                            
                                            ______–
                                            
                                            
                                            
                                            15,486
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            –
                                            
                                            
                                            
                                            15,486Balance,
      December 31, 2008
                                            
                                            
                                            26,796
                                            
                                            
                                            $
                                            268
                                            
                                            
                                            $
                                            164,574
                                            
                                            
                                            $
                                            (1,002
                                            )
                                            
                                            $
                                            (53,268
                                            )
                                            
                                            
                                            2,534
                                            
                                            
                                            $
                                            (59,500
                                            )
                                            
                                            $
                                            51,072
 The
accompanying Notes to Consolidated Financial Statements
 are an
integral part of these financial statements.
 36
 Table of Contents
   THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 For the Years Ended December
      31,2008
                              
                              
                              2007
                              
                              
                              2006(In
      thousands)Cash
      flows from operating activities:Net
      income (loss)
                              
                              $
                              (2,897
                              )
                              
                              $
                              33,129
                              
                              
                              $
                              4,133Adjustments
      to reconcile net income (loss) to net cash providedby
      operating activities, net of effects from business
      combination:Depreciation
      and amortization
                              
                              
                              10,106
                              
                              
                              
                              7,068
                              
                              
                              
                              5,371Provision
      for doubtful accounts
                              
                              
                              1,546
                              
                              
                              
                              1,505
                              
                              
                              
                              813Non-cash
      expense for stock based compensation
                              
                              
                              15,456
                              
                              
                              
                              10,172
                              
                              
                              
                              6,246Deferred
      income taxes
                              
                              
                              (1,205
                              )
                              
                              
                              (19,851
                              )
                              
                              
                              –Changes
      in operating assets and liabilities:Accounts
      receivable
                              
                              
                              (5,190
                              )
                              
                              
                              (9,588
                              )
                              
                              
                              (8,940
                              )Prepaid
      expenses and other current assets
                              
                              
                              (6,210
                              )
                              
                              
                              (1,190
                              )
                              
                              
                              (2,712
                              )Other
      assets, net
                              
                              
                              (2,488
                              )
                              
                              
                              (2,517
                              )
                              
                              
                              (3,484
                              )Accounts
      payable
                              
                              
                              3,672
                              
                              
                              
                              (366
                              )
                              
                              
                              1,021Accrued
      expenses
                              
                              
                              1,199
                              
                              
                              
                              2,039
                              
                              
                              
                              3,365Deferred
      revenue
                              
                              
                              11,786
                              
                              
                              
                              8,739
                              
                              
                              
                              9,617Net
      cash provided by  operating activities
                              
                              
                              25,775
                              
                              
                              
                              29,140
                              
                              
                              
                              15,430Cash
      flows from investing activities:Purchases
      of marketable securities
                              
                              
                              (6,688
                              )
                              
                              
                              (20,036
                              )
                              
                              
                              (22,208
                              )Maturities
      of marketable securities
                              
                              
                              19,315
                              
                              
                              
                              17,890
                              
                              
                              
                              20,990Net
      purchases of client funds securities
                              
                              
                              (5,863
                              )
                              
                              
                              –
                              
                              
                              
                              –Purchases
      of property and equipment
                              
                              
                              (12,206
                              )
                              
                              
                              (7,429
                              )
                              
                              
                              (6,367
                              )Capitalized
      software
                              
                              
                              (2,230
                              )
                              
                              
                              (1,653
                              )
                              
                              
                              (1,801
                              )Payments
      for acquisition
                              
                              
                              –
                              
                              
                              
                              (24
                              )
                              
                              
                              (3,627
                              )Net
      cash used in investing activities
                              
                              
                              (7,672
                              )
                              
                              
                              (11,252
                              )
                              
                              
                              (13,013
                              )Cash
      flows from financing activities:Repurchases
      of Common Stock
                              
                              
                              (26,692
                              )
                              
                              
                              (21,957
                              )
                              
                              
                              (9,797
                              )Principal
      payments on capital lease obligations
                              
                              
                              (2,152
                              )
                              
                              
                              (2,045
                              )
                              
                              
                              (1,717
                              )Net
      increase in client fund obligations
                              
                              
                              5,863
                              
                              
                              
                              –
                              
                              
                              
                              –Net
      proceeds from issuances of Common Stock
                              
                              
                              5,182
                              
                              
                              
                              7,617
                              
                              
                              
                              8,602Repayments
      of borrowings of long-term debt
                              
                              
                              (572
                              )
                              
                              
                              (768
                              )
                              
                              
                              (501
                              )Net
      cash used in financing activities
                              
                              
                              (18,371
                              )
                              
                              
                              (17,153
                              )
                              
                              
                              (3,413
                              )Effect
      of exchange rate changes on cash
                              
                              
                              6
                              
                              
                              
                              (7
                              )
                              
                              
                              (1
                              )Net
      (decrease) increase in cash and cash equivalents
                              
                              
                              (262
                              )
                              
                              
                              728
                              
                              
                              
                              (997
                              )Cash
      and cash equivalents, beginning of year
                              
                              
                              17,462
                              
                              
                              
                              16,734
                              
                              
                              
                              17,731Cash
      and cash equivalents, end of year
                              
                              $
                              17,200
                              
                              
                              $
                              17,462
                              
                              
                              $
                              16,734Supplemental
      disclosure of cash flow information:Cash
      paid for interest
                              
                              $
                              85
                              
                              
                              $
                              96
                              
                              
                              $
                              102Cash
      paid for income taxes
                              
                              $
                              332
                              
                              
                              $
                              75
                              
                              
                              $
                              –Supplemental
      disclosure of non-cash investing and financing activities (in
      thousands):-The
      Company entered into capital lease obligations to acquire new equipment
      totaling $1,712, $3,109 and $2,285 in 2008, 2007 and 2006,
      respectively.-The
      Company included in capitalized software on the Company’s consolidated
      balance sheet a total of $30, $42 and $41 in stock-based compensation
      related to capitalized software at December 31, 2008, 2007 and 2006,
      respectively.- The Company entered into a long-term installment loan agreement
      with a third-party vendor to acquire computer software totaling $961
      during the year ended December 31, 2007.-The
      Company satisfied its agreement for the 2006 purchase of RTIX during 2007
      with a stock consideration payment valued at $972.
                                -The
      Company entered into an agreement to purchase source code from a
      third-party vendor, for $2.0 million, of which $1.5 million was paid
      during 2008.-The
      Company had a $1,005 adjustment between goodwill and other comprehensive
      loss (related to foreign currency translation) during
2008.
 
 The
accompanying Notes to Consolidated Financial Statements
 are an
integral part of these financial statements.
 
 37
 Table of Contents
 
 THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 
 1.  Nature
of Operations
 
 The
Ultimate Software Group, Inc. and subsidiaries (“Ultimate” or the “Company”)
designs, markets, implements and supports human resources (“HR”), payroll and
talent management solutions principally in the United States and
Canada.  Ultimate solutions are available as two solution suites based
on company size.  UltiPro Enterprise (“Enterprise”) was developed to
address the needs of large and very large companies (700 or more employees and
including companies as large as 15,000 employees and larger) and UltiPro
Workplace (“Workplace”) was developed for companies in the mid-market (200 to
700 employees).  UltiPro is marketed primarily through the Company’s
Enterprise and Workplace direct sales teams.
 
 2.  Basis
of Presentation, Consolidation and the Use of Estimates
 
 The
accompanying consolidated financial statements of the Company have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(the “SEC”).
  The
consolidated financial statements included herein reflect all adjustments, which
are, in the opinion of the Company’s management, necessary for a fair
presentation of the information for the periods presented. The preparation of
financial statements in conformity with generally accepted accounting principles
in the United States (“GAAP”) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
 The
consolidated financial statements reflect the financial position and operating
results of the Company and include its wholly-owned subsidiaries. Intercompany
accounts and transactions have been eliminated in consolidation.
 
 3.  Summary
of Significant Accounting Policies and Recent Accounting
Pronouncements
 
 Cash
and Cash Equivalents
 
 All
highly liquid instruments with an original maturity of three months or less when
acquired are considered cash equivalents and are comprised of interest-bearing
accounts.
 
 Accounts
Receivable
 
 Accounts
receivable are principally from end-users of the Company’s products. The Company
performs credit evaluations of its customers and has recorded allowances for
estimated losses. The Company maintains an allowance for doubtful accounts at an
amount estimated to be sufficient to provide adequate protection against losses
resulting from collecting less than full payment on accounts receivable. A
considerable amount of judgment is required when the realization of receivables
is assessed, including assessing the probability of collection and current
credit-worthiness of each customer. If the financial condition of the Company’s
customers were to deteriorate, resulting in an impairment of their ability to
make payments, an additional provision for doubtful accounts may be
required.
 
 Funds
Held for Customers and Customers Funds Obligations
 
 During
the second quarter of 2008, the Company introduced a new product, UltiPro Tax
Filing, for its Workplace market.  Tax filing services provided to
Workplace customers through the Company’s UltiPro Tax Filing product are being
sold directly by the Company to its Workplace customers only on a
per-employee-per-month (“PEPM”) basis in conjunction with UltiPro, its core
product.  As a result of rolling out its new UltiPro Tax Filing
product, the Company receives funds from its Workplace customers and holds such
funds for purposes of paying the appropriate taxing authorities on behalf of
such customers.  The Company holds Workplace customers’ tax filing
deposits for the period between collection from Workplace customers and
remittance to the applicable taxing authority.  These funds held for
customers and the corresponding customer funds obligations are included in
current assets and current liabilities, respectively, in the Company’s
consolidated balance sheet as of December 31, 2008.  The Company has
reported the cash flows related to the purchases of overnight repurchase
agreements backed by U.S. Treasury or U.S. Government Agency securities using
funds received from Workplace UltiPro Tax Filing customers in the investing
activities section of the unaudited condensed consolidated statement of cash
flows for the year ended December 31, 2008.  The Company has reported
the cash flows related to the funds received and paid on behalf of such
customers to the applicable taxing authorities in the financing activities
section of the consolidated statement of cash flows for the year ended December
31, 2008.  The associated PEPM fees for UltiPro Tax Filing are
included in recurring revenues in the audited consolidated statements of
operations for the year ended December 31, 2008. Since UltiPro Tax Filing was
introduced during the second quarter of 2008, the interest earned associated
therewith was not material for the year ended December 31, 2008.
 
 Fair
Value of Financial Instruments
 
 The
Company’s financial instruments, consisting of cash and cash equivalents,
investments in marketable securities, funds held for customer and the related
obligations, accounts receivable, accounts payable, and capital lease
obligations, approximated fair value as of December 31, 2008 and
2007.
 
 Fair
Value of a Conditional Asset Retirement Obligation
 
 The
Company adopted Financial Accounting Standards Board (“FASB”) Interpretation
(“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligation, an
interpretation of FASB Statement No. 143” (“FIN No. 47”).  FIN No. 47
requires an entity to recognize a liability for the fair value of a conditional
asset retirement obligation when incurred if the liability’s fair value can be
reasonably estimated.  The adoption of FIN No. 47 did not have an
impact on the Company’s consolidated financial statements.
 
 Goodwill
and Other Intangible Assets
 
 Goodwill is not subject to
amortization, but is subject to an impairment test at least annually or more
frequently if events or circumstances indicate that impairment might
exist.  The Company completed its annual impairment analysis of
goodwill and determined goodwill had not been impaired as of December 31,
2008.  Statement of Financial Accounting Standards (“SFAS”) No. 142,
“Goodwill and Other Intangible Assets” (“SFAS No. 142”), also requires that
intangible assets with definite lives be amortized over their estimated useful
lives and reviewed for impairment in accordance with SFAS No. 144 (defined
below).  The Company is currently amortizing its acquired intangible
assets with finite lives over periods ranging from five to six
years.  See Note 10 for further discussion.
 
 38
 Table of Contents
 Long-Lived
Assets
 
 On January 1, 2002, the Company adopted
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”
(“SFAS No. 144”).  The Company evaluates the carrying value of
long-lived assets when indicators of impairment exist.  For the year
ended December 31, 2008, no such events or circumstances were
identified.  The carrying value of a long-lived asset is considered
impaired when the undiscounted expected future cash flows from such asset (or
asset group) are separately identifiable and less than the asset’s (or asset
group’s) carrying value.  In that event, a loss is recognized to the
extent that the carrying value exceeds the fair value of the long-lived
asset.  Fair value is determined primarily using the anticipated cash
flows discounted at a rate commensurate with the risk involved.  For
the years ended December 31, 2008, 2007 and 2006, the Company made no material
adjustments to its long-lived assets.
  Property
and Equipment
 
 Property and equipment is stated at
cost, net of accumulated depreciation and amortization. Property and equipment
is depreciated using the straight-line method over the estimated useful lives of
the assets, which range from two to twenty years. Leasehold improvements and
assets under capital leases are amortized over the shorter of the life of the
asset or the term of the lease over periods ranging from two to fifteen years.
Maintenance and repairs are charged to expense when incurred; betterments are
capitalized. Upon the sale or retirement of assets, the cost, accumulated
depreciation and amortization are removed from the accounts and any gain or loss
is recognized.
 
 Deferred
Revenue
 
 Deferred
revenue is primarily comprised of deferrals for recurring revenues for
Intersourcing services which are recognized over the term of the related
contract as the services are performed, typically two years; maintenance
services which have not yet been rendered; implementation consulting services
for which the services have not yet been rendered; and subscription revenues
which are recognized ratably over the minimum term of the related contract upon
the delivery of the product and services.
 
 Guarantees
 
 The
Company adopted FASB Interpretation No. 45, “Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others” (“FIN No. 45”). The provision for initial recognition
and measurement of liability is applied on a prospective basis to guarantees
issued or modified after December 31, 2002. FIN No. 45 expands previously issued
accounting guidance and disclosure requirements for certain guarantees and
requires recognition of an initial liability for the fair value of an obligation
assumed by issuing a guarantee.  As an element of standard commercial
terms in its standard sales contracts for UltiPro, the Company includes an
indemnification clause that indemnifies the customer against certain liabilities
and damages arising from any claims of patent, copyright, or other proprietary
rights of any third party. Due to the nature of the intellectual property
indemnification provided to its customers, the Company cannot estimate the fair
value, or determine the total nominal amount, of the indemnification until such
time as a claim for such indemnification is made.  In the event of a
claim made against the Company under such provision, the Company evaluates
estimated losses for such indemnification under SFAS No. 5, “Accounting for
Contingencies,” as interpreted by FIN No. 45, considering such factors as the
degree of probability of an unfavorable outcome and the ability to make a
reasonable estimate of the amount of loss.  To date, the Company has
not had any claims made against it under such provision and, accordingly, has
not accrued any liabilities related to such indemnifications in its consolidated
financial statements.
 
 Accounting
Changes and Error Corrections
 
 The
Company adopted SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS
No. 154”), which replaced APB Opinion No. 20, “Accounting Changes” (“APB No.
20”) and FASB Statement No. 3, “Reporting Accounting Changes in Interim
Financial Statements” (“SFAS No. 3”) effective December 31, 2006.  APB
No. 20 required that changes in accounting principles be recognized by including
the cumulative effect of the change in the period in which the new accounting
principle was adopted.  SFAS No. 154 requires retrospective
application of the change to prior periods’ financial statements, unless it is
impracticable to determine the period-specific effects of the
change.  The adoption of SFAS No. 154 did not have an impact on the
Company’s consolidated financial statements.
 
 Segment
Information
 
 SFAS No.
131, “Disclosures about Segments of an Enterprise and Related Information”
(“SFAS No. 131”), establishes standards for the way that public companies report
selected information about operating segments in annual and interim financial
reports to shareholders. It also establishes standards for related disclosures
about an enterprise’s business segments, products, services, geographic areas
and major customers. The Company operates its business as a single
segment.
 
 Revenue
Recognition
 
 Sources
of revenue for the Company are as follows:
  1)  Recurring
revenues, which include:
  o
              Subscription
      revenues generated from sales of the right to use UltiPro through
      Intersourcing, which includes Hosting Services (defined below), with the
      relevant elements as follows:
  §
              Upfront
      one-time fees priced on a per-employee basis;
  and
  §
              Monthly
      subscription revenues, priced on a PEPM
basis.
  o
              Maintenance
      revenues generated from maintaining, supporting and providing periodic
      updates for the Company’s UltiPro solutions sold under software license
      agreements:
  §
              Renewal
      maintenance associated with perpetual license agreements sold in prior
      periods and related to an existing customer
  base;
  §
              First
      year maintenance associated with new perpetual license agreements or those
      which are still in the initial contract period (see discussion below
      regarding the cessation of future perpetual license sales effective April
      1, 2009);
  o
              Subscription
      revenues generated from sales of services to host the UltiPro application
      (“Hosting Services”) in conjunction with sales of perpetual licenses of
      UltiPro;
  o
              Subscription
      revenues generated from sales of Hosting Services on a stand-alone basis
      to customers who already own a perpetual license (“Base
      Hosting”);
  o
              Subscription
      revenues generated from the Original Ceridian Agreement (an agreement
      signed in 2001, subsequently amended and terminated on March 9, 2008,
      granting Ceridian Corporation a non-exclusive license to use UltiPro as
      part of an on-line offering to market primarily to businesses with less
      than 500 employees); and, to a lesser
extent;
  o
              Subscription
      revenues generated from PEPM fees related to sales of UltiPro by
      independent business service providers
  (“BSP’s”).
 39
 2)  Sales
of services including implementation of the Company’s UltiPro solutions
(representing the majority of services revenues), training (also known as
knowledge management) and other services, including the provision of
payroll-related forms and the printing of Form W-2’s for certain
customers;
  3)  Sales
of perpetual licenses for UltiPro:
  o
              Effective
      April 1, 2009, Ultimate will discontinue selling its on-site UltiPro
      solutions on a perpetual license basis, although the Company will continue
      to sell on-site UltiPro solutions on a subscription basis (which is priced
      and billed to customers on a PEPM
basis).
  Recurring
Revenues
   Sales
Generated from the Intersourcing Offering
  Subscription
revenues generated from the Intersourcing Offering are recognized in accordance
with Emerging Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with
Multiple Deliverables” (“EITF No. 00-21”) as a services arrangement since the
customer is purchasing the right to use UltiPro rather than licensing the
software on a perpetual basis. Fair value of multiple elements in Intersourcing
arrangements is assigned to each element based on the guidance provided by EITF
No. 00-21.
  The
elements that typically exist in Intersourcing arrangements include Hosting
Services, the right to use UltiPro, maintenance of UltiPro (i.e., product
enhancements and customer support) and professional services (i.e.,
implementation services and training in the use of UltiPro).  The
pricing for Hosting Services, the right to use UltiPro and maintenance of
UltiPro is bundled (the “Bundled Elements”).  Since these three
Bundled Elements are components of recurring revenues in the consolidated
statements of operations, allocation of fair values to each of the three
elements is not necessary and they are not reported separately.  Fair
value for the Bundled Elements, as a whole, is based upon evidence provided by
the Company’s pricing for Intersourcing arrangements sold
separately.  The Bundled Elements are provided on an ongoing basis and
represent undelivered elements under EITF No. 00-21; they are recognized on a
monthly basis as the services are performed, once the customer processes its
first live payroll (i.e., goes “Live”).
  Implementation
and training services (the “Professional Services”) provided for Intersourcing
arrangements are typically priced on a time and materials basis and are
recognized as services revenue in the consolidated statements of operations as
the services are performed.  Under EITF No. 00-21, fair value is
assigned to service elements in the arrangement based on their relative fair
values, using the prices established when the services are sold on a stand-alone
basis.  Fair value for Professional Services is based on the
respective Implementation Valuation (defined below) and Training Valuation
(defined below).  If evidence of the fair value of one or more
undelivered elements does not exist, the revenue is deferred and recognized when
delivery of those elements occurs or when fair value can be
established.
  The
Company believes that applying EITF No. 00-21 to Intersourcing arrangements, as
opposed to applying American Institute of Public Accountants (“AICPA”) Statement
of Position (“SOP”) 97-2, “Software Revenue Recognition” (“SOP 97-2”), is
appropriate given the nature of the arrangements whereby the customer has no
right to the UltiPro license.
  Sales
of Base Hosting Services
 
 Subscription
revenues generated from Base Hosting are recognized in accordance with EITF No.
00-3, “Application of AICPA Statement of Position 97-2 to Arrangements that
Include the Right to Use Software Stored on Another Entity’s Hardware,” (“EITF
No. 00-3”) which provides guidance as to the application of SOP 97-2 to hosting
arrangements that include a license right to the software.  The
elements that typically exist for Base Hosting arrangements include Hosting
Services and implementation services.  Base Hosting is different than
Intersourcing arrangements in that the customer already owns a perpetual license
and is subsequently adding Hosting Services or is purchasing a perpetual license
for UltiPro together with Hosting Services, whereas, with Intersourcing, the
customer is purchasing the right to use (not license) UltiPro together with
Hosting Services.  Implementation services provided for Base Hosting
arrangements, whereby the customer already owns a perpetual license, are less
than those provided for Intersourcing arrangements since UltiPro is already
implemented in these Base Hosting arrangements and only needs to be transitioned
to a hosted environment.  Fair value for Hosting Services is based on
the Hosting Valuation (defined below). The fair value for implementation
services is based on the Implementation Valuation in accordance with guidelines
provided by SOP 97-2.
  Revenue
Recognition for Elements included in Recurring Revenues
  Recurring
revenues include subscription revenues and maintenance revenues.
  Subscription revenuesare principally derived from PEPM fees earned through the Intersourcing
Offering, Base Hosting and, to a lesser extent, the BSP sales channel, as well
as revenues generated from the Original Ceridian Agreement (which terminated
March 9, 2008).
  To the
extent there are upfront (or setup) fees associated with the Intersourcing
Offering, Base Hosting or the BSP sales channel, subscription revenues are
recognized ratably over the minimum term of the related contract upon the
delivery of the product and services.  In the cases of Intersourcing
and Base Hosting sales, delivery of the services is when the customer processes
its first payroll (or goes “Live”), at which time amortization of the upfront
fees commences and extends until the end of the initial contract
period.  In the case of BSP channel sales, amortization of the upfront
fee typically commences when the contract is signed, which is when the BSP’s
rights under the agreement begin, continuing until the initial contract term
ends.  Ongoing PEPM fees from the Intersourcing Offering, Base Hosting
and the BSP sales channel are recognized as subscription revenue as the services
are delivered, typically on a monthly basis.
  Subscription
revenues from the Original Ceridian Agreement of $1.5 million were recognized in
2008 through the agreement’s termination date on March 9, 2008.  For
each of the years ended December 31, 2007 and 2006, $642,000 per month (or $7.7
million per year) of subscription revenues was recognized.
  Subscription
revenues generated from the BSP sales channel include both the right to use
UltiPro and maintenance.  The BSP is charged a fee on a PEPM
basis.  Revenue is recognized on a PEPM basis as the services are
provided to the underlying customer.  To the extent the BSP pays the
Company a one-time upfront fee, the Company accounts for such fee by recognizing
it as subscription revenue over the minimum term of the related
agreement.
  Maintenance revenues
are derived from maintaining, supporting and providing periodic updates for the
Company’s software.  Maintenance and support fees are generally priced
as a percentage of the initial license fee for the underlying
products.  Maintenance services provided to customers include product
updates and technical support services.  Product updates are included
in general releases to the Company’s customers and are distributed on a periodic
basis.  Such updates may include, but are not limited to, product
enhancements, payroll tax updates, additional security features or bug fixes.
All features provided in general releases are unspecified upgrade rights. To the
extent specified upgrade rights or entitlements to future products are included
in a multi-element arrangement, revenue is recognized upon delivery provided
fair value for the elements exists.  In multi-element arrangements
that include a specified upgrade right or entitlement to a future product, if
fair value does not exist for all undelivered elements, revenue for the entire
arrangement is deferred until all elements are delivered or when fair value can
be established. Maintenance revenues are recognized ratably over the service
period, generally one year.  Annual maintenance renewal fees which
occur subsequent to the initial contract period are also recognized ratably over
the related service period.
  40
 Table of Contents
  Services
Revenues
  Sales
of Services, including Implementation and Training Services, and Related Revenue
Recognition
  Services revenues
include revenues from fees charged for the implementation of the Company’s
software products and training of customers in the use of such products, fees
for other services, including services provided to BSP’s, the provision of
payroll-related forms and the printing of Form W-2’s for certain customers, as
well as certain reimbursable out-of-pocket expenses.  Revenues for
implementation consulting and training services are recognized as services are
performed to the extent the pricing for such services is on a time and materials
basis. Other services are recognized as the product is shipped or as the
services are rendered depending on the specific terms of the
arrangement.
  Arrangement
fees related to fixed-fee implementation services contracts are recognized using
the percentage of completion accounting method, which involves the use of
estimates.  Percentage of completion is measured at each reporting
date based on hours incurred to date compared to total estimated hours to
complete.  If a sufficient basis to measure the progress towards
completion does not exist, revenue is recognized when the project is completed
or when the Company receives final acceptance from the customer.
  The
Company recognizes revenue in accordance with the Securities Exchange Commission
(“SEC”) Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial
Statements” (“SAB No. 101”) and the SEC Staff Accounting Bulletin No. 104,
“Revenue Recognition” (“SAB No. 104”). Management believes the Company is
currently in compliance in all material aspects with the current provisions set
forth in SOP 97-2, SOP 98-9 “Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions” (“SOP 98-9”), EITF No. 00-21,
EITF No. 00-3, SAB No. 101 and SAB No. 104.
 
 License
Revenues
 
  Sales
of Perpetual Licenses for UltiPro Sold With or Without Hosting
Services
  Sales of
perpetual licenses for UltiPro and sales of perpetual licenses for UltiPro in
conjunction with Hosting Services are multiple-element arrangements that involve
the sale of software and consequently fall under the guidance of SOP 97-2 for
revenue recognition.
 
  The
Company licenses software under non-cancelable license agreements and provides
services including maintenance, implementation consulting and training services.
In accordance with the provisions of SOP 97-2, license revenues are generally
recognized when (1) a non-cancelable license agreement has been signed by both
parties, (2) the product has been shipped, (3) no significant vendor obligations
remain and (4) collection of the related receivable is considered
probable.  To the extent any one of these four criteria is not
satisfied, license revenue is deferred and not recognized in the audited
consolidated statements of operations until all such criteria are
met.
 
 For
multiple-element software arrangements, each element of the arrangement is
analyzed and the Company allocates a portion of the total fee under the
arrangement to the elements based on vendor-specific objective evidence of fair
value of the element (“VSOE”), regardless of any separate prices stated within
the contract for each element. Fair value for the elements of multiple-element
software arrangements is considered to be the price a customer would be required
to pay when the element is sold separately.
 
 The
Residual Method (as defined below) is used to recognize revenue when a license
agreement includes one or more elements to be delivered at a future date and
VSOE of the fair value of all undelivered elements exists.  The fair
value of the undelivered elements is determined based on the historical evidence
of stand-alone sales of these elements to customers.  Undelivered
elements in a license arrangement typically include maintenance, implementation
and training services (the “Standard Undelivered Elements”).  The fair
value for maintenance fees is based on the price of the services sold
separately, which is determined by the annual renewal rate historically and
consistently charged to customers (the “Maintenance
Valuation”).  Maintenance fees are generally priced as a percentage of
the related license fee.  The fair value for implementation services
is based on standard pricing (i.e., rate per hour charged to customers for
implementation services), for stand-alone sales of implementation services (the
“Implementation Valuation”).  The fair value for training services is
based on standard pricing (i.e., rate per training day charged to customers for
class attendance), taking into consideration stand-alone sales of training
services through year-end seminars and historically consistent pricing for such
services (the “Training Valuation”).  Under the residual method (the
“Residual Method”), the fair value of the undelivered elements is deferred and
the remaining portion of the arrangement fee attributable to the delivered
element, the license fee, is recognized as license revenue.  If VSOE
for one or more undelivered elements does not exist, the revenue is deferred on
the entire arrangement until the earlier of the point at which (i) such VSOE
does exist or (ii) all elements of the arrangement have been
delivered.
  Perpetual
licenses of UltiPro sold without Hosting Services typically include a license
fee and the Standard Undelivered Elements.  Fair value for the
Standard Undelivered Elements is based on the Maintenance Valuation, the
Implementation Valuation and the Training Valuation.  The delivered
element of the arrangement, the license fee, is accounted for in accordance with
the Residual Method.
  Perpetual
licenses of UltiPro sold with Hosting Services typically include a license fee,
the Standard Undelivered Elements and Hosting Services.  Fair value
for the Standard Undelivered Elements is based on the Maintenance Valuation, the
Training Valuation and the Implementation Valuation.  Hosting Services
are delivered to customers on a PEPM basis over the term of the related customer
contract (“Hosting PEPM Services”).  Upfront fees charged to customers
represent fees for the hosting infrastructure, including hardware costs,
third-party license fees and other upfront costs incurred by the Company in
relation to providing such services (“Hosting Upfront Fees”).  Hosting
PEPM Services and Hosting Upfront Fees (collectively, “Hosting Services”)
represent undelivered elements in the arrangement since their delivery is over
the course of the related contract term.  The fair value for Hosting
Services is based on standard pricing (i.e., rate charged PEPM), taking into
consideration stand-alone sales of Hosting Services through the sale of such
services to existing customers (i.e., those who already own the UltiPro
perpetual license at the time Hosting Services are sold to them) and
historically consistent pricing for such services (the “Hosting
Valuation”).  The delivered element of the arrangement, the license
fee, is accounted for in accordance with the Residual Method.
  The
Company’s customer contracts are non-cancelable agreements.  The
Company does not provide for rights of return or price protection on its
software.  The Company provides a limited warranty that its software
will perform in accordance with user manuals for varying periods, which are
generally less than one year from the contract date.  The Company’s
customer contracts generally do not include conditions of
acceptance.  However, if conditions of acceptance are included in a
contract or uncertainty exists about customer acceptance of the software,
license revenue is deferred until acceptance occurs.
  Effective
April 1, 2009, Ultimate will discontinue selling its on-site UltiPro solutions
on a perpetual license basis, although the Company will continue to sell on-site
UltiPro solutions on a subscription basis (which is priced and billed to
customers on a PEPM basis).
  
 41
 Table of Contents
 Cost
of Revenues
 
 Cost of
revenues consists of the cost of recurring, services and license revenues. Cost
of recurring revenues consists of costs to provide maintenance and technical
support to the Company’s customers, the cost of providing periodic updates and
the cost of subscription revenues, including amortization of capitalized
software. Cost of services revenues primarily consists of costs to provide
implementation services and training to the Company’s customers and, to a lesser
degree, costs related to sales of payroll-related forms, costs associated with
certain reimbursable out-of-pocket expenses, discussed below, and costs to
support additional services provided to BSPs.  Cost of license
revenues primarily consists of fees payable to third parties for software
products distributed by the Company. UltiPro includes third-party software for
enhanced report writing purposes and for time and attendance
functionality.  When UltiPro licenses are sold, customers pay the
Company on a per user basis for the license rights to the third-party report
writing software and for the add-on product, UltiPro Time and Attendance
(“UTA”), which was introduced in 2006.
 
 Stock-Based
Compensation
  The
Company’s equity compensation program provides broad discretion to the
Compensation Committee of the Board of Directors to create appropriate equity
incentives for non-employee directors, officers and employees of the
Company.  The program is intended to attract and retain talented
employees and align employee and stockholder interests.  Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
SFAS No. 123R, “Share-Based Payment,” using the modified-prospective transition
method. Under this transition method, compensation was recognized beginning
January 1, 2006 and includes (a) compensation expense for all stock-based
employee compensation arrangements granted prior to, but not yet vested as of,
January 1, 2006, based on the grant date fair value estimated in accordance with
the original provisions of SFAS No. 123, “Share-Based Payment,” and (b)
compensation expense for all share-based employee compensation arrangements
granted subsequent to January 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS No. 123 (revised 2004),
“Share-Based Payment” (“SFAS No. 123R”).
 
 In
accordance with SFAS No. 123R, the Company capitalizes the portion of
stock-based compensation (“SBC”) expense attributed to research and development
personnel whose labor costs are being capitalized pursuant to SFAS No. 86
“Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed” (“SFAS No. 86”), related to software development.  The
following table summarizes SBC recognized by the Company (in
thousands):
 
 For
      the Years Ended
                                December
      31,2008
                              
                              
                              2007
                              
                              
                              2006SBC
      – Statements of operations
                              
                              $
                              15,456
                              
                              
                              $
                              10,172
                              
                              
                              $
                              6,246SBC
      – Capitalized software
                              
                              
                              30
                              
                              
                              
                              42
                              
                              
                              
                              41SBC
      – Statements of stockholders’ equity
                              
                              $
                              15,486
                              
                              
                              $
                              10,214
                              
                              
                              $
                              6,287
 
 During
the first quarter of fiscal 2006, the Company adopted FASB Staff Position
(“FSP”) FAS 123R-2, “Practical Accommodation to the Application of Grant Date as
Defined in FASB Statement No. 123R” (“FSP No. FAS 123R-2”).  FSP No.
FAS 123R-2 provides guidance on the application of grant date as defined in SFAS
No. 123R.  As a practical accommodation, a mutual understanding of the
key terms and conditions of an award is approved in accordance with the relevant
corporate governance requirements if certain conditions are met.  The
adoption of FSP No. FAS 123R-2 did not have an impact on the Company’s
consolidated financial statements.
 
 In
November 2005, the FASB issued FSP No. FAS 123(R)-3, “Transition
Election Related to Accounting for Tax Effects of Share-Based Payment Awards”
(“FSP No. FAS 123(R)-3”). The Company has elected to adopt the alternative
transition method provided in FSP No. FAS 123(R)-3 for calculating the tax
effects of stock-based compensation expense pursuant to SFAS No. 123(R). The
alternative transition method includes a simplified method to establish the
beginning balance of the additional paid-in capital pool (“APIC pool”) related
to the tax effects of employee and non-employee director SBC expense, and to
determine the subsequent impact on the APIC pool and the consolidated statements
of cash flows of the tax effects of employee and non-employee director
stock-based awards that were outstanding upon adoption of SFAS No.
123(R).  Due to the Company’s accumulated tax net operating losses,
there was no beginning balance in the APIC pool at the date of adoption of SFAS
No. 123R on January 1, 2006.
 
 The Company also adopted FSP FAS
123R-4, “Classification of Options and Similar Instruments Issued as Employee
Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent
Event” (“FSP No. FAS 123R-4”) during the first quarter of fiscal year
2006.  FSP No. FAS 123R-4 addresses the classification of options and
similar instruments issued as employee compensation that allow for cash
settlement upon the occurrence of a contingent event.  FSP No. FAS
123R-4 amends SFAS No. 123R so that a cash settlement feature that can be
exercised only upon the occurrence of a contingent event that is outside the
employee’s control does not meet the condition to classify as a liability until
it becomes probable that the event will occur.  The adoption of FSP
No. FAS 123R-4 did not have an impact on the Company’s consolidated financial
statements.
 
 Rental
Costs Incurred during a Construction Period
 
 The
Company adopted FSP FAS 13-1, “Accounting for Rental Costs Incurred during a
Construction Period,” (“FSP No. FAS 13-1”) which addresses the accounting for
rental costs associated with operating leases that are incurred during a
construction period.  Rental costs incurred during and after a
construction period are costs incurred for the right to control the use of a
leased asset during and after construction of a leased asset.  Since
there is no distinction between the right to use a leased asset during the
construction period and the right to use that asset after the construction
period, rental costs associated with ground or building operating leases that
are incurred during a construction period shall be recognized as rental expense
on a straight-line basis.
 
 Income
Taxes
 
 The
Company is subject to corporate Federal, foreign and state income taxes and
accounts for income taxes under the provisions of SFAS No. 109, “Accounting for
Income Taxes” (“SFAS No. 109”).  SFAS No. 109 provides for an asset
and liability approach under which deferred income taxes are provided based upon
enacted tax laws and rates applicable to the periods in which the taxes become
payable.
 
 The
Company makes certain estimates and judgments in determining income tax expense
for financial statement purposes.  These estimates and judgments occur
in the calculation of certain tax assets and liabilities, which arise from
differences in the timing of recognition of revenue and expense for tax and
financial statement purposes.
 
 The Company assesses the likelihood
that it will be able to recover its deferred tax assets.  Management
considers all available evidence, both positive and negative, including
historical levels of income, expiration of net operating losses, expectations
and risks associated with estimates of future taxable income and ongoing prudent
and feasible tax planning strategies as well as current tax laws and
interpretation of current tax laws in assessing the need for a valuation
allowance.  If recovery is not likely, we record a valuation allowance
against the deferred tax assets that we estimate will not ultimately be
recoverable.  The available positive evidence at December 31, 2008
included, among other factors,  three years of historical operating
profits and a projection of future financial and taxable income including the
estimated impact of future tax deductions from the exercise of stock options
sufficient to realize most of our remaining deferred tax assets.  As a
result of our analysis of all available evidence, both positive and negative, at
December 31, 2008, it was considered more likely than not that a full valuation
allowance for deferred tax assets was not required. See Note 16 for further
discussion.
 42
 Table of Contents
 Effective
January 1, 2007, the Company adopted FIN No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN No. 48”).  The interpretation clarifies the
accounting for uncertainty in income taxes recognized in a company’s financial
statements in accordance with SFAS No. 109.  Specifically, the
interpretation prescribes a recognition threshold and a measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return.  The interpretation also
provides guidance on the related derecognition, classification, interest and
penalties, accounting for interim periods, disclosure and transition of
uncertain tax positions.  The Company recognizes interest and
penalties accrued related to unrecognized tax benefits as components of its
income tax provision. The Company did not have any interest and penalties
accrued upon the adoption of FIN No. 48, and, as of December 31, 2008, the
Company does not have any interest and penalties accrued related to unrecognized
tax benefits.
 
 Reimbursable
Out-Of-Pocket Expenses
 
 EITF No.
01-14, “Income Statement Characterization of Reimbursements Received for
‘Out-of-Pocket’ Expenses Incurred” (“EITF No. 01-14”) requires companies to
characterize reimbursements received for out-of-pocket expenses
incurred.   Reimbursable out-of-pocket expenses, which are
included in services revenues and cost of services revenues in the Company’s
accompanying consolidated statements of operations, were $1.8 million, $1.7
million and $1.4 million for 2008, 2007 and 2006, respectively.
 
 Recently
Adopted Accounting Pronouncements
 
 In
January 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”).  SFAS No. 157 defines fair value as used in numerous
accounting pronouncements, establishes a framework for measuring fair value in
GAAP and expands disclosures related to the use of fair value measures in
financial statements.  SFAS No. 157 does not expand the use of fair
value measures infinancial statements, but
standardizes its definition and guidance in GAAP and emphasizes that fair value
is a market-based measurement and not an entity-specific measurement based on an
exchange transaction in which the entity sells an asset or transfers a liability
(exit price).  SFAS No. 157 establishes a fair value hierarchy from
observable market data as the highest level to fair value based on an entity’s
own fair value assumptions as the lowest level.  On February 6, 2008,
the Financial Accounting Standards Board (“FASB”) deferred the effective date of
SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value in the financial statements
on a recurring basis.  These nonfinancial items include assets and
liabilities such as reporting units measured at fair value in a goodwill
impairment test and nonfinancial assets acquired and liabilities assumed in a
business combination.  The effect of the adoption of SFAS No. 157 is
discussed in Note 4.
 
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities; including an amendment of FASB
Statement No. 115” (“SFAS No. 159”).  SFAS No. 159 permits entities to
elect to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair
value.  If elected, SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007 and this election is
irrevocable.  The Company has not elected to apply the fair value
option to any of its financial instruments.
 
 Recently
Issued Accounting Pronouncements
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”).  SFAS No. 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with GAAP.  SFAS No. 162
directs the GAAP hierarchy to the entity, not the independent auditors, as the
entity is responsible for selecting accounting principles for financial
statements that are presented in conformity with GAAP.  SFAS No. 162
is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board amendments to remove the GAAP hierarchy from the
auditing standards.  SFAS No. 162 is not expected to have a material
impact on the Company’s consolidated financial statements.
 
 In April
2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP No. 142-3”).  FSP No. 142-3 amends the
factors an entity should consider in developing
 renewal
or extension assumptions used in determining the useful life of recognized
intangible assets under FASB Statement No. 142, “Goodwill and Other Intangible
Assets.”  This new guidance applies prospectively to intangible assets
that are acquired individually or with a group of other assets in business
combinations and asset acquisitions.  FSP No. 142-3 is effective for
financial statements issued for fiscal years and interim periods beginning after
December 15, 2008 and is applied prospectively.  FSP No. 142-3 is not
expected to have a material impact on the Company’s consolidated financial
statements.
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141R”) and SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No. 51” (“SFAS No. 160”).  SFAS No. 141R will change how business
acquisitions are accounted for and will impact financial statements both on the
acquisition date and in subsequent periods.  SFAS No. 160 will change
the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a component of
equity.  SFAS No. 141R and SFAS No. 160 are effective for the Company
beginning in the first quarter of 2009.  Early adoption is not
permitted.  SFAS No. 141R and SFAS No. 160 will only affect the
Company if the Company makes an acquisition after December 31,
2008.
 
 43
 Table of Contents
 4.           Investments
in Marketable Securities and Fair Value of Financial Instruments
 
 The
Company classifies all its investments in marketable securities with readily
determinable fair values as securities available-for-sale in accordance with
SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”
and FASB Staff Position No. 115-1, “The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments.”  Unrealized
gains and losses on securities available-for-sale are reported as a net amount
in accumulated other comprehensive income (loss) in stockholders’ equity until
realized.  Gains and losses on the sale of securities
available-for-sale are determined using the specific identification
method.  Included in accumulated other comprehensive income (loss) at
December 31, 2008 and 2007 are an unrealized gain of $4 thousand and an
unrealized loss of $11 thousand, respectively, on available-for-sale securities
held at each year end.
 
 The
amortized cost and fair value of the Company’s investments in marketable
securities available-for-sale at December 31, 2008 and 2007 are shown below (in
thousands):
 
 As
      of December 31, 2008
                                              
                                              
                                              As
      of December 31, 2007Net
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              NetAmortized
                                              
                                              
                                              Unrealized
                                              
                                              
                                              Fair
                                              
                                              
                                              Amortized
                                              
                                              
                                              Unrealized
                                              
                                              
                                              FairCost
                                              
                                              
                                              Gain
                                              
                                              
                                              Value
                                              
                                              
                                              Cost
                                              
                                              
                                              Loss
                                              
                                              
                                              ValueCorp.
      debentures – bonds
                                              
                                              $
                                              4,306
                                              
                                              
                                              $
                                              2
                                              
                                              
                                              $
                                              4,308
                                              
                                              
                                              $
                                              12,055
                                              
                                              
                                              $
                                              (4
                                              )
                                              
                                              $
                                              12,051Commercial
      paper
                                              
                                              
                                              995
                                              
                                              
                                              
                                              2
                                              
                                              
                                              
                                              997
                                              
                                              
                                              
                                              3,875
                                              
                                              
                                              
                                              (3
                                              )
                                              
                                              $
                                              3,872Certificates
      of deposit
                                              
                                              
                                              500
                                              
                                              
                                              
                                              –
                                              
                                              
                                              
                                              500
                                              
                                              
                                              
                                              –
                                              
                                              
                                              
                                              –
                                              
                                              
                                              
                                              –Asset-backed
      - fixed
                                              
                                              
                                              –
                                              
                                              
                                              
                                              –
                                              
                                              
                                              
                                              –
                                              
                                              
                                              
                                              2,499
                                              
                                              
                                              
                                              (4
                                              )
                                              
                                              
                                              2,495Total
      investments
                                              
                                              $
                                              5,801
                                              
                                              
                                              $
                                              4
                                              
                                              
                                              $
                                              5,805
                                              
                                              
                                              $
                                              18,429
                                              
                                              
                                              $
                                              (11
                                              )
                                              
                                              $
                                              18,418
 The
amortized cost and fair value of the fixed income securities by contractual
maturity at December 31, 2008 and 2007 are shown below (in
thousands):
 
 As
      of December 31, 2008
                              
                              
                              As
      of December 31, 2007Amortized
                              
                              
                              Fair
                              
                              
                              Amortized
                              
                              
                              FairCost
                              
                              
                              Value
                              
                              
                              Cost
                              
                              
                              ValueDue
      in one year or less
                              
                              $
                              5,801
                              
                              
                              $
                              5,805
                              
                              
                              $
                              17,132
                              
                              
                              $
                              17,120Due
      after one year
                              
                              
                              –
                              
                              
                              
                              –
                              
                              
                              
                              1,297
                              
                              
                              
                              1,298Total
                              
                              $
                              5,801
                              
                              
                              $
                              5,805
                              
                              
                              $
                              18,429
                              
                              
                              $
                              18,418
 
 
 The
Company adopted SFAS No. 157 effective January 1, 2008 for financial assets and
liabilities measured at fair value on a recurring basis.  SFAS No. 157
applies to all financial assets and liabilities that are being measured and
reported on a fair value basis.  There was no impact from the adoption
of SFAS No. 157 on the consolidated financial statements.  SFAS No.
157 requires disclosure that establishes a framework for management’s
measurement of fair value and expands disclosure about fair value
measurements.  The statement requires fair value measurements to be
classified and disclosed in one of the following three categories of the fair
value hierarchy:
 
 Level
      1:
              Unadjusted
      quoted prices in active markets that are accessible at the measurement
      date for identical, unrestricted assets and
  liabilities.
 Level
      2:
              Quoted
      prices in markets that are not active or financial instruments for which
      all significant inputs are observable, either directly or
      indirectly.
 Level
      3:
              Prices
      or valuations that require inputs that are both significant to the fair
      value measurement and unobservable.
 
 A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of any
 input
      that is significant to the fair value
  measurement.
 
 The
Company’s assets that are measured by management at fair value on a recurring
basis are generally classified within Level 1 or Level 2 of the fair value
hierarchy.  The types of instruments valued based on quoted market
prices in active markets include most money market securities and certificates
of deposit.  Such instruments are generally classified within Level 1
of the fair value hierarchy.
 
 The types
of instruments valued by management based on quoted prices in less active
markets, broker or dealer quotations, or alternative pricing sources with
reasonable levels of price transparency, include the Company’s corporate
debenture bonds, commercial paper and asset-backed securities.  Such
instruments are generally classified within Level 2 of the fair value
hierarchy.  The Company uses consensus pricing, which is based on
multiple pricing sources, to value its fixed income investments.
 
 The
following table sets forth, by level within the fair value hierarchy, financial
assets and liabilities accounted for at fair value and subject to the disclosure
requirements of SFAS No. 157 as of December 31, 2008 (in
thousands):
 
 QuotedPrices
      in
                            
                            
                            Other
                            
                            
                            Un-Active
                            
                            
                            Observable
                            
                            
                            observableMarkets
                            
                            
                            Inputs
                            
                            
                            InputsTotal
                            
                            
                            (Level
      1)
                            
                            
                            (Level
      2)
                            
                            
                            (Level
      3)Corporate
      debentures – bonds
                            
                            $
                            4,308
                            
                            
                            $
                            —
                            
                            
                            $
                            4,308
                            
                            
                            $
                            —Commercial
      paper
                            
                            
                            997
                            
                            
                            
                            —
                            
                            
                            
                            997
                            
                            
                            
                            —Certificates
      of deposit
                            
                            
                            500
                            
                            
                            
                            500
                            
                            
                            
                            —
                            
                            
                            
                            —Total
      investments available-for-sale
                            
                            $
                            5,805
                            
                            
                            $
                            500
                            
                            
                            $
                            5,305
                            
                            
                            $
                            —
 
 Assets
and liabilities measured at fair value on a recurring basis were presented in
the consolidated balance sheet as of December 31, 2008 as short-term investments
in marketable securities.  There were no financial liabilities
accounted for at fair value and subject to the disclosure requirements of SFAS
No. 157 as of December 31, 2008.
 
 44
 Table of Contents
 5.           Property
and Equipment
 
 Property and equipment consists of the
following (in thousands):
 
 As
      of December 31,2008
                      
                      
                      2007Computer
      equipment
                      
                      $
                      53,758
                      
                      
                      $
                      43,611Leasehold
      improvements
                      
                      
                      7,420
                      
                      
                      
                      5,094Furniture
      and fixtures
                      
                      
                      3,231
                      
                      
                      
                      2,381Building
                      
                      
                      870
                      
                      
                      
                      870Land
                      
                      
                      655
                      
                      
                      
                      655Property
      and equipment
                      
                      
                      65,934
                      
                      
                      
                      52,611Less:  accumulated
      depreciation and amortization
                      
                      
                      42,950
                      
                      
                      
                      34,373Property
      and equipment, net
                      
                      $
                      22,984
                      
                      
                      $
                      18,238
 
 Depreciation
and amortization expense on property and equipment totaled $9.2 million, $6.7
million and $5.3 million for the years ended December 31, 2008, 2007 and 2006,
respectively.
 
 
  Included
in property and equipment is computer equipment acquired under capital leases as
follows (in thousands):
 
 As
      of December 31,2008
                        
                        
                        2007Computer
      equipment
                        
                        $
                        16,447
                        
                        
                        $
                        14,734Less:  accumulated
      amortization
                        
                        
                        14,489
                        
                        
                        
                        12,300$
                        1,958
                        
                        
                        $
                        2,434
 
 Depreciation
and amortization expense on property and equipment under capital leases, totaled
$2.2 million, $2.1 million and $2.4 million for the years ended December 31,
2008, 2007 and 2006, respectively.
 
 6.           Foreign
Currency
 
 The financial statements of the
Company’s foreign subsidiaries have been translated into U.S.
dollars.  The functional currency of The Ultimate Software Group of
Canada, Inc. is the Canadian dollar and the functional currency of The Ultimate
Software Group UK Limited is the British pound.  Assets and
liabilities are translated into U.S. dollars at period-end exchange
rates.  Income and expenses are translated at the average exchange
rate for the reporting period.  The resulting translation adjustments,
representing unrealized gains or losses, are included in stockholders’ equity as
a component of accumulated other comprehensive (loss)
income.  Realized gains and losses resulting from foreign exchange
transactions are included in total operating expenses in the consolidated
statements of operations. For the years ended December 31, 2008 and 2007, the
Company had cumulative unrealized translation losses of $1 million and $7
thousand, respectively.  There was a $1 thousand unrealized
translation loss for the year ended December 31, 2006.
 
 7.           Software
Development Costs
 
 SFAS No.
86 requires capitalization of certain software development costs subsequent to
the establishment of technological feasibility. Based on the Company’s product
development process, technological feasibility is established upon completion of
a working model. During 2008, a total of $0.8 million of research and
development expenses were capitalized in relation to a new product offering
referred to as Onboarding, which is a product that handles certain human
resources functionality for new hires of a company, and has an expected general
release in the first quarter of 2009.  During2007 and 2006, $1.7
million and $1.8 million, respectively, of research and development expenses
were capitalized for the development of UltiPro Canadian HR/payroll (“UltiPro
Canada”) functionality.  UltiPro Canada was built from the existing
product infrastructure of UltiPro (e.g., using UltiPro’s source code and
architecture).  UltiPro Canada provides HR/payroll functionality which
includes the availability of Canadian tax rules, as well as Canadian human
resources functionality, taking into consideration labor laws in Canada and
including changes to the language where necessary (i.e., English to
French).  Annual amortization is based on the greater of the amount
computed using (a) the ratio that current gross revenues for the related product
bears to the total of current and anticipated future gross revenues for that
product or (b) the straight-line method over the remaining estimated economic
life of the product including the period being reported on.
 
 Capitalized
software is amortized using the straight-line method over the estimated useful
lives of the assets, which are typically five years. Amortization of capitalized
software was $749,000, $119,000 and $26,000 in 2008, 2007 and 2006,
respectively, and is included within cost of sales in the consolidated
statements of operations. Accumulated amortization of capitalized software was
$5.7 million, $5.0 million and $5.6 million as of December 31, 2008, 2007 and
2006, respectively. Capitalized software, net of amortization, was $5.6 million,
$3.6 million and $2.1 million as of December 31, 2008, 2007 and 2006,
respectively.
 
 The
Company evaluates the recoverability of capitalized software based on estimated
future gross revenues reduced by the estimated costs of completing the products
and of performing maintenance and customer support.  If the Company’s
gross revenues were to be significantly less than its estimates, the net
realizable value of the Company’s capitalized software intended for sale would
be impaired, which could result in the write-off of all or a portion of the
unamortized balance of such capitalized software.
 
 45
 Table of Contents
 8.           Earnings
Per Share
 
 SFAS No.
128, “Earnings Per Share,” requires dual presentation of earnings per share —
“basic” and “diluted.” Basic earnings per share is computed by dividing income
available to common stockholders (the numerator) by the weighted average number
of common shares (the denominator) for the period. The computation of diluted
earnings per share is similar to basic earnings per share, except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the potentially dilutive common shares had been
issued.
 
 The
following is a reconciliation of the shares used in the computation of basic and
diluted net income per share (in thousands):
 
 For
      the Years Ended
                              December
      31,2008
                            
                            
                            2007
                            
                            
                            2006Basic
      weighted average shares outstanding
                            
                            
                            24,588
                            
                            
                            
                            24,701
                            
                            
                            
                            23,853Effect
      of dilutive equity instruments
                            
                            
                            –
                            
                            
                            
                            2,021
                            
                            
                            
                            3,125Dilutive
      shares outstanding
                            
                            
                            24,588
                            
                            
                            
                            26,722
                            
                            
                            
                            26,978Other
      common stock equivalents (i.e., stockoptions,
      restricted stock awards andrestricted
      stock units) outstandingwhich
      are not included in the calculationof
      diluted income per share because theirimpact
      is anti-dilutive
                            
                            
                            2,700
                            
                            
                            
                            615
                            
                            
                            
                            485
 
  9.           Comprehensive
Income
 
 SFAS No.
130, “Reporting Comprehensive Income” (“SFAS No. 130”), establishes standards
for the reporting and display of comprehensive income and its components in the
Company’s consolidated financial statements. The objective of SFAS No. 130 is to
report a measure (comprehensive income), of all changes in equity of an
enterprise that result from transactions and other economic events in a period
other than transactions with owners. Accumulated other comprehensive (loss)
income, as presented on the consolidated balance sheets, consists of unrealized
gains and losses on available-for-sale securities and foreign currency
translation adjustments, recorded net of any related tax.
 
 
 
 Comprehensive
income (loss) for the years ended December 31, 2008, 2007 and 2006 was as
follows (in thousands):
 
 For
      the Years EndedDecember
      31,2008
                        
                        
                        2007
                        
                        
                        2006Net
      income (loss)
                        
                        $
                        (2,897
                        )
                        
                        $
                        33,129
                        
                        
                        $
                        4,133Other
      comprehensive income (loss):Unrealized
      gain (loss) on investments inmarketable
      securities available-for-sale
                        
                        
                        15
                        
                        
                        
                        (13
                        )
                        
                        
                        33Unrealized
      (loss) on foreign currencytranslation
      adjustments
                        
                        
                        (999
                        )
                        
                        
                        (6
                        )
                        
                        
                        (1
                        )Comprehensive
      income (loss)
                        
                        $
                        (3,881
                        )
                        
                        $
                        33,110
                        
                        
                        $
                        4,165
 
 46
 Table of Contents
 10.  Goodwill
and Intangible Assets
 
 Goodwill
represents the excess of cost over the net tangible and identifiable intangible
assets of acquired businesses.  Identifiable intangible assets
acquired in business combinations are recorded based upon fair value at the date
of acquisition.  Goodwill consists of the following (in
thousands):
 
 As
      ofDecember
      31, 2008Goodwill,
      December 31, 2007
                          
                          $
                          4,063RTIX
      tax-related adjustment
                          
                          
                          (152
                          )Impact
      of foreign currency translation
                          
                          
                          (1,005
                          )Goodwill,
      December 31, 2008
                          
                          $
                          2,906
 
 On
October 5, 2006, the Company acquired 100% of the common stock of RTIX Limited,
a United Kingdom company, now known as The Ultimate Software Group UK Limited,
and its wholly-owned U.S. subsidiary, RTIX Americas, Inc. (collectively,
“RTIX”).  The results of RTIX’s operations have been included in the
Company’s consolidated financial statements since that date.  RTIX
developed the performance management/appraisals solution that Ultimate Software
has offered its customers since February 2006, which have been incorporated into
the Company’s UltiPro Talent Management product suite that it markets and sells
to its customers in the U.S.
 
 The
values assigned to each of the intangible assets included in the RTIX valuation
were based on an income approach valuation methodology.  The income
approach presumes that the value of an asset can be estimated by the net
economic benefit (i.e., cash flows) to be received over the life of the asset,
discounted to present value.
 
 
  
 
 As of
December 31, 2008, the Company’s intangible assets have estimated useful lives
and are classified in other assets, net, in the Company’s audited consolidated
balance sheet as follows (in thousands):
 
 Estimated
                        
                        Balance
      as ofUseful
      Lives
                        
                        December
      31, 2008Acquired
      intangible assets:Developed
      technology
                        5
      years
                        
                        $
                        302Customer
      relationships
                        6
      years
                        
                        
                        281
 
 Amortization
expense for the acquired intangible assets reflected above was $185 thousand,
$208 thousand and $54 thousand for the years ended December 31, 2008, 2007 and
2006, respectively.  Future amortization expense for acquired
intangible assets is as follows, as of December 31, 2008 (in
thousands):
 
 Year
                            
                            Amount2009
                            
                            $
                            1852010
                            
                            
                            1852011
                            
                            
                            1582012
                            
                            
                            55Total
                            
                            $
                            583
 
 11.  Significant
Transaction
 
 Ultimate
and Ceridian Corporation (“Ceridian”) signed an agreement in 2001, as amended,
granting Ceridian a non-exclusive license to use UltiPro as part of an on-line
offering for Ceridian to market primarily to businesses with less than 500
employees (the “Original Ceridian Agreement”). During December 2004, RSM
McGladrey Employer Services (“RSM”), a former BSP of Ultimate, acquired
Ceridian’s product and existing base of small and mid-size business customers
throughout the United States (the “RSM Acquisition”).  The financial
terms of the Original Ceridian Agreement did not change as a result of the RSM
Acquisition. Subsequent to the RSM Acquisition, Ceridian continued to be
financially obligated to pay, and did pay, Ultimate minimum fees pursuant to the
terms of the Original Ceridian Agreement.  The Original Ceridian
Agreement, was terminated pursuant to its terms on March 9, 2008.  The
amount of subscription revenues recognized under the Original Ceridian Agreement
during the year ended December 31, 2008 was $1.5 million (through the effective
date of the termination of the agreement) and $7.7 million for each of the years
ended December 31, 2007 and 2006.
 
 47
 Table of Contents
 12.  Other
Income, net
 
 Other
income, net, consisted of the following (in thousands):
 
 For
      the Years Ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006Interest
      income
                            
                            $
                            776
                            
                            
                            $
                            1,413
                            
                            
                            $
                            1,295Other
      income
                            
                            
                            84
                            
                            
                            
                            214
                            
                            
                            
                            243Non-recurring
      settlement fee, net
                            
                            
                            –
                            
                            
                            
                            4,375
                            
                            
                            
                            –Total
      other income, net
                            
                            $
                            860
                            
                            
                            $
                            6,002
                            
                            
                            $
                            1,538
 
 Included in other income, net, in the
consolidated statement of operations for the year ended December 31, 2007, is a
non-recurring settlement fee of $4.4 million, net of related costs, resulting
from the early termination of a multi-year business arrangement with one of our
business partners that decided to exit the payroll business.
  
 13.  Stock
Repurchase Plan
 
 On
October 30, 2000, the Company announced that its Board of Directors authorized
the repurchase of up to 1,000,000 shares of the Company’s outstanding Common
Stock (the “Stock Repurchase Plan”).
 On February
6, 2007, the Company’s Board of Directors extended the Stock Repurchase Plan by
authorizing the repurchase of up to 1,000,000 additional shares of the Company’s
issued and outstanding Common Stock.
  On February
5, 2008, the Company’s Board of Directors extended the Stock Repurchase Plan
further by authorizing the repurchase of up to 1,000,000 additional shares of
the Company’s Common Stock.
  As of
December 31, 2008, the Company had purchased 2,533,575 shares of the Company’s
Common Stock under the Stock Repurchase Plan, with 466,425 shares available for
repurchase in the future.  The details of Common Stock repurchases for
the year ended December 31, 2008 were as follows:
   
 Total
      Cumulative Number of
                              
                              
                              Maximum
      Number ofShares
      Purchased as Part
                              
                              
                              Shares
      That May YetTotal
      Number of
                              
                              
                              Average
      Price
                              
                              
                              Of
      Publicly Announced
                              
                              
                              Be
      Purchased Under thePeriod
                              
                              Shares Purchased (1)
                              
                              
                              Paid per Share
                              
                              
                              Plans or Programs
                              
                              
                              Plans or ProgramsJanuary
      1 – 31, 2008
                              
                              
                              –
                              
                              
                              
                              –
                              
                              
                              
                              –
                              
                              
                              
                              547,625February
      1 – 29, 2008
                              
                              
                              334,500
                              
                              
                              
                              28.32
                              
                              
                              
                              1,786,875
                              
                              
                              
                              1,213,125
                              (2)March
      1 – 31, 2008
                              
                              
                              –
                              
                              
                              
                              –
                              
                              
                              
                              1,786,875
                              
                              
                              
                              1,213,125April
      1 – 30, 2008
                              
                              
                              –
                              
                              
                              
                              –
                              
                              
                              
                              1,786,875
                              
                              
                              
                              1,213,125May
      1 – 31, 2008
                              
                              
                              220,200
                              
                              
                              
                              34.97
                              
                              
                              
                              2,007,075
                              
                              
                              
                              992,925June
      1 – 30, 2008
                              
                              
                              13,300
                              
                              
                              
                              37.50
                              
                              
                              
                              2,020,375
                              
                              
                              
                              979,625July
      1 – 31, 2008
                              
                              
                              –
                              
                              
                              
                              –
                              
                              
                              
                              2,020,375
                              
                              
                              
                              979,625August
      1 – 31, 2008
                              
                              
                              155,100
                              
                              
                              
                              25.90
                              
                              
                              
                              2,175,475
                              
                              
                              
                              824,525September
      1 – 30, 2008
                              
                              
                              –
                              
                              
                              
                              –
                              
                              
                              
                              2,175,475
                              
                              
                              
                              824,525October
      1 – 31, 2008
                              
                              
                              –
                              
                              
                              
                              –
                              
                              
                              
                              2,175,475
                              
                              
                              
                              824,525November
      1 – 30, 2008
                              
                              
                              358,100
                              
                              
                              
                              13.97
                              
                              
                              
                              2,533,575
                              
                              
                              
                              466,425December
      1 – 31, 2008
                              
                              
                              –
                              
                              
                              
                              –
                              
                              
                              
                              2,533,575
                              
                              
                              
                              466,425Total
                              
                              
                              1,081,200
                              
                              
                              $
                              23.48
                              
                              
                              
                              2,533,575
                              
                              
                              
                              466,425(1) All
      shares were purchased through the publicly announced Stock Repurchase Plan
      in open-market transactions.(2)
      On February 5, 2008, the Company announced that its Board of Directors had
      authorized the repurchase of up to 1,000,000 additional shares of the
      Company’s Common Stock pursuant to the Stock Repurchase
    Plan.
 
 14.  Accrued
Expenses
 
 Accrued
expenses consist of the following (in thousands):
 
 As
      of December 31,2008
                    
                    
                    2007Sales
      commissions
                    
                    $
                    3,745
                    
                    
                    $
                    3,811Other
      items individually less than 5% of total current
    liabilities
                    
                    
                    8,956
                    
                    
                    
                    7,594$
                    12,701
                    
                    
                    $
                    11,405
 
 48
 Table of Contents
 15.  Capital
Lease Obligations
 
 The
Company leases certain equipment under non-cancelable agreements, which are
accounted for as capital leases and expire at various dates through 2011.
Interest rates on these leases range from 1.0% to 6.0%. The scheduled lease
payments of the capital lease obligations are as follows as of December 31, 2008
(in thousands):
   
 Year
                        
                        Amount2009
                        
                        $
                        2,1332010
                        
                        
                        1,1292011
                        
                        
                        4493,711Less
      amount representing interest
                        
                        
                        (158
                        )Lease
      obligations reflected as current ($2,034) and
                          non-current
      ($1,519)
                        
                        $
                        3,553
 
 16.  Income
Taxes
 
 Income
tax expense is based on income before income tax.  Deferred tax assets
and liabilities are determined based on the difference between financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to
reverse.
 
 The
income tax benefit consists of the following (in thousands):
 
 For
      the Year Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Current
      taxes:Federal
                    
                    $
                    —
                    
                    
                    $
                    95
                    
                    
                    $
                    —State
      and Local
                    
                    
                    45
                    
                    
                    
                    20
                    
                    
                    
                    —Foreign
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Deferred
      taxes, netFederal
                    
                    
                    (931
                    )
                    
                    
                    (16,523
                    )
                    
                    
                    —State
      and Local
                    
                    
                    (337
                    )
                    
                    
                    (2,768
                    )
                    
                    
                    —Foreign
                    
                    
                    64
                    
                    
                    
                    (560
                    )
                    
                    
                    —Income
      tax benefit, net
                    
                    $
                    (1,159
                    )
                    
                    $
                    (19,736
                    )
                    
                    $
                    —
 
 
 
 
 
 
 The
income tax (benefit) provision is different from that which would be obtained by
applying the statutory Federal income tax rate of 35% to income before income
taxes as a result of the following (in thousands):
 
 For
      the Year Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Income
      tax provision at statutory Federal tax rate
                    
                    $
                    (1,420
                    )
                    
                    $
                    4,687
                    
                    
                    $
                    1,446State
      and local income taxes
                    
                    
                    (169
                    )
                    
                    
                    353
                    
                    
                    
                    238Non
      deductible expenses
                    
                    
                    380
                    
                    
                    
                    312
                    
                    
                    
                    282Change
      in tax rates
                    
                    
                    25
                    
                    
                    
                    1,979
                    
                    
                    
                    —Change
      in valuation allowance
                    
                    
                    65
                    
                    
                    
                    (26,863
                    )
                    
                    
                    (1,899
                    )Other,
      net
                    
                    
                    (40
                    )
                    
                    
                    (204
                    )
                    
                    
                    (67
                    )Income
      tax benefit, net
                    
                    $
                    (1,159
                    )
                    
                    $
                    (19,736
                    )
                    
                    $
                    —
  
 49
 Table of Contents
 Deferred
income tax assets and liabilities reflect the net effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax
purposes.  Deferred tax assets are also recorded for the future tax
benefit of net operating losses and tax credit
carryforwards.  Significant components of the Company’s deferred tax
assets and liabilities at December 31, 2008, 2007 and 2006 are as follows (in
thousands):
   
 As of December 31,2008
                    
                    
                    2007
                    
                    
                    2006Deferred
      tax assets:Net
      operating losses
                    
                    $
                    6,515
                    
                    
                    $
                    10,251
                    
                    
                    $
                    21,780Tax
      credit carryforwards
                    
                    
                    224
                    
                    
                    
                    222
                    
                    
                    
                    —Deferred
      revenue
                    
                    
                    7,515
                    
                    
                    
                    6,603
                    
                    
                    
                    5,686Accruals
      not currently deductible
                    
                    
                    129
                    
                    
                    
                    141
                    
                    
                    
                    85Allowance
      for doubtful accounts
                    
                    
                    272
                    
                    
                    
                    272
                    
                    
                    
                    204Charitable
      contributions
                    
                    
                    251
                    
                    
                    
                    195
                    
                    
                    
                    312Stock-based
      compensation
                    
                    
                    13,168
                    
                    
                    
                    7,166
                    
                    
                    
                    3,362Deferred
      rent adjustment
                    
                    
                    1,188
                    
                    
                    
                    1,029
                    
                    
                    
                    1,135Gross
      deferred tax assets
                    
                    
                    29,262
                    
                    
                    
                    25,879
                    
                    
                    
                    32,564Less
      valuation allowance
                    
                    
                    (5,657
                    )
                    
                    
                    (5,592
                    )
                    
                    
                    (32,455
                    )Net
      deferred tax assets
                    
                    
                    23,605
                    
                    
                    
                    20,287
                    
                    
                    
                    109Deferred
      tax liabilities:Property
      and equipment
                    
                    
                    (1,057
                    )
                    
                    
                    1,206
                    
                    
                    
                    1,217Acquired
      intangible assets
                    
                    
                    (227
                    )
                    
                    
                    (299
                    )
                    
                    
                    (398
                    )Software
      development costs
                    
                    
                    (1,417
                    )
                    
                    
                    (1,412
                    )
                    
                    
                    (837
                    )Other,
      net
                    
                    
                    (28
                    )
                    
                    
                    (262
                    )
                    
                    
                    (91
                    )Gross
      deferred tax liabilities
                    
                    
                    (2,729
                    )
                    
                    
                    (767
                    )
                    
                    
                    (109
                    )Net
      deferred tax assets
                    
                    $
                    20,876
                    
                    
                    $
                    19,520
                    
                    
                    $
                    —
 
 
 SFAS 109
provides for the recognition of deferred tax assets if realization of such
assets is more likely than not.  The Company considers all available
evidence, both positive and negative, including historical levels of income,
expiration of net operating losses, expectations and risks associated with
estimates of future taxable income, ongoing prudent and feasible tax planning
strategies and reversal of deferred tax liabilities in assessing the need for
the valuation allowance. If it is not more likely than not that we will recover
our deferred tax assets, we will increase our provision for taxes by recording a
valuation allowance against the deferred tax assets that we estimate will not
ultimately be recoverable.
 
 The
available positive evidence at December 31, 2008, included, amongst other
factors,  three years of historical operating profits and a projection
of future financial and taxable income by jurisdiction including the estimated
impact of future tax deductions from the exercise of stock options sufficient to
realize most of our remaining deferred tax assets. As a result of our analysis
of all available evidence, both positive and negative, we believe that is it
more likely than not that a portion of the deferred tax asset as of December 31,
2008 will be realized in the future.  We continue to maintain a
valuation allowance of $5.7 million which relates to stock option tax deductions
claimed prior to the adoption of SFAS No. 123R, which will result in a credit to
equity when the deductions reduce cash taxes payable.
 
 The net
increase in the valuation allowance for the year ended December 31, 2008 was $65
thousand and relates primarily to foreign operations.  The net
decrease in the valuation allowance for the ended December 31, 2007 was $26.9
million. The principal reason for the decrease in the valuation allowance in
fiscal 2007 relates to the release of the valuation allowance against deferred
tax assets.
 
 At
December 31, 2008, the Company had approximately $73.9 million and $1.1 million
of net operating loss carryforwards for Federal and foreign income tax reporting
purposes, respectively, available to offset future taxable income. Of the total
net operating loss carryforwards, approximately $71.9 million is attributable to
deductions from the exercise of non-qualified employee, and non-employee
director, stock options the benefit of which will be credited to paid in capital
when realized.  The carryforwards expire from 2011 through 2028.
Utilization of such net operating loss carryforwards may be limited as a result
of cumulative ownership changes in the Company’s equity
instruments.
 
 Effective
January 1, 2007, the Company adopted FIN No. 48.  FIN No. 48
requires that a position taken or expected to be taken in a tax return be
recognized in the financial statements when it is more likely than not (i.e., a
likelihood of more than fifty percent) that the position would be sustained upon
examination by tax authorities. A recognized tax position is then measured at
the largest amount of benefit that is greater than fifty percent likely of being
realized upon ultimate settlement. Upon adoption and as of December 31, 2008,
the Company did not have any unrecognized tax benefits.
 
 The
Company recognizes interest and penalties accrued related to unrecognized tax
benefits as components of its income tax provision. The Company did not have any
interest and penalties accrued upon the adoption of FIN No. 48, and, as of
December 31, 2008, the Company does not have any interest and penalties
accrued related to unrecognized tax benefits.
 
 Tax years
1996 to 2008 remain subject to future examination by the major tax jurisdictions
in which the Company is subject to tax.
 
 50
 Table of Contents
 17.  Stock-Based
Compensation and Equity
 
 Summary
of Plans
 
 The
Company’s Amended and Restated 2005 Equity and Incentive Plan (the “Plan”)
authorizes the grant of options to non-employee directors, officers and
employees of the Company to purchase shares of the Company’s Common Stock
(“Options”).  The Plan also authorizes the grant to such persons of
restricted and non-restricted shares of Common Stock, stock appreciation rights,
stock units and cash performance awards (collectively, the
“Awards”).  Prior to the adoption of the Plan, options to purchase
shares of Common Stock were issued under the Company’s Nonqualified Stock Option
Plan (the “Prior Plan”).  Beginning in 2009, the Company commenced
making grants to employees of restricted stock grants in lieu of
Options.
 
 As of
December 31, 2008, the aggregate number of shares of Common Stock authorized
under the Plan and the Prior Plan was 12,000,000 and the aggregate number of
shares of Common Stock that were available to be issued under all Awards granted
under the Plan was 934,921 shares.  Options granted to officers and
employees under the Plan and the Prior Plan generally have a 10-year term,
vesting 25% immediately and 25% on each of the first three anniversaries of the
grant date.  Options granted to non-employee directors under the Plan
and the Prior Plan generally have a 10-year term and vest and become exercisable
immediately on the grant date.  However, certain Options granted to
non-employee directors for board services during the period January 3, 2005
through July 2, 2007 become exercisable on the earliest of (i) the fifth
anniversary of the date of grant, (ii) the 90th day
after the date on which the director ceases to be a member of the Board of
Directors of the Company (the “Board”) or (iii) the effective date of a change
in control of the Company.
 
 Prior
to July 24, 2007, non-employee directors received discounted Options under
the Plan and the Prior Plan as compensation for their services.  On
that date, the Compensation Committee of the Board (the “Compensation
Committee”) rescinded the previously approved fee schedule for service on the
Board and Board Committees and replaced it with a program involving market price
Options and restricted stock awards under the Plan.  Under resolutions
adopted by the Compensation Committee, commencing with the third fiscal quarter
of 2007, (i) each non-employee director was granted an Option to purchase
3,750 shares of the Company’s Common Stock for each regular quarterly meeting of
the Board attended in 2007 and 2008, dated as of the date of such meeting, at an
exercise price equal to the closing price of the Company’s Common Stock on
NASDAQ on the date of such meeting, and (ii) each of the Chairman of the Audit
Committee and the Chairman of the Compensation Committee of the Board was
granted an Option to purchase 2,500 shares of the Company’s Common Stock for
each fiscal quarter in 2007 and 2008, dated as of the date of the regularly
scheduled meeting of such Committee during such quarter, at an exercise price
equal to the closing price of the Company’s Common Stock on NASDAQ on the date
of such meeting.  These Option grants vested immediately upon
grant.
  In
addition to the Option grants discussed above, commencing with the third fiscal
quarter of 2007, each non-employee director was granted a restricted stock award
under the Plan for each fiscal quarter in 2007 and 2008, dated as of the date of
the regularly scheduled meeting of the Compensation Committee during such
quarter, of that number of shares of the Company’s Common Stock equal to the
quotient of $12,500 divided by the closing price of the Company’s Common Stock
on NASDAQ on the date of such meeting, rounded down to the nearest full number
of shares.  The restricted stock awards shall vest on the fourth
anniversary of the date of grant, subject to accelerated vesting in the event of
a director’s death, disability, cessation of service at the end of his term or
the occurrence of a change in control of the Company.
 
  On
February 4, 2009, the Compensation Committee amended the previously approved
arrangement pursuant to which the non-employee directors and the Chairman of the
Audit and Compensation Committees of the Board, respectively, were granted
Options for each regular Board and Committee meeting attended.  Under
the arrangement as amended, (i) each non-employee director shall be granted a
restricted stock award of 1,000 shares of Common Stock for each regular meeting
of the Board attended in 2009 and (ii) each of the Chairmen of the Audit
Committee and Compensation Committee of the Board shall be granted a restricted
stock award of 625 shares of Common Stock for attendance at each regular meeting
of the Committee in 2009 that he chairs.  In addition, the
Compensation Committee determined that in 2009, each non-employee director shall
be granted, for each fiscal quarter during which he serves, a restricted stock
award of that number of shares of Common Stock equal to the quotient of $12,500
divided by the closing price of the Common Stock on NASDAQ on the date of grant,
which is the effective date of the grant determined by the Committee for each
such quarter, rounded down to the closest full number of shares.  The
date of grant shall not be a date prior to the date of the Compensation
Committee’s determination of the same.  Such restricted stock awards
shall vest on the fourth anniversary of the date of grant, subject to
accelerated vesting in the event of a director’s death, disability, cessation of
service or the end of his term or the occurrence of a change of control of the
Company.
  Fair
Value
 
 On
January 1, 2006, the Company adopted the provisions of SFAS No. 123R, which
requires the Company to recognize expense related to the fair value of
stock-based compensation awards.  The Company elected the modified
prospective transition method as permitted by SFAS No. 123R.  Under
the modified prospective transition method, stock based compensation expense for
the years ended December 31, 2008, 2007 and 2006 includes compensation expense
for all stock-based compensation awards granted prior to, but not yet vested as
of, January 1, 2006, based on the grant date fair value estimated in accordance
with the provisions of SFAS No. 123 and compensation expense for all stock-based
compensation awards granted subsequent to January 1, 2006, based on the grant
date fair value estimated in accordance with the provisions of SFAS No.
123R.  In addition, options granted to certain members of the Board of
Directors for board services recorded in accordance with SFAS No. 123R and the
issuance of restricted stock awards and stock units are also included in
stock-based compensation for the years ended December 31, 2008, 2007 and
2006.  The Company recognizes compensation expense for restricted
stock awards and restricted stock units on a straight-line basis over the
requisite service period of the award.
 
 The
following table sets forth the SBC resulting from share-based arrangements that
is recorded in the Company’s consolidated statements of operations for the
periods indicated (in thousands):
 
 For
      the Years Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Cost
      of recurring revenues
                    
                    $
                    871
                    
                    
                    $
                    635
                    
                    
                    $
                    394Cost
      of service revenues
                    
                    
                    1,988
                    
                    
                    
                    1,542
                    
                    
                    
                    874Cost
      of license revenues
                    
                    
                    12
                    
                    
                    
                    5
                    
                    
                    
                    6Sales
      and marketing
                    
                    
                    7,389
                    
                    
                    
                    4,617
                    
                    
                    
                    2,967Research
      and development
                    
                    
                    1,570
                    
                    
                    
                    985
                    
                    
                    
                    620General
      and administrative
                    
                    
                    3,626
                    
                    
                    
                    2,388
                    
                    
                    
                    1,385Total
      SBC
                    
                    $
                    15,456
                    
                    
                    $
                    10,172
                    
                    
                    $
                    6,246
 
 Included
in capitalized software in the Company’s consolidated balance sheet at December
31, 2008 and 2007 was $30 thousand and $42 thousand, respectively, in
stock-based compensation expense related to capitalized software during the
fiscal years then ended.  This amount would have otherwise been
charged to research and development expense for the years ended December 31,
2008 and 2007.
 
 51
 Table of Contents
 Net cash
proceeds from the exercise of stock options and warrants were $5.2 million, $7.6
million, and $8.6 million for the years ended December 31, 2008, 2007, and 2006,
respectively.  No income tax benefit was realized from stock option
exercises during the years ended December 31, 2008, 2007 and 2006.
 
 The fair
value of stock-based awards was estimated using the Black-Scholes model with the
following weighted-average assumptions for the years ended December 31, 2008,
2007 and 2006:
 
 For
      the Years EndedDecember
      31,2008
                    
                    
                    2007
                    
                    
                    2006Expected
      term (in years)
                    
                    
                    5.2
                    
                    
                    
                    5.0
                    
                    
                    
                    4.6Volatility
                    
                    
                    41
                    %
                    
                    
                    39
                    %
                    
                    
                    40
                    %Interest
      rate
                    
                    
                    2.78
                    %
                    
                    
                    4.45
                    %
                    
                    
                    4.74
                    %Dividend
      yield
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Weighted
      average fair value at grant date
                    
                    $
                    11.17
                    
                    
                    $
                    11.06
                    
                    
                    $
                    8.55
 
 The
Company’s computation of the expected term is based on the historical exercise
experience under the share-based plans of the underlying award (including
post-vesting employment termination behavior) and represents the period of time
the share-based awards are expected to be outstanding.  The Company’s
computation of the expected volatility for the years ended December 31, 2008,
2007 and 2006 is based upon historical volatility and the expected term of the
option.  The interest rate is based on the U.S. Treasury yield in
effect at the time of grant for a period commensurate with the estimated
expected life. Pursuant to SFAS No. 123R, which was implemented effective
January 1, 2006, the Company is required to estimate forfeitures at the time of
grant and revise those estimates in subsequent periods if actual forfeitures
differ from those estimates.  The weighted-average forfeiture rates of
5.2%, 4.6% and 5.0% for the years ended December 31, 2008, 2007 and 2006,
respectively, were based on historical data.
 
 Restricted
Stock Awards
 
 Under the
provisions of the Plan, the Company may, at the discretion of the Compensation
Committee, grant restricted stock awards (“Restricted Stock Awards”) to
officers, employees and non-employee directors.  The shares of Common
Stock issued under Restricted Stock Awards are subject to certain vesting
requirements and restrictions on transfer.  During the years ended
December 31, 2008 and 2007, the Company granted Restricted Stock Awards for
439,991 and 475,592 shares, respectively, of Common Stock to officers and
employees and the Company granted Restricted Stock Awards for 10,285 and 3,845
shares, respectively, of Common Stock to non-employee
directors.  During the year ended December 31, 2006, the Company
granted Restricted Stock Awards for 263,000 shares of Common Stock to officers
and employees.  There were no Restricted Stock Awards granted to
non-employee directors for the year ended December 31,
2006.  Compensation expense for Restricted Stock Awards is measured
based on the closing market price of the Company’s Common Stock at the date of
grant and is recognized on a straight-line basis over the vesting
period.  Holders of Restricted Stock Awards have all rights of a
stockholder including the right to vote the shares and receive all dividends and
other distributions paid or made with respect thereto.  Each
Restricted Stock Award becomes vested on the fourth anniversary of the
respective date of grant, subject to the grantee’s continued employment with the
Company or any of its subsidiaries on each such vesting date and subject further
to accelerated vesting in the event of a change in control of the Company, death
or disability, the termination of employment by the Company without cause or, in
the case of a non-employee director, at cessation of his board services at the
end of his term.  Included in the Company’s consolidated statements of
operations for the years ended December 31, 2008, 2007, and 2006 was $6.5
million, $3.4 million, and $1.4 million, respectively, of compensation expense
for Restricted Stock Awards.
  Restricted
Stock Unit Awards
 
 The
Company may, at the discretion of the Compensation Committee, make awards of
stock units or restricted stock units under the Plan (“Restricted Stock Unit
Awards”) to certain officers and employees.  A Restricted Stock Unit
Award is a grant of a number of hypothetical share units with respect to shares
of Common Stock that are subject to vesting and transfer restrictions and
conditions under a restricted stock unit award agreement.  The value
of each unit is equal to the fair value of one share of Common Stock on any
applicable date of determination.  The payment with respect to each
unit under a Restricted Stock Unit Award may be made, at the discretion of the
Compensation Committee, (i) in a number of shares of the Company’s Common Stock
equal to the number of Restricted Stock Units becoming vested, (ii) in cash, in
an amount equal to the fair market value of a share of the Company’s Common
Stock on the vesting date multiplied by the number of restricted stock units
becoming vested on such date or (iii) in a combination of both.  The
grantee of a Restricted Stock Unit Award does not have any rights as a
stockholder with respect to the shares subject to a Restricted Stock Unit Award
until such time as shares of Common Stock are delivered to the grantee pursuant
to the terms of the related stock unit award agreement.
  Beginning
in 2009, the Company commenced making grants of Restricted Stock Unit Awards to
employees and discontinued the grant of Options under the Plan.  Such
Restricted Stock Unit Awards vest in three equal annual installments of 33-1/3%
of the number of Restricted Stock Unit Awards on each of the first three
anniversaries of the date of grant thereof, subject to the participant’s
continued employment with the Company or any of its subsidiaries on each such
vesting date, and shall be payable as described above, provided, however, that
if any such anniversary is not a date on which the Company’s Common Stock is
traded on NASDAQ, then the vesting date shall be the next such date; and
provided further, however, that if the Chief Financial Officer (“CFO”) of the
Company should determine that any such anniversary falls within a period during
which the participant is prohibited from trading the Company’s Common Stock
under the Company’s stock trading policy, the CFO shall so advise the
participant in writing and the vesting date shall be the date as of which the
CFO has determined that such period has ended.
  As
provided for in the Plan, the Chief Executive Officer and the Chief Operating
Officer deferred receipt of one-half of their cash performance awards under the
Plan for 2005 and 2006 performance in exchange for the grant of Restricted Stock
Unit Awards under the Plan made in 2006 and 2007 (the “Elected
Deferral”).  No such election was made for 2007 or 2008
performance.  Pursuant to the terms of the Plan, the Company provided
matching contributions equal to one-half of the amount deferred for each year
(the “Company Match”).  The number of restricted stock units subject
to such Restricted Stock Unit Award is determined by dividing the total amount
deferred (including the Company Match) by the fair value of a share of the
Company’s Common Stock on the date of payment of the non-deferred portion of the
cash performance awards. The Restricted Stock Unit Awards granted to the Chief
Executive Officer and the Chief Operating Officer vest on the fourth anniversary
of the date of grant, subject to the respective Officer’s continued employment
with the Company, or any of its subsidiaries, on such vesting date and subject
further to accelerated vesting in the event of a change in control of the
Company, his death or disability or the termination of his employment by the
Company without cause.  The vested Restricted Stock Unit Awards are
payable in shares of Common Stock upon the earliest to occur of the fifth
anniversary of the date of grant, the respective Officer’s death, disability or
termination of employment with the Company or a change in control of the
Company.  In the event that the Chief Executive Officer or the Chief
Operating Officer were to terminate employment and Restricted Stock Unit Awards
resulting from his Elected Deferral remain unvested, the Company would be
required to refund to him a cash amount equal to the lesser of such Elected
Deferral (less taxes withheld) and the fair value of such units upon termination
of employment.  There were no Restricted Stock Unit Awards granted
during the year ended December 31, 2008.  During the years ended
December 31, 2007 and 2006, the Company granted 16,603, and 28,518 Restricted
Stock Unit Awards, respectively, to the Chief Executive Officer and the Chief
Operating Officer.  Included in the Company’s consolidated statements
of operations for the years ended December 31, 2008, 2007 and 2006 was $77
thousand, $77 thousand and $0.3 million, respectively, of non-cash compensation
expense from Restricted Stock Unit Awards.
  
 52
 Table of Contents
 Stock
Option and Restricted Stock Activity
 
 The
following table summarizes Option activity for the years ended December 31,
2006, 2007 and 2008, as follows (in thousands, except per share
amounts):
     WeightedAverageWeighted
                                    
                                    
                                    Remaining
                                    
                                    
                                    AggregateAverage
                                    
                                    
                                    Contractual
                                    
                                    
                                    IntrinsicStock
      Options
                                    
                                    Shares
                                    
                                    
                                    Exercise
      Price
                                    
                                    
                                    Term
      (in Years)
                                    
                                    
                                    ValueOutstanding
      at December 31, 2005
                                    
                                    
                                    5,490
                                    
                                    
                                    $
                                    7.77
                                    
                                    
                                    
                                    –
                                    
                                    
                                    
                                    –Granted
                                    
                                    
                                    727
                                    
                                    
                                    
                                    21.62
                                    
                                    
                                    
                                    –
                                    
                                    
                                    
                                    –Exercised
                                    
                                    
                                    (1,290
                                    )
                                    
                                    
                                    6.60
                                    
                                    
                                    
                                    –
                                    
                                    
                                    
                                    –Forfeited
      or expired
                                    
                                    
                                    (34
                                    )
                                    
                                    
                                    18.34
                                    
                                    
                                    
                                    –
                                    
                                    
                                    
                                    –Outstanding
      at December 31, 2006
                                    
                                    
                                    4,893
                                    
                                    
                                    $
                                    10.07
                                    
                                    
                                    
                                    5.68
                                    
                                    
                                    $
                                    64,789Exercisable
      at December 31, 2006
                                    
                                    
                                    3,931
                                    
                                    
                                    $
                                    8.09
                                    
                                    
                                    
                                    4.93
                                    
                                    
                                    $
                                    59,712Outstanding
      at December 31, 2006
                                    
                                    
                                    4,893
                                    
                                    
                                    $
                                    10.07
                                    
                                    
                                    
                                    –
                                    
                                    
                                    
                                    –Granted
                                    
                                    
                                    759
                                    
                                    
                                    
                                    26.48
                                    
                                    
                                    
                                    –
                                    
                                    
                                    
                                    –Exercised
                                    
                                    
                                    (1,047
                                    )
                                    
                                    
                                    7.16
                                    
                                    
                                    
                                    –
                                    
                                    
                                    
                                    –Forfeited
      or expired
                                    
                                    
                                    (58
                                    )
                                    
                                    
                                    22.92
                                    
                                    
                                    
                                    –
                                    
                                    
                                    
                                    –Outstanding
      at December 31, 2007
                                    
                                    
                                    4,547
                                    
                                    
                                    $
                                    13.31
                                    
                                    
                                    
                                    5.90
                                    
                                    
                                    $
                                    82,771Exercisable
      at December 31, 2007
                                    
                                    
                                    3,582
                                    
                                    
                                    $
                                    10.69
                                    
                                    
                                    
                                    5.16
                                    
                                    
                                    $
                                    74,550Outstanding
      at December 31, 2007
                                    
                                    
                                    4,547
                                    
                                    
                                    $
                                    13.31
                                    
                                    
                                    
                                    –
                                    
                                    
                                    
                                    –Granted
                                    
                                    
                                    1,066
                                    
                                    
                                    
                                    28.33
                                    
                                    
                                    
                                    –
                                    
                                    
                                    
                                    –Exercised
                                    
                                    
                                    (576
                                    )
                                    
                                    
                                    8.97
                                    
                                    
                                    
                                    –
                                    
                                    
                                    
                                    –Forfeited
      or expired
                                    
                                    
                                    (72
                                    )
                                    
                                    
                                    26.54
                                    
                                    
                                    
                                    –
                                    
                                    
                                    
                                    –Outstanding
      at December 31, 2008
                                    
                                    
                                    4,965
                                    
                                    
                                    $
                                    16.86
                                    
                                    
                                    
                                    6.02
                                    
                                    
                                    $
                                    16,140Exercisable
      at December 31, 2008
                                    
                                    
                                    3,792
                                    
                                    
                                    $
                                    13.73
                                    
                                    
                                    
                                    5.17
                                    
                                    
                                    $
                                    16,140
 
 The
aggregate intrinsic value of stock options in the table above represents total
pretax intrinsic value (i.e., the difference between the closing price of the
Company’s Common Stock on the last trading day of the reporting period and the
exercise price, times the number of shares) that would have been received by the
option holders had all option holders exercised their options on December 31,
2008.  The amount of the aggregate intrinsic value changes, based on
the fair value of the Company’s Common Stock.  Total intrinsic value
of share options exercised during the years ended December 31, 2008, 2007 and
2006 was $13.0 million, $23.0 million and $22.3 million,
respectively.  Total fair value of options vested during the years
ended December 31, 2008, 2007 and 2006 was $7.6 million, $4.9 million and $3.6
million, respectively.
 
 As of
December 31, 2008, $8.1 million of total unrecognized compensation cost related
to non-vested stock options is expected to be recognized over a weighted average
period of 1.8 years.
 
 53
 Table of Contents
 The
following table summarizes restricted stock and restricted stock unit activity
for the year ended December 31, 2008, as follows (in thousands, except per share
amounts):
   Restricted
      Stock Awards
                    
                    
                    Restricted
      Stock UnitsWeightedAverageGrant
      DateRestricted
      Stock
                    
                    Shares
                    
                    
                    Fair
      Value
                    
                    
                    SharesOutstanding
      at December 31, 2005
                    
                    
                    169
                    
                    
                    $
                    16.86
                    
                    
                    
                    –Granted
                    
                    
                    263
                    
                    
                    
                    23.16
                    
                    
                    
                    29Vested
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Forfeited
      or expired
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Outstanding
      at December 31, 2006
                    
                    
                    432
                    
                    
                    $
                    20.70
                    
                    
                    
                    29Granted
                    
                    
                    479
                    
                    
                    
                    32.89
                    
                    
                    
                    16Vested
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Forfeited
      or expired
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Outstanding
      at December 31, 2007
                    
                    
                    911
                    
                    
                    $
                    27.11
                    
                    
                    
                    45Granted
                    
                    
                    450
                    
                    
                    
                    14.94
                    
                    
                    
                    –Vested
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Forfeited
      or expired
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Outstanding
      at December 31, 2008
                    
                    
                    1,361
                    
                    
                    $
                    23.09
                    
                    
                    
                    45
   
 As of
December 31, 2008, $14.7 million of total unrecognized compensation cost related
to non-vested Restricted Stock Awards is expected to be recognized over a
weighted average period of 2.6 years.  As of December 31, 2008, $0.1
million of total unrecognized compensation costs related to non-vested Stock
Unit Awards is expected to be recognized over a weighted average period of 1.5
years.
  The
following table summarizes information Options outstanding under the Plan at
December 31, 2008:
  
 Options Outstanding
                        
                        
                        Options ExercisableRange
      of Exercise
                          Prices
                        
                        
                        Number
                        
                        
                        Weighted-Average
                          Remaining
                          Contractual
      Life
                          (Years)
                        
                        
                        Weighted-Average
                          Exercise Price
                        
                        
                        Number
                        
                        
                        Weighted-Average
                          Exercise Price$
                        0.89—$3.38
                        
                        
                        
                        536,841
                        
                        
                        
                        2.58
                        
                        
                        $
                        2.86
                        
                        
                        
                        536,841
                        
                        
                        $
                        2.86$
                        3.49—$7.63
                        
                        
                        
                        607,345
                        
                        
                        
                        2.72
                        
                        
                        
                        5.21
                        
                        
                        
                        607,345
                        
                        
                        
                        5.21$
                        7.75—$10.00
                        
                        
                        
                        506,929
                        
                        
                        
                        2.88
                        
                        
                        
                        8.87
                        
                        
                        
                        506,929
                        
                        
                        
                        8.87$
                        10.54—$13.63
                        
                        
                        
                        674,811
                        
                        
                        
                        5.73
                        
                        
                        
                        12.78
                        
                        
                        
                        674,811
                        
                        
                        
                        12.78$
                        14.32—$18.69
                        
                        
                        
                        551,250
                        
                        
                        
                        7.31
                        
                        
                        
                        16.53
                        
                        
                        
                        449,626
                        
                        
                        
                        16.64$
                        21.60—$24.30
                        
                        
                        
                        889,887
                        
                        
                        
                        7.47
                        
                        
                        
                        23.28
                        
                        
                        
                        566,347
                        
                        
                        
                        23.10$
                        26.72—$27.02
                        
                        
                        
                        66,900
                        
                        
                        
                        7.72
                        
                        
                        
                        26.84
                        
                        
                        
                        39,839
                        
                        
                        
                        26.82$
                        28.41—$28.41
                        
                        
                        
                        569,151
                        
                        
                        
                        9.06
                        
                        
                        
                        28.41
                        
                        
                        
                        158,656
                        
                        
                        
                        28.41$
                        30.34—$32.54
                        
                        
                        
                        501,200
                        
                        
                        
                        9.21
                        
                        
                        
                        31.83
                        
                        
                        
                        209,226
                        
                        
                        
                        31.59$
                        34.89—$34.89
                        
                        
                        
                        60,500
                        
                        
                        
                        8.81
                        
                        
                        
                        34.89
                        
                        
                        
                        42,126
                        
                        
                        
                        34.89$
                        0.89—$34.89
                        
                        
                        
                        4,964,814
                        
                        
                        
                        6.02
                        
                        
                        $
                        16.86
                        
                        
                        
                        3,791,746
                        
                        
                        $
                        13.73
 
 
 54
 Table of Contents
 
 Board
Compensation.  The following table summarizes information about
Options to purchase the Company’s Common Stock and Restricted Stock Awards
granted by the Company to non-employee directors in exchange for services
rendered for 2008, 2007 and 2006:
 
 Exercise
      Price of
                          
                          
                          
                          Market
      Value of
                          
                          Number
      ofStock
      Options Granted
                          
                          Number
      of
                          
                          Restricted
      Stock Awards
                          
                          Restricted
      Stock AwardsYear
                          
                          (1)
      (2) (3) (4) (5)
                          
                          Options
      Granted
                          
                          Granted
                          
                          Granted2006
                          
                          $7.80
                          
                          1,728
                          
                          $–
                          
                          –5.74
                          
                          2,350
                          
                          –
                          
                          –6.94
                          
                          2,012
                          
                          –
                          
                          –6.86
                          
                          2,351
                          
                          –
                          
                          –2007
                          
                          $7.82
                          
                          2,120
                          
                          $–
                          
                          –8.76
                          
                          1,890
                          
                          –
                          
                          –30.34
                          
                          23,750
                          
                          30.34
                          
                          2,05534.89
                          
                          23,750
                          
                          34.89
                          
                          1,7902008
                          
                          $28.41
                          
                          20,000
                          
                          $28.41
                          
                          2,19532.54
                          
                          23,750
                          
                          32.54
                          
                          1,92032.39
                          
                          23,750
                          
                          32.39
                          
                          1,92514.72
                          
                          23,750
                          
                          14.72
                          
                          4,245
  ______________________
 (1)
              Stock
      option grants to non-employee directors during 2006 and the first half of
      2007 were granted at an exercise price equal to 30% of the fair value of
      the Company’s Common Stock on the date of grant.  In October
      2006, 25,000 stock options were issued at grant date fair value to Al
      Leiter upon his election to the Company’s
Board.
  (2)
              Stock
      option grants to non-employee directors beginning in the second half of
      2007 were granted at fair value based on the closing price of the
      Company’s Common Stock on the date of
grant.
  (3)
              Stock
      options granted during 2006 and the first half of 2007 become exercisable
      on the earliest of (i) the fifth anniversary of the date of grant, (ii)
      the date on which the director ceases to be a member of the Board and
      (iii) the effective date of a change in control of the
      Company.  All stock options granted during 2006, 2007 and 2008
      were valued on the date of grant in accordance with SFAS No.
      123R.  See Note 3 of Notes to the Company’s Consolidated
      Financial Statements.  These options were granted in lieu of
      cash retainers and Board meeting
fees.
  (4)
              Stock
      options granted during the second half of 2007 and 2008 became exercisable
      immediately.  All such stock options were valued on the date of
      grant in accordance with the requirements prescribed in SFAS No.
      123R.  See Note 3 of Notes to the Company’s Consolidated
      Financial Statements.  These options were granted in lieu of
      cash retainers and Board meeting
fees.
  (5)
              The
      non-cash compensation expense related to the Board options and Restricted
      Stock Awards granted in 2008, 2007 and 2006, determined pursuant to the
      application of SFAS No. 123R for 2008, 2007 and 2006 was $1,052,000,
      $767,000 and $343,000, respectively, and is included in general and
      administrative expenses in the accompanying consolidated statements of
      operations.
 
 Warrants
 
 Warrants
to purchase shares of the Company’s Common Stock, all of which were exercised as
of December 31, 2007, were fully vested and exercisable as of the date of
issuance.  There were no warrants outstanding during the year ended
December 31, 2008.  A summary of warrants as of December 31, 2007 and
2006, and changes during the years then ended, is presented below:
 
 WeightedAverageShares
                    
                    
                    Exercise
      PriceOutstanding
      at December 31, 2006
                    
                    
                    44,550
                    
                    
                    $
                    4.00Granted
                    
                    
                    —
                    
                    
                    
                    4.00Exercised
                    
                    
                    (44,550
                    )
                    
                    
                    4.00Canceled
                    
                    
                    —
                    
                    
                    
                    4.00Outstanding
      at December 31, 2007
                    
                    
                    —
                    
                    
                    $
                    –
 
 Common
Stock
 
 The
holders of Common Stock are entitled to one vote per share for each share held
of record on all matters submitted to a vote of the stockholders.
 
 55
 Table of Contents
 Other
Equity Transactions
 
 Issuance
of Equity Securities.On October 5, 2006, the
Company entered into a stock purchase agreement (the “Stock Purchase Agreement”)
with the stockholders of RTIX Limited (the “RTIX Stockholders”) to acquire 100%
of the common stock of RTIX Limited in exchange for a combination of $3.4
million in cash and 27,894 shares of the Company’s Common Stock (the “Stock
Consideration”) issuable upon the satisfaction of the contingency discussed
below.  The acquisition was completed on October 5, 2006 and the cash
consideration of $3.4 million was paid at that time.
 
 Pursuant
to the Stock Purchase Agreement, the Stock Consideration was subject to a
downward adjustment based on the measurement (as of October 5, 2007) of RTIX’s
annual recurring revenues against a target amount established in said agreement
(the “Measurement”).  Based on the Measurement, the Company determined
there was no downward adjustment required under the terms of the Stock Purchase
Agreement and the Stock Consideration was recorded in the Company’s consolidated
financial statements as of October 5, 2007 in accordance with
GAAP.  The value of the Stock Consideration was $1.0
million.
 
 The Company relied on Section 4(2) of
the Securities Act of 1933, as amended (the “Securities Act”) and Regulation D
thereunder for the exemption from registration of the sale of such shares of
Common Stock issued to the RTIX Stockholders.  The RTIX Stockholders
represented their intention to acquire the shares of the Common Stock of the
Company for investment purposes only, and not with a view towards the sale or
distribution thereof; their knowledge, skill and experience in business,
financial and investment matters, their ability to evaluate the merits and risk
and bear the economic risks of such investment in the Company’s Common Stock;
that they are “accredited investors” as defined in Regulation D promulgated
under the Securities Act; and that they were given the opportunity to ask
questions of, and receive answers from, the Company concerning the Company’s
business.  The RTIX Stockholders received, or had access to, material
information concerning the Company and the appropriate legends were affixed to
the certificates evidencing the shares of Common Stock issued in the
transaction.
 
 18.  Commitments
and Contingencies
 
 Operating
Leases
 
 The
Company leases corporate office space and certain equipment under
non-cancellable operating lease agreements expiring at various dates. Total rent
expense under these agreements was $3.9 million, $3.2 million and $2.7 million
for the years ended December 31, 2008, 2007 and 2006, respectively. Future
minimum annual rental commitments related to these leases are as follows at
December 31, 2008 (in thousands):
 
 Year
                    
                    Amount2009
                    
                    $
                    3,3372010
                    
                    
                    3,2662011
                    
                    
                    3,2322012
                    
                    
                    3,2482013
                    
                    
                    2,702Thereafter
                    
                    
                    7,235$
                    23,020
 
 Product
Liability
 
 Software
products such as those offered by the Company frequently contain undetected
errors or failures when first introduced or as new versions are released.
Testing of the Company’s products is particularly challenging because it is
difficult to simulate the wide variety of computing environments in which the
Company’s customers may deploy these products. Despite extensive testing, the
Company from time to time has discovered defects or errors in products. There
can be no assurance that such defects, errors or difficulties will not cause
delays in product introductions and shipments, result in increased costs and
diversion of development resources, require design modifications or decrease
market acceptance or customer satisfaction with the Company’s products. In
addition, there can be no assurance that, despite testing by the Company and by
current and potential customers, errors will not be found after commencement of
commercial shipments, resulting in loss of or delay in market acceptance, which
could have a material adverse effect upon the Company’s business, operating
results and financial condition.
 
 Litigation
 
 From
time-to-time, the Company is involved in litigation relating to claims arising
out of its operations in the normal course of business. The Company is not
currently a party to any legal proceeding the adverse outcome of which,
individually or in the aggregate, could reasonably be expected to have a
material adverse effect on the Company’s operating results or financial
condition.
 
 19.  Related
Party Transactions
 
 On
October 23, 2006, the Company’s Board of Directors elected Al Leiter as a
non-employee member of the Company’s Board of Directors.  During
October 2002, Mr. Leiter entered into an agreement with the Company pursuant to
which he agreed to (i) attend and participate in certain internal meetings of
the Company; (ii) assist the Company’s salespeople with prospects; and (iii) act
as an official spokesperson for the Company in exchange for which the Company
agreed to make contributions to Leiter’s Landing, Mr. Leiter’s non-profit
charitable organization benefiting children, in the amount of one tenth (1/10)
of one percent, or 0.1%, of the Company’s total revenues as reported in its
consolidated statements of operations.  Pursuant to this agreement,
for the fiscal years ended December 31, 2008, 2007 and 2006, the Company
contributed a total of approximately $179,000, $142,000, and $107,000,
respectively, to Leiter’s Landing.  In February 2007, Mr. Leiter and
the Company agreed that the maximum amount payable by the Company in any one
year under this agreement is $200,000.
 
 20.  Employee
Benefit Plan
 
 The
Company provides retirement benefits for eligible employees, as defined, through
a defined contribution plan that is qualified under Section 401(k) of the
Internal Revenue Code (the “401 (k) Plan”). Contributions to the 401 (k) Plan,
which are made at the sole discretion of the Company, were $1.6 million, $1.1
million and $0.9 million for the years ended December 31, 2008, 2007 and 2006,
respectively.
 
 56
 Table of Contents
 21.  Staff
Accounting Bulletin No. 108
 
 During
the fourth quarter of 2006, the Company adopted the provisions of Staff
Accounting Bulletin No. 108 “Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements” (“SAB No.
108”).  SAB No. 108 addresses how the effects of prior year
uncorrected misstatements should be considered when quantifying misstatements in
current-year financial statements.  SAB No. 108 requires an entity to
quantify misstatements using a balance sheet and income statement approach and
to evaluate whether either approach results in quantifying an error that is
material in light of relevant quantitative and qualitative factors.
 
 During
2005, the Company identified prior year misstatements (covering 1998 through
2005) related to accounting for rent holidays associated with the construction
periods of certain real estate leases. The Company assessed the materiality for
each of the years impacted by these misstatements, using the permitted rollover
method (or income statement approach), and determined that the effect on the
financial statements, taken as a whole, was not material. As allowed by SAB No.
108, the Company elected to not restate prior year financial statements and,
instead, increased the 2006 beginning balance of the accumulated deficit and
deferred rent in the amount of $1.8 million.
  Item
      9.
              Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
 
 None.
 
 Item
9A.                      Controls
and Procedures
 
 Evaluation
of Disclosure Controls and Procedures
  The
Company carried out an evaluation, under the supervision and with the
participation of the Company’s management, including the Chief Executive Officer
(the “CEO”) and the Chief Financial Officer (the “CFO”), of the effectiveness of
the design and operation of the Company’s disclosure controls and procedures as
of the end of the period covered by this Form 10-K pursuant to Securities
Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e). Based on that evaluation, the
Company’s management, including the CEO and CFO, concluded that, as of December
31, 2008, the Company’s disclosure controls and procedures were effective to
provide reasonable assurance that information required to be disclosed in the
Company’s Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified by the SEC’s rules and forms and is
accumulated and communicated to management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required
disclosure.  It should be noted that the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events and thus has inherent limitations.  Therefore, even
those systems determined to be effective can only provide reasonable assurances
as to the achievement of their objectives.
  Management's
Annual Report on Internal Control Over Financial Reporting
 
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) or
15(d)-15(f) under the Securities Exchange Act of 1934, as amended). Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2008. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated
Framework.  Our management has concluded that, as of December 31,
2008, our internal control over financial reporting is effective based on these
criteria.The
Company’s internal control over financial reporting as of December 31, 2008 has
been audited by KPMG LLP, an independent registered public accounting firm, as
stated in their report, which is included below.
 
 
 
  57
 Table of Contents
  Report of Independent
Registered Public Accounting Firm
 
 The Board
of Directors and Stockholders
 The
Ultimate Software Group, Inc.:
 
 We have
audited The Ultimate Software Group, Inc. and subsidiaries (the “Company”)
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our
audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk.  Our audit also included
performing such other procedures as we considered necessary in the
circumstances.  We believe that our audit provides a reasonable basis
for our opinion.
 
 A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
 
 In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the
Company as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders’ equity and comprehensive income (loss),
and cash flows for each of the years in the three-year period ended December 31,
2008, and our report dated March 2, 2009 expressed an unqualified opinion
on those consolidated financial statements.
  /s/ KPMG
LLP
 KPMG LLP
 
 March 2,
2009
 Miami,
Florida
 Certified
Public Accountants
  58
 Table of Contents
  Changes
in Internal Control Over Financial Reporting
 
 There
have been no changes in internal control over financial reporting during the
fourth quarter of 2008 that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial
reporting.
 
 Item 9B.  Other
Information
 
 None.
 
 PART
III
 
 Item
10.                      Directors,
Executive Officers and Corporate Governance
 
 The
directors, executive officers (Messrs. Scott Scherr, Marc D. Scherr and Mitchell
K. Dauerman) and other key employees of the Company, and their ages as of
February 18, 2009, are as follows:
 
 Name
                Age
                Position(s)Scott
      Scherr
                56
                Chairman
      of the Board, President and Chief Executive OfficerMarc
      D. Scherr
                51
                Vice
      Chairman of the Board and Chief Operating OfficerMitchell
      K. Dauerman
                51
                Executive
      Vice President, Chief Financial Officer and TreasurerJon
      Harris
                44
                Senior
      Vice President, Chief Services OfficerRobert
      Manne
                55
                Senior
      Vice President, General CounselVivian
      Maza
                47
                Senior
      Vice President, People and SecretaryJody
      Kaminsky
                34
                Senior
      Vice President, MarketingLaura
      Johnson
                44
                Senior
      Vice President, Product StrategyAdam
      Rogers
                34
                Senior
      Vice President, Chief Technology OfficerGreg
      Swick
                45
                Senior
      Vice President, Chief Sales Officer of Enterprise SalesChris
      Phenicie
                37
                Senior
      Vice President, Workplace SalesJulie
      Dodd
                39
                Vice
      President and General Manager of Workplace OperationsBill
      Hicks
                43
                Senior
      Vice President, Chief Information OfficerJames
      A. FitzPatrick, Jr.
                59
                DirectorLeRoy
      A. Vander Putten
                74
                DirectorRick
      A. Wilber
                62
                DirectorRobert
      A. Yanover
                72
                DirectorAlois
      T. Leiter
                43
                Director
 
 Scott
Scherr has served as President and a director of the Company since its inception
in April 1996 and has been Chairman of the Board and Chief Executive Officer of
the Company since September 1996. Mr. Scherr is also a member of the Executive
Committee of the Board of Directors (the “Board”). In 1990, Mr. Scherr founded
The Ultimate Software Group, Ltd. (the “Partnership”), the business and
operations of which were assumed by the Company in 1998. Mr. Scherr served as
President of the Partnership’s general partner from the inception of the
Partnership until its dissolution in March 1998. From 1979 until 1990, he held
various positions at ADP, a payroll services company, where his titles included
Vice President of Operations and Sales Executive. Prior to joining ADP, Mr.
Scherr operated Management Statistics, Inc., a data processing service bureau
founded by his father, Reuben Scherr, in 1959. He is the brother of Marc Scherr,
the Vice Chairman of the Board of the Company and the father-in-law of Adam
Rogers, Senior Vice President, Chief Technology Officer.
 
 Marc D.
Scherr has been a director of the Company since its inception in April 1996 and
has served as Vice Chairman since July 1998 and as Chief Operating Officer since
October 2003. Mr. Scherr is also a member of the Executive Committee of the
Board. Mr. Scherr became an executive officer of the Company effective March 1,
2000. Mr. Scherr served as a director of Gerschel & Co., Inc., a private
investment firm from January 1992 until March 2000. In December 1995, Mr. Scherr
co-founded Residential Company of America, Ltd. (“RCA”), a real estate firm, and
served as President of its general partner until March 2000. Mr. Scherr also
served as Vice President of RCA’s general partner from its inception in August
1993 until December 1995. From 1990 to 1992, Mr. Scherr was a real estate
pension fund advisor at Aldrich, Eastman & Waltch. Previously, he was a
partner in the Boston law firm of Fine & Ambrogne. Mr. Scherr is the brother
of Scott Scherr, Chairman of the Board, President and Chief Executive Officer of
the Company.
 
 Mitchell
K. Dauerman has served as Executive Vice President of the Company since April
1998 and as Chief Financial Officer and Treasurer of the Company since September
1996. From 1979 to 1996, Mr. Dauerman held various positions with KPMG LLP, an
accounting firm, serving as a Partner in the firm from 1988 to 1996. Mr.
Dauerman is a Certified Public Accountant.
 
 Jon
Harris has served as Senior Vice President, Services since January 1, 2002 and
Chief Services Officer since February 6, 2007. Mr. Harris served as Vice
President, Professional Services from July 1998 through December 31, 2001. From
1992 to 1997, Mr. Harris held various management positions within ADP’s National
Accounts Division. From 1989 to 1992, Mr. Harris held the position of Consulting
Services Director for Sykes Enterprises, Inc., a diverse information technology
company.
 
 Robert
Manne has served as Senior Vice President, General Counsel since February 2004
and served as Vice President, General Counsel from May 1999 through January
2004. Prior to joining the Company, Mr. Manne was an attorney and partner of
Becker & Poliakoff, P.A., an international law firm, since 1978. In addition
to administering the Litigation Department of the law firm, Mr. Manne was a
permanent member of the firm’s executive committee which was responsible for law
firm operations. Mr. Manne has performed legal services for the Company since
its inception.
 
 Vivian
Maza has served as Senior Vice President, People for the Company since February
2004 and served as Vice President, People from January 1998 through January
2004.  Ms. Maza has served as Secretary of the Company since September
1996. Prior to that, Ms. Maza served as the Office Manager of the Company from
its organization in April 1996 and of the Partnership from its inception in 1990
until April 1996. Ms. Maza is an HR Generalist and holds a Professional in Human
Resources (PHR) certification from the Society for Human Resource Management
(SHRM) association. From 1985 to 1990, Ms. Maza was a systems analyst for the
Wholesale Division of ADP.
 
 Jody Kaminskyhas served as Vice President,
Marketing since July 2008.  Ms. Kaminsky served as Vice President,
Marketing Operations from July 2005 to June 2008, as Director of Strategic
Marketing  from December 2002 through June 2005, and in various other
Marketing and Communications positions from November 1999 through November
2002.  Prior to that, Ms. Kaminsky held various positions with General
Electric's GE Information Services division from April 1997 through August 1999
including ManagerofCommunications and
Community Relations.
 
 Laura
Johnson has served as Senior Vice President, Product Strategy since February
2004 and served as Vice President, Product Strategy from July 1998 through
January 2004. From May 1996 to July 1998, Ms. Johnson served as the Director of
Applications Consulting. From 1991 to 1996, Ms. Johnson held various positions
with Best Software, Inc., Abra Products Division. Ms. Johnson holds a Certified
Payroll Professional (CPP) certification from the American Payroll Association
(APA).
 59
 Table of Contents
 Adam
Rogers has served as Senior Vice President, Chief Technology Office since
February 6, 2007.  Mr. Rogers served as Senior Vice President,
Development from December 2002 to February 6, 2007. From July 2001 to December
2002, Mr. Rogers served as Vice President of Engineering. From May 1997 to July
2001, Mr. Rogers held various positions in the Company’s research and
development organization, including Director of Technical Support from October
1998 to November 1999 and Director of Web Development from November 1999 to July
2001.  Mr. Rogers is the son-in-law of Scott Scherr, Chairman of the
Board, President and Chief Executive Officer of the Company.
 
 Greg
Swick has served as Senior Vice President since January 2001 and as Chief Sales
Officer of Enterprise Sales since February 6, 2007. Mr. Swick served as Vice
President and General Manager of the PEO Division of the Company’s sales
organization from November 1999 to January 2001. From February 1998 to November
1999, Mr. Swick was Director of Sales, Northeast Division. Prior to joining the
Company, Mr. Swick was President of The Ultimate Software Group of New York and
New England, G.P., a reseller of the Company which was acquired by the Company
in March 1998. From 1987 to 1994, Mr. Swick held various positions with ADP,
where the most recent position was Area Vice President — ADP Dealer Services
Division.
 
 Chris
Phenicie has served as Senior Vice President of Workplace Sales since January
2009 and as Vice President of Workplace Sales since April 2007. From January
2000 to April 2007, Mr. Phenicie served as Strategic Account Manager for
Ultimate. From July 1997 to January 2000, Mr. Phenicie held various sales
positions with ADP, the most recent of which position was Sales
Manager.
 
 Julie
Dodd has served as Vice President and General Manager of Workplace Operations
since January 2009.  From October 2007 to December 2008, Ms. Dodd
served as the Director of Product Strategy, with primary focus on the UltiPro
Workplace product offering.  Prior to joining Ultimate, Ms. Dodd
provided consulting services for large scale implementations, operations
efficiencies projects and new SaaS product launches for various service
providers. From 2002 to 2005, Ms. Dodd held various executive positions with
Ceridian Corporation, an information technology company, supporting their small
and mid-market solutions.
 
 Bill
Hicks has served as Senior Vice President, Chief Information Officer since April
2005.  Mr. Hicks served as Vice President, Chief Information Officer
from February 2004 through March 2005.  From 1993 until February 2004,
Mr. Hicks held various positions in the management of technologies for Precision
Response Corporation, a wholly-owned subsidiary of Interactive Corporation and a
provider of call centers and on-line commerce customer care services, including
Chief Information Officer and Senior Vice President of Technology from August
2000 until February 2004.
 
 James A.
FitzPatrick, Jr. has served as a director of the Company since July 2000. Mr.
FitzPatrick is a partner in the law firm Dewey & LeBoeuf LLP, which provides
legal services to the Company. Mr. FitzPatrick has been a partner in Dewey &
LeBoeuf LLP or its predecessor firms since January 1983 and was an associate
from September 1974 until January 1983.
 
 LeRoy A.
Vander Putten has served as a director of the Company since October 1997, is
Chairman of the Compensation Committee of the Board and is a member of the Audit
Committee of the Board. Mr. Vander Putten served as the Executive Chairman of
The Insurance Center, Inc., a holding company for 14 insurance agencies, from
October 2001 until January 2006 at which time the company was sold. Previously,
he served as the Chairman of CORE Insurance Holdings, Inc., a member of the GE
Global Insurance Group, engaged in the underwriting of casualty reinsurance,
from August 2000 to August 2001. From April 1998 to August 2000, he served as
Chairman of Trade Resources International Holdings, Ltd., a corporation engaged
in trade finance for exporters from developing countries. From January 1988
until May 1997, Mr. Vander Putten was Chairman and Chief Executive Officer of
Executive Risk Inc., a specialty insurance holding company. From August 1982 to
January 1988, Mr. Vander Putten served as Vice President and Deputy Treasurer of
The Aetna Life and Casualty Company, an insurance company.
 
 Rick A.
Wilber has served as a director of the Company since October 2002 and is a
member of the Audit Committee and a member of the Compensation Committee of the
Board. Mr. Wilber formerly served on the Company’s Board of Directors from
October 1997 through May 2000. Mr. Wilber is currently the President of Lynn’s
Hallmark Cards, which owns and operates a number of Hallmark Card stores. Mr.
Wilber was a co-founder of Champs Sports Shops and served as its President from
1974 to 1984. He served on the Board of Royce Laboratories, a pharmaceutical
concern, from 1990 until April 1997, when the company was sold to Watson
Pharmaceuticals, Inc., a pharmaceutical concern.
 
 Robert A.
Yanover has served as a director of the Company since January 1997 and is
Chairman of the Audit Committee and a member of the Compensation Committee of
the Board. Mr. Yanover founded Computer Leasing Corporation of Michigan, a
private leasing company, in 1975 and served as its President from its founding
until 2007, at which time Mr. Yanover retired. Mr. Yanover also founded Lason,
Inc., a corporation specializing in the imaging business, and served as Chairman
of the Board from its inception in 1987 until 1998 and as a director through
February 2001.
 
 Al Leiter
has served as director of the Company since October 2006.  Mr. Leiter
was a three-time Major League Baseball World Champion and two-time All-Star
pitcher formerly with the New York Yankees, New York Mets, Toronto Blue Jays,
and Florida Marlins, and has been an official spokesperson for Ultimate since
2002.  Mr. Leiter has served as a television commentator for the
Yankees Entertainment and Sports Network since 2006 and as an analyst with MLB
Network since January 2009.  Mr. Leiter is president and founder of
Leiter’s Landing, a charitable organization formed in 1996.  Mr.
Leiter has served on the Executive Committee of New York City’s official tourism
marketing organization, NYC & Company, since 2000 and is on the Board of
Directors of America’s Camp, a legacy organization of the Twin Towers Fund, on
which he also served as a board member.
 
 Each
officer serves at the discretion of the Board and holds office until his or her
successor is elected and qualified or until his or her earliest resignation or
removal. Messrs. Marc D. Scherr, James A. FitzPatrick, Jr. and Rick A. Wilber
serve on the Board in the class whose term expires at the Annual Meeting in
2009.  Messrs. Scott Scherr and Al Leiter serve on the Board in the
class whose term expires at the Annual Meeting of stockholders (the “Annual
Meeting”) in 2010.  Messrs. LeRoy A. Vander Putten and Robert A.
Yanover serve on the Board in the class whose term expires at the Annual Meeting
in 2011.
 
 60
 Table of Contents
 Code
of Ethics
 
 The Company has adopted a Code of
Ethics within the meaning of Item 406 of Regulation S-K of the Exchange
Act.  The Company’s Code of Ethics applies to its principal executive
officer, principal financial officer and principal accounting
officer.  A copy of the Company’s Code of Ethics is posted on the
Company’s website at www.ultimatesoftware.com.  In
the event that the Company makes any amendments to, or grants any waiver from, a
provision of the Code of Ethics that requires disclosure under Item 5.05 of Form
8-K, the Company will post such information on its website.
 
 Corporate
Governance
 
 The Board
does not have a standing nominating committee or committee performing similar
functions.  The Board has determined that it is appropriate not to
have a nominating committee because of the relatively small size of the Board
and because the entire Board functions in the capacity of a nominating
committee.
  When
considering potential director candidates, the Board considers the candidate’s
independence (as mandated by the NASDAQ rules), character, judgment, age,
skills, financial literacy, and experience in the context of the needs of the
Company and the Board.  In 2008, the Company did not pay any fees to a
third party to assist in identifying or evaluating potential
nominees.
  The Board
will consider director candidates recommended by the Company’s stockholders in a
similar manner as those recommended by members of management or other
directors.
 
 Other
Information
 
 The
information set forth in the Company’s Proxy Statement for the Annual Meeting in
2009 under the headings “Section 16(a) Beneficial Ownership Reporting
Compliance” and “Board Meetings and Committees of the Board-Audit Committee,” is
incorporated herein by reference.
 
 Item
11.                      Executive
Compensation
 
 The
information required by this item is incorporated herein by reference to the
information in the Company’s Proxy Statement for the 2009 Annual Meeting under
the heading “Executive Compensation”.
  Item
12.                      Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
 The
information set forth in this item is incorporated herein by reference to the
information in the Company’s Proxy Statement for the 2009 Annual Meeting under
the heading “Security Ownership of Certain Beneficial Owners and
Management”.  See page 16 of this Form 10-K for information
concerning securities authorized for issuance under equity compensation
plans.
 
 Item
13.                      Certain
Relationships and Related Transactions, and Director
Independence
 
 The
information required by this item is incorporated herein by reference to the
information in the Company’s Proxy Statement for the 2009 Annual Meeting under
the heading “Certain Related Transactions”.
 
 Item
14.                      Principal
AccountantFees and Services
 
 The information required by this item
is incorporated herein by reference to the information in the Company’s Proxy
Statement for the 2009 Annual Meeting under the heading “KPMG LLP
Fees”.
  61
 Table of Contents
  PART
IV
 
 Item
15.    Exhibits
and Financial Statement Schedule
 
 Documents
filed as part of this Form 10-K:
 
 (1)
              Financial
      Statements. The following financial statements of the Company are included
      in Part II, Item 8, of this Form
10-K:
 
 Report of
Independent Registered Public Accounting Firm
 
 Consolidated
Balance Sheets as of December 31, 2008 and 2007
 
 Consolidated
Statements of Operations for the Years Ended December 31, 2008, 2007 and
2006
 
 Consolidated
Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the Years
Ended December 31, 2008, 2007 and 2006
 
 Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
2006
 
 Notes to Consolidated Financial
Statements
 (2)            Consolidated
Financial Statement Schedule:
 
 Report of
Independent Registered Public Accounting Firm
 
 Schedule
II — Valuation and Qualifying Accounts
 (3)
              Exhibits
  Number
              Description3.1
              Amended
      and Restated Certificate of Incorporation  (incorporated by
      reference to Exhibit 3.4 to theRegistration
      Statement on Form S-1 (File No. 333-47881), initially filed March 13, 1998
      (the “Registration  Statement”)3.2
              Certificate
      of Designations of Series A Junior Preferred Stock (incorporated by
      reference to Exhibit 2  to the Company’s Current Report on Form
      8-K dated October 23, 1998)3.3
              Amended
      and Restated Bylaws (incorporated herein by reference to Exhibit 3.5 to
      the Registration Statement)4.1
              Form
      of Certificate for the Common Stock, par value $0.01 per share
      **4.2
              Form
      of Warrant for Common Stock (incorporated by reference
  toExhibit
      4.4 to the Company’s Registration Statement on Form S-3 (File No.
      333-107527), initially  filed July 31, 2003)10.1
              Shareholders
      Rights Agreement, dated June 6, 1997 among the Company and
      certainstockholders
      named therein **10.2
              Asset
      Purchase Agreement, dated February 2, 1998, among The Ultimate Software
      Group of Virginia, Inc., the Company and certain principals named therein
      **10.3
              Asset
      Purchase Agreement, dated February 2, 1998, among the
    Company,The
      Ultimate Software Group of the Carolinas, Inc. and certain principals name
      therein **10.4
              Asset
      Acquisition Agreement, dated February 20, 1998, among the
      Company,The
      Ultimate Software Group of Northern California, Inc. and certain
      principals named therein **10.5
              Asset
      Purchase Agreement dated March 4, 1998, among the Company, Ultimate
      Investors Group, Inc. and certain principals name therein
    **10.6
              Agreement
      and Plan of Merger dated February 24, 1998, among the Company, ULD Holding
      Corp.,Ultimate
      Software Group of New York and New England, G.P. and certain principals
      namedtherein
      **10.7
              Nonqualified
      Stock Option Plan, as amended and restated as of December 20,
      2002(incorporated
      by reference to the corresponding exhibit in the Company’s Annual Report
      on Form 10-K dated March 31, 2003)10.8
              Commercial
      Office Lease agreement by and between UltiLand, Ltd., a Florida limited
      partnership,and
      the Company, dated December 31, 1998 (incorporated by reference herein
      tocorresponding
      exhibit in the Company’s Annual Report on Form 10-K dated March 31,
      1999)10.9
              Rights
      Agreement, dated as of October 22, 1998, between the Company and
      BankBoston, N.A.,as
      Rights Agent. The Rights Agreement includes the Form of Certificate of
      Designations of Series AJunior
      Preferred Stock as Exhibit A, the Form of Rights Certificate as Exhibit B,
      and the Summary of Rights as Exhibit C (incorporated by reference herein
      to Exhibit 2 to the Company’s Current Report on Form 8-K dated October 23,
      1998)10.10
              Commercial
      Office Lease by and between UltiLand, Ltd., a Florida limited
      partnershipand
      the Company, dated December 22, 1998 (incorporated by reference to Exhibit
      10.1to
      the Company’s Quarterly Report on Form 10-Q dated August 15,
      1999)10.11
              Letter
      Agreement between Aberdeen Strategic Capital LP and the Company, dated
      October 21, 1999(incorporated
      herein by reference to Exhibit 10.1 to the Company’s Quarterly
      Reporton
      Form 10-Q dated November 15, 1999)10.12
              Warrant
      issued to Aberdeen Strategic Capital LP (incorporated by reference to
      Exhibit 10.2 to theCompany’s
      Quarterly Report on Form 10-Q dated November 15, 1999)10.13
              Software
      License Agreement between the Company and CeridianCorporation
      dated as of March 9, 2001 (incorporated by reference to Exhibit 10.17 to
      the Company’sAnnual
      Report on Form 10-K dated March 27, 2001)10.14
              Letter
      amendment between the Company and Ceridian Corporation dated as of August
      9, 2001(incorporated
      by reference to Exhibit 10.14 to the Company’s Annual Report on Form
      10-Kdated
      March 29, 2002)10.15
              Letter
      amendment between the Company and Ceridian Corporation dated as of
      February 5, 2002(incorporated
      by reference to Exhibit 10.15 to the Company’s Annual Report on Form
      10-Kdated
      March 29, 2002)10.16
              Loan
      and Security Agreement by and between the Company and Silicon Valley
      Bankdated
      as of November 29, 2001 (incorporated by reference to Exhibit 10.16 to the
      Company’sAnnual
      Report on Form 10-K dated March 29, 2002)10.17
              Revolving
      Promissory Note by and between the Company and Silicon Valley Bank dated
      as of November 29, 2001 (incorporated by reference to Exhibit 10.17 to the
      Company’sAnnual
      Report on Form 10-K dated March 29, 2002)10.18
              Equipment
      Term Note by and between the Company and Silicon Valley Bank dated as
      ofNovember
      29, 2001 (incorporated herein by reference to Exhibit 10.18 to the
      Company’s Annual Report on Form 10-K dated March 29,
  2002)10.19
              Services
      Agreement between the Company and Ceridian Corporation dated as of
      February 10, 2003(incorporated
      by reference to the corresponding exhibit in the Company’s Annual Report
      on Form 10-K dated March 31, 2003)10.20
              Third
      Loan Modification Agreement by and between the Companyand
      Silicon Valley Bank dated March 27, 2003 (incorporated by reference to the
      corresponding exhibit in the Company’s Annual Report on Form 10-K dated
      March 31, 2003)10.21
              Fourth
      Loan Modification Agreement by and between the Companyand
      Silicon Valley Bank dated as of April 29, 2003 (incorporated by reference
      to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q dated May
      14, 2003)10.22
              Change
      in Control Bonus Plan for Executive Officers, effectiveMarch
      5, 2004 (incorporated by reference to Exhibit 10.1 to the Company’s
      Quarterly Report on Form 10-Q dated May 13, 2004)10.23
              Fifth
      Loan Modification Agreement by and between the Companyand
      Silicon Valley Bank dated as of May 28, 2004 (incorporated by reference to
      Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q dated August
      12, 2004)10.24
              Silicon
      Valley Bank Second Amended and Restated Revolving Promissory Note by and
      betweenthe
      Company and Silicon Valley Bank dated May 28, 2004 (incorporated by
      reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q
      dated August 12, 2004)10.25
              Amended
      Nonqualified stock option agreement (incorporated by reference to Exhibit
      10.1 to the Company’s Form 8-K dated January 3, 2006)10.26
              Amended
      Director Fee Option Award Agreement (incorporated by reference to Exhibit
      10.2 to the Company’s Form 8-K dated January 3, 2006)10.27
              Amended
      Director Fee Option Agreement for Non-Employee Directors (as incorporated
      by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K
      dated March 15, 2006)10.28
              Entry
      into a Material  Definitive Agreement with executives
      (incorporated by reference to the Company’s Form 8-K, Item 1.01 dated
      February 10, 2006)10.29
              Seventh
      Loan Modification Agreement between the Company and  Silicon
      Valley Bank(incorporated
      by reference to Exhibit 10.1 to the Company’s Form 8-K dated June 17,
      2005)10.30
              Term
      Note between the Company and Silicon Valley Bank (incorporated by
      reference to Exhibit 10.2to
      the Company’s Form 8-K dated June 17, 2005)10.31
              Notice
      of Termination of License Agreement and Acknowledgement of Receipt
      byCeridian
      Corporation dated, March 9, 2006 (incorporated by reference to Exhibit
      10.31 to the       Company’s Annual
      Report on Form 10-K, dated March 15, 2006)10.32
              Commercial
      Office Lease by and between ROHO Ultimate, LTD. II, a Florida limited
      partnership     (“Landlord”) and the
      Company  dated May 23, 2001 (incorporated by reference to
      Exhibit 10.32 to the  Company’s Annual Report on Form 10-K,
      dated March 15, 2006)10.33
              Agreement
      of Purchase and Sale by and between Parry F. Goodman and Ivy Goodman and
      Robert J. Manne and/or assigns dated September 22,
      2004  (incorporated by reference to Exhibit 10.33 to
      the  Company’s Annual Report on Form 10-K, dated March 15,
      2006)10.34
              Assignment
      of Agreement of Purchase and Sale by and between Robert J. Manne a/k/a
      Robert Manne and the Company dated October 26, 2004 (incorporated by
      reference to Exhibit 10.34 to the Company’s Annual Report on Form 10-K,
      dated March 15, 2006)10.35
              Weston
      Town Center South Office Building Lease between South Office Building-DLB,
      LLC, a Florida Limited Liability Company, South Office Building Bagtrust,
      LLC, a Florida Limited Liability Company, and South Office Building-BJB,
      LLC, a Florida Limited Liability Company, and the Company and Weston
      Common Area LTD., dated August 18, 2005 (incorporated by reference to
      Exhibit 10.35 to the Company’s Annual Report on Form 10-K, dated March 15,
      2006)10.36
              Galleria
      Atlanta office lease agreement between Galleria 600, LLC, a Delaware
      limited liability company, and the Company, dated April 27,
      2006  (incorporated by reference to Exhibit 10.36 to the
      Company’s Quarterly Report on Form 10-Q, dated August 8,
    200610.37
              Lease
      of Office Space by and between OMERS Realty Corporation CPP Investment
      Board Real Estate Holdings Inc., and The Ultimate Software Group of
      Canada, Inc., dated August 22, 2006 (incorporated by reference to Exhibit
      10.37 to the Company’s Quarterly Report on Form 10-Q, dated November 8,
      2006)10.38
              Indemnity
      Agreement between OMERS Realty Corporation, CPP Investment Board Real
      Estate Holdings, Inc., and the Company dated August 22, 2006 (incorporated
      by reference to Exhibit 10.38 to the Company’s Quarterly Report on Form
      10-Q, dated  November 8, 2006)10.39
              Amendment
      to Lease by and between ROHO Ultimate, Ltd. I (“Landlord”) and Ultimate
      Software Group. Inc. (“Tenant”) for Demised premises at 2000 Ultimate Way,
      Weston, FL 33326 (the “Premises”) dated February 15, 2000 (incorporated by
      reference to Exhibit 10.39 to the Company’s Annual Report on Form 10-K,
      dated March 16, 2007)10.40
              Lease
      Relating to Unit 2 Sceptre House, Hornbeam Park, Harrogate between St.
      James Property Management Limited (“The Landlord”) And RTIX Limited (“The
      Tenant”) dated May 25, 2005 (incorporated by reference to Exhibit 10.40 to
      the Company’s Annual Report on Form 10-K, dated March 16,
      2007)10.41
              Counterpart/Underlease
      relating to Unit 2 Second Floor Sceptre House Hornbeam Square North
      Hornbeam Business Park, Harrogate between RTIX Limited (“The Landlord”)
      and First 4 IT Limited to (“The Tenant”) dated May 25, 2005 (incorporated
      by reference to Exhibit 10.41 to the Company’s Annual Report on Form 10-K,
      dated March 16, 2007)10.42
              First
      Amendment to Lease between Galleria 600, LLC (“Landlord”) and the Company,
      dated August 18, 2006 (incorporated by reference to Exhibit 10.42 to the
      Company’s Annual Report on Form      10-K,
      dated March 16, 2007)10.43
              Amended
      and Restated Change in Control Bonus Plan for Executive Officers,
      effective July 24, 2007 (incorporated by reference to Exhibit 10.1 to the
      Company’s Quarterly Report on Form 10-Q, dated August 8,
    2007)10.44
              Amended
      and Restated 2005 Equity and Incentive Plan (incorporated by reference to
      Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q, dated August
      8, 2007)10.45
              Commercial
      lease between Weston Office, LLC (“Landlord”) and the Company, dated
      January 18, 2008 (incorporated by reference to Exhibit 10.45 to the
      Company’s Annual Report on Form 10-K, dated March 13,
  2008)10.46
              Amended
      and Restated Rights Agreement, dated as of August 26, 2008, between the
      Company and Computershare Trust Company, N.A., as Rights
      Agent.  The Rights Agreement includes the Form of Certificate
      Designations of Series A Junior Preferred Stock as Exhibit A, the Form of
      Rights Certificate as Exhibit B and the Summary of Rights as Exhibit C
      (incorporated by reference herein to Exhibit 4.1 to the Company’s Current
      Report on Form 8-K dated September 2, 2008).10.47
              Commercial
      lease between AGF Woodfield Owner, L.L.C., (“Landlord”) and the Company,
      dated October 31, 2008 *21.1
              Subsidiary
      of the Registrant (incorporated by reference to Exhibit 21.1 to the
      Company’s Quarterly Report on Form 10-Q, dated November 8,
      2007)23.1
              Consent
      of Independent Registered Public Accounting Firm *31.1
              Certification
      Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange
      Act of 1934, as amended*31.2
              Certification
      Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange
      Act of 1934, as amended *32.1
              Certification
      Pursuant to 18 U.S.C. Section 1350, as AdoptedPursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002, as amended
    *32.2
              Certification
      Pursuant to 18 U.S.C. Section 1350, as AdoptedPursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002, as amended
    *
 
 
 * Filed
herewith.
 **  Incorporated
by reference to the corresponding exhibit in the Company’s Registration
Statement.
 62
 Table of
Contents
 Report
of Independent Registered Public Accounting Firm
 
 The Board
of Directors and Stockholders
 The
Ultimate Software Group, Inc.:
  Under
date of March 2, 2009, we reported on the consolidated balance sheets of The
Ultimate Software Group, Inc. and subsidiaries (the “Company”) as of December
31, 2008 and 2007, and the related consolidated statements of operations,
stockholders’ equity and comprehensive income (loss), and cash flows for each of
the years in the three-year period ended December 31, 2008, which report appears
in the December 31, 2008 Annual Report on Form 10-K of the
Company.  In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule as listed in Item 15 of this Annual Report on Form
10-K.  This financial statement schedule is the responsibility of the
Company’s management.  Our responsibility is to express an opinion on
this financial statement schedule based on our audits.
  In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
  As
discussed in Note 21 to the consolidated financial statements, the Company
changed its method of quantifying errors in 2006.
 
  /s/ KPMG
LLP
 KPMG
LLP
 
 March 2,
2009
 Miami,
Florida
 Certified
Public Accountants
  63
 Table of Contents
  SCHEDULE
II
 
 THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
 VALUATION
AND QUALIFYING ACCOUNTS
 (in
thousands)
 
 Classification
                  
                  Balance
      at
                    Beginning
      of
                    Year
                  
                  
                  Charged
      to Expenses andOther
                  
                  
                  Write-offs
      and
                    Other
                  
                  
                  Balance
      at
                    End of YearAllowance
      for doubtful accounts:December
      31, 2008
                  
                  $
                  700
                  
                  
                  $
                  1,546
                  
                  
                  $
                  (1,546
                  )
                  
                  $
                  700December
      31, 2007
                  
                  
                  500
                  
                  
                  
                  1,505
                  
                  
                  
                  (1,305
                  )
                  
                  
                  700December
      31, 2006
                  
                  
                  500
                  
                  
                  
                  813
                  
                  
                  
                  (813
                  )
                  
                  
                  500Valuation
      allowance for deferred tax asset:
                  
                  Balance
      at
                    Beginning
      of
                    Year
                  
                  
                  Charged
      to Expenses and Other
                  
                  
                  Write-offs
      and
                    Other
                  
                  
                  Balance
      at
                    End of YearDecember
      31, 2008
                  
                  $
                  5,592
                  
                  
                  $
                  65
                  (1)
                  
                  $
                  –
                  
                  
                  $
                  5,657December
      31, 2007
                  
                  
                  32,455
                  
                  
                  
                  –
                  
                  
                  
                  (26,863
                  )
      (2)
                  
                  
                  5,592December
      31, 2006
                  
                  
                  33,955
                  
                  
                  
                  –
                  
                  
                  
                  (1,500
                  )
                  
                  
                  32,455(1)Represents
      an increase in the valuation allowance primarily due to foreign
      operations.(2)Represents
      a decrease in the valuation allowance for the release of the reserves
      against deferred tax assets.
 
  64
 Table of Contents
  SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized.
 
 THE ULTIMATE SOFTWARE
GROUP, INC.
 
 By:/s/ Mitchell K.
Dauerman
 Mitchell K. Dauerman
 Executive
Vice President, Chief Financial
 Officer
and Treasurer
 
 Date:  March
2, 2009
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
 
 Signature
              Title
              Date/s/ Scot Scherr
              President,
      Chief Executive
              March
      2, 2009Scott  Scherr
              Officer
      and Chairman of theBoard/s/ Mitchell K. Dauerman
              Executive
      Vice President,
              March
      2, 2009Mitchell
      K. Dauerman
              Chief
      Financial Officer andTreasurer
      (Principal Financialand
      Accounting Officer)
              March
      2, 2009/s/ Marc D. Scherr
              Vice
      Chairman of the Board
              March
      2, 2009Marc
      D. Scherr
              and
      Chief Operating Officer/s/ James A. FitzPatrick,
    Jr.
              Director
              March
      2, 2009James
      A. FitzPatrick, Jr./s/ LeRoy A. Vander Putten
              Director
              March
      2, 2009LeRoy
      A. Vander Putten/s/ Rick Wilber
              Director
              March
      2, 2009Rick
      Wilber/s/ Robert A. Yanover
              Director
              March
      2, 2009Robert
      A. Yanover/s/ Alois T. Leiter
              Director
              March
      2, 2009Alois
      T. Leiter
  65