UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





þ
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the quarterly period ended March 31, 2009





 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
transition period from _______ to _______


Commission
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 incorporation)
            
            (I.R.S.
      Employer Identification No.)or
      organization





2000 Ultimate Way, Weston,
    FL
            
            33326(Address
      of principal executive offices)
            
            (Zip
      Code)





(954) 331 -
7000


(Registrant’s
telephone number, including area code)





None


(Former
name, former address and former fiscal year, if changed since last
report)





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 whether registrant has submitted electronically and posted on its
corporate web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding twelve months (or for such period that the registrant was
required to submit and post such files).  Yes þ  No  ̈





Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See 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 Exchange Act).  Yes  ̈ No þ





As of
April 29, 2009, there were 24,351,153 shares of the Registrant’s Common Stock,
par value $0.01, outstanding.








THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES





TABLE
OF CONTENTS


Page(s)Part I – FinancialInformation:Item
      1 – Financial Statements:Unaudited Condensed Consolidated Balance Sheets as of
      March 31, 2009 and December 31, 2008
              
              1Unaudited Condensed Consolidated Statements of
      Operations for the Three Months Ended March 31, 2009 and
      2008
              
              2Unaudited Condensed Consolidated Statements of Cash Flows for
      the Three Months Ended March 31, 2009 and 2008
              
              3Unaudited Condensed Consolidated Statement of Stockholders’
      Equity and Comprehensive Loss for the Three Months Ended March 31,
      2009
              
              4Notes to Unaudited Condensed Consolidated Financial
      Statements
              
              5-9Item
      2 – Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
              
              9-13Item
      3 – Quantitative and Qualitative Disclosures About
      Market Risk
              
              14Item
      4 – Controls and Procedures
              
              14Part
      II – Other Information:Item
      1A – Risk Factors
              
              15Item
      2 – Unregistered Sales of Equity Securities
      and Use of Proceeds
              
              15Item
      6 – Exhibits
              
              16Signatures
              
              17Certifications










i





PART
      1 – FINANCIAL INFORMATIONItem
      1 – Financial StatementsTHE
      ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIESUNAUDITED
      CONDENSED CONSOLIDATED BALANCE SHEETS(Dollars
      in thousands, except share and per share data)As
      of
                          
                          
                          As
      ofMarch
      31,
                          
                          
                          December
      31,2009
                          
                          
                          2008ASSETSCurrentassets:Cash
      and cash equivalents
                          
                          $
                          21,691
                          
                          
                          $
                          17,200Short-term
      investments in marketable securities
                          
                          
                          2,801
                          
                          
                          
                          5,805Accounts
      receivable, net of allowance for doubtful accounts of
                            $700
      for 2009 and 2008
                          
                          
                          32,041
                          
                          
                          
                          38,302Prepaid
      expenses and other current assets
                          
                          
                          16,221
                          
                          
                          
                          16,011Deferred
      tax assets, net
                          
                          
                          3,533
                          
                          
                          
                          3,533Total
      current assets before funds held for customers
                          
                          
                          76,287
                          
                          
                          
                          80,851Funds
      held for customers
                          
                          
                          9,012
                          
                          
                          
                          5,863Total
      current assets
                          
                          
                          85,299
                          
                          
                          
                          86,714Property
      and equipment, net
                          
                          
                          22,594
                          
                          
                          
                          22,984Capitalized
      software, net
                          
                          
                          5,477
                          
                          
                          
                          5,642Goodwill
                          
                          
                          2,853
                          
                          
                          
                          2,906Other
      assets, net
                          
                          
                          11,622
                          
                          
                          
                          11,668Long-term
      deferred tax assets, net
                          
                          
                          17,383
                          
                          
                          
                          17,343Total
      assets
                          
                          $
                          145,228
                          
                          
                          $
                          147,257LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                          
                          $
                          5,549
                          
                          
                          $
                          7,200Accrued
      expenses
                          
                          
                          7,726
                          
                          
                          
                          12,701Current
      portion of deferred revenue
                          
                          
                          52,918
                          
                          
                          
                          54,687Current
      portion of capital lease obligations
                          
                          
                          2,085
                          
                          
                          
                          2,034Current
      portion of long-term debt
                          
                          
                          320
                          
                          
                          
                          320Total
      current liabilities before customer funds obligations
                          
                          
                          68,598
                          
                          
                          
                          76,942Customer
      funds obligations
                          
                          
                          9,012
                          
                          
                          
                          5,863Total
      current liabilities
                          
                          
                          77,610
                          
                          
                          
                          82,805Deferred
      revenue, net of current portion
                          
                          
                          8,348
                          
                          
                          
                          8,807Deferred
      rent
                          
                          
                          3,305
                          
                          
                          
                          3,054Capital
      lease obligations, net of current portion
                          
                          
                          1,610
                          
                          
                          
                          1,519Total
      liabilities
                          
                          
                          90,873
                          
                          
                          
                          96,185Stockholders’
      equity:Preferred
      Stock, $.01 par value, 2,000,000 shares authorized, no shares issued or
      outstanding
                          
                          
                          –
                          
                          
                          
                          –Series
      A Junior Participating Preferred Stock, $.01 par value, 500,000 shares
      authorized, no shares issued or outstanding
                          
                          
                          –
                          
                          
                          
                          –Common
      Stock, $.01 par value, 50,000,000 shares authorized, 26,862,986 and
      26,796,169 shares issued in 2009 and 2008, respectively
                          
                          
                          269
                          
                          
                          
                          268Additional
      paid-in capital
                          
                          
                          168,333
                          
                          
                          
                          164,574Accumulated
      other comprehensive loss
                          
                          
                          (1,066
                          )
                          
                          
                          (1,002
                          )Accumulated
      deficit
                          
                          
                          (53,681
                          )
                          
                          
                          (53,268
                          )113,855
                          
                          
                          
                          110,572Treasury stock, 2,533,575 shares,
      at cost, for 2009 and 2008
                          
                          
                          (59,500
                          )
                          
                          
                          (59,500
                          )Total
      stockholders’ equity
                          
                          
                          54,355
                          
                          
                          
                          51,072Total
      liabilities and stockholders’ equity
                          
                          $
                          145,228
                          
                          
                          $
                          147,257





The
accompanying Notes to Unaudited Condensed Consolidated Financial Statements are
an integral part of these financial statements.


1
 Table
of Contents





THE
      ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIESUNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(In
      thousands, except per share amounts)For
      the Three MonthsEnded
      March 31,2009
                              
                              
                              2008Revenues:Recurring
                              
                              $
                              30,888
                              
                              
                              $
                              25,696Services
                              
                              
                              15,930
                              
                              
                              
                              14,120License
                              
                              
                              2,001
                              
                              
                              
                              3,653Total
      revenues
                              
                              
                              48,819
                              
                              
                              
                              43,469Cost
      of revenues:Recurring
                              
                              
                              8,906
                              
                              
                              
                              6,525Services
                              
                              
                              12,327
                              
                              
                              
                              11,299License
                              
                              
                              337
                              
                              
                              
                              428Total
      cost of revenues
                              
                              
                              21,570
                              
                              
                              
                              18,252Gross
      profit
                              
                              
                              27,249
                              
                              
                              
                              25,217Operating
      expenses:Sales
      and marketing
                              
                              
                              13,835
                              
                              
                              
                              11,829Research
      and development
                              
                              
                              9,338
                              
                              
                              
                              8,879General
      and administrative
                              
                              
                              4,557
                              
                              
                              
                              4,296Total
      operating expenses
                              
                              
                              27,730
                              
                              
                              
                              25,004Operating
      income (loss)
                              
                              
                              (481
                              )
                              
                              
                              213Other
      income (expense):Interest
      expense and other
                              
                              
                              (44
                              )
                              
                              
                              (79
                              )Other
      income, net
                              
                              
                              72
                              
                              
                              
                              357Total
      other income, net
                              
                              
                              28
                              
                              
                              
                              278Income
      (loss) before benefit (provision) for income taxes
                              
                              
                              (453
                              )
                              
                              
                              491Benefit
      (provision) for income taxes
                              
                              
                              40
                              
                              
                              
                              (201
                              )Net
      income (loss)
                              
                              $
                              (413
                              )
                              
                              $
                              290Net
      income (loss) per share:Basic
                              
                              $
                              (0.02
                              )
                              
                              $
                              0.01Diluted
                              
                              $
                              (0.02
                              )
                              
                              $
                              0.01Weighted
      average shares outstanding:Basic
                              
                              
                              24,292
                              
                              
                              
                              24,682Diluted
                              
                              
                              24,292
                              
                              
                              
                              26,460





The
accompanying Notes to Unaudited Condensed Consolidated Financial Statements are
an integral part of these financial statements.


2
 Table
of Contents





THE
      ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIESUNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In
      thousands)For
      the Three MonthsEnded
      March 31,2009
                          
                          
                          2008Cash
      flows from operating activities:Net
      income (loss)
                          
                          $
                          (413
                          )
                          
                          $
                          290Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      and amortization
                          
                          
                          2,928
                          
                          
                          
                          2,139Provision
      for doubtful accounts
                          
                          
                          376
                          
                          
                          
                          522Non-cash
      stock-based compensation expense
                          
                          
                          3,315
                          
                          
                          
                          4,575Deferred
      income taxes
                          
                          
                          (40
                          )
                          
                          
                          201Changes
      in operating assets and liabilities:Accounts
      receivable
                          
                          
                          5,885
                          
                          
                          
                          4,239Prepaid
      expenses and other current assets
                          
                          
                          (210
                          )
                          
                          
                          (1,940
                          )Other
      assets
                          
                          
                          –
                          
                          
                          
                          (1,174
                          )Accounts
      payable
                          
                          
                          (1,651
                          )
                          
                          
                          3,633Accrued
      expenses and deferred rent
                          
                          
                          (4,499
                          )
                          
                          
                          (2,530
                          )Deferred
      revenue
                          
                          
                          (2,228
                          )
                          
                          
                          572Net
      cash provided by operating activities
                          
                          
                          3,463
                          
                          
                          
                          10,527Cash
      flows from investing activities:Purchases
      of marketable securities
                          
                          
                          (308
                          )
                          
                          
                          (642
                          )Maturities
      of marketable securities
                          
                          
                          3,304
                          
                          
                          
                          8,174Net
      purchases of securities from customer funds
                          
                          
                          (3,149
                          )
                          
                          
                          –Capitalized
      software
                          
                          
                          (630
                          )
                          
                          
                          (167
                          )Purchases
      of property and equipment
                          
                          
                          (1,173
                          )
                          
                          
                          (3,657
                          )Net
      cash (used in) provided by investing activities
                          
                          
                          (1,956
                          )
                          
                          
                          3,708Cash
      flows from financing activities:Repurchases
      of Common Stock
                          
                          
                          –
                          
                          
                          
                          (9,474
                          )Principal
      payments on capital lease obligations
                          
                          
                          (605
                          )
                          
                          
                          (583
                          )Net
      increase in customer fund obligations
                          
                          
                          3,149
                          
                          
                          
                          –Repayments
      of borrowings of long-term debt
                          
                          
                          –
                          
                          
                          
                          (84
                          )Net
      proceeds from issuances of Common Stock
                          
                          
                          443
                          
                          
                          
                          1,051Net
      cash provided by (used in) financing activities
                          
                          
                          2,987
                          
                          
                          
                          (9,090
                          )Effect
      of exchange rate changes on cash
                          
                          
                          (3
                          )
                          
                          
                          (13
                          )Net
      decrease in cash and cash equivalents
                          
                          
                          (4,491
                          )
                          
                          
                          5,132Cash
      and cash equivalents, beginning of period
                          
                          
                          17,200
                          
                          
                          
                          17,462Cash
      and cash equivalents, end of period
                          
                          $
                          21,691
                          
                          
                          $
                          22,594Supplemental
      disclosure of cash flow information:Cash
      paid for interest
                          
                          $
                          35
                          
                          
                          $
                          22Cash
      paid for income taxes
                          
                          $
                          34
                          
                          
                          $
                          29Supplemental
      disclosure of non-cash financing activities:- The
      Company entered into capital lease obligations to acquire new equipment
      totaling $747 and $103 for the three monthsended
      March 31, 2009 and 2008, respectively.- The
      Company entered into an agreement to purchase certain source code from a
      third-party vendor, for $2.0 million, of which$0.5
      million was paid during the three months ended March 31, 2009. There
      were no cash payments during the three monthsended
      March 31, 2008.


The
accompanying Notes to Unaudited Condensed Consolidated Financial Statements are
an integral part of these financial statements.


3
 Table
of Contents








THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
LOSS


(In
thousands)








Common
      Stock
                  
                  
                  Additional
      Paid-in
                  
                  
                  Accumulated
      Other Comprehensive
                  
                  
                  Accumulated
                  
                  
                  TreasuryStock
                  
                  
                  Total
      Stockholders’Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Loss
                  
                  
                  Deficit
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  EquityBalance,
      December31, 2008
                  
                  
                  26,796
                  
                  
                  $
                  268
                  
                  
                  $
                  164,574
                  
                  
                  $
                  (1,002
                  )
                  
                  $
                  (53,268
                  )
                  
                  
                  2,534
                  
                  
                  $
                  (59,500
                  )
                  
                  $
                  51,072Net
      loss
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  (413
                  )
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  (413
                  )Unrealized
      loss on investments in marketable securities available for
      sale
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  (3
                  )
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  (3
                  )Unrealized
      loss on foreign currencytranslation adjustments
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  (61
                  )
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  (61
                  )Comprehensive
      loss
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  (477
                  )Issuances
      of Common Stock from exercises of stock options
                  
                  
                  67
                  
                  
                  
                  1
                  
                  
                  
                  442
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  443Non-cash
      stock-based compensation
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  3,317
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  3,317Balance,
      March 31, 2009
                  
                  
                  26,863
                  
                  
                  $
                  269
                  
                  
                  $
                  168,333
                  
                  
                  $
                  (1,066
                  )
                  
                  $
                  (53,681
                  )
                  
                  
                  2,534
                  
                  
                  $
                  (59,500
                  )
                  
                  $
                  54,355









































The
accompanying Notes to Unaudited Condensed Consolidated Financial Statements are
an integral part of these financial statements.


4
 Table
of Contents


THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES


NOTES TO UNAUDITED
CONDENSED 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’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.  Ultimate’s solutions are available in two 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 unaudited condensed consolidated financial statements of the
Company have been prepared, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission (the “SEC”). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with U.S. generally accepted accounting principles (“GAAP”) have been
condensed or omitted pursuant to such rules and regulations. The information in
this report should be read in conjunction with the Company’s audited
consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed
with the SEC on March 2, 2009 (the “Form 10-K”).





The
unaudited condensed consolidated financial statements included herein reflect
all adjustments (consisting only of normal, recurring 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 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. Interim
results of operations for the three months ended March 31, 2009 and 2008 are not
necessarily indicative of operating results for the full fiscal years or for any
future periods.





The
unaudited condensed 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





Summary
of Significant Accounting Policies





The
Company’s significant accounting policies discussed in Note 3 to its audited
consolidated financial statements for the fiscal year ended December 31, 2008,
included in the Form 10-K, have not significantly changed.





Recently
Adopted Accounting Pronouncements





In
January 2009, the Company adopted Financial Accounting Standards Board (“FASB”)
Staff Position (“FSP”) No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP No. 142-3”).  FSP No. 142-3 amended 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 did not have an impact on the Company’s
unaudited condensed consolidated financial statements.





In
January 2009, the Company adopted Statement of Financial Accounting Standards
(“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 changed how business acquisitions are accounted
for and will impact financial statements both on the acquisition date and in
subsequent periods.  SFAS No. 160 changed 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 were effective for the Company beginning in the first quarter of
2009.  SFAS No. 141R and SFAS No. 160 will only affect the Company if
the Company makes an acquisition after December 31, 2008.  As of the
first quarter of 2009, neither SFAS No. 141R nor SFAS No. 160 had an impact on
the Company’s unaudited condensed consolidated financial
statements.





Recently
Issued Accounting Pronouncements





In April
2009, the FASB issued FSP No. 107-1, Interim Disclosures about Fair Value of
Financial Instruments (“FSP No. 107-1”), which increased the frequency of fair
value disclosures to a quarterly basis instead of an annual
basis.  FSP No. 107-1 relates to fair value disclosures for any
financial instruments that are not currently reflected on the balance sheet at
fair value.  FSP No. 107-1 is effective for interim and annual periods
ending after June 15, 2009, but entities may choose to adopt it for the interim
and annual periods ending after March 15, 2009.  The Company does not
expect the adoption of FSP No. 107-1 to have a material impact on its unaudited
condensed consolidated financial statements.





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 unaudited consolidated financial
statements.





5
 Table
of Contents





4.           Investments
in Marketable Securities and Fair Value of Financial Instruments





The
Company classifies 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.” The Company has
classified all investments in marketable securities as
available-for-sale.  Securities available-for-sale consist of debt and
equity securities not classified as trading securities or as securities to be
held to maturity.  Unrealized gains and losses on securities
available-for-sale are reported as a net amount in accumulated other
comprehensive income or 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 loss was $1
thousand and $4 thousand of unrealized gain on securities available-for-sale at
March 31, 2009 and December 31, 2008, respectively.





The
amortized cost, net unrealized gain and fair value of the Company’s investments
in marketable securities available-for-sale at March 31, 2009 and December 31,
2008 are shown below (in thousands):





As
      of March 31, 2009
              
              As
      of December 31, 2008Net
              
              
              
              
              
              NetAmortized
              
              Unrealized
              
              Fair
              
              Amortized
              
              Unrealized
              
              FairCost
              
              Gain
              
              Value
              
              Cost
              
              Gain
              
              ValueCorp.
      debentures – bonds
              
              $   2,800
              
              $   1
              
              $   2,801
              
              $   4,306
              
              $   2
              
              $   4,308Commercial
      paper
              
              –
              
              –
              
              –
              
              995
              
              2
              
              997Certificates
      of deposit
              
              –
              
              –
              
              –
              
              500
              
              ––
              
              500Total
      investments
              
              $   2,800
              
              $   1
              
              $   2,801
              
              $   5,801
              
              $   4
              
              $   5,805





The
amortized cost and fair value of the fixed income securities by contractual
maturity at March 31, 2009 and December 31, 2008 are shown below (in
thousands):





As
      of March 31, 2009
              
              As
      of December 31, 2008Amortized
              
              Fair
              
              Amortized
              
              FairCost
              
              Value
              
              Cost
              
              ValueDue
      in one year or less
              
              $   2,800
              
              $   2,801
              
              $   5,801
              
              $   5,805Total
              
              $   2,800
              
              $   2,801
              
              $   5,801
              
              $   5,805





The
Company adopted SFAS No. 157, Fair Value Measurements (“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
unaudited condensed consolidated financial statements.  SFAS No. 157
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
debentures, 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 March 31, 2009 and December 31, 2008 (in
thousands):





As
      of March 31, 2009
                                                                            
                                                                            
                                                                            As
      of December 31, 2008Quoted
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            QuotedPrices
      in
                                                                            
                                                                            
                                                                            Other
                                                                            
                                                                            
                                                                            Un-
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            Prices
      in
                                                                            
                                                                            
                                                                            Other
                                                                            
                                                                            
                                                                            Un-Active
                                                                            
                                                                            
                                                                            Observable
                                                                            
                                                                            
                                                                            Observable
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            Active
                                                                            
                                                                            
                                                                            Observable
                                                                            
                                                                            
                                                                            ObservableMarkets
                                                                            
                                                                            
                                                                            Inputs
                                                                            
                                                                            
                                                                            Inputs
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            Markets
                                                                            
                                                                            
                                                                            Inputs
                                                                            
                                                                            
                                                                            InputsTotal
                                                                            
                                                                            
                                                                            (Level
      1)
                                                                            
                                                                            
                                                                            (Level
      2)
                                                                            
                                                                            
                                                                            (Level
      3)
                                                                            
                                                                            
                                                                            Total
                                                                            
                                                                            
                                                                            (Level
      1)
                                                                            
                                                                            
                                                                            (Level
      2)
                                                                            
                                                                            
                                                                            (Level
      3)Corporate
      debenture bonds
                                                                            
                                                                            $
                                                                            2,801
                                                                            
                                                                            
                                                                            $
                                                                            –
                                                                            
                                                                            
                                                                            $
                                                                            2,801
                                                                            
                                                                            
                                                                            $
                                                                            –
                                                                            
                                                                            
                                                                            $
                                                                            4,308
                                                                            
                                                                            
                                                                            $
                                                                            –
                                                                            
                                                                            
                                                                            $
                                                                            4,308
                                                                            
                                                                            
                                                                            $
                                                                            –Commercial
      paper
                                                                            
                                                                            
                                                                            –
                                                                            
                                                                            
                                                                            
                                                                            –
                                                                            
                                                                            
                                                                            
                                                                            –
                                                                            
                                                                            
                                                                            
                                                                            –
                                                                            
                                                                            
                                                                            
                                                                            997
                                                                            
                                                                            
                                                                            
                                                                            –
                                                                            
                                                                            
                                                                            
                                                                            997
                                                                            
                                                                            
                                                                            
                                                                            –Certificates
      of deposit
                                                                            
                                                                            
                                                                            –
                                                                            
                                                                            
                                                                            
                                                                            –
                                                                            
                                                                            
                                                                            
                                                                            –
                                                                            
                                                                            
                                                                            
                                                                            –
                                                                            
                                                                            
                                                                            
                                                                            500
                                                                            
                                                                            
                                                                            
                                                                            500
                                                                            
                                                                            
                                                                            
                                                                            –
                                                                            
                                                                            
                                                                            
                                                                            –Total
                                                                            
                                                                            $
                                                                            2,801
                                                                            
                                                                            
                                                                            $
                                                                            –
                                                                            
                                                                            
                                                                            $
                                                                            2,801
                                                                            
                                                                            
                                                                            $
                                                                            –
                                                                            
                                                                            
                                                                            $
                                                                            5,805
                                                                            
                                                                            
                                                                            $
                                                                            500
                                                                            
                                                                            
                                                                            $
                                                                            5,305
                                                                            
                                                                            
                                                                            $
                                                                            –





Assets
and liabilities measured at fair value on a recurring basis were presented in
the unaudited condensed consolidated balance sheet as of March 31, 2009 and in
the audited 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 March 31, 2009 and December 31,
2008.





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5.              Property
and Equipment





Property
and equipment are stated at cost, net of accumulated depreciation and
amortization. Property and equipment are 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 estimated useful life of the asset or the term
of the lease, which range 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.





Property
and equipment consist of the following (in thousands):





As
      of
                  
                  
                  As
      ofMarch
      31,
                    2009
                  
                  
                  December
      31, 2008Property
      and equipment
                  
                  $
                  68,095
                  
                  
                  $
                  65,934Less:  accumulated
      depreciation and amortization
                  
                  
                  45,501
                  
                  
                  
                  42,950$
                  22,594
                  
                  
                  $
                  22,984





6.           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 outstanding (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 (loss) per share (in thousands):
  For
      the Three Months
                      ended
      March 31,2009
                    
                    
                    2008Basic
      weighted average shares outstanding
                    
                    
                    24,292
                    
                    
                    
                    24,682Effect
      of dilutive equity instruments
                    
                    
                    –
                    
                    
                    
                    1,778Dilutive
      weighted average shares outstanding
                    
                    
                    24,292
                    
                    
                    
                    26,460Other
      common stock equivalents (i.e., stock options,restricted
      stock awards and stock units) outstandingwhich
      are not included in the calculation of dilutedincome
      (loss) per share because their impact is anti-dilutive
                    
                    
                    4,153
                    
                    
                    
                    998
 
 Potential
shares totaling 4,153,000 for the three month period ended March 31, 2009 were
anti-dilutive due to the net loss in that period; therefore, diluted earnings
per share is the same as basic earnings per share for that
period.


7.           Comprehensive
Income (Loss)





SFAS No.
130, “Reporting Comprehensive Income” (“SFAS No. 130”), establishes standards
for the reporting and display of comprehensive income (loss) and its components
in the Company’s unaudited condensed consolidated financial statements. The
objective of SFAS No. 130 is to report a measure (comprehensive income (loss))
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, as presented in the accompanying unaudited
condensed consolidated balance sheets, consists of unrealized gains and losses
on securities available-for-sale and foreign currency translation adjustments,
recorded net of any related income tax.





Comprehensive
income (loss) for the periods presented was as follows (in
thousands):





For
      the Three Months
                      ended
      March 31,2009
                    
                    
                    2008Net
      income (loss)
                    
                    $
                    (413
                    )
                    
                    $
                    290Other
      comprehensive income (loss)Change
      in unrealized gain (loss) on investments inmarketable
      securities available-for-sale
                    
                    
                    (3
                    )
                    
                    
                    44Change
      in unrealized (loss) on foreign currencytranslation
      adjustments
                    
                    
                    (61
                    )
                    
                    
                    (13
                    )Comprehensive
      income (loss)
                    
                    $
                    (477
                    )
                    
                    $
                    321


8.           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 (including related goodwill) 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.  Realized gains and losses resulting from foreign exchange
transactions are included in total operating expenses in the unaudited condensed
consolidated statements of operations. For the three months ended March 31, 2009
and March 31, 2008, the Company had unrealized translation losses of $61
thousand and $13 thousand, respectively. Included in accumulated other
comprehensive loss, as presented in the accompanying unaudited condensed
consolidated balance sheets, is $1.1 million of unrealized translation losses at
March 31, 2009 and $1 million of unrealized translation losses at December 31,
2008.





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9.           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.  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, together with stock
options, 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 units in lieu of stock
options.





As of
March 31, 2009, 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 828,443 shares.





The
Company proposed in its 2009 proxy statement that stockholders approve at the
annual meeting of stockholders to be held on May 12, 2009 (the “Annual Meeting”)
a 500,000 share increase in the number of shares of Common Stock that may be
issued pursuant to Awards under the Plan (the “Proposal to Amend the
Plan”).





Stock-Based
Compensation





The
following table sets forth the non-cash stock-based compensation expense
resulting from stock-based arrangements that was recorded in the Company’s
unaudited condensed consolidated statements of operations for the periods
indicated (in thousands):




For
      the Three Months
                      Ended
      March 31,2009
                    
                    
                    2008Non-cash stock-based compensation
      expense:Cost
      of recurring revenues
                    
                    $
                    165
                    
                    
                    $
                    329Cost
      of services revenues
                    
                    
                    344
                    
                    
                    
                    679Cost
      of license revenues
                    
                    
                    -
                    
                    
                    
                    4Sales
      and marketing
                    
                    
                    1,788
                    
                    
                    
                    2,053Research
      and development
                    
                    
                    302
                    
                    
                    
                    589General
      and administrative
                    
                    
                    716
                    
                    
                    
                    921Total
      non-cash stock-based compensation expense
                    
                    $
                    3,315
                    
                    
                    $
                    4,575





Included
in capitalized software in the Company’s unaudited condensed consolidated
balance sheet at March 31, 2009 was an aggregate amount of $2 thousand in
stock-based compensation for the three months ended March 31, 2009 related to
capitalized software.  The amounts capitalized would have otherwise
been charged to research and development expense.





Net cash
proceeds from the exercise of stock options were $0.4 million and $1.1 million
for the three months ended March 31, 2009 and March 31, 2008, respectively.
There was no income tax benefit realized from stock option exercises during the
three months ended March 31, 2009 and March 31, 2008.





Stock
Option and Restricted Stock Activity





There
were no stock options granted during the three months ended March 31,
2009.  The following table summarizes stock option activity (for
previously granted stock options) for the three months ended March 31, 2009 (in
thousands, except per share amounts):





WeightedAverageWeighted
                  
                  
                  Remaining
                  
                  
                  AggregateAverage
                  
                  
                  Contractual
                  
                  
                  IntrinsicStock
      Options
                  
                  Shares
                  
                  
                  Exercise
      Price
                  
                  
                  Term
      (in Years)
                  
                  
                  ValueOutstanding
      at December 31, 2008
                  
                  
                  4,965
                  
                  
                  $
                  16.86
                  
                  
                  
                  6.02
                  
                  
                  $
                  16,140Granted
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –Exercised
                  
                  
                  (67
                  )
                  
                  
                  6.63
                  
                  
                  
                  –
                  
                  
                  
                  –Forfeited
      or expired
                  
                  
                  (63
                  )
                  
                  
                  23.10
                  
                  
                  
                  –
                  
                  
                  
                  –Outstanding
      at March 31, 2009
                  
                  
                  4,835
                  
                  
                  $
                  16.92
                  
                  
                  
                  5.80
                  
                  
                  $
                  22,166Exercisable
      at March 31, 2009
                  
                  
                  4,014
                  
                  
                  $
                  14.72
                  
                  
                  
                  5.21
                  
                  
                  $
                  22,009





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 March 31,
2009.  The amount of the aggregate intrinsic value changes based on
the fair value of the Company’s Common Stock.  Total intrinsic value
of options exercised was $0.6 million for the three months ended March 31, 2009
and $2.6 million for the three months ended March 31, 2008.  Total
fair value of options vested during the three months ended March 31, 2009 was
$3.2 million and was $4.0 million for the three months ended March 31,
2008.





As of
March 31, 2009, $6.7 million of total unrecognized compensation costs related to
non-vested stock options is expected to be recognized over a weighted average
period of 1.7 years.





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The
following table summarizes restricted stock and restricted stock unit activity
for the three months ended March 31, 2009 (in thousands, except per share
amounts):





Restricted
      Stock Awards
                                
                                
                                Restricted
      Stock Unit AwardsWeightedAverageGrant
      DateShares
                                
                                
                                Fair
      Value
                                
                                
                                SharesOutstanding
      at December 31, 2008
                                
                                
                                1,361
                                
                                
                                $
                                23.09
                                
                                
                                
                                45Granted
                                
                                
                                11
                                
                                
                                
                                14.43
                                
                                
                                
                                159Vested
                                
                                
                                –
                                
                                
                                
                                –
                                
                                
                                
                                –Forfeited
      or expired
                                
                                
                                –
                                
                                
                                
                                –
                                
                                
                                
                                (2
                                )Outstanding
      at March 31, 2009
                                
                                
                                1,372
                                
                                
                                $
                                23.02
                                
                                
                                
                                202





As of
March 31, 2009, $18.1 million of total unrecognized compensation costs related
to non-vested restricted stock Awards is expected to be recognized over a
weighted average period of 2.4 years.  As of March 31, 2009, $2.1
million of total unrecognized compensation costs related to non-vested
restricted stock unit Awards is expected to be recognized over a weighted
average period of 2.5 years.




ITEM
2.                     Management’sDiscussion and Analysis of Financial
Condition and Results of Operations





The
following discussion of the financial condition and results of operations of The
Ultimate Software Group, Inc. and its subsidiaries (“Ultimate” or the “Company”)
should be read in conjunction with the unaudited condensed consolidated
financial statements and notes thereto included elsewhere in this Quarterly
Report on Form 10-Q (“Form 10-Q”).





The
Company’s significant accounting policies discussed in Note 3 to its audited
consolidated financial statements for the fiscal year ended December 31, 2008,
included in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2008, filed with the Securities and Exchange Commission (the “SEC”)
on March 2, 2009 (the “Form 10-K”), have not significantly changed.





Executive
Summary





Ultimate
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.





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, “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.





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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.  For its recurring revenue customer base,
Ultimate’s annualized retention rate for such customers was 97% as of March 31,
2009. 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 the three months ended March 31, 2009 and for the three
months ended March 31, 2008, license revenues, as a percentage of total
revenues, represented 4.1% and 8.4%, respectively.





On
February 5, 2009, Ultimate announced that after April 1, 2009 it would
discontinue selling its on-site UltiPro solutions on a perpetual license
basis.  However, the Company will continue to sell on-site UltiPro
solutions on a subscription basis (priced and billed to customers on a PEPM
basis) and the Company may have additional license revenues attributable to
contractual arrangements in process with new customers as of March 31, 2009, as
well as from contractual arrangements with existing license customers. After the
elimination of sales of perpetual licenses to new customers, the variable costs
associated with new customer 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 strong customer retention rate for its renewal maintenance
agreements 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.





Critical
Accounting Estimates





The
preparation of the Company’s 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 Company’s critical accounting estimates, as discussed
in Item 7, Management’s Discussion and Analysis of Financial Condition and
Results of Operations, included in the Form 10-K, have not significantly
changed.




Results
of Operations





The
following table sets forth the unaudited condensed consolidated statements of
operations data of the Company, as a percentage of total revenues, for the
periods indicated.





For
      the Three MonthsEnded
      March 31,2009
                              
                              
                              2008Revenues:Recurring
                              
                              
                              63.3
                              %
                              
                              
                              59.1
                              %Services
                              
                              
                              32.6
                              
                              
                              
                              32.5License
                              
                              
                              4.1
                              
                              
                              
                              8.4Total
      revenues
                              
                              
                              100.0
                              
                              
                              
                              100.0Cost
      of revenues:Recurring
                              
                              
                              18.2
                              
                              
                              
                              15.0Services
                              
                              
                              25.3
                              
                              
                              
                              26.0License
                              
                              
                              0.7
                              
                              
                              
                              1.0Total
      cost of revenues
                              
                              
                              44.2
                              
                              
                              
                              42.0Operating
      expenses:Sales
      and marketing
                              
                              
                              28.4
                              
                              
                              
                              27.2Research
      and development
                              
                              
                              19.1
                              
                              
                              
                              20.4General
      and administrative
                              
                              
                              9.3
                              
                              
                              
                              9.9Total
      operating expenses
                              
                              
                              56.8
                              
                              
                              
                              57.5Operating
      income (loss)
                              
                              
                              (1.0
                              )
                              
                              
                              0.5Other
      income (expense):Interest
      expense and other
                              
                              
                              –
                              
                              
                              
                              (0.2
                              )Other
      income, net
                              
                              
                              0.1
                              
                              
                              
                              0.8Total
      other income, net
                              
                              
                              0.1
                              
                              
                              
                              0.6Income
      (loss) before income taxes
                              
                              
                              (0.9
                              )
                              
                              
                              1.1Benefit
      (provision) for income taxes
                              
                              
                              –
                              
                              
                              
                              (0.4
                              )Net
      income (loss)
                              
                              
                              (0.9
                              )%
                              
                              
                              0.7
                              %





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The
following table sets forth the stock-based compensation expense (excluding the
income tax effect) resulting from share-based arrangements and the amortization
of acquired intangibles that are recorded in the Company’s unaudited condensed
consolidated statements of operations for the periods indicated (in
thousands):





For
      the Three Months Ended March 31,2009
                  
                  
                  2008Stock-based
      compensation:Cost
      of recurring revenues
                  
                  $
                  165
                  
                  
                  $
                  329Cost
      of service revenues
                  
                  
                  344
                  
                  
                  
                  679Cost
      of license revenues
                  
                  
                  –
                  
                  
                  
                  4Sales
      and marketing
                  
                  
                  1,788
                  
                  
                  
                  2,053Research
      and development
                  
                  
                  302
                  
                  
                  
                  589General
      and administrative
                  
                  
                  716
                  
                  
                  
                  921Total
      non-cash stock-based   compensation expense
                  
                  $
                  3,315
                  
                  
                  $
                  4,575Amortization
      of acquired intangibles:General
      and administrative
                  
                  $
                  46
                  
                  
                  $
                  46





Revenues





The
Company’s revenues are derived from recurring revenues, services revenues and,
to a lesser extent, license revenues.  The Company’s significant
revenue recognition policies, as discussed in Note 3 to its audited consolidated
financial statements for the fiscal year ended December 31, 2008, included in
the Form 10-K, have not changed.





Total
revenues, consisting of recurring, services and license revenues, increased
12.3% to $48.8 million for the three months ended March 31, 2009 from $43.5
million for the three months ended March 31, 2008.




Recurring
revenues increased 20.2% to $30.9 million for the three months ended March 31,
2009 from $25.7 million for the three months ended March 31, 2008. The increase
for the three months ended March 31, 2009 was primarily due to increases in
Intersourcing revenues and, to a lesser extent, maintenance revenues, partially
offset by a decrease in subscription revenues.  Ultimate’s annualized
retention rate of 97% for existing recurring revenue customers as of March 31,
2009 contributed to the year-over-year growth for both Intersourcing revenues
(due to continued sales growth, which allows for an increased customer base to
which the annualized retention rate applies) and maintenance revenues (due to
the annual price increases that typically accompany annual
renewals).





a)
            Intersourcing
      revenues increased 39.4% for the three months ended March 31, 2009 in
      comparison to the same period in 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 March 31, 2008,
      including the UltiPro core product and, to a lesser extent, Optional
      Features of UltiPro.  Intersourcing revenues from the Workplace
      solution in 2009 also contributed to the year-over-year growth,
      particularly since this solution was introduced late in
      2007.  Recognition of recurring revenues for Intersourcing sales
      commences upon Live date.


b)
            Maintenance
      revenues from license sales increased 3.6% for the three months ended
      March 31, 2009, in comparison to the same period of 2008, due to
      additional maintenance fees resulting from cumulative net increases in the
      customer base subsequent to March 31, 2008 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.


c)
            Subscription
      revenues decreased 65.2% for the three months ended March 31, 2009, in
      comparison to the same period of 2008, primarily due to the termination of
      the Company’s agreement with Ceridian Corporation (“Ceridian”), pursuant
      to which Ceridian was granted 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.  This agreement was terminated
      effective March 9, 2008, at which time the related revenue recognition
      ended. During the three months ended March 31, 2008, revenue recognized
      under the Ceridian agreement amounted to $1.5 million as compared to zero
      for the same period in 2009.





Services
revenues increased 12.8% to $15.9 million for the three months ended March 31,
2009 from $14.1 million for the three months ended March 31, 2008. The increase
for the three months ended March 31, 2009 was mainly due to an increase in
implementation revenues principally attributable to additional billable hours,
an increase in the blended net rate per hour and, to a lesser extent,
implementation revenues recognized for Workplace sales.  The
additional billable hours stemmed from additional hours worked by more
revenue-generating consultants (employed by the Company) than in the prior year
comparable period (as the Company hired more implementation personnel subsequent
to March 31, 2008 to accommodate the increased sales growth), partially offset
by fewer hours worked by third-party (or independent) implementation partners
(“IP’s”).





License
revenues decreased 45.2% to $2.0 million for the three months ended March 31,
2009 from $3.7 million for the three months ended March 31,
2008.   The decrease in the three month period ended March 31,
2009 was principally due to a lower average selling price per unit.





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Cost
of Revenues





Cost of
revenues consists of the cost of recurring, services and license revenues. Cost
of recurring revenues primarily 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 client reimbursable out-of-pocket
expenses.  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.





Total
cost of revenues increased 18.2% to $21.6 million for the three months ended
March 31, 2009 from $18.3 million for the three months ended March 31,
2008.





Cost of
recurring revenues increased 36.5% to $8.9 million for the three months ended
March 31, 2009 from $6.5 million for the three months ended March 31,
2008.  The $2.4 million increase in cost of recurring revenues for the
three months ended March 31, 2009 was primarily due to increases in both
Intersourcing costs and maintenance costs.  The increase in
Intersourcing costs was principally due to the growth in Intersourcing
operations and increased sales, including higher depreciation and amortization
of related computer equipment supporting the hosting operations, increased
hosting data center costs and, to a lesser extent, increased labor costs and
increased third-party royalty fees for UTA sales.  The increase in
maintenance costs was primarily related to increased labor costs commensurate
with the growth in the Company’s customer base.





Cost of
services revenues increased 9.1% to $12.3 million for the three months ended
March 31, 2009 from $11.3 million for the three months ended March 31, 2008. The
increase in cost of services revenues for the three-month period ended March 31,
2009 was primarily due to an increase in costs of implementation.  The
increase in implementation costs for the three-month period was mainly
attributable to labor costs associated with growing the implementation
infrastructure (predominantly billable consultants) to accommodate the overall
growth in unit sales, partially offset by decreased costs for third-party IP’s,
which correlates with the decreased implementation revenues generated from the
work performed by IP’s.





Cost of
license revenues decreased 21.3% to $337 thousand for the three months ended
March 31, 2009 from $428 thousand for the three months ended March 31,
2008.  The decrease in cost of license revenues for the three months
ended March 31, 2009 as compared to the same period in 2008 was primarily due to
decreased third-party royalty fees tied to decreased sales of UTA license
products.





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 17.0% to $13.8 million for the three
months ended March 31, 2009 from $11.8 million for the three months ended March
31, 2008. The increase in sales and marketing expenses for the three month
period ended March 31, 2009 was primarily due to increased labor and related
costs attributable to hiring additional direct sales force personnel
(particularly for the Company’s Workplace solution) and higher sales commissions
principally related to increased Intersourcing sales. Commissions on
Intersourcing sales are amortized over the initial contract term (typically 24
months) commencing on the Live date, which corresponds to the revenue
recognition for Intersourcing sales.




Research
and Development





Research
and development expenses consist primarily of software development personnel
costs.  Research and development expenses increased 5.2% to $9.3
million for the three months ended March 31, 2009 from $8.9 million for the
three months ended March 31, 2008.  The increase in research and
development expenses for the three month period ended March 31, 2009 was
principally due to higher labor costs related to the ongoing development of
UltiPro and complementary products.





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 for the three months ended March 31, 2009 increased
6.1% to $4.6 million from $4.3 million for the three months ended March 31,
2008. The increase for the three months ended March 31, 2009 was primarily due
to additional labor and related costs (including additional personnel costs to
support the Company’s growth).





Interest
Expense and Other





Interest
expense and other of $44 thousand for the three months ended March 31, 2009
decreased from $79 thousand for the same period in the prior year.





Other
Income, Net





Other
income, net, decreased to $72 thousand for the three months ended March 31, 2009
from $357 thousand for the three months ended March 31, 2008. The decrease in
the three month period ended March 31, 2009 was related to decreases in interest
income primarily due to lower balances of cash, cash equivalents and marketable
securities combined with lower interest rates.





Income
Taxes





An income
tax benefit of $40 thousand during the three months ended March 31, 2009 was
recorded relating to the loss for the same period.  An income tax
provision of $201 thousand was recorded for the three months ended March 31,
2008 relating to the income for the same period.  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.





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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
March 31, 2009, the Company had $24.5 million in cash, cash equivalents and
total investments in marketable securities, reflecting a net increase of $1.5
million since December 31, 2008.  This $1.5 million increase was
mainly due to cash provided by operating activities of $3.5 million and, to a
lesser extent, proceeds from the issuance of Common Stock from stock option
exercises during the three months ended March 31, 2009 of $0.4 million,
partially offset by an increase in cash purchases of property and equipment and
principal payments on financed equipment totaling $1.8 million and increased
capitalized software costs of $0.6 million.





Net cash
provided by operating activities was $3.5 million for the three months ended
March 31, 2009 as compared to $10.5 million for the three months ended March 31,
2008. The $7.0 million decrease was primarily due to decreased accrued expenses
and decreased accounts payable and, to a lesser extent, due to a net operating
loss in the current period.





Net cash
used in investing activities was $2.0 million for the three months ended March
31, 2009 as compared to net cash provided by investing activities of $3.7
million for the three months ended March 31, 2008.  The decrease of
$5.7 million from the comparable period in 2008 was primarily attributable to a
decrease in cash provided from the maturities of marketable securities (net of
purchases) of $4.5 million, and an increase of $3.1 million in funds received
from and held on behalf of Ultimate’s customers using the UltiPro tax filing
offering (“UltiPro Tax Filing Customer Funds”), with such funds being invested
by the Company in overnight repurchase agreements and, to a lesser extent, an
increase in capitalized software costs of $0.5 million, partially offset by a
decrease in cash purchases of property and equipment of $2.5
million.





Net cash
provided by financing activities was $3.0 million for the three months ended
March 31, 2009 as compared to net cash used in financing activities of $9.1
million for the three months ended March 31, 2008. The $12.1 million increase in
net cash provided by financing activities was primarily related to a $9.5
million decrease in repurchases of Common Stock pursuant to the Company’s stock
repurchase plan and an increase of $3.1 million in UltiPro Tax Filing Customer
Funds received, partially offset by a $0.4 million decrease in proceeds from the
issuance of Common Stock from stock option exercises.




Days
sales outstanding (“DSO”), calculated on a trailing three-month basis, as of
March 31, 2009 and March 31, 2008, were 60 days and 63 days,
respectively.





Deferred
revenues were $61.3 million at March 31, 2009, as compared to $63.5 million at
December 31, 2008.  The decrease of $2.2 million in deferred revenues
for the 2009 period was primarily due to decreased deferred maintenance as
revenues recognized exceeded the billings, which is consistent with prior year
comparable periods and decreased deferred services including the timing of
contractual obligations (if any).  Substantially all of the total
balance in deferred revenues is related to future recurring revenues, including
deferred revenues related to Intersourcing.





The
Company believes that cash and cash equivalents, investments in marketable
securities, equipment financing 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.





TheCompany did not have any
material commitments for capital expenditures as of March 31, 2009.





Off-Balance
Sheet Arrangements





The
Company does not have any off-balance sheet arrangements (as that term is
defined in applicable SEC rules) that have a current, or are reasonably likely
to have a future, material effect on the Company’s financial condition, results
of operations, liquidity, capital expenditures or capital
resources.





Quarterly
Fluctuations





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 achieve and, if achieved in future periods, 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.





Forward-Looking
Statements





The foregoing Management’s Discussion
and Analysis of Financial Condition and Results of Operations and the following
Quantitative and Qualitative Disclosures about Market Risk contain certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the “Securities Act”), and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 relationships with third parties, contract renewals
with business partners, compliance by the Company’s customers with the terms of
their contracts with the Company, and other factors disclosed in this Form 10-Q
and the Form 10-K.  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.





13
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of Contents


ITEM
3.                      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 risk and foreign currency risk.  Risks
that are either non-financial or non-quantifiable, such as political, economic,
tax, or regulatory 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 financial 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 according to the Company’s investment guidelines
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
March 31, 2009, total investments in available-for-sale marketable securities
were $2.8 million.





As of
March 31, 2009, virtually all of the investments in the Company’s portfolio were
at fixed rates (with a weighted average interest rate of 1.0% per
annum).




To
illustrate the potential impact of changes in interest rates, the Company has
performed an analysis based on its March 31, 2009 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 $6 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 $6 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 income.





ITEM
4.                      Controls and Procedures





(a) 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-Q pursuant to Exchange Act 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 March 31, 2009, 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 assurance
as to the achievement of their objectives.





(b) Changes in internal control over
financial reporting.  There have been no changes during the
quarter ended March 31, 2009 in the Company’s internal control over financial
reporting that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial
reporting.


14
 Table
of Contents





PART
II – OTHER INFORMATION





ITEM
1A.                      Risk Factors





The risk factors associated with the
Company’s business, as disclosed in Item 1A. “Risk Factors,” in the Form 10-K,
have not significantly changed.





ITEM
2.                      Unregistered Sales of EquitySecurities and Use of
Proceeds





(c)  Purchases
of Equity Securities by the Issuer.On October 30, 2000,
the Company announced that its Board of Directors authorized a stock repurchase
plan providing for 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.  Stock repurchases may be made
periodically in the open market, in privately negotiated transactions or in a
combination of both. The extent and timing of repurchase transactions will
depend on market conditions and other business considerations.





As
of March 31, 2009, 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.  There was no activity under the Stock
Repurchase Plan during the three months ended March 31, 2009.





15
 Table
of Contents








ITEM
6.  Exhibits





Number
              Description31.1
              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.






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Signatures





Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.











The
      Ultimate Software Group, Inc.Date:                      May
      11, 2009
              By:
              /s/ Mitchell K. DauermanMitchell
      K. DauermanExecutive
      Vice President, Chief Financial Officer and Treasurer (Authorized
      Signatory and Principal Financial and Accounting
  Officer)


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