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, 2010





 ̈
            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  ̈  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   ̈
            
            Accelerated
      filer  þNon-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 May
3, 2010, there were 24,924,605 shares of the Registrant’s Common Stock, par
value $0.01, outstanding.








THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES (“ULTIMATE”)





TABLE OF CONTENTS


Page(s)Part
      I – Financial Information:Item
      1 – Financial Statements:Unaudited Condensed Consolidated Balance
      Sheets as of March 31, 2010 and December 31, 2009
            
            
            1Unaudited Condensed Consolidated Statements
      of Operations for the Three Months Ended March 31, 2010 and March 31,
      2009
            
            
            2Unaudited Condensed Consolidated Statements of Cash
      Flows for the Three Months Ended March 31, 2010 and March 31,
      2009
            
            
            3Unaudited Condensed Consolidated Statement of
      Stockholders’ Equity and Comprehensive Loss for the Three Months Ended
      March 31, 2010
            
            
            4Notes to Unaudited Condensed Consolidated
      Financial Statements
            
            
            5-9Item
      2 –Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
            
            
            9-14Item
      3 – Quantitative and
      Qualitative Disclosures About Market Risk
            
            
            14Item
      4 – Controls and
      Procedures
            
            
            15Part
      II – Other Information:Item
      1A – Risk
    Factors
            
            
            15Item
      2 – Unregistered Sales of Equity
      Securities and Use of Proceeds
            
            
            15Item
      6 – Exhibits
            
            
            16Signatures
            
            
            17Certifications










Table of Contents





PART
      1 – FINANCIAL INFORMATIONItem
      1 – Financial StatementsTHE
      ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIESUNAUDITED
      CONDENSED CONSOLIDATED BALANCE SHEETS(In
      thousands, except share data)As
      of
            
            
            As
      ofMarch
      31,
            
            
            December
      31,2010
            
            
            2009ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            25,583
            
            
            $
            23,684Short-term
      investments in marketable securities
            
            
            8,286
            
            
            
            8,079Accounts
      receivable, net of allowance for doubtful accounts of
              $700
      for 2010 and $600 for 2009
            
            
            37,880
            
            
            
            38,450Prepaid
      expenses and other current assets
            
            
            16,649
            
            
            
            15,594Deferred
      tax assets, net
            
            
            1,137
            
            
            
            1,128Total
      current assets before funds held for customers
            
            
            89,535
            
            
            
            86,935Funds
      held for customers
            
            
            73,814
            
            
            
            23,560Total
      current assets
            
            
            163,349
            
            
            
            110,495Property
      and equipment, net
            
            
            18,965
            
            
            
            19,496Capitalized
      software, net
            
            
            4,125
            
            
            
            4,463Goodwill
            
            
            3,025
            
            
            
            3,198Long-term
      investments in marketable securities
            
            
            1,239
            
            
            
            1,444Other
      assets, net
            
            
            12,185
            
            
            
            12,298Long-term
      deferred tax assets, net
            
            
            20,171
            
            
            
            19,736Total
      assets
            
            $
            223,059
            
            
            $
            171,130LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
            
            $
            5,909
            
            
            $
            4,476Accrued
      expenses
            
            
            9,112
            
            
            
            9,972Current
      portion of deferred revenue
            
            
            59,380
            
            
            
            60,980Current
      portion of capital lease obligations
            
            
            1,952
            
            
            
            1,897Total
      current liabilities before customer funds obligations
            
            
            76,353
            
            
            
            77,325Customer
      funds obligations
            
            
            73,814
            
            
            
            23,560Total
      current liabilities
            
            
            150,167
            
            
            
            100,885Deferred
      revenue, net of current portion
            
            
            7,785
            
            
            
            7,579Deferred
      rent
            
            
            3,113
            
            
            
            3,186Capital
      lease obligations, net of current portion
            
            
            1,910
            
            
            
            1,710Total
      liabilities
            
            
            162,975
            
            
            
            113,360Stockholders’
      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, 27,954,350 and
      27,620,384 shares issued in 2010 and 2009, respectively
            
            
            280
            
            
            
            276Additional
      paid-in capital
            
            
            190,133
            
            
            
            184,256Accumulated
      other comprehensive loss
            
            
            (834
            )
            
            
            (696
            )Accumulated
      deficit
            
            
            (54,155
            )
            
            
            (54,410
            )135,424
            
            
            
            129,426Treasury stock, 3,105,925 and
      2,985,425 shares, at cost, for 2010 and 2009, respectively
            
            
            (75,340
            )
            
            
            (71,656
            )Total
      stockholders’ equity
            
            
            60,084
            
            
            
            57,770Total
      liabilities and stockholders’ equity
            
            $
            223,059
            
            
            $
            171,130





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 31,2010
            
            
            2009Revenues:Recurring
            
            $
            39,476
            
            
            $
            30,888Services
            
            
            15,591
            
            
            
            15,930License
            
            
            628
            
            
            
            2,001Total
      revenues
            
            
            55,695
            
            
            
            48,819Cost
      of revenues:Recurring
            
            
            11,433
            
            
            
            8,906Services
            
            
            13,181
            
            
            
            12,327License
            
            
            100
            
            
            
            337Total
      cost of revenues
            
            
            24,714
            
            
            
            21,570Gross
      profit
            
            
            30,981
            
            
            
            27,249Operating
      expenses:Sales
      and marketing
            
            
            15,116
            
            
            
            13,835Research
      and development
            
            
            10,293
            
            
            
            9,338General
      and administrative
            
            
            5,016
            
            
            
            4,557Total
      operating expenses
            
            
            30,425
            
            
            
            27,730Operating
      income (loss)
            
            
            556
            
            
            
            (481
            )Other
      (expense) income:Interest
      expense and other
            
            
            (48
            )
            
            
            (44
            )Other
      income, net
            
            
            14
            
            
            
            72Total
      other (expense) income, net
            
            
            (34
            )
            
            
            28Income
      (loss) before income taxes
            
            
            522
            
            
            
            (453
            )(Expense)
      benefit for income taxes
            
            
            (267
            )
            
            
            40Net
      income (loss)
            
            $
            255
            
            
            $
            (413
            )Net
      income (loss) per share:Basic
            
            $
            0.01
            
            
            $
            (0.02
            )Diluted
            
            $
            0.01
            
            
            $
            (0.02
            )Weighted
      average shares outstanding:Basic
            
            
            24,755
            
            
            
            24,292Diluted
            
            
            26,823
            
            
            
            24,292





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 31,2010
            
            
            2009Cash
      flows from operating activities:Net
      income (loss)
            
            $
            255
            
            
            $
            (413
            )Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      and amortization
            
            
            3,021
            
            
            
            2,928Provision
      for doubtful accounts
            
            
            554
            
            
            
            376Tax
      charge for equity awards
            
            
            (516
            )
            
            
            –Non-cash
      stock-based compensation expense
            
            
            3,391
            
            
            
            3,315Deferred
      income taxes
            
            
            208
            
            
            
            (40
            )Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            16
            
            
            
            5,885Prepaid
      expenses and other current assets
            
            
            (1,055
            )
            
            
            (210
            )Other
      assets
            
            
            39
            
            
            
            –Accounts
      payable
            
            
            1,433
            
            
            
            (1,651
            )Accrued
      expenses and deferred rent
            
            
            (933
            )
            
            
            (4,499
            )Deferred
      revenue
            
            
            (1,394
            )
            
            
            (2,228
            )Net
      cash provided by operating activities
            
            
            5,019
            
            
            
            3,463Cash
      flows from investing activities:Purchases
      of property and equipment
            
            
            (1,207
            )
            
            
            (1,173
            )Purchases
      of marketable securities
            
            
            (2,100
            )
            
            
            (308
            )Maturities
      of marketable securities
            
            
            2,098
            
            
            
            3,304Net
      purchases of securities with customer funds
            
            
            (50,254
            )
            
            
            (3,149
            )Capitalized
      software
            
            
            –
            
            
            
            (630
            )Net
      cash used in investing activities
            
            
            (51,463
            )
            
            
            (1,956
            )Cash
      flows from financing activities:Repurchases
      of common stock
            
            
            (3,684
            )
            
            
            –Principal
      payments on capital lease obligations
            
            
            (614
            )
            
            
            (605
            )Net
      increase in customer fund obligations
            
            
            50,254
            
            
            
            3,149Net
      proceeds from issuances of Common Stock
            
            
            2,352
            
            
            
            443Net
      cash provided by financing activities
            
            
            48,308
            
            
            
            2,987Effect
      of exchange rate changes on cash
            
            
            35
            
            
            
            (3
            )Net
      increase in cash and cash equivalents
            
            
            1,899
            
            
            
            4,491Cash
      and cash equivalents, beginning of period
            
            
            23,684
            
            
            
            17,200Cash
      and cash equivalents, end of period
            
            $
            25,583
            
            
            $
            21,691Supplemental
      disclosure of cash flow information:Cash
      paid for interest
            
            $
            43
            
            
            $
            35Cash
      paid for income taxes
            
            $
            18
            
            
            $
            34Supplemental
      disclosure of non-cash financing activities:- Ultimate
      entered into capital lease obligations to acquire new equipment totaling
      $869 and $747 for the threemonths
      ended March 31, 2010 and March 31, 2009, respectively.- Ultimate
      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 payments during the three months endedMarch
      31, 2010.


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
INCOME


(In
thousands)








Common
      Stock
            
            
            Additional
      Paid-in
            
            
            Accumulated
      Other Comprehensive
            
            
            Accumulated
            
            
            TreasuryStock
            
            
            Total
      Stockholders’Shares
            
            
            Amount
            
            
            Capital
            
            
            Loss
            
            
            Deficit
            
            
            Shares
            
            
            Amount
            
            
            EquityBalance,
      December 31, 2009
            
            
            27,620
            
            
            $
            276
            
            
            $
            184,256
            
            
            $
            (696
            )
            
            $
            (54,410
            )
            
            
            2,985
            
            
            $
            (71,656
            )
            
            $
            57,770Net  income
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            255
            
            
            
            –
            
            
            
            –
            
            
            
            255Unrealized
      loss on foreign currentcy translation adjustments
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (138
            )
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (138
            )Comprehensive
      income
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            117Issuances
      of  Common Stock from exercises of stock options
            
            
            168
            
            
            
            2
            
            
            
            2,350
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            2,352Issuances
      of Common Stock from restricted stock releases
            
            
            166
            
            
            
            2
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            2Tax
      charge from equity awards
            
            
            –
            
            
            
            –
            
            
            
            (516
            )
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (516
            )Realized
      excess stock-based payment deductions
            
            
            –
            
            
            
            –
            
            
            
            652
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            652Repurchases
      of  Common Stock
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            121
            
            
            
            (3,684
            )
            
            
            (3,684
            )Non-cash
      stock-based compensation
            
            
            –
            
            
            
            –
            
            
            
            3,391
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            3,391Balance,
      March 31, 2010
            
            
            27,954
            
            
            $
            280
            
            
            $
            190,133
            
            
            $
            (834
            )
            
            $
            (54,155
            )
            
            
            3,106
            
            
            $
            (75,340
            )
            
            $
            60,084

































































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 UNAUDTIED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS










1.  Nature
of Operations





The
Ultimate Software Group, Inc. and subsidiaries (“Ultimate,” “we,” “us,” or
“our”) is the leading provider of unified, end-to-end human capital management
(“HCM”) software-as-a-service (“SaaS”) solutions in North
America.  Ultimate’s solutions are available as two solution suites,
based on company size.  UltiPro Enterprise (“Enterprise”) was
developed to address the needs of companies with 1,000 or more employees and
UltiPro Workplace (“Workplace”) was developed for companies with fewer than
1,000 employees.  UltiPro is marketed primarily through our Enterprise
and Workplace direct sales teams.





2.           Basis
of Presentation, Consolidation and the Use of Estimates





The
accompanying unaudited condensed consolidated financial statements of Ultimate
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 quarterly report should be read in conjunction with Ultimate’s audited
consolidated financial statements and notes thereto included in Ultimate’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2009 filed
with the SEC on March , 2010 (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 Ultimate’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, 2010 are not necessarily indicative of operating results for the full
fiscal year or for any future periods.





The
unaudited condensed consolidated financial statements reflect the financial
position and operating results of Ultimate 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





Ultimate’s
significant accounting policies discussed in Note 3 to its audited consolidated
financial statements for the fiscal year ended December 31, 2009, included in
the Form 10-K, have not significantly changed.





Recently
Adopted Accounting Pronouncements





In
January 2010, we adopted Accounting Standard Update (“ASU”) 2009-05, “Fair Value
Measurements and Disclosures (Topic 820)-Measuring Liabilities at Fair Value”
(“ASU 2009-05”).  ASU 2009-05, which amends ASC Topic 820, “Fair Value
Measurements,” allows companies determining the fair value of a liability to use
the perspective of an investor that holds the related obligation as an
asset.  The amendment addresses practice difficulties caused by the
tension between fair-value measurements based on the price that would be paid to
transfer a liability to a new obligor and contractual or legal requirements that
prevent such transfers from taking place.  The adoption of ASU 2009-05
did not have an impact on our unaudited condensed consolidated financial
statements.





In
January 2010, we adopted ASU 2010-06, “Fair Value Measurements and Disclosures
(Topic 820)” (“ASU 2010-06”).  ASU 2010-06 provides amendments to
Subtopic 820-10 that (a) require new disclosures as follows: (1) transfers in
and out of Levels 1 and 2 and (2) activity in Level 3 fair value measurements,
and (b) clarify existing disclosures as follows:  (1) level of
disaggregation requiring a reporting entity to provide fair value measurement
disclosures for each class of assets and liabilities, and (2) disclosures about
inputs and valuation techniques for both recurring and nonrecurring fair value
measurements for Levels 2 and 3.  The adoption of ASU 2010-06 did not
have an impact on our unaudited condensed consolidated financial
statements.





In
February 2010, we adopted ASU 2010-09, “Subsequent Events (Topic 855)” (“ASU
2010-09”).  ASU 2010-09 provides amendments to Subtopic 855-10 as
follows: (a) updates the date subsequent events are evaluated depending on the
registrant’s classification; (b) adds the definition of SEC filer; (c) removes
the requirement of disclosing the date through which subsequent events have been
evaluated; (d) removes the definition of public entity; and (e) changes the
scope of the reissuance disclosure requirements.  We evaluated events
that occurred subsequent to March 31, 2010 and determined that there were no
recordable or reportable subsequent events.





Recently
Issued Accounting Pronouncements





In
October 2009, the FASB issued ASU 2009-13 (EITF 08-1), “Multiple-Deliverable
Revenue Arrangements” (“ASU 2009-13 (EITF 08-1)”).  ASC Subtopic
605-25, “Revenue Recognition-Multiple-Element Arrangements” (“ASC Subtopic
605-25”), sets forth requirements that must be met for an entity to recognize
revenue from the sale of a delivered item that is part of a multiple-element
arrangement when other items have not yet been delivered.  One of
those current requirements is that there be objective and reliable evidence of
the standalone selling price of the undelivered items, which must be supported
by either vendor-specific objective evidence (“VSOE”) or third-party evidence
(“TPE”).





5
 Table of Contents





ASU
2009-13 (EITF 08-1) amends ASC Subtopic 650-25 to eliminate the requirement that
all undelivered elements have VSOE or TPE before an entity can recognize the
portion of an overall arrangement fee that is attributable to items that already
have been delivered.  In the absence of VSOE or TPE of the standalone
selling price for one or more delivered or undelivered elements in a
multiple-element arrangement, entities will be required to estimate the selling
prices of those elements.  The overall arrangement fee will be
allocated to each element (both delivered and undelivered items) based on their
relative selling prices, regardless of whether those selling prices are
evidenced by VSOE or TPE or are based on the entity’s estimated selling
price.  Application of the “residual method” of allocating an overall
arrangement fee between delivered and undelivered elements will no longer be
permitted upon adoption of ASU 2009-13 (EITF 08-1).  Additionally, the
new guidance will require entities to disclose more information about their
multiple-element revenue arrangements.  ASU 2009-13 is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010.  Early adoption is
permitted.  If a company elects early adoption and the period of
adoption is not the beginning of its fiscal year, the requirements must be
applied retrospectively to the beginning of the fiscal year.  We are
evaluating the impact of ASU 2009-13 (EITF 08-1) and are contemplating early
adoption.  We do not believe early adoption of ASU 2009-13 (EITF 08-1)
will have a material impact on our unaudited condensed consolidated financial
statements.




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





We
classify our investments in marketable securities with readily determinable fair
values as available-for-sale.  Available-for-sale securities consist
of debt and equity securities not classified as trading securities or as
securities to be held to maturity.  Unrealized gains and losses on
available-for-sale securities 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 available-for-sale
securities are determined using the specific identification
method.  Included in accumulated other comprehensive loss were $5
thousand and $6 thousand of unrealized gains on available-for-sale securities at
March 31, 2010 and December 31, 2009, respectively.





The
amortized cost, net unrealized gain and fair value of our investments in
marketable available-for-sale securities as of March 31, 2010 and December 31,
2009 are shown below (in thousands):





As
      of March 31, 2010
            
            
            As
      of December 31, 2009Net
            
            
            
            
            
            
            
            
            NetAmortized
            
            
            Unrealized
            
            
            Fair
            
            
            Amortized
            
            
            Unrealized
            
            
            FairCost
            
            
            Gain
            
            
            Value
            
            
            Cost
            
            
            Gain
            
            
            ValueCorporate
      debentures – bonds
            
            $
            3,028
            
            
            $
            3
            
            
            $
            3,031
            
            
            $
            3,025
            
            
            $
            3
            
            
            $
            3,028Commercial
      paper
            
            
            1,199
            
            
            
            –
            
            
            
            1,199
            
            
            
            1,499
            
            
            
            –
            
            
            
            1,499Agency
      bonds
            
            
            1,404
            
            
            
            –
            
            
            
            1,404
            
            
            
            1,407
            
            
            
            1
            
            
            
            1,408U.S.
      Treasury bills
            
            
            1,998
            
            
            
            1
            
            
            
            1,999
            
            
            
            1,995
            
            
            
            2
            
            
            
            1,997U.S.
      Treasury bonds
            
            
            501
            
            
            
            1
            
            
            
            502
            
            
            
            501
            
            
            
            –
            
            
            
            501Certificates
      of deposit
            
            
            1,390
            
            
            
            –
            
            
            
            1,390
            
            
            
            1,090
            
            
            
            –
            
            
            
            1,090Total
      investments
            
            $
            9,520
            
            
            $
            5
            
            
            $
            9,525
            
            
            $
            9,517
            
            
            $
            6
            
            
            $
            9,523





The
amortized cost and fair value of the marketable available-for-sale securities by
contractual maturity as of March 31, 2010 are shown below (in
thousands):





As
      of March 31, 2010Amortized
            
            
            FairCost
            
            
            ValueDue
      in one year or less
            
            $
            8,281
            
            
            $
            8,286Due
      after one year
            
            
            1,239
            
            
            
            1,239Total
            
            $
            9,520
            
            
            $
            9,525





We
classify and disclose fair value measurements in one of the following three
categories of 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.




Our
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.   We did not have any significant
transfers into and out of Level 1 and Level 2 during the three months ended
March 31, 2010 and the twelve months ended December 31, 2009.





6
 Table of Contents





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 Ultimate’s corporate debentures
and bonds, commercial paper, agency bonds, and U.S. Treasury bills and
bonds.  Such instruments are generally classified within Level 2 of
the fair value hierarchy.  Ultimate 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 as of March 31, 2010 and
December 31, 2009 (in thousands):





As
      of March 31, 2010
            
            
            As
      of December 31, 2009Quoted
            
            
            
            
            
            
            
            
            
            
            
            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
      debentures and bonds
            
            $
            3,031
            
            
            $
            –
            
            
            $
            3,031
            
            
            $
            –
            
            
            $
            3,028
            
            
            $
            –
            
            
            $
            3,028
            
            
            $
            –Commercial
      paper
            
            
            1,199
            
            
            
            –
            
            
            
            1,199
            
            
            
            –
            
            
            
            1,499
            
            
            
            –
            
            
            
            1,499
            
            
            
            –Agency
      bonds
            
            
            1,404
            
            
            
            –
            
            
            
            1,404
            
            
            
            
            
            
            
            1,408
            
            
            
            –
            
            
            
            1,408U.S.
      Treasury bills
            
            
            1,999
            
            
            
            –
            
            
            
            1,999
            
            
            
            
            
            
            
            1,997
            
            
            
            –
            
            
            
            1,997U.S.Treasury
      bonds
            
            
            502
            
            
            
            –
            
            
            
            502
            
            
            
            
            
            
            
            501
            
            
            
            –
            
            
            
            501Certificates
      of deposit
            
            
            1,390
            
            
            
            1,390
            
            
            
            –
            
            
            
            –
            
            
            
            1,090
            
            
            
            1,090
            
            
            
            –
            
            
            
            –Total
            
            $
            9,525
            
            
            $
            1,390
            
            
            $
            8,135
            
            
            $
            –
            
            
            $
            9,523
            
            
            $
            1,090
            
            
            $
            8,433
            
            
            $
            –





Assets
and liabilities measured at fair value on a recurring basis were presented in
the unaudited condensed consolidated balance sheet as of March 31, 2010 and in
the audited consolidated balance sheet as of December 31, 2009 as short-term and
long-term investments in marketable securities.  There were no
financial liabilities accounted for at fair value as of March 31, 2010 and
December 31, 2009.





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 three 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 as of March 31, 2010 and December 31, 2009 consist of the
following (in thousands):




As
      of
              March
      31,
              2010
            
            
            As
      of
              December
      31,
              2009Property
      and equipment
            
            $
            74,669
            
            
            $
            72,717Less:  accumulated
      depreciation and amortization
            
            
            55,704
            
            
            
            53,221$
            18,965
            
            
            $
            19,496




6.Earnings Per Share





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 for the three months ended March 31, 2010
and 2009 (in thousands):




For
      the Three Months
                      ended
      March 31,2010
                    
                    
                    2009Basic
      weighted average shares outstanding
                    
                    
                    24,755
                    
                    
                    
                    24,292Effect
      of dilutive equity instruments
                    
                    
                    2,068
                    
                    
                    
                    –Dilutive
      weighted average shares outstanding
                    
                    
                    26,823
                    
                    
                    
                    24,292Options
      to purchase shares of Common Stock and other stock-based awards
      outstanding which are not included in the calculation of diluted income
      (loss) per share because their impact is
    anti-dilutive
                    
                    
                    391
                    
                    
                    
                    6,406


7
 Table of Contents





7.           Comprehensive
Income (Loss)





Comprehensive
income (loss) represents all changes in equity 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 available-for-sale securities and foreign currency translation adjustments,
recorded net of any related income tax.





Comprehensive
income (loss) for the three months ended March 31, 2010 and 2009 was as follows
(in thousands):





For
      the Three MonthsEnded
      March 31,2010
            
            
            2009Net
      income (loss)
            
            $
            255
            
            
            $
            (413
            )Other
      comprehensive income (loss)Unrealized
      loss on investments inmarketable
      available-for-sale securities
            
            
            –
            
            
            
            (3
            )Unrealized
      loss on foreign currencytranslation
      adjustments
            
            
            (138
            )
            
            
            (61
            )Comprehensive
      income (loss)
            
            $
            117
            
            
            $
            (477
            )





8.           Foreign
Currency





The
financial statements of Ultimate’s foreign subsidiaries have been translated
into U.S. dollars.  The functional currency of The Ultimate Software
Group of Canada, Inc. is the Canadian dollar and the functional currency of The
Ultimate Software Group UK Limited is the British pound.  Assets and
liabilities are translated into U.S. dollars at period-end exchange
rates.  Income and expenses are translated at the average exchange
rate for the reporting period.  The resulting translation adjustments,
representing unrealized gains or losses, are included in unaudited condensed
consolidated 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, 2010 and March 31, 2009, Ultimate had cumulative unrealized
translation losses of $0.1 million and $61 thousand,
respectively.  Included in accumulated other comprehensive loss, as
presented in the accompanying unaudited condensed consolidated balance sheets,
is $0.8 million of unrealized translation losses at March 31, 2010 and $0.7
million in unrealized translation losses at December 31, 2009.





9.           Stock-Based
Compensation





Our
Amended and Restated 2005 Equity and Incentive Plan (the “Plan”) authorizes the
grant of options to non-employee directors, officers and employees of Ultimate
to purchase shares of Ultimate’s Common Stock (“Options”).  The Plan
also authorizes the grant to such persons of restricted and non-restricted
shares of Common Stock, stock appreciation rights, stock units and cash
performance awards (collectively, the “Awards”).  Prior to the
adoption of the Plan, options to purchase shares of Common Stock were issued
under Ultimate’s Nonqualified Stock Option Plan (the “Prior Plan”).





As of
March 31, 2010, the aggregate number of shares of Common Stock authorized under
the Plan and the Prior Plan was 12,500,000 and the aggregate number of shares of
Common Stock that were available to be issued under all Awards granted under the
Plan was 1,042,391 shares.





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





For
      the Three Months
              Ended
      March 31,2010
            
            
            2009Non-cash stock-based compensation
      expense:Cost
      of recurring revenues
            
            $
            217
            
            
            $
            165Cost
      of services revenues
            
            
            341
            
            
            
            344Sales
      and marketing
            
            
            1,719
            
            
            
            1,788Research
      and development
            
            
            327
            
            
            
            302General
      and administrative
            
            
            787
            
            
            
            716Total
      non-cash stock-based compensation expense
            
            $
            3,391
            
            
            $
            3,315





Net cash
proceeds from the exercise of stock options were $2.4 million for the three
months ended March 31, 2010, and $0.4 million for the three months ended March
31, 2009. There was a $0.7 million income tax benefit recognized in additional
paid in capital from the realization of excess share-based payment deductions
during the three months ended March 31, 2010.  There was no income tax
benefit realized from stock option exercises during the three months ended March
31, 2009.





8
 Table of Contents





Stock
Option, Restricted Stock and Restricted Stock Unit Activity





There
were no stock options granted during the three months ended March 31,
2010.  The following table summarizes stock option activity (for
previously granted stock options) for the three months ended March 31, 2010 (in
thousands, except per share amounts):






WeightedAverageWeighted
            
            
            Remaining
            
            
            AggregateAverage
            
            
            Contractual
            
            
            IntrinsicStock
      Options
            
            Shares
            
            
            Exercise
      Price
            
            
            Term
      (in Years)
            
            
            ValueOutstanding
      at December 31, 2009
            
            
            4,165
            
            
            $
            17.79
            
            
            
            5.55
            
            
            $
            49,687Granted
            
            
            –
            
            
            
            –Exercised
            
            
            (168
            )
            
            
            14.01Forfeited
      or expired
            
            
            (7
            )
            
            
            26.27Outstanding
      at March 31, 2010
            
            
            3,990
            
            
            $
            17.93
            
            
            
            5.38
            
            
            $
            60,010Exercisable
      at March 31, 2010
            
            
            3,638
            
            
            $
            16.87
            
            
            
            5.13
            
            
            $
            58,591





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
Ultimate’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,
2010.  The amount of the aggregate intrinsic value changes based on
the fair value of Ultimate’s Common Stock.  Total intrinsic value of
options exercised was $2.9 million for the three months ended March 31, 2010 and
$0.6 million for the three months ended March 31, 2009.  Total fair
value of options vested during the three months ended March 31, 2010 was $3.5
million and $3.2 million for the three months ended March 31, 2009.





As of
March 31, 2010, $2.6 million of total unrecognized compensation costs related to
non-vested stock options is expected to be recognized over a weighted average
period of 1.02 years.





During
the three months ended March 31, 2010 and March 31, 2009, we granted Restricted
Stock Awards for 8,310 shares and 10,580 shares, respectively, of Common Stock
to non-employee directors.  There were 140,400 and 158,760 Restricted
Stock Unit Awards granted to employees during the three months ended March 31,
2010 and March 31, 2009, respectively.  During the three months ended
March 31, 2010, 105,000 shares of Common Stock previously issued under
Restricted Stock Awards became vested.  No shares of Common Stock
issued under Restricted Stock Awards became vested during the three months ended
March 31, 2009.  During the three months ended March 31, 2010, 79,146
shares became payable under Restricted Stock Unit Awards that vested during such
period.  18,012 of such shares were retained by Ultimate and not
issued, in satisfaction of withholding tax requirements applicable to payment of
such Awards, and 61,134 of such shares were issued to the holders of such
Awards.  No Restricted Stock Unit Awards became vested and no payments
were made under Restricted Stock Units during the three months ended March 31,
2009.





The
following table summarizes restricted stock and restricted stock unit activity
for the three months ended March 31, 2010 (in thousands, except per share
amounts):





Restricted
      Stock Awards
            
            
            Restricted
      Stock Unit AwardsWeightedAverageGrant
      DateShares
            
            
            Fair
      Value
            
            
            SharesOutstanding
      at December 31, 2009
            
            
            1,405
            
            
            $
            24.36
            
            
            
            247Granted
            
            
            8
            
            
            
            30.29
            
            
            
            140Vested
            
            
            (105
            )
            
            
            21.60
            
            
            
            (79
            )Forfeited
      or expired
            
            
            –
            
            
            
            –
            
            
            
            (1
            )Outstanding
      at March 31, 2010
            
            
            1,308
            
            
            $
            24.62
            
            
            
            307





As of
March 31, 2010, $15.9 million of total unrecognized compensation costs related
to non-vested Restricted Stock Awards were expected to be recognized over a
weighted average period of 2.0 years.  As of March 31, 2010, $6.1
million of total unrecognized compensation costs related to non-vested
Restricted Stock Unit Awards were expected to be recognized over a weighted
average period of 2.4 years.





ITEM
2.                      Management’s
Discussion 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 subsidiaries (“Ultimate,” “we,” “us,” or
“our”) 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 (the “Form 10-Q”) and in Ultimate’s Annual Report on Form
10-K for the fiscal year ended December 31, 2009, filed with the Securities and
Exchange Commission (the “SEC”) on March 5, 2010 (the “Form 10-K”).





Ultimate’s
significant accounting policies discussed in Note 3 to its audited consolidated
financial statements for the fiscal year ended December 31, 2009, included in
the Form 10-K, have not significantly changed.




9





Overview





Ultimate
is the leading provider of unified, end-to-end human capital management (“HCM”)
software-as-a-service (“SaaS”) solutions in North America.





Ultimate’s
UltiPro software (“UltiPro”) is a comprehensive Internet-based solution
delivered primarily as an online service and designed to deliver the
functionality businesses need to manage the complete employment life cycle from
recruitment to retirement. The solution includes feature sets for talent
acquisition and onboarding, HCM and compliance, benefits management and online
enrollment, payroll, performance management, salary planning and budgeting for
compensation management, reporting and analytical decision-making tools, time
and attendance, and a self-service Web portal for executives, managers,
administrators, and employees.





Our SaaS offering of UltiPro, branded
“Intersourcing” (the “SaaS Offering”), provides on-line access to comprehensive
human capital management functionality for organizations that want to simplify
the information technology (“IT”) support requirements of their business
applications. We have found that our SaaS Offering is attractive to companies
that want to focus on their core competencies to increase sales and profits.
Through the SaaS Offering, we supply and manage the hardware, infrastructure,
ongoing maintenance and backup services for our customers.  Customer
systems are managed at three data centers, one located in the Miami, Florida
area, one in the Atlanta, Georgia area, and another in Toronto, Canada.All data
centers are owned and operated by independent third parties.





UltiPro
is available as two solution suites, based on company size.  UltiPro
Enterprise (“Enterprise”) was developed to address the needs of companies with
1,000 or more employees and is delivered primarily through SaaS but is also
available as an on-premise solution.  UltiPro Workplace (“Workplace”)
was designed for companies with fewer than 1,000 employees and is delivered
exclusively through SaaS.  UltiPro Workplace provides medium-sized and
smaller companies with nearly all the features that larger Enterprise companies
have with UltiPro, plus a bundled services package. Since many companies in this
market do not have 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
Ultimate’s Enterprise and Workplace direct sales teams.





In
addition to UltiPro’s core HCM functionality, Ultimate’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 (recruitment, onboarding, performance management, salary planning and
budgeting for compensation management, and employee relations tools for managing
disciplinary actions, grievances, and succession planning); (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.  Some of the Optional Features are 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
HCM environment.





The key
drivers of our business are growth in sales production and the retention of the
underlying customers, once our solutions are sold.  For the quarter,
our total revenues grew by 14% and our customer retention was 96%, on a trailing
twelve-month basis.





Ultimate
has two primary revenue sources:  recurring revenues and services
revenues.  Revenues from our SaaS Offering and maintenance revenues
are the primary components of recurring revenues in Ultimate’s unaudited
condensed consolidated statements of operations.  The majority of
services revenues are derived from implementation services and, to a lesser
extent, training services.





Effective
April 1, 2009, Ultimate discontinued selling its on-site UltiPro solutions to
new customers on a perpetual license basis, although we continue to sell on-site
UltiPro solutions on a subscription basis (priced and billed to customers on a
PEPM basis). We sell licenses to existing license customers but only in relation
to the customer’s employee growth or for Optional Features if they already have
a perpetual license for the on-site UltiPro solutions.  After the
elimination of new sales of perpetual licenses, the variable costs associated
with licenses, such as sales commissions, have also been eliminated. However,
there 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 have been shifted to costs of recurring revenues. As perpetual
license agreements were sold, annual maintenance contracts (priced as a
percentage of the related license fee) accompanied those
agreements.  Maintenance contracts typically have a one-year term with
annual renewal periods thereafter.  We have historically maintained a
steady customer retention rate for our renewal maintenance agreements and do not
believe our decision to discontinue new sales of perpetual license agreements
will materially affect our future maintenance revenues (as they relate to
existing license customers).





As SaaS
units are sold, the recurring revenue backlog associated with the SaaS Offering
grows, enhancing the predictability of future revenue streams.  SaaS
sales of UltiPro 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 the SaaS Offering is triggered when
the related customer processes its first payroll (or goes
“Live”).  When a SaaS 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 we begin recognizing the associated
ongoing monthly PEPM fees.





Critical
Accounting Estimates





The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles (“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.  Ultimate’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.


10
 Table of Contents





Results
of Operations





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





For
      the Three MonthsEnded
      March 31,2010
            
            
            2009Revenues:Recurring
            
            
            70.9
            %
            
            
            63.3
            %Services
            
            
            28.0
            
            
            
            32.6License
            
            
            1.1
            
            
            
            4.1Total
      revenues
            
            
            100.0
            
            
            
            100.0Cost
      of revenues:Recurring
            
            
            20.5
            
            
            
            18.2Services
            
            
            23.7
            
            
            
            25.3License
            
            
            0.2
            
            
            
            0.7Total
      cost of revenues
            
            
            44.4
            
            
            
            44.2Operating
      expenses:Sales
      and marketing
            
            
            27.1
            
            
            
            28.4Research
      and development
            
            
            18.5
            
            
            
            19.1General
      and administrative
            
            
            9.0
            
            
            
            9.3Total
      operating expenses
            
            
            54.6
            
            
            
            56.8Operating
      income (loss)
            
            
            1.0
            
            
            
            (1.0
            )Other
      income (expense):Interest
      expense and other
            
            
            (0.1
            )
            
            
            –Other
      income, net
            
            
            –
            
            
            
            0.1Total
      other income, net
            
            
            (0.1
            )
            
            
            0.1Income
      (loss) before income taxes
            
            
            0.9
            
            
            
            (0.9
            )(Expense)
      benefit for income taxes
            
            
            (0.5
            )
            
            
            –Net
      income (loss)
            
            
            0.4
            %
            
            
            (0.9
            )
      %





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





For
      the Three Months
              Ended
      March 31,2010
            
            
            2009Stock-based compensation:Cost
      of recurring revenues
            
            $
            217
            
            
            $
            165Cost
      of services revenues
            
            
            341
            
            
            
            344Sales
      and marketing
            
            
            1,719
            
            
            
            1,788Research
      and development
            
            
            327
            
            
            
            302General
      and administrative
            
            
            787
            
            
            
            716Total
      non-cash stock-based compensation expense
            
            $
            3,391
            
            
            $
            3,315Amortization
      of acquired intangibles:General
      and administrative
            
            $
            74
            
            
            $
            46





Revenues





Our
revenues are derived from recurring revenues and services revenues and, to a
lesser extent, license revenues.  Our significant revenue recognition
policies, as discussed in Note 3 to our audited consolidated financial
statements for the fiscal year ended December 31, 2009, included in the Form
10-K, have not changed.





Total
revenues, consisting of recurring, services and license revenues, increased
14.1% to $55.7 million for the three months ended March 31, 2010 from $48.8
million for the three months ended March 31, 2009.





Recurring
revenues increased 27.8 % to $39.5 million for the three months ended March 31,
2010 from $30.9 million for the three months ended March 31, 2009. The increase
for the three months ended March 31, 2010 was primarily due to increases in
revenues from our SaaS Offering and, to a lesser extent, maintenance
revenues.





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a)
            Revenues
      from our SaaS Offering increased 40.1% for the three months ended March
      31, 2010, in comparison to the same period in 2009. This increase was
      based on the revenue impact of incremental units sold that have gone Live
      since March 31, 2009, including UltiPro and, to a lesser extent, Optional
      Features of UltiPro.  Recognition of recurring subscription
      revenues for sales from our SaaS Offering begins when the related customer
      goes Live.





b)
            Maintenance
      revenues decreased 2.6% for the three months ended March 31, 2010, in
      comparison to the same period in 2009.  This decrease was
      primarily due to the fact that we no longer sell perpetual licenses to new
      customers, partially offset by maintenance revenues from renewals of
      existing license customers.  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.





Services
revenues decreased 2.1% to $15.6 million for the three months ended March 31,
2010 from $15.9 million for the three months ended March 31, 2009. The decrease
for the three months ended March 31, 2010 was mainly due to (i) less billable
hours from fewer Ultimate revenue-generating consultants for Enterprise sales
and, to a lesser extent, from the reduced use of third party implementation
partners and (ii) a decrease in the Enterprise blended net rate per hour,
partially offset by (iii) higher implementation revenues recognized for
Workplace sales.





License
revenues decreased 68.6% to $0.6 million for the three months ended March 31,
2010, from $2.0 million for the three months ended March 31,
2009.   The $1.4 million decrease  in the three month
period ended March 31, 2010 was principally due to Ultimate’s decision not to
sell perpetual licenses to new customers after April 1, 2009 as there were no
new sales of perpetual licenses in the quarter ended March 31, 2010. However, we
did sell licenses of Optional Features to existing license customers during the
first fiscal quarter of 2010.





Cost
of Revenues





Cost of
revenues primarily consists of the costs of recurring and services revenues.
Cost of recurring revenues primarily consists of costs to provide maintenance
and technical support to Ultimate’s customers, the cost of providing periodic
updates and the cost of recurring subscription revenues, including amortization
of capitalized software. Cost of services revenues primarily consists of costs
to provide implementation services and training to Ultimate’s customers and, to
a lesser degree, costs related to sales of payroll-related forms and costs
associated with certain client reimbursable out-of-pocket expenses.





Total
cost of revenues increased 14.6% to $24.7 million for the three months ended
March 31, 2010 from $21.6 million for the three months ended March 31,
2009.





Cost of
recurring revenues increased 28.4% to $11.4 million for the three months ended
March 31, 2010 from $8.9 million for the three months ended March 31, 2009. The
$2.5 million increase in cost of recurring revenues for the three months ended
March 31, 2010 was primarily due to increases in both maintenance costs and SaaS
costs.  Maintenance costs increased primarily due to higher labor
costs commensurate with the growth in Ultimate’s recurring revenues customer
base.  SaaS costs increased principally as a result of the growth in
SaaS operations and increased sales, including increased third party data center
costs, increased labor costs, and, to a lesser extent, amortization of
capitalized software and increased third-party license fees to support the
growth in sales from our SaaS Offering.





Cost of
services revenues increased 6.9% to $13.2 million for the three months ended
March 31, 2010 from $12.3 million for the three months ended March 31, 2009.
Cost of services revenues increased for the three months ended March 31, 2010
primarily due to an increase in labor costs from Workplace implementation
services as we continued to build the infrastructure for Workplace to support
the growth in sales.





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 9.3% to $15.1 million for the three
months ended March 31, 2010 from $13.8 million for the three months ended March
31, 2009. The $1.3 million increase in sales and marketing expenses was
primarily due to increased labor and related costs attributable to hiring
additional personnel for the Workplace direct sales team and higher sales
commissions principally related to increased recurring subscription revenues
from our SaaS Offering for both Enterprise and Workplace. Commissions on SaaS
sales are amortized over the initial contract term (typically 24 months)
commencing on the Live date, which corresponds to the revenue recognition for
SaaS sales.





Research
and Development




Research
and development expenses consist primarily of software development personnel
costs.  Research and development expenses increased 10.2% to $10.3
million for the three months ended March 31, 2010 from $9.3 million for the
three months ended March 31, 2009 principally due to higher labor costs related
to the ongoing development of core UltiPro and Optional
Features.


General
and Administrative




General
and administrative expenses consist primarily of salaries and benefits of
executive, administrative and financial personnel, as well as external
professional fees and the provision for doubtful accounts.  General
and administrative expenses increased 10.1% to $5.0 million for the three months
ended March 31, 2010 from $4.6 million for the three months ended March 31,
2009.  The $0.4 million increase in general and administrative
expenses was primarily due to higher labor and related costs and an increase in
the provision for doubtful accounts.







12
 Table of Contents





Income
Taxes





Income
taxes for the three months ended March 31, 2010 included a consolidated
provision of $0.3 million. Income taxes for the three months ended March 31,
2009 included a consolidated benefit of $40 thousand.





At
December 31, 2009, we had approximately $82.1 million and $0.8 million of net
operating loss carryforwards for Federal and foreign income tax reporting
purposes, respectively, available to offset future taxable income.  Of
the total net operating loss carryforwards, approximately $82.1 million was
attributable to deductions from the exercise of non-qualified employee, and
non-employee director, stock options, the benefit of which will primarily be
credited to paid-in capital and deferred tax assets when
realized.  Such carryforwards expire from 2011 through
2029.  Utilization of such carryforwards may be limited as a result of
cumulative ownership changes in Ultimate’s equity instruments.





The
balance of deferred tax assets, net of deferred tax liabilities, was $21.3
million as of March 31, 2010.  If estimates of taxable income are
decreased, a valuation allowance may need to be provided for some or all
deferred tax assets, which will cause an increase in income tax
expense.





Liquidity
and Capital Resources





In recent
years, Ultimate has funded operations from cash flows generated from operations
and, to a lesser extent, equipment financing and borrowing
arrangements.





As of
March 31, 2010, we had $35.1 million in cash, cash equivalents and total
investments in marketable securities, reflecting a net increase of $1.9 million
since December 31, 2009.


This $1.9
million increase was primarily due to cash provided by operations of $5.0
million, partially offset by cash purchases of property and equipment (including
principal payments on financed purchases) of $1.8 million and repurchases of
Common Stock (net of proceeds from the issuance of Common Stock from employee
and non-employee director stock option exercises) of $1.3 million.





Net cash
provided by operating activities was $5.0 million for the three months ended
March 31, 2010 as compared to $3.5 million for the three months ended March 31,
2009. This $1.5 million increase was primarily due to decreases in vendor
payments, partially offset by an increase in accounts receivable (net of
deferred revenue) which is related to our sales growth.





Net cash
used in investing activities was $51.4 million for the three months ended March
31, 2010 as compared to $2.0 million for the three months ended March 31,
2009.  The increase of $49.4 million from the comparable period in
2009 was primarily attributable to an increase 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 us in
overnight repurchase agreements backed by U.S. Treasury or U.S. Government
Agency securities of $47.1 million, and an increase in cash purchases of
marketable securities of $1.8 million, partially offset by a decrease in cash
provided from the maturities of marketable securities of $1.2 million and, to a
lesser extent, a decrease in capitalized software costs of $0.6
million.





Net cash
provided by financing activities was $48.3 million for the three months ended
March 31, 2010 as compared to $3.0 million for the three months ended March 31,
2009. The $45.3 million increase was primarily related to an increase of $47.1
million in UltiPro Tax Filing Customer Funds received, and a $1.9 million
increase in proceeds from the issuance of Common Stock from stock option
exercises, partially offset by a $3.7 million increase in repurchases of Common
Stock pursuant to Ultimate’s stock repurchase plan.





Days
sales outstanding, calculated on a trailing three-month basis, as of March 31,
2010 and March 31, 2009, were 61 days and 60 days, respectively.





Deferred revenues were $67.2 million at
March 31, 2010, as compared to $68.6 million at December 31,
2009.  The decrease of $1.4 million in deferred revenues was primarily
due to decreased deferred maintenance revenues partially offset by increased
deferred SaaS revenues.  During the three months ended March 31, 2010,
deferred maintenance revenues reflected the cyclical nature of the annual
maintenance renewals whereby the amounts recognized as maintenance revenues
exceeded the amounts deferred from billing annual renewals.





We
believe that cash and cash equivalents, investments in marketable securities,
equipment financing and cash generated from operations will be sufficient to
fund our 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.





We
did not have any material commitments for capital expenditures as of March 31,
2010.





Off-Balance
Sheet Arrangements





We do
not, and as of March 31, 2010 we did not, have any off-balance sheet
arrangements (as that term is defined in applicable SEC rules) that are
reasonably likely to have a current or future material effect on our financial
condition, results of operations, liquidity, capital expenditures or capital
resources.





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Table of Contents





Quarterly
Fluctuations





Our
quarterly revenues and operating results have varied significantly in the past
and are likely to vary substantially from quarter to quarter in the future. Our
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 us or our competitors and capital spending
patterns of our customers. We establish our expenditure levels based upon our
expectations as to future revenues, and, if revenue levels are below
expectations, expenses can be disproportionately high. A drop in near term
demand for our 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 we
will be able to maintain profitability on a quarterly basis. We believe that,
due to the underlying factors for quarterly fluctuations, quarter-to-quarter
comparisons of Ultimate’s 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, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
represent our expectations or beliefs, including, but not limited to, our
expectations concerning our 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. Ultimate’s actual results could differ materially from
those contained in the forward-looking statements due to risks and uncertainties
associated with fluctuations in our quarterly operating results, concentration
of our  product offerings, development risks involved with new
products and technologies, competition, our contractual relationships with third
parties, contract renewals with business partners, compliance by our customers
with the terms of their contracts with us, and other factors disclosed in
Ultimate’s filings with the Securities and Exchange Commission.  Other
factors that may cause such differences include, but are not limited to, those
discussed in this Form 10-Q and the Form 10-K, including the risk factors set
forth in Part I, Item 1A of the Form 10-K. Ultimate undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.





ITEM
3.                      Quantitative
and Qualitative Disclosures About Market Risk





In the
ordinary course of Ultimate’s operations, we are 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 our
market risks.





Interest Rate Risk.Ultimate
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 Ultimate’s anticipated interest income from interest-bearing cash
accounts, or cash equivalents and investments in marketable
securities.  We manage 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.





Ultimate
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 Ultimate’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, 2010, total investments in available-for-sale marketable securities
were $9.5 million.





As of
March 31, 2010, virtually all of the investments in Ultimate’s portfolio were at
fixed rates (with a weighted average interest rate of 0.5% per
annum).




To
illustrate the potential impact of changes in interest rates, Ultimate has
performed an analysis based on its March 31, 2010 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 Ultimate’s
total portfolio of approximately $48 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 Ultimate’s total portfolio of
approximately $48 thousand over the next 12 months.





Foreign Currency
Risk.  Ultimate 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 Ultimate transacts business will significantly affect future
net income.





14
 Table of Contents


ITEM
4.                      Controls
and Procedures





(a) Evaluation of disclosure controls
and procedures.  Ultimate carried out an evaluation, under the
supervision and with the participation of Ultimate’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 Ultimate’s disclosure
controls and procedures as of the end of the period covered by this Form 10-Q
pursuant to Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of
1934, as amended (the “Exchange Act”). Based on that evaluation, Ultimate’s
management, including the CEO and CFO, concluded that, as of March 31, 2010,
Ultimate’s disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed in Ultimate’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, 2010 in Ultimate’s internal control over financial
reporting that have materially affected, or are reasonably likely to materially
affect, Ultimate’s internal control over financial reporting.








PART
II – OTHER INFORMATION





ITEM
1A.                      Risk
Factors





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








ITEM
2.                      Unregistered
Sales of Equity Securities and Use of Proceeds





(c)  Purchases
of Equity Securities by the Issuer.On October 30, 2000,
Ultimate announced that its Board of Directors authorized a stock repurchase
plan providing for the repurchase of up to 1,000,000 shares of Ultimate’s issued
and outstanding Common Stock (the “Stock Repurchase Plan”).





On
February 6, 2007, Ultimate’s Board of Directors extended the Stock Repurchase
Plan by authorizing the repurchase of up to 1,000,000 additional shares of
Ultimate’s issued and outstanding Common Stock.





On
February 5, 2008, Ultimate’s Board of Directors extended the Stock Repurchase
Plan further by authorizing the repurchase of up to 1,000,000 additional shares
of Ultimate’s issued and outstanding Common Stock.





On
October 26, 2009, Ultimate’s Board of Directors extended the Stock Repurchase
Plan further by authorizing the repurchase of up to 1,000,000 additional shares
of Ultimate’s issued and outstanding Common Stock.  As a result, an
aggregate of 1,203,175 shares of Common Stock were available for repurchase
under the Stock Repurchase Plan as of October 26, 2009.  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, 2010, Ultimate had purchased 3,105,925 shares of Ultimate’s issued
and outstanding Common Stock under the Stock Repurchase Plan, with 894,075
shares being available for repurchase in the future.  The detail of
Common Stock repurchases for the three months ended March 31, 2010, and the
total cumulative number of shares purchased and the maximum number of shares
that may yet be purchased under the Stock Repurchase Plan as of March 31, 2010,
are as follows:











Total
      Cumulative Number of
            
            
            Maximum
      Number ofShares
      Purchased as Part
            
            
            Shares
      That May YetTotal
      Number of
            
            
            Average
      Price
            
            
            Of
      Publicly Announced
            
            
            Be
      Purchased Under thePeriod
            
            Shares Purchased (1)
            
            
            Paid per Share
            
            
            Plans or Programs (1)
            
            
            Plans or ProgramsJanuary
      1 – 31, 2010
            
            
            –
            
            
            
            –
            
            
            
            2,985,425
            
            
            
            1,014,575February
      1 – 28, 2010
            
            
            78,700
            
            
            
            29.96
            
            
            
            3,064,125
            
            
            
            935,875March
      1 – 31, 2010
            
            
            41,800
            
            
            
            31.99
            
            
            
            3,105,925
            
            
            
            894,075Total
            
            
            120,500
            
            
            $
            30.91
            
            
            
            3,105,925
            
            
            
            894,075(1) All
      shares were purchased through the publicly announced Stock Repurchase Plan
      in open-market transactions.




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.


16
 Table of Contents





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
      10, 2010
            By:
            /s/ Mitchell K. DauermanMitchell
      K. DauermanExecutive
      Vice President, Chief Financial Officer and Treasurer (Authorized
      Signatory and Principal Financial and Accounting
  Officer)











17