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 September 30, 2008





 ̈
            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 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
November 1, 2008, there were 24,438,838 shares of the Registrant’s Common Stock,
par value $0.01, outstanding.








THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES





TABLE
OF CONTENTS


Page(s)Part I – Financial
      Information:Item 1 – Financial Statements:Unaudited Condensed Consolidated Balance Sheets as
      of September 30, 2008 and December 31, 2007
              
              3Unaudited Condensed Consolidated Statements of
      Operations for the Three Months and Nine Months Ended September 30, 2008
      and 2007
              
              4Unaudited Condensed Consolidated Statements of
      Cash Flows for the Nine Months Ended September 30, 2008 and
      2007
              
              5Unaudited Condensed Consolidated Statement of
      Stockholders’ Equity and Comprehensive Loss for the Nine Months Ended
      September 30, 2008
              
              6Notes to Unaudited Condensed Consolidated
      Financial Statements
              
              7-11Item 2 – Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
              
              12-15Item 3 – Quantitative and Qualitative Disclosures About
      Market Risk
              
              16Item 4 – Controls and
    Procedures
              
              16Part II – Other Information:Item 1A – Risk Factors
              
              17-21Item 2 – Unregistered Sales of Equity Securities
      and Use of Proceeds
              
              22Item 6 – Exhibits
              
              22Signatures
              
              23Certifications





2
 Table
of Contents








PART 1 – FINANCIAL INFORMATIONItem
      1 – Financial StatementsTHE
      ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIESUNAUDITED
      CONDENSED CONSOLIDATED BALANCE SHEETS(Dollars
      in thousands, except share and per share data)As
      of
                            
                            
                            As
      ofSeptember
      30,
                            
                            
                            December
      31,2008
                            
                            
                            2007ASSETSCurrent assets:Cash
      and cash equivalents
                            
                            $
                            15,278
                            
                            
                            $
                            17,462Short-term
      investments in marketable securities
                            
                            
                            8,516
                            
                            
                            
                            17,120Accounts
      receivable, net of allowance for doubtful accounts of $825 for 2008 and
      $700 for 2007
                            
                            
                            32,228
                            
                            
                            
                            34,658Prepaid
      expenses and other current assets
                            
                            
                            14,193
                            
                            
                            
                            9,801Deferred
      tax assets, net
                            
                            
                            3,516
                            
                            
                            
                            3,516Total
      current assets before funds held for customers
                            
                            
                            73,731
                            
                            
                            
                            82,557Funds
      held for customers
                            
                            
                            1,734
                            
                            
                            
                            –Total
      current assets
                            
                            
                            75,465
                            
                            
                            
                            82,557Property
      and equipment, net
                            
                            
                            22,694
                            
                            
                            
                            18,238Capitalized
      software, net
                            
                            
                            5,609
                            
                            
                            
                            3,631Goodwill
                            
                            
                            4,063
                            
                            
                            
                            4,063Long-term
      investments in marketable securities
                            
                            
                            –
                            
                            
                            
                            1,298Other
      assets, net
                            
                            
                            11,007
                            
                            
                            
                            9,365Long-term
      deferred tax assets, net
                            
                            
                            17,513
                            
                            
                            
                            16,004Total
      assets
                            
                            $
                            136,351
                            
                            
                            $
                            135,156LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                            
                            $
                            6,034
                            
                            
                            $
                            3,528Accrued
      expenses
                            
                            
                            11,174
                            
                            
                            
                            11,405Current
      portion of deferred revenue
                            
                            
                            48,561
                            
                            
                            
                            43,262Current
      portion of capital lease obligations
                            
                            
                            1,891
                            
                            
                            
                            2,002Current
      portion of long-term debt
                            
                            
                            761
                            
                            
                            
                            572Total
      current liabilities before customer funds obligations
                            
                            
                            68,421
                            
                            
                            
                            60,769Customer
      funds obligations
                            
                            
                            1,727
                            
                            
                            
                            –Total
      current liabilities
                            
                            
                            70,148
                            
                            
                            
                            60,769Deferred
      revenue, net of current portion
                            
                            
                            8,366
                            
                            
                            
                            8,446Deferred
      rent
                            
                            
                            3,162
                            
                            
                            
                            2,652Capital
      lease obligations, net of current portion
                            
                            
                            1,234
                            
                            
                            
                            1,991Long-term
      debt, net of current portion
                            
                            
                            797
                            
                            
                            
                            320Total
      liabilities
                            
                            
                            83,707
                            
                            
                            
                            74,178Stockholders’
      equity:Preferred
      Stock, $.01 par value, 2,000,000 shares authorized, no shares issued or
      outstanding
                            
                            
                            –
                            
                            
                            
                            –Series
      A Junior Participating Preferred Stock, $.01 par value, 500,000 shares
      authorized, no shares issued or outstanding
                            
                            
                            –
                            
                            
                            
                            –Common
      Stock, $.01 par value, 50,000,000 shares authorized, 26,748,771 and
      26,219,789 shares issued in 2008 and 2007, respectively
                            
                            
                            267
                            
                            
                            
                            262Additional
      paid-in capital
                            
                            
                            160,821
                            
                            
                            
                            143,913Accumulated
      other comprehensive loss
                            
                            
                            (63
                            )
                            
                            
                            (18
                            )Accumulated
      deficit
                            
                            
                            (53,883
                            )
                            
                            
                            (50,371
                            )107,142
                            
                            
                            
                            93,786Treasury stock, 2,175,475 and
      1,452,375 shares, at cost, in 2008 and 2007,
    respectively
                            
                            
                            (54,498
                            )
                            
                            
                            (32,808
                            )Total
      stockholders’ equity
                            
                            
                            52,644
                            
                            
                            
                            60,978Total
      liabilities and stockholders’ equity
                            
                            $
                            136,351
                            
                            
                            $
                            135,156




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 SUBSIDIARIESUNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(In
      thousands, except per share amounts)For
      the Three Months
                            
                            
                            For
      the Nine MonthsEnded
      September 30,
                            
                            
                            Ended
      September 30,2008
                            
                            
                            2007
                            
                            
                            2008
                            
                            
                            2007Revenues:Recurring
                            
                            $
                            26,738
                            
                            
                            $
                            22,174
                            
                            
                            $
                            77,811
                            
                            
                            $
                            62,720Services
                            
                            
                            15,002
                            
                            
                            
                            12,312
                            
                            
                            
                            42,287
                            
                            
                            
                            35,773License
                            
                            
                            2,172
                            
                            
                            
                            3,337
                            
                            
                            
                            8,782
                            
                            
                            
                            10,829Total
      revenues
                            
                            
                            43,912
                            
                            
                            
                            37,823
                            
                            
                            
                            128,880
                            
                            
                            
                            109,322Cost
      of revenues:Recurring
                            
                            
                            7,927
                            
                            
                            
                            5,630
                            
                            
                            
                            21,454
                            
                            
                            
                            16,609Services
                            
                            
                            12,751
                            
                            
                            
                            10,066
                            
                            
                            34,630
                            
                            
                            
                            29,439License
                            
                            
                            463
                            
                            
                            
                            352
                            
                            
                            
                            1,355
                            
                            
                            
                            1,026Total
      cost of revenues
                            
                            
                            21,141
                            
                            
                            
                            16,048
                            
                            
                            
                            57,439
                            
                            
                            
                            47,074Gross
      profit
                            
                            
                            22,771
                            
                            
                            
                            21,775
                            
                            
                            
                            71,441
                            
                            
                            
                            62,248Operating
      expenses:Sales
      and marketing
                            
                            
                            12,483
                            
                            
                            
                            9,040
                            
                            
                            
                            35,548
                            
                            
                            
                            26,265Research
      and development
                            
                            
                            9,912
                            
                            
                            
                            7,107
                            
                            
                            
                            28,090
                            
                            
                            
                            20,941General
      and administrative
                            
                            
                            4,697
                            
                            
                            
                            3,645
                            
                            
                            
                            13,398
                            
                            
                            
                            10,345Total
      operating expenses
                            
                            
                            27,092
                            
                            
                            
                            19,792
                            
                            
                            
                            77,036
                            
                            
                            
                            57,551Operating
      income (loss)
                            
                            
                            (4,321
                            )
                            
                            
                            1,983
                            
                            
                            
                            (5,595
                            )
                            
                            
                            4,697Other
      income (expense):Interest
      expense and other
                            
                            
                            (33
                            )
                            
                            
                            (61
                            )
                            
                            
                            (173
                            )
                            
                            
                            (161
                            )Other
      income, net
                            
                            
                            168
                            
                            
                            
                            433
                            
                            
                            
                            747
                            
                            
                            
                            5,602Total
      other income, net
                            
                            
                            135
                            
                            
                            
                            372
                            
                            
                            
                            574
                            
                            
                            
                            5,441Income
      (loss) before benefit (provision) for income taxes
                            
                            
                            (4,186
                            )
                            
                            
                            2,355
                            
                            
                            
                            (5,021
                            )
                            
                            
                            10,138Benefit
      (provision) for income taxes
                            
                            
                            1,135
                            
                            
                            
                            –
                            
                            
                            
                            1,509
                            
                            
                            
                            (115
                            )Net
      income (loss)
                            
                            $
                            (3,051
                            )
                            
                            $
                            2,355
                            
                            
                            $
                            (3,512
                            )
                            
                            $
                            10,023Net
      income (loss) per share:Basic
                            
                            $
                            (0.12
                            )
                            
                            $
                            0.10
                            
                            
                            $
                            (0.14
                            )
                            
                            $
                            0.41Diluted
                            
                            $
                            (0.12
                            )
                            
                            $
                            0.09
                            
                            
                            $
                            (0.14
                            )
                            
                            $
                            0.36Weighted
      average shares outstanding:Basic
                            
                            
                            24,613
                            
                            
                            
                            24,764
                            
                            
                            
                            24,654
                            
                            
                            
                            24,688Diluted
                            
                            
                            24,613
                            
                            
                            
                            27,692
                            
                            
                            
                            24,654
                            
                            
                            
                            27,577





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 SUBSIDIARIESUNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In
      thousands)For
      the Nine MonthsEnded
      September 30,2008
                      
                      
                      2007Cash flows fromoperating
      activities:Net
      income (loss)
                      
                      $
                      (3,512
                      )
                      
                      $
                      10,023Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      and amortization
                      
                      
                      7,108
                      
                      
                      
                      5,070Provision
      for doubtful accounts
                      
                      
                      1,325
                      
                      
                      
                      1,075Non-cash
      stock-based compensation expense
                      
                      
                      11,969
                      
                      
                      
                      7,294Deferred
      income taxes
                      
                      
                      (1,509
                      )
                      
                      
                      –Changes
      in operating assets and liabilities:Accounts
      receivable
                      
                      
                      1,105
                      
                      
                      
                      (3,555
                      )Prepaid
      expenses and other current assets
                      
                      
                      (3,197
                      )
                      
                      
                      (1,620
                      )Other
      assets
                      
                      
                      (1,780
                      )
                      
                      
                      (1,478
                      )Accounts
      payable
                      
                      
                      2,506
                      
                      
                      
                      1,479Accrued
      expenses and deferred rent
                      
                      
                      (721
                      )
                      
                      
                      (1,323
                      )Deferred
      revenue
                      
                      
                      5,219
                      
                      
                      
                      3,410Net
      cash provided by operating activities
                      
                      
                      18,513
                      
                      
                      
                      20,375Cash
      flows from investing activities:Purchases
      of marketable securities
                      
                      
                      (6,688
                      )
                      
                      
                      (13,629
                      )Maturities
      of marketable securities
                      
                      
                      16,563
                      
                      
                      
                      13,614Net
      purchases of securities from customer funds
                      
                      
                      (1,734
                      )
                      
                      
                      –Capitalized
      software
                      
                      
                      (1,511
                      )
                      
                      
                      (1,391
                      )Acquisition-related
      expenses
                      
                      
                      –
                      
                      
                      
                      (24
                      )Purchases
      of property and equipment
                      
                      
                      (10,137
                      )
                      
                      
                      (4,777
                      )Net
      cash used in investing activities
                      
                      
                      (3,507
                      )
                      
                      
                      (6,207
                      )Cash
      flows from financing activities:Repurchases
      of Common Stock
                      
                      
                      (21,690
                      )
                      
                      
                      (18,962
                      )Principal
      payments on capital lease obligations
                      
                      
                      (1,598
                      )
                      
                      
                      (1,452
                      )Net
      increase in customer fund obligations
                      
                      
                      1,727
                      
                      
                      
                      –Repayments
      of borrowings of long-term debt
                      
                      
                      (529
                      )
                      
                      
                      (684
                      )Net
      proceeds from issuances of Common Stock
                      
                      
                      4,919
                      
                      
                      
                      6,123Net
      cash used in financing activities
                      
                      
                      (17,171
                      )
                      
                      
                      (14,975
                      )Effect
      of exchange rate changes on cash
                      
                      
                      (19
                      )
                      
                      
                      7Net
      decrease in cash and cash equivalents
                      
                      
                      (2,184
                      )
                      
                      
                      (800
                      )Cash
      and cash equivalents, beginning of period
                      
                      
                      17,462
                      
                      
                      
                      16,734Cash
      and cash equivalents, end of period
                      
                      $
                      15,278
                      
                      
                      $
                      15,934Supplemental
      disclosure of cash flow information:Cash
      paid for interest
                      
                      $
                      57
                      
                      
                      $
                      73Cash
      paid for income taxes
                      
                      $
                      316
                      
                      
                      $
                      –Supplemental
      disclosure of non-cash financing activities:- The
      Company entered into capital lease obligations to acquire new equipment
      totaling $730 and $2,289for
      the nine months ended September 30, 2008 and 2007,
      respectively.- The
      Company entered into an agreement to purchase certain source code from
      NOVAtime Technology, Inc., a third-partyvendor,
      for $2.0 million, of which $1.0 million was paid during the nine months
      ended September 30, 2008.- The
      Company entered into a 3 year financing agreement for hosting software
      maintenance with a third-party vendorfor
      $1.2 million, of which no cash payments were made during the nine months
      ended September 30, 2008.


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


5
 Table
of Contents








THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
LOSS


(In
thousands)








Common
      Stock
                  
                  
                  Additional
      Paid-in
                  
                  
                  Accumulated
      Other Comprehensive
                  
                  
                  Accumulated
                  
                  
                  TreasuryStock
                  
                  
                  Total
      Stockholders’Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Loss
                  
                  
                  Deficit
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  EquityBalance, December31, 2007
                  
                  
                  26,220
                  
                  
                  $
                  262
                  
                  
                  $
                  143,913
                  
                  
                  $
                  (18
                  )
                  
                  $
                  (50,371
                  )
                  
                  
                  1,452
                  
                  
                  $
                  (32,808
                  )
                  
                  $
                  60,978Net
      loss
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  (3,512
                  )
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  (3,512
                  )Unrealized
      loss on investments in marketable securities available for
      sale
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  (26
                  )
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  (26
                  )Unrealized
      loss on foreign currency translation
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  (19
                  )
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  (19
                  )Comprehensive
      loss
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  (3,557
                  )Repurchases
      of Common Stock
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  723
                  
                  
                  
                  (21,690
                  )
                  
                  
                  (21,690
                  )Issuances
      of Common Stock from exercises of stock options
                  
                  
                  529
                  
                  
                  
                  5
                  
                  
                  
                  4,914
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  4,919Non-cash
      stock-based compensation
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  11,994
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  11,994Balance,
      September 30, 2008
                  
                  
                  26,749
                  
                  
                  $
                  267
                  
                  
                  $
                  160,821
                  
                  
                  $
                  (63
                  )
                  
                  $
                  (53,883
                  )
                  
                  
                  2,175
                  
                  
                  $
                  (54,498
                  )
                  
                  $
                  52,644


































































































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


6
 Table
of Contents


THE
ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES





NOTES TO UNAUDITEDCONDENSED CONSOLIDATED
      FINANCIAL STATEMENTS





1.           Nature
of Operations





The
Ultimate Software Group, Inc. and subsidiaries (“Ultimate Software” or the
“Company”) provide end-to-end strategic human resources, payroll, and talent
management solutions primarily to middle-market organizations with 200 to 15,000
employees. The Company reaches its customer base and target market through its
direct sales force.





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





The
accompanying unaudited condensed consolidated financial statements of the
Company have been prepared, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission (the “SEC”). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with U.S. generally accepted accounting principles (“GAAP”) have been
condensed or omitted pursuant to such rules and regulations. The information in
this report should be read in conjunction with the Company’s audited
consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed
with the SEC on March 13, 2008 (the “Form 10-K”).





The
unaudited condensed consolidated financial statements included herein reflect
all adjustments (consisting only of normal, recurring adjustments) which are, in
the opinion of the Company’s management, necessary for a fair presentation of
the information for the periods presented. The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Interim
results of operations for the three and nine months ended September 30, 2008 and
2007 are not necessarily indicative of operating results for the full fiscal
years or for any future periods.





The
unaudited condensed consolidated financial statements reflect the financial
position and operating results of the Company and include its wholly-owned
subsidiaries.  Intercompany accounts and transactions have been
eliminated in consolidation.





3.           Summary
of Significant Accounting Policies and Recent Accounting
Pronouncements





Summary
of Significant Accounting Policies





The
Company’s significant accounting policies discussed in Note 3 to its audited
consolidated financial statements for the fiscal year ended December 31, 2007,
included in the Form 10-K, have not significantly changed, except as noted
below.





During
the second quarter of 2008, the Company introduced a new product, UltiPro Tax
Filing, for its Workplace market, which the Company defines as businesses with
200 to 700 employees.  Tax filing services provided to Workplace
customers through the Company’s UltiPro Tax Filing product are being sold
directly by the Company to its Workplace customers only on a per employee per
month (“PEPM”) basis in conjunction with UltiPro, its core
product.  As a result of rolling out its new UltiPro Tax Filing
product, the Company receives funds from its Workplace customers and holds such
funds for purposes of paying the appropriate taxing authorities on behalf of
such customers.  The Company holds Workplace customers’ tax filing
deposits for the period between collection from Workplace customers and
remittance to the applicable taxing authority.  These funds held for
customers and the corresponding customer
funds obligations are included in current assets and current liabilities,
respectively, in the Company’s unaudited condensed consolidated balance sheet as
of September 30, 2008.  The Company has reported the cash flows
related to the purchases of overnight repurchase agreements backed by U.S.
Treasury or U.S. Government Agency securities using funds received from
Workplace UltiPro Tax Filing customers in the investing activities section of
the unaudited condensed consolidated statement of cash flows for the nine months
ended September 30, 2008.  The Company has reported the cash flows
related to the funds received and paid on behalf of such customers to the
applicable taxing authorities in the financing activities section of the
unaudited condensed consolidated statement of cash flows for the nine months
ended September 30, 2008.  The associated PEPM fees for UltiPro Tax
Filing are included in recurring revenues in the unaudited condensed
consolidated statements of operations. Since UltiPro Tax Filing was introduced
during the second quarter of 2008, the interest earned associated therewith was
not material for the three and nine months ended September 30,
2008.





Recently
Adopted Accounting Pronouncements





In
January 2008, the Company adopted Statement of Financial Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”).  SFAS
No. 157 defines fair value as used in numerous accounting pronouncements,
establishes a framework for measuring fair value in GAAP and expands disclosures
related to the use of fair value measures in financial
statements.  SFAS No. 157 does not expand the use of fair value
measures infinancial
statements, but standardizes its definition and guidance in GAAP and emphasizes
that fair value is a market-based measurement and not an entity-specific
measurement based on an exchange transaction in which the entity sells an asset
or transfers a liability (exit price).  SFAS No. 157 establishes a
fair value hierarchy from observable market data as the highest level to fair
value based on an entity’s own fair value assumptions as the lowest
level.  On February 6, 2008, the Financial Accounting Standards Board
(“FASB”) deferred the effective date of SFAS No. 157 for all nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis.  These
nonfinancial items include assets and liabilities such as reporting units
measured at fair value in a goodwill impairment test and nonfinancial assets
acquired and liabilities assumed in a business combination.  The
effect of the adoption of SFAS No. 157 is discussed in Note 4 – Investments in
Marketable Securities and Fair Value of Financial Instruments.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities; including an amendment of FASB
Statement No. 115” (“SFAS No. 159”).  SFAS No. 159 permits entities to
elect to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair
value.  If elected, SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007 and this election is
irrevocable.  The Company has not elected to apply the fair value
option to any of its financial instruments.





Recently
Issued Accounting Pronouncements





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles (“SFAS No. 162”).  SFAS No. 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with GAAP.  SFAS No. 162
directs the GAAP hierarchy to the entity, not the independent auditors, as the
entity is responsible for selecting accounting principles for financial
statements that are presented in conformity with GAAP.  SFAS No. 162
is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board amendments to remove the GAAP hierarchy from the
auditing standards.  SFAS No. 162 is not expected to have a material
impact on the Company’s consolidated financial statements.





In April
2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP No. 142-3”).  FSP No. 142-3 amends the
factors an entity should consider in developing renewal
or extension assumptions used in determining the useful life of recognized
intangible assets under FASB Statement No. 142, “Goodwill and Other Intangible
Assets.”  This new guidance applies prospectively to intangible assets
that are acquired individually or with a group of other assets in business
combinations and asset acquisitions.  FSP No. 142-3 is effective for
financial statements issued for fiscal years and interim periods beginning after
December 15, 2008 and is applied prospectively.  FSP No. 142-3 is not
expected to have a material impact on the Company’s consolidated financial
statements.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141R”) and SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No. 51” (“SFAS No. 160”).  SFAS No. 141R will change how business
acquisitions are accounted for and will impact financial statements both on the
acquisition date and in subsequent periods.  SFAS No. 160 will change
the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a component of
equity.  SFAS No. 141R and SFAS No. 160 are effective for the Company
beginning in the first quarter of 2009.  Early adoption is not
permitted.  SFAS No. 141R and SFAS No. 160 will only affect the
Company if the Company makes an acquisition after December 31,
2008.




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





The
Company classifies its investments in marketable securities with readily
determinable fair values as securities available-for-sale in accordance with
SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”
and FASB Staff Position No. 115-1, “The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments.” The Company has
classified all investments in marketable securities as
available-for-sale.  Securities available-for-sale consist of debt and
equity securities not classified as trading securities or as securities to be
held to maturity.  Unrealized gains and losses on securities
available-for-sale are reported as a net amount in accumulated other
comprehensive loss in stockholders’ equity until realized.  Gains and
losses on the sale of securities available-for-sale are determined using the
specific identification method.  Included in accumulated other
comprehensive loss is $37 thousand of unrealized losses on securities
available-for-sale at September 30, 2008 and $11 thousand of unrealized losses
on securities available-for-sale held at December 31, 2007.





The
amortized cost and fair value of the Company’s investments in marketable
securities available-for-sale at September 30, 2008 are shown below (in
thousands):





Gross
                          
                          
                          GrossAmortized
                          
                          
                          Unrealized
                          
                          
                          Unrealized
                          
                          
                          FairCost
                          
                          
                          Gain
                          
                          
                          Loss
                          
                          
                          ValueCorporate
      debentures – bonds
                          
                          $
                          4,920
                          
                          
                          $
                          –
                          
                          
                          $
                          (37
                          )
                          
                          $
                          4,883Commercial
      paper
                          
                          
                          2,483
                          
                          
                          
                          –
                          
                          
                          
                          -
                          
                          
                          
                          2,483Certificates
      of deposit
                          
                          
                          500
                          
                          
                          
                          –
                          
                          
                          
                          -
                          
                          
                          
                          500Asset-backed
      securities
                          
                          
                          650
                          
                          
                          
                          –
                          
                          
                          
                          -
                          
                          
                          
                          650Total
      investments available-for-sale
                          
                          $
                          8,553
                          
                          
                          $
                          –
                          
                          
                          $
                          (37
                          )
                          
                          $
                          8,516





The
amortized cost and fair value of the fixed income securities by contractual
maturity at September 30, 2008 are shown below (in thousands):





Amortized
                      
                      
                      FairCost
                      
                      
                      ValueDue
      in one year or less
                      
                      $
                      8,553
                      
                      
                      $
                      8,516$
                      8,553
                      
                      
                      $
                      8,516


The
Company adopted SFAS No. 157 effective January 1, 2008 for financial assets and
liabilities measured at fair value on a recurring basis.  SFAS No. 157
applies to all financial assets and liabilities that are being measured and
reported on a fair value basis.  There was no impact from the adoption
of SFAS No. 157 on the unaudited condensed consolidated financial
statements.  SFAS No. 157 requires disclosure that establishes a
framework for management’s measurement of fair value and expands disclosure
about fair value measurements.  The statement requires fair value
measurements to be classified and disclosed in one of the following three
categories of the fair value hierarchy:





Level
      1:
            Unadjusted
      quoted prices in active markets that are accessible at the measurement
      date for identical, unrestricted assets and
  liabilities.


Level
      2:
            Quoted
      prices in markets that are not active or financial instruments for which
      all significant inputs are observable, either directly or
      indirectly.


Level
      3:
            Prices
      or valuations that require inputs that are both significant to the fair
      value measurement and unobservable.





A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of any input that is significant to the fair value
measurement.





The
Company’s assets that are measured by management at fair value on a recurring
basis are generally classified within Level 1 or Level 2 of the fair value
hierarchy.  The types of instruments valued based on quoted market
prices in active markets include most money market securities and certificates
of deposit.  Such instruments are generally classified within Level 1
of the fair value hierarchy.





The types
of instruments valued by management based on quoted prices in less active
markets, broker or dealer quotations, or alternative pricing sources with
reasonable levels of price transparency, include the Company’s corporate
debenture bonds, commercial paper and asset-backed securities.  Such
instruments are generally classified within Level 2 of the fair value
hierarchy.  The Company uses consensus pricing, which is based on
multiple pricing sources, to value its fixed income investments.




The
following table sets forth, by level within the fair value hierarchy, financial
assets and liabilities accounted for at fair value and subject to the disclosure
requirements of SFAS No. 157 as of September 30, 2008 (in
thousands):





QuotedPrices
      in
                  
                  
                  Other
                  
                  
                  Un-Active
                  
                  
                  Observable
                  
                  
                  observableMarkets
                  
                  
                  Inputs
                  
                  
                  InputsTotal
                  
                  
                  (Level
      1)
                  
                  
                  (Level
      2)
                  
                  
                  (Level
      3)Corporate
      debentures – bonds
                  
                  $
                  4,883
                  
                  
                  $
                  —
                  
                  
                  $
                  4,883
                  
                  
                  $
                  —Commercial
      paper
                  
                  
                  2,483
                  
                  
                  
                  —
                  
                  
                  
                  2,483
                  
                  
                  
                  —Certificates
      of deposit
                  
                  
                  500
                  
                  
                  
                  500
                  
                  
                  
                  —
                  
                  
                  
                  —Asset-backed
      securities
                  
                  
                  650
                  
                  
                  
                  —
                  
                  
                  
                  650
                  
                  
                  
                  —Total
      investments available-for-sale
                  
                  $
                  8,516
                  
                  
                  $
                  500
                  
                  
                  $
                  8,016
                  
                  
                  $
                  —





Assets
and liabilities measured at fair value on a recurring basis were presented in
the unaudited condensed consolidated balance sheet as of September 30, 2008 as
short-term investments in marketable securities.  There were no
financial liabilities accounted for at fair value and subject to the disclosure
requirements of SFAS No. 157 as of September 30, 2008.




8
 Table
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5.              Property
and Equipment





Property
and equipment are stated at cost, net of accumulated depreciation and
amortization. Property and equipment are depreciated using the straight-line
method over the estimated useful lives of the assets, which range from two to
twenty years. Leasehold improvements and assets under capital leases are
amortized over the shorter of the life of the asset or the term of the lease,
which range from two to fifteen years. Maintenance and repairs are charged to
expense when incurred; betterments are capitalized. Upon the sale or retirement
of assets, the cost, accumulated depreciation and amortization are removed from
the accounts and any gain or loss is recognized.





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





As
      of
                    
                    
                    As
      ofSeptember
      30, 2008
                    
                    
                    December
      31, 2007Property
      and equipment
                    
                    $
                    63,452
                    
                    
                    $
                    52,611Less:  accumulated
      depreciation and amortization
                    
                    
                    40,758
                    
                    
                    
                    34,373$
                    22,694
                    
                    
                    $
                    18,238





6.           Goodwill
and Other Intangible Assets





Goodwill and other intangible assets
with indefinite lives are not subject to amortization, but are subject to an
impairment test at least annually or more frequently if events or circumstances
indicate that impairment might exist.  SFAS No. 142, “Goodwill and
Other Intangible Assets,” also requires that intangible assets with finite
useful lives be amortized over their estimated useful lives and reviewed for
impairment in accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.”  As of September 30, 2008 and December
31, 2007, the balance of acquired intangibles, net of amortization, included in
other assets on the Company’s unaudited condensed consolidated balance sheets
was $0.6 million and $0.8 million, respectively.  The Company is
currently amortizing its acquired intangible assets with finite useful lives
over periods ranging from five to six years.





7.           Current
and Long-term Debt





During
the three months ended September 30, 2008, the Company entered into a 36 month
financing agreement with a third-party vendor (“Financing Arrangement”) for the
payment of annual software maintenance (covering the term of the agreement)
related to hosting software used in the Company’s hosting data centers for its
customers using the hosted offering for its software products (referred to as
the “Intersourcing” offering).  The total obligation due under this
agreement over the 36 month term is $1.2 million and is included in current and
long-term debt. The first payment made under the agreement was made in the
amount of $0.1 million (covering the three month period ended October 31, 2008)
in October 2008, after which the Company will make 33 equal monthly installment
payments until the termination of the agreement on July 31, 2011.





8.           Earnings
Per Share





SFAS No.
128, “Earnings Per Share,” requires dual presentation of earnings per share —
“basic” and “diluted.” Basic earnings per share is computed by dividing income
available to common stockholders (the numerator) by the weighted average number
of common shares outstanding (the denominator) for the period. The computation
of diluted earnings per share is similar to basic earnings per share, except
that the denominator is increased to include the number of additional common
shares that would have been outstanding if the potentially dilutive common
shares had been issued.





The
following is a reconciliation of the shares used in the computation of basic and
diluted net income (loss) per share (in thousands):


For
      the Three Months
                            ended
      September 30,
                          
                          
                          For
      the Nine Months
                            ended
      September 30,2008
                          
                          
                          2007
                          
                          
                          2008
                          
                          
                          2007Basic
      weighted average shares outstanding
                          
                          24,613
                          
                          
                          
                          24,764
                          
                          
                          
                          24,654
                          
                          
                          
                          24,688Effect
      of dilutive equity instruments
                          
                          –
                          
                          
                          
                          2,928
                          
                          
                          
                          –
                          
                          
                          
                          2,889Dilutive
      weighted average shares outstanding
                          
                          24,613
                          
                          
                          
                          27,692
                          
                          
                          
                          24,654
                          
                          
                          
                          27,577Other
      common stock equivalents (i.e., stock options, restricted stock awards and
      stock units)
                            outstanding
      which are not included in the calculation
                            of
      diluted income (loss) per share because their impact is
      anti-dilutive5,889
                          
                          
                          
                          179
                          
                          
                          
                          5,889
                          
                          
                          
                          634





Potential
shares totaling 5,889,000 for the three and nine month periods ended September
30, 2008 were anti-dilutive due to the net loss in the respective periods;
therefore, diluted earnings per share is the same as basic earnings per share
for the respective periods.




9.           Comprehensive
Income (Loss)





SFAS No.
130, “Reporting Comprehensive Income” (“SFAS No. 130”), establishes standards
for the reporting and display of comprehensive income (loss) and its components
in the Company’s unaudited condensed consolidated financial statements. The
objective of SFAS No. 130 is to report a measure (comprehensive income (loss))
of all changes in equity of an enterprise that result from transactions and
other economic events in a period other than transactions with owners.
Accumulated other comprehensive loss, as presented in the accompanying unaudited
condensed consolidated balance sheets, consists of unrealized gains and losses
on securities available-for-sale and foreign currency translation adjustments,
recorded net of any related income tax.

















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





For
      the Three Months
                    ended
      September 30,
                  
                  
                  For
      the Nine Months
                    ended
      September 30,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Net
      income (loss)
                  
                  $
                  (3,051
                  )
                  
                  $
                  2,355
                  
                  
                  $
                  (3,512
                  )
                  
                  $
                  10,023Other
      comprehensive income (loss)Unrealized
      gain (loss) on investments inmarketable
      securities available-for-sale
                  
                  
                  (50
                  )
                  
                  
                  14
                  
                  
                  
                  (26
                  )
                  
                  
                  –Unrealized
      gain (loss) on foreign currencytranslation
      adjustments
                  
                  
                  (9
                  )
                  
                  
                  1
                  
                  
                  
                  (19
                  )
                  
                  
                  6Comprehensive
      income (loss)
                  
                  $
                  (3,110
                  )
                  
                  $
                  2,370
                  
                  
                  $
                  (3,557
                  )
                  
                  $
                  10,029




9
 Table
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10.           Foreign
Currency





The financial statements of the
Company’s foreign subsidiaries have been translated into U.S.
dollars.  The functional currency of The Ultimate Software Group of
Canada, Inc. is the Canadian dollar and the functional currency of The Ultimate
Software Group UK Limited is the British pound.  Assets and
liabilities are translated into U.S. dollars at period-end exchange rates, while
fixed assets and equity accounts are translated at historical
rates.  Income and expenses are translated at the average exchange
rate for the reporting period.  The resulting translation adjustments,
representing unrealized gains or losses, are included in stockholders’ equity as
a component of accumulated other comprehensive loss.  Realized gains
and losses resulting from foreign exchange transactions are included in total
operating expenses in the unaudited condensed consolidated statements of
operations. For the three months ended September 30, 2008, the Company had an
unrealized translation loss of $9 thousand and for the nine months ended
September 30, 2008, the Company had an unrealized translation loss of $19
thousand.  Included in accumulated other comprehensive loss, as
presented in the accompanying unaudited condensed consolidated balance sheets,
is $26 thousand of unrealized translation losses at September 30, 2008 and $7
thousand of unrealized translation losses at December 31, 2007.





11.           Stock-Based
Compensation





Summary
of Plans





The
Company’s Amended and Restated 2005 Equity and Incentive Plan (the “Plan”)
authorizes the grant of options to non-employee directors, officers and
employees of the Company to purchase shares of the Company’s Common
Stock.  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, and together with stock
options, the “Awards”).  Prior to the adoption of the Plan, options to
purchase shares of Common Stock were issued under the Company’s Nonqualified
Stock Option Plan (the “Prior Plan”).





As of September 30, 2008, the aggregate
number of shares of Common Stock authorized under the Plan and the Prior Plan
was 12,000,000 and the aggregate number of shares of Common Stock that were
available to be issued under all Awards granted under the Plan was 1,465,331
shares.  Options granted to officers and employees under the Plan and
the Prior Plan generally have a 10-year term, vesting 25% immediately and 25% on
each of the first three anniversaries of the grant date.  Options
granted to non-employee directors under the Plan and the Prior Plan generally
have a 10-year term and vest and become exercisable immediately on the grant
date.  However, certain options granted to non-employee directors for
services on the Board of Directors of the Company (the “Board”) during the
period January 3, 2005 through July 2, 2007 are exercisable on the earliest of
(i) the fifth anniversary of the date of grant, (ii) the 90thday after the date on which the
director ceases to be a member of the Board or (iii) the effective date of a
change in control of the Company.





Stock-Based
Compensation





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





For
      the Three Months
                      Ended
      September 30,
                    
                    
                    For
      the Nine Months
                      Ended
      September 30,2008
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2007Non-cash stock-based compensation
      expense:Cost
      of recurring revenues
                    
                    $
                    191
                    
                    
                    $
                    161
                    
                    
                    $
                    689
                    
                    
                    $
                    489Cost
      of services revenues
                    
                    
                    479
                    
                    
                    
                    330
                    
                    
                    
                    1,565
                    
                    
                    
                    1,242Cost
      of license revenues
                    
                    
                    2
                    
                    
                    
                    1
                    
                    
                    
                    9
                    
                    
                    
                    4Sales
      and marketing
                    
                    
                    2,043
                    
                    
                    
                    1,151
                    
                    
                    
                    5,656
                    
                    
                    
                    3,274Research
      and development
                    
                    
                    316
                    
                    
                    
                    213
                    
                    
                    
                    1,257
                    
                    
                    
                    753General
      and administrative
                    
                    
                    924
                    
                    
                    
                    701
                    
                    
                    
                    2,793
                    
                    
                    
                    1,532Total
      non-cash stock-based compensation expense
                    
                    $
                    3,955
                    
                    
                    $
                    2,557
                    
                    
                    $
                    11,969
                    
                    
                    $
                    7,294




Included
in capitalized software in the Company’s unaudited condensed consolidated
balance sheet at September 30, 2008 was an aggregate amount of $107 thousand in
stock-based compensation related to capitalized software.  The amounts
capitalized would have otherwise been charged to research and development
expense.





Net cash
proceeds from the exercise of stock options were $0.5 million and $4.9 million
for the three and nine months ended September 30, 2008, respectively, and net
cash proceeds from the exercise of stock options and warrants were $2.1 million
and $6.1 million for the three and nine months ended September 30, 2007,
respectively.  There was no income tax benefit realized from stock
option exercises during the three and nine months ended September 30, 2008 and
September 30, 2007.





The fair
value of stock-based awards was estimated using the Black-Scholes model with the
following weighted-average assumptions for the three and nine months ended
September 30, 2008 and September 30, 2007 (dollars in thousands):





For
      the Three Months
                    Ended
      September 30,
                  
                  
                  For
      the Nine Months
                    Ended
      September 30,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Expected
      term (in years)
                  
                  
                  5.3
                  
                  
                  
                  5.0
                  
                  
                  
                  5.4
                  
                  
                  
                  5.0Volatility
                  
                  
                  39
                  %
                  
                  
                  39
                  %
                  
                  
                  39
                  %
                  
                  
                  39
                  %Interest
      rate
                  
                  
                  3.38
                  %
                  
                  
                  4.63
                  %
                  
                  
                  3.21
                  %
                  
                  
                  4.64
                  %Dividend
      yield
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –Weighted
      average fair value at grant date
                  
                  $
                  13.11
                  
                  
                  $
                  12.67
                  
                  
                  $
                  11.79
                  
                  
                  $
                  10.80





Restricted
Stock Awards





Under the
provisions of the Plan, the Company may, at its discretion, grant restricted
stock awards (“Restricted Stock Awards”) to officers, employees and non-employee
directors.  The shares of Common Stock issued under Restricted Stock
Awards are subject to certain vesting requirements and restrictions on
transfer.  The following table sets forth Restricted Stock Awards
granted to officers, employees and non-employee directors for the periods
indicated:





For
      the Three Months
                    Ended
      September 30,
                  
                  
                  For
      the Nine Months
                    Ended
      September 30,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Officers
      and employees
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  105,000Non-employee
      directors
                  
                  
                  1,925
                  
                  
                  
                  2,055
                  
                  
                  
                  6,040
                  
                  
                  
                  2,055








Included
in the Company’s unaudited condensed consolidated statements of operations for
the three and nine months ended September 30, 2008 was $1.5 million and $4.6
million, respectively, of stock-based compensation expense for Restricted Stock
Awards.  There was $0.7 million and $2.1 million of stock-based
compensation expense for Restricted Stock Awards for the three and nine months
ended September 30, 2007, respectively.




10
 Table
of Contents




Stock
Unit Awards





The Company may, at its discretion,
make awards of stock units under the Plan (“Stock Unit Awards”) to certain
officers and employees.  A Stock Unit Award is a grant of a number of
hypothetical share units with respect to shares of Common Stock that are subject
to vesting and transfer restrictions and conditions under a stock unit award
agreement.  The value of each unit is equal to the fair market value
of one share of Common Stock on any applicable date of
determination.  The payment with respect to each unit under a Stock
Unit Award may be made, at the discretion of the Compensation Committee of the
Board, in cash or shares of Common Stock or in a combination of
both.  The grantee of a Stock Unit Award does not have any rights as a
stockholder with respect to the shares of Common Stock subject to a Stock Unit
Award until such time as such shares of Common Stock are delivered to the
grantee pursuant to the terms of the related stock unit award
agreement.





There
were no grants of Stock Unit Awards during the three and nine months ended
September 30, 2008.  There were no grants of Stock Unit Awards during
the three months ended September 30, 2007.  During the nine months
ended September 30, 2007, the Company granted an aggregate of 16,603 stock units
to certain officers, of which none have been forfeited as of September 30,
2008.  Included in the Company’s unaudited condensed consolidated
statements of operations for the three and nine months ended September 30, 2008
was $19 thousand and $57 thousand, respectively, of stock-based compensation
expense for Stock Unit Awards.  There was $19 thousand and $57
thousand of stock-based compensation expense for Stock Unit Awards for the three
and nine months ended September 30, 2007, respectively.





Stock
Option and Restricted Stock Activity





The
following table summarizes stock option activity for the nine months ended
September 30, 2008 (in thousands, except per share amounts):


WeightedAverageWeighted
                          
                          
                          Remaining
                          
                          
                          AggregateAverage
                          
                          
                          Contractual
                          
                          
                          IntrinsicStock
      Options
                          
                          Shares
                          
                          
                          Exercise
      Price
                          
                          
                          Term
      (in Years)
                          
                          
                          ValueOutstanding
      at December 31, 2007
                          
                          
                          4,547
                          
                          
                          $
                          13.31
                          
                          
                          
                          –
                          
                          
                          
                          –Granted
                          
                          
                          947
                          
                          
                          
                          29.98
                          
                          
                          
                          –
                          
                          
                          
                          –Exercised
                          
                          
                          (529
                          )
                          
                          
                          9.30
                          
                          
                          
                          –
                          
                          
                          
                          –Forfeited
      or expired
                          
                          
                          (39
                          )
                          
                          
                          27.62
                          
                          
                          
                          –
                          
                          
                          
                          –Outstanding
      at September 30, 2008
                          
                          
                          4,926
                          
                          
                          $
                          16.84
                          
                          
                          
                          6.21
                          
                          
                          $
                          53,758Exercisable
      at September 30, 2008
                          
                          
                          3,752
                          
                          
                          $
                          13.49
                          
                          
                          
                          5.36
                          
                          
                          $
                          52,133





The
aggregate intrinsic value of stock options in the table above represents total
pretax intrinsic value (i.e., the difference between the closing price of the
Company’s Common Stock on the last trading day of the reporting period and the
exercise price, times the number of shares) that would have been received by the
option holders had all option holders exercised their options on September 30,
2008.  The amount of the aggregate intrinsic value changes based on
the fair value of the Company’s Common Stock.  Total intrinsic value
of options exercised was $0.6 million and $12.6 million for the three and nine
months ended September 30, 2008, respectively, and $5.9 million and $18.5
million for the three and nine months ended September 30, 2007,
respectively.  Total fair value of options vested during the three and
nine months ended September 30, 2008 was $2.1 million and $6.6 million,
respectively, and $1.0 million and $4.1 million for the three and nine months
ended September 30, 2007, respectively.





As of
September 30, 2008, $9.1 million of total unrecognized compensation costs
related to non-vested stock options is expected to be recognized over a weighted
average period of 1.9 years.





The
following table summarizes restricted stock activity for the nine months ended
September 30, 2008 (in thousands, except per share amounts):





WeightedAverageGrant
      DateRestricted
      Stock
                    
                    Shares
                    
                    
                    Fair
      ValueOutstanding
      at December 31, 2007
                    
                    
                    911
                    
                    
                    $
                    27.11Granted
                    
                    
                    6
                    
                    
                    
                    30.99Vested
                    
                    
                    –
                    
                    
                    
                    –Forfeited
      or expired
                    
                    
                    –
                    
                    
                    
                    –Outstanding
      at September 30, 2008
                    
                    
                    917
                    
                    
                    $
                    27.14





As of
September 30, 2008, $8.6 million of total unrecognized compensation costs
related to non-vested Restricted Stock Awards is expected to be recognized over
a weighted average period of 2.2 years.  As of September 30, 2008,
$0.1 million of total unrecognized compensation costs related to non-vested
Stock Unit Awards is expected to be recognized over a weighted average period of
1.7 years.


11
 Table
of Contents





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





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





The
Company’s significant accounting policies discussed in Note 3 to its audited
consolidated financial statements for the fiscal year ended December 31, 2007,
included in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2007, filed with the Securities and Exchange Commission (the “SEC”)
on March 13, 2008 (the “2007 Form 10-K”), have not significantly changed, except
as noted in Part I, Item 1, Note 3 above in the Company’s Notes to Unaudited
Condensed Financial Statements.





Executive
Summary





Ultimate
Software provides end-to-end strategic human resources, payroll, and talent
management solutions primarily to middle-market organizations with 200 to 15,000
employees.





Ultimate
Software’s UltiPro software (“UltiPro”) is a comprehensive Web-based solution
designed to deliver the functionality businesses need to manage the employee
life cycle, from recruiting and hiring to compensating and managing benefits to
terminating, whether the customer’s processes are centralized at headquarters or
distributed across multiple divisions or branch offices. UltiPro’s end-to-end
functionality includes comprehensive online recruitment and onboarding tools,
human resources (“HR”) and benefits management, a strong payroll engine, time
and attendance management, workforce scheduling, on-line benefits enrollment,
training management, performance and learning management, reporting and
analytical decision-making tools, and a self-service Web portal for executives,
managers, administrators, and employees.  Ultimate Software believes
that UltiPro helps customers streamline HR and payroll processes to
significantly reduce administrative and operational costs, while also empowering
managers and staff to analyze workforce trends for better decision making, to
access critical information quickly and to perform routine business activities
efficiently.





Ultimate
Software’s software-as-a-service, branded “Intersourcing” (the “Intersourcing
Offering”), provides Web access to comprehensive workforce management
functionality for organizations that need to simplify the information technology
(“IT”) support requirements of their business applications. Intersourcing is
available to companies primarily on a subscription basis (priced on a per
employee per month, or “PEPM” basis) and is known in the industry as
“software-as-a-service” (“SaaS”) and on-demand.  Ultimate Software
believes that Intersourcing is attractive to companies that want to focus on
their core competencies to increase sales and profits. Through the Intersourcing
model, Ultimate Software provides the hardware, infrastructure, ongoing
maintenance and backup services for its customers at two data centers, one
located in the Miami, Florida area and the other in the Atlanta, Georgia
area.





The
Company’s target market has primarily been middle-market organizations with 200
to 15,000 employees. The Company reaches its customer base and target market
through its direct sales force. In late 2007, the Company began the expansion of
its sales team to accommodate its new solution offering, branded
“Workplace.”  Workplace is an offering of UltiPro, targeted for
companies with 200 to 700 employees, and is a subscription-based SaaS solution
that provides these medium-sized and smaller companies with nearly all the
features that larger companies (which the Company refers to as “Enterprise”
customers) have with UltiPro, plus a bundled service
package.  Workplace is designed to give these relatively smaller
customers a high degree of convenience since Ultimate Software handles system
setup, business rules, and other situations for customers “behind the scenes,”
and many companies of this size do not have IT staff on-premises to help with
system issues.  Since the introduction of Workplace in late 2007, the
Company has continued to invest in this solution. The Company’s sales force is
segregated between sales associates who sell to Workplace customers (or the
Workplace sales team) and sales associates who sell to the Company’s Enterprise
customers (or the Enterprise sales team).





During
the second quarter of 2008, the Company rolled out two new product offerings
directed at its Workplace market.  Ultimate Software purchased the
source code for a time and attendance solution from a third party during the
second quarter of 2008.  The Company has rebranded this product as
UltiPro Time Management for Workplace customers. In addition, Ultimate Software
introduced UltiPro Tax Filing for its Workplace market (“Tax Filing” offering).
Workplace product offerings are sold only on a subscription basis.





The
Company’s main sources of revenues include sales from the Intersourcing
Offering, sales of perpetual software licenses for UltiPro to customers who do
not prefer a subscription-based arrangement (and the related annual maintenance)
and sales of services (mostly implementation) related to both Intersourcing and
license sales. Intersourcing revenues and maintenance revenues are the primary
components of recurring revenues in the Company’s condensed consolidated
statements of operations.





Since the
introduction of the Intersourcing Offering in 2002, the revenue mix in the
Company’s sales production has continued to favor Intersourcing. As
Intersourcing units are sold, the recurring revenue backlog associated with
Intersourcing grows, enhancing the predictability of future revenue
streams.  Intersourcing sales include a one-time upfront fee, priced
on a per-employee basis, and ongoing monthly fees, priced on a PEPM
basis.  Revenue recognition for Intersourcing is triggered when the
related customer processes its first live payroll (or goes
“Live”).  When an Intersourcing customer goes Live, the related
upfront fees are recognized as recurring subscription revenues ratably over the
term of the related contract (typically 24 months) and the Company begins
recognizing the associated ongoing monthly PEPM fees.





In
connection with the Company’s business strategy, an internal financial metric
used by the Company in measuring future financial performance is new annual
recurring revenues (“ARR”).  ARR represent the expected one-year value
from (i) new Intersourcing sales from the Company’s hosted model (including
prorated one-time fees); (ii) maintenance revenues related to new software
license sales; and (iii) recurring revenues from additional sales to Ultimate
Software’s existing customer base.





New ARR
attributable to sales during the three months ended September 30, 2008 were
$10.8 million as compared to $7.1 million for the same period in
2007.  New ARR attributable to sales during the nine months ended
September 30, 2008 were $29.3 million as compared to $20.1 million for the same
period in 2007.  The main contributors to the increase in new ARR were
new sales of the Company’s Intersourcing Offering, including sales of UltiPro
(both Enterprise and Workplace) and complementary products (including prorated
one-time fees).





Critical
Accounting Estimates





The
preparation of the Company’s financial statements in conformity with generally
accepted accounting principles in the United States (“GAAP”) requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.  The Company’s critical accounting estimates, as discussed
in Item 7, Management’s Discussion and Analysis of Financial Condition and
Results of Operations, included in the 2007 Form 10-K have not significantly
changed through the date hereof.


12
 Table
of Contents





Results
of Operations





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





For
      the Three Months
                                                  
                                                  
                                                  For
      the Nine MonthsEnded
      September 30,
                                                  
                                                  
                                                  Ended
      September 30,2008
                                                  
                                                  
                                                  2007
                                                  
                                                  
                                                  2008
                                                  
                                                  
                                                  2007Revenues:Recurring
                                                  
                                                  
                                                  60.9
                                                  %
                                                  
                                                  
                                                  58.6
                                                  %
                                                  
                                                  
                                                  60.4
                                                  %
                                                  
                                                  
                                                  57.4
                                                  %Services
                                                  
                                                  
                                                  34.2
                                                  
                                                  
                                                  
                                                  32.6
                                                  
                                                  
                                                  
                                                  32.8
                                                  
                                                  
                                                  
                                                  32.7License
                                                  
                                                  
                                                  4.9
                                                  
                                                  
                                                  
                                                  8.8
                                                  
                                                  
                                                  
                                                  6.8
                                                  
                                                  
                                                  
                                                  9.9Total
      revenues
                                                  
                                                  
                                                  100.0
                                                  
                                                  
                                                  
                                                  100.0
                                                  
                                                  
                                                  
                                                  100.0
                                                  
                                                  
                                                  
                                                  100.0Cost
      of revenues:Recurring
                                                  
                                                  
                                                  18.1
                                                  
                                                  
                                                  
                                                  14.9
                                                  
                                                  
                                                  
                                                  16.6
                                                  
                                                  
                                                  
                                                  15.2Services
                                                  
                                                  
                                                  29.0
                                                  
                                                  
                                                  
                                                  26.6
                                                  
                                                  
                                                  
                                                  26.9
                                                  
                                                  
                                                  
                                                  26.9License
                                                  
                                                  
                                                  1.1
                                                  
                                                  
                                                  
                                                  0.9
                                                  
                                                  
                                                  
                                                  1.1
                                                  
                                                  
                                                  
                                                  0.9Total
      cost of revenues
                                                  
                                                  
                                                  48.2
                                                  
                                                  
                                                  
                                                  42.4
                                                  
                                                  
                                                  
                                                  44.6
                                                  
                                                  
                                                  
                                                  43.0Operating
      expenses:Sales
      and marketing
                                                  
                                                  
                                                  28.4
                                                  
                                                  
                                                  
                                                  23.9
                                                  
                                                  
                                                  
                                                  27.5
                                                  
                                                  
                                                  
                                                  24.0Research
      and development
                                                  
                                                  
                                                  22.5
                                                  
                                                  
                                                  
                                                  18.8
                                                  
                                                  
                                                  
                                                  21.8
                                                  
                                                  
                                                  
                                                  19.2General
      and administrative
                                                  
                                                  
                                                  10.7
                                                  
                                                  
                                                  
                                                  9.6
                                                  
                                                  
                                                  
                                                  10.4
                                                  
                                                  
                                                  
                                                  9.5Total
      operating expenses
                                                  
                                                  
                                                  61.7
                                                  
                                                  
                                                  
                                                  52.3
                                                  
                                                  
                                                  
                                                  59.7
                                                  
                                                  
                                                  
                                                  52.7Operating
      income (loss)
                                                  
                                                  
                                                  (9.8
                                                  )
                                                  
                                                  
                                                  5.3
                                                  
                                                  
                                                  
                                                  (4.3
                                                  )
                                                  
                                                  
                                                  4.3Other
      income (expense):Interest
      expense and other
                                                  
                                                  
                                                  (0.1
                                                  )
                                                  
                                                  
                                                  (0.2
                                                  )
                                                  
                                                  
                                                  (0.1
                                                  )
                                                  
                                                  
                                                  (0.1
                                                  )Other
      income, net
                                                  
                                                  
                                                  0.4
                                                  
                                                  
                                                  
                                                  1.1
                                                  
                                                  
                                                  
                                                  0.5
                                                  
                                                  
                                                  
                                                  5.1Total
      other income, net
                                                  
                                                  
                                                  0.3
                                                  
                                                  
                                                  
                                                  0.9
                                                  
                                                  
                                                  
                                                  0.4
                                                  
                                                  
                                                  
                                                  5.0Income
      (loss) before income taxes
                                                  
                                                  
                                                  (9.5
                                                  )
                                                  
                                                  
                                                  6.2
                                                  
                                                  
                                                  
                                                  (3.9
                                                  )
                                                  
                                                  
                                                  9.3Benefit  (provision)
      for income taxes
                                                  
                                                  
                                                  2.6
                                                  
                                                  
                                                  
                                                  –
                                                  
                                                  
                                                  
                                                  1.2
                                                  
                                                  
                                                  
                                                  (0.1
                                                  )Net
      income (loss)
                                                  
                                                  
                                                  (6.9
                                                  )
      %
                                                  
                                                  
                                                  6.2
                                                  %
                                                  
                                                  
                                                  (2.7
                                                  )
      %
                                                  
                                                  
                                                  9.2
                                                  %





Revenues





The
Company’s significant revenue recognition policies, as discussed in Note 3 to
its 2007 Form 10-K, have not changed through the date hereof.





The
Company’s revenues are derived from three principal sources: recurring revenues,
services revenues and software licenses (“license revenues”).





Recurring
revenues consist of Intersourcing revenues, maintenance revenues and, to a
lesser extent, subscription revenues. Intersourcing revenues are derived from
the Intersourcing Offering which is a bundled offering that includes the right
to use the Company’s UltiPro product (and complementary products, where
applicable), hosting services and the right to upgrades for such products as
well as telephone support (which represents the maintenance component of the
bundled offering). Both the Enterprise and Workplace sales teams contribute to
Intersourcing sales production. Maintenance revenues (excluding the component
embedded in the bundled Intersourcing Offering) are derived from license sales,
representing the right to upgrades and telephone support. Subscription revenues
are derived from PEPM fees generated by third party business service providers.
License sales are generated by the Enterprise sales team only.





Services
revenues include revenues from fees charged for the implementation of the
Company’s software products and training of customers in the use of such
products, fees for other services, including the provision of payroll-related
forms and the printing of Form W-2’s for certain customers, as well as certain
reimbursable out-of-pocket expenses.


License
revenues include revenues from software license agreements for the Company’s
products, entered into between the Company and its customers in which the
license fees are non-cancelable.





Total
revenues, consisting of recurring, services and license revenues, increased
16.1% to $43.9 million for the three months ended September 30, 2008 from $37.8
million for the three months ended September 30, 2007, and 17.9% to $128.9
million for the nine months ended September 30, 2008 from $109.3 million for the
nine months ended September 30, 2007.





Recurring
revenues increased 20.6% to $26.7 million for the three months ended September
30, 2008 from $22.2 million for the three months ended September 30, 2007, and
24.1% to $77.8 million for the nine months ended September 30, 2008 from $62.7
million for the nine months ended September 30, 2007.  The increases
for the three and nine months ended September 30, 2008 were primarily due to
increases in Intersourcing revenues and, to a lesser extent, maintenance
revenues, partially offset by a decrease in subscription revenues, as described
below:





a)
            Intersourcing
      revenues increased 46.3% and 50.9% for the three and nine months ended
      September 30, 2008, respectively, in comparison to the same periods of
      2007, primarily due to the continued growth of the Intersourcing Offering,
      which comprised the majority of unit sales. The increase in Intersourcing
      revenues is based on the revenue impact of incremental units that have
      gone Live since September 30, 2007, including both UltiPro and, to a
      lesser extent, complementary products such as UltiPro Time and Attendance
      (“UTA”) and UltiPro Recruitment.  Intersourcing revenues from
      the Workplace solution in 2008 also contributed to the year-over-year
      growth, particularly since this solution was introduced after September
      30, 2007.  Recognition of recurring revenues for Intersourcing
      sales commences upon Live date. The Company’s rolling twelve month
      retention rate of 97% for existing Intersourcing customers also
      contributed to the growth in Intersourcing revenues when combined with
      continued sales growth.


b)
            Maintenance
      revenues from license sales increased 8.6% and 10.7% for the three and
      nine months ended September 30, 2008, respectively, in comparison to the
      same periods of 2007, due to additional maintenance fees resulting from
      cumulative net increases in the customer base subsequent to September 30,
      2007 due to incremental license sales since such
      date.  Maintenance revenues are recognized over the initial term
      of the related license contract, which is typically 12 months, and then on
      a monthly recurring basis thereafter as the maintenance contracts renew
      annually.  The Company’s rolling twelve month retention rate of
      97% for existing customers’ annual maintenance renewals in the three and
      nine months ended September 30, 2008, combined with the annual price
      increases that typically accompany annual renewals, also contributed to
      the increase in maintenance
revenues.


c)
            The
      impact on recurring revenues of units sold under the Intersourcing
      Offering (as compared to the typical immediate impact on license revenues
      of licensed units sold) has been and is expected to be a gradual increase
      from one period to the next, based on the incremental effect of revenue
      recognition of the Intersourcing fees over the terms of the related
      contracts as sales in backlog go
Live.


d)
            Recurring
      subscription revenues decreased 70.1% and 54.3% for the three and nine
      months ended September 30, 2008, respectively, in comparison to the same
      periods of 2007, due to the termination of the Company’s agreement with
      Ceridian Corporation effective March 9, 2008, at which time the related
      revenue recognition ended.





Services
revenues increased 21.8% to $15.0 million for the three months ended September
30, 2008 from $12.3 million for the three months ended September 30, 2007, and
18.2% to $42.3 million for the nine months ended September 30, 2008 from $35.8
million for the nine months ended September 30, 2007. The increases for the
three and nine months ended September 30, 2008 were mainly due to an increase in
implementation revenues principally attributable to additional billable hours,
implementation revenues recognized for the new Workplace sales, and, to a lesser
extent, an increase in the blended net rate per hour.  The additional
billable hours stemmed from additional hours worked by more revenue-generating
consultants than in the prior year comparable period (as the Company hired more
implementation personnel to accommodate the increased sales growth) as well as
additional hours worked by third-party implementation partners
(“IP’s”).





License
revenues decreased 34.9% to $2.2 million for the three months ended September
30, 2008 from $3.3 million for the three months ended September 30,
2007.  For the nine months ended September 30, 2008, license revenues
decreased 18.9% to $8.8 million from $10.8 million for the nine months ended
September 30, 2007.  The decreases in both the three and nine month
periods ended September 30, 2008 were principally due to a reduced number of new
license units sold as more customers chose the Company’s subscription-based
Intersourcing Offering.




13
 Table
of Contents




Cost
of Revenues





Cost of
revenues consists of the cost of recurring, services and license revenues. Cost
of recurring revenues consists of costs to provide maintenance and technical
support to the Company’s customers, the cost of providing periodic updates and
the cost of subscription revenues, including amortization of capitalized
software. Cost of services revenues primarily consists of costs to provide
implementation services and training to the Company’s customers and, to a lesser
degree, costs related to sales of payroll-related forms and costs associated
with certain reimbursable out-of-pocket expenses, discussed
below.  Cost of license revenues primarily consists of fees payable to
third parties for software products distributed by the Company. UltiPro includes
third-party software for enhanced report writing purposes and for time and
attendance functionality.  The Company pays a distribution license fee
to a third-party provider for report writing software used in conjunction with
UltiPro. When UltiPro licenses are sold with this software or the add-on UTA
product, customers pay the Company on a per user basis for the license rights to
such third-party software.





Total
cost of revenues (including $0.7 million and $2.3 million in stock-based
compensation expense for the three and nine months ended September 30, 2008,
respectively, as compared to $0.5 million and $1.7 million for the three and
nine months ended September 30, 2007, respectively) increased 31.7% to $21.1
million for the three months ended September 30, 2008 from $16.0 million for the
three months ended September 30, 2007, and 22.0% to $57.4 million for the nine
months ended September 30, 2008 from $47.1 million for the nine months ended
September 30, 2007.





Cost of
recurring revenues increased 40.8% to $7.9 million for the three months ended
September 30, 2008 from $5.6 million for the three months ended September 30,
2007 and 29.2% to $21.5 million for the nine months ended September 30, 2008
from $16.6 million for the nine months ended September 30, 2007.  The
$2.3 million and $4.9 million increases in cost of recurring revenues for the
three and nine months ended September 30, 2008, respectively (which included
stock-based compensation expense of $0.2 million and $0.7 million for the three
and nine months ended September 30, 2008, respectively, as compared to $0.2
million and $0.5 million for the three and nine months ended September 30, 2007,
respectively), were primarily due to the increases in both Intersourcing costs
and maintenance costs.  The increase in Intersourcing costs was
principally due to the growth in Intersourcing operations and increased sales,
including increased labor costs and higher operating costs such as increased
third-party royalty fees for UTA sales, depreciation and amortization of related
computer equipment supporting the hosting operations and increased hosting data
center costs.  In addition, there was increased amortization for
UltiPro Canadian HR/payroll (“UltiPro Canada”) due to the general release of
UltiPro Canada in the fourth quarter of 2007 and the resulting commencement of
the amortization of the capitalized costs.  The increase in
maintenance costs was primarily related to increased labor costs commensurate
with the growth in the number of customers in the Company’s base.





Cost of
services revenues increased 26.7% to $12.8 million for the three months ended
September 30, 2008 from $10.1 million for the three months ended September 30,
2007, and 17.6% to $34.6 million for the nine months ended September 30, 2008
from $29.4 million for the nine months ended September 30, 2007. The increase in
cost of services revenues for the three-month period ended September 30, 2008
(which included stock-based compensation expense of $0.5 million for the three
months ended September 30, 2008, as compared to $0.3 million for the three
months ended September 30, 2007) was primarily due to an increase in costs of
implementation.  The implementation cost increase for the three-month
period was mainly attributable to labor costs associated with growing the
implementation infrastructure (predominantly billable consultants) to
accommodate the overall growth in unit sales and, to a lesser extent, increased
costs for third-party IP’s which correlate with the increased implementation
revenues generated from the work performed by IP’s.  The increase in
cost of services revenues for the nine month period ended September 30, 2008
(which included stock-based compensation expense of $1.6 million for the nine
months ended September 30, 2008, as compared to $1.2 million for the nine months
ended September 30, 2007), was primarily due to an increase in costs of
implementation and, to a lesser extent, an increase in training
costs.  The increases in implementation costs and training costs were
primarily labor costs associated with the growth in the Intersourcing operations
(including the growth in Enterprise and Workplace unit sales).





Cost of
license revenues increased 31.5% to $463 thousand for the three months ended
September 30, 2008 from $352 thousand for the three months ended September 30,
2007, and increased 32.1% to $1.4 million for the nine months ended September
30, 2008 from $1.0 million for the nine months ended September 30,
2007.   The increases in cost of license revenues for the three
and nine months ended September 30, 2008 as compared to the same periods in 2007
were primarily due to increased third-party royalty fees tied to increased sales
of UTA products, and increased amortization for capitalized software resulting
from the general release of UltiPro Canada in the fourth quarter of 2007 and the
commencement of the related amortization.





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 38.1% to $12.5 million for the three
months ended September 30, 2008 from $9.0 million for the three months ended
September 30, 2007 and 35.3% to $35.5 million for the nine months ended
September 30, 2008 from $26.3 million for the nine months ended September 30,
2007. The increases in sales and marketing expenses for the three and nine month
periods ended September 30, 2008 (including $2.0 million and $5.7 million,
respectively, of stock-based compensation expense as compared to $1.2 million
and $3.3 million of stock-based compensation expense for the three and nine
months ended September 30, 2007, respectively) were primarily due to increased
labor and related costs attributable to hiring additional direct sales force
personnel (particularly for the Company’s Workplace solution) and higher sales
commissions principally related to increased Intersourcing sales. Marketing
expenses associated with the investment in the Workplace solution also increased
from the same periods in the prior year.  Commissions on license sales
are recognized when the license revenues are recognized, which is typically when
the product is shipped.  Commissions on Intersourcing sales are
amortized over the initial contract term (typically 24 months) commencing on the
Live date, which corresponds to the Intersourcing revenue
recognition.





Research
and Development





Research
and development expenses consist primarily of software development personnel
costs.  Research and development expenses increased 39.5% to $9.9
million for the three months ended September 30, 2008 from $7.1 million for the
three months ended September 30, 2007, and 34.1% to $28.1 million for the nine
months ended September 30, 2008 from $20.9 million for the nine months ended
September 30, 2007.  The increases in research and development
expenses for the three and nine month periods ended September 30, 2008
(including $0.3 million and $1.3 million, respectively, of stock-based
compensation expense as compared to $0.2 million and $0.8 million for the three
and nine months ended September 30, 2007, respectively) were principally due to
higher labor costs related to the ongoing development of UltiPro and
complementary products, including the impact of increased staffing costs (from
additional headcount) and increased third-party consulting costs, and, to a
lesser extent, a net reduction in capitalized labor costs. Capitalization of
costs for UltiPro Canada ended in November 2007 (upon its general release) and
certain labor costs were capitalized in the three and nine months ended
September 30, 2008 in relation to a new product offering referred to as
Onboarding which is a product that handles certain human resources functionality
for new hires of a company, and has an expected general release toward the end
of 2008 upon its full integration with UltiPro.





General
and Administrative





General
and administrative expenses consist primarily of salaries and benefits of
executive, administrative and financial personnel, as well as external
professional fees and the provision for doubtful accounts.  General
and administrative expenses for the three months ended September 30, 2008
increased 28.9% to $4.7 million from $3.6 million for the three months ended
September 30, 2007 and 29.5% to $13.4 million for the nine months ended
September 30, 2008 from $10.3 million for the nine months ended September 30,
2007.  The increases for the three and nine months ended September 30,
2008 (including $0.9 million and $2.8 million of stock-based compensation
expense, respectively, and $46 thousand and $0.1 million, of amortization of
acquired intangible assets, respectively, as compared to $0.7 million and $1.5
million of stock-based compensation expense and $0.1 million and $0.2 million of
amortization of acquired intangible assets for the three and nine months ended
September 30, 2007, respectively) were primarily due to additional labor and
related costs (including additional personnel costs to support the Company’s
growth) and, to a lesser extent, an increase in the provision for doubtful
accounts.





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Interest
Expense and Other





Interest
expense and other of $33 thousand and $173 thousand for the three and nine
months ended September 30, 2008, respectively, was comparable to interest
expense and other during the same period in the prior year ($61 thousand and
$161 thousand for the three and nine months ended September 30, 2007,
respectively).





Other
Income, Net





Other
income, net, decreased to $168 thousand for the three months ended September 30,
2008 from $433 thousand for the three months ended September 30, 2007 and to
$747 thousand for the nine months ended September 30, 2008 from $5.6 million for
the nine months ended September 30, 2007.  The decrease in the three
month period ended September 30, 2008 was related to decreases in interest
income primarily due to less cash, cash equivalents and marketable securities
and a decrease in interest rates.  The decrease of $4.9 million for
the nine month period ended September 30, 2008 reflects a non-recurring
settlement fee of $4.4 million, net of related costs, resulting from the early
termination of a multi-year business arrangement with one of the Company’s
business partners that decided to exit the payroll business during the second
quarter of 2007. There was also a decrease in interest income for the nine month
period ended September 30, 2008 compared to the same period in 2007, due to less
cash, cash equivalents and marketable securities and a decrease in interest
rates.





Income
Taxes





Income
taxes for the three and nine months ended September 30, 2008 included a benefit
of $1.1 million and $1.5 million, respectively.  There was no income
tax provision for the three months ended September 30, 2007.  Income
taxes for the nine months ended September 30, 2007 were $115 thousand, mostly
related to alternative minimum income taxes.  Net operating loss
carryforwards available at December 31, 2007, expiring at various times from
2011 through 2027 and which are available to offset future taxable income,
approximated $71.9 million. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income.  Additionally,
utilization of such net operating loss carryforwards may be limited as a result
of cumulative ownership changes in the Company’s equity
instruments.





Liquidity
and Capital Resources





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





As of
September 30, 2008, the Company had $23.8 million in cash, cash equivalents and
total investments in marketable securities, reflecting a net decrease of $12.1
million since December 31, 2007.  This $12.1 million decrease was
mainly due to the use of $16.8 million in cash for Common Stock repurchases (net
of proceeds from the issuance of Common Stock from stock option exercises)
during the nine months ended September 30, 2008 which were made pursuant to the
Company’s previously announced stock repurchase plan, an increase in capital
expenditures, including cash purchases of property and equipment, and principal
payments on financed equipment, totaling $12.3 million and increased capitalized
software costs of $1.5 million, partially offset by cash generated from
operations of $18.5 million during the nine months ended September 30,
2008.





Net cash
provided by operating activities was $18.5 million for the nine months ended
September 30, 2008 as compared to $20.4 million for the nine months ended
September 30, 2007.  Included in the 2007 nine-month period was a
non-recurring settlement fee of $4.3 million, net of related costs and income
taxes,  resulting from the early termination of a multiyear business
arrangement with one of the Company’s business partners that decided to exit the
payroll business.





Net cash
used in investing activities was $3.5 million for the nine months ended
September 30, 2008 as compared to $6.2 million for the nine months ended
September 30, 2007.  The decrease of $2.7 million from the comparable
period in 2007 was primarily attributable to an increase in cash provided from
the maturities of marketable securities (net of purchases) of $8.1 million,
partially offset by an increase in cash purchases of property and equipment of
$5.4 million and, to a lesser extent, an increase in capitalized software costs
of $0.1 million.





Net cash
used in financing activities was $17.2 million for the nine months ended
September 30, 2008 as compared to $15.0 million for the nine months ended
September 30, 2007. The $2.2 million increase in net cash used in financing
activities was primarily related to a $3.9 million increase in repurchases of
Common Stock pursuant to the Company’s stock repurchase plan (including a
decrease in proceeds from the issuance of Common Stock from stock option
exercises), partially offset by an increase of $1.7 million of customer fund
obligations from the Company’s UltiPro Tax Filing offering.





Days
sales outstanding (“DSO”), calculated on a trailing three-month basis, as of
September 30, 2008 and December 31, 2007, were 68 days and 76 days,
respectively.  The decrease in DSO’s of 8 days compared to December
31, 2007 was primarily related to the decrease in accounts
receivable.





Deferred
revenues were $56.9 million at September 30, 2008, as compared to $51.7 million
at December 31, 2007.  The increase of $5.2 million in deferred
revenues for 2008 was primarily due to increased Intersourcing unit sales and an
increase in deferred services, partially offset by a decrease in deferred
maintenance as revenues recognized exceeded the billings, which is consistent
with the prior year comparable period.  Substantially all of the total
balance in deferred revenues is related to future recurring revenues, including
deferred revenues related to Intersourcing.





The
Company believes that cash and cash equivalents, investments in marketable
securities, equipment financing and cash generated from operations will be
sufficient to fund its operations for at least the next 12 months. This belief
is based upon, among other factors, management’s expectations for future revenue
growth, controlled expenses and collections of accounts receivable.





Off-Balance
Sheet Arrangements





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





Quarterly
Fluctuations





The
Company’s quarterly revenues and operating results have varied significantly in
the past and are likely to vary significantly from quarter to quarter in the
future. The Company’s operating results may fluctuate as a result of a number of
factors, including, but not limited to, increased expenses (especially as they
relate to product development and sales and marketing), timing of product
releases, increased competition, variations in the mix of revenues,
announcements of new products by the Company or its competitors, capital
spending patterns of the Company’s customers and fluctuations in time to Live.
The Company establishes its expenditure levels based upon its expectations as to
future revenues, and, if revenue levels are below expectations, expenses can be
disproportionately high. A significant change in the revenue mix (between
Intersourcing and license unit sales) could cause the quarterly results to
differ considerably.  A drop in near term demand for the Company’s
products could significantly affect both revenues and profits in any quarter.
Operating results achieved in previous fiscal quarters are not necessarily
indicative of operating results for the full fiscal years or for any future
periods. As a result of these factors, there can be no assurance that the
Company will be able to be profitable on a quarterly basis. The Company believes
that, due to the underlying factors for quarterly fluctuations, period-to-period
comparisons of its operations are not necessarily meaningful and that such
comparisons should not be relied upon as indications of future
performance.


Forward-Looking
Statements





The foregoing Management’s Discussion
and Analysis of Financial Condition and Results of Operations and the following
Quantitative and Qualitative Disclosures about Market Risk contain certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the “Securities Act”), and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). These
forward-looking statements represent the Company’s expectations or beliefs,
including, but not limited to, statements concerning the Company’s operations
and financial performance and condition. Words such as “anticipates,” “expects,”
“intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions
are intended to identify such forward-looking statements. These forward-looking
statements are not guarantees of future performance and are subject to certain
risks and uncertainties that are difficult to predict. The Company’s actual
results could differ materially from those contained in the forward-looking
statements due to risks and uncertainties associated with fluctuations in the
Company’s quarterly operating results, concentration of the Company’s product
offerings, development risks involved with new products and technologies,
competition, the Company’s relationships with third parties, contract renewals
with business partners, compliance by the Company’s customers with the terms of
their contracts with the Company, and other factors disclosed in this Quarterly
Report on Form 10-Q and the 2007 Form 10-K.  The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.




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ITEM
3.                      Quantitative and Qualitative Disclosures About Market
Risk





In the
ordinary course of its operations, the Company is exposed to certain market
risks, primarily interest rates. Risks that are either non-financial or
non-quantifiable, such as political, economic, tax, other regulatory or credit
risks, are not included in the following assessment of the Company’s market
risks.





Market risks.The Company
manages market risks in accordance with its investment guideline objectives,
including:





·
            Maximum
      safety of principal;


·
            Maintenance
      of appropriate liquidity for regular cash
needs;


·
            Maximum
      yields in relationship to guidelines and market
  conditions;


·
            Diversification
      of risks; and


·
            Fiduciary
      control of all investments.





The
Company targets its fixed income investment portfolio to have maturities of 24
months or less.  Investments are held to enhance the preservation of
capital and not for trading purposes.





Interest rates. Cash
equivalents consist of money market accounts with original maturities of less
than three months. Short-term investments include obligations of U.S. government
agencies and corporate debt securities.  Corporate debt securities
include commercial paper which must carry minimum short-term ratings of P-1 by
Moody’s Investor Service, Inc. (“Moody’s”) and A-1 by Standard & Poor’s
Ratings Service, a Division of The McGraw-Hill Companies, Inc.
(“S&P”).  Other corporate debt obligations must carry a minimum
rating of A-2 by Moody’s or A by S&P.  Asset-backed securities
must carry a minimum AAA rating by Moody’s and S&P with a maximum average
life of two years at the time of purchase.





The
Company had a credit facility (the “Credit Facility”) with Silicon Valley Bank,
which was secured by the Company’s eligible accounts receivable. The Credit
Facility was comprised of a revolving line of credit (the “Revolver”) and an
equipment term loan (the “Equipment Loan”). The Credit Facility’s Revolver
expired on May 27, 2006.Interest on the Equipment
Loan under the Credit Facility is based on Prime Rate per annum. Because of
the Company’s existing cash position and its expected cash flows from
operations, the Company chose not to renew the Credit Facility upon its
expiration.  The Company was charged a weighted average interest rate
of 6.5% per annum during the third quarter of 2008 under the Credit
Facility.  As of September 30, 2008, there was no amount outstanding
under the Credit Facility’s Revolver and $40 thousand outstanding under the
Credit Facility’s Equipment Loan, with no future availability to draw on the
Equipment Loan and payment of the outstanding balance of such Equipment Loan due
on or before December 31, 2008.





As of
September 30, 2008, total investments in available-for-sale marketable
securities were $8.5 million.  The Company is subject to financial
market risks, including changes in interest rates and in the valuations of its
investment portfolio.  Changes in interest rates could impact the Company’s
anticipated interest income from interest-bearing cash accounts, or cash
equivalents and investments in marketable securities, as well as interest
expense on borrowings under the Credit Facility.





Interest rate
risk.As of September 30, 2008, virtually all of the
investments in the Company’s portfolio were at fixed rates (with a weighted
average interest rate of 2.8% per annum).  In addition, the Credit
Facility’s Equipment Loan is based on a variable interest rate.




To
illustrate the potential impact of changes in interest rates, the Company has
performed an analysis based on its September 30, 2008 unaudited condensed
consolidated balance sheet and assuming no changes in its investment and
borrowing structure.  Under this analysis, an immediate and sustained 100
basis point increase in the various base rates would result in a decrease in the
fair value of the Company’s total portfolio of approximately $31 thousand over
the next 12 months.  An immediate and sustained 100 basis point decrease in
the various base rates would result in an increase of the fair value of the
Company’s total portfolio of approximately $31 thousand over the next 12
months.





ITEM
4.                      Controls and Procedures





(a) Evaluation of disclosure controls
and procedures.  The Company carried out an evaluation, under
the supervision and with the participation of the Company’s management,
including the Chief Executive Officer (the “CEO”) and the Chief Financial
Officer (the “CFO”), of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures as of the end of the period covered
by this report pursuant to Rule 13a-15 and Rule 15d-15 promulgated under the
Exchange Act.  Based on that evaluation, the Company’s management,
including the CEO and CFO, concluded that, as of September 30, 2008, the
Company’s disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed in the Company’s
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified by the SEC’s rules and forms and is accumulated and
communicated to management, including the CEO and CFO, as appropriate to allow
timely decisions regarding required disclosure. It should be noted that 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 September 30, 2008 in the Company’s internal control over
financial reporting that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting.


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PART II – OTHER INFORMATION





ITEM
1A.                      Risk Factors





A description of the risk factors
associated with our business is set forth below. This description supersedes the
risk factors previously disclosed in “Risk Factors,” Item 1A of the Company’s
Quarterly Report on Form 10-Q for the quarterly period ending June 30,
2008.





This
Form 10-Q may contain certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
represent the Company’s expectations or beliefs, including, but not limited to,
statements concerning the Company’s operations and financial performance and
condition. Words such as “anticipates,” “expects,” “intends,” “plans,”
“believes,” “seeks,” “estimates,” and similar expressions are intended to
identify such forward-looking statements. These forward-looking statements are
not guarantees of future performance and are subject to certain risks and
uncertainties that are difficult to predict. The Company’s actual results could
differ materially from those contained in the forward-looking statements due to
risks and uncertainties associated with fluctuations in the Company’s quarterly
operating results, concentration of the Company’s product offerings, development
risks involved with new products and technologies, competition, the Company’s
contractual relationships with third parties, contract renewals with business
partners, compliance by our customers with the terms of their contracts with us,
and other factors disclosed in the Company’s filings with the Securities and
Exchange Commission.  Other factors that may cause such differences
include, but are not limited to, those discussed in this Form 10-Q, including
the following disclosures. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.





We
may be adversely affected by substantial quarterly fluctuations in our revenues
and operating results.




Our
quarterly revenues and operating results have varied significantly in the past
and are likely to vary substantially from quarter to quarter in the future. Our
quarterly operating results may fluctuate as a result of a number of factors,
including:






§
            Variations
      in the mix of revenues;






§
            Increased
      expenses (especially as they relate to product development and sales and
      marketing);






§
            Timing
      of product releases:






§
            Increased
      competition;






§
            Announcements
      of new products by us or our
competitors;






§
            Capital
      spending patterns of our customers;
and






§
            A
      drop in near-term demand for our
products.




We
establish our expenditure levels based upon our expectations as to future
revenues. If revenue levels are below expectations, expenses can be
disproportionately high. While sales production could be at our level of
expectations, a variation in the mix of revenues (i.e., a shift from expected
license sales to Intersourcing sales) could cause the immediate reported
revenues to be lower than expected.  This is based on the method of
accounting for Intersourcing sales, which recognizes the revenue over the
initial contract term after the first live payroll is processed by the customer
(also referred to as the “Live” date) as opposed to a license sale which (if all
relevant accounting requirements are met) typically recognizes the entire
license fee upon delivery.  Our operating results for previous fiscal
quarters are not necessarily indicative of our operating results for the full
fiscal years or for any future periods. We believe that, due to the underlying
factors for quarterly fluctuations, quarter-to-quarter comparisons of our
operations are not necessarily meaningful and that such comparisons should not
be relied upon as indications of future performance.





Due
to the method of accounting for Intersourcing sales, a change in the period of
the time from contract date to the Live date (“Time to Live”) could negatively
impact the amount of recurring revenues recognized in a reporting
period.





Sales
production, as it pertains to sales of Intersourcing units, is not reflected in
recurring revenues and related variable costs in the Company’s consolidated
statements of operations until the related customer goes Live (as discussed
above). In its internal business model, the Company makes certain assumptions,
among other things, with respect to future sales production, revenue growth,
variable costs, personnel costs and other operating expenses.





The
Company’s expectations for recurring revenue growth are typically established
based on combinations of actual Intersourcing sales production (for those units
that have been previously sold but have not yet gone Live, or “Backlog”) and
expected future Intersourcing sales production, together with expectations as to
the Time to Live. Estimates for Time to Live are usually based on (i) specific
estimates (for certain Backlog sales) provided by our field personnel, which
estimates include factors and assumptions that are not within the control of our
field personnel; and (ii) estimates for Time to Live for other Intersourcing
sales (including Backlog sales without specific estimates at that point in
time), as well as expected sales), which are typically based on assumptions
derived from our historical Time to Live periods. Factors that could impact the
Time to Live include, but are not limited to, customer size (as larger customers
may have longer implementations, tend to go Live on more UltiPro features and
have more interface and integration requirements), or the number of
complementary products sold in addition to UltiPro to a single customer, which,
in some cases involve customers’ desires to go Live on all products at once, as
opposed to UltiPro first, followed by complementary products.





To the
extent there are changes in the underlying assumptions which drive the Company’s
expected revenue growth from Intersourcing sales, which include, but are not
limited to, actual sales production achieved, changes in Time to Live, our
recurring revenues, as reported in our consolidated statements of operations,
could differ materially from levels we expected to achieve.




Our
quarterly revenues and operating results may be negatively impacted by
seasonality, especially in the first fiscal quarter of each year.






In past
years, sales production in the first fiscal quarter has been lower than in the
other fiscal quarters of those years.  While we are unable to quantify
the impact of seasonality on our business, particularly in the first quarter of
a fiscal year, we believe that seasonality has been a contributing
factor.  Our business, operating results and financial condition may
be affected by such trends in the future.  This seasonality is
expected to continue.




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We
believe the impact of seasonality on our business is due to a number of factors,
including the reduced availability of certain key personnel of potential
customers due to their involvement in the year-end payroll process that occurs
in the first fiscal quarter.  The seasonal trends that we have
experienced in the past are expected to continue in the foreseeable
future.






Adverse
changes in general economic or political conditions could adversely affect our
operating results.






As our
business has grown, we have become increasingly subject to the risks arising
from adverse changes in domestic and global economic and political
conditions.  For example, the U.S. economy has recently been weakened
due to softness in the housing and commercial real estate markets, difficulties
in the financial services sector and other industry sectors and continuing
geopolitical uncertainties.  If weakness in the economies of the U.S.
and other countries persists, many customers may delay or reduce technology
purchases.  This could result in reductions in sales of our products,
longer sales cycles, slower adoption of new technologies and increased price
competition.  Any of these events would likely harm our business,
results of operations and financial condition.






Our
failure to maintain and increase acceptance of UltiPro, which accounts for
substantially all of our revenues, could cause a significant decline in our
revenues.






Currently,
the UltiPro product, including the core UltiPro and complementary or “add-on”
products, and related services account for substantially all of our revenues.
Our future success depends on maintaining and increasing acceptance of UltiPro,
including Intersourcing (our hosting service through which we offer the
hardware, infrastructure, ongoing maintenance and backup services for our
customers), and related services. Any decrease in the demand for UltiPro would
have a material adverse effect on our business, operating results and financial
condition.






A
systems failure or other service interruption at either of the data centers
managed by Quality Technology Services (“QTS”) and used for our hosting services
could result in substantial expense to us, loss of customers and claims by our
customers for damages caused by any losses they incur.






We offer
hosting services, which include hardware, infrastructure, ongoing maintenance
and back-up services, to our customers at two data centers both owned and
operated by QTS—one in the Atlanta, Georgia area and another one in the Miami,
Florida area.






These
hosting services, which we refer to as Intersourcing, must be able to be
reliably operated on a 24 hours per day, seven days per week basis without
interruption or data loss. The success of Intersourcing depends on our ability
to protect the infrastructure, equipment and customer data files against damage
from:






§
            Human
      error;






§
            Natural
      disasters;






§
            Power
      loss or telecommunication failures;






§
            Sabotage
      or other intentional acts of vandalism;
and






§
            Unforeseen
      interruption or damages experienced in moving hardware to a new
      location.






We
perform a daily backup of our customer data which is stored offsite of the data
centers. However, the occurrence of one of the above listed events or other
unanticipated problems at either of the data centers could:




§
            Result
      in interruptions in the services we provide to our customers, during which
      time our customers may be unable to retrieve their
  data;






§
            Require
      us to spend substantial amounts of money replacing existing equipment
      and/or purchasing services from an alternative data
  center;






§
            Cause
      existing customers to cancel their
contracts;






§
            Cause
      our customers to seek damages for losses incurred;
  or






§
            Make
      it more difficult for us to attract new
  customers.






If
our direct sales force is not successful, we may be unable to achieve
significant revenue growth in the future.






We sell
our products and services primarily through a direct sales force.  Our
ability to achieve significant revenue growth in the future will depend upon the
success of our direct sales force and our ability to adapt our sales efforts to
address the evolving markets for our products. If our direct sales force does
not perform as expected, our revenues could suffer.




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If
we are not able to successfully recruit personnel, our revenues could be
negatively affected.






Our
ability to achieve significant revenue growth in the future will also depend on
our success in recruiting, training and retaining sufficient sales, marketing,
professional services, product development and other personnel.






Rapid
technological changes and the introduction of new products and enhancements by
new or existing competitors could undermine our current market
position.






The
market for our products is characterized by rapid technological advancements,
changes in customer requirements, frequent new product introductions and
enhancements and changing industry standards. The life cycles of our products
are difficult to estimate. Rapid technological changes and the introduction of
new products and enhancements by new or existing competitors could undermine our
current market position. Our growth and future success will depend, in part,
upon our ability to:






§
            Enhance
      our current products and introduce new products in order to keep pace with
      products offered by our
competitors;






§
            Adapt
      to technological advancements and changing industry standards;
      and






§
            Expand
      the functionality of our products to address the increasingly
      sophisticated requirements of our
customers.


We may
not have sufficient resources to make the necessary investments and we may
experience difficulties that could delay or prevent the successful development,
introduction or marketing of new products or enhancements. In addition, our
products or enhancements may not meet the increasingly sophisticated customer
requirements of the marketplace or achieve market acceptance at the rate we
expect, or at all. Any failure by us to anticipate or respond adequately to
technological advancements, customer requirements and changing industry
standards, or any significant delays in the development, introduction or
availability of new products or enhancements, could undermine our current market
position.




Our
current and future competitors include companies with greater financial,
technical and marketing resources than we have and if we are unable to compete
successfully with other businesses in our industry or with in-house systems
developed by potential customers, our profitability will be adversely
affected.






Our
future success will depend significantly upon our ability to increase our share
of our target market, to maintain and increase our recurring revenues from new
and existing customers and to sell additional products, product enhancements,
maintenance and support services and training and consulting services to
existing and new customers. The human resource management and payroll market is
intensely competitive. Ultimate Software’s competitors include:






§
            Large
      service bureaus, primarily Automatic Data Processing, Inc. (ADP) and, to a
      lesser extent, Ceridian
Corporation;






§
            A
      number of companies, such as PeopleSoft/Oracle, Lawson and Kronos, that
      offer human resource management and payroll software products for use on
      mainframes, client/server environments and/or Web servers;
    and






§
            The
      internal payroll/human resources departments of potential customers which
      use custom-written software.









Our
competitors may develop products that are superior to our products or achieve
greater market acceptance. Many of our competitors or potential competitors have
significantly greater financial, technical and marketing resources than we do.
As a result, they may be able to respond more quickly to new or emerging
technologies and to changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than we can.
We believe that existing competitors and new market entrants will attempt to
develop in-house systems that will compete with our products. We may be unable
to compete successfully against current or future competitors. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address the needs of our prospective customers. Accordingly,
it is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share.






The
loss of the services of one or more of our key employees could negatively affect
our ability to implement our business strategy.






Our
success depends to a significant extent upon a limited number of members of
senior executive management and other key employees, including Scott Scherr, our
Chairman of the Board of Directors, President and Chief Executive Officer. We do
not have employment contracts with any of our key personnel other than a
confidentiality agreement with Mr. Scherr. The loss of the service of one
or more of our key employees could have a material adverse effect upon us. In
addition, uncertainty created by turnover of our key employees could cause
further turnover of our employees.






The
potential growth of our business and expansion of our customer base may place a
significant strain on our management and operations and we may be unable to
manage that growth and expansion successfully.






We expect
to increase research and development, professional services, sales and marketing
and administrative operations as and when appropriate to accommodate our growth
plans. Accordingly, our future operating results will depend on the ability of
our management and other key employees to continue to implement and improve our
systems for operations, financial control and information management and to
recruit, train, manage and retain our employee base. We cannot be certain that
we will be able to manage any future growth successfully.




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Our
business relies heavily on the products of Microsoft, which may not always be
compatible with our products, and we may be required to spend significant
capital if businesses adopt alternative technologies that are incompatible with
our products.






Our
software products are designed primarily to operate with Microsoft Corporation
technologies and our strategy requires that our products and technology be
compatible with new developments in Microsoft technology. Although we believe
that Microsoft technologies are currently widely utilized by businesses of all
sizes, we cannot be certain that businesses will continue to adopt such
technologies as anticipated, will migrate from older Microsoft technologies to
newer Microsoft technologies or will not adopt alternative technologies that are
incompatible with our products. As a result, we may be required to develop new
products or improve our existing products to be compatible with different
technologies that may be used by our customers. We cannot be certain we will be
able to adapt our product to any technologies other than
Microsoft’s.






If
our third-party software is not adequately maintained or updated, our sales
could be materially adversely affected.






Our
products utilize certain software licensed to us by third-party software
developers. Although we believe that there are alternatives for these products,
any significant interruption in the availability of such third-party software
could have a material adverse impact on our sales unless and until we can
replace the functionality provided by these products. Additionally, we are, to a
certain extent, dependent upon such third parties’ abilities to enhance their
current products, to develop new products on a timely and cost-effective basis
and to respond to emerging industry standards and other technological changes.
We may be unable to replace the functionality provided by the third-party
software currently offered in conjunction with our products in the event that
such software becomes obsolete or incompatible with future versions of our
products or is otherwise not adequately maintained or updated.






If
we are unable to release annual or periodic updates on a timely basis to reflect
changes in tax laws and regulations or other regulatory provisions applicable to
our products, the market acceptance of our products may be adversely affected
and our revenues could decline.






Our
products are affected by changes in tax laws and regulations and generally must
be updated annually or periodically to maintain their accuracy and
competitiveness. We cannot be certain that we will be able to release these
annual or periodic updates on a timely basis in the future. Failure to do so
could have a material adverse effect on market acceptance of our products. In
addition, significant changes in tax laws and regulations or other regulatory
provisions applicable to our products could require us to make a significant
investment in product modifications, which could result in significant
unexpected costs to us.






If
we are unable to protect our proprietary rights against unauthorized third-party
copying or use, our revenues or our methods of doing business could be
negatively impacted.






Our
success is dependent in part on our ability to protect our proprietary rights.
We rely on a combination of copyright, trademark and trade secret laws, as well
as confidentiality agreements and licensing arrangements, to establish and
protect our proprietary rights. We do not have any patents or patent
applications pending, and existing copyright, trademark and trade secret laws
afford only limited protection. As a result, we cannot be certain that we will
be able to protect our proprietary rights against unauthorized third-party
copying or use. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or reverse engineer aspects of our
products or to obtain and use information that we regard as proprietary. In
addition, others may develop products that perform comparably to our proprietary
products. Policing the unauthorized use of our products is
difficult.




Litigation
may be necessary in the future to enforce our intellectual property rights, to
protect our trademarks, copyrights or trade secrets or to determine the validity
and scope of the proprietary rights of others; such litigation may be expensive
and divert the attention of management.






Litigation
may be necessary in the future to enforce our intellectual property rights, to
protect our trademarks, copyrights or trade secrets or to determine the validity
and scope of the proprietary rights of others. Any litigation could result in
substantial costs and diversion of resources and management
attention.






As is
common in the software industry, from time to time we may become aware of
third-party claims of infringement by our operations or products of third-party
proprietary rights. While we are not currently aware of any such claim, our
software products may increasingly be subject to such claims as the number of
products and competitors in our industry grows, as the functionality of products
overlaps and as the issuance of software patents becomes increasingly common.
Any such claims, with or without merit, can be time consuming and expensive to
defend, cause product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to us, or at all.






Defects
and errors in our software could affect market acceptance of our
products.






Software
products such as those offered by us frequently contain undetected errors or
failures when first introduced or as new versions are released. Testing of our
products is particularly challenging because it is difficult to simulate the
wide variety of computing environments in which our customers may use these
products. Despite extensive testing, from time to time we have discovered
defects or errors in our products. Defects and errors may:






§
            Cause
      delays in product introductions and
shipments;






§
            Result
      in increased costs and diversion of development
  resources;






§
            Require
      design modifications; or






§
            Decrease
      market acceptance of, or customer satisfaction with, our
      products.









Despite
testing by us and by current and potential customers, errors may be found after
commencement of commercial shipments, which may result in loss of or delay in
market acceptance.






Our
software products may be vulnerable to break-ins and similar disruptive
problems; addressing these issues may be expensive and require a significant
amount of our resources.






We have
included security features in our products that are intended to protect the
privacy and integrity of customer data. Despite the existence of these security
features, our software products may be vulnerable to break-ins and similar
disruptive problems. Addressing these evolving security issues may be expensive
and require a significant amount of our resources.




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The
sale and support of software products and the performance of related services by
us entail the risk of product liability claims, which could significantly affect
our financial results.






Customers
use our products in connection with the preparation and filing of tax returns
and other regulatory reports. If any of our products contain errors that produce
inaccurate results upon which users rely, or cause users to misfile or fail to
file required information, we could be subject to liability claims from users.
Our license agreements with our customers typically contain provisions intended
to limit our exposure to such claims, but such provisions may not be effective
in limiting our exposure. Contractual limitations we use may not be enforceable
and may not provide us with adequate protection against product liability claims
in certain jurisdictions. A successful claim for product or service liability
brought against us could result in substantial cost to us and divert
management’s attention from our operations.




Anti-takeover
provisions in our certificate of incorporation and by-laws and under our Amended
and Restated Rights Agreement and Delaware law and our Change in Control Bonus
Plans could substantially increase the cost to acquire us or prevent or delay a
change in control and, as a result, negatively impact our stockholders and the
price of our Common Stock.






We have
taken a number of actions that could have the effect of discouraging a takeover
attempt. For example, we have adopted an Amended and Restated Rights Agreement
that would cause substantial dilution to a stockholder, and substantially
increase the cost paid by a stockholder, who attempts to acquire us on terms not
approved by our Board of Directors. This could prevent us from being acquired.
Our Board of Directors is divided into three classes, each of whose members
serve for a staggered three-year term. This may prevent a stockholder from
gaining control of our Board of Directors by electing members who are not
supported by management.






In
addition, our certificate of incorporation grants our Board of Directors the
authority to fix the rights, preferences and privileges of and issue up to
2,500,000 shares of preferred stock without stockholder approval. Although we
have no present intention to issue shares of preferred stock, such an issuance
could have the effect of making it more difficult and less attractive for a
third-party to acquire a majority of our outstanding voting stock. Preferred
stock may also have other rights, including economic rights senior to our common
stock, that could have a material adverse effect on our stock
price.




We are
also subject to the anti-takeover provisions of Section 203 of Delaware
General Corporation Law. This section provides that a corporation may not engage
in any business combination with any interested stockholder (as defined in that
section) during the three-year period following the time that a stockholder
became an interested stockholder.  This provision could have the
effect of delaying or preventing a change in control of our
company.





We have
adopted two Amended and Restated Change in Control Bonus Plans. One plan
provides for the payment of cash amounts to our three named executive officers,
Scott Scherr, Marc D. Scherr and Mitchell K. Dauerman, upon a “change in
control” of Ultimate Software. The other plan provides for the payment of cash
amounts in the event of a “change in control” to our employees, other than named
executive officers, designated by the Compensation Committee of our Board of
Directors. A “change in control” would occur if more than 50% of our Common
Stock were acquired by a person or entity other than Ultimate Software or a
subsidiary or employee benefit plan of ours. There are other conditions that
could result in a change in control event such as a sale or transfer of all or
substantially all of our assets or business. The aggregate amount of payment
that may be made to all participants under the two Change in Control Bonus Plans
may be as much as 6% of the gross consideration received by us or our
stockholders in a change in control transaction. The Change in Control Bonus
Plans could substantially increase the cost to acquire us.





The
growth of the international operations of our business subjects us to additional
risks associated with foreign operations.





International
operations are subject to risks associated with operating outside of the United
States.  Our international operations are new.  During the
fourth fiscal quarter of 2006, we began operating in the United Kingdom (through
the acquisition of a foreign subsidiary) and Canada (through the formation of a
wholly-owned Canadian subsidiary).  The financial impact of our
international operations to our overall business has been insignificant to
date.  However, over time, those international operations may grow and
increase their significance to our business.  Sales to international
customers subject us to a number of risks, including foreign currency
fluctuations, unexpected changes in regulatory requirements for software,
international economic and political instability, compliance with multiple,
conflicting, and changing governmental laws and regulations, difficulty in
staffing and managing foreign operations, international tax laws, potentially
weaker protection for our intellectual property than in the United States, and
difficulties in enforcing such rights abroad.  If sales to any of our
customers outside of the United States are delayed or cancelled because of any
of the above factors, our revenue may be negatively impacted.





Our
international operations also increase our exposure to international laws and
regulations. If we are unable to comply with foreign laws and regulations, which
are often complex and subject to variation and unexpected changes, we could
incur unexpected costs and potential litigation.





If
our goodwill or amortizable intangible assets become impaired we may be required
to record a significant charge to earnings.





Under
generally accepted accounting principles, we review our amortizable intangible
assets for impairment when events or changes in circumstances indicate the
carrying value may not be recoverable.  Goodwill is required to be
tested for impairment at least annually.  Factors that may be
considered in circumstances indicating that the carrying value of our goodwill
or amortizable intangible assets may not be recoverable include a reduction in
our market capitalization (as a result of a decline in our stock price) to a
level below our consolidated stockholders’ equity as of the applicable balance
sheet date, declining future cash flows, and slower growth rates in our
industry.  We may be required to record a significant charge to
earnings in our financial statements during the period in which any impairment
of our goodwill or amortizable intangible assets is determined, resulting in a
negative impact on our results of operations.





Changes
in, or interpretations of, accounting principles could result in unfavorable
accounting changes.





We
prepare our consolidated financial statements in conformity with U.S. generally
accepted accounting principles and accompanying accounting pronouncements,
implementation guidelines, and interpretations.  Changes in these
rules or their interpretation could significantly change our reported results
and may even retroactively affect previously reported
transactions.  Our accounting principles that recently have been or
may be affected by changes in accounting principles include, but are not limited
to:  software revenue recognition; accounting for stock-based
compensation; accounting for income taxes; and accounting for business
combinations and related goodwill.





Changes
in, or interpretations of, tax rules and regulations may adversely affect our
effective tax rates.





Unanticipated
changes in our tax rates could affect our future results of
operations.  Our future effective tax rates could be unfavorably
affected by changes in tax laws or the interpretation of tax laws, or by changes
in the valuation of our deferred tax assets and liabilities.  In
addition, we are subject to the examination of our income tax returns by the
Internal Revenue Service and other domestic and foreign tax
authorities.  We regularly assess the likelihood of outcomes resulting
from these examinations to determine the adequacy of our provision for income
taxes.  There can be no assurance that these potential examinations
will not have an adverse effect on our operating results and financial
position.


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ITEM
2.                      Unregistered Sales of EquitySecurities and Use of
Proceeds





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





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





On
February 5, 2008, the Company’s Board of Directors extended the Stock Repurchase
Plan further by authorizing the repurchase of up to 1,000,000 additional shares
of the Company’s Common Stock.  As a result, an aggregate of 1,547,625
shares of Common Stock were available for repurchase under the Stock Repurchase
Plan as of February 5, 2008.  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 September 30, 2008, the Company had purchased 2,175,475 shares of the
Company’s Common Stock under the Stock Repurchase Plan, with 824,525 shares
available for repurchase in the future.  The details of Common Stock
repurchases for the three months ended September 30, 2008 are as
follows:





Total
      Number of Shares
                  
                  
                  Maximum
      Number ofPurchased
      as Part
                  
                  
                  Shares
      That May YetTotal
      Number of
                  
                  
                  Average
      Price
                  
                  
                  Of
      Publicly Announced
                  
                  
                  Be
      Purchased Under thePeriod
                  
                  Shares Purchased (1)
                  
                  
                  Paid per Share
                  
                  
                  Plans or Programs
                  
                  
                  Plans or ProgramsJuly
      1- 31, 2008
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  2,020,375
                  
                  
                  
                  979,625August
      1- 31, 2008
                  
                  
                  155,100
                  
                  
                  
                  25.90
                  
                  
                  
                  2,175,475
                  
                  
                  
                  824,525September
      1- 30, 2008
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  2,175,475
                  
                  
                  
                  824,525Total
                  
                  
                  155,100
                  
                  
                  $
                  25.
      90
                  
                  
                  
                  2,175,475
                  
                  
                  
                  824,525(1) All
      shares were purchased through the publicly announced Stock Repurchase Plan
      in open-market transactions.





ITEM
6.                      Exhibits





Number
            Description31.1
            Certification
      Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange
      Act of 1934, as amended *31.2
            Certification
      Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange
      Act of 1934, as amended *32.1
            Certification
      Pursuant to 18 U.S.C. Section 1350, as AdoptedPursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002, as amended
    *32.2
            Certification
      Pursuant to 18 U.S.C. Section 1350, as AdoptedPursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002, as amended
    *


____________________





*  Filed
herewith.






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Signatures





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











The
      Ultimate Software Group, Inc.Date:                      November
      10, 2008
            By:
            /s/ Mitchell K. DauermanMitchell
      K. DauermanExecutive
      Vice President, Chief Financial Officer and Treasurer (Authorized
      Signatory and Principal Financial and Accounting
  Officer)


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