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

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

Executive Summary

Ultimate designs, markets, implements and supports human resources ("HR"), payroll and talent management solutions principally in the United States and Canada.

Ultimate's UltiPro software ("UltiPro") is a comprehensive Internet-based solution designed to deliver the functionality businesses need to manage the complete employment life cycle from recruitment to retirement.

Ultimate's software-as-a-service ("SaaS") offering, branded "Intersourcing" (the "Intersourcing Offering"), provides on-line access to comprehensive human capital management functionality for organizations that need to simplify the information technology ("IT") support requirements of their business applications. Through the Intersourcing Offering, Ultimate provides the hardware, infrastructure, ongoing maintenance and backup services for its customers at two data centers located in the Miami, Florida and Atlanta, Georgia areas. Both data centers are owned and operated by a third party, Quality Technology Services ("QTS"). QTS is one of the largest privately-held providers of data center facilities and management services in the United States.

UltiPro is available as two solution suites based on company size. UltiPro Enterprise ("Enterprise") was developed to address the needs of large and very large companies (700 or more employees and including companies as large as 15,000 employees and larger) and is delivered as either SaaS or an on-premise solution. UltiPro Workplace ("Workplace") was developed for companies in the mid-market (200 to 700 employees) and is delivered exclusively as SaaS. UltiPro Workplace provides medium-sized and smaller companies with nearly all the features that larger Enterprise companies have with UltiPro, plus a bundled service package. Since many companies in this market do not have IT staff on their premises to help with system issues, UltiPro Workplace is designed to give these customers a high degree of convenience by handling system setup, business rules, and other situations for customers "behind the scenes." UltiPro is marketed primarily through the Company's Enterprise and Workplace direct sales teams.

In addition to UltiPro's core HR/payroll functionality, the Company's customers have the option to purchase a number of additional features on a per-employee-per-month (or "PEPM") basis, which are available to enhance the functionality of UltiPro's core features based on certain business needs of the customers. These optional UltiPro features currently include (i) the talent management suite of products; (ii) benefits enrollment; (iii) time, attendance and scheduling; (iv) time management, (v) tax filing; (vi) wage attachments; and
(vii) other optional features (collectively, "Optional Features"). All Optional Features are individually priced solely on a subscription basis with some of the Optional Features available to both Enterprise and Workplace customers while others are available exclusively to either Enterprise or Workplace customers, based on the needs of the respective customers, including their employee size and the complexity of their HR/payroll environment.

On February 5, 2009, Ultimate announced that after April 1, 2009 it would discontinue selling its on-site UltiPro solutions on a perpetual license basis. However, the Company will continue to sell on-site UltiPro solutions on a subscription basis (priced and billed to customers on a PEPM basis) and the Company may have additional license revenues attributable to contractual arrangements in process with new customers as of March 31, 2009, as well as from contractual arrangements with existing license customers. After the elimination of sales of perpetual licenses to new customers, the variable costs associated with new customer licenses, such as sales commissions, will also be eliminated. However, there will remain certain fixed third-party costs that were formerly allocated to costs of license revenues (in proportion to their contribution to the total sales mix) which will be shifted to costs of recurring revenues. As perpetual license agreements are sold, annual maintenance contracts (priced as a percentage of the related license fee) accompany those agreements. Maintenance contracts typically have a one-year term with annual renewal periods thereafter. The Company has historically maintained a strong customer retention rate for its renewal maintenance agreements and does not foresee its decision to discontinue new sales of perpetual license agreements to materially affect its future maintenance revenues (as they relate to existing license customers).

As Intersourcing units are sold, the recurring revenue backlog associated with Intersourcing grows, enhancing the predictability of future revenue streams. Intersourcing sales include a one-time upfront (or setup) fee, priced on a per-employee basis, and ongoing monthly fees, priced on a PEPM basis. Revenue recognition for Intersourcing is triggered when the related customer processes its first payroll (or goes "Live"). When an Intersourcing customer goes Live, the related upfront fees are recognized as recurring subscription revenues ratably over the term of the related contract (typically 24 months) and the Company begins recognizing the associated ongoing monthly PEPM fees.

Critical Accounting Estimates

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

Results of Operations

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

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

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

Amortization of acquired intangibles:
General and administrative $ 46 $ 46

Revenues

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

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

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

a) Intersourcing revenues increased 39.4% for the three months ended March 31, 2009 in comparison to the same period in 2008, primarily due to the continued growth of the Intersourcing Offering, which comprised the majority of unit sales. The increase in Intersourcing revenues is based on the revenue impact of incremental units that have gone Live since March 31, 2008, including the UltiPro core product and, to a lesser extent, Optional Features of UltiPro. Intersourcing revenues from the Workplace solution in 2009 also contributed to the year-over-year growth, particularly since this solution was introduced late in 2007. Recognition of recurring revenues for Intersourcing sales commences upon Live date.

b) Maintenance revenues from license sales increased 3.6% for the three months ended March 31, 2009, in comparison to the same period of 2008, due to additional maintenance fees resulting from cumulative net increases in the customer base subsequent to March 31, 2008 due to incremental license sales since such date. Maintenance revenues are recognized over the initial term of the related license contract, which is typically 12 months, and then on a monthly recurring basis thereafter as the maintenance contracts renew annually.

c) Subscription revenues decreased 65.2% for the three months ended March 31, 2009, in comparison to the same period of 2008, primarily due to the termination of the Company's agreement with Ceridian Corporation ("Ceridian"), pursuant to which Ceridian was granted a non-exclusive license to use UltiPro as part of an on-line offering for Ceridian to market primarily to businesses with less than 500 employees. This agreement was terminated effective March 9, 2008, at which time the related revenue recognition ended. During the three months ended March 31, 2008, revenue recognized under the Ceridian agreement amounted to $1.5 million as compared to zero for the same period in 2009.

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

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

Cost of revenues consists of the cost of recurring, services and license revenues. Cost of recurring revenues primarily consists of costs to provide maintenance and technical support to the Company's customers, the cost of providing periodic updates and the cost of subscription revenues, including amortization of capitalized software. Cost of services revenues primarily consists of costs to provide implementation services and training to the Company's customers and, to a lesser degree, costs related to sales of payroll-related forms, costs associated with certain client reimbursable out-of-pocket expenses. Cost of license revenues primarily consists of fees payable to third parties for software products distributed by the Company. UltiPro includes third-party software for enhanced report writing purposes and for time and attendance functionality ("UTA"). When UltiPro units are sold, customers pay the Company on a per user basis for the license rights to the third-party report writing software and for the add-on product, UTA.

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

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

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

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

Sales and Marketing

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

Research and Development

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

General and Administrative

General and administrative expenses consist primarily of salaries and benefits of executive, administrative and financial personnel, as well as external professional fees and the provision for doubtful accounts. General and administrative expenses for the three months ended March 31, 2009 increased 6.1% to $4.6 million from $4.3 million for the three months ended March 31, 2008. The increase for the three months ended March 31, 2009 was primarily due to additional labor and related costs (including additional personnel costs to support the Company's growth).

Interest Expense and Other

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

Other Income, Net

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

Income Taxes

An income tax benefit of $40 thousand during the three months ended March 31, 2009 was recorded relating to the loss for the same period. An income tax provision of $201 thousand was recorded for the three months ended March 31, 2008 relating to the income for the same period. Net operating loss carryforwards available at December 31, 2008, expiring at various times from 2011 through the year 2028 and which are available to offset future taxable income, approximated $73.9 million. The timing and levels of future profitability may result in the expiration of net operating loss carryforwards before utilization. Additionally, utilization of such net operating losses may be limited as a result of cumulative ownership changes in the Company's equity instruments.

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

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

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

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

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

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

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

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

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

Off-Balance Sheet Arrangements

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

Quarterly Fluctuations

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

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