10-Q

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 June 30, 2011

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

For the transition period from _______ to _______

Commission file number:                                           0-24347

THE ULTIMATE SOFTWARE GROUP, INC.

(Exact name of Registrant as specified in its charter)

Delaware	65-0694077
(State or other jurisdiction of incorporation)	(I.R.S. Employer Identification No.)
or organization

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

(954) 331 - 7000

(Registrant’s telephone number, including area code)

None

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No ¨

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  þ	Accelerated filer  ¨
Non-accelerated filer  ¨	Smaller reporting company ¨

(Do not check if a 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 August 3, 2011, there were 25,860,210 shares of the Registrant’s common stock, par value $0.01 (“Common Stock”), outstanding.

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

	Page(s)
Part I – Financial Information:
Item 1 – Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010		1
Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and June 30, 2010		2
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and June 30, 2010		3
Notes to Unaudited Condensed Consolidated Financial Statements		4-11
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		12-18
Item 3 – Quantitative and Qualitative Disclosures About Market Risk		19
Item 4 – Controls and Procedures		19
Part II – Other Information:
Item 1A – Risk Factors		20
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		20
Item 6 – Exhibits		21
Signatures		22
Certifications		23-26

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PART 1 – FINANCIAL INFORMATION
Item 1 – Financial Statements
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
	As of			As of
	June 30,			December 31,
	2011			2010
ASSETS
Current assets:
Cash and cash equivalents	$	45,234		$	40,889
Short-term investments in marketable securities		7,112			8,884
Accounts receivable, net of allowance for doubtful accounts of        $600 for 2011 and $800 for 2010		46,733			47,570
Prepaid expenses and other current assets		22,707			18,613
Deferred tax assets, net		1,458			1,434
Total current assets before funds held for customers		123,244			117,390
Funds held for customers		165,468			72,875
Total current assets		288,712			190,265
Property and equipment, net		22,040			18,075
Capitalized software, net		2,440			3,115
Goodwill		3,025			3,025
Long-term investments in marketable securities		1,636			433
Other assets, net		12,290			11,656
Long-term deferred tax assets, net		22,386			22,988
Total assets	$	352,529		$	249,557
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	6,376		$	4,683
Accrued expenses		12,895			11,074
Current portion of deferred revenue		73,212			71,808
Current portion of capital lease obligations		2,614			2,551
Total current liabilities before customer funds obligations		95,097			90,116
Customer funds obligations		165,468			72,875
Total current liabilities		260,565			162,991
Deferred revenue, net of current portion		4,798			6,287
Deferred rent		3,580			3,022
Capital lease obligations, net of current portion		2,281			2,406
Income taxes payable		1,866			1,866
Total liabilities		273,090			176,572
Stockholders’ 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, 29,578,959 and 29,027,277 shares issued in 2011 and 2010, respectively		296			290
Additional paid-in capital		229,365			216,262
Accumulated other comprehensive income		175			126
Accumulated deficit		(51,032	)		(52,253	)
		178,804			164,425
Treasury stock, 3,744,503 and 3,594,825 shares, at cost, for 2011 and 2010, respectively		(99,365	)		(91,440	)
Total stockholders’ equity		79,439			72,985
Total liabilities and stockholders’ equity	$	352,529		$	249,557

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

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THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
	For the Three Months Ended June 30,						For the Six Months  Ended June 30,
	2011			2010			2011			2010
Revenues:
Recurring	$	52,002		$	41,365		$	101,950		$	80,813
Services		11,761			13,032			25,490			28,613
License		442			320			1,270			948
Total revenues		64,205			54,717			128,710			110,374
Cost of revenues:
Recurring		15,543			12,048			30,236			23,452
Services		12,104			11,877			26,033			25,058
License		100			50			273			150
Total cost of revenues		27,747			23,975			56,542			48,660
Gross profit		36,458			30,742			72,168			61,714
Operating expenses:
Sales and marketing		15,524			14,580			32,647			29,696
Research and development		12,370			10,520			24,337			20,753
General and administrative		5,762			5,169			11,375			10,170
Total operating expenses		33,656			30,269			68,359			60,619
Operating income		2,802			473			3,809			1,095
Other income (expense):
Interest expense and other		(143	)		(61	)		(301	)		(106	)
Other income, net		26			45			60			67
Total other (expense), net		(117	)		(16	)		(241	)		(39	)
Income from continuing operations
before income taxes		2,685			457			3,568			1,056
Provision for income taxes		(1,792	)		(186	)		(2,347	)		(465	)
Income from continuing operations		893			271			1,221			591
Loss from discontinued operations,
net of income taxes		–			(865	)		–			(930	)
Net income (loss)	$	893		$	(594	)	$	1,221		$	(339	)
Basic earnings (loss) per share:
Earnings from continuing operations	$	0.03		$	0.01		$	0.05		$	0.02
Loss from discontinued operations	$	–		$	(0.03	)	$	–		$	(0.04	)
Total	$	0.03		$	(0.02	)	$	0.05		$	(0.02	)
Diluted earnings (loss) per share:
Earnings from continuing operations	$	0.03		$	0.01		$	0.04		$	0.02
Loss from discontinued operations	$	–		$	(0.03	)	$	–		$	(0.03	)
Total	$	0.03		$	(0.02	)	$	0.04		$	(0.01	)
Weighted average shares outstanding:
Basic		25,837			24,839			25,716			24,797
Diluted		27,863			26,972			27,804			26,911

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

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THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
	For the Six Months
	Ended June 30,
	2011			2010
Cash flows from operating activities:
Net income (loss)	$	1,221		$	(339	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		5,743			6,108
Provision for doubtful accounts		1,115			1,038
Non-cash stock-based compensation expense		7,619			6,725
Non-cash realized loss on foreign currency translation adjustment		–			886
Income taxes		2,290			426
Excess tax benefit from stock-based payments		(1,713	)		(950	)
Changes in operating assets and liabilities:
Accounts receivable		(278	)		(4,687	)
Prepaid expenses and other current assets		(4,094	)		(2,764	)
Other assets		(689	)		755
Accounts payable		1,693			446
Accrued expenses and deferred rent		2,379			1,949
Deferred revenue		(85	)		445
Net cash provided by operating activities		15,201			10,038
Cash flows from investing activities:
Purchases of property and equipment		(7,609	)		(2,401	)
Purchases of marketable securities		(7,700	)		(4,600	)
Maturities of marketable securities		8,269			4,835
Net purchases of securities with customer funds		(92,593	)		(24,884	)
Net cash used in investing activities		(99,633	)		(27,050	)
Cash flows from financing activities:
Repurchases of Common Stock		(7,925	)		(12,987	)
Excess tax benefits from stock-based payments		1,713			950
Shares acquired to settle employee tax withholding liability		(3,631	)		(552	)
Principal payments on capital lease obligations		(1,432	)		(1,206	)
Net increase in customer fund obligations		92,593			24,884
Net proceeds from issuances of Common Stock		7,407			4,936
Net cash provided by financing activities		88,725			16,025
Effect of exchange rate changes on cash		52			(6	)
Net increase (decrease) in cash and cash equivalents		4,345			(993	)
Cash and cash equivalents, beginning of period		40,889			23,684
Cash and cash equivalents, end of period	$	45,234		$	22,691
Supplemental disclosure of cash flow information:
Cash paid for interest	$	126		$	100
Cash paid for income taxes	$	395		$	136
Supplemental disclosure of non-cash financing activities:
- Ultimate entered into capital lease obligations to acquire new equipment totaling $1.4 million and $1.4 million for the six months ended June 30, 2011 and June 30, 2010, respectively.

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

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THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.           Nature of Operations

The Ultimate Software Group, Inc. and subsidiaries (“Ultimate,” “we,” “us” or “our”) is a leading provider of unified human capital management (“HCM”) software-as-a-service (“SaaS”) solutions for global businesses.  Ultimate’s UltiPro software (“UltiPro”) is a comprehensive SaaS-based solution delivered primarily to organizations based in the United States and Canada and designed to deliver the functionality businesses need to manage the complete employment life cycle from recruitment to retirement.   Ultimate’s solutions are marketed as two solution suites based on company size.  UltiPro Enterprise (“Enterprise”) is designed to address the needs of companies with 1,000 or more employees.   UltiPro Workplace (“Workplace”) is designed for companies with fewer than 1,000 employees.  UltiPro is marketed primarily through our Enterprise and Workplace direct sales teams.

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

The accompanying unaudited condensed consolidated financial statements of Ultimate have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The information in this quarterly report should be read in conjunction with Ultimate’s audited consolidated financial statements and notes thereto included in Ultimate’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the SEC on March 1, 2011 (the “Form 10-K”).

The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting only of normal, recurring adjustments) which are, in the opinion of Ultimate’s management, necessary for a fair presentation of the information for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Interim results of operations for the three and six months ended June 30, 2011 are not necessarily indicative of operating results for the full fiscal year or for any future periods.

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

3.Summary of Significant Accounting Policies and Recent Accounting Pronouncements

Summary of Significant Accounting Policies

Ultimate’s significant accounting policies discussed in Note 3 to its audited consolidated financial statements for the fiscal year ended December 31, 2010, included in the Form 10-K, have not significantly changed with the exception of our revenue recognition policy due to the adoption of Accounting Standards Update No. 2009-13, “ Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”) as discussed below.

Revenue Recognition

Effective January 1, 2011, we adopted ASU 2009-13 on a prospective basis.  ASU 2009-13 requires the use of the relative selling price method of allocating the total consideration to units of accounting in a multiple element arrangement and eliminates the residual method. This new accounting principle requires an entity to allocate revenue to an arrangement using the estimated selling price (“ESP”) of deliverables if it does not have vendor-specific objective evidence (“VSOE”) or third-party evidence (“TPE”) of selling price.  The adoption of ASU 2009-13 did not have a material impact on our unaudited condensed consolidated financial statements.

VSOE is the price charged when the same or similar product or service is sold separately.  We define VSOE as a median price of recent stand-alone transactions that are priced within a narrow range.

TPE is determined based on the prices charged by our competitors for a similar deliverable when sold separately.  However, due to the difficulty in obtaining sufficient information on competitor pricing and differences in our product offerings when compared with those of our peers, we generally are unable to reliably determine TPE.

ESP is our best estimate of the selling price of an element in a transaction. If we are unable to establish selling price using either VSOE or TPE, we will use ESP in our allocation of arrangement consideration.  The objective of ESP is to determine the price at which we would transact if the product or service were sold by us on a stand-alone basis.  Our determination of ESP involves the use of a customary discount from the list (or book) price for each element, with the discounted price applied within a narrow range.  The customary discount is derived from historical data that has been analyzed to determine trends and patterns. We will analyze the customary discount used for determining ESP on no less than an annual basis.

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We expect our products and services to continue to qualify as separate units of accounting under ASU 2009-13.  We evaluate each deliverable in our arrangements to determine whether they represent a separate unit of accounting.  A deliverable constitutes a separate unit of accounting when it has stand-alone value to the customers.

 There are two major elements in our multiple element arrangements for the delivery of our SaaS offering (the “SaaS Offering”), which are recurring revenues and services revenues.   Also included in our total revenues, to a much lesser degree, are the sales of software licenses.

We recognize revenues when all of the following criteria are met:

·   persuasive evidence of an arrangement exists;

·   delivery has occurred;

·   the fees are fixed and determinable; and

·   collection is considered probable.

If collection is not considered probable, we recognize revenues when the fees are collected. If the fees are not fixed and determinable, we recognize revenues when the fees become due from the customer. If non-standard acceptance periods or non-standard performance criteria are required, we recognize revenue when the acceptance period expires or upon the satisfaction of the acceptance/performance criteria, as applicable.

The majority of services revenues are recognized over the implementation period, which is from the contract execution date until the customer processes its first payroll using UltiPro (also referred to as going “Live”). SaaS revenues are recognized over the contract term, beginning in the month the customer goes Live. There was no significant change to the pattern or timing of revenue recognition for either services or SaaS elements as a result of adopting ASU 2009-13.

Recurring Revenues

Recurring revenues consist of subscription revenues recognized from our SaaS Offering, as well as customer support and maintenance revenues.

i)   SaaS subscription revenues are principally derived from per employee per month (“PEPM”) fees earned from the SaaS Offering and from sales of hosting services on a stand-alone basis to customers who already own a perpetual license (“Base Hosting”). To the extent there are upfront or setup fees associated with our SaaS Offering, the related SaaS subscription revenues are recognized ratably over the term of the related contract, commencing when the customer goes Live.  Ongoing PEPM fees from the SaaS Offering and Base Hosting are recognized as subscription revenues as the services are delivered commencing when the customer goes Live.

ii) Customer support and maintenance revenues are derived from maintaining, supporting, and  providing periodic updates of our software for our hosting services.

Under our SaaS Offering, our customers do not have the right to take possession of our software and these arrangements are considered service contracts. Fair value of multiple elements in SaaS arrangements is derived for each element based on the guidance provided by ASU 2009-13.  The multiple elements that typically exist in SaaS arrangements include hosting services, the right to use UltiPro, maintenance of UltiPro (i.e., product enhancements, updates and customer support) and professional services (i.e., primarily implementation services).

The pricing for the three elements that pertain to recurring revenues (i.e., hosting services, the right to use UltiPro and maintenance of UltiPro) is bundled.  Since these three bundled elements are components of recurring revenues in the unaudited condensed consolidated statements of income, allocation of fair values to each of the three elements is not necessary and they are not reported separately.  Fair value for the bundled elements, as a whole, is determined on the basis of renewal pricing, without taking into consideration potential price increases or changes in the number of underlying employees caused by potential changes in the size of the customer in the future due to the uncertainties surrounding these potential occurrences.  These bundled elements are provided on an ongoing basis, represent undelivered elements and are recognized on a monthly basis as the related services are performed, commencing once the customer goes Live.

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Services Revenues

Services revenues primarily include revenues from fees charged for consulting services in connection with the implementation of our product solutions and, to a lesser extent, training of customers in the use of our products and fees for other services, including the provision of payroll-related forms, sales of time clocks and the printing of W-2 forms for certain customers, as well as certain reimbursable out-of-pocket expenses.  Revenues from implementation consulting services comprise the majority of total services revenues.

Revenues from implementation consulting services, billed on a time and materials basis (at an hourly rate), are recognized as these services are performed.  The total arrangement consideration is allocated to services elements in the arrangement based on their relative fair values, using the prices established when the services are sold on a stand-alone basis.  Other services are recognized as the product is shipped or as the services are rendered, depending on the specific terms of the related arrangement.

Revenues from implementation consulting services sold on a fixed-fee basis are recognized using the percentage of completion accounting method, which involves the use of estimates.  Percentage of completion is measured at each reporting date based on progress made to date compared to the total estimate to complete the implementation job.

License Revenues

From our inception through March 31, 2009, we sold perpetual licenses of UltiPro, which resulted in license revenues recognized for that period of time.  Customer support and maintenance revenues, from previously sold perpetual licenses, are derived from maintaining, supporting, and providing periodic updates of our software.  Customer support and maintenance revenues are recognized ratably over the service period, generally one year, and are included in recurring revenues.  Annual maintenance renewal fees which occur subsequent to the initial contract period are also recognized ratably over the related service period.

While we still sell on-site licenses of UltiPro on an infrequent basis, sales to new customers are only on a subscription basis (priced and billed to our customers on a PEPM basis).  We no longer sell our on-site UltiPro solutions to new customers on a perpetual license basis. We do sell licenses to existing license customers but only in relation to the customer’s employee growth or for products complementary to UltiPro for which the customer already has a perpetual license. Any such licenses are recognized as license revenues in our unaudited condensed consolidated financial statements upon the delivery of the related software product when all significant contractual obligations have been satisfied.

Recently Issued Accounting Standards

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, “Comprehensive Income” (“ASU 2011-05”).  ASU 2011-05 was issued to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  To increase the prominence of items reported in other comprehensive income and to facilitate the convergence of GAAP and International Financial Reporting Standards (“IFRS”), the FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.  ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate, but consecutive, statements.  ASU 2011-05 is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011.  Early adoption is permitted.  We have evaluated the impact of adopting ASU 2011-05 and determined the adoption of this ASU will not have an impact on our unaudited condensed consolidated financial statements, as it only requires a change in the format of our current presentation of comprehensive income.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement” (“ASU 2011-04”).  ASU 2011-04 is an amendment to Accounting Standard Codification (“ASC”) 820, “Fair Value Measurement” (“ASC 820”) to achieve common fair value measurement and disclosure requirements in GAAP and IFRS.  The amendments in ASU 2011-04 change the wording used to describe the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements.  The amendments include (i) those that clarify the intent of the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  ASU 2011-04 is effective prospectively for interim and annual periods beginning after December 15, 2011.  We have evaluated the impact of adopting ASU 2011-04 and determined the adoption will not have a material impact on our unaudited condensed consolidated financial statements.

4.          Discontinued Operations

During the second quarter of 2010, Ultimate discontinued the operations of The Ultimate Software Group UK Limited, our wholly-owned subsidiary in the United Kingdom (the “UK Subsidiary”).  Loss from discontinued operations, net of income taxes, for the three and six months ended June 30, 2010, was principally comprised of $0.9 million from the realization of a non-cash foreign currency translation adjustment.  The discontinuation of the operations of the UK Subsidiary was substantially complete as of June 30, 2010.  There was no income or loss from discontinued operations for the three and six months ended June 30, 2011.

The assets and liabilities of the UK Subsidiary were immaterial, both individually and in the aggregate, and, therefore, were not presented separately in the unaudited condensed consolidated financial statements and notes thereto as of June 30, 2011 and December 31, 2010.

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

We classify our investments in marketable securities with readily determinable fair values as available-for-sale.  Available-for-sale securities consist of debt and equity securities not classified as trading securities or as securities to be held to maturity.  Unrealized gains and losses, net of tax, on available-for-sale securities are reported as a net amount in accumulated other comprehensive income in stockholders’ equity until realized.  Gains and losses on the sale of available-for-sale securities are determined using the specific identification method.  Included in accumulated other comprehensive income was $1 thousand and $4 thousand of unrealized gains, net of tax, on available-for-sale securities at June 30, 2011 and December 31, 2010, respectively.

The amortized cost, net unrealized gain and fair value of our investments in marketable available-for-sale securities as of June 30, 2011 and December 31, 2010 are shown below (in thousands):

	As of June 30, 2011						As of December 31, 2010
			Net						Net
	Amortized		Unrealized		Fair		Amortized		Unrealized		Fair
	Cost		Gain		Value		Cost		Gain		Value
Corporate debentures and  bonds	$	4,644	$	–	$	4,644	$	2,903	$	4	$	2,907
Commercial paper		2,098		–		2,098		2,599		–		2,599
U.S. Agency bonds		–		–		–		1,513		1		1,514
U.S. Treasury bills		1,210		3		1,213		1,504		2		1,506
Non U.S. government bond		303		–		303		301		–		301
Certificates of deposit		490		–		490		490		–		490
Total investments	$	8,745	$	3	$	8,748	$	9,310	$	7	$	9,317

The amortized cost and fair value of the marketable available-for-sale securities by contractual maturity as of June 30, 2011 are shown below (in thousands):

	As of June 30, 2011
	Amortized		Fair
	Cost		Value
Due in one year or less	$	7,112	$	7,112
Due after one year		1,633		1,636
Total	$	8,745	$	8,748

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

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

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

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

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

Our assets that are measured by management at fair value on a recurring basis are generally classified within Level 1 or Level 2 of the fair value hierarchy.  The types of instruments valued based on quoted market prices in active markets include certificates of deposit.  Such instruments are generally classified within Level 1 of the fair value hierarchy.   We did not have any transfers into and out of Level 1 and Level 2 during the three and six months ended June 30, 2011.

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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 corporate debentures and bonds, commercial paper, agency bonds, U.S. Treasury bills and a non U.S. government bond.  Such instruments are generally classified within Level 2 of the fair value hierarchy.  We use consensus pricing, which is based on multiple pricing sources, to value our fixed income investments. The following table sets forth, by level within the fair value hierarchy, financial assets accounted for at fair value as of June 30, 2011 and December 31, 2010 (in thousands):

	As of June 30, 2011								As of December 31, 2010
	Total		(Level 1)		(Level 2)		(Level 3)		Total		(Level 1)		(Level 2)		(Level 3)
Corporate debentures and bonds	$	4,644	$	–	$	4,644	$	–	$	2,907	$	–	$	2,907	$	–
Commercial paper		2,098		–		2,098		–		2,599		–		2,599		–
U.S. Agency bonds		–		–		–		–		1,514		–		1,514		–
U.S. Treasury bills		1,213		–		1,213		–		1,506		–		1,506		–
Non U.S. government bond		303		–		303		–		301		–		301		–
Certificates of deposit		490		490		–		–		490		490		–		–
Total	$	8,748	$	490	$	8,258	$	–	$	9,317	$	490	$	8,827	$	–

Assets measured at fair value on a recurring basis were presented in the unaudited condensed consolidated balance sheet as of June 30, 2011 and in the audited consolidated balance sheet as of December 31, 2010 as short-term and long-term investments in marketable securities.  There were no financial liabilities accounted for at fair value as of June 30, 2011 and December 31, 2010.

6.              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 fifteen years. Leasehold improvements and assets under capital leases are amortized over the shorter of the estimated useful life of the asset or the term of the lease, which range from three to fifteen years. Maintenance and repairs are charged to expense when incurred; betterments are capitalized. Upon the sale or retirement of assets, the cost, accumulated depreciation and amortization are removed from the accounts and any gain or loss is recognized.

Property and equipment as of June 30, 2011 and December 31, 2010 consist of the following (in thousands):

	As of June 30, 2011		As of December 31,  2010
Property and equipment	$	89,756	$	81,413
Less:  accumulated depreciation and amortization		67,716		63,338
	$	22,040	$	18,075

7.Earnings Per Share

Basic earnings per share is computed by dividing income available to common stockholders (the numerator) by the weighted average number of common shares outstanding (the denominator) for the period. The computation of diluted earnings per share is similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.

Due to the discontinued operations of the UK Subsidiary, income from continuing operations was used in determining whether potential common shares are dilutive or anti-dilutive for the three and six months ended June 30, 2010.  For the three and six months ended June 30, 2010, potential common shares were dilutive due to income from continuing operations.

The following is a reconciliation of the shares used in the computation of basic and diluted net income per share for the three and six months ended June 30, 2011 and 2010 (in thousands):

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2011		2010		2011		2010
Basic weighted average shares outstanding		25,837		24,839		25,716		24,797
Effect of dilutive equity instruments		2,026		2,133		2,088		2,114
Dilutive weighted average shares outstanding		27,863		26,972		27,804		26,911
Options to purchase shares of Common Stock and
other stock-based awards outstanding which are not
included in the calculation of diluted earnings (loss)
per share because their impact is anti-dilutive		–		59		–		56

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8.           Comprehensive Income

Comprehensive income represents all changes in equity that result from transactions and other economic events in a period other than transactions with owners. Accumulated other comprehensive income, as presented in the accompanying unaudited condensed consolidated balance sheets, consists of unrealized gains and losses on available-for-sale securities and foreign currency translation adjustments, recorded net of any related income tax.

For the three and six months ended June 30, 2010, we realized a foreign currency translation adjustment for the discontinued operations of our UK Subsidiary.  This was recorded in discontinued operations and represents the reclassification of prior period net unrealized losses from other comprehensive income (loss).  There was no realized foreign currency translation adjustment for the three and six months ended June 30, 2011.

Comprehensive income for the three and six months ended June 30, 2011 and 2010 is as follows (in thousands):

	For the Three Months ended June 30,						For the Six Months ended June 30,
	2011			2010			2011			2010
Net income (loss) (1)	$	893		$	(594	)	$	1,221		$	(339	)
Other comprehensive income (loss)
Realized foreign currency translation
adjustment		–			886			–			886
Unrealized loss on investments in
marketable securities available-for-sale,
net of tax		–			(1	)		(3	)		(2	)
Unrealized gain (loss) on foreign currency
translation adjustments, net of tax		(10	)		(41	)		52			(178	)
Comprehensive income	$	883		$	250		$	1,270		$	367

(1)   Pursuant to applicable accounting rules, the amount attributable to the UK Subsidiary and accumulated in the foreign currency translation adjustment component of equity became realized in the unaudited condensed consolidated statement of operations during the second quarter of 2010, the period in which discontinuation of the operations of the UK Subsidiary was substantially complete.

9.           Foreign Currency

The financial statements of our foreign subsidiary, The Ultimate Software Group of Canada, Inc. (“Ultimate Canada”), have been translated into U.S. dollars.  The functional currency of Ultimate Canada  is the Canadian dollar.  Assets and liabilities are translated into U.S. dollars at period-end exchange rates.  Income and expenses are translated at the average exchange rate for the reporting period.  The resulting translation adjustments, representing unrealized gains or losses, are included in unaudited condensed consolidated stockholders’ equity as a component of accumulated other comprehensive income.  Realized gains and losses resulting from foreign exchange transactions are included in total operating expenses in the unaudited condensed consolidated statements of income as presented in the table below (in thousands).  Included in accumulated other comprehensive income, as presented in the unaudited condensed consolidated balance sheets, is $0.2 million and $0.1 million of unrealized translation gains at June 30, 2011 and at December 31, 2010, respectively.

Included in comprehensive income for the three and six months ended June 30, 2011 and 2010 were a realized loss on foreign currency translation and cumulative unrealized foreign currency translation gains (losses), as follows:

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2011			2010			2011		2010
Realized foreign currency translation loss	$	–		$	886		$	–	$	886
Unrealized foreign currency translation gains (losses)	$	(10	)	$	(41	)	$	52	$	(178	)

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10.           Stock-Based Compensation

Summary of Plans

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

As of June 30, 2011, the aggregate number of shares of Common Stock that were available to be issued under all Awards granted under the Plan was 805,383 shares.

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2011		2010		2011		2010
Non-cash stock-based compensation expense:
Cost of recurring revenues	$	350	$	224	$	679	$	441
Cost of services revenues		371		322		747		663
Sales and marketing		1,713		1,642		3,510		3,361
Research and development		410		341		794		668
General and administrative		925		805		1,889		1,592
Total non-cash stock-based compensation expense	$	3,769	$	3,334	$	7,619	$	6,725

Net cash proceeds from the exercise of options were $2.4 million and $7.4 million for the three and six months ended June 30, 2011, respectively, and $2.6 million and $4.9 million for the three and six months ended June 30, 2010, respectively. There was a $1.3 million and $1.7 million income tax benefit recognized in additional paid-in capital from the realization of excess stock-based payment deductions during the three and six months ended June 30, 2011, respectively and a $0.3 million and $1.0 million income tax benefit recognized in additional paid-in capital from the realization of excess stock-based payment deductions during the three and six months ended June 30, 2010, respectively.   

Stock Option, Restricted Stock and Restricted Stock Unit Activity

There were no options granted during the six months ended June 30, 2011.  The following table summarizes stock option activity (for previously granted options) for the six months ended June 30, 2011 (in thousands, except per share amounts):

Options	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2010		3,015		$	19.40		5.07	$	88,136
Granted		–			–		–		–
Exercised		(414	)		17.89		–		–
Forfeited or expired		(15	)		18.72		–		–
Outstanding at June 30, 2011		2,586		$	19.65		4.66	$	89,977
Exercisable at June 30, 2011		2,524		$	19.44		4.60	$	88,332

The aggregate intrinsic value of options in the table above represents total pretax intrinsic value (i.e., the difference between the closing price of Ultimate’s Common Stock on the last trading day of the reporting period and the exercise price times the number of shares) that would have been received by the option holders had all option holders exercised their options on June 30, 2011.  The amount of the aggregate intrinsic value changes, based on the fair value of our Common Stock.  Total intrinsic value of options exercised was $6.5 million and $14.9 million for the three and six months ended June 30, 2011, respectively, and $6.2 million and $9.2 million for the three and six months ended June 30, 2010, respectively.  Total fair value of options vested was $0.3 million and $1.6 million for the three and six months ended June 30, 2011, respectively, and $0.5 million and $3.9 million for the three and six months ended June 30, 2010, respectively.

As of June 30, 2011, $0.1 million of total unrecognized compensation costs related to non-vested options is expected to be recognized over a weighted average period of 0.14 years.

During the three months ended June 30, 2011 and June 30, 2010, we granted restricted stock awards for 5,851 shares and 8,210 shares, respectively, of Common Stock to non-employee directors.  There were 19,450 and 15,375 restricted stock unit awards granted to employees during the three months ended June 30, 2011 and June 30, 2010, respectively.

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During the three months ended June 30, 2011, 60,000 shares of Common Stock previously issued under restricted stock awards became vested and were released.  During the three months ended June 30, 2010, there were no shares of Common Stock previously issued under restricted stock awards that became vested.  For the three months ended June 30, 2011, 20,079 of these shares were retained by Ultimate and not released, in satisfaction of withholding tax requirements applicable to payment of such awards in the amounts of $1.1 million, while 39,921 of such shares were released to the holders of such awards.

During the three months ended June 30, 2011, 7,409 shares became payable under restricted stock unit awards that vested and were released during such period.  Of these shares, 2,502 were retained by Ultimate and not issued, in satisfaction of withholding tax requirements applicable to payment of such awards in the amount of $0.1 million, while 4,907 of such shares were issued to the holders of such awards.  During the three months ended June 30, 2010, 3,006 shares became payable under restricted stock unit awards that vested and were released during such period.  1,127 of such shares were retained by Ultimate and not issued, in satisfaction of withholding tax requirements applicable to payment of such awards in the amount of $36 thousand, while 1,879 of such shares were issued to the holders of such awards.

The following table summarizes restricted stock award and restricted stock unit activity for the six months ended June 30, 2011 (in thousands, except per share amounts):

	Restricted Stock Awards					Restricted Stock Unit Awards
				Weighted
				Average
				Grant Date
	Shares			Fair Value		Shares
Outstanding at December 31, 2010		1,307		$	26.64		336
Granted		13			53.44		187
Vested and Released		(105	)		25.85		(101	)
Forfeited or expired		–			–		(6	)
Outstanding at June 30, 2011		1,215		$	26.99		416

As of June 30, 2011, $12.6 million of total unrecognized compensation costs related to non-vested restricted stock awards were expected to be recognized over a weighted average period of 1.5 years.  As of June 30, 2011, $12.0 million of total unrecognized compensation costs related to non-vested restricted stock unit awards were expected to be recognized over a weighted average period of 2.0 years.

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

The following discussion of the financial condition and results of operations of The Ultimate Software Group, Inc. and subsidiaries (“Ultimate,” “we,” “us,” or “our”) should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q (the “Form 10-Q”) and in Ultimate’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2011 (the “Form 10-K”).

Ultimate’s significant accounting policies discussed in Note 3 to its audited consolidated financial statements for the fiscal year ended December 31, 2010, included in the Form 10-K, have not significantly changed with the exception of our revenue recognition policy due to the adoption of Accounting Standards Update No. 2009-13, “ Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”) as discussed above in Note 3 to the unaudited condensed consolidated financial statements.

Overview

Ultimate is a leading provider of unified human capital management (“HCM”) software-as-a-service (“SaaS”) solutions for global businesses.

Ultimate’s UltiPro software (“UltiPro”) is a comprehensive SaaS-based solution delivered primarily to organizations based in the United States and Canada and designed to deliver the functionality businesses need to manage the complete employment life cycle from recruitment to retirement. The solution includes feature sets for talent acquisition and onboarding, human resources (“HR”) management and compliance, benefits management and online enrollment, payroll, performance management, learning management, salary planning and budgeting for compensation management, reporting and analytical decision-making tools, and time and attendance.  UltiPro has role-based self-service capabilities for executives, managers, administrators, and employees whether they are in or out of the office, including an UltiPro application for use on the iPhone or iPad.

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

UltiPro is marketed as two solution suites, based on company size.  UltiPro Enterprise (“Enterprise”) is designed to address the needs of companies with 1,000 or more employees and is delivered primarily through SaaS but is also available as an on-premise solution.  UltiPro Workplace (“Workplace”) is designed for companies with fewer than 1,000 employees and is delivered exclusively through SaaS.  UltiPro Workplace provides medium-sized and smaller companies with nearly all the features that larger Enterprise companies have with UltiPro, plus a bundled services package. Since many companies in this market do not have information technology staff on their premises to help with system issues, UltiPro Workplace is designed to give these customers a high degree of convenience by handling system setup, business rules, and other situations for customers “behind the scenes.”  UltiPro is marketed primarily through Ultimate’s Enterprise and Workplace direct sales teams.

In addition to UltiPro’s core HCM functionality, our customers have the option to purchase a number of additional features on a per-employee-per-month (“PEPM”) basis, which are available to enhance the functionality of UltiPro’s core features and which are based on the particular business needs of the customers.  These optional UltiPro features currently include (i) the talent management suite of products (recruitment, onboarding, performance management, learning management, salary planning and budgeting for compensation management, and employee relations tools for managing disciplinary actions, grievances, and succession planning); (ii) benefits enrollment; (iii) time, attendance and scheduling; (iv) time management; (v) tax filing; (vi) wage attachments; and (vii) other optional features (collectively, “Optional Features”).  All Optional Features are individually priced solely on a subscription basis.  Some of the Optional Features are available to both Enterprise and Workplace customers while others are available exclusively to either Enterprise or Workplace customers, and availability is based on the needs of the respective customer types, the number of their employees and the complexity of their HCM environment.

During the second half of 2010, we introduced our Partners for Life program to our customers. Our Partners for Life program is designed to make it easier for customers to leverage the full scope of UltiPro’s features and reach more users in our customers’ organizations. The incremental benefit for the Partners for Life program is that we enhance the quality of our customer relationships and encourage increased customer loyalty, as well as a readiness for the customer to be a reference for us.  As part of the Partners for Life program, we changed the pricing method for our services from a time and materials offering to a fixed fee offering, with the expected objective of lowering the total cost of services charged to each customer.  For more information about the Partners for Life program, see the discussion of services revenues under “Results of Operations – Revenues” below.

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The key drivers of our business are (i) growth in recurring revenues; (ii) the retention of the underlying customers, once our solutions are sold (“Customer Retention”) and (iii) management’s control of operating expense growth.  For the quarter ended June 30, 2011, our (i) recurring revenues grew by 26%, compared with the same quarter last year, (ii) Customer Retention exceeded 96%, on a trailing twelve-month basis, and (iii) operating expenses grew by 11% compared with the same quarter last year.

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 and services.  We provide our sales personnel with comprehensive and continuing training with respect to technology and market place developments.  Aside from sales commissions, we also provide various incentives to encourage our sales representatives, including stock-based compensation awards based upon performance.

The HCM market is intensely competitive.  We address competitive pressures through improvements and enhancements to our products and services, the development of additional features of UltiPro and a comprehensive marketing team and process that distinguishes Ultimate and its products from the competition.  Our focus on customer service, which enables us to maintain a high Customer Retention rate, also helps us address competitive pressures.

As our business has grown, we have become increasingly subject to the risks arising from adverse changes in domestic and global economic conditions.  If general economic conditions were to deteriorate, we may experience delays in our sales cycles, increased pressure from prospective customers to offer discounts and increased pressure from existing customers to renew expiring recurring revenue agreements for lower amounts.  We address continuing economic pressures by, among other things, efforts to control growth of our operating expenses through the monitoring of controllable costs and vendor negotiations.

Ultimate has two primary revenue sources:  recurring revenues and services revenues.  Revenues from our SaaS Offering and customer support and maintenance revenues are the primary components of recurring revenues.  The majority of services revenues are derived from implementation services.

We discontinued selling our on-site UltiPro solutions to new customers on a perpetual license basis, although we infrequently continue to sell on-site UltiPro solutions on a subscription basis (priced and billed to customers on a PEPM basis). We sell licenses to existing license customers but only in relation to the customer’s employee growth or for Optional Features if the customer already has a perpetual license for the on-site UltiPro solutions.  As perpetual license agreements were sold, annual maintenance contracts (priced as a percentage of the related license fee) accompanied those agreements.  Maintenance contracts typically have a one-year term with annual renewal periods thereafter.

As SaaS units are sold, the recurring revenue backlog associated with the SaaS Offering grows, enhancing the predictability of future revenue streams.  SaaS revenues include ongoing monthly subscription fees, priced on a PEPM basis, and, to a lesser extent, a one-time upfront (or setup) fee, priced on a per-employee basis.  Revenue recognition for the SaaS Offering is triggered when the customer processes its first payroll using UltiPro (or goes “Live”).  When a SaaS customer goes Live, we begin recognizing the associated ongoing monthly PEPM fees and the related upfront fees are recognized as recurring subscription revenues ratably over the term of the related contract (typically 24 months).

Critical Accounting Estimates

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

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Results of Operations

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

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2011			2010			2011			2010
Revenues:
Recurring		81.0	%		75.6	%		79.2	%		73.2	%
Services		18.3			23.8			19.8			25.9
License		0.7			0.6			1.0			0.9
Total revenues		100.0			100.0			100.0			100.0
Cost of revenues:
Recurring		24.2			22.0			23.5			21.2
Services		18.9			21.7			20.2			22.8
License		0.1			0.1			0.2			0.1
Total cost of revenues		43.2			43.8			43.9			44.1
Operating expenses:
Sales and marketing		24.1			26.7			25.4			26.9
Research and development		19.3			19.2			18.9			18.8
General and administrative		9.0			9.4			8.8			9.2
Total operating expenses		52.4			55.3			53.1			54.9
Operating income		4.4			0.9			3.0			1.0
Other income (expense):
Interest expense and other		(0.2	)		(0.1	)		(0.3	)		(0.1	)
Other income, net		–			–			–			–
Total other expense, net		(0.2	)		(0.1	)		(0.3	)		(0.1	)
Income from continuing operations
before income taxes		4.2			0.8			2.7			0.9
Provision for income taxes		(2.8	)		(0.3	)		(1.8	)		(0.4	)
Income from continuing operations		1.4			0.5			0.9			0.5
Loss from discontinued operations,
net of taxes		–			(1.6	)		–			(0.8	)
Net income (loss)		1.4	%		(1.1	) %		0.9	%		(0.3	) %

Revenues

Our revenues are derived from recurring revenues and services revenues and, to a lesser extent, license revenues.

Total revenues increased 17.3% to $64.2 million for the three months ended June 30, 2011 from $54.7 million for the three months ended June 30, 2010, and 16.6% to $ 128.7 million for the six months ended June 30, 2011 from $110.4 million for the six months ended June 30, 2010.

Recurring revenues increased 25.7 % to $52.0 million for the three months ended June 30, 2011 from $41.4 million for the three months ended June 30, 2010 and 26.2% to $102.0 million for the six months ended June 30, 2011 from $80.8 million for the six months ended June 30, 2010.  The increases for the three and six months ended June 30, 2011 were primarily due to increased revenues from our SaaS Offering, which were partially offset by decreased maintenance revenues.

a) Revenues from our SaaS Offering increased 32.1% for the three months ended June 30, 2011 and 33.1% for the six months ended June 30, 2011, both in comparison to the same period in 2010.  These increases were based on the revenue impact of incremental units sold that have gone Live since June 30, 2010, including the UltiPro core product and, to a lesser extent, Optional Features of UltiPro.  Recognition of recurring subscription revenues from our SaaS Offering begins when the related customer goes Live.

b) Customer support and maintenance revenues decreased slightly, by 0.8%, for the three months ended June 30, 2011, and by 1.3% for the six months ended June 30, 2011, both in comparison to the same period in 2010.  These decreases were primarily due to the fact that we no longer sell perpetual licenses to new customers, partially offset by maintenance revenues from annual renewals from existing license customers.  Maintenance revenues are recognized over the initial term of the related license contract, which is typically 12 months, and then on a monthly recurring basis thereafter, as the maintenance contracts renew annually.

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Services revenues decreased 9.8% to $11.8 million for the three months ended June 30, 2011 from $13.0 million for the three months ended June 30, 2010 and 10.9% to $25.5 million for the six months ended June 30, 2011 from $28.6 million for the six months ended June 30, 2010. The decreases for the three and six months ended June 30, 2011 were mainly due to the transition to our Partners for Life program, which began in late 2010 and is ramping up in 2011. The Partners for Life program changed the method by which we charge customers for our services that are delivered primarily over the period leading up to the point the customer goes Live (the “Time to Live Period”). As new sales are generated, we charge a fixed fee for services based on the number of the customer’s employees, as opposed to our former billing method for new sales, which included charging customers on a time and materials basis as these services were provided. The Partners for Life program was designed to lower the total cost of services charged to each customer primarily over the Time to Live Period for UltiPro and/or Optional Features, through a fixed fee, as compared with the former time and materials program. Partially offsetting the decrease in services revenues attributable to the Partners for Life program were increased revenues from other services, which included higher revenues from printing W-2 forms for our customers (which occurred in the first quarter of 2011) and higher revenues from increased sales of time clocks to our customers.

License revenues increased 38.1% to $0.4 million for the three months ended June 30, 2011, from $0.3 million for the three months ended June 30, 2010. For the six months ended June 30, 2011, license revenues increased 34.0% to $1.3 million from $0.9 million for the six months ended June 30, 2010.  These increases were principally due to the employee growth of our underlying existing customers that previously purchased license agreements from us.

Cost of Revenues

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

Total cost of revenues increased 15.7% to $27.7 million for the three months ended June 30, 2011 from $24.0 million for the three months ended June 30, 2010 and 16.2% to $56.5 million for the six months ended June 30, 2011 from $48.7 million for the six months ended June 30, 2010.

Cost of recurring revenues increased 29.0% to $15.5 million for the three months ended June 30, 2011 from $12.0 million for the three months ended June 30, 2010 and 28.9% to $30.2 million for the six months ended June 30, 2011 from $23.5 million for the six months ended June 30, 2010. The $3.5 million and $6.7 million increases in cost of recurring revenues for the three and six months ended June 30, 2011, respectively, were primarily due to increases in both maintenance costs and SaaS costs.  Maintenance costs increased primarily due to higher labor costs to support our growing customer base.  SaaS costs increased principally as a result of the growth in SaaS operations and increased sales, including increased labor costs, costs related to our tax filing services (as we continue to grow that business) and, to a lesser extent, increased hosting data center costs.

Cost of services revenues increased 1.9% to $12.1 million for the three months ended June 30, 2011 from $11.9 million for the three months ended June 30, 2010, and 3.9% to $26.0 million for the six months ended June 30, 2011 from $25.1 million for the six months ended June 30, 2010. Cost of services revenues increased for the three months ended June 30, 2011 primarily due to increased costs of time clocks, which correlate with the increased revenues from these other services.  Cost of services revenues increased for the six months ended June 30, 2011 primarily due to an increase in costs for other services, including increased costs of time clocks and higher costs related to printing and shipping W-2 forms for our customers.

Cost of license revenues increased 100.0% to $0.1 million for the three months ended June 30, 2011 from $50 thousand for the three months ended June 30, 2010 and 82.0% to $0.3 million for the six months ended June 30, 2011 from $0.2 million for the six months ended June 30, 2010.  The increases in cost of license revenues for the three and six months ended June 30, 2011, as compared with the same periods in 2010, were primarily related to the growth in the number of employees of our customers that previously purchased a perpetual license. These increases (over the 2010 comparable periods) correlate with the increases in license revenues in 2011 for both the three-month and six-month periods ended June 30, 2011.

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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 6.5% to $15.5 million for the three months ended June 30, 2011 from $14.6 million for the three months ended June 30, 2010, and 9.9% to $32.6 million for the six months ended June 30, 2011 from $29.7 million for the six months ended June 30, 2010. The $0.9 million increase for the three months ended June 30, 2011  was primarily due to increased labor and related costs (including higher sales commissions related to increased SaaS sales).  The $2.9 million increase for the six months ended June 30, 2011 was primarily due to increased labor and related costs (including higher sales commissions related to increased SaaS sales) and costs associated with our Ultimate Partner Forum, known as Connections (which is our national customer conference held in 2011 and not in 2010), partially offset by lower advertising and marketing expenses.  Commissions on SaaS sales are amortized over the initial contract term (typically 24 months) commencing on the Live date, which corresponds to the related SaaS revenue recognition.

Research and Development

Research and development expenses consist primarily of software development personnel costs.  Research and development expenses increased 17.6% to $12.4 million for the three months ended June 30, 2011 from $10.5 million for the three months ended June 30, 2010, and 17.3% to $24.3 million for the six months ended June 30, 2011 from $20.8 million for the six months ended June 30, 2010 principally due to higher labor costs related to the ongoing development of UltiPro and complementary products, including the impact of increased personnel costs (predominantly from additional headcount) and, to a lesser extent, increased third-party consulting costs.

General and Administrative

General and administrative expenses consist primarily of salaries and benefits of executive, administrative and financial personnel, as well as external professional fees and the provision for doubtful accounts.  General and administrative expenses increased 11.5% to $5.8 million for the three months ended June 30, 2011 from $5.2 million for the three months ended June 30, 2010 and increased 11.8 % to $11.4 million for the six months ended June 30, 2011 from $10.2 million for the six months ended June 30, 2010.  The $0.6 million and $1.2 million increases in general and administrative expenses were primarily due to higher labor and related costs.

Income Taxes

Income taxes related to continuing operations included a consolidated provision of $1.8 million for the three months ended June 30, 2011 and $0.2 million for the three months ended June 30, 2010.   Income taxes related to continuing operations included a consolidated provision of $2.3 million for the six months ended June 30, 2011 and $0.5 million for the six months ended June 30, 2010.   The effective income tax rate related to continuing operations for the six months ended June 30, 2011 and June 30, 2010 was 65.8% and 44.0%, respectively.   The increase in effective income tax rate is primarily attributable to a benefit in the six months ended June 30, 2010 resulting from a decrease in a foreign valuation allowance and an expense attributable to an increase in nondeductible expenses, primarily related to compensation, in the six months ended June 30, 2011.

At December 31, 2010, we had approximately $91.6 million of net operating loss carryforwards for Federal income tax reporting purposes, available to offset future taxable income.  As of that date, we did not have any net operating loss carryforwards for foreign income tax reporting purposes available to offset future taxable income.  The $91.6 million was attributable to deductions from the exercise of non-qualified employee, and non-employee director, stock options and the vesting of restricted stock units and restricted stock awards, the benefit of which will primarily be credited to paid-in capital and deferred tax asset when realized.  Such carryforwards expire from 2011 through 2030.  Utilization of such carryforwards may be limited as a result of cumulative ownership changes in Ultimate’s equity instruments.

We recognized $23.8 million of deferred tax assets, net of deferred tax liabilities, as of June 30, 2011.  If estimates of taxable income are decreased, a valuation allowance may need to be provided for some or all deferred tax assets, which will cause an increase in income tax expense.  Management continues to apply the exception to the comprehensive recognition of deferred income taxes to the undistributed earnings of our foreign subsidiary, Ultimate Canada.  Accordingly, deferred income taxes were not recognized on the undistributed earnings of Ultimate Canada, the liquid assets of which are not deemed material.

16

Liquidity and Capital Resources

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

As of June 30, 2011, we had $54.0 million in cash, cash equivalents and total investments in marketable securities, reflecting a net increase of $3.8 million since December 31, 2010.

This $3.8 million increase was primarily due to cash provided by operations of $15.2 million, partially offset by cash purchases of property and equipment (including principal payments on financed equipment) of $9.0 million, cash used to settle employee tax withholding liabilities for the vesting of restricted stock awards and restricted stock units  of $3.6 million, and the purchase of Common Stock under our previously announced stock repurchase plan (the “Stock Repurchase Plan”), net of proceeds from the issuance of Common Stock from employee stock option exercises, of $0.5 million.

Net cash provided by operating activities was $15.2 million for the six months ended June 30, 2011 as compared with $10.0 million for the six months ended June 30, 2010. This $5.2 million increase was primarily due to earnings improvement, a reduction in accounts receivable, net of deferred revenue, of $3.9 million (tied to increased collections) and a decrease in vendor payments of $1.6 million, partially offset by an increase in prepaid expenses and other current assets of $1.3 million (including the prepayment of our payroll taxes for the July 1, 2011 payroll period), and an increase in other assets of $1.4 million (principally related to long-term prepaid SaaS sales commissions).

Net cash used in investing activities was $99.6 million for the six months ended June 30, 2011 as compared with $27.1 million for the six months ended June 30, 2010.  The increase of $72.5 million from the comparable period in 2010 was primarily attributable to an increase in funds received from and held on behalf of Ultimate’s customers using the UltiPro tax filing offering (“UltiPro Tax Filing Customer Funds”) of $67.7 million, an increase in cash purchases of property and equipment of $5.2 million, and an increase in cash purchases of marketable securities of $3.1 million, partially offset by an increase in cash from the maturities of marketable securities of $3.4 million.

Net cash provided by financing activities was $88.7 million for the six months ended June 30, 2011 as compared with $16.0 million for the six months ended June 30, 2010. The $72.7 million increase was primarily related to an increase of $67.7 million in UltiPro Tax Filing Customer Funds, an increase of $5.1 million attributable to purchases of Common Stock under the Stock Repurchase Plan and a $2.5 million increase in proceeds from the issuances of Common Stock from employee stock option exercises, partially offset by a $3.1 million increase in cash used to settle the employee tax withholding liability for vesting of restricted stock awards and restricted stock units.

Days sales outstanding, calculated on a trailing three-month basis, as of June 30, 2011 and June 30, 2010, were 66 days and 70 days, respectively.

Deferred revenues were $78.0 million at June 30, 2011, as compared to $78.1 million at December 31, 2010.  The decrease of $0.1 million in deferred revenues was primarily due to decreased deferred maintenance revenues, partially offset by increased deferred services revenues.  Substantially all of the total balance in deferred revenues is related to future recurring revenues, including deferred revenues related to SaaS.

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

 We did not have any material commitments for capital expenditures as of June 30, 2011.

17

Off-Balance Sheet Arrangements

We do not, and as of June 30, 2011 we did not, have any off-balance sheet arrangements (as that term is defined in applicable SEC rules).

Quarterly Fluctuations

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

Forward-Looking Statements

The foregoing Management’s Discussion and Analysis of Financial Condition and Results of Operations and the following Quantitative and Qualitative Disclosures about Market Risk contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent our expectations or beliefs, including, but not limited to, our expectations concerning our operations and financial performance and condition. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict. Ultimate’s actual results could differ materially from those contained in the forward-looking statements due to risks and uncertainties associated with fluctuations in our quarterly operating results, concentration of our  product offerings, development risks involved with new products and technologies, competition, our contractual relationships with third parties, contract renewals with business partners, compliance by our customers with the terms of their contracts with us, and other factors disclosed in Ultimate’s filings with the SEC.  Other factors that may cause such differences include, but are not limited to, those discussed in this Form 10-Q and the Form 10-K, including the risk factors set forth in Part I, Item 1A of the Form 10-K. Ultimate undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

18

ITEM 3.                      Quantitative and Qualitative Disclosures About Market Risk

In the ordinary course of Ultimate’s operations, we are exposed to certain market risks, primarily interest rate risk and foreign currency risk.  Risks that are either non-financial or non-quantifiable, such as political, economic, tax, or regulatory risks, are not included in the following assessment of our market risks.

Interest Rate Risk. Ultimate is subject to financial market risks, including changes in interest rates which influence the valuations of its fixed income investment portfolio.  Changes in interest rates could also impact Ultimate’s anticipated interest income from interest-bearing cash accounts, or cash equivalents and investments in marketable securities.  We manage financial market risks, including interest rate risks, in accordance with our investment guideline objectives, including:

· Maximum safety of principal;

· Maintenance of appropriate liquidity for regular cash needs;

· Maximum yields in relationship to guidelines and market conditions;

· Diversification of risks; and

· Fiduciary control of all investments.

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

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

As of June 30, 2011, total investments in available-for-sale marketable securities were $8.7 million.

As of June 30, 2011, virtually all of the investments in Ultimate’s portfolio were at fixed rates (with a weighted average interest rate of 0.4% per annum).

To illustrate the potential impact of changes in interest rates, Ultimate has performed an analysis based on its June 30, 2011 unaudited condensed consolidated balance sheet and assuming no changes in its investments.  Under this analysis, an immediate and sustained 100 basis point increase in the various base rates would result in a decrease in the fair value of Ultimate’s total portfolio of approximately $53 thousand over the next 12 months.  An immediate and sustained 100 basis point decrease in the various base rates would result in an increase in the fair value of Ultimate’s total portfolio of approximately $53 thousand over the next 12 months.

Foreign Currency Risk.  Ultimate has foreign currency risks related to its revenue and operating expenses denominated in currencies other than the U.S. dollar.  Management does not believe movements in the foreign currencies in which Ultimate transacts business will significantly affect future net income.

ITEM 4.                      Controls and Procedures

(a) Evaluation of disclosure controls and procedures.  Ultimate carried out an evaluation, under the supervision and with the participation of Ultimate’s management, including the Chief Executive Officer (the “CEO”) and the Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of Ultimate’s disclosure controls and procedures as of the end of the period covered by this Form 10-Q pursuant to Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, Ultimate’s management, including the CEO and CFO, concluded that, as of June 30, 2011, Ultimate’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in Ultimate’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.  Ultimate’s disclosure controls and procedures were designed to provide reasonable assurance as to the achievement of these objectives.  It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events and thus has inherent limitations.  Therefore, even those systems determined to be effective can only provide reasonable assurance as to the achievement of their objectives.

(b) Changes in internal control over financial reporting.  There have been no changes during the quarter ended June 30, 2011 in Ultimate’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Ultimate’s internal control over financial reporting.

19

PART II – OTHER INFORMATION

ITEM 1A.                      Risk Factors

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

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

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

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

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

On October 26, 2009, Ultimate’s Board of Directors extended the Stock Repurchase Plan further by authorizing the repurchase of up to 1,000,000 additional shares of Ultimate’s issued and outstanding Common Stock.

 As of June 30, 2011, Ultimate had purchased 3,744,503 shares of Ultimate’s issued and outstanding Common Stock under the Stock Repurchase Plan, with 255,497 shares available for repurchase in the future.  The number of shares of Common Stock repurchased during the three months ended June 30, 2011, the average price paid per share for such repurchases, the total cumulative number of shares purchased and the maximum number of shares that may yet be purchased under the Stock Repurchase Plan as of June 30, 2011, are as follows:

Period	Total Number of Shares Purchased (1)		Average Price Paid Per Share		Total Cumulative Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)		Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
April 1 – 30, 2011		–		–		3,594,825		405,175
May 1 – 31, 2011		57,016		53.82		3,651,841		348,159
June 1 – 30, 2011		92,662		52.41		3,744,503		255,497
Total		149,678	$	52.95		3,744,503		255,497
(1) All shares were purchased through the publicly announced Stock Repurchase Plan in open-market transactions.

20

ITEM 6.                      Exhibits

Number	Description
10.1	Commercial lease between AG/LPC Griffin Towers, L.P.,
	(“Landlord”) and Ultimate, dated February 23, 2011 *
31.1	Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended *
31.2	Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended *
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
	Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended *
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
	Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended *

____________________

*  Filed herewith.

21

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:           August 9, 2011	By:	/s/ Mitchell K. Dauerman
		Mitchell K. Dauerman
		Executive Vice President, Chief Financial Officer and Treasurer (Authorized Signatory and Principal Financial and Accounting Officer)

22

EX-31.1

   Exhibit 31.1

CERTIFICATION

I, Scott Scherr, certify that:

1. I have reviewed this Form 10-Q of The Ultimate Software Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and

5. The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.

Date:  August 9, 2011

/s/ Scott Scherr                            

Scott Scherr

Chief Executive Officer

 23

EX-31.2

 Exhibit 31.2

CERTIFICATION

I, Mitchell K. Dauerman, certify that:

1. I have reviewed this Form 10-Q of The Ultimate Software Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and

5. The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.

Date:  August 9,  2011

/s/  Mitchell K. Dauerman                                                       

Mitchell K. Dauerman

Chief Financial Officer

(Principal Financial and Accounting Officer)

24

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Scott Scherr, Chief Executive Officer of The Ultimate Software Group, Inc., hereby certify to the best of my knowledge and belief that this Quarterly Report on Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and that the information contained in this Quarterly Report on Form 10-Q fairly represents, in all material respects, the financial condition and results of operations of The Ultimate Software Group, Inc.

/s/ Scott Scherr

Scott Scherr

Chief Executive Officer

Date: August 9, 2011

25

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Mitchell K. Dauerman, Chief Financial Officer of The Ultimate Software Group, Inc., hereby certify to the best of my knowledge and belief that this Quarterly Report on Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and that the information contained in this Quarterly Report on Form 10-Q fairly represents, in all material respects, the financial condition and results of operations of The Ultimate Software Group, Inc.

/s/ Mitchell K. Dauerman

Mitchell K. Dauerman

Chief Financial Officer

(Principal Financial and Accounting Officer)

Date: August 9, 2011

26

XML



UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Share data	Jun. 30, 2011	Dec. 31, 2010
Current assets:
Allowance for doubtful accounts	$ 600	$ 800
Stockholders' equity:
Preferred Stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred Stock, shares authorized (in shares)	2,000,000	2,000,000
Preferred Stock, shares issued (in shares)	0	0
Preferred Stock, shares outstanding (in shares)	0	0
Common Stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common Stock, shares authorized (in shares)	50,000,000	50,000,000
Common Stock, shares issued (in shares)	29,578,959	29,027,277
Treasury stock, shares (in shares)	3,744,503	3,594,825
Series A Junior Participating Preferred Stock [Member]
Stockholders' equity:
Preferred Stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred Stock, shares authorized (in shares)	500,000	500,000
Preferred Stock, shares issued (in shares)	0	0
Preferred Stock, shares outstanding (in shares)	0	0

XML



UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Per Share data	3 Months Ended				6 Months Ended
	Jun. 30, 2011		Jun. 30, 2010		Jun. 30, 2011		Jun. 30, 2010
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS [Abstract]
Recurring	$ 52,002		$ 41,365		$ 101,950		$ 80,813
Services	11,761		13,032		25,490		28,613
License	442		320		1,270		948
Total revenues	64,205		54,717		128,710		110,374
Recurring	15,543		12,048		30,236		23,452
Services	12,104		11,877		26,033		25,058
License	100		50		273		150
Total cost of revenues	27,747		23,975		56,542		48,660
Gross profit	36,458		30,742		72,168		61,714
Sales and marketing	15,524		14,580		32,647		29,696
Research and development	12,370		10,520		24,337		20,753
General and administrative	5,762		5,169		11,375		10,170
Total operating expenses	33,656		30,269		68,359		60,619
Operating income	2,802		473		3,809		1,095
Interest expense and other	(143)		(61)		(301)		(106)
Other income, net	26		45		60		67
Total other (expense), net	(117)		(16)		(241)		(39)
Income from continuing operations before income taxes	2,685		457		3,568		1,056
Provision for income taxes	(1,792)		(186)		(2,347)		(465)
Income from continuing operations	893		271		1,221		591
Loss from discontinued operations, net of income taxes	0		(865)		0		(930)
Net income (loss)	$ 893	[1]	$ (594)	[1]	$ 1,221	[1]	$ (339)	[1]
Earnings from continuing operations (in dollars per share)	$ 0.03		$ 0.01		$ 0.05		$ 0.02
Loss from discontinued operations (in dollars per share)	$ 0		$ (0.03)		$ 0		$ (0.04)
Total (in dollars per share)	$ 0.03		$ (0.02)		$ 0.05		$ (0.02)
Earnings from continuing operations (in dollars per share)	$ 0.03		$ 0.01		$ 0.04		$ 0.02
Loss from discontinued operations (in dollars per share)	$ 0		$ (0.03)		$ 0		$ (0.03)
Total (in dollars per share)	$ 0.03		$ (0.02)		$ 0.04		$ (0.01)
Basic (in shares)	25,837		24,839		25,716		24,797
Diluted (in shares)	27,863		26,972		27,804		26,911

[1] Pursuant to applicable accounting rules, the amount attributable to the UK Subsidiary and accumulated in the translation adjustment component of equity became realized in the unaudited condensed consolidated statement of operations during the second quarter of 2010, the period in which discontinuation of the operations for the UK Subsidiary were substantially complete.

XML



Nature of Operations (Details)	Jun. 30, 2011
Nature of Operations [Abstract]
Number of solution suites marketed	2
UltiPro Enterprise solution suite, company size, minimum number of employees	1,000
UltiPro Workplace solution suite, company size, maximum number of employees	1,000

XML



Document And Entity Information (USD $) In Millions, except Share data	6 Months Ended
	Jun. 30, 2011	Aug. 03, 2011	Jun. 30, 2010
Entity Registrant Name	ULTIMATE SOFTWARE GROUP INC
Entity Central Index Key	0001016125
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	Yes
Entity Voluntary Filers	No
Entity Current Reporting Status	No
Entity Filer Category	Large Accelerated Filer
Entity Public Float			$ 784.7
Entity Common Stock, Shares Outstanding		25,860,210
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q2
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2011

XML



Investments in Marketable Securities and Fair Value of Financial Instruments (Details) (USD $) In Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2011	Dec. 31, 2010
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	$ 8,745	$ 9,310
Net Unrealized Gain	3	7
Fair Value	8,748	9,317
Due in one year or less	7,112
Due after one year	1,633
Total	8,745
Due in one year or less	7,112
Due after one year	1,636
Total	8,748	9,317
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Corporate debentures and bonds	4,644	2,907
Commercial paper	2,098	2,599
U.S. Agency bonds	0	1,514
U.S. Treasury bills	1,213	1,506
Non U.S. government bond	303	301
Certificates of deposit	490	490
Total	8,748	9,317
Unrealized gains on available-for-sale securities	1	4
Corporate debentures and bonds [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	4,644	2,903
Net Unrealized Gain	0	4
Fair Value	4,644	2,907
Commercial paper [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	2,098	2,599
Net Unrealized Gain	0	0
Fair Value	2,098	2,599
U.S. Agency bonds [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	0	1,513
Net Unrealized Gain	0	1
Fair Value	0	1,514
U.S. Treasury bills [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	1,210	1,504
Net Unrealized Gain	3	2
Fair Value	1,213	1,506
Non U.S. government bond [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	303	301
Net Unrealized Gain	0	0
Fair Value	303	301
Certificates of Deposit [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	490	490
Net Unrealized Gain	0	0
Fair Value	490	490
Fair Value, Measurements, Recurring [Member] | Level 1 [Member]
Schedule of Available-for-sale Securities [Line Items]
Total	490	490
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Corporate debentures and bonds	0	0
Commercial paper	0	0
U.S. Agency bonds	0	0
U.S. Treasury bills	0	0
Non U.S. government bond	0	0
Certificates of deposit	490	490
Total	490	490
Fair Value, Measurements, Recurring [Member] | Level 2 [Member]
Schedule of Available-for-sale Securities [Line Items]
Total	8,258	8,827
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Corporate debentures and bonds	4,644	2,907
Commercial paper	2,098	2,599
U.S. Agency bonds	0	1,514
U.S. Treasury bills	1,213	1,506
Non U.S. government bond	303	301
Certificates of deposit	0	0
Total	8,258	8,827
Fair Value, Measurements, Recurring [Member] | Level 3 [Member]
Schedule of Available-for-sale Securities [Line Items]
Total	0	0
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Corporate debentures and bonds	0	0
Commercial paper	0	0
U.S. Agency bonds	0	0
U.S. Treasury bills	0	0
Non U.S. government bond	0	0
Certificates of deposit	0	0
Total	$ 0	$ 0

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Earnings Per Share

6 Months Ended

Jun. 30, 2011

Earnings Per Share [Abstract]

Earnings Per Share

7.Earnings Per Share

Basic earnings per share is computed by dividing income available to common stockholders (the numerator) by the weighted average number of common shares outstanding (the denominator) for the period. The computation of diluted earnings per share is similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.

Due to the discontinued operations of the UK Subsidiary, income from continuing operations was used in determining whether potential common shares are dilutive or anti-dilutive for the three and six months ended June 30, 2010.  For the three and six months ended June 30, 2010, potential common shares were dilutive due to income from continuing operations.

The following is a reconciliation of the shares used in the computation of basic and diluted net income per share for the three and six months ended June 30, 2011 and 2010 (in thousands):

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2011		2010		2011		2010
Basic weighted average shares outstanding		25,837		24,839		25,716		24,797
Effect of dilutive equity instruments		2,026		2,133		2,088		2,114
Dilutive weighted average shares outstanding		27,863		26,972		27,804		26,911
Options to purchase shares of Common Stock and
other stock-based awards outstanding which are not
included in the calculation of diluted earnings (loss)
per share because their impact is anti-dilutive		–		59		–		56

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Property and Equipment (Details) (USD $) In Thousands, unless otherwise specified			6 Months Ended
	Jun. 30, 2011	Dec. 31, 2010	Jun. 30, 2011 Property and equipment [Member]	Jun. 30, 2011 Leasehold improvements and assets under capital leases [Member]
Property and Equipment [Abstract]
Property and equipment, gross	$ 89,756	$ 81,413
Less: accumulated depreciation and amortization	67,716	63,338
Property and equipment, net	$ 22,040	$ 18,075
Property, Plant and Equipment [Line Items]
Estimated useful life, minimum			2	3
Estimated useful life, maximum			15	15

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Discontinued Operations (Details) (USD $) In Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Discontinued Operations [Abstract]
Loss from discontinued operations, net of income taxes	$ 0	$ 865	$ 0	$ 930

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Investments in Marketable Securities and Fair Value of Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2011

Investments in Marketable Securities and Fair Value of Financial Instruments [Abstract]

Amortized cost, net unrealized gain and fair value of investments in marketable available-for-sale securities

The amortized cost, net unrealized gain and fair value of our investments in marketable available-for-sale securities as of June 30, 2011 and December 31, 2010 are shown below (in thousands):

	As of June 30, 2011						As of December 31, 2010
			Net						Net
	Amortized		Unrealized		Fair		Amortized		Unrealized		Fair
	Cost		Gain		Value		Cost		Gain		Value
Corporate debentures and  bonds	$	4,644	$	–	$	4,644	$	2,903	$	4	$	2,907
Commercial paper		2,098		–		2,098		2,599		–		2,599
U.S. Agency bonds		–		–		–		1,513		1		1,514
U.S. Treasury bills		1,210		3		1,213		1,504		2		1,506
Non U.S. government bond		303		–		303		301		–		301
Certificates of deposit		490		–		490		490		–		490
Total investments	$	8,745	$	3	$	8,748	$	9,310	$	7	$	9,317

Amortized costs and fair value of marketable available-for-sale securities by contractual maturity

The amortized cost and fair value of the marketable available-for-sale securities by contractual maturity as of June 30, 2011 are shown below (in thousands):

	As of June 30, 2011
	Amortized		Fair
	Cost		Value
Due in one year or less	$	7,112	$	7,112
Due after one year		1,633		1,636
Total	$	8,745	$	8,748

Fair value of financial assets and liabilities, by level within the fair value hierarchy

The following table sets forth, by level within the fair value hierarchy, financial assets accounted for at fair value as of June 30, 2011 and December 31, 2010 (in thousands):

	As of June 30, 2011								As of December 31, 2010
	Total		(Level 1)		(Level 2)		(Level 3)		Total		(Level 1)		(Level 2)		(Level 3)
Corporate debentures and bonds	$	4,644	$	–	$	4,644	$	–	$	2,907	$	–	$	2,907	$	–
Commercial paper		2,098		–		2,098		–		2,599		–		2,599		–
U.S. Agency bonds		–		–		–		–		1,514		–		1,514		–
U.S. Treasury bills		1,213		–		1,213		–		1,506		–		1,506		–
Non U.S. government bond		303		–		303		–		301		–		301		–
Certificates of deposit		490		490		–		–		490		490		–		–
Total	$	8,748	$	490	$	8,258	$	–	$	9,317	$	490	$	8,827	$	–

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Summary of Significant Accounting Policies and Recent Accounting Pronouncements

6 Months Ended

Jun. 30, 2011

Summary of Significant Accounting Policies and Recent Accounting Pronouncements [Abstract]

Summary of Significant Accounting Policies and Recent Accounting Pronouncements

3.Summary of Significant Accounting Policies and Recent Accounting Pronouncements

Summary of Significant Accounting Policies

Ultimate's significant accounting policies discussed in Note 3 to its audited consolidated financial statements for the fiscal year ended December 31, 2010, included in the Form 10-K, have not significantly changed with the exception of our revenue recognition policy due to the adoption of Accounting Standards Update No. 2009-13, “ Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”) as discussed below.

Revenue Recognition

Effective January 1, 2011, we adopted ASU 2009-13 on a prospective basis.  ASU 2009-13 requires the use of the relative selling price method of allocating the total consideration to units of accounting in a multiple element arrangement and eliminates the residual method. This new accounting principle requires an entity to allocate revenue to an arrangement using the estimated selling price (“ESP”) of deliverables if it does not have vendor-specific objective evidence (“VSOE”) or third-party evidence (“TPE”) of selling price.  The adoption of ASU 2009-13 did not have a material impact on our unaudited condensed consolidated financial statements.

VSOE is the price charged when the same or similar product or service is sold separately.  We define VSOE as a median price of recent stand-alone transactions that are priced within a narrow range.

ESP is our best estimate of the selling price of an element in a transaction. If we are unable to establish selling price using either VSOE or TPE, we will use ESP in our allocation of arrangement consideration.  The objective of ESP is to determine the price at which we would transact if the product or service were sold by us on a stand-alone basis.  Our determination of ESP involves the use of a customary discount from the list (or book) price for each element, with the discounted price applied within a narrow range.  The customary discount is derived from historical data that has been analyzed to determine trends and patterns. We will analyze the customary discount used for determining ESP on no less than an annual basis.

We expect our products and services to continue to qualify as separate units of accounting under ASU 2009-13.  We evaluate each deliverable in our arrangements to determine whether they represent a separate unit of accounting.  A deliverable constitutes a separate unit of accounting when it has stand-alone value to the customers.

 There are two major elements in our multiple element arrangements for the delivery of our SaaS offering (the “SaaS Offering”), which are recurring revenues and services revenues.   Also included in our total revenues, to a much lesser degree, are the sales of software licenses.

We recognize revenues when all of the following criteria are met:

·   persuasive evidence of an arrangement exists;

·   delivery has occurred;

·   the fees are fixed and determinable; and

·   collection is considered probable.

If collection is not considered probable, we recognize revenues when the fees are collected. If the fees are not fixed and determinable, we recognize revenues when the fees become due from the customer. If non-standard acceptance periods or non-standard performance criteria are required, we recognize revenue when the acceptance period expires or upon the satisfaction of the acceptance/performance criteria, as applicable.

The majority of services revenues are recognized over the implementation period, which is from the contract execution date until the customer processes its first payroll using UltiPro (also referred to as going “Live”). SaaS revenues are recognized over the contract term, beginning in the month the customer goes Live. There was no significant change to the pattern or timing of revenue recognition for either services or SaaS elements as a result of adopting ASU 2009-13.

Recurring Revenues

Recurring revenues consist of subscription revenues recognized from our SaaS Offering, as well as customer support and maintenance revenues.

i)   SaaS subscription revenues are principally derived from per employee per month (“PEPM”) fees earned from the SaaS Offering and from sales of hosting services on a stand-alone basis to customers who already own a perpetual license (“Base Hosting”). To the extent there are upfront or setup fees associated with our SaaS Offering, the related SaaS subscription revenues are recognized ratably over the term of the related contract, commencing when the customer goes Live.  Ongoing PEPM fees from the SaaS Offering and Base Hosting are recognized as subscription revenues as the services are delivered commencing when the customer goes Live.

ii) Customer support and maintenance revenues are derived from maintaining, supporting, and  providing periodic updates of our software for our hosting services.

Under our SaaS Offering, our customers do not have the right to take possession of our software and these arrangements are considered service contracts. Fair value of multiple elements in SaaS arrangements is derived for each element based on the guidance provided by ASU 2009-13.  The multiple elements that typically exist in SaaS arrangements include hosting services, the right to use UltiPro, maintenance of UltiPro (i.e., product enhancements, updates and customer support) and professional services (i.e., primarily implementation services).

The pricing for the three elements that pertain to recurring revenues (i.e., hosting services, the right to use UltiPro and maintenance of UltiPro) is bundled.  Since these three bundled elements are components of recurring revenues in the unaudited condensed consolidated statements of income, allocation of fair values to each of the three elements is not necessary and they are not reported separately.  Fair value for the bundled elements, as a whole, is determined on the basis of renewal pricing, without taking into consideration potential price increases or changes in the number of underlying employees caused by potential changes in the size of the customer in the future due to the uncertainties surrounding these potential occurrences.  These bundled elements are provided on an ongoing basis, represent undelivered elements and are recognized on a monthly basis as the related services are performed, commencing once the customer goes Live.

Services Revenues

Services revenues primarily include revenues from fees charged for consulting services in connection with the implementation of our product solutions and, to a lesser extent, training of customers in the use of our products and fees for other services, including the provision of payroll-related forms, sales of time clocks and the printing of W-2 forms for certain customers, as well as certain reimbursable out-of-pocket expenses.  Revenues from implementation consulting services comprise the majority of total services revenues.

Revenues from implementation consulting services, billed on a time and materials basis (at an hourly rate), are recognized as these services are performed.  The total arrangement consideration is allocated to services elements in the arrangement based on their relative fair values, using the prices established when the services are sold on a stand-alone basis.  Other services are recognized as the product is shipped or as the services are rendered, depending on the specific terms of the related arrangement.

Revenues from implementation consulting services sold on a fixed-fee basis are recognized using the percentage of completion accounting method, which involves the use of estimates.  Percentage of completion is measured at each reporting date based on progress made to date compared to the total estimate to complete the implementation job.

License Revenues

From our inception through March 31, 2009, we sold perpetual licenses of UltiPro, which resulted in license revenues recognized for that period of time.  Customer support and maintenance revenues, from previously sold perpetual licenses, are derived from maintaining, supporting, and providing periodic updates of our software.  Customer support and maintenance revenues are recognized ratably over the service period, generally one year, and are included in recurring revenues.  Annual maintenance renewal fees which occur subsequent to the initial contract period are also recognized ratably over the related service period.

While we still sell on-site licenses of UltiPro on an infrequent basis, sales to new customers are only on a subscription basis (priced and billed to our customers on a PEPM basis).  We no longer sell our on-site UltiPro solutions to new customers on a perpetual license basis. We do sell licenses to existing license customers but only in relation to the customer's employee growth or for products complementary to UltiPro for which the customer already has a perpetual license. Any such licenses are recognized as license revenues in our unaudited condensed consolidated financial statements upon the delivery of the related software product when all significant contractual obligations have been satisfied.

Recently Issued Accounting Standards

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, “Comprehensive Income” (“ASU 2011-05”).  ASU 2011-05 was issued to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  To increase the prominence of items reported in other comprehensive income and to facilitate the convergence of GAAP and International Financial Reporting Standards (“IFRS”), the FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity.  ASU 2011-05 requires that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate, but consecutive, statements.  ASU 2011-05 is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011.  Early adoption is permitted.  We have evaluated the impact of adopting ASU 2011-05 and determined the adoption of this ASU will not have an impact on our unaudited condensed consolidated financial statements, as it only requires a change in the format of our current presentation of comprehensive income.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement” (“ASU 2011-04”).  ASU 2011-04 is an amendment to Accounting Standard Codification (“ASC”) 820, “Fair Value Measurement” (“ASC 820”) to achieve common fair value measurement and disclosure requirements in GAAP and IFRS.  The amendments in ASU 2011-04 change the wording used to describe the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements.  The amendments include (i) those that clarify the intent of the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  ASU 2011-04 is effective prospectively for interim and annual periods beginning after December 15, 2011.  We have evaluated the impact of adopting ASU 2011-04 and determined the adoption will not have a material impact on our unaudited condensed consolidated financial statements.

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Foreign Currency

6 Months Ended

Jun. 30, 2011

Foreign Currency [Abstract]

Foreign Currency

9.           Foreign Currency

The financial statements of our foreign subsidiary, The Ultimate Software Group of Canada, Inc. (“Ultimate Canada”), have been translated into U.S. dollars.  The functional currency of Ultimate Canada  is the Canadian dollar.  Assets and liabilities are translated into U.S. dollars at period-end exchange rates.  Income and expenses are translated at the average exchange rate for the reporting period.  The resulting translation adjustments, representing unrealized gains or losses, are included in unaudited condensed consolidated stockholders' equity as a component of accumulated other comprehensive income.  Realized gains and losses resulting from foreign exchange transactions are included in total operating expenses in the unaudited condensed consolidated statements of income as presented in the table below (in thousands).  Included in accumulated other comprehensive income, as presented in the unaudited condensed consolidated balance sheets, is $0.2 million and $0.1 million of unrealized translation gains at June 30, 2011 and at December 31, 2010, respectively.

Included in comprehensive income for the three and six months ended June 30, 2011 and 2010 were a realized loss on foreign currency translation and cumulative unrealized foreign currency translation gains (losses), as follows:

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2011			2010			2011		2010
Realized foreign currency translation loss	$	–		$	886		$	–	$	886
Unrealized foreign currency translation gains (losses)	$	(10	)	$	(41	)	$	52	$	(178	)

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Earnings Per Share (Tables)

6 Months Ended

Jun. 30, 2011

Earnings Per Share [Abstract]

Reconciliation of shares used in the computation of basic and diluted net income per share

The following is a reconciliation of the shares used in the computation of basic and diluted net income per share for the three and six months ended June 30, 2011 and 2010 (in thousands):

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2011		2010		2011		2010
Basic weighted average shares outstanding		25,837		24,839		25,716		24,797
Effect of dilutive equity instruments		2,026		2,133		2,088		2,114
Dilutive weighted average shares outstanding		27,863		26,972		27,804		26,911
Options to purchase shares of Common Stock and
other stock-based awards outstanding which are not
included in the calculation of diluted earnings (loss)
per share because their impact is anti-dilutive		–		59		–		56

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Stock Based Compensation

6 Months Ended

Jun. 30, 2011

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock-Based Compensation

10.           Stock-Based Compensation

Summary of Plans

Our Amended and Restated 2005 Equity and Incentive Plan (the “Plan”) authorizes the grant of options to non-employee directors, officers and employees of Ultimate to purchase shares of Ultimate's Common Stock.  The Plan also authorizes the grant to such persons of restricted and non-restricted shares of Common Stock, stock appreciation rights, stock units and cash performance awards (collectively, together with the options, the “Awards”).

As of June 30, 2011, the aggregate number of shares of Common Stock that were available to be issued under all Awards granted under the Plan was 805,383 shares.

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2011		2010		2011		2010
Non-cash stock-based compensation expense:
Cost of recurring revenues	$	350	$	224	$	679	$	441
Cost of services revenues		371		322		747		663
Sales and marketing		1,713		1,642		3,510		3,361
Research and development		410		341		794		668
General and administrative		925		805		1,889		1,592
Total non-cash stock-based compensation expense	$	3,769	$	3,334	$	7,619	$	6,725

Net cash proceeds from the exercise of options were $2.4 million and $7.4 million for the three and six months ended June 30, 2011, respectively, and $2.6 million and $4.9 million for the three and six months ended June 30, 2010, respectively. There was a $1.3 million and $1.7 million income tax benefit recognized in additional paid-in capital from the realization of excess stock-based payment deductions during the three and six months ended June 30, 2011, respectively and a $0.3 million and $1.0 million income tax benefit recognized in additional paid-in capital from the realization of excess stock-based payment deductions during the three and six months ended June 30, 2010, respectively.   

Stock Option, Restricted Stock and Restricted Stock Unit Activity

There were no options granted during the six months ended June 30, 2011.  The following table summarizes stock option activity (for previously granted options) for the six months ended June 30, 2011 (in thousands, except per share amounts):

Options	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2010		3,015		$	19.40		5.07	$	88,136
Granted		–			–		–		–
Exercised		(414	)		17.89		–		–
Forfeited or expired		(15	)		18.72		–		–
Outstanding at June 30, 2011		2,586		$	19.65		4.66	$	89,977
Exercisable at June 30, 2011		2,524		$	19.44		4.60	$	88,332

The aggregate intrinsic value of options in the table above represents total pretax intrinsic value (i.e., the difference between the closing price of Ultimate's Common Stock on the last trading day of the reporting period and the exercise price times the number of shares) that would have been received by the option holders had all option holders exercised their options on June 30, 2011.  The amount of the aggregate intrinsic value changes, based on the fair value of our Common Stock.  Total intrinsic value of options exercised was $6.5 million and $14.9 million for the three and six months ended June 30, 2011, respectively, and $6.2 million and $9.2 million for the three and six months ended June 30, 2010, respectively.  Total fair value of options vested was $0.3 million and $1.6 million for the three and six months ended June 30, 2011, respectively, and $0.5 million and $3.9 million for the three and six months ended June 30, 2010, respectively.

As of June 30, 2011, $0.1 million of total unrecognized compensation costs related to non-vested options is expected to be recognized over a weighted average period of 0.14 years.

During the three months ended June 30, 2011 and June 30, 2010, we granted restricted stock awards for 5,851 shares and 8,210 shares, respectively, of Common Stock to non-employee directors.  There were 19,450 and 15,375 restricted stock unit awards granted to employees during the three months ended June 30, 2011 and June 30, 2010, respectively.

During the three months ended June 30, 2011, 60,000 shares of Common Stock previously issued under restricted stock awards became vested and were released.  During the three months ended June 30, 2010, there were no shares of Common Stock previously issued under restricted stock awards that became vested.  For the three months ended June 30, 2011, 20,079 of these shares were retained by Ultimate and not released, in satisfaction of withholding tax requirements applicable to payment of such awards in the amounts of $1.1 million, while 39,921 of such shares were released to the holders of such awards.

During the three months ended June 30, 2011, 7,409 shares became payable under restricted stock unit awards that vested and were released during such period.  Of these shares, 2,502 were retained by Ultimate and not issued, in satisfaction of withholding tax requirements applicable to payment of such awards in the amount of $0.1 million, while 4,907 of such shares were issued to the holders of such awards.  During the three months ended June 30, 2010, 3,006 shares became payable under restricted stock unit awards that vested and were released during such period.  1,127 of such shares were retained by Ultimate and not issued, in satisfaction of withholding tax requirements applicable to payment of such awards in the amount of $36 thousand, while 1,879 of such shares were issued to the holders of such awards.

The following table summarizes restricted stock award and restricted stock unit activity for the six months ended June 30, 2011 (in thousands, except per share amounts):

	Restricted Stock Awards					Restricted Stock Unit Awards
				Weighted
				Average
				Grant Date
	Shares			Fair Value		Shares
Outstanding at December 31, 2010		1,307		$	26.64		336
Granted		13			53.44		187
Vested and Released		(105	)		25.85		(101	)
Forfeited or expired		–			–		(6	)
Outstanding at June 30, 2011		1,215		$	26.99		416

As of June 30, 2011, $12.6 million of total unrecognized compensation costs related to non-vested restricted stock awards were expected to be recognized over a weighted average period of 1.5 years.  As of June 30, 2011, $12.0 million of total unrecognized compensation costs related to non-vested restricted stock unit awards were expected to be recognized over a weighted average period of 2.0 years.

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Comprehensive Income

6 Months Ended

Jun. 30, 2011

Comprehensive Income [Abstract]

Comprehensive Income

8.           Comprehensive Income

Comprehensive income represents all changes in equity that result from transactions and other economic events in a period other than transactions with owners. Accumulated other comprehensive income, as presented in the accompanying unaudited condensed consolidated balance sheets, consists of unrealized gains and losses on available-for-sale securities and foreign currency translation adjustments, recorded net of any related income tax.

For the three and six months ended June 30, 2010, we realized a foreign currency translation adjustment for the discontinued operations of our UK Subsidiary.  This was recorded in discontinued operations and represents the reclassification of prior period net unrealized losses from other comprehensive income (loss).  There was no realized foreign currency translation adjustment for the three and six months ended June 30, 2011.

Comprehensive income for the three and six months ended June 30, 2011 and 2010 is as follows (in thousands):

	For the Three Months ended June 30,						For the Six Months ended June 30,
	2011			2010			2011			2010
Net income (loss) (1)	$	893		$	(594	)	$	1,221		$	(339	)
Other comprehensive income (loss)
Realized foreign currency translation
adjustment		–			886			–			886
Unrealized loss on investments in
marketable securities available-for-sale,
net of tax		–			(1	)		(3	)		(2	)
Unrealized gain (loss) on foreign currency
translation adjustments, net of tax		(10	)		(41	)		52			(178	)
Comprehensive income	$	883		$	250		$	1,270		$	367

(1)   Pursuant to applicable accounting rules, the amount attributable to the UK Subsidiary and accumulated in the foreign currency translation adjustment component of equity became realized in the unaudited condensed consolidated statement of operations during the second quarter of 2010, the period in which discontinuation of the operations of the UK Subsidiary was substantially complete.

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Nature of Operations

6 Months Ended

Jun. 30, 2011

Nature of Operations [Abstract]

Nature of Operations

1.           Nature of Operations

The Ultimate Software Group, Inc. and subsidiaries (“Ultimate,” “we,” “us” or “our”) is a leading provider of unified human capital management (“HCM”) software-as-a-service (“SaaS”) solutions for global businesses.  Ultimate's UltiPro software (“UltiPro”) is a comprehensive SaaS-based solution delivered primarily to organizations based in the United States and Canada and designed to deliver the functionality businesses need to manage the complete employment life cycle from recruitment to retirement.   Ultimate's solutions are marketed as two solution suites based on company size.  UltiPro Enterprise (“Enterprise”) is designed to address the needs of companies with 1,000 or more employees.   UltiPro Workplace (“Workplace”) is designed for companies with fewer than 1,000 employees.  UltiPro is marketed primarily through our Enterprise and Workplace direct sales teams.

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Discontinued Operations

6 Months Ended

Jun. 30, 2011

Discontinued Operations [Abstract]

Discontinued Operations

4.          Discontinued Operations

During the second quarter of 2010, Ultimate discontinued the operations of The Ultimate Software Group UK Limited, our wholly-owned subsidiary in the United Kingdom (the “UK Subsidiary”).  Loss from discontinued operations, net of income taxes, for the three and six months ended June 30, 2010, was principally comprised of $0.9 million from the realization of a non-cash foreign currency translation adjustment.  The discontinuation of the operations of the UK Subsidiary was substantially complete as of June 30, 2010.  There was no income or loss from discontinued operations for the three and six months ended June 30, 2011.

The assets and liabilities of the UK Subsidiary were immaterial, both individually and in the aggregate, and, therefore, were not presented separately in the unaudited condensed consolidated financial statements and notes thereto as of June 30, 2011 and December 31, 2010.

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Stock Based Compensation (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Aggregate number of shares of Common Stock available for issuance (in shares)	805,383		805,383
Net cash proceeds from the exercise of stock options	$ 2,400,000	$ 2,600,000	$ 7,407,000	$ 4,936,000
Excess tax benefits from stock-based payments	1,300,000	300,000	1,713,000	950,000
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total non-cash stock-based coompensation expense	3,769,000	3,334,000	7,619,000	6,725,000
Stock Options [Member]
Stock Options [Roll Forward]
Outstanding at beginning of period (in shares)			3,015,000
Granted (in shares)			0
Exercised (in shares)			(414,000)
Forfeited or expired (in shares)			(15,000)
Outstanding at end of period (in shares)	2,586,000		2,586,000
Exercisable at end of period (in shares)	2,524,000		2,524,000
Weighted Average Exercise Price [Abstract]
Outstanding at beginning of period (in dollars per share)			$ 19.40
Granted (in dollars per share)	$ 0.00		$ 0.00
Exercised (in dollars per share)	$ 17.89		$ 17.89
Forfeited or expired (in dollars per share)			$ 18.72
Outstanding at end of period (in dollars per share)	$ 19.65		$ 19.65
Exercisable at end of period (in dollars per share)	$ 19.43		$ 19.43
Weighted Average Remaining Contractual Term [Abstract]
Outstanding at beginning of period (in years)			5.07
Granted (in years)			0
Exercised (in years)			0
Forfeited or expired (in years)			0
Outstanding at end of period (in years)	4.66		4.66
Exercisable at end of period (in years)			4.60
Aggregate Intrinsic Value [Abstract]
Outstanding at beginning of period			88,136,000
Granted			0
Exercised			0
Forfeited or expired			0
Outstanding at end of period	89,977,000		89,977,000
Exercisable at end of period	88,332,000		88,332,000
Total intrinsic value of options exercised	6,500,000	6,200,000	14,900,000	9,200,000
Total fair value of options vested	300,000	500,000	1,600,000	3,900,000
Total unrecognized compensation costs	100,000		100,000
Weighted average period over which unrecognized compensation costs are expected to be recognized (in years)			0.14
Restricted Stock Awards [Member]
Aggregate Intrinsic Value [Abstract]
Total unrecognized compensation costs	12,600,000		12,600,000
Weighted average period over which unrecognized compensation costs are expected to be recognized (in years)			1.5
Restricted stock and restricted stock unit award [Roll Forward}
Outstanding at beginning of period (in shares)			1,307,000
Granted (in shares)	5,851	8,210	13,000
Vested and Released (in shares)	(60,000)		(105,000)
Vested and Released (in shares)	60,000		105,000
Forfeited or expired (in shares)			0
Outstanding at end of period (in shares)	1,215,000		1,215,000
Restricted stock awards, weighted average grant date fair value [Abstract]
Outstanding at beginning of period (in dollars per share)			$ 26.64
Granted (in dollars per share)			$ 53.44
Vested and Released (in dollars per share)			$ 25.85
Forfeited or expired (in dollars per share)	$ 0.00		$ 0.00
Outstanding at end of period (in shares) (in dollars per share)	$ 26.99		$ 26.99
Shares retained by company and not issued, in satisfaction of employee withholding tax requirements applicable to payment of awards (in shares)	20,079
Aggregate amount of shares retained by company and not issued	1,100,000
Shares issued to holders of awards (in shares)	39,921
Restricted Stock Unit Awards [Member]
Aggregate Intrinsic Value [Abstract]
Total unrecognized compensation costs	12,000,000		12,000,000
Weighted average period over which unrecognized compensation costs are expected to be recognized (in years)			2.0
Restricted stock and restricted stock unit award [Roll Forward}
Outstanding at beginning of period (in shares)			336,000
Granted (in shares)	19,450	15,375	187,000
Vested and Released (in shares)	(7,409)	(3,006)	(101,000)
Vested and Released (in shares)	7,409	3,006	101,000
Forfeited or expired (in shares)			(6,000)
Outstanding at end of period (in shares)	416,000		416,000
Restricted stock awards, weighted average grant date fair value [Abstract]
Shares retained by company and not issued, in satisfaction of employee withholding tax requirements applicable to payment of awards (in shares)	2,502	1,127
Aggregate amount of shares retained by company and not issued	100,000	36,000
Shares issued to holders of awards (in shares)	4,907	1,879
Cost of recurring revenues [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total non-cash stock-based coompensation expense	350,000	224,000	679,000	441,000
Cost of services revenues [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total non-cash stock-based coompensation expense	371,000	322,000	747,000	663,000
Sales and marketing [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total non-cash stock-based coompensation expense	1,713,000	1,642,000	3,510,000	3,361,000
Research and development [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total non-cash stock-based coompensation expense	410,000	341,000	794,000	668,000
General and administrative [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total non-cash stock-based coompensation expense	$ 925,000	$ 805,000	$ 1,889,000	$ 1,592,000

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Investments in Marketable Securities and Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2011

Investments in Marketable Securities and Fair Value of Financial Instruments [Abstract]

Investments in Marketable Securities and Fair Value of Financial Instruments

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

We classify our investments in marketable securities with readily determinable fair values as available-for-sale.  Available-for-sale securities consist of debt and equity securities not classified as trading securities or as securities to be held to maturity.  Unrealized gains and losses, net of tax, on available-for-sale securities are reported as a net amount in accumulated other comprehensive income in stockholders' equity until realized.  Gains and losses on the sale of available-for-sale securities are determined using the specific identification method.  Included in accumulated other comprehensive income was $1 thousand and $4 thousand of unrealized gains, net of tax, on available-for-sale securities at June 30, 2011 and December 31, 2010, respectively.

The amortized cost, net unrealized gain and fair value of our investments in marketable available-for-sale securities as of June 30, 2011 and December 31, 2010 are shown below (in thousands):

	As of June 30, 2011						As of December 31, 2010
			Net						Net
	Amortized		Unrealized		Fair		Amortized		Unrealized		Fair
	Cost		Gain		Value		Cost		Gain		Value
Corporate debentures and  bonds	$	4,644	$	–	$	4,644	$	2,903	$	4	$	2,907
Commercial paper		2,098		–		2,098		2,599		–		2,599
U.S. Agency bonds		–		–		–		1,513		1		1,514
U.S. Treasury bills		1,210		3		1,213		1,504		2		1,506
Non U.S. government bond		303		–		303		301		–		301
Certificates of deposit		490		–		490		490		–		490
Total investments	$	8,745	$	3	$	8,748	$	9,310	$	7	$	9,317

The amortized cost and fair value of the marketable available-for-sale securities by contractual maturity as of June 30, 2011 are shown below (in thousands):

	As of June 30, 2011
	Amortized		Fair
	Cost		Value
Due in one year or less	$	7,112	$	7,112
Due after one year		1,633		1,636
Total	$	8,745	$	8,748

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

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

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

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

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

Our assets that are measured by management at fair value on a recurring basis are generally classified within Level 1 or Level 2 of the fair value hierarchy.  The types of instruments valued based on quoted market prices in active markets include certificates of deposit.  Such instruments are generally classified within Level 1 of the fair value hierarchy.   We did not have any transfers into and out of Level 1 and Level 2 during the three and six months ended June 30, 2011.

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 corporate debentures and bonds, commercial paper, agency bonds, U.S. Treasury bills and a non U.S. government bond.  Such instruments are generally classified within Level 2 of the fair value hierarchy.  We use consensus pricing, which is based on multiple pricing sources, to value our fixed income investments. The following table sets forth, by level within the fair value hierarchy, financial assets accounted for at fair value as of June 30, 2011 and December 31, 2010 (in thousands):

	As of June 30, 2011								As of December 31, 2010
	Total		(Level 1)		(Level 2)		(Level 3)		Total		(Level 1)		(Level 2)		(Level 3)
Corporate debentures and bonds	$	4,644	$	–	$	4,644	$	–	$	2,907	$	–	$	2,907	$	–
Commercial paper		2,098		–		2,098		–		2,599		–		2,599		–
U.S. Agency bonds		–		–		–		–		1,514		–		1,514		–
U.S. Treasury bills		1,213		–		1,213		–		1,506		–		1,506		–
Non U.S. government bond		303		–		303		–		301		–		301		–
Certificates of deposit		490		490		–		–		490		490		–		–
Total	$	8,748	$	490	$	8,258	$	–	$	9,317	$	490	$	8,827	$	–

Assets measured at fair value on a recurring basis were presented in the unaudited condensed consolidated balance sheet as of June 30, 2011 and in the audited consolidated balance sheet as of December 31, 2010 as short-term and long-term investments in marketable securities.  There were no financial liabilities accounted for at fair value as of June 30, 2011 and December 31, 2010.

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Earnings Per Share (Details) In Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Earnings Per Share [Abstract]
Basic weighted average shares outstanding (in shares)	25,837	24,839	25,716	24,797
Effect of dilutive equity instruments (in shares)	2,026	2,133	2,088	2,114
Dilutive weighted average shares outstanding (in shares)	27,863	26,972	27,804	26,911
Stock Options and Other Equity-Based Awards [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Options to purchase shares of Common Stock and other stock-based awards outstanding which are not included in the calculation of diluted income per share because their impact is anti-dilutive (in shares)	0	59	0	56

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Foreign Currency (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Foreign Currency [Abstract]
Unrealized translation gains included in accumulated other comprehensive income	$ 200,000	$ 100,000	$ 200,000	$ 100,000
Realized foreign currency translation loss	0	886,000	0	886,000
Unrealized foreign currency translation gains (losses)	$ (10,000)	$ (41,000)	$ 52,000	$ (179,000)

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Property and Equipment (Tables)

6 Months Ended

Jun. 30, 2011

Property and Equipment [Abstract]

Property and Equipment

Property and equipment as of June 30, 2011 and December 31, 2010 consist of the following (in thousands):

	As of June 30, 2011		As of December 31,  2010
Property and equipment	$	89,756	$	81,413
Less:  accumulated depreciation and amortization		67,716		63,338
	$	22,040	$	18,075

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Property and Equipment

6 Months Ended

Jun. 30, 2011

Property and Equipment [Abstract]

Property and Equipment

6.              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 fifteen years. Leasehold improvements and assets under capital leases are amortized over the shorter of the estimated useful life of the asset or the term of the lease, which range from three to fifteen years. Maintenance and repairs are charged to expense when incurred; betterments are capitalized. Upon the sale or retirement of assets, the cost, accumulated depreciation and amortization are removed from the accounts and any gain or loss is recognized.

Property and equipment as of June 30, 2011 and December 31, 2010 consist of the following (in thousands):

	As of June 30, 2011		As of December 31,  2010
Property and equipment	$	89,756	$	81,413
Less:  accumulated depreciation and amortization		67,716		63,338
	$	22,040	$	18,075

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Foreign Currency (Tables)

6 Months Ended

Jun. 30, 2011

Foreign Currency [Abstract]

Realized and unrealized foreign currency translation gains (losses)

Included in comprehensive income for the three and six months ended June 30, 2011 and 2010 were a realized loss on foreign currency translation and cumulative unrealized foreign currency translation gains (losses), as follows:

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2011			2010			2011		2010
Realized foreign currency translation loss	$	–		$	886		$	–	$	886
Unrealized foreign currency translation gains (losses)	$	(10	)	$	(41	)	$	52	$	(178	)

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Comprehensive Income (Details) (USD $) In Thousands	3 Months Ended				6 Months Ended
	Jun. 30, 2011		Jun. 30, 2010		Jun. 30, 2011		Jun. 30, 2010
Comprehensive Income [Abstract]
Net income (loss)	$ 893	[1]	$ (594)	[1]	$ 1,221	[1]	$ (339)	[1]
Realized foreign currency translation adjustment	0		886		0		886
Unrealized gain (loss) on investments in marketable securities available-for-sale, net of tax	0		(1)		(3)		(2)
Unrealized gain (loss) on foreign currency translation adjustments, net of tax	(10)		(41)		52		(179)
Comprehensive income (loss)	$ 883		$ 250		$ 1,270		$ 367

[1] Pursuant to applicable accounting rules, the amount attributable to the UK Subsidiary and accumulated in the translation adjustment component of equity became realized in the unaudited condensed consolidated statement of operations during the second quarter of 2010, the period in which discontinuation of the operations for the UK Subsidiary were substantially complete.

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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	6 Months Ended
	Jun. 30, 2011		Jun. 30, 2010
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS [Abstract]
Net income (loss)	$ 1,221,000	[1]	$ (339,000)	[1]
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	5,743,000		6,108,000
Provision for doubtful accounts	1,115,000		1,038,000
Non-cash stock-based compensation expense	7,619,000		6,725,000
Non-cash realized loss on foreign currency translation adjustment	0		886,000
Income taxes	2,290,000		426,000
Excess tax benefit from stock-based payments	(1,713,000)		(950,000)
Changes in operating assets and liabilities:
Accounts receivable	(278,000)		(4,687,000)
Prepaid expenses and other current assets	(4,094,000)		(2,764,000)
Other assets	(689,000)		755,000
Accounts payable	1,693,000		446,000
Accrued expenses and deferred rent	2,379,000		1,949,000
Deferred revenue	(85,000)		445,000
Net cash provided by operating activities	15,201,000		10,038,000
Purchases of property and equipment	(7,609,000)		(2,401,000)
Purchases of marketable securities	(7,700,000)		(4,600,000)
Maturities of marketable securities	8,269,000		4,835,000
Net purchases of securities with customer funds	(92,593,000)		(24,884,000)
Net cash used in investing activities	(99,633,000)		(27,050,000)
Repurchases of Common Stock	(7,925,000)		(12,987,000)
Excess tax benefits from stock-based payments	1,713,000		950,000
Shares acquired to settle employee tax withholding liability	(3,631,000)		(552,000)
Principal payments on capital lease obligations	(1,432,000)		(1,206,000)
Net increase in customer fund obligations	92,593,000		24,884,000
Net proceeds from issuances of Common Stock	7,407,000		4,936,000
Net cash provided by financing activities	88,725,000		16,025,000
Effect of exchange rate changes on cash	52,000		(6,000)
Net increase (decrease) in cash and cash equivalents	4,345,000		(993,000)
Cash and cash equivalents, beginning of period	40,889,000		23,684,000
Cash and cash equivalents, end of period	45,234,000		22,691,000
Cash paid for interest	126,000		100,000
Cash paid for income taxes	395,000		136,000
Capital lease obligations to acquire new equipment	$ 1,400		$ 1,400

[1] Pursuant to applicable accounting rules, the amount attributable to the UK Subsidiary and accumulated in the translation adjustment component of equity became realized in the unaudited condensed consolidated statement of operations during the second quarter of 2010, the period in which discontinuation of the operations for the UK Subsidiary were substantially complete.

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Stock Based Compensation (Tables)

6 Months Ended

Jun. 30, 2011

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Non-cash stock-based compensation expense

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2011		2010		2011		2010
Non-cash stock-based compensation expense:
Cost of recurring revenues	$	350	$	224	$	679	$	441
Cost of services revenues		371		322		747		663
Sales and marketing		1,713		1,642		3,510		3,361
Research and development		410		341		794		668
General and administrative		925		805		1,889		1,592
Total non-cash stock-based compensation expense	$	3,769	$	3,334	$	7,619	$	6,725

Summary of stock option activity

The following table summarizes stock option activity (for previously granted options) for the six months ended June 30, 2011 (in thousands, except per share amounts):

Options	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2010		3,015		$	19.40		5.07	$	88,136
Granted		–			–		–		–
Exercised		(414	)		17.89		–		–
Forfeited or expired		(15	)		18.72		–		–
Outstanding at June 30, 2011		2,586		$	19.65		4.66	$	89,977
Exercisable at June 30, 2011		2,524		$	19.44		4.60	$	88,332

Summary of restricted stock award and restricted stock unit activity

The following table summarizes restricted stock award and restricted stock unit activity for the six months ended June 30, 2011 (in thousands, except per share amounts):

	Restricted Stock Awards					Restricted Stock Unit Awards
				Weighted
				Average
				Grant Date
	Shares			Fair Value		Shares
Outstanding at December 31, 2010		1,307		$	26.64		336
Granted		13			53.44		187
Vested and Released		(105	)		25.85		(101	)
Forfeited or expired		–			–		(6	)
Outstanding at June 30, 2011		1,215		$	26.99		416

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Summary of Significant Accounting Policies and Recent Accounting Pronouncements (Details)	Jun. 30, 2011
Summary of Significant Accounting Policies and Recent Accounting Pronouncements [Abstract]
Number of major elements in multiple element arrangements for delivery of SaaS offering	2
Number of elements that pertain to recurring revenues	3
Maintenance revenues, service period (in years)	1Y

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Basis of Presentation, Consolidation and the Use of Estimates

6 Months Ended

Jun. 30, 2011

Basis of Presentation, Consolidation and the Use of Estimates [Abstract]

Basis of Presentation, Consolidation and the Use of Estimates

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

The accompanying unaudited condensed consolidated financial statements of Ultimate have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The information in this quarterly report should be read in conjunction with Ultimate's audited consolidated financial statements and notes thereto included in Ultimate's Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the SEC on March 1, 2011 (the “Form 10-K”).

The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting only of normal, recurring adjustments) which are, in the opinion of Ultimate's management, necessary for a fair presentation of the information for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Interim results of operations for the three and six months ended June 30, 2011 are not necessarily indicative of operating results for the full fiscal year or for any future periods.

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

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Summary of Significant Accounting Policies and Recent Accounting Pronouncements (Policies)

6 Months Ended

Jun. 30, 2011

Summary of Significant Accounting Policies and Recent Accounting Pronouncements [Abstract]

Revenue recognition

Recurring Revenues

Recurring revenues consist of subscription revenues recognized from our SaaS Offering, as well as customer support and maintenance revenues.

i)   SaaS subscription revenues are principally derived from per employee per month (“PEPM”) fees earned from the SaaS Offering and from sales of hosting services on a stand-alone basis to customers who already own a perpetual license (“Base Hosting”). To the extent there are upfront or setup fees associated with our SaaS Offering, the related SaaS subscription revenues are recognized ratably over the term of the related contract, commencing when the customer goes Live.  Ongoing PEPM fees from the SaaS Offering and Base Hosting are recognized as subscription revenues as the services are delivered commencing when the customer goes Live.

ii) Customer support and maintenance revenues are derived from maintaining, supporting, and  providing periodic updates of our software for our hosting services.

Under our SaaS Offering, our customers do not have the right to take possession of our software and these arrangements are considered service contracts. Fair value of multiple elements in SaaS arrangements is derived for each element based on the guidance provided by ASU 2009-13.  The multiple elements that typically exist in SaaS arrangements include hosting services, the right to use UltiPro, maintenance of UltiPro (i.e., product enhancements, updates and customer support) and professional services (i.e., primarily implementation services).

The pricing for the three elements that pertain to recurring revenues (i.e., hosting services, the right to use UltiPro and maintenance of UltiPro) is bundled.  Since these three bundled elements are components of recurring revenues in the unaudited condensed consolidated statements of income, allocation of fair values to each of the three elements is not necessary and they are not reported separately.  Fair value for the bundled elements, as a whole, is determined on the basis of renewal pricing, without taking into consideration potential price increases or changes in the number of underlying employees caused by potential changes in the size of the customer in the future due to the uncertainties surrounding these potential occurrences.  These bundled elements are provided on an ongoing basis, represent undelivered elements and are recognized on a monthly basis as the related services are performed, commencing once the customer goes Live.

Services Revenues

Services revenues primarily include revenues from fees charged for consulting services in connection with the implementation of our product solutions and, to a lesser extent, training of customers in the use of our products and fees for other services, including the provision of payroll-related forms, sales of time clocks and the printing of W-2 forms for certain customers, as well as certain reimbursable out-of-pocket expenses.  Revenues from implementation consulting services comprise the majority of total services revenues.

Revenues from implementation consulting services, billed on a time and materials basis (at an hourly rate), are recognized as these services are performed.  The total arrangement consideration is allocated to services elements in the arrangement based on their relative fair values, using the prices established when the services are sold on a stand-alone basis.  Other services are recognized as the product is shipped or as the services are rendered, depending on the specific terms of the related arrangement.

Revenues from implementation consulting services sold on a fixed-fee basis are recognized using the percentage of completion accounting method, which involves the use of estimates.  Percentage of completion is measured at each reporting date based on progress made to date compared to the total estimate to complete the implementation job.

License Revenues

From our inception through March 31, 2009, we sold perpetual licenses of UltiPro, which resulted in license revenues recognized for that period of time.  Customer support and maintenance revenues, from previously sold perpetual licenses, are derived from maintaining, supporting, and providing periodic updates of our software.  Customer support and maintenance revenues are recognized ratably over the service period, generally one year, and are included in recurring revenues.  Annual maintenance renewal fees which occur subsequent to the initial contract period are also recognized ratably over the related service period.

While we still sell on-site licenses of UltiPro on an infrequent basis, sales to new customers are only on a subscription basis (priced and billed to our customers on a PEPM basis).  We no longer sell our on-site UltiPro solutions to new customers on a perpetual license basis. We do sell licenses to existing license customers but only in relation to the customer's employee growth or for products complementary to UltiPro for which the customer already has a perpetual license. Any such licenses are recognized as license revenues in our unaudited condensed consolidated financial statements upon the delivery of the related software product when all significant contractual obligations have been satisfied.

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Comprehensive Income (Tables)

6 Months Ended

Jun. 30, 2011

Comprehensive Income [Abstract]

Comprehensive income

Comprehensive income for the three and six months ended June 30, 2011 and 2010 is as follows (in thousands):

	For the Three Months ended June 30,						For the Six Months ended June 30,
	2011			2010			2011			2010
Net income (loss) (1)	$	893		$	(594	)	$	1,221		$	(339	)
Other comprehensive income (loss)
Realized foreign currency translation
adjustment		–			886			–			886
Unrealized loss on investments in
marketable securities available-for-sale,
net of tax		–			(1	)		(3	)		(2	)
Unrealized gain (loss) on foreign currency
translation adjustments, net of tax		(10	)		(41	)		52			(178	)
Comprehensive income	$	883		$	250		$	1,270		$	367

(1)   Pursuant to applicable accounting rules, the amount attributable to the UK Subsidiary and accumulated in the foreign currency translation adjustment component of equity became realized in the unaudited condensed consolidated statement of operations during the second quarter of 2010, the period in which discontinuation of the operations of the UK Subsidiary was substantially complete.

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UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (USD $) In Thousands	Jun. 30, 2011	Dec. 31, 2010
Current assets:
Cash and cash equivalents	$ 45,234	$ 40,889
Short-term investments in marketable securities	7,112	8,884
Accounts receivable, net of allowance for doubtful accounts of $600 for 2011 and $800 for 2010	46,733	47,570
Prepaid expenses and other current assets	22,707	18,613
Deferred tax assets, net	1,458	1,434
Total current assets before funds held for customers	123,244	117,390
Funds held for customers	165,468	72,875
Total current assets	288,712	190,265
Property and equipment, net	22,040	18,075
Capitalized software, net	2,440	3,115
Goodwill	3,025	3,025
Long-term investments in marketable securities	1,636	433
Other assets, net	12,290	11,656
Long-term deferred tax assets, net	22,386	22,988
Total assets	352,529	249,557
Current liabilities:
Accounts payable	6,376	4,683
Accrued expenses	12,895	11,074
Current portion of deferred revenue	73,212	71,808
Current portion of capital lease obligations	2,614	2,551
Total current liabilities before customer funds obligations	95,097	90,116
Customer funds obligations	165,468	72,875
Total current liabilities	260,565	162,991
Deferred revenue, net of current portion	4,798	6,287
Deferred rent	3,580	3,022
Capital lease obligations, net of current portion	2,281	2,406
Income taxes payable	1,866	1,866
Total liabilities	273,090	176,572
Stockholders' equity:
Preferred Stock	0	0
Common Stock, $.01 par value, 50,000,000 shares authorized, 29,578,959 and 29,027,277 shares issued in 2011 and 2010, respectively	296	290
Additional paid-in capital	229,365	216,262
Accumulated other comprehensive income	175	126
Accumulated deficit	(51,032)	(52,253)
Stockholders' equity before treasury stock	178,804	164,425
Treasury stock, 3,744,503 and 3,594,825 shares, at cost, for 2011 and 2010, respectively	(99,365)	(91,440)
Total stockholders' equity	79,439	72,985
Total liabilities and stockholders' equity	352,529	249,557
Series A Junior Participating Preferred Stock [Member]
Stockholders' equity:
Preferred Stock	$ 0	$ 0