10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

         For the quarterly period ended July 3, 2004

OR

( )  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    0-20109

Kronos Incorporated

         (Exact name of registrant as specified in its charter)

Massachusetts	04-2640942
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

297 Billerica Road, Chelmsford, MA 01824
(Address of principal executive offices)(Zip Code)

(978) 250-9800
(Registrant’s telephone number, including area code)

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 __X__           No ____

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes __X__           No ____

As of July 31, 2004, 31,142,671 shares of the registrant’s common stock, $.01 par value, were outstanding.

KRONOS INCORPORATED

INDEX

PART I.	FINANCIAL INFORMATION	Page
Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Statements of Income for the Three and Nine Months Ended July 3, 2004 and June 28, 2003	1
	Condensed Consolidated Balance Sheets at July 3, 2004 and September 30, 2003	2
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended July 3, 2004 and June 28, 2003	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	36
Item 4.	Evaluation of Disclosure Controls and Procedures	36
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	38
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Submission of Matters to a Vote of Security Holders	38
Item 5.	Other Information	38
Item 6.	Exhibits and Reports on Form 8-K	39
Signatures

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

KRONOS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
UNAUDITED

	Three Months Ended						Nine Months Ended
	July 3, 2004			June 28, 2003			July 3, 2004			June 28, 2003
Net revenues:
Product	$	50,941		$	42,185		$	135,047		$	125,215
Maintenance		35,427			32,826			104,169			91,477
Professional services		28,332			23,205			83,136			67,714
		114,700			98,216			322,352			284,406
Cost of sales:
Costs of product		10,802			10,097			31,014			30,453
Costs of maintenance and professional services		34,157			28,664			99,505			82,937
		44,959			38,761			130,519			113,390
Gross profit		69,741			59,455			191,833			171,016
Operating expenses and other income:
Sales and marketing		33,627			30,544			96,991			90,193
Engineering, research and development		11,028			9,894			31,476			27,929
General and administrative		7,943			6,063			22,355			18,498
Amortization of intangible assets		1,003			985			3,011			2,493
Other income, net		(973	)		(1,384	)		(4,344	)		(3,811	)
		52,628			46,102			149,489			135,302
Income before income taxes		17,113			13,353			42,344			35,714
Provision for income taxes		5,958			4,969			14,157			13,019
Net income	$	11,155		$	8,384		$	28,187		$	22,695
Net income per common share:
Basic	$	0.36		$	0.28		$	0.91		$	0.76
Diluted	$	0.35		$	0.27		$	0.88		$	0.74
Weighted-average common shares outstanding:
Basic		31,109,965			29,828,427			30,930,863			29,689,491
Diluted		32,050,336			30,982,514			31,986,345			30,810,186

See accompanying notes to condensed consolidated financial statements.

KRONOS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
UNAUDITED

	July 3, 2004			September 30, 2003
ASSETS
Current assets:
Cash and equivalents	$	49,391		$	42,509
Marketable securities		40,549			44,431
Accounts receivable, less allowances of $8,337		88,306			84,275
at July 3, 2004 and $7,833 at September 30, 2003
Deferred income taxes		8,048			8,427
Other current assets		19,094			18,649
Total current assets		205,388			198,291
Marketable securities		77,412			44,065
Property, plant and equipment, net		40,705			39,263
Intangible assets		21,501			22,938
Goodwill		74,076			70,446
Capitalized software, net		23,036			23,012
Other assets		17,918			14,791
Total assets	$	460,036		$	412,806
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	8,374		$	6,584
Accrued compensation		37,011			35,655
Accrued expenses and other current liabilities		12,188			16,169
Deferred product revenues		8,241			3,387
Deferred professional service revenues		37,830			39,745
Deferred maintenance revenues		79,681			75,505
Total current liabilities		183,325			177,045
Deferred maintenance revenues		7,393			7,319
Deferred income taxes		9,168			8,190
Other liabilities		2,783			3,655
Shareholders' equity:
Preferred Stock, par value $1.00 per share: authorized
1,000,000 shares, no shares issued and outstanding		--			--
Common Stock, par value $.01 per share: authorized
50,000,000 shares, 31,170,523 and 30,439,518 shares
issued at July 3, 2004 and September 30, 2003, respectively		312			304
Additional paid-in capital		50,860			38,104
Retained earnings		206,028			177,841
Accumulated other comprehensive income:
Foreign currency translation		489			(8	)
Net unrealized gain (loss) on available-for-sale investments		(322	)		356
		167			348
Total shareholders' equity		257,367			216,597
Total liabilities and shareholders' equity	$	460,036		$	412,806

See accompanying notes to condensed consolidated financial statements.

KRONOS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
UNAUDITED

	Nine Months Ended
	July 3, 2004			June 28, 2003
Operating activities:
Net income	$	28,187		$	22,695
Adjustments to reconcile net income to net cash and equivalents
provided by operating activities:
Depreciation		8,767			8,100
Amortization of intangible assets		3,008			2,537
Amortization of capitalized software		9,774			8,624
Provision for deferred income taxes		1,920			601
Changes in certain operating assets and liabilities:
Accounts receivable, net		(6,705	)		10,015
Deferred product revenues		4,859			(2,889	)
;Deferred professional service revenues		(2,136	)		(399	)
Deferred maintenance revenues		2,616			879
Accounts payable, accrued compensation
and other liabilities		2,060			(3,278	)
Taxes payable		(4,221	)		(27	)
Other		(752	)		(409	)
Tax benefit from exercise of stock options		8,667			6,760
Net cash and equivalents provided by operating activities		56,044			53,209
Investing activities:
Purchase of property, plant and equipment		(10,135	)		(8,452	)
Capitalized internal software development costs		(9,751	)		(8,982	)
Increase in marketable securities		(29,465	)		(19,664	)
Acquisitions of businesses and software, net of cash acquired		(4,576	)		(13,245	)
Net cash and equivalents used in investing activities		(53,927	)		(50,343	)
Financing activities:
Net proceeds from exercise of stock options and
employee purchase plans		21,255			16,929
Repurchase of common stock		(17,286	)		(14,704	)
Proceeds from call options		--			2,596
Net cash and equivalents provided by financing activities		3,969			4,821
Effect of exchange rate changes on cash and equivalents		796			979
Increase in cash and equivalents		6,882			8,666
Cash and equivalents at the beginning of the period		42,509			20,892
Cash and equivalents at the end of the period	$	49,391		$	29,558

See accompanying notes to condensed consolidated financial statements.

KRONOS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE A — General

The accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals that management of Kronos Incorporated (“the Company” or “Kronos”) considers necessary for a fair presentation of the Company’s financial position and results of operations as of and for the interim periods presented pursuant to the rules and regulations of the Securities and Exchange Commission. Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures in these financial statements are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the fiscal year ended September 30, 2003. The results of operations for the nine months ended July 3, 2004 are not necessarily indicative of the results for a full fiscal year. The Company has reclassified certain auction rate securities, for which interest rates reset in less than 90 days, but for which the maturity date is longer than 90 days, from cash and equivalents to short-term marketable securities. This resulted in a reclassification from cash and equivalents to short-term marketable securities of approximately $27.4 million on the September 30, 2003 balance sheet. In addition, in response to the Massachusetts Business Corporation Act (see Note I), the Company reclassified shares previously classified as Treasury shares as authorized but unissued shares of common stock. Certain other reclassifications, which are not material, have been made in the accompanying consolidated financial statements in order to conform to the fiscal 2004 presentation.

NOTE B — Fiscal Quarters

The Company utilizes a system of fiscal quarters. Under this system, the first three quarters of each fiscal year end on a Saturday. However, the fourth quarter of each fiscal year will always end on September 30. Because of this, the number of days in the first quarter (95 days in fiscal 2004 and 89 days in fiscal 2003) and fourth quarter (89 days in fiscal 2004 and 94 days in fiscal 2003) of each fiscal year varies from year to year. The second and third quarters of each fiscal year will be exactly thirteen weeks long. This policy does not have a material effect on the comparability of results of operations between quarters.

NOTE C — Stock-Based Compensation

The Company accounts for its stock-based compensation plan under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related Interpretations. We have adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure”, an amendment of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” (“Statement No. 123”). Therefore, no stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement No. 123 to stock-based employee compensation (in thousands, except per share data).

	Three Months Ended				Nine Months Ended
	July 3, 2004		June 28, 2003		July 3, 2004		June 28, 2003
Net income, as reported	$11,155		$8,384		$28,187		$22,695
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards, net
of related tax effects	(2,411	)	(1,522	)	(7,004	)	(5,652	)
Pro forma net income	$8,744		$6,862		$21,183		$17,043
Earnings per share:
Basic--as reported	$0.36		$0.28		$0.91		$0.76
Basic--pro forma	$0.28		$0.23		$0.68		$0.57
Diluted--as reported	$0.35		$0.27		$0.88		$0.74
Diluted--pro forma	$0.27		$0.22		$0.66		$0.55

NOTE D — Other Current Assets

Other current assets consists of the following (in thousands):

	July 3, 2004	September 30, 2003
Inventory	$4,588	$5,197
Prepaid expenses	14,506	13,452
Total	$19,094	$18,649

NOTE E — Intangible Assets

Acquired intangible assets subject to amortization are presented in the following table (in thousands).

	Weighted Average Life in Years	Gross Carrying Value	Accumulated Amortization	Net Book Value
As of July 3, 2004:
Intangible assets:
Customer related	9.8	$22,185	$10,787	$11,398
Maintenance relationships	12.0	8,653	1,621	7,032
Tax benefits	10.7	2,158	692	1,466
Non-compete agreements	3.9	4,272	2,667	1,605
Total intangible assets		$37,268	$15,767	$21,501
As of September 30, 2003:
Intangible assets:
Customer related	9.7	$21,327	$9,261	$12,066
Maintenance relationships	11.9	8,092	1,101	6,991
Tax benefits	10.7	2,144	527	1,617
Non-compete agreements	4.0	4,060	1,796	2,264
Total intangible assets		$35,623	$12,685	$22,938

For the three months ended July 3, 2004 and June 28, 2003, the amount of goodwill acquired is $1.3 million and $2.7 million, respectively. The amount of goodwill acquired during the nine months ended July 3, 2004 and June 28, 2003 is $3.6 million and $12.3 million, respectively.

For the three months ended July 3, 2004 and June 28, 2003, the Company recorded amortization expense for intangible assets of $1.0 million for both periods, and recorded $3.0 million and $2.5 million of amortization expense for intangible assets for the nine months ended July 3, 2004 and June 28, 2003, respectively. The estimated annual amortization expense for intangible assets for the current and next five fiscal years is as follows (in thousands):

Fiscal Year Ending September 30,	Estimated Annual Amortization Expense
2004	$3,951
2005	3,509
2006	3,052
2007	2,628
2008	2,498
2009	2,174

NOTE F – Acquisitions

During the nine months ended July 3, 2004, the Company completed five acquisitions with a combined purchase price of $3.1 million. The results of operations for these acquisitions are not material to the Company’s results of operations and have been included in the consolidated financial statements since their acquisition date. Acquired entities were engaged in the sale and service of employee time and attendance, employee scheduling, data collection and labor management software and hardware systems, including the resale of the Company’s products through a dealer relationship. As a result of these acquisitions, the Company gained access to direct sales and service organizations, as well as access to the entire existing maintenance revenue stream from their customers. The deferred revenue related to the maintenance and professional services revenue streams, which was recorded at fair value, was recognized as the Company had assumed a legal performance obligation as described in EITF 01-03.

Certain agreements which were previously entered into contain provisions that require the Company to make a guaranteed payment and/or contingent payments based upon profitability of the business unit or if specified minimum revenue requirements are met. These provisions expire during fiscal 2004 through 2006. Guaranteed payments are accrued at the time of the acquisition and are included in the purchase price allocation. As of July 3, 2004, the Company has the obligation to pay $2.7 million in guaranteed payments. These payments will be made at various dates through fiscal 2006. Amounts due to be paid within twelve months of the balance sheet date are included in accrued expenses and amounts due to be paid in excess of twelve months of the balance sheet date are included in other liabilities. Contingent payments due under the terms of the agreements are recognized when earned and are principally recorded as goodwill. However, under certain circumstances, a portion of the contingent payment may be recorded as compensation expense. During the three months ended July 3, 2004 and June 28, 2003, there were no contingent payments earned. There were $0.1 million of contingent payments earned during the nine months ended July 3, 2004 and all were recorded to compensation expense. There were $1.8 million of contingent payments earned during the nine months ended June 28, 2003 and all were recorded as goodwill.

NOTE G — Comprehensive Income

For the three and nine months ended July 3, 2004 and June 28, 2003, comprehensive income consisted of the following (in thousands):

	Three Months Ended				Nine Months Ended
	July 3, 2004		June 28, 2003		July 3, 2004		June 28, 2003
Comprehensive income:
Net income	$11,155		$8,384		$28,187		$22,695
Cumulative translation adjustment	(494	)	923		497		1,383
Unrealized loss on available-for-sale
securities	(432	)	(70	)	(678	)	(340	)
Total comprehensive income	$10,229		$9,237		$28,006		$23,738

NOTE H — Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except share and per share data):

	Three Months Ended		Nine Months Ended
	July 3, 2004	June 28, 2003	July 3, 2004	June 28, 2003
Net income	$11,155	$8,384	$28,187	$22,695
Weighted-average shares	31,109,965	29,828,427	30,930,863	29,689,491
Effect of dilutive securities:
Employee stock options	940,371	1,154,087	1,055,482	1,120,695
Adjusted weighted-average shares and
assumed conversions	32,050,336	30,982,514	31,986,345	30,810,186
Basic earnings per share	$0.36	$0.28	$0.91	$0.76
Diluted earnings per share	$0.35	$0.27	$0.88	$0.74

NOTE I — The Massachusetts Business Corporation Act

Effective July 1, 2004, the Massachusetts Business Corporation Act (the “Act”) eliminated the concept of treasury stock. Under the Act, shares previously classified as treasury stock are to be treated as authorized but unissued shares of common stock. As a result of this change, the Company has reclassified treasury stock for the balance sheets presented in this filing such that the shares which were previously classified as treasury stock are now classified as authorized, but unissued shares of common stock on the balance sheet. At September 30, 2003, the Company had 260 shares and approximately $6,000 classified as treasury stock.

NOTE J — Stock Split

On October 7, 2003, the Company’s Board of Directors approved a three-for-two stock split effected in the form of a 50% stock dividend. This stock dividend was paid on October 31, 2003 to stockholders of record as of October 20, 2003. Accordingly the presentation of shares outstanding and amounts per share have been restated for all periods presented to reflect the split. The par value of the additional shares was transferred from additional paid-in capital to common stock.

NOTE K — New Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities (“FIN 46”), which requires the consolidation of a variable interest entity (as defined) by its primary beneficiary. Primary beneficiaries are those companies that are subject to a majority of the risk of loss or entitled to receive a majority of the variable interest entity’s residual returns, or both. In determining whether it is the primary beneficiary of a variable interest entity, a company with a variable interest must also treat a variable interest held by the Company’s related parties in that same entity as its own interest. In December 2003, the FASB published a revision to FIN 46 to clarify some of the provisions of FIN 46 and to exempt certain entities from its requirements. FIN 46, as revised, applies to variable interest entities that are commonly referred to as special-purpose entities for periods ending after December 15, 2003 (Kronos’ fiscal 2004 first quarter) and for all other types of variable interest entities for periods ending after March 15, 2004 (Kronos’ fiscal 2004 second quarter).

Kronos currently has no contractual relationship or other business relationship with a variable interest entity and therefore the adoption of FIN No. 46 and 46-6 did not have an effect on Kronos’ consolidated financial position, results of operations or cash flows.

NOTE L — Call Option Arrangements

In August 2002, the Company entered into a call option arrangement, which was classified as an equity instrument in accordance with the provisions of EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” The call option arrangement provided the Company an opportunity to lock in a repurchase price for shares under the Company’s stock repurchase program. The call option arrangement matured in December 2002. At maturity, the Company’s stock price exceeded the strike price of $16.67 per share and the Company received a return of its cash investment and a premium totaling approximately $2.6 million, which was credited to additional paid-in-capital. If at maturity the Company’s stock price was less than the strike price, the Company would use its cash investment to purchase Company shares at a predetermined price. There were no dividend and liquidation preferences, participation rights, sinking-fund requirements, unusual voting rights or any other significant terms pertaining to this call option arrangement. The Company currently does not have any call option arrangements outstanding.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

         This discussion includes certain forward-looking statements about our business and our expectations, including statements relating to product and service revenues, revenue growth rates, product and service gross profit, operating expenses, earnings per share, future acquisitions, capital expenditures, customer purchase patterns, income tax rates, available cash, investments and operating cash flow, and the current economic climate. Any such statements are subject to risk that could cause the actual results to vary materially from expectations. For a further discussion of the various risks that may affect our business and expectations, see “Certain Factors That May Affect Future Operating Results” at the end of Management’s Discussion and Analysis of Financial Condition and Results of Operations and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2003. The risks and uncertainties discussed herein do not reflect the potential future impact of any mergers, acquisitions or dispositions. In addition, any forward-looking statements represent our estimates only as of the day this Quarterly Report was filed with the Securities and Exchange Commission and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change.

Overview

         We provide a suite of solutions that automate employee-centric processes and provide tools to optimize the workforce. Our solutions, which include human resources, payroll, scheduling, and time and labor applications, are designed for a wide range of businesses from single-site to large multi-site enterprises. We derive revenues from the licensing of our software solutions, sales of our hardware solutions and by providing professional services as well as ongoing customer support and maintenance.

         We have been successful in continuing to increase revenues in all periods presented. While we believe that the current economic environment is improving, certain factors such as a lack of job creation and the apparent lag in technology purchasing in the current economic recovery, as well as the diversion of resources towards compliance with new regulatory requirements on internal controls may result in many customers deferring or reducing their technology purchases in the future.

         Our revenues for the three and nine month periods ended July 3, 2004 posted increases over the comparable periods of the prior year of 17% for the three month period and 13% for the nine month period. Our product revenue growth of 21% and 8% in the three and nine month periods ended July 3, 2004 was a primary factor in the revenue growth, as was continued growth in professional services revenues and maintenance revenues (22% and 23%, respectively, for professional services revenues and 8% and 14%, respectively, for maintenance revenues).

         Net income for the three month period ended July 3, 2004 increased 33% to $11.2 million from $8.4 million, with earnings per share increasing to $0.35 from $0.27 per diluted share. Net income for the nine month period ended July 3, 2004 increased 24% to $28.2 million from $22.7 million, with earnings per diluted share increasing to $0.88 from $0.74. Net income growth for both the three and nine month periods ended July 3, 2004 was primarily the result of continued growth in revenues as well as continued corporate-wide efforts to contain costs, and to a lesser extent, a reduction in the income tax rate, primarily resulting from the completion of certain tax audits during the three month period ended April 3, 2004. We will continue to leverage investments in infrastructure to generate higher sales volumes, and continue corporate-wide efforts to contain costs. However, anticipated costs related to the release of additional product offerings may partially offset these efforts.

         Regarding expectations for the remainder of the current fiscal year, we presently anticipate that revenue growth for the fourth quarter and for the entire fiscal 2004, including revenues from customers obtained in the acquisition of businesses, will range between 10% — 14% and 12% — 13%, respectively, with earnings per share in the range of $0.47 — $0.53 for the fourth quarter and $1.35 — $1.41 for the entire fiscal 2004.

Critical Accounting Policies and Estimates

         Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions.

         We have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of consolidated financial statements. This listing is not a comprehensive list of all of our accounting policies. Please refer to Note A in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q and in Item 15 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2003 for further information.

         Revenue Recognition – We license software and sell data collection hardware and related ancillary products to end-user customers through our direct sales force as well as indirect channel customers, which include Automatic Data Processing, Inc. (“ADP”) and other independent resellers. Substantially all of our software license revenue is earned from perpetual licenses of off-the-shelf software requiring no modification or customization. The software license, data collection hardware and related ancillary product revenues from our end-user customers and indirect channel customers are generally recognized using the residual method when:

o Persuasive evidence of an arrangement exists, which is typically when a non-cancelable sales and software license agreement has been signed;

o Delivery, which is typically FOB shipping point, is complete for the software (either physically or electronically), data collection hardware and related ancillary products;

o The customer’s fee is deemed to be fixed or determinable and free of contingencies or significant uncertainties;

o Collectibility is probable; and

o Vendor-specific objective evidence of fair value exists for all undelivered elements, typically maintenance and professional services.

         Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue, assuming all other conditions for revenue recognition have been satisfied. Substantially all of our product revenue is recognized in this manner. If we cannot determine the fair value of any undelivered element included in an arrangement, we will defer revenue until all elements are delivered, services are performed or until fair value can be objectively determined.

         As part of an arrangement, end-user customers typically purchase maintenance contracts as well as professional services from us. Maintenance services include telephone and Web-based support as well as rights to unspecified upgrades and enhancements, when and if we make them generally available. Professional services are deemed to be non-essential to the functionality of the software and typically are for implementation planning, loading of software, installation of the data collection hardware, training, building simple interfaces, running test data, and assisting in the development and documentation of pay rules and best practices consulting.

         Revenues from maintenance services are recognized ratably over the term of the maintenance contract period based on vendor-specific objective evidence of fair value. Vendor-specific objective evidence of fair value is based upon the amount charged when purchased separately, which is typically the contract’s renewal rate. Maintenance services are typically stated separately in an arrangement. We have classified the allocated fair value of revenues pertaining to the contractual maintenance obligations that exist for the 12-month period subsequent to the balance sheet date as a current liability, and the contractual obligations with a term beyond 12 months as a non-current liability. Revenues from time and material customer support services are recognized as the services are delivered.

         Revenues from professional services are generally recognized based on vendor-specific objective evidence of fair value when:

o A non-cancelable agreement for the services has been signed or a customer’s purchase order has been received;

o The professional services have been delivered;

o The customer’s fee is deemed to be fixed or determinable and free of contingencies or significant uncertainties; and

o Collectibility is probable.

Vendor-specific objective evidence of fair value is based upon the price charged when these services are sold separately and are typically an hourly rate for professional services and a per-class rate for training. Based upon our experience in completing product implementations, we have determined that these services are typically delivered within a 12-month period subsequent to the contract signing and therefore have classified deferred professional services as a current liability.

         Our arrangements with end-user customers and indirect channel customers do not include any rights of return or price protection, nor do arrangements with indirect channel customers include any acceptance provisions. Generally, our arrangements with end-user customers also do not include any acceptance provisions. However, if an arrangement does include acceptance provisions, they typically are based on our standard acceptance provision. Our standard acceptance provision provides the end-user customer with a right to a refund if the arrangement is terminated because the product did not meet our published specifications. Generally, we determine that these acceptance provisions are not substantive and therefore should be accounted for as a warranty in accordance with SFAS No. 5.

         At the time we enter into an arrangement, we assess the probability of collection of the fee and the terms granted to the customer. For end-user customers, our typical payment terms include a deposit and subsequent payments, based on specific due dates, such that all payments for the software license, data collection hardware and related ancillary products, as well as services included in the original arrangement are ordinarily due within one year of contract signing. Our payment terms for indirect channel customers are less than 90 days and typically payments are due within 30 days of invoice date.

         If the payment terms for the arrangement are considered extended or if the arrangement includes a substantive acceptance provision, we defer revenue not meeting the criterion for recognition under SOP 97-2 and classify this revenue as deferred revenue, including deferred product revenue. This revenue is recognized, assuming all other conditions for revenue recognition have been satisfied, when the payment of the arrangement fee becomes due and/or when the uncertainty regarding acceptance is resolved as generally evidenced by written acceptance or payment of the arrangement fee. We report the allocated fair value of revenues related to the product element of arrangements as a current liability because of the expectation that these revenues will be recognized within 12 months of the balance sheet date.

         Since fiscal 1996, we have had a standard practice of providing creditworthy end-user customers the option of financing arrangements beyond one year. Our policy for recognizing revenue and the timing of the recognition for arrangements that are financed is the same as our non-financed arrangements. The financed arrangements, which encompass separate fees for software license, data collection hardware and ancillary products, maintenance and support contracts and professional services, are evidenced by distinct standard sales, license and maintenance agreements and typically require equal monthly payments. The term of these arrangements typically range between 18 and 48 months. At the time we enter into an arrangement, we assess the probability of collection and whether the arrangement fee is fixed or determinable. We consider our history of collection without concessions as well as whether each new transaction involves similar customers, products and arrangement economics to ensure that the history developed under previous arrangements remains relevant to current arrangements. If the fee is not determined to be collectible, fixed or determinable, we will initially defer the revenue and recognize when collection becomes probable, which typically is when payment is due assuming all other conditions for revenue recognition have been satisfied. As a financing arrangement, we apply a present value factor using interest rates ranging from 5% to 8%. These rates may vary depending upon when the financing arrangement is entered into and the length of the financing arrangement.

         Allowance for Doubtful Accounts and Sales Returns Allowance – We maintain an allowance for doubtful accounts to reflect estimated losses resulting from the inability of customers to make required payments. This allowance is based on estimates made by us after consideration of factors such as the composition of the accounts receivable aging and bad debt history. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances and bad debt expense may be required. In addition, we maintain a sales returns allowance to reflect estimated losses for sales returns and adjustments. Sales returns and adjustments are generally due to incorrect ordering of product, general customer satisfaction issues or incorrect billing. This allowance is established by us using estimates based on historical experience. If we experience an increase in sales returns and adjustments, additional allowances and charges against revenue may be required.

         Valuation of Intangible Assets and Goodwill – In assessing the recoverability of goodwill and other intangible assets, we must make assumptions regarding the estimated future cash flows and other factors to determine the fair value of these assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges against these assets in the reporting period in which the impairment is determined. For intangible assets, this evaluation includes an analysis of estimated future undiscounted net cash flows expected to be generated by the assets over their estimated useful lives. If the estimated future undiscounted net cash flows are insufficient to recover the carrying value of the assets over their estimated useful lives, we will record an impairment charge in the amount by which the carrying value of the assets exceeds their fair value. For goodwill, the impairment evaluation includes a comparison of the carrying value of the reporting unit which houses goodwill to that reporting unit’s fair value. We have only one reporting unit. The fair value of the

reporting unit is based upon the net present value of future cash flows, including a terminal value calculation. If the reporting unit’s estimated fair value exceeds the reporting unit’s carrying value, no impairment of goodwill exists. If the fair value of the reporting unit does not exceed its carrying value, then further analysis would be required to determine the amount of the impairment, if any. If we determine that there is an impairment in either an intangible asset, or goodwill, we may be required to record an impairment charge in the reporting period in which the impairment is determined, which may have a negative impact on earnings. During fiscal 2003, we completed the annual testing of the impairment of goodwill, and as a result of this test, we concluded that no impairment of goodwill existed as of June 29, 2003, the annual goodwill impairment measurement date.  In addition, we have determined that no events or circumstances currently exist that would indicate that either the fair value of the reporting unit has been reduced, or the carrying value of the intangible assets is no longer recoverable.  Therefore, no impairment charges have been recorded in the nine months ended July 3, 2004.

         Capitalization of Software Development Costs — Costs incurred in the research, design and development of software for sale to others are charged to expense until technological feasibility is established. Thereafter, software development costs are capitalized and amortized to product cost of sales on a straight-line basis over the lesser of three years or the estimated economic lives of the respective products. Costs incurred in the development of software for internal use are charged to expense until it becomes probable that future economic benefits will be realized. Thereafter, certain costs are capitalized and amortized to operating expense on a straight-line basis over the lesser of three years or the estimated economic life of the software.

         Income Taxes — We account for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We record a valuation allowance in accordance with generally accepted accounting principles to reduce our deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, there is no assurance that the valuation allowance will not need to be increased to cover additional deferred tax assets that may not be realizable. Any increase in the valuation allowance could have a material adverse impact on our income tax provision and net income in the period in which such determination is made.

Results of Operations

Revenues.     We derive revenues from the licensing of our software solutions, sales of our hardware solutions and by providing professional services as well as ongoing customer support and maintenance.

Total Revenues (dollars in thousands):

	Three Months Ended			Nine Months Ended
	July 3, 2004	June 28, 2003	Percent Change	July 3, 2004	June 28, 2003	Percent Change
Total revenues	$114,700	$98,216	17%	$322,352	$284,406	13%

         The principal factor driving revenue growth in the three month period ended July 3, 2004 was increased demand for our software and hardware products from new and existing customers, as well as increased demand for our professional and maintenance services. The principal factor driving revenue growth in the nine month period ended July 3, 2004 was increased demand for our professional and maintenance services from new and existing customers, and to a lesser extent an increase in demand for our software and hardware products.

	Three Months Ended				Nine Months Ended
	July 3, 2004		June 28, 2003		July 3, 2004		June 28, 2003
Revenues from acquired
businesses*	$806		$1,890		$5,925		$8,524
Percentage of total
revenues	0.7	%	1.9	%	1.8	%	3.0	%

        * Revenues from acquired businesses are revenues generated from customers that have been part of an acquired business transaction over the preceding four fiscal quarters.

Product Revenues (dollars in thousands):

	Three Months Ended						Nine Months Ended
	July 3, 2004		June 28, 2003		Percent Change		July 3, 2004		June 28, 2003		Percent Change
Product revenues	$50,941		$42,185		21	%	$135,047		$125,215		8	%
Product revenues as a
percent of total revenues	44	%	43	%	--		42	%	44	%	--

         The product revenue growth and the increase in the proportion of product revenue to total revenues in the three month period ended July 3, 2004 was primarily the result of an increase in demand for our Workforce Central® suite and related software modules, our Kronos iSeries Central suite, as well as our Kronos 4500™ Terminal. The increased demand is primarily the result of the continued introduction of new products and software modules, as well as new and platform conversion sales. The rate of product revenue growth and the lower proportion of product revenues to total revenues in the nine month period ended July 3, 2004 is principally attributable to the unusually high product sales volume in the first nine months of the prior year. In addition, the product revenues in the nine month period ended July 3, 2004 benefited less from incremental revenues from acquired businesses due to the timing of acquisitions than the same period of the prior year.

	Three Months Ended				Nine Months Ended
	July 3, 2004		June 28, 2003		July 3, 2004		June 28, 2003
Revenues from acquired businesses	$241		$4		$557		$2,382
Percentage of product revenues	0.5	%	0.0	%	0.4	%	1.9	%

Maintenance Revenues (dollars in thousands):

	Three Months Ended						Nine Months Ended
	July 3, 2004		June 28, 2003		Percent Change		July 3, 2004		June 28, 2003		Percent Change
Maintenance revenues	$35,427		$32,826		8	%	$104,169		$91,477		14	%
Maintenance revenues
as a percent of
total revenues	31	%	33	%	--		32	%	32	%	--

         The increase in maintenance revenues in the three and nine month periods ended July 3, 2004 was principally the result of expansion of the installed base and an increase in the value of maintenance contracts. The increase in the value of the maintenance contracts was principally attributable to the sales of platform and capacity upgrade licenses to existing customers. Platform and capacity upgrade sales typically result in an increased value of maintenance contracts due to the higher value typically associated with the new platform’s product or increased value in the product resulting from the additional capacity. The maintenance value is typically based on the related product’s value. The reduced rate of maintenance revenue growth experienced in the three month period ended July 3, 2004 as compared to the rate of growth experienced in the nine month period ended July 3, 2004 is primarily due to the timing of acquisitions as well as the timing of incremental revenues related to our focus of enforcing the appropriate effective dates on maintenance contracts upon customer reinstatements. The lower proportion of maintenance revenues to total revenues in the three months period ended July 3, 2004 is primarily due to the increased proportion of product revenue.

	Three Months Ended				Nine Months Ended
	July 3, 2004		June 28, 2003		July 3, 2004		June 28, 2003
Revenues from acquired businesses	$380		$1,274		$3,398		$4,109
Percentage of maintenance revenues	1.1	%	3.9	%	3.3	%	4.5	%

Professional Services Revenues (dollars in thousands):

	Three Months Ended						Nine Months Ended
	July 3, 2004		June 28, 2003		Percent Change		July 3, 2004		June 28, 2003		Percent Change
Professional
services revenues	$28,332		$23,205		22	%	$83,136		$67,714		23	%
Professional services
revenues as a percent
of total revenues	25	%	24	%	--		26	%	24	%	--

         The growth in professional services revenues in the three and nine month periods ended July 3, 2004 was principally due to an increase in demand for professional services, which is the result of an increase in sales to new customers. Also contributing to the growth in professional services revenue is an increase in the level of professional services accompanying new and platform conversion sales, which may result in the delivery of additional professional services hours during the implementations. Further contributing to the growth of the professional services revenue is an increase in the utilization rate and bill rate experienced in the services organization. The growth in professional services revenues was partially offset by a decrease in revenues from acquired businesses in both the three and nine month periods ended July 3, 2004.

	Three Months Ended				Nine Months Ended
	July 3, 2004		June 28, 2003		July 3, 2004		June 28, 2003
Revenues from acquired
businesses	$185		$612		$1,970		$2,032
Percentage of professional
services revenues	0.7	%	2.6	%	2.4	%	3.0	%

Gross Profit. Gross profit is the net result of revenues, less cost of sales. Product cost of sales primarily consists of salaries, facilities and related expenses for manufacturing personnel, costs of materials for the manufacturing of certain hardware products, amortization of capitalized software costs, as well as the cost of royalties paid to third-parties for certain products. Service cost of sales primarily consists of salaries, facilities and related expenses for service personnel, as well as the cost of maintenance contracts paid to third-parties for certain products.

Gross Profit/Gross Margin (dollars in thousands):

	Three Months Ended						Nine Months Ended
	July 3, 2004		June 28, 2003		Percent Change		July 3, 2004		June 28, 2003		Percent Change
Product gross profit	$40,139		$32,088		25	%	$104,033		$94,762		10	%
Service gross profit	29,602		27,367		8	%	87,800		76,254		15	%
Total gross profit	$69,741		$59,455		17	%	$191,833		$171,016		12	%
Product gross margin	79	%	76	%	--		77	%	76	%	--
Service gross margin	46	%	49	%	--		47	%	48	%	--
Total gross margin	61	%	61	%	--		60	%	60	%	--

         Total gross margin for both the three and nine month periods ended July 3, 2004 remained unchanged. Although service gross margin decreased in both periods presented, this decrease was offset by an increase in product gross margin. We anticipate total gross margin to increase in the fourth quarter of fiscal 2004 principally as a result of our expectation that the proportion of product revenues to total revenues will increase in the fourth quarter.

         Product gross margin increased in the three and nine month periods ended July 3, 2004 primarily due to a favorable product mix during the periods. Product revenues from hardware and software, which typically carry a higher gross margin than sales of third-party product for resale, were a greater proportion of total product revenues in both the three and nine month periods ended July 3, 2004 as compared to the comparable period in the prior year (94% and 91% for both the three and nine month periods, respectively).

         The decrease in service gross margin in the three and nine month periods ended July 3, 2004 was principally attributable to an increase in professional services revenues as a proportion to total service revenues. Professional services revenues typically carry a lower gross margin than maintenance revenues. This unfavorable service mix was partially offset by an increase in the utilization rate of the service personnel, as well as an increase in the overall average hourly bill rate as compared to the comparable period in the prior year. The utilization rate increase is in part due to an increase in the productivity in our human resources and payroll implementations. Although we anticipate continued productivity increases in our human resources and payroll implementations in the fourth quarter of the fiscal year due to improvements in our service delivery tools and processes, we expect these benefits to be partially offset by our continued investments in training and personnel to support our human resources, payroll and other new product introductions planned for the remainder of fiscal 2004.

Net Operating Expenses. Net operating expenses includes sales and marketing expenses, engineering, research and development expenses, general and administrative expenses, amortization of intangible assets and other income, net.

Total Net Operating Expenses (dollars in thousands):

	Three Months Ended						Nine Months Ended
	July 3, 2004		June 28, 2003		Percent Change		July 3, 2004		June 28, 2003		Percent Change
Net operating
expenses	$52,628		$46,102		14	%	$149,489		$135,302		10	%
Net operating expenses
as a % of total revenues	46	%	47	%	--		46	%	48	%	--

         The increase in total net operating expenses for the three and nine month periods ended July 3, 2004 was principally attributable to investments in personnel and related compensation and overhead costs in response to increased customer demand and to support the development of new products. The reduction in total net operating expenses as a percentage of revenues was attributable to the leveraging of investments in infrastructure to generate higher sales volumes, and continued corporate-wide efforts to contain costs. We intend to continue efforts to contain costs and to leverage our infrastructure to generate higher sales volume, and believe that net operating expenses as a percentage of revenues will decrease in the three month period ended September 30, 2004 due to anticipated increased sales volume during that three month period.

         Sales and Marketing Expenses: Sales and marketing expenses primarily consist of personnel and overhead-related expenses for sales and marketing functions, as well as costs associated with advertising, promotions, tradeshows, seminars, training and other sales and marketing programs (dollars in thousands).

	Three Months Ended						Nine Months Ended
	July 3, 2004		June 28, 2003		Percent Change		July 3, 2004		June 28, 2003		Percent Change
Sales and marketing
expenses	$33,627		$30,544		10	%	$96,991		$90,193		8	%
Sales and marketing
expenses as a % of
total revenues	29	%	31	%	--		30	%	32	%	--

         The increase in sales and marketing expense in both periods was primarily attributable to investment in sales personnel and related compensation and support costs to add new customers and to maximize the penetration of existing accounts. The decrease in sales and marketing expense as a percentage of total revenues for the three and nine month periods ended July 3, 2004 was primarily attributable to leveraging the investments in infrastructure to generate higher sales volumes.

         Engineering, Research and Development Expenses: Engineering, research and development expenses primarily consist of personnel and overhead-related expenses for engineering functions, as well as costs associated with training and third-party consulting (dollars in thousands).

	Three Months Ended						Nine Months Ended
	July 3, 2004		June 28, 2003		Percent Change		July 3, 2004		June 28, 2003		Percent Change
Total Engineering,
research and
development spending	$14,311		$13,005		10	%	$41,227		$36,910		12	%
Capitalized software
development costs	(3,283	)	(3,111	)	6	%	(9,751	)	(8,981	)	9	%
Engineering, research
and development expenses	$11,028		$9,894		11	%	$31,476		$27,929		13	%
Engineering, research and
development expenses as
a % of total revenues	10	%	10	%	--		10	%	10	%	--

         The increase in engineering, research and development spending for the three and nine month periods ended July 3, 2004 was attributable to continued investment in engineering personnel and their compensation-related expenses. This increase is the result of the continued development and support of new products. This increase in both the three and nine month periods ended July 3, 2004 was partially offset by a decrease in spending related to third-party engineering consultants. The significant project development efforts in the first nine months of fiscal 2004 were principally related to further development and enhancement of the Workforce Central® suite, including scheduling, activities and workflow modules as well as Workforce HR™, Workforce Payroll™ and the Kronos 4500 terminal.

         General and Administrative Expenses: General and administrative expenses primarily consist of personnel and overhead-related expenses for administrative, information technology, finance, legal and human resources support functions (dollars in thousands).

	Three Months Ended						Nine Months Ended
	July 3, 2004		June 28, 2003		Percent Change		July 3, 2004		June 28, 2003		Percent Change
General and
administrative expenses	$7,943		$6,063		31	%	$22,355		$18,498		21	%
General and administrative
expenses as a % of
total revenues	7	%	6	%	--		7	%	7	%	--

         The increase in general and administrative expenses in the three and nine month periods ended July 3, 2004 was primarily due to investment in personnel and related compensation and support costs required for the continued support of our growing operations, and an increase in fees related to consulting services and training associated with the replacement of information technology systems.

         Amortization of Intangible Assets and Other Income, Net: Amortization of intangible assets includes the amortization expense related to the identified intangible assets recorded by us related to acquisitions of other businesses. Other income, net is principally interest income earned from cash as well as investments in our marketable securities and financing arrangements (dollars in thousands).

	Three Months Ended						Nine Months Ended
	July 3, 2004		June 28, 2003		Percent Change		July 3, 2004		June 28, 2003		Percent Change
Amortization of
intangible assets	$1,003		$985		2	%	$3,011		$2,493		21	%
Amortization of
intangible assets as a
% of total revenues	1	%	1	%	--		1	%	1	%	--
Other income, net	$973		$1,384		(30	%)	$4,344		$3,811		14	%
Other income, net as a
% of total revenues	1	%	1	%	--		1	%	1	%	--

         The increase in amortization of intangible assets in the three and nine month periods ended July 3, 2004, as compared to the same period in the prior year, is principally attributed to amortization charges related to acquisitions which were completed during the last two fiscal years. The decrease in other income, net in the three month period ended July 3, 2004 is principally due to changes in the foreign exchange rates which resulted in exchange gains in the three month period ended June 28, 2003, and exchange losses in the three month period ended July 3, 2004. The increase in other income, net in the nine month period ended July 3, 2004, as compared to the comparable period in the prior year, is principally attributed to the reversal of excess interest and other tax-related accruals as a result of the favorable completion of certain tax audits during the three month period ended April 3, 2004.

         Income Taxes. The provision for income taxes as a percentage of pre-tax income was 34.8% for the three month period ended July 3, 2004 and 33.4% for the nine month period ended July 3, 2004. For the comparable periods in the prior fiscal year, the provision for income taxes as a percentage of pre-tax income was 37.2% and 36.5%, respectively. The provision for income taxes was favorably impacted as a result of the completion of certain tax audits during the three month period ended April 3, 2004. We currently anticipate that the income tax rate will approximate 33% for the three month period ended September 30, 2004. Our effective income tax rate may fluctuate between periods as a result of various factors, including income tax credits, foreign tax rate differentials and state income taxes.

         Newly Issued Accounting Standards. In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which requires the consolidation of a variable interest entity (as defined) by its primary beneficiary. Primary beneficiaries are those companies that are subject to a majority of the risk of loss or entitled to receive a majority of the variable interest entity’s residual returns, or both. In determining whether it is the primary beneficiary of a variable interest entity, a company with a variable interest must also treat a variable interest held by the Company’s related parties in that same entity as its own interest. In December 2003, the FASB published a revision to FIN 46 to clarify some of the provisions of FIN 46 and to exempt certain entities from its requirements. FIN 46, as revised, applies to variable interest entities that are commonly referred to as special-purpose entities for periods ending after December 15, 2003 (our fiscal 2004 first quarter) and for all other types of variable interest entities for periods ending after March 15, 2004 (our fiscal 2004 second quarter).

         We currently have no contractual relationship or other business relationship with a variable interest entity and therefore the adoption of FIN No. 46 and No. 46-6 did not have an effect on our consolidated financial position, results of operations or cash flows.

Liquidity and Capital Resources

         We fund our business through cash generated by operations. If near-term demand for our products weakens or if significant anticipated sales in any quarter do not close when expected, the availability of such funds may be adversely impacted. We believe, however, that we have more than adequate financing to sustain our operations through the next twelve months.

Cash, Cash Equivalents and Marketable Securities (dollars in thousands):

	As of
	July 3, 2004	September 30, 2003	Percent Change
Cash, cash equivalents and marketable securities
(including short and long-term)	$167,352	$131,005	28	%
Working capital	$22,063	$21,246	4	%

         The increase in cash, cash equivalents and marketable securities is due to cash generated from operations. The increase in working capital is primarily due to an increase in cash, cash equivalents and short-term marketable securities resulting from cash provided by operations. A portion of our cash reserves is invested in long-term marketable securities.

Cash Flow Highlights (dollars in thousands):

	Three Months Ended				Nine Months Ended
	July 3, 2004	June 28, 2003	Percent Change		July 3, 2004	June 28, 2003	Percent Change
Cash provided by
operations	$29,656	$13,068	127	%	$56,044	$53,209	5	%
Cash used for property,
plant and equipment	$4,104	$2,346	75	%	$10,135	$8,452	20	%
Cash used for acquisitions
of businesses	$1,786	$3,302	(46	%)	$4,576	$13,245	(65	%)
Increases in
marketable securities	$4,864	$12,146	(60	%)	$29,465	$19,664	50	%
Net proceeds from
exercise of stock
options and employee
stock purchase plans	$5,109	$6,347	(20	%)	$21,255	$16,929	26	%
Repurchases of common
stock	$8,552	$2,230	283	%	$17,286	$14,704	18	%

         The increase in cash provided by operations in the three and nine month periods ended July 3, 2004 was principally attributable to an increase in net income, an increased rate of growth in our deferred maintenance and product revenues, and an increased rate of growth of accounts payable and accrued expenses related to the timing of certain vendor payments and the timing of certain compensation related accruals. These are partially offset by an increase in accounts receivable during the three and nine month periods ended July 3, 2004 as compared to the same period in the prior year, which is attributable to an increase in sales volume. The accounts receivable balance from the prior year benefited from significant collection efforts, which offset any increases related to sales volume. A decrease in the rate of growth in our deferred professional services revenues also partially offsets the increases discussed above. This decrease is attributable to an increase in our practice of billing customers in arrears as professional services are delivered rather than billing customers in advance of service delivery. Although cash flow from operations may be negatively impacted in the short term as our practice of billing in arrears increases, we believe this practice will benefit the sales cycle as it is consistent with industry practice.

         Our use of cash for property, plant and equipment in the three and nine month periods ended July 3, 2004 includes investments in information system and infrastructure to improve and support expanding operations. We anticipate making significant capital investments during the remainder of fiscal 2004 in conjunction with the replacement of information technology systems. To date, we have invested approximately $5.6 million (excluding internal personnel related costs) related to this project. We expect our total investment in this project (excluding internal personnel related costs) to range between $19.0 million and $21.0 million through the end of fiscal 2005. Our use of cash for the acquisition of businesses in all periods presented was principally related to the acquisitions of specified assets and/or businesses of our resellers and/or other providers of labor management solutions. We are assessing several acquisition opportunities that may be completed over the next twelve months, although there can be no assurance that these acquisitions will be completed. Excess cash reserves not required for operations, investments in property, plant and equipment or acquisitions are invested in marketable securities.

Stock Repurchases Under Stock Repurchase Program (dollars in thousands):

	Three Months Ended				Nine Months Ended
	July 3, 2004	June 28, 2003	Percent Change		July 3, 2004	June 28, 2003	Percent Change
Shares of common stock
repurchased	215,500	90,600	138	%	391,000	535,050	(27	%)
Cost of shares of common
stock repurchased	$7,756	$2,205	252	%	$13,784	$13,213	4	%

         The common stock repurchased under our stock repurchase program is used for our employee stock option plans and employee stock purchase plan.

          During the first quarter of fiscal 2003, we received $2.6 million upon the maturity of a call option arrangement. We currently do not have any outstanding call option arrangements. Please refer to Note L in the Notes to Condensed Consolidated Financial Statements for further details regarding call option arrangements.

         We lease certain office space, manufacturing facilities and equipment under long-term operating lease agreements. In addition, certain acquisition agreements contain provisions that require us to make a guaranteed payment and/or contingent payments based upon profitability of the business unit or if specified minimum revenue requirements are met. Future minimum rental commitments under operating leases with non-cancelable terms of one year or more, and future payment obligations related to guaranteed payments are as follows:

Payments Due by Period (in thousands)

Contractual Obligations	Total	Less Than 1 Year	More Than 1 Year, Less Than 3 Years	More Than 3 Years, Less Than 5 Years	More Than 5 Years
Operating lease obligations	$35,887	$10,592	$14,796	$5,936	$4,563
Guaranteed payment obligations	2,674	2,075	599	--	--
Total	$38,561	$12,667	$15,395	$5,936	$4,563

         We believe that we have adequate cash and investments and operating cash flow to fund our investments in property, plant and equipment, software development costs, cash requirements under operating leases, cash payments related to acquisitions, if any, and any additional stock repurchases for the foreseeable future.

Certain Factors That May Affect Future Operating Results

         Except for historical matters, the matters discussed in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). We desire to take advantage of the safe harbor provisions of the Act and include this statement for the express purpose of availing ourselves of the protection of the safe harbor with respect to all forward-looking statements that involve risks and uncertainties.

         Actual operating results may differ from those indicated by forward-looking statements made in this Quarterly Report on Form 10-Q and presented elsewhere by us from time to time because of a number of factors including the potential fluctuations in quarterly results, timing and acceptance of new product introductions by us and our competitors, the dependence on our time and labor product line, the ability to attract and retain sufficient technical personnel, the protection of our intellectual property and the potential infringement on our intellectual property rights, competitive pricing pressure, and the dependence on alternate distribution channels and on key vendors, as further described below and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2003, which are specifically incorporated by reference herein.

         Competition. The workforce management (“WM”) market, which includes time and labor, scheduling, human resources and payroll, is highly competitive. Technological changes such as those allowing for increased use of the Internet have resulted in new entrants into the market. Increased competition could adversely affect our operating results through price reductions and/or loss of market share. With our efforts to expand our labor management offering with the introduction of our human resources and payroll product suite, we will continue to meet strong competition. Many of these competitors may be able to adapt more quickly to new or emerging technologies or to devote greater resources to the promotion and sale of their human resources and payroll products. Many of our human resources and payroll competitors have significantly greater financial, technical and sales and marketing resources than us, as well as more experience in delivering human resources and payroll solutions. Although we believe our organization has core competencies that position us strongly in the marketplace, maintaining our technological and other advantages over competitors will require continued investment in research and development as well as marketing and sales programs. There can be no assurance that we will have sufficient resources to make such investments or be able to achieve the technological advances necessary to maintain our competitive advantages. There can be no assurance that we will be able to compete successfully in the human resources and payroll marketplace, and our failure to do so could have a material adverse impact upon our business, prospects, financial condition and operating results.

Potential Fluctuations in Results. Our operating results, including revenue growth, sources of revenue, effective tax rate and liquidity, may fluctuate as a result of a variety of factors, including general economic conditions and related effect on workforce size, the purchasing patterns of our customers, the diversion of public companies’ resources to address compliance with new regulatory requirements on internal controls, mix of products and services sold, the ability to effectively integrate acquired businesses into our operations, the timing of the introduction of new products and product enhancements by us and our competitors, the strategy employed by us in the human resources and payroll market, market acceptance of new products, competitive pricing pressure, and costs associated with the transition related to the replacement of our information technology systems. We historically have realized a relatively larger percentage of our annual revenues and profits in the third and fourth quarters and a relatively smaller percentage in the first and second quarters of each fiscal year, although there can be no assurance that this pattern will continue. In addition, substantially all of our product revenue and profits in each quarter result from orders received in that quarter. If near-term demand for our products weakens or if significant anticipated sales in any quarter do not close when expected, our revenues for that quarter will be adversely affected. We believe that our operating results for any one period are not necessarily indicative of results for any future period.

         Dependence on Time and Attendance Product Line. To date, more than 90% of our revenues have been attributable to sales of time and attendance systems and related services. Although we have introduced products for scheduling solutions, and the licensed human resources and payroll market, we expect that our dependence on the time and attendance product line for revenues will continue for the foreseeable future. Competitive pressures or other factors could cause our time and attendance products to lose market acceptance or experience significant price erosion, adversely affecting the results of our operations.

         Product Development and Technological Change. Continual change and improvement in computer software and hardware technology characterize the markets for WM systems. Our future success will depend largely on our ability to enhance the capabilities and increase the performance of our existing products and to develop new products and interfaces to third-party products on a timely basis to meet the increasingly sophisticated needs of our customers. Although we are continually seeking to further enhance our WM offerings and to develop new products and interfaces, there can be no assurance that these efforts will succeed, or that, if successful, such product enhancements or new products will achieve widespread market acceptance, or that our competitors will not develop and market products which are superior to our products or achieve greater market acceptance.

         Dependence on Alternate Distribution Channels. We market and sell our products through our direct sales organization, independent resellers and ADP under an OEM agreement. In the first nine months of fiscal 2004, approximately 9% of our revenue was generated through sales to resellers and ADP. During fiscal 2003 we signed an agreement with ADP extending our business relationship for an additional term of five years, and during the three month period ended July 3, 2004, signed an amendment to that agreement which provides for minimum purchasing requirements, and further extends the agreement for an additional six months, and therefore do not anticipate that our entrance into the human resources and payroll market will have a negative impact on our relationship with ADP. However, a reduction in the sales efforts of either our major resellers or ADP, or termination or changes in their relationships with us, could have a material adverse effect on the results of our operations.

         Attracting and Retaining Sufficient Technical Personnel for Product Development, Support and Sales. We have encountered intense competition for experienced technical personnel for product development, technical support and sales and expect such competition to continue in the future. Any inability to attract and retain a sufficient number of qualified technical personnel could adversely affect our ability to produce, support and sell products in a timely manner.

         Protection of Intellectual Property. We have developed, and through our acquisitions of businesses and software, acquired proprietary technology and intellectual property rights. Our success is dependent upon our ability to further develop and protect our proprietary technology and intellectual property rights. We seek to protect products, software, documentation and other written materials primarily through a combination of trade secret, patent, trademark and copyright laws, confidentiality procedures and contractual provisions. While we have attempted to safeguard and maintain our proprietary rights, it is unknown whether we have been or will be successful in doing so.

         Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that is regarded as proprietary. Policing unauthorized use of our products is difficult. While we are unable to determine the extent to which piracy of our software products exists, software piracy can be expected to be a persistent problem, particularly in foreign countries where the laws may not protect proprietary rights as fully as in the United States. We can offer no assurance that we can adequately protect our proprietary rights or that our competitors will not reverse engineer or independently develop similar technology.

         Infringement of Intellectual Property Rights. We cannot provide assurance that others will not claim that our developed or acquired intellectual property rights infringe on their intellectual property rights or that we do not in fact infringe on those intellectual property rights.

         Any litigation regarding intellectual property rights could be costly and time-consuming and divert the attention of our management and key personnel from business operations. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. Claims of intellectual property infringement might also require us to enter into costly royalty or license agreements, and in this event, we may not be able to obtain royalty or license agreements on acceptable terms, if at all. We may also be subject to significant damages or an injunction against the use of our products. A successful claim of patent or other intellectual property infringement against us could cause immediate and substantial damage to our business and financial condition.

Additional Stock Option Program Information

         Option Program Description. We intend that our stock option program be our primary vehicle for offering long-term incentives and rewarding executives and key employees. Stock options are granted to key employees based upon prior performance, the importance of our retaining their services and the potential for their performance to help us attain our long-term goals. However, there is no set formula for the award of options to individual executives or employees.

         Stock options are generally granted annually in conjunction with the Compensation Committee’s formal review of the individual performance of key executives, including our Chief Executive Officer, and their contributions to the Company. In the nine month period ended July 3, 2004, 75% of the options granted went to employees other than our “Named Executive Officers” (as set forth in the table below). All the options awarded are granted from the same plan. Options, which are granted at the fair market value on the date of grant, typically vest in four equal annual installments beginning one year from the date of grant and have a contractual life of four years and six months.

         The presentation of share and per share amounts have been restated to reflect our three-for-two stock split effected in the form of a 50% common stock dividend that was paid on October 31, 2003 to stockholders of record as of October 20, 2003.

Distribution and Dilutive Effect of Options.

Employee and Executive Option Grants:

	For the Nine Month Period Ended July 3, 2004		For the Fiscal Year Ended September 30, 2003		For the Fiscal Year Ended September 30, 2002
Net grants during period as % of outstanding
shares	3.8	%	4.1	%	4.7	%
Grants to Named Executive Officers* during period
as % of options granted	24.6	%	24.1	%	25.3	%
Grants to Named Executive Officers*
during period as % of shares outstanding	0.9	%	1.0	%	1.2	%

*The following individuals are Kronos’ Named Executive Officers for fiscal 2003 and for the first nine month period of fiscal 2004:

Mark S. Ain	Chief Executive Officer and Chairman
Paul A. Lacy	Executive Vice President, Chief Financial and Administrative Officer
Aron J. Ain	Executive Vice President, Chief Operating Officer
Peter C. George	Vice President, Engineering and Chief Technology Officer
James Kizielewicz	Vice President, Corporate Development

The figures for fiscal 2002 reflect the Named Executive Officers as reported in our definitive proxy statement for our 2003 Annual Meeting of Shareholders.

General Option Information.

Summary of Option Activity (in thousands, except per share data)

	Shares Available for Options		Number of Shares		Weighted-Average Exercise Price per Share
Outstanding at September 30, 2003	1,229		3,640		$16.89
Additional shares (1)	2,450		--		--
Grants	(1,187	)	1,187		38.72
Exercises	--		(1,091	)	16.31
Cancellations (2)	18		(37	)	19.54
Outstanding at July 3, 2004	2,510		3,699		$24.04

(1) Represents an increase of 2,450,000 shares approved for issuance by the stockholders at their Annual Meeting in February 2004.

(2) Includes 18,515 shares cancelled under the 1992 Equity Incentive Plan, which expired under its terms on March 27, 2002.

In-the-Money and Out-of-the-Money Option Information as of July 3, 2004 (in thousands, except per share data)

	Exercisable		Unexercisable		Total
	Shares	Weighted-Average Exercise Price per Share	Shares	Weighted-Average Exercise Price per Share	Shares	Weighted-Average Exercise Price per Share
In-the-Money	737	$16.88	2,962	$25.82	3,699	$24.04
Out-of-the-Money (1)	--	--	--	--	--	--
Total Options Outstanding	737	$16.88	2,962	$25.82	3,699	$24.04

(1) Out-of-the-Money options are those options with an exercise price equal to or above the closing price of $40.43 at the end of the current quarter.

         Executive Options. The following tables summarize option grants and exercises during the nine months ended July 3, 2004 to our Named Executive Officers and the value of the options held by such persons at July 3, 2004.

Options Granted to Named Executive Officers

	Individual Grants				Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term (4)
Name	Number of Securities Underlying Options Granted (1)	Percent of Total Options Granted to Employees in Fiscal Year (2)	Exercise or Base Price per Share (3)	Expiration Date	5%	10%
Mark S. Ain	88,500	7.5%	$38.81	05/21/08	$844,568	$1,845,473
CEO and Chairman
Paul A. Lacy	58,500	4.9%	38.81	05/21/08	558,274	1,219,889
Exec. V.P. and Chief
Financial and
Administrative Officer
Aron J. Ain	58,500	4.9%	38.81	05/21/08	558,274	1,219,889
Exec. V.P. and Chief
Operating Officer
Peter C. George	43,500	3.7%	38.81	05/21/08	415,127	907,097
V.P., Engineering and
Chief Technology Officer
James Kizielewicz	43,500	3.7%	38.81	05/21/08	415,127	907,097
V.P., Marketing and
Corporate Strategy

(1) Each option vests in four equal annual installments commencing one year from the date of grant.

(2) Based on an aggregate of 1,187,500 shares subject to options granted to our employees in the nine month period ended July 3, 2004.

(3) The exercise price of each option was equal to the fair market value of our common stock on the date of grant as reported by The NASDAQ National Market®.

(4) Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. These gains are based on assumed rates of stock appreciation of 5% and 10% compounded annually from the date the respective options were granted to their expiration date (and are shown net of the option exercise price, but do not include deductions for taxes or other expenses associated with the exercise of the options or the sale of the underlying shares.) Actual gains, if any, on stock option exercises will depend on the future performance of the common stock, the option holder’s continued employment with us through the option vesting period and the date on which the options are exercised.

   Option Exercises and Remaining Holdings of Named Executive Officers

			Number of Securities Underlying Unexercised Options at Fiscal Year-End	Value of Unexercised In-The-Money Options at Fiscal Year-End (2)
Name	Shares Acquired on Exercise	Value Realized (1)	Exercisable/ Unexercisable	Exercisable/ Unexercisable
Mark S. Ain	146,250	$3,550,613	91,125/224,625	$2,071,913/3,288,983
Paul A. Lacy	52,875	1,211,164	20,625/149,625	420,338/2,191,208
Aron J. Ain	52,813	1,247,196	6,625/149,625	86,298/2,191,208
Peter C. George	48,375	1,261,257	46,687/112,688	1,064,545/1,661,150
James Kizielewicz	35,375	748,449	10,187/112,688	214,352/1,655,777

(1) Represents the difference between the exercise price and the fair market value of the common stock on the date of exercise.

(2) Based on the fair market value of the common stock on July 3, 2004 ($40.43), the last day of the third quarter of our 2004 fiscal year, less the option exercise price.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

         We are exposed to a variety of market risks, including changes in interest rates affecting the return on our investments, foreign currency fluctuations and decreases in our common stock price affecting capped call options. Refer to Note A, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended September 30, 2003 for further discussion regarding marketable securities, foreign currency forward exchange contracts and capped call option arrangements. Our marketable securities that expose us to market rate risks are comprised of debt securities. A decrease in interest rates would not adversely impact interest income or related cash flows pertaining to securities held at July 3, 2004, as all of these securities have fixed rates of interest. A 100 basis point increase in interest rates would not adversely impact the fair value of these securities by a material amount due to the size and average duration of the portfolio. Our exposure to market risk for fluctuations in foreign currency relate primarily to the amounts due from subsidiaries. Exchange gains and losses related to amounts due from subsidiaries have not been material. For foreign currency exposures existing at July 3, 2004, a 10% unfavorable movement in the foreign exchange rates for each subsidiary location would not expose us to material losses in earnings or cash flows. The calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar.

         In August 2002, we entered into short-term capped call options in conjunction with our stock repurchase initiatives. During the first quarter of fiscal 2003, we received $2.6 million upon the maturity of a call option arrangement. For more information on this call option, please refer to Note L in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q. There are currently no capped call option arrangements outstanding.

Item 4. Controls and Procedures.

(a)     Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of July 3, 2004. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of July 3, 2004, the Company’s disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company’s Chief Executive Officer and Chief Financial Officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b)      Changes in Internal Controls

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended July 3, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II.     OTHER INFORMATION

Item 1.      Legal Proceedings

None

Item 2.      Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

         In the following table, we provide information about our purchases during the quarter ended July 3, 2004 of equity securities that are registered by the company pursuant to Section 12 of the Exchange Act.

ISSUER PURCHASES OF EQUITY SECURITIES

	(a)	(b)	(c)	(d)
Period	Total Number of Shares Purchased (1)	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Programs (2)	Maximum Number of Shares that May Yet Be Purchased Under the Programs
04/04/04-05/04/04	103,500	$33.80	103,500	685,913
05/05/04-06/05/04	76,500	37.42	76,500	609,413
06/06/04-07/03/04	35,500	39.29	35,500	573,913
Total:	215,500	$35.99	215,500	573,913

(1)     We repurchased an aggregate of 215,500 shares of our common stock pursuant to the repurchase programs that we publicly announced on May 13, 2002 and May 13, 2003 (the “Programs”).

(2)     Our board of directors approved the repurchase by us of up to an aggregate of 1,500,000 shares of our common stock pursuant to the Programs. Unless terminated earlier by resolution of our board of directors, the Programs will expire when we have repurchased all shares authorized for repurchase thereunder.

Item 3.      Defaults Upon Senior Securities

None

Item 4.      Submission of Matters to a Vote of Security Holders

None

Item 5.      Other Information

None

Item 6.     Exhibits and Reports on Form 8-K

(a)     Exhibits

10.1* Amendment, dated as of July 1, 2004, between Kronos Incorporated and ADP, Inc. to the Software License, Hardware Purchase and Support Agreement, dated as of July 24, 2003.

10.2 Form of Nonstatutory Stock Option Agreement entered into with officers, directors, employees, consultants and advisors in connection with stock option grants under our 2002 Stock Incentive Plan.

31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1 Certificate by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Confidential treatment requested as to certain portions, which portions have been filed separately with the Securities and Exchange Commission.

(b)     Reports on Form 8-K

On July 27, 2004, the Company furnished a Current Report on Form 8-K under Item 12, containing a copy of its earnings release, dated July 27, 2004, for the period ending July 3, 2004 pursuant to Item 12 (Results of Operations and Financial Condition).

SIGNATURES

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

Date: August 12, 2004	KRONOS INCORPORATED
	By: /s/ Paul A. Lacy Paul A. Lacy Executive Vice President, Chief Financial and Administrative Officer (Duly Authorized Officer and Principal Financial Officer)

KRONOS INCORPORATED

EXHIBIT INDEX

Exhibit
Number        Description

10.1* Amendment, dated as of July 1, 2004, between Kronos Incorporated and ADP, Inc. to the Software License, Hardware Purchase and Support Agreement, dated as of July 24, 2003.

10.2 Form of Nonstatutory Stock Option Agreement entered into with officers, directors, employees, consultants and advisors in connection with stock option grants under our 2002 Stock Incentive Plan.

31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1 Certificate by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*     Confidential treatment requested as to certain portions, which portions have been filed separately with the Securities and Exchange Commission.

EX-10

Exhibit No. 10.1

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

FIRST AMENDMENT, dated as of July 1, 2004 (this “Amendment”), between Kronos Incorporated (“Kronos”) and ADP, Inc. (“ADP”) to that certain Software License, Hardware Purchase and Support Agreement, dated as of July 24, 2003 between Kronos and ADP (the “Agreement”).

WHEREAS, the parties desire to modify and/or supplement certain of the restrictions on the parties contained in the Agreement and to memorialize certain other changes to the Agreement, all on the terms and conditions set forth in this Amendment.

NOW, THEREFORE, for good and valuable consideration, the sufficiency of which is hereby acknowledged by the parties, the parties hereto agree as follows:

1.     Definitions. Unless otherwise specifically indicated in this Amendment, capitalized terms used but not defined in this Amendment that are defined in the Agreement shall have the meanings provided in the Agreement. Each of Kronos and ADP shall be referred to individually as a “party,” and, together, as the “parties.”

2.     Principal ADP Restrictions.

(a)     Section 3.1(a)(i) and Section 6(c) of the Agreement are hereby amended by deleting the number “[**]” contained in each such section and replacing it in each case with the number “[**]"; provided that such changes shall only apply with respect to eLabor Software.

(b)     The amendments to the Agreement pursuant to the preceding Section 2(a) will be subject to reversal (and will be of no further force and effect thereafter) at the time, and under the circumstances, contemplated in Section 3(e), below.

3.     Agreement Term, ADP Minimums.

(a)     The term of the Agreement is hereby extended by changing the date set forth in Section 13(a) of the Agreement from “April 3, 2008” to “September 30, 2008.”

(b)     As used in this Amendment:

(i) “FY ‘05” shall mean the 15 month period commencing on July 1, 2004 and ending on September 30, 2005;

(ii) “FY ‘06” shall mean the 12 month period commencing on October 1, 2005 and ending on September 30, 2006;

(iii) “FY ‘07” shall mean the 12 month period commencing on October 1, 2006 and ending on September 30, 2007; and

(iv) “FY ‘08” shall mean the 12 month period commencing on October 1, 2007 and ending on September 30, 2008.

(v) “Kronos Items” shall mean any and all Kronos products and services covered by the Agreement, including, without limitation, software, hardware, maintenance, refurbishment, training and support.

(vi) “Purchase” (including the plural “Purchases”) shall mean the ordering by ADP of Kronos Items that consist of hardware and/or software and the rendering of all other acts or services by Kronos that constitute Kronos Items, in each case, within the specified time period. Any credits issued to ADP during any specified time period shall reduce the total Purchase accordingly.

(c)     With respect to FY ‘05, ADP shall be obligated to Purchase a minimum of $[**] ([**] Dollars) of Kronos Items at the prices then in effect under the Agreement or as otherwise agreed by the parties (the “FY ‘05 Minimum”). In the event the Purchases by ADP in respect of such period exceed the FY ‘05 Minimum, the amount of the FY ‘06 Minimum, as defined below, shall automatically (i.e., without a further amendment of the Agreement) be reduced by the amount of such excess. Notwithstanding the foregoing, with respect to each fiscal quarterly period (commencing July 1, 2004), ADP shall be required to Purchase from Kronos no less than [**]% ([**] percent) of the Quarter Specific Percentage of the FY ‘05 Minimum, as set forth below. However, if ADP’s Purchases in any quarterly period of FY ‘05 exceed the applicable Quarterly Specific Percentage, the amount of such excess shall be applied to any subsequent quarterly periods in FY ‘05 in which ADP’s Purchases fail to reach the Quarterly Minimum Percentage for such subsequent quarterly period. The Quarter Specific Percentage for each of the five applicable quarterly periods in FY ‘05 are as follows:

Quarterly Period		Quarter Specific Percentage
7/1/04 to 9/30/04		[**]% of FY '05 Min.
10/01/04 to 12/31/04	--	[**]% of FY '05 Min.
1/01/05 to 3/31/05	--	[**]% of FY '05 Min.
4/01/05 to 6/30/05	--	[**]% of FY '05 Min.
7/1/05 to 9/30/05	--	[**]% of FY '05 Min.

(d)     With respect to FY ‘06, ADP shall be obligated to Purchase a minimum of $[**] ([**] Dollars) of Kronos Items at the prices then in effect under the Agreement or as otherwise agreed by the parties (subject to adjustment as contemplated in Section 3(c) above, the “FY ‘06 Minimum”). Notwithstanding the foregoing, with respect to each fiscal quarterly period (commencing October 1, 2005), ADP shall be required to Purchase from Kronos no less than [**]% ([**] percent) of the Quarter Specific Percentage of the FY ‘06 Minimum, as set forth below. However, if ADP’s Purchases in any quarterly period of FY ‘06 exceed the applicable Quarterly Specific Percentage, the amount of such excess shall be applied to any subsequent quarterly periods in FY ‘06 in which ADP’s Purchases fail to reach the Quarterly Minimum Percentage for such subsequent quarterly period. Unless modified pursuant to the last sentence (below) of this Section 3(d), the Quarter Specific Percentage for each of the four applicable quarterly periods in FY ‘06 shall be as follows:

Quarterly Period	Quarter Specific Percentage
10/1/05 to 12/31/05	[**]% of FY '06 Min.
1/01/06 to 3/31/06	[**]% of FY '06 Min.
4/1/06 to 6/30/06	[**]% of FY '06 Min
7/1/06 to 9/30/06	[**]% of FY '06 Min.

Kronos agrees that it will not unreasonably withhold any reasonable modification to the Quarter Specific Percentages for FY ‘06 that may be proposed or requested by ADP hereafter (provided, for the sake of certainty, that the 4 quarterly percentages continue to add up to 100%).

(e)     During the latter half of FY’ 06, the parties will use reasonable commercial efforts in good faith to negotiate, agree upon and document ADP minimum purchase amounts for Kronos Items for FY’07 and FY’08; provided that (i) in no event shall the minimum established for FY ‘07 constitute an increase of more than [**]% ([**] percent) over the FY ‘06 Minimum and (ii) in no event shall the minimum established for FY ‘08 constitute an increase of more than [**]% ([**] percent) over the minimum established for FY ‘07 , if any. The parties acknowledge that the foregoing limitations on increases are included as absolute maximums only, and that changed conditions or circumstances at the time such future minimums are to be negotiated may provide a reasonable basis to take the position that an increase, no increase or a decrease in such minimums is warranted. In the event the parties are unable to come to agreement on minimums for FY ‘07 and FY ‘08 prior to the end of FY ‘06 (or such extended negotiation period to which the parties may agree), then, unless otherwise agreed by the parties at the time, the amendment contained in Section 2(a) above shall be reversed, null and void effective as of the beginning of FY ‘07. In the event that the actual Purchases by ADP in respect of FY ‘05 and FY ‘06 exceed the applicable minimums agreed to herein for such periods (the “Excess”), then, for purposes of the first sentence of this Section 3(e) the term “FY ‘06 Minimum” shall be deemed to be modified to say “FY ‘06 Minimum minus the Excess”.

(f)     ADP’s obligations to satisfy any minimums agreed hereunder or to be agreed hereafter (including quarterly minimums) shall be reasonably suspended or the amounts thereof reasonably reduced in the event of any of the following Force Majeure Event(s) (as hereafter defined) that is reasonably expected to have a material adverse affect upon ADP’s ability to satisfy any such minimums. A “Force Majeure Event” shall mean epidemics, environmental contaminations (due to chemical, biological or nuclear materials purposely or accidentally released into the environment, etc.), acts of terrorism, civil disobedience and extraordinary elements of nature or acts of God (other than localized fire, hurricane, tornado or flood) and could not have been prevented by ADP’s reasonable precautions or could not reasonably be circumvented by ADP through the use of alternate plans. The parties expressly acknowledge that a Force Majeure Event(s) does not include vandalism, the regulatory acts of governmental agencies or labor strikes. Upon the occurrence of a Force Majeure Event(s), ADP shall be excused from any further performance of the obligation to satisfy the minimums agreed hereunder for as long as such circumstances prevail, and for so long as ADP continues to attempt to recommence performance to the greatest extent possible, without delay. Furthermore, Kronos represents and warrants that it shall not materially and significantly change its current business practices (particularly with respect to the pricing of its products outside of the ADP/Kronos relationship and its methods of compensating its direct sales force) in such a way as would be reasonably expected to make it significantly more difficult for ADP to satisfy any such minimums.

(g)     For purposes of clarity, it is understood and agreed that in event the amendment contained in Section 2(a) is reversed (for the reasons identified in Section 3(e)), ADP shall not be obligated to make the payments contemplated in Section 6(c) of the Agreement with respect to clients that have crossed the [**] employee threshold during the period after the date hereof and prior to the reversal of such amendment.

(h)     The restrictions contained in Section 3.1(d) of the Agreement shall not apply to the sale by ADP to Clients of additional non-Kronos data collection equipment if the previous sales to such Clients of such non-Kronos equipment was done in accordance with, or not in contravention of any of, the terms of the Agreement.

4.     Elimination/Modification of Kronos Restrictions.

(a) Notwithstanding anything to the contrary contained in the Agreement, from and after the date hereof, Kronos shall be permitted to do or engage in the following activities:

(i) partnering or entering into business relationships, with respect to Kronos Software, Hardware and related services with business process outsourcing firms that provide Payroll Processing Services (each, a “BPO”), regardless of the size of any ultimate client’s workforce; provided that none of such BPOs derives more than [**]% of its total annual revenue from Payroll Processing Services, unless the total annual revenue of such BPO is below $[**] ([**] Dollars).

(ii) partnering or entering into business relationships with third party distributors with respect to distribution of Kronos Software, Hardware and related services to clients having less than [**] employees; provided that none of such distributors derives more than [**]% of its total annual revenue from Payroll Processing Services, unless the total annual revenue of such distributor is below $[**] ([**] Dollars).

(iii) directly providing payroll and HR software on a subscription basis to clients, regardless of the size of any client’s workforce.

5.     Other Agreements.

(a) Attached hereto as Exhibit A is a list of ADP clients currently using eLabor Software. Kronos hereby releases ADP from any commitment or obligation to Kronos to cause or attempt to cause such clients identified on Exhibit A to cease using eLabor Software.

(b) Interpretive understandings regarding the Agreement that have been reached between in-house counsel to ADP and in-house counsel to Kronos since the commencement of the Agreement shall apply to this Amendment in the same manner as applied to the Agreement. In addition, the parties will continue to act reasonably in consultation with one another with respect to “one-off” individual client exceptions that may be requested by ADP from time to time with respect to prospects for eLabor Software that potentially exceed [**] employees by an amount that may be viewed as immaterial or insignificant.

6.     Miscellaneous.

The Agreement, as amended hereby, remains in full force and effect. This Amendment (like the Agreement) shall be governed in all respects by the laws of the State of New Jersey without giving effect to principles of conflicts of law. The headings in this Amendment are intended for convenience of reference and this Amendment shall not be affected or impaired thereby. This Amendment may be executed in any number of counterparts.

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written.

ADP, INC	KRONOS INCORPORATED
By:      /s/Cambell Langdon	By:      /s/Aron Ain
(Authorized Signature)	(Authorized Signature)
Name: Cambell Langdon	Name: Aron Ain
(please print)	(please print)
Title: President, Tax, Financial and           Time Management Services	Title: Executive VP, COO

EXHIBIT A

Legacy eLabor Clients	Main Location
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]	[**]
[**]	[**]
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[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]	[**]
[**]	[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]
[**]	[**]

EX-10

Exhibit 10.2

Kronos Incorporated

Nonstatutory Stock Option Agreement Granted
Under 2002 Stock Incentive Plan

1.     Grant of Option .

         This agreement evidences the grant by Kronos Incorporated, a Massachusetts corporation (the “Company”), on _____________ (the “Grant Date”) to __________________, an _________ of the Company (the “Participant”), of an option award (an “Option”) to purchase, in whole or in part, on the terms provided herein and in the Company’s 2002 Stock Incentive Plan (the “Plan”), a total of ___ shares (the “Shares”) of common stock, $0.01 par value per share, of the Company (“Common Stock”) at $_____ per Share. Unless earlier terminated pursuant to the terms hereof or the Plan, this Option shall expire on __________ (the “original expiration date”).

         The Board of Directors (the “Board”) intends that the Option evidenced by this agreement shall not be an incentive stock option as defined in Section 422 of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the “Code”). Except as otherwise indicated by the context, the term “Participant”, as used in this Option, shall be deemed to include any person who acquires the right to exercise this option validly under its terms.

2.     Vesting Schedule.

         This Option will become exercisable (“vest”) as to 25% of the original number of Shares on the first anniversary of the Grant Date and as to an additional 25% of the original number of Shares at the end of each successive twelve-month period following the first anniversary of the Grant Date until the fourth anniversary of the Grant Date, at which time this option shall be fully vested and exercisable.

         The right of exercise shall be cumulative so that to the extent this Option is not exercised in any period to the maximum extent permissible it shall continue to be exercisable, in whole or in part, with respect to all shares for which it is vested until the earlier of the original expiration date or the termination of this Option under Section 3 or 4 hereof or under the Plan.

3.     Exercise of Option.

         This Option may be exercised by delivery to the Company of a written notice of exercise signed by the Participant (or other proper person as provided herein or in the Plan) or by any other form of notice (including electronic notice) approved by the Board together with payment in full as specified in Section 5(f) of the Plan for the number of shares for which this Option is exercised. This Participant may purchase less than the number of shares covered hereby, provided that no partial exercise of this option may be for any fractional share. Unless otherwise provided herein or in the Plan, this Option may not be exercised unless the Participant, at the time of such exercise, is, and has been at all times since the Grant Date, an employee, director or officer of, or consultant or advisor to, the Company or any parent or subsidiary of the Company as defined in Section 424(e) or (f) of the Code.

4.     Changes in Employment Status.

         (a)      Termination by Death. If the Participant’s employment or service to the Company or it subsidiaries terminates by reason of death, this Option to the extent exercisable immediately prior to date of death may be exercised by the legal representative or legatee of the Participant until the earlier of the second anniversary of the date of death or the original expiration date of this Option.

         (b)     Termination by Reason of Disability. If the Participant’s employment or service to the Company or its subsidiaries terminates by reason of disability, this Option to the extent exercisable on the date of termination may be exercised by the Participant until the earlier of the first anniversary of the date of termination or the original expiration date of this Option.

         (c)     Termination by Reason of Retirement. If the Participant’s employment with the Company or its subsidiaries terminates by reason of retirement, this Option to the extent exercisable on the date of termination may be exercised by the Participant until the earlier of three (3) months from the date of termination or the original expiration date of this Option. Notwithstanding the foregoing, a Participant who is at least sixty (60) years of age and has been in continuous employment with the Company for at least ten (10) years, will be entitled to additional acceleration of vesting and an extended period in which to exercise this Option as provided in Section 6 in the Plan.

         (d)     Termination for Cause. If the Participant’s employment or service to the Company or its subsidiaries is terminated for cause, this Option shall terminate immediately; provided that the Board may, at its sole discretion, allow the exercise of this Option by the Participant to the extent exercisable on the date of termination until the earlier of one month from the date of termination or the original expiration date of this Option.

         (e)     Leave of Absence. If the Participant’s employment is interrupted by reason if a leave of absence, whether paid or unpaid, this Option held by the Participant shall cease to vest during such leave of absence and will resume vesting upon the Participant’s return from such leave. The original expiration date of this Option shall in no way be affected.

         (f)     Other Termination. Unless otherwise determined by the Board, if a Participant’s status with the Company or its subsidiaries terminates for any reason other than death, disability, retirement, cause or leave of absence, this Option to the extent exercisable on the date of termination or change of status may be exercised by the Participant until the earlier of three (3) months from the date of termination or change of status or the original expiration date of this Option.

5.     Withholding.

         No Shares will be issued pursuant to the exercise of this Option unless and until the Participant pays to the Company, or makes provision satisfactory to the Company for payment of, any federal, state or local withholding taxes required by law to be withheld in respect of this Option in accordance with the terms of Section 7(d) of the Plan.

6.     Nontransferability of Option.

         Except as specified in Section 7(a) of the Plan, this Option may not be sold, assigned, transferred, pledged or otherwise encumbered by the Participant, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the lifetime of the Participant, this Option shall be exercisable only by the Participant.

7.     Forfeiture.

         In the event that the Participant terminates his or her employment with the Company or any of its subsidiaries for any reason whatsoever, and within twenty four (24) months if the Participant is employed in the fields of research and development, engineering, testing, strategic planning or any phase of management or within twelve (12) months if the Participant is employed in any other fields (i) accepts employment with any competitor of, or otherwise engages in competition with, the Company or (ii) attempts directly or indirectly to induce any employee of the Company to accept employment elsewhere, the Board of Directors, in its sole discretion, may require the Participant to return, or (if not received) to forfeit, to the Company the economic value of an Award which is realized or obtained (measured at the date of exercise or vesting) by such Participant during the twelve (12) months prior to the date of such Participant’s termination of employment with the Company. In addition to the forfeiture provision specified above and the termination provisions in the 2002 Stock Incentive Plan, the Company reserves the right to terminate (to the extent not previously exercised) this Option if Participant's employment is terminated without the written consent of the Company.

8.     Provisions of the Plan.

         This Option is subject to, and shall be governed by, the provisions of the Plan, a copy of which is furnished to the Participant with this Option.

         IN WITNESS WHEREOF, the Company has caused this Option to be executed by its duly authorized officer.

By:	_______________________
	Mark S. Ain  Chief Executive Officer

PARTICIPANT’S ACCEPTANCE

         The undersigned Participant hereby accepts this Option and agrees to the terms and conditions of the Option, this agreement and to the terms and conditions of the Plan, pursuant to which this Option was granted to the Participant. The undersigned Participant hereby acknowledges receipt of a copy of the Company’s 2002 Stock Incentive Plan.

PARTICIPANT:

 _______________________________
 Signature

 _______________________________
 Name

  Print Address of Participant:

 _______________________________
 Street

 _______________________________
 City

 _______________________________
 State      Zip/Postal Code

EX-31

Exhibit 31.1

CERTIFICATIONS

        I, Mark S. Ain, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Kronos Incorporated;

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 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)) 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) [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986]

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 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 12, 2004	/s/ Mark S. Ain
	Mark S. Ain Chief Executive Officer

EX-31

Exhibit 31.2

CERTIFICATIONS

        I, Paul A. Lacy, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Kronos Incorporated;

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 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)) 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) [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986]

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 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 12, 2004	/s/ Paul A. Lacy
	Paul A. Lacy Executive Vice President, Chief Financial and Administrative Officer

EX-32

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

         In connection with the Quarterly Report on Form 10-Q of Kronos Incorporated (the “Company”) for the period ended July 3, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Mark S. Ain, Chief Executive Officer of the Company, and Paul A. Lacy, Executive Vice President, Chief Financial and Administrative Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

    (1)        The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

    (2)        The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 12, 2004	/s/ Mark S. Ain
	Mark S. Ain Chief Executive Officer

Date: August 12, 2004	/s/ Paul A. Lacy
	Paul A. Lacy Executive Vice President, Chief Financial and Administrative Officer

A signed original of this written statement required by Section 906 has been provided to Kronos Incorporated and will be retained by Kronos Incorporated and furnished to the Securities and Exchange Commission or its staff upon request.