10-Q

UNITED STATES

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 April 1, 2006

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	(I.R.S. Employer
Incorporation or organization)	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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer X Accelerated filer Non-accelerated filer

As of May 5, 2006, 32,049,795 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
		Six Months Ended April 1, 2006 and April 2, 2005	1
	Condensed Consolidated Balance Sheets at April 1, 2006
		and September 30, 2005	2
	Condensed Consolidated Statements of Cash Flows for the
		Six Months Ended April 1, 2006 and April 2, 2005	3
	Notes to Condensed Consolidated Financial Statements		4
Item 2.	Management's Discussion and Analysis of Financial Condition and
		Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosure About Market Risk		34
Item 4.	Controls and Procedures		34
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		35
Item 1A.	Risk Factors		35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		39
Item 3.	Defaults Upon Senior Securities		40
Item 4.	Submission of Matters to a Vote of Security Holders		40
Item 5.	Other Information		40
Item 6.	Exhibits		41
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						Six Months Ended
	April 1, 2006			April 2, 2005			April 1, 2006			April 2, 2005
Net revenues:
Product	$	59,038		$	46,317		$	107,025		$	99,583
Maintenance		47,233			42,451			93,479			81,119
Professional services		37,252			31,853			70,962			58,195
		143,523			120,621			271,466			238,897
Cost of sales:
Costs of product		14,883			11,651			25,469			23,024
Costs of maintenance		14,746			11,023			28,766			22,123
Costs of professional services		30,585			26,079			60,510			49,671
		60,214			48,753			114,745			94,818
Gross profit		83,309			71,868			156,721			144,079
Operating expenses and other income:
Sales and marketing		42,395			34,616			81,167			70,478
Engineering, research and development		13,910			12,027			26,923			24,816
General and administrative		12,105			8,546			24,082			16,992
Amortization of intangible assets		1,665			1,194			3,207			2,290
Other income, net		(1,857	)		(1,611	)		(3,365	)		(3,313	)
		68,218			54,772			132,014			111,263
Income before income taxes		15,091			17,096			24,707			32,816
Provision for income taxes		5,237			5,873			8,629			10,935
Net income	$	9,854		$	11,223		$	16,078		$	21,881
Net income per common share:
Basic	$	0.31		$	0.35		$	0.50		$	0.69
Diluted	$	0.31		$	0.34		$	0.50		$	0.67
Weighted-average common shares outstanding:
Basic		31,919,542			31,910,961			31,854,544			31,741,255
Diluted		32,251,370			32,835,874			32,261,262			32,716,724
Stock-based compensation expense included in the above captions:
Costs of product	$	97		$	--		$	179		$	--
Costs of maintenance		290			--			589			--
Costs of professional services		676			--			1,196			--
Sales and marketing		1,400			--			2,656			--
Engineering, research and development		887			--			1,670			--
General and administrative		1,175			--			2,149			--
	$	4,525		$	--		$	8,439		$	--

See accompanying notes to condensed consolidated financial statements.

1

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

	April 1, 2006			September 30, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	62,978		$	43,492
Marketable securities		51,812			37,078
Accounts receivable, less allowances of $10,584
at April 1, 2006 and $11,156 at September 30, 2005		110,650			120,746
Deferred income taxes		8,267			10,937
Other current assets		20,343			20,142
Total current assets		254,050			232,395
Marketable securities		48,366			59,865
Property, plant and equipment, net		57,973			56,158
Customer related intangible assets		30,826			31,085
Other intangible assets		15,270			15,818
Goodwill		150,691			142,665
Capitalized software, net		22,862			23,092
Other assets		22,399			18,348
Total assets	$	602,437		$	579,426
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	8,995		$	9,013
Accrued compensation		41,002			43,379
Accrued expenses and other current liabilities		24,648			27,877
Deferred product revenues		2,722			3,938
Deferred professional service revenues		26,661			36,530
Deferred maintenance revenues		112,218			102,038
Total current liabilities		216,246			222,775
Deferred maintenance revenues		7,744			4,921
Deferred income taxes		12,102			15,261
Other liabilities		4,715			4,435
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, 32,079,145 and
31,724,460 shares issued at April 1, 2006 and September 30, 2005 respectively		321			317
Additional paid-in capital		66,456			52,802
Retained earnings		294,073			277,995
Accumulated other comprehensive income:
Foreign currency translation		1,204			1,307
Net unrealized (loss) on available-for-sale investments		(424	)		(387	)
		780			920
Total shareholders' equity		361,630			332,034
Total liabilities and shareholders' equity	$	602,437		$	579,426

See accompanying notes to condensed consolidated financial statements.

2

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

	Six Months Ended
	April 1, 2006			April 2, 2005
Operating activities:
Net income	$	16,078		$	21,881
Adjustments to reconcile net income to net cash and equivalents
provided by operating activities:
Depreciation		8,001			6,245
Amortization of intangible assets		3,605			2,290
Amortization of capitalized software		7,132			6,825
Provision for deferred income taxes		(534	)		1,727
Stock based compensation		8,439			--
Changes in certain operating assets and liabilities:
Accounts receivable, net		8,631			7,394
Deferred product revenues		(1,470	)		(4,163	)
Deferred professional service revenues		(11,832	)		(4,039	)
Deferred maintenance revenues		11,976			2,638
Accounts payable, accrued compensation
and other liabilities		(2,995	)		(7,416	)
Taxes payable		4,484			(4,936	)
Tax benefit from exercise of stock options		(5,267	)		11,126
Other		(1,959	)		(3,525	)
Net cash and equivalents provided by operating activities		44,289			36,047
Investing activities:
Purchase of property, plant and equipment		(9,911	)		(14,853	)
Capitalized internal software development costs		(6,901	)		(7,238	)
(Increase) decrease in marketable securities		(3,235	)		17,129
Acquisitions of businesses and software, net of cash acquired		(8,592	)		(52,488	)
Net cash and equivalents used in investing activities		(28,639	)		(57,450	)
Financing activities:
Net proceeds from exercise of stock options and
employee purchase plans		13,120			18,584
Tax benefit from exercise of stock options		5,267			--
Repurchase of common stock		(14,112	)		(10,398	)
Net cash and equivalents provided by financing activities		4,275			8,186
Effect of exchange rate changes on cash and equivalents		(439	)		957
Increase (decrease) in cash and equivalents		19,486			(12,260	)
Cash and equivalents at the beginning of the period		43,492			45,877
Cash and equivalents at the end of the period	$	62,978		$	33,617

See accompanying notes to condensed consolidated financial statements.

3

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, 2005. The results of operations for the six months ended April 1, 2006 are not necessarily indicative of the results for a full fiscal year. The Company has reclassified $2.0 million of accrued liabilities which were classified as accounts payable on the September 30, 2005 balance sheet to accrued expenses and other current liabilities to conform with current period 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 (92 days in fiscal 2006 and 93 days in fiscal 2005) and fourth quarter (91 days in fiscal 2006 and 90 days in fiscal 2005) 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

On October 1, 2005, the Company adopted Statement of Financial Accounting Standard No. 123R, “Share-Based Payment” (“FAS 123R”), which requires all share-based payments, including grants of stock options, to be recognized in the income statement as an operating expense, based on their fair values.

Prior to adopting FAS 123R, the Company accounted for stock-based compensation under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“Opinion 25”), as permitted by Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation,” (“FAS 123”). No stock-based compensation cost was recognized in the Statement of Income for the three and six-month periods ended April 2, 2005, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. The Company has applied the modified prospective method in adopting FAS 123R. Accordingly, periods prior to adoption have not been restated. Under the modified prospective method, compensation cost recognized in the three and six-month periods ended April 1, 2006 includes (a) compensation cost for all share-based payments granted prior to, but not yet vested as of October 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of FAS 123, and (b) compensation cost for all share-based payments granted subsequent to October 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of FAS 123R.

As a result of adopting FAS 123R on October 1, 2005, the Company’s income before income taxes and net income for the three-month period ended April 1, 2006, are $4.5 million and $3.2 million lower, respectively, than if it had continued to account for share-based compensation under Opinion 25. Income before income taxes and net income for the six-month period ended April 1, 2006, are $8.4 million and $5.8 million lower, respectively, than if the Company had continued to account for share-based compensation under Opinion 25. Basic and diluted earnings per share would have been $0.41 and $0.40 for the three-month period ended April 1, 2006 and $0.69 and $0.68 for the six-month period ended April 1, 2006, if the Company had not adopted FAS 123R, compared to reported basic and diluted earnings per share of $0.31 and $0.50 for the three and six-month periods ended April 1, 2006, respectively.

4

Prior to the adoption of FAS 123R, the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. FAS 123R requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The $5.3 million tax benefit from the exercise of stock options classified as a financing cash inflow would have been classified as an operating cash inflow if the Company had not adopted FAS 123R.

The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to the prior period:

	Three Months Ended		Six Months Ended
		April 2, 2005		April 2, 2005
Net income, as reported		$11,223		$21,881
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		---		---
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(3,053)		(5,598)
Pro forma net income		$ 8,170		$16,283
Earnings per share:
Basic—as reported		$0.35		$0.69
Basic—pro forma		$0.26		$0.51
Diluted—as reported		$0.34		$0.67
Diluted—pro forma		$0.25		$0.50

On April 1, 2006, the Company had two share-based compensation plans, which are described below (together, the “Plans”). The compensation cost that has been charged against income for the Plans during the three and six month periods ended April 1, 2006 was approximately $4.5 million and $8.4 million, respectively. The total income tax benefit recognized in the income statement for the three and six month periods ended April 1, 2006 for share-based payments was approximately $1.4 million and $2.6 million, respectively.

Stock Award Plan: In February 2005, the stockholders approved amendments to the 2002 Stock Incentive Plan (“Award Plan”), which was previously adopted in February 2002 and amended in February 2004. The amendments enable the Compensation Committee of the Board of Directors to utilize various forms of equity awards as defined by the Award Plan, including stock options, restricted stock, and restricted stock units, as and when they deem necessary. The Award Plan permits the award of up to 5,000,000 stock options. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant. Options granted under the Award Plan during the three and six month periods ended April 1, 2006 and during the fiscal years of 2005, 2004, 2003 and 2002 are exercisable in equal installments over a four-year period beginning one year from the date of grant and have a contractual life of four years and six months. Restricted stock units granted under the Award Plan during the three and six month periods ended April 1, 2006 are exercisable in equal installments over a four-year period beginning one year from the date of grant.

5

Stock Purchase Plan: In July 2005, the Company’s Board of Directors voted to amend the 2003 Employee Stock Purchase Plan (“Purchase Plan”), which was previously approved for adoption by the stockholders in February 2003. The amendment eliminated the look-back feature previously contained in the Purchase Plan. Under the Purchase Plan, eligible employees may authorize payroll deductions of up to 10% of their compensation (not to exceed $12,500 in a six month period) to purchase shares at 85% of the fair market value of the Company’s common stock at the end of the six-month option period.

The fair value of each option award issued under the Plans is estimated on the date of grant using a Black-Scholes based option-pricing model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company’s stock. The expected term of the options is based on the Company’s historical option exercise data taking into consideration the exercise patterns of the option holders during the option’s life. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant.

	Six Month Period Ended
		April 1, 2006	April 2, 2005
Expected Volatility		41.8%	50.3%
Expected Term		3.42 years	4.0 years
Risk Free Interest Rate		4.39%	3.38%
Dividend Yield		0.0%	0.0%

The Company has not paid and does not anticipate paying cash dividends; therefore, the expected dividend yield is assumed to be zero.

The expected term used to value the shares issued under the Purchase Plan is assumed to be zero as there is no look-back feature contained in the Purchase Plan.

The value of the restricted stock units is based on the intrinsic value of the award at the date of grant. The resulting compensation charges are then recognized ratably over the vesting period of the awards, which is typically four years.

A summary of option activity under the Award Plan as of April 1, 2006, and changes during the six month period then ended is presented below:

Options	Shares (000s)	Weighted-Average Exercise Price	Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value ($000s)
Outstanding at September 30, 2005	3,362	$33.80
Granted*	852	47.80
Exercised	(614)	19.05
Canceled*	(56)	41.43
Outstanding at April 1, 2006	3,544	$39.61	2.7 years	$13,407
Exercisable at April 1, 2006	1,105	$33.71	2.0 years	$7,499

*Does not include restricted stock units. The restricted stock units were granted with an exercise price of $0.01, and vest equally on an annual basis over a four year period. The market price of the Company’s common stock on the date of grant was $48.22. A summary of restricted stock unit activity under the Award Plan as of April 1, 2006, and the changes during the six month period then ended is presented below:

6

Restricted Stock Units	Shares (000s)
Outstanding at September 30, 2005	---
Granted	70
Exercised	---
Canceled	(1)
Outstanding at April 1, 2006	69
Exercisable at April 1, 2006	---

The weighted-average grant-date fair value of options, estimated using a Black-Scholes based option pricing model, granted during the three and six month periods ended April 1, 2006 was $17.10 for both periods. For the three and six month periods ended April 2, 2005, the weighted-average grant-date fair value was $22.26 and $20.71, respectively. The total intrinsic value of options exercised was approximately $6.7 million and $14.5 million for the three and six month periods ended April 1, 2006 and $16.0 million and $31.6 million for the three and six month periods ended April 2, 2005.

A summary of the status of the Company’s nonvested stock options as of April 1, 2006, and changes during the period then ended, is presented below:

Nonvested Shares	Shares (000s)	Weighted-Average Grant- Date Fair Value*
Nonvested at October 1, 2005	2,718	$16.07
Granted	852	17.10
Vested	(1,075)	13.69
Forfeited	(56)	17.36
Nonvested at April 1, 2006	2,439	$17.45

* Estimated using a Black-Scholes based option pricing model.

As of April 1, 2006, there was approximately $38.9 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plans, including compensation cost related to stock options, restricted stock units and stock purchase plan shares. That cost is expected to be recognized over a weighted-average period of 2.9 years. The total fair value of shares vested during the three and six month periods ended April 1, 2006 was $0.8 million and $14.7 million, respectively. The compensation cost related to stock options, restricted stock units and stock purchase plan shares is recognized ratably over the vesting periods.

Cash received from option exercise under the Plans for the three and six month periods ended April 1, 2006 was $7.9 million and $13.1 million, respectively. For the three and six month period ended April 2, 2005 the total cash received from option excercises was $10.8 million and $18.6 million, respectively. The tax benefit realized for the tax deductions from option exercises totaled $2.6 million and $5.3 million for the three and six month periods ended April 1, 2006, respectively. For the three and six month period ended April 2, 2005, the tax benefit realized for the tax deductions from option exercises was $5.7 million and $11.1 million, respectively.

7

The Company has a policy of repurchasing shares on the open market to satisfy share option exercises. The Company repurchased 197,500 shares of its common stock during the three month period ended April 1, 2006 and 339,250 shares of its common stock during the six month period ended April 1, 2006. Under the Company’s current repurchase program up to an additional 714,226 shares may be repurchased.

NOTE D - Other Current Assets

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

	April 1, 2006	September 30, 2005
Inventory	$                4,230	$               4,995
Prepaid expenses	16,113	15,147
Total	$              20,343	$             20,142

NOTE E – Intangible Assets

Acquired intangible assets subject to amortization are presented in the following table (dollars in thousands). Due to the timing of recent acquisitions, the Company has not finalized the allocation of the purchase price on certain acquisitions and the amounts shown below for intangible assets and goodwill are estimates.

	Weighted Average Life in Years	Gross Carrying Value	Accumulated Amortization	Net Book Value
As of April 1, 2006:
Intangible assets:
Customer related	9.8	$47,144	$16,318	$30,826
Maintenance relationships	11.9	10,102	3,136	6,966
Non-compete agreements	3.7	6,201	4,759	1,442
Technology	9.6	7,956	1,094	6,862
Total intangible assets		$71,403	$25,307	$46,096
As of September 30, 2005:
Intangible assets:
Customer related	9.8	$45,452	$14,367	$31,085
Maintenance relationships	12.0	9,492	2,739	6,753
Non-compete agreements	3.7	5,860	4,055	1,805
Technology	10.0	7,956	696	7,260
Total intangible assets		$68,760	$21,857	$46,903

8

For the three months ended April 1, 2006 and April 2, 2005, the amount of goodwill acquired is $3.4 million and $13.2 million, respectively. The amount of goodwill acquired during the six months ended April 1, 2006 and April 2, 2005 is $7.8 million and $40.8 million, respectively. The Company has approximately $150.7 million and $142.7 million of goodwill recorded on its balance sheet as of April 1, 2006 and September 30, 2005, respectively.

For the three months ended April 1, 2006 and April 2, 2005, the Company recorded amortization expense for intangible assets of $2.1 million and $1.2 million, respectively. The Company recorded $3.6 million and $2.3 million of amortization expense for intangible assets for the six months ended April 1, 2006 and April 2, 2005, respectively. The estimated annual amortization expense for intangible assets for the current and next five fiscal years is as follows (in thousands):

FiscalYear Ending September 30,	Estimated Annual Amortization Expense
2006	$7,024
2007	6,454
2008	6,282
2009	5,608
2010	4,931
2011	4,543

NOTE F – Acquisitions

On January 17, 2006, the Company purchased the outstanding shares of common stock of Timeworks Inc. (“Timeworks”). The aggregate consideration paid, which includes actual cash paid (approximately $5.0 million) and the liabilities assumed (approximately $0.1 million), was approximately $5.1 million. Timeworks was formerly a provider of time and labor software solutions. The amounts allocated to identifiable intangible assets and goodwill are approximately $1.8 million and $3.3 million, respectively. The goodwill recognized is deductible for income tax purposes over a 15 year amortization period. Due to the timing of the acquisition, the Company has not finalized the allocation of the purchase price. The Company anticipates that the allocation of the purchase price will be completed by September 30, 2006. The results of Timeworks’ operations, which are not material to the Company’s results of operations, have been included in the consolidated financial statements since the date of acquisition. As a result of this acquisition, and in support of the premium paid for Timeworks, the Company expects to enhance its time and labor solutions. The deferred revenue related to the maintenance revenue streams, which was recorded at fair value of the Company’s remaining performance obligation, was recorded as the Company had assumed a legal performance obligation as described in Emerging Issues Task Force 01-03, “Accounting in a Business Combination for Deferred Revenue of an Acquiree” (“EITF 01-03”).

On December 19, 2005, the Company assumed certain assets, liabilities and the ongoing business operations of Compu Cash, Systems. (“Compu Cash”), the former Nevada-based Kronos reseller. The aggregate consideration paid, which includes actual cash paid (approximately $2.2 million) and the liabilities assumed (approximately $0.1 million), was approximately $2.3 million. The amounts allocated to identifiable intangible assets and goodwill are approximately $1.0 million and $1.3 million, respectively. The goodwill recognized is deductible for income tax purposes over a 15 year amortization period. The results of Compu Cash’s operations, which are not material to the Company’s results of operations, have been included in the consolidated financial statements since December 19, 2005. Compu Cash was engaged in the sale and service of employee time and attendance, employee scheduling, data collection and labor management hardware and software systems, including the resale of the Company’s products through a reseller relationship. As a result of the acquisition, the Company gained access to direct sales and service organizations, as well as access to the entire existing maintenance revenue stream from Compu Cash’s customers. The deferred revenue related to the maintenance revenue streams, which was recorded at fair value of the Company’s remaining performance obligation, was recorded as the Company had assumed a legal performance obligation as described in Emerging Issues Task Force 01-03, “Accounting in a Business Combination for Deferred Revenue of an Acquiree” (“EITF 01-03”).

9

On November 18, 2004, the Company acquired through Kronos Acquisition Inc., a Canadian corporation and the Company’s wholly-owned subsidiary, approximately 10.5 million common shares of AD OPT Technologies Inc. (“AD OPT”), a Canadian corporation, representing approximately 95.6% of the outstanding common shares, for an aggregate purchase price of approximately $39.1 million, net of cash and short-term investments acquired of approximately $16.0 million. On December 16, 2004, the Company acquired the remaining 4.4% outstanding common shares through the compulsory acquisition provisions of the Canada Business Corporations Act, for an additional purchase price of approximately $2.5 million. The results of AD OPT’s operations have been included in the consolidated financial statements since November 18, 2004. AD OPT was a provider of advanced workforce planning and scheduling solutions. As a result of this acquisition, and in support of the premium paid for AD OPT, the Company expects to enhance its growth strategy and its leadership in employee scheduling solutions.

The transaction was accounted for under the purchase method of accounting and accordingly, the assets and liabilities acquired were recorded at their estimated fair values at the effective date of the acquisition. The goodwill recognized is deductible for income tax purposes, over a 15 year amortization period. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed (in thousands):

Accounts receivable	$4,062
Fixed assets	1,817
Deferred taxes	4,924
Other assets	1,667
Identifiable intangible assets	13,672
Goodwill	32,221
Total assets acquired	58,363
Accounts payable	4,742
Deferred product revenues	732
Deferred maintenance revenues	3,344
Deferred professional services	963
Deferred tax liabilities	5,291
Other liabilities	180
Total liabilities assumed	15,252
Net assets acquired	$43,111

The preceding table reflects the payment of approximately $1.5 million in transaction costs related to the AD OPT acquisition.

The deferred revenue included in the table above, which was recorded at estimated fair value of the Company’s remaining performance obligation, was recorded as the Company had assumed a legal performance obligation as described in EITF 01-03.

The following table presents the consolidated results of operations on an unaudited pro forma basis as if the acquisition of AD OPT had taken place at the beginning of the periods presented. The following table has been prepared on the basis of estimates and assumptions available at the time of this filing that the Company and AD OPT believe are reasonable (in thousands, except per share data).

	Three Months Ended		Six Months Ended
Unaudited		April 2, 2005		April 2, 2005
Total revenues		$120,621		$242,751
Net income		11,223		22,692
Earnings per share – basic		$0.35		$0.71
Earnings per share – diluted		$0.34		$0.69

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The unaudited pro forma results of operations are for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisitions occurred at the beginning of the periods presented or the results which may occur in the future.

As a result of the AD OPT and 3i Systems acquisitions, the Company has begun to provide customized software solutions to its customers. Revenue related to the sale of customized software solutions is recognized on a contract accounting basis in accordance with the provisions of Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” (“SOP 81-1”). The contract accounting is applied based on a percentage-of-completion basis generally representing labor costs incurred relative to total estimated labor costs. Provisions for estimated losses on contracts are recorded when identified. Deferred revenues are recorded when invoicing exceeds recognized revenues. Revenue derived from the development and delivery of customized software solutions is included in product revenues. Revenue recognized under SOP 81-1 is not material to the Company’s results of operations.

Certain acquisition 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. Guaranteed payments are accrued at the time of the acquisition and are included in the purchase price allocation. As of April 1, 2006, the Company was obligated to pay $2.3 million in guaranteed payments. These payments will be made at various dates through fiscal 2008. 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. The provisions for contingent payments expire during fiscal 2006 and 2009. During the three and six months ended April 1, 2006, there were no contingent payments earned. During the three months ended April 2, 2005, there were $80,000 of contingent payments earned, all of which was recorded as compensation expense. During the six months ended April 2, 2005 there were $207,000 of contingent payments earned of which $108,000 were recorded as goodwill. The remainder was recorded as compensation expense.

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NOTE G – Comprehensive Income

For the three and six months ended April 1, 2006 and April 2, 2005, comprehensive income consisted of the following (in thousands):

	Three Months Ended		Six Months Ended
	April 1, 2006	April 2, 2005	April 1, 2006	April 2, 2005
Comprehensive income:
Net income	$9,854	$11,223	$16,078	$21,881
Cumulative translation adjustment	--	(541)	(103)	200
Unrealized loss on available-for-sale Securities	(4)	(416)	(37)	(808)
Total comprehensive income	$9,850	$10,266	$15,938	$21,273

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		Six Months Ended
	April 1, 2006	April 2, 2005	April 1, 2006	April 2, 2005
Net income	$9,854	$11,223	$16,078	$21,881
Weighted-average shares	31,919,542	31,910,961	31,854,544	31,741,255
Effect of dilutive securities:
Employee stock options and awards	331,828	924,913	406,718	975,469
Adjusted weighted-average shares and assumed conversions	32,251,370	32,835,874	32,261,262	32,716,724
Basic earnings per share	$0.31	$0.35	$0.50	$0.69
Diluted earnings per share	$0.31	$0.34	$0.50	$0.67

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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 revenues, product revenues, revenue growth rates, gross margin, operating expenses, earnings per share, future acquisitions, capital expenditures, capitalization of software development costs, 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 “Item 1A. Risk Factors” in Part II of this Quarterly Report on Form 10-Q and “Certain Factors That May Affect Future Operating Results” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2005. 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 and organizations 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.

SUMMARY:
	Three Months Ended			Six Months Ended
	April 1, 2006	April 2, 2005	Percent Change	April 1, 2006	April 2, 2005	Percent Change
Product revenues	$59,038	$46,317	27%	$107,025	$99,583	7%
Maintenance revenues	47,233	42,451	11%	93,479	81,119	15%
Professional services revenues	37,252	31,853	17%	70,962	58,195	22%
Total revenues	$143,523	$120,621	19%	$271,466	$238,897	14%
Net income	$9,854	$11,223	(12%)	$16,078	$21,881	(27%)
Earnings per share - basic	$0.31	$0.35	(11%)	$0.50	$0.69	(28%)
Earnings per share - diluted	$0.31	$0.34	(9%)	$0.50	$0.67	(25%)

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Total revenues in the three and six month periods ended April 1, 2006 increased 19% and 14%, respectively, over the comparable periods in fiscal 2005. The growth was primarily attributable to revenues from our core business, which excludes revenues generated from customers that have been part of an acquired business transaction over the preceding four fiscal quarters. The growth quarter over quarter was due to a 27% increase in product revenues as well as increases of 11% and 17%, respectively, in maintenance and professional services revenues. Product revenues increased 7% in the six month period ended April 1, 2006 as compared to the same period in 2005, and maintenance and professional service revenues increased 15% and 22%, respectively, during that same period.   

Net income in the second quarter of fiscal 2006 decreased 12% to $9.9 million from $11.2 million in the prior year quarter, with earnings per share decreasing to $0.31 from $0.34 per diluted share. Net income in the first six months of fiscal 2006 decreased 27% to $16.1 million from $21.9 million in the prior year, with earnings per share decreasing to $0.50 from $0.67 per diluted share. The decrease in net income as compared to the prior year was primarily due to the recording of stock-based compensation during the three and six month periods ended April 1, 2006 related to our adoption of Financial Accounting Standards Board, or FASB, Statement No. 123 (revised 2004), “Share-Based Payment,” or FAS 123R, on October 1, 2005. These costs were approximately $3.2 million and $5.8 million, respectively, net of tax benefits.

Regarding expectations for the third quarter and the remainder of fiscal 2006, we presently anticipate revenue in the range of $145 – $149 million for the third quarter and $577 – $584 million for fiscal 2006, with diluted earnings per share in the range of $0.32 – $0.36 for the third quarter of fiscal 2006 and $1.35 – $1.43 for the entire fiscal 2006. We expect that the impact of FAS 123R (including outstanding, unvested awards and new stock and stock-based awards) will be approximately $0.10 per diluted share for the third quarter and $0.37 for the entire fiscal 2006. We expect amortization of intangible assets to be approximately $0.03 per diluted share for the third quarter of fiscal 2006 and $0.14 per diluted share for the entire fiscal 2006.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

• Revenue Recognition

• Allowance for Doubtful Accounts and Sales Returns Allowance

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• Valuation of Intangible Assets and Goodwill

• Capitalization of Software Development Costs

• Income Taxes

• Business Combinations

• Stock-Based Compensation

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result. Our senior management has reviewed these critical accounting policies and related disclosures with our Audit Committee.

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., or 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:

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

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

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

• Collectibility is probable; and

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

Although these factors are governed by specific and detailed rules and guidelines related to revenue recognition, there is often a significant amount of judgment involved in determining the amount of revenue to be recognized for a specific customer arrangement as well as the timing of that revenue. Areas most often affected are:

• Determining whether the fee is fixed or determinable

• Determining whether collectibility is probable

• When multiple elements exist and there is an undelivered element:

• determining whether undelivered elements are non-essential

• determining whether vendor-specific objective evidence of fair value for each separate undelivered element exists

• determining vendor specific objective evidence

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• determining the amount of revenue to be recognized on shipment and

• determining the timing of the recognition of any revenue that is deferred

• in addition, we may change our pricing models in the future, which could result in a different fair value assignment for undelivered elements. This could cause our future revenue recognition to differ significantly from our historical results.

We base our judgment on the specific facts and circumstances of the arrangements and our general experience in addressing these subjective factors. Historically, our estimates and assumptions have been accurate and we do not anticipate that this will change significantly in the near future. However, if our estimates and assumptions are inaccurate in any period, it could have a material adverse affect on our results of operations.

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 typically 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:

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

• The professional services have been delivered;

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

• Collectibility is probable.

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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 we therefore have classified deferred professional services as a current liability.

Our arrangements with end-user customers and indirect channel customers do not include any contractual rights of return or price protection, nor do arrangements with indirect channel customers include any acceptance provisions. Our arrangements with end-user customers generally include 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 technical specifications. Generally, we determine that these acceptance provisions are not substantive and therefore should be accounted for as a warranty in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies.”

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 payments based on specific due dates, such that all payments for the software license, data collection hardware and related ancillary products, as well as training services included in the original arrangement, are ordinarily paid within one year of contract signing. Professional services are typically rendered on a buy-as-you-go basis such that the customer is invoiced for services on a monthly basis, in arrears. Professional services billings are generally due within 30 days of the invoice date. Our payment terms for indirect channel customers are less than 90 days and payments are typically due within 30 days of the invoice date.

If the arrangement includes a substantive acceptance provision, we defer revenue not meeting the criterion for recognition under Statement of Position 97-2, “Software Revenue Recognition,” and classifies this revenue as deferred revenue. 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. Revenue that is deferred due to a substantive acceptance provision is recognized, assuming all other conditions for revenue recognition have been satisfied, when the uncertainty regarding acceptance is resolved as generally evidenced by written acceptance or payment of the arrangement fee.

If the payment terms for an arrangement are considered extended, other than those arrangements that are financing arrangements as discussed below, we defer revenue on the arrangement until the payment of the arrangement fee becomes due. The deferred amounts, both product and services, related to arrangements with extended payment terms are removed from deferred revenue and accounts receivable, as we have determined that these amounts do not represent either a receivable or deferred revenue until the payment becomes due.

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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 terms of these arrangements typically range between 18 and 48 months. The short-term component (amounts due within 12 months) of these financing arrangements is included in accounts receivable on our balance sheet. The long-term component is included in other assets. 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 it 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 annual interest rates ranging from 5% to 9%. These rates may vary depending upon when the financing arrangement is entered into and the length of the financing arrangement.

As a result of our acquisition of AD OPT Technologies, Inc., or AD OPT, completed on November 18, 2004 and 3i Systems, completed on September 21, 2004, we have begun to provide customized software solutions to our customers. Revenue related to the sale of customized software solutions is recognized on a contract accounting basis in accordance with the provisions of Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” The contract accounting is applied based on a percentage-of-completion basis generally representing labor costs incurred relative to total estimated labor costs. If we are not able to produce reasonably dependable estimates, revenue is recognized upon completion of the project and final acceptance from the customer. If significant uncertainties exist about project completion or receipt of payment, the revenue is deferred until the uncertainty is resolved. Provisions for estimated losses on contracts are recorded during the period in which they are identified. Deferred revenues are recorded when invoicing exceeds recognized revenues. Revenue derived from the development and delivery of customized software solutions are included in product revenues. The significant amount of estimation that is involved with percentage-of-completion accounting can have a material impact on the amounts of revenue and related expenses that are reported in our consolidated financial statements. A number of factors can affect these estimates such as labor rates, utilization and efficiency variances and contract change orders by the customer.

In accordance with FASB Technical Bulletin No. 79-10, “Fiscal Funding Clauses in Lease Agreements”, SOP 97-2 requires that all arrangements with governmental entities containing “fiscal funding” provisions be evaluated to determine the probability of contract cancellation. Some of the factors that we evaluate are our history with this customer and similar customers in other fiscal funding transactions as well as the governmental unit’s financial condition and past practices.

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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 historical data we use to calculate the allowance for doubtful accounts does not reflect the future ability to collect outstanding receivables, or 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 and our future results could be materially affected. Historically, there has not been a significant amount of deviation between our estimates and actual results and we do not anticipate that this will change in the future.

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. Estimates used to establish the allowance for doubtful accounts and sales returns allowance have been consistently applied. If the historical data we use to calculate these estimates do not properly reflect future returns, then a change in the allowances would be made in the period in which such a determination is made and revenues in that period could be materially affected. Historically, we have not seen a significant amount of deviation between our estimates and actual results and we do not anticipate that this will change in the future.

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 for which goodwill is attributable 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. Determining these amounts is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected cash flows, risk-adjusted discount rates as well as future economic and market conditions. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. However, a 100 basis point increase in the assumed discount rate, which is a significant assumption that affects terminal value and the net present value of the cash flows, would not have a material effect on our financial statements . 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.

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If we determine that there is an impairment in either an intangible asset or goodwill, we will be required to record an impairment charge in the reporting period in which the impairment is determined. During fiscal 2005 we completed the annual testing of the impairment of goodwill, and as a result of those tests, we concluded that no impairment of goodwill existed as of July 3, 2005, the annual goodwill impairment measurement date for fiscal 2005.  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 three or six months ended April 1, 2006.

Capitalization of Software Development Costs - Costs incurred in the research, design and development of software for sale to others, which we refer to as software development costs, 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.

Capitalized software development costs are stated at the lower of amortized cost or net realizable value, using management’s best estimates and appropriate assumptions and projections at that time. Upon review, if it is determined that the carrying value exceeds net realizable value the asset is written down, which could materially affect our future results. However, a 10% reduction in our estimated net realizable value would not have a material effect on our financial statements. Historically, we have not seen a significant amount of deviation between our estimates and actual results and no write-downs have been necessary. We do not anticipate that this will change in the future.

In addition to the software development costs described above, 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. We have determined, due to the scope of the project and based on the expected estimated economic life of the software, that the capitalized costs related to the current replacement of our information technology systems will be amortized over a period of five years. For other projects related to the development of software for internal use, we will generally amortize the capitalized costs over the lesser of three years or the estimated economic life of the software. We have capitalized approximately $18.6 million (including internal personnel related costs) in costs associated with the replacement of information technology systems since the start of this project in fiscal 2004, and anticipate capitalizing approximately $3.3 million in additional costs for the balance of fiscal 2006.

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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 the 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. When necessary, 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. Significant judgment and estimates are used in determining our income tax assets and liabilities as well as our income tax provision. The interim tax provision is dependent on the forecast of consolidated current year earnings, tax credits and other permanent items, the most significant of which are meals and entertainment, the deduction for qualified production activities, permanent effects of FAS 123R and tax free interest income. 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. Additionally, although we believe that our estimates are reasonable, no assurance can be given that our final tax outcome will not be different from that which is reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision and net income in the period in which such a determination is made. Historically, we have not seen a significant amount of deviation between our estimates and actual rates and we do not anticipate that this will change in the future.

Business Combinations - In accordance with SFAS No. 141, “Business Combinations”, we are required to allocate the purchase price of acquired companies to the tangible assets and liabilities and identifiable intangible assets acquired based on their estimated fair values. Any residual purchase price is recorded as goodwill. For our more significant acquisitions, these fair values are determined with the assistance of a third-party valuation firm and require us to make significant estimates and assumptions, especially with respect to intangible assets. The estimates are based on historical experience, in combination with information obtained from the management of the acquired companies, and we believe them to be reasonable at the time they are made. However, these estimates are inherently uncertain, and if unanticipated events and/or circumstances should occur they may affect the accuracy or validity of these assumptions and estimates. We also make significant estimates when determining the useful lives of our intangible assets, based on the expected period over which we anticipate generating economic benefits from these assets. Changes to any of these judgments, estimates and assumptions could materially affect the fair values of these assets and require us to record an impairment loss, which could have a material affect on our future results. Historically, we have not seen a significant amount of deviation between our estimates and actual results and we do not anticipate that this will change in the future.

Stock-Based Compensation - On October 1, 2005, we adopted Statement of Financial Accounting Standard No. 123R, “Share-Based Payment” (“FAS 123R”), which requires all share-based payments, including grants of stock options, to be recognized in the income statement as an operating expense, based on their fair values.

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We estimate the fair value of each option award on the date of grant using a Black-Scholes based option-pricing model. Various assumptions are used in these estimations, including:

• Expected volatility, which is based on historical volatility of our stock

• Expected option term, which is based on our historical option exercise data taking into consideration the exercise patterns of the option holders during the option’s life

• Risk-free interest rate, based on the U.S. Treasury yield curve in effect at the time of the grant

• Forfeiture rate

A 10% unfavorable change in expected volatility and option term, which represent the most sensitive and judgmental assumptions, would not have a material effect on our financial statements.

Prior to adopting FAS 123R, we accounted for stock-based compensation under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“Opinion 25”), as permitted by Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation,” (“FAS 123”). We have applied the modified prospective method in adopting FAS 123R. Accordingly, periods prior to adoption have not been restated.

The implementation of FAS 123R has had no adverse affect on our balance sheet or total cash flows, but it does impact our operating expenses, net income and earnings per share. Because we are not restating periods prior to adoption, comparability between periods has been affected. Additionally, management uses estimates of and assumptions about forfeiture rates, volatility and interest rates to calculate stock-based compensation. Changing these estimates could materially affect our operating results.

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			Six Months Ended
	April 1, 2006	April 2, 2005	Percent Change	April 1, 2006	April 2, 2005	Percent Change
Total revenues	$143,523	$120,621	19%	$271,466	$238,897	14%

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Revenue growth in the three month period ended April 1, 2006 was primarily related to product revenue growth (a 27% increase), with significant increases in services revenue (11% in maintenance and 17% in professional services) as well. Overall our core business, which excludes revenues generated from customers that have been part of an acquired business transaction over the preceding four fiscal quarters, increased 22% during this three month period. The increase in product revenue was primarily the result of an increase in sales of our hardware products; sales of software also increased during the period but to a lesser extent. The increase in demand for our maintenance and professional services solutions was principally related to the continued expansion of our installed customer base, continued innovation of our existing products, introduction of new products and the success of our implementation methodology. Revenue growth in the six month period ended April 1, 2006 principally related to maintenance and professional services (increases of 15% and 22%, respectively). Product revenues also contributed, increasing 7% over the same period in the prior year. Overall, revenues from our core business as well as from acquired businesses grew during this period. 

	Three Months Ended		Six Months Ended
	April 1, 2006	April 2, 2005	April 1, 2006	April 2, 2005
Revenues from acquired businesses*	$3,942	$6,644	$10,619	$9,375
Percentage of total revenues	2.7%	5.5%	3.9%	3.9%

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

Product Revenues (dollars in thousands):

	Three Months Ended			Six Months Ended
	April 1, 2006	April 2, 2005	Percent Change	April 1, 2006	April 2, 2005	Percent Change
Product revenues	$59,038	$46,317	27%	$107,025	$99,583	7%
Product revenues as a percent of total revenues	41%	38%	---	39%	42%	---

The product revenue increase in the three month period ended April 1, 2006 was related to our core business. The increase in product revenues was primarily the result of an increase in revenues associated with sales of our hardware products (approximately $7.9 million). This increase was primarily driven by a one-time, sales incentive-related, promotional terminal upgrade program which resulted in approximately $6.0 million in sales of our Kronos 4500 terminals to customers who were using our legacy products. An increase in software revenue (approximately $4.5 million) also contributed significantly to this increase. Also contributing to the increase in product revenues in the three month period ended April 1, 2006 was an unusually low quarter for product revenues in the three month period ended April 2, 2005. These unusually low product revenues were primarily due to a delay in orders from our reseller channels and the effect of the reorganization of our sales force completed during the first fiscal quarter of 2005. The increase in product revenues for the six month period ended April 1, 2006 over the prior year was primarily related to an increase in hardware sales of $8.8 million, or 28% increase, offset by a decrease in software sales (approximately $1.3 million or 2%). Substantially all of our product revenue in each quarter results from orders received in that quarter. Therefore, product revenues are subject to quarterly fluctuations relative to sales volume and the proportion of total revenues, based on the timing of transactions.

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	Three Months Ended		Six Months Ended
	April 1, 2006	April 2, 2005	April 1, 2006	April 2, 2005
Product revenues from acquired businesses	$---	$3,215	$647	$4,794
Percentage of product revenues	---	6.9%	0.6%	4.8%

Maintenance Revenues (dollars in thousands):

	Three Months Ended			Six Months Ended
	April 1, 2006	April 2, 2005	Percent Change	April 1, 2006	April 2, 2005	Percent Change
Maintenance revenues	$47,233	$ 42,451	11%	$93,479	$81,119	15%
Maintenance revenues as a percent of total revenues	33%	35%	---	34%	34%	---

The increase in maintenance revenues in the three and six month periods ended April 1, 2006 was principally the result of expansion of our installed base of software solutions, resulting from an increase in demand for our Workforce Central suite and related software modules in the preceding periods, 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 capacity upgrade licenses and add-on modules to existing customers. Capacity upgrade and add-on module sales typically result in an increased value of maintenance contracts due to the increased selling price for the products. Revenue generated by a particular maintenance contract is typically based on the related product’s selling price. Maintenance revenues in the six month period ended April 1, 2006 were also positively impacted by an increase in maintenance revenues associated with acquired businesses, although these revenues decreased slightly in the second quarter. Maintenance revenues in relation to total revenues in the three month period ended April 1, 2006 declined primarily due to the large increase in product revenue. Maintenance revenues in relation to total revenues in the six month period ended April 1, 2006 was consistent with the same period from the prior fiscal year.

	Three Months Ended		Six Months Ended
	April 1, 2006	April 2, 2005	April 1, 2006	April 2, 2005
Maintenance revenues from acquired businesses	$1,818	$2,420	$5,622	$3,072
Percentage of maintenance revenues	3.8%	5.7%	6.0%	3.8%

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Professional Services Revenues (dollars in thousands):

	Three Months Ended			Six Months Ended
	April 1, 2006	April 2, 2005	Percent Change	April 1, 2006	April 2, 2005	Percent Change
Professional services revenues	$37,252	$31,853	17%	$70,962	$58,195	22%
Professional services revenues as a percent of total revenues	26%	26%	---	26%	24%	---

The growth in professional services in the three and six month periods ended April 1, 2006 was principally due to an increase in the capacity to deliver professional services, as well as an increase in the utilization rate experienced by our services organization due to more efficient implementation methodologies, such as remote services. The expansion of our complementary product offerings, as well as an expansion of our professional consulting and value added professional services offerings also contributed to the increase in professional services. In addition, professional services revenue growth in the three and six month periods ended April 1, 2006 was positively impacted by an increase in professional services revenues associated with acquired businesses.

	Three Months Ended		Six Months Ended
	April 1, 2006	April 2, 2005	April 1, 2006	April 2, 2005
Professional services revenues from acquired businesses	$2,124	$1,009	$4,350	$1,509
Percentage of professional services revenues	5.7%	3.2%	6.1%	2.6%

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 and personnel developing and delivering customized software solutions, including stock-based compensation, costs of materials for the manufacturing of certain hardware products, amortization of capitalized software costs and acquired technology, 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, including stock-based compensation, as well as the cost of maintenance contracts paid to third-parties for certain products. As the costs incurred related to the development of our products cannot be segregated between development for existing customers and new customers, the cost of developing unspecified product upgrades, which are received by our customers who maintain a current maintenance program, are included in Net Operating Expenses as Engineering, Research and Development Costs.

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	Three Months Ended			Six Months Ended
	April 1,	April 2,	Percent	April 1,	April 2,	Percent
	2006	2005	Change	2006	2005	Change
Product gross profit	$44,155	$34,666	27%	$81,556	$76,559	7%
Stock-based compensation expenses included in product gross profit	$97	---	NM	$179	---	NM
Maintenance gross profit	$32,487	$31,428	3%	$64,713	$58,996	10%
Stock-based compensation expenses included in maintenance gross profit	$290	---	NM	$589	---	NM
Professional Services gross profit	$6,667	$5,774	15%	$10,452	$8,524	23%
Stock-based compensation expenses included in professional services gross profit	$676	---	NM	$1,196	---	NM
Service gross profit	$39,154	$37,202	5%	$75,165	$67,520	11%
Stock-based compensation expenses included in service gross profit	$966	---	NM	$1,785	---	NM
Total gross profit	$83,309	$71,868	16%	$156,721	$144,079	9%
Stock-based compensation expenses included in total gross profit	$1,063	---	NM	$1,964	---	NM
Product gross margin	75%	75%	---	76%	77%	---
Maintenance gross margin	69%	74%	---	69%	73%	---
Professional services gross margin	18%	18%	---	15%	15%	---
Service gross margin	46%	50%	---	46%	48%	---
Total gross margin	58%	60%	---	58%	60%	---

NM = Not meaningful

Total gross margin for the three and six month periods ended April 1, 2006 declined as compared with the total gross margin for the comparable periods in the prior year. In the three months ending April 1, 2006, product gross margins were consistent with the prior period while service gross margins declined as compared to the three month period ended April 2, 2005. Both product and service gross margins declined in the six month period ended April 1, 2006 as compared to the six month period ended April 2, 2005. We anticipate that the total gross margins will increase sequentially during the remainder of fiscal 2006. As compared to the prior year, we anticipate total gross margin will continue to decrease for the remainder of the fiscal year, principally as a result of our expectation of a higher proportion of services revenues which typically generate lower gross margins than product revenues.

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Product gross margin, which consists of hardware and software revenue and costs, remained consistent in the three month period ended April 1, 2006 as compared to the same period in the prior fiscal year. These margins decreased slightly in the six month period ended April 1, 2006 as compared to the same period in the prior year. Although software gross margin increased in the three and six month periods ended April 1, 2006 due to a lower proportion of product revenues associated with our customized software solutions (which typically generate a lower gross margin), this positive impact was offset in the three and six month periods ending April 1, 2006 by lower margins resulting from the one-time, sales incentive-related, promotional terminal upgrade program in the second quarter, an accrual related to a loss associated with a strategic customer contract as well as stock-based compensation. This contract is being accounted for using the completed contract basis under Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” and includes customer specific feature development as well as core development to be included in our product offerings. As the expected costs of this project exceed our expected revenue, as provided for in SOP 81-1, we have accrued the loss (approximately $2.1 million), as a component of Costs of Product. When this project is completed, we expect to have a much more advanced, more configurable, less costly product to support our scheduling applications. We currently anticipate that our product gross margins for the remainder of Fiscal 2006 will increase when compared to the same period in the prior year.

Maintenance gross margin in the three and six month periods ended April 1, 2006 decreased as compared to maintenance gross margin in the same periods in the prior year primarily due to stock-based compensation as well as increased costs associated with account management positions, which are allocated to our maintenance line of business.

Professional services gross margin in the three and six month periods ended April 1, 2006 remained consistent as compared to professional services gross margin in the same periods in the prior year. We experienced an increase in the utilization rate in the service organization during these periods due to an increase in revenues associated with more efficient implementation methodologies, such as remote services, which was offset by stock-based compensation and an increase in costs related to our continued investment in account management positions and other non-revenue generating positions, which are allocated to this line of business.

We expect that gross margin for maintenance as well as professional services for the balance of fiscal 2006 will be lower than the comparable periods in fiscal 2005 due to stock-based compensation and our continued investment in account management and other non-revenue generating positions.

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

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Total Net Operating Expenses (dollars in thousands):

	Three Months Ended			Six Months Ended
	April 1, 2006	April 2, 2005	Percent Change	April 1, 2006	April 2, 2005	Percent Change
Net operating expenses	$68,218	$54,772	25%	$132,014	$111,263	19%
Stock-based compensation included in net operating expenses	$3,462	---	NM	$6,475	---	NM
Net operating expenses as a % of total revenues	48%	45%	---	49%	47%	---

NM = Not meaningful

The increase in operating expenses for the three and six month periods ended April 1, 2006 was principally attributable to an increase in stock-based compensation expense (approximately $3.5 million and $6.5 million, respectively), compensation, overhead and support costs (approximately $7.2 million and $6.2 million, respectively), costs related to the implementation of our new information technology system (approximately $1.4 million and $3.0 million, respectively), an increase in spending related to marketing programs (approximately $0.9 million and $2.3 million, respectively), and an increase in bad debt provisions (approximately $0.7 million in the six months ended April 1, 2006). The following discussions on each functional area analyze the spending in further detail.

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

	Three Months Ended			Six Months Ended
	April 1, 2006	April 2, 2005	Percent Change	April 1, 2006	April 2, 2005	Percent Change
Sales and marketing expenses	$42,395	$34,616	22%	$81,167	$70,478	15%
Stock-based compensation included in sales and marketing expenses	$1,400	---	NM	$2,656	---	NM
Sales and marketing expenses as a % of total revenues	30%	29%	---	30%	30%	---

NM = Not meaningful

The increase in net sales and marketing expense for the three and six month periods ended April 1, 2006 was primarily attributable to an increase in expenses related to compensation, overhead and support costs (approximately $5.2 million and $4.0 million, respectively), which includes higher commission costs associated with our sales incentive-related, promotional terminal upgrade program, the hiring of additional personnel and increases in salaries and fringe benefits due to annual salary increases, stock-based compensation (approximately $1.4 million and $2.7 million, respectively), and an increase in spending related to marketing programs (approximately $0.9 million and $2.3 million, respectively).

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

	Three Months Ended			Six Months Ended
	April 1, 2006	April 2, 2005	Percent Change	April 1, 2006	April 2, 2005	Percent Change
Total engineering, research and development spending	$17,534	$16,001	10%	$33,824	$32,054	6%
Capitalized software development costs	(3,624)	(3,974)	(9%)	(6,901)	(7,238)	(5%)
Engineering, research and development expenses	$13,910	$12,027	16%	$26,923	$24,816	8%
Stock-based compensation included in engineering, research and development expenses	$887	---	NM	$1,670	---	NM
Engineering, research and development expenses as a % of total revenues	10%	10%	---	10%	10%	---

NM = Not meaningful

The increase in engineering, research and development spending for the three and six month periods ended April 1, 2006 as compared to the same periods in the prior year was primarily attributable to an increase in expenses related to compensation, overhead and support costs (approximately $1.2 million and $1.2 million, respectively), which includes the hiring of additional personnel and increases in salaries and fringe benefits due to annual salary increases, and stock-based compensation ($0.9 million and $1.7 million, respectively), partially offset by a decrease in spending related to the use of outside consultant resources (approximately $0.3 million and $0.7 million, respectively). The significant product development efforts in the first six months of fiscal 2006 were principally related to further development and enhancement of the Workforce Central® suite, including Workforce HR™, Workforce Payroll™ software, Workforce Scheduler™ and Workforce Scheduler™ with Optimization, Altitude®, Total Care, and the Kronos 4500 terminal.

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

	Three Months Ended			Six Months Ended
	April 1, 2006	April 2, 2005	Percent Change	April 1, 2006	April 2, 2005	Percent Change
General and administrative expenses	$12,105	$8,546	42%	$24,082	$16,992	42%
Stock-based compensation included in general and administrative expenses	$1,175	---	NM	$2,149	---	NM
General and administrative expenses as a % of total revenues	8%	7%	---	9%	7%	---

NM = Not meaningful

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The increase in net general and administrative expenses in the three and six month periods ended April 1, 2006 was primarily due to an increase in costs and lower capitalization of internal costs related to the implementation of our new information technology system (approximately $1.4 million and $3.0 million, respectively), an increase in expenses related to compensation, overhead and support costs, which include the hiring of additional personnel and increases in salaries and fringe benefits due to annual salary increases (approximately $0.8 million and $1.0 million, respectively), stock-based compensation (approximately $1.2 million and $2.1 million, respectively) and an increase in bad debt provisions (approximately $0.7 million in the six months ended April 1, 2006) resulting from our periodic calculation of our bad debt reserve requirements.

Amortization of Intangible Assets and Other Income, Net: Amortization of intangible assets includes the amortization expense related to certain identified intangible assets recorded by us related to acquisitions of 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			Six Months Ended
	April 1, 2006	April 2, 2005	Percent Change	April 1, 2006	April 2, 2005	Percent Change
Amortization of intangible assets	$1,665	$1,194	39%	$3,207	$2,290	40%
Amortization of intangible assets as a % of total revenues	1%	1%	---	1%	1%	---
Other income, net	$1,857	$1,611	15%	$3,365	$3,313	2%
Other income, net as a % of total revenues	1%	1%	---	1%	1%	---

The increase in amortization of intangible assets in the three and six month periods ended April 1, 2006, as compared to the same periods in the prior year, was principally attributed to amortization charges related to acquisitions which were completed during the previous four fiscal quarters. The increase in other income, net in the three month period ended April 1, 2006 as compared to the same period in the prior year, was principally attributed to foreign exchange gains related to inter-company balances with our foreign subsidiaries as a result of favorable changes in foreign exchange rates. Other income, net remained flat in the six months ended April 1, 2006, as compared with the same period in the prior year.

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Income Taxes. The provision for income taxes as a percentage of pre-tax income was 34.7% and 34.9% for the three and six month periods ended April 1, 2006 as compared to 34.4% and 33.3% for the comparable periods in the prior year. The provision for income taxes for the six month period ended April 1, 2006 was unfavorably impacted by the expiration on December 31, 2005 of the research and development credit and the impact of a permanent item related to the employee stock purchase plan expense under FAS 123R. The provision for income taxes for the six month period ended April 2, 2005 was favorably impacted as a result of the retroactive reinstatement of legislation related to certain research and development tax credits as well as the impact of certain research and development tax credits related to the AD OPT operations. We currently anticipate that the income tax rate will range approximately between 34 – 35% for the remainder of the fiscal year.

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. To be more in line with competitive practices, effective April 2, 2005, we completed the change in our business process to one in which our customers are billed in arrears for professional services as the services are delivered, rather than being billed in advance of service delivery. As a result of this change, we have experienced and expect to continue to experience a short-term negative impact in cash provided by operating activities, as reflected in our Statement of Cash Flows. However, we do believe that this practice will ultimately generate more service revenues.

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

	As of
	April 1, 2006	September 30, 2005	Percent Change
Cash, cash equivalents and marketable securities (including short and long-term)	$163,156	$140,435	16%
Working capital	$37,804	$9,620	293%

The increase in cash, cash equivalents and marketable securities was primarily due to cash generated from operations, partially offset by cash paid for the repurchase of our common stock, the purchase of property, plant, equipment and capitalized software development costs as well as cash paid for acquired businesses during the six month period ended April 1, 2006. The increase in working capital was primarily due to an increase in cash and short-term marketable securities balances, a decrease in accounts payable and accrued compensation, and a decrease in deferred professional services revenues, partially offset by a decrease in accounts receivable. A portion of our cash reserves is invested in long-term marketable securities.

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Cash Flow Highlights (dollars in thousands):

	Three Months Ended			Six Months Ended
	April 1, 2006	April 2, 2005	Percent Change	April 1, 2006	April 2, 2005	Percent Change
Cash provided by operations	$21,257	$20,392	4%	$44,289	$36,047	23%
Cash used for property, plant and equipment	($6,049)	($8,526)	(29%)	($9,911)	($14,853)	(33%)
Cash used for acquisitions of businesses	($6,629)	($9,814)	(32%)	($8,592)	($52,488)	(84%)
(Increase)/decrease in marketable securities	$898	($9,109)	(110%)	($3,235)	$17,129	(119%)
Net proceeds from exercise of stock options and employee stock purchase	$7,869	$10,794	(27%)	$13,120	$18,584	(29%)
Repurchases of common stock	($7,734)	($6,564)	18%	($14,112)	($10,398)	36%

The increase in cash provided by operations in the six month period ended April 1, 2006, as compared to the same period in the prior year, was primarily due to an increase in deferred maintenance, a lower decrease in deferred product revenues, collections of accounts receivable, and an increase in net income, net of non-cash stock-based compensation charges. These factors are partially offset by a decrease in deferred professional services revenues (due to the impact of billing our customers in arrears for professional services as the services are delivered).

Our use of cash for property, plant and equipment in the six month period ended April 1, 2006 includes investments in information systems and infrastructure to improve and support our expanding operations. We anticipate making significant capital investments during the remainder of fiscal 2006 in conjunction with the replacement of our information technology systems. To date, we have invested approximately $20.6 million (excluding internal personnel related costs) related to the replacement of our information technology systems of which $14.0 million has been capitalized, with the remainder expensed through operations. We expect our total investment in this project (excluding internal personnel related costs) to range between $25.0 million and $27.0 million. Our use of cash for the acquisition of businesses in the first half of 2006 was principally related to the acquisition of TimeWorks, Inc. on January 17, 2006 and Compu-Cash Systems on December 19, 2005. Our use of cash for the acquisition of businesses during the same periods ended April 2, 2005 was principally related to the acquisition of AD OPT on November 18, 2004 and Nextime, Inc. on February 28, 2005. Please refer to Note F in the Notes to the Condensed Consolidated Financial Statements for further details. 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.

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

	Three Months Ended			Six Months Ended
	April 1, 2006	April 2, 2005	Percent Change	April 1, 2006	April 2, 2005	Percent Change
Shares of common stock repurchased	197,500	133,200	48%	339,250	211,594	60%
Cost of shares of common stock repurchased	$7,733	$6,564	18%	$14,112	$10,398	36%

The common stock repurchased under our stock repurchase program is used to partially cover the shares required for our employee stock option plans and employee stock purchase plan.

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, 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 3Years	More Than 3 Years, Less Than 5 Years	More Than 5 Years
Operating lease obligations	$42,453	$11,240	$14,209	$10,257	$6,747
Guaranteed payment obligations	2,303	1,970	333	---	---
Total	$44,756	$13,210	$14,542	$10,257	$6,747

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.

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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 and foreign currency fluctuations. 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, 2005 for further discussion regarding marketable securities and foreign currency forward exchange contracts. 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 April 1, 2006, 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 April 1, 2006, 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.

Item 4. Controls and Procedures.

(a)Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Principal Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of April 1, 2006. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a 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 Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our Principal Executive Officer and Chief Financial Officer concluded that, as of April 1, 2006, our disclosure controls and procedures were effective at the reasonable assurance level.

(b)Changes in Internal Controls. No change in our 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 April 1, 2006 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A. Risk Factors

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, 2005.

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 effects 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, the 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 and competitive pricing pressure. 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.

New Information Technology System Implementation. We completed the first phase of the implementation of our new information technology system in April 2005, and therefore have begun incurring certain recurring costs that were not incurred prior to completion of this first phase, including amortization and depreciation related costs.

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During the implementation of and transition to our new information technology systems we may experience some short-term erosion to our productivity resulting from duplicate data entry, troubleshooting and mitigation of any issues related to the rollout of these systems as well as increased costs related to the completion of the implementation, which may have an impact on our cash flows.

Integration of Acquired Businesses.As part of our overall growth strategy, we acquire from time to time resellers of our products and, in certain instances, complementary business lines. Even if we are successful in identifying and acquiring businesses strategic to us, these acquisition activities involve a number of risks, including:

•We may find the acquired business does not further our business strategy, that we overpaid for the company or the economic assumptions underlying our acquisition decision have changed or were not accurate;

•Difficulties integrating the acquired companies’ products and services and customer base with our existing product and service offerings;

•Difficulties integrating the operations, technology and personnel of the acquired company, or retaining the key personnel of the acquired company critical to its continued operation and success;

•Disruption of our ongoing business and diversion of management’s attention by transition or integration issues and the complexity of managing geographically or culturally diverse enterprises;

• Difficulties maintaining uniform standards, controls, procedures and policies across locations and businesses;

• Litigation by terminated employees or third parties; and

•Problems or liabilities associated with product quality, technology and legal contingencies relating to the acquired business or technology, such as intellectual property matters.

These and other factors could have a material adverse effect on our results of operations, particularly in the case of a larger acquisition or multiple acquisitions in a short period of time. Acquisitions may also have a negative effect on our earnings per share. If we were to proceed with one or more significant acquisitions or investments in which the consideration included cash, we could be required to use a substantial portion of our available cash to consummate such acquisition or investment. To the extent we issue shares of our capital stock or other rights to purchase our capital stock, including options and warrants, existing stockholders may be diluted and earnings per share may decrease. In addition, acquisitions and investments may result in the incurrence of debt, large one-time write-offs, such as acquired in-process research and development costs, and restructuring charges. They may also result in goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges.

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Changes in stock option accounting rules may have a significant adverse affect on our operating results. We have a history of using broad based employee stock option programs to hire, incentivize and retain our workforce in a competitive marketplace. FASB Statement No. 123, “Accounting for Stock-Based Compensation,” or Statement 123 previously allowed companies the choice of either using a fair value method of accounting for options that would result in expense recognition for all options granted, or using an intrinsic value method, as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees, “ or Opinion No. 25, with pro forma disclosure of the impact on net income of using the fair value option exercise recognition method. We had previously elected to apply Opinion No. 25 and accordingly, had not recognized any compensation expense with respect to employee stock options through the end of fiscal 2005.

In December 2004, FASB issued FAS 123R, which is a revision of FASB Statement No. 123 and supersedes Opinion No. 25. FAS 123R requires all companies to measure compensation cost for all share-based payments, including employee stock options, at fair value. This statement is effective for fiscal years beginning after June 15, 2005. Adoption of FAS 123R will result in the recognition of stock compensation expense. We adopted FAS 123R on October 1, 2005, the beginning of our 2006 fiscal year. The actual impact on future periods will depend on a number of factors, including our stock price and the level of future grants and awards made from our stock-based compensation plans. Our financial statements beginning with the first quarter of fiscal 2006 include stock-based compensation expense, as required by our adoption of FAS 123R. If we had used the fair value method to measure compensation related to stock awards to employees in periods prior to the three month period ended December 31, 2005, we would have incurred stock-based compensation expense. Refer to Note C of the Notes to Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further details on the pro forma net income and stock compensation expense for the three and six month periods ended April 2, 2005.

Competition. The workforce management 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 or loss of market share. With our efforts to expand our workforce management offering with the introduction of our human resources and payroll product suite and the expansion of our scheduling product offerings, 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 on our business, prospects, financial condition and operating results.

37

Dependence on Time and Labor Product Line. To date, the substantial majority of our revenues have been attributable to sales of time and labor 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 labor product line for revenues will continue for the foreseeable future. Competitive pressures or other factors could cause our time and labor 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 workforce management 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 workforce management 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 that 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 original equipment manufacturer agreement. In the first six months of fiscal 2006, approximately 7% of our revenue was generated through sales to resellers and ADP. 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.

38

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 in our products 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.

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

In the following table, we provide information about our purchases during the quarter ended April 1, 2006 of equity securities that are registered by the company pursuant to Section 12 of the Exchange Act.

ISSUER PURCHASES OF EQUITY SECURITIES

Period	(a) Total Number of Shares Purchased (1)	(b) Average Price Paid per Share	(c) Total Number of Shares Purchased as Part of Publicly Announced Programs (2)	(d) Maximum Number of Shares that May Yet Be Purchased Under the Programs
01/01/06 - 02/01/06	72,500	$38.80	72,500	89,226
02/02/06 - 03/02/06	58,750	$40.07	58,750	780,476
03/03/06 - 04/01/06	66,250	$38.73	66,250	714,226
Total:	197,500	$39.16	197,500	714,226

(1) We repurchased an aggregate of 197,500 shares of our common stock pursuant to the repurchase programs that we publicly announced on May 13, 2005 and February 16, 2006 (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. All shares authorized for repurchase under the Program announced on May 13, 2005 have been repurchased.

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Unless terminated earlier by resolution of our board of directors, the Program announced on February 16, 2006 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.

(a) The 2006 Annual Meeting of Stockholders of Kronos Incorporated was held on February 16, 2006.

(b) At the Annual Meeting, Messrs. Mark S. Ain and David B. Kiser were elected as Class II Directors for three-year terms expiring in 2009. In addition, the Directors whose terms of office continue after the meeting are three Class I Directors: W. Patrick Decker, Lawrence Portner and Bruce J. Ryan and three Class III Directors: Messrs. Aron J. Ain, Richard J. Dumler and Samuel Rubinovitz. The tabulation was as follows:

	FOR	WITHHELD
Mark S. Ain	29,653,369	1,090,468
David B. Kiser	30,387,367	356,470

(c) The amended and restated 2002 Stock Incentive Plan was approved as follows:

FOR	AGAINST	ABSTAIN/BROKER NON-VOTE
18,020,185	9,921,756	2,801,896

(d) The other item voted upon at the meeting was the ratification of the selection of Ernst & Young LLP as the Company’s independent auditors for the 2006 fiscal year.

FOR	AGAINST	ABSTAIN/BROKER NON-VOTE
30,036,537	702,258	5,042

Item 5. Other Information

None

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Item 6.	Exhibits
	10.1	Form of Kronos Incorporated Restricted Stock Unit Agreement Granted under 2002 Stock Incentive Plan.
	10.2	Kronos Incorporated 2002 Stock Incentive Plan, as amended.
	31.1	Certification by Principal 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 Principal 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.

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.

KRONOS INCORPORATED

May 11, 2006	By		/s/ Mark V. Julien
						Mark V. Julien
					Chief Financial Officer
		(Duly Authorized Officer and
				Principal Financial Officer)

KRONOS INCORPORATED
EXHIBIT INDEX
Exhibit
Number	Description
10.1	Form of Kronos Incorporated Restricted Stock Unit Agreement Granted under 2002 Stock Incentive Plan.
10.2	Kronos Incorporated 2002 Stock Incentive Plan, as amended.
31.1	Certification by Principal 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 Principal 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.

EX-10

Exhibit 10.1

Kronos Incorporated

Restricted Stock Unit Agreement

Granted Under 2002 Stock Incentive Plan

1. Grant of Award.

This Agreement evidences the grant by Kronos Incorporated, a Massachusetts corporation (the “Company”) on ___________ (the “Grant Date”) to ____________ (the “Participant”) of ________ restricted stock units of the Company (individually, an “RSU” and collectively, the “RSUs”). Each RSU represents the right to purchase one share of the common stock, $0.01 par value per share, of the Company (“Common Stock”) for $0.01 per share (the “Purchase Price”) as provided in this Agreement. The shares of Common Stock that are issuable upon vesting of the RSUs are referred to in this Agreement as “Shares.” Unless earlier terminated pursuant to the terms hereof or to the Company’s 2002 Stock Incentive Plan (the “Plan”), this award shall expire on ______________ (the “Original Expiration Date”).

2. Vesting.

(a)           This award shall vest as to __% of the original number of RSUs on the first anniversary of the Grant Date and as to an additional __% of the original number of RSUs on each succeeding anniversary of the Grant Date until the ____ anniversary of the Grant Date, at which time this award shall be fully vested.

(b)           In the event that the Participant’s employment with the Company is terminated by reason of retirement, and the Participant is at least sixty (60) years of age and has been in continuous employment with the Company for at least ten (10) years, the Participant will be entitled to additional acceleration of vesting as provided in Section 10(c) of the 2002 Stock Incentive Plan (the “Plan”).

(c)           In the event that the Participant ceases to be employed by the Company for any reason other than retirement as described in Section 2 (b) above, the award shall cease to vest effective as of the date of the participant’s termination of employment with Company and any unvested RSUs will be cancelled.

(d)           If the Participant’s employment with the Company is interrupted by reason of a leave of absence, whether paid or unpaid, the RSUs shall cease to vest during such leave or absence and will resume vesting upon the Participant’s return from such leave. The Original Expiration Date shall in no way be affected.

(e)          For purposes of this Agreement, employment with the Company shall include employment with a parent or subsidiary of the Company.

3. Forfeiture

In the event that the Participant terminates his or her employment with the Company or any of its subsidiaries for any reason whatsoever, 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 and the Participant (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 the RSUs which is realized or obtained (measured at the date of vesting) by the Participant during the twelve (12) months prior to the date of the Participant’s termination of employment with the Company. Nothing herein shall limit any other remedies that may be available to the Company under any other agreement(s).

4. Payment

By signing this Agreement below under “Participant’s Acceptance”, the Participant agrees that the Purchase Price for each vested RSU will be withheld from the Participant’s pay check immediately following the date of vesting for each such RSU.

5. Distribution of Shares.

(a)           The Company will distribute to the Participant (or to the Participant’s estate in the event that his or her death occurs after a vesting date but before distribution of the corresponding Shares), as soon as administratively practicable after each vesting date (each such date of distribution is hereinafter referred to as a “Settlement Date”), the Shares of Common Stock represented by RSUs that vested on such vesting date.

(b)           The Company shall not be obligated to issue to the Participant the Shares upon the vesting of any RSU (or otherwise) unless the issuance and delivery of such Shares shall comply with all relevant provisions of law and other legal requirements including, without limitation, any applicable federal or state securities laws and the requirements of any stock exchange upon which shares of Common Stock may then be listed.

6. Restrictions on Transfer.

The Participant shall not sell, assign, transfer, pledge, hypothecate or otherwise encumber by operation of law or otherwise (collectively “transfer”) any RSUs, or any interest therein, except by will or the laws of descent and distribution.

7. Dividend and Other Shareholder Rights.

Except as set forth in the Plan, neither the Participant nor any person claiming under or through the Participant shall be, or have any rights or privileges of, a stockholder of the Company in respect of the Shares issuable pursuant to the RSUs granted hereunder until the Shares have been delivered to the Participant.

8. Provisions of the Plan; Reorganization Event.

This Agreement is subject to the provisions of the Plan, a copy of which is furnished to the Participant with this Agreement.

9. Withholding Taxes; Section 83(b) Election.

(a)           No Shares will be delivered pursuant to the vesting of an RSU 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.

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(b)           The Participant acknowledges that no election under Section 83(b) of the Internal Revenue Code of 1986 may be filed with respect to this award.

10. Miscellaneous.

(a)           No Rights to Employment. The Participant acknowledges and agrees that participation in this plan is discretionary and that the vesting of the RSUs pursuant to Section 2 hereof is earned only by continuing service as an employee at the will of the Company (not through the act of being hired or purchasing shares hereunder). The Participant further acknowledges and agrees that the transactions contemplated hereunder and the vesting schedule set forth herein do not constitute an express or implied promise of continued engagement as an employee or consultant for the vesting period, for any period, or at all.

(b)           Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement and each other provision of this Agreement shall be severable and enforceable to the extent permitted by law.

(c)           Waiver. Any provision for the benefit of the Company contained in this Agreement may be waived, either generally or in any particular instance, by the Board of Directors of the Company.

(d)           Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Company and the Participant and their respective heirs, executors, administrators, legal representatives, successors and assigns, subject to the restrictions on transfer set forth in Section 7 of this Agreement.

(e)           Notice. All notices required or permitted hereunder shall be in writing and deemed effectively given upon personal delivery or five days after deposit in the United States Post Office, by registered or certified mail, postage prepaid, addressed to the other party hereto at the address shown beneath his or its respective signature to this Agreement, or at such other address or addresses as either party shall designate to the other in accordance with this Section 10(e).

(f)           Pronouns. Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural, and vice versa.

(g)           Entire Agreement. This Agreement and the Plan constitute the entire agreement between the parties, and supersedes all prior agreements and understandings, relating to the subject matter of this Agreement.

(h)           Amendment. This Agreement may be amended or modified only by a written instrument executed by both the Company and the Participant.

(i)           Governing Law. This Agreement shall be construed, interpreted and enforced in accordance with the internal laws of the State of Massachusetts without regard to any applicable conflicts of laws.

(j)            Unfunded Rights. The right of the Participant to receive Common Stock pursuant to this Agreement is an unfunded and unsecured obligation of the Company. The Participant shall have no rights under this Agreement other than those of an unsecured general creditor of the Company.

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IN WITNESS WHEREOF, the Company has caused this Award to be executed as of the day and year first above written.

Kronos Incorporated

By:___________________________

Mark. S. Ain

Executive Chairman of the Board

PARTICIPANT’S ACCEPTANCE

The undersigned Participant acknowledges that he or she: (i) has read this Agreement; (ii) has been advised by legal counsel of the Participant’s own choice or has voluntarily declined to seek such counsel; (iii) understands and agrees to the terms and conditions of this Agreement; and (iv) is fully aware of the legal and binding effect of this Agreement. The undersigned Participant acknowledges receipt of a copy of the Company’s 202 Stock Incentive Plan and hereby accepts this Award.

PARTICIPANT:

_____________________________

Signature

_____________________________

Name

Print Address of Participant:

_____________________________

Street

_____________________________

City

_____________________________

State Zip/Postal Code

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EX-10

Exhibit 10.2

KRONOS INCORPORATED

2002 STOCK INCENTIVE PLAN

1. Purpose

The purpose of this 2002 Stock Incentive Plan (the “Plan”) of Kronos Incorporated, a Massachusetts corporation (the “Company”), is to advance the interests of the Company’s stockholders by enhancing the Company’s ability to attract, retain and motivate persons who make (or are expected to make) important contributions to the Company by providing such persons with equity ownership opportunities and performance-based incentives and thereby better aligning the interests of such persons with those of the Company’s stockholders. Except where the context otherwise requires, the term “Company” shall include any of the Company’s present or future parent or subsidiary corporations as defined in Section 424(e) or (f) of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the “Code”) and any other business venture (including, without limitation, joint venture or limited liability company) in which the Company has a significant interest, as determined by the Board of Directors of the Company (the “Board”).

2. Eligibility

All of the Company’s employees, officers, directors, consultants, advisors and other entities are eligible to receive options, stock appreciation rights, restricted stock and other stock-based awards (each, an “Award”) under the Plan. Each person who receives an Award under the Plan shall be deemed a “Participant”.

3. Administration and Delegation

(a) Administration by Board of Directors. The Plan will be administered by the Board. The Board shall have authority to grant Awards and to adopt, amend and repeal such administrative rules, guidelines and practices relating to the Plan as it shall deem advisable. The Board may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency. All decisions by the Board shall be made in the Board’s sole discretion and shall be final and binding on all persons having or claiming any interest in the Plan or in any Award. No director or person acting pursuant to the authority delegated by the Board shall be liable for any action or determination relating to or under the Plan made in good faith.

(b) Appointment of Committees. To the extent permitted by applicable law, the Board may delegate any or all of its powers under the Plan to a committee or sub-committee of the Board (a “Committee”). Such Committee shall consist of not less than two members, each member of which shall be an “outside director” within the meaning of Section 162(m) of the Internal Revenue Code and a “non-employee director” as defined in Rule 16-b3 promulgated under the Exchange Act. All references in the Plan to the “Board” shall mean the Board or a Committee of the Board or a single member of the Board referred to in Section 3(c) to the extent that the Board’s powers or authority under the Plan have been delegated to such Committee or board member.

(c) Delegation to a Single Member of the Board. To the extent permitted by applicable law, the Board may delegate to a single member of the Board the power to grant Awards to employees of the Company or any of its present or future subsidiary corporations and to exercise such other powers under the Plan as the Board may determine, provided that the Board shall fix the terms of the Awards to be granted by such Board member (including the exercise price of such Awards, which may include a formula by which the exercise price will be determined) and the maximum number of shares subject to Awards that the Board member may grant; provided further, however, that the Board member shall not be authorized to grant Awards to any “executive officer” of the Company (as defined by Rule 3b-7 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) or to any “officers” of the Company (as defined by Rule 16a-1 under the Exchange Act).

4. Stock Available for Awards

(a) Number of Shares. Subject to adjustment under Section 13, Awards may be made under the Plan for up to 9,000,000 shares of common stock, $.01 par value per share, of the Company (the “Common Stock”). If any Award expires, is terminated, is canceled or is surrendered without having been fully exercised or is forfeited in whole or in part (including as the result of shares of Common Stock subject to such Award being repurchased by the Company at the original issuance price pursuant to a contractual repurchase right) or results in any Common Stock not being issued, the unused Common Stock covered by such Award shallagain be available for the grant of Awards under the Plan. However, in the case of Incentive Stock Options (as hereinafter defined), the foregoing provisions shall be subject to any limitations under the Code. Shares issued under the Plan shall consist of authorized but unissued shares.

(b) Share Counting Formula. Solely for the purpose of applying the limitation in this Section 4(a):

(1) each stock Option and Stock Appreciation Right granted under this plan shall reduce the number of shares available for grant by one share for every one share granted.

(2) each Award granted under this plan other than a Stock Option or a Stock Appreciation Right shall reduce the number of shares available for grant by 2.2 shares for every one share granted.

(c) Sub-Limits. Subject to adjustment under Section 13, the following sub-limits on the number of shares subject to Awards shall apply:

(1) Section 162(m) Per Participant Limit. The maximum number of shares of Common Stock with respect to which Awards may be granted to any Participant under the Plan shall be300,000 per fiscal year. For purposes of the foregoing limit, the combination of an Option in tandem with a SAR (as each is hereafter defined) shall be treated as a single Award. The per-Participant limit described in this Section 4(c)(1) shall be construed and applied consistently with Section 162(m) of the Code or any successor provision thereto, and the regulations thereunder (“Section 162(m)”).

(2) Limit on Awards to Directors. The maximum number of shares with respect to which annual Awards may be granted to directors who are not employees of the Company at the time of grant shall be 7,500,except in the case of newly appointed directors who will receive a grant of up to 7,500 additional shares upon their appointment to the Board.

5. Stock Options

(a) General. The Board may grant options to purchase Common Stock (each, an “Option”) and determine the number of shares of Common Stock to be covered by each Option, the exercise price of each Option and the conditions and limitations applicable to the exercise of each Option, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable. An Option which is not intended to be an Incentive Stock Option (as hereinafter defined) shall be designated a “Nonstatutory Stock Option”.

(b) Incentive Stock Options. An Option that the Board intends to be an “incentive stock option” as defined in Section 422 of the Code (an “Incentive Stock Option”) shall only be granted to employees of Kronos Incorporated, any of Kronos Incorporated’s present or future parent or subsidiary corporations as defined in Sections 424(e) or (f) of the Code and shall be subject to and shall be construed consistently with the requirements of Section 422 of the Code. The Company shall have no liability to a Participant, or any other party, if an Option (or any part thereof) which is intended to be an Incentive Stock Option is not an Incentive Stock Option or for any action taken by the Board pursuant to Section 11(e), including without limitation the conversion of an Incentive Stock Option to a Nonstatutory Stock Option.

(c) Exercise Price. The Board shall establish the exercise price at the time each Option is granted and specify it in the applicable option agreement provided, however, that the exercise price shall be not less than 100% of the fair market value of the Common Stock, as determined by the Board, at the time the Option is granted.

(d) Vesting and Duration of Options. Each Option shall be exercisable at such times and subject to such terms and conditions as the Board may specify in the applicable agreement provided, however, that no Option shall vest in whole or in part before the first anniversary date of grant of that Option and no Option will be granted for a term in excess of 5 years.

(e) Exercise of Option. Options may be exercised by delivery to the Company of a written notice of exercise signed by the proper person 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) for the number of shares for which the Option is exercised. Shares of Common Stock subject to the Option will be delivered by the Company following exercise either as soon as practicable or, subject to such conditions as the Board shall specify, on a deferred basis (with the Company’s obligation to be evidenced by an instrument providing for future delivery of the deferred shares at the time or times specified by the Board).

(f) Payment Upon Exercise. Common Stock purchased upon the exercise of an Option granted under the Plan shall be paid for as follows:

(1) in cash or by check, payable to the order of the Company;

(2) except as the Board may, in its sole discretion, otherwise provide in an option agreement, by (i) delivery of an irrevocable and unconditional undertaking by a creditworthy broker to deliver promptly to the Company sufficient funds to pay the exercise price and any requiredtax withholding or (ii) delivery by the Participant to the Company of a copy of irrevocable and unconditional instructions to a creditworthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price and any required tax withholding;

(3) when the Common Stock is registered under the Securities Exchange Act of 1934 (the “Exchange Act”), by delivery of shares of Common Stock owned by the Participant valued at their fair market value as determined by (or in a manner approved by) the Board in good faith (“Fair Market Value”), provided (i) such method of payment is then permitted under applicable law, (ii) such Common Stock, if acquired directly from the Company was owned by the Participant at least six months prior to such delivery; and (iii) such Common Stock is not subject to any repurchase, forfeiture, unfulfilled vesting or other similar requirements; or

(4) by any combination of the above permitted forms of payment.

(g) Substitute Options. In connection with a merger or consolidation of an entity with the Company or the acquisition by the Company of property or stock of an entity, the Board may grant Options in substitution for any options or other stock or stock-based awards granted by such entity or an affiliate thereof. Substitute Options may be granted on such terms as the Board deems appropriate in the circumstances, notwithstanding any limitations on Options contained in this Section 5 or in Section 2.

6. Director Options.  

(a) Initial Grant. Upon the commencement of service on the Board by any individual who is not then an employee of the Company or any subsidiary of the Company, the Company shall grant to such person a Nonstatutory Stock Option to purchase 6,750 shares of Common Stock (subject to adjustment under Section 13).

(b) Annual Grant. On the date of each annual meeting of stockholders of the Company, the Company shall grant to each member of the Board of Directors of the Company who is both serving as a director of the Company immediately prior to and immediately following such annual meeting and who is not then an employee of the Company or any of its subsidiaries, a Nonstatutory Stock Option to purchase 6,750 shares of Common Stock (subject to adjustment under Section 13); provided, however, that a director shall not be eligible to receive an option grant under this Section 6(b) until such director has served on the Board for at least six months.

(c) Terms of Director Options. Options granted under this Section 6 shall (i) have an exercise price equal to the closing sale price (for the primary trading session) of the Common Stock on The Nasdaq Stock Market® or the national securities exchange on which the Common Stock is then traded on the trading date immediately prior to the date of grant, (ii) vest in four equal installments beginning on the first anniversary of the date of grant, provided that no additional vesting shall take place after the Participant ceases to serve as a director and further provided that the Board may provide for accelerated vesting in the case of death, disability, attainment of mandatory retirement age or retirement following at least 10 years of service, (iii) expire on the earlier of 4½ years from the date of grant or three months following cessation of service on the Board and (iv) contain such other terms and conditions as the Board shall determine.

(d) Board Discretion. The Board shall have the specific authority to from time to time increase or decrease the number of shares subject to options granted under this Section 6, subject to the provisions of Section 4(c)(2).

7. Stock Appreciation Rights.

(a) General. A Stock Appreciation Right, or SAR, is an Award entitling the holder, upon exercise, to receive an amount in cash or Common Stock or a combination thereof (such form to be determined by the Board) determined in whole or in part by reference to appreciation, from and after the date of grant, in the fair market value of a share of Common Stock. SARs may be based solely on appreciation in the fair market value of Common Stock or on a comparison of such appreciation with some other measure of market growth such as (but not limited to) appreciation in a recognized market index. The date as of which such appreciation or other measure is determined shall be the exercise date unless another date is specified by the Board in the SAR Award.

(b) Grants. Stock Appreciation Rights may be granted in tandem with, or independently of, Options granted under the Plan.

(1) Tandem Awards. When Stock Appreciation Rights are expressly granted in tandem with Options, (i) the Stock Appreciation Right will be exercisable only at such time or times, and to the extent, that the related Option is exercisable (except to the extent designated by the Board in connection with a Reorganization Event or a Change in Control Event) and will be exercisable in accordance with the procedure required for exercise of the related Option; (ii) the Stock Appreciation Right will terminate and no longer be exercisable upon the termination or exercise of the related Option, except to the extent designated by the Board in connection with a Reorganization Event or a Change in Control Event and except that a Stock Appreciation Right granted with respect to less than the full number of shares covered by an Option will not be reduced until the number of shares as to which the related Option has been exercised or has terminated exceeds the number of shares not covered by the Stock Appreciation Right; (iii) the Option will terminate and no longer be exercisable upon the exercise of the related Stock Appreciation Right; and (iv) the Stock Appreciation Right will be transferable only with the related Option.

(2) Independent SARs. A Stock Appreciation Right not expressly granted in tandem with an Option will become exercisable at such time or times, and on such conditions, as the Board may specify in the SAR Award, but in no case will it become exercisable in whole or in part before the first anniversary date of grant of the Award and no SAR Award will be granted for a term of more than 5 years.

(c) Exercise. Stock Appreciation Rights may be exercised by delivery to the Company of a written notice of exercise signed by the proper person or by any other form of notice (including electronic notice) approved by the Board, together with any other documents required by the Board.

8. Restricted Stock; Restricted Stock Units.

(a) General. The Board may grant Awards entitling recipients to acquire shares of Common Stock (“Restricted Stock”), subject to the right of the Company to repurchase all or part of such shares at their issue price or other stated or formula price from the recipient in the event that conditions specified by the Board in the applicable Award are not satisfied prior to the end of the applicable restriction period or periods established by the Board for such Award. Instead of granting Awards for Restricted Stock, the Board may grant Awards entitling the recipient to receive shares of Common Stock to be delivered at the time such shares of Common Stock vest (“Restricted Stock Units”). (Restricted Stock and Restricted Stock Units are referred to herein as a “Restricted Stock Award”).

(b) Terms and Conditions. The Board shall determine the terms and conditions of a Restricted Stock Award, including the conditions for repurchase (or forfeiture) and the issue price.

(c) Limitations on Vesting.

(1) Restricted Stock Awards that vest based on the passage of time alone shall not vest before the first anniversary of the date of grant and no more than 33 1/3% shall vest on each anniversary of the date of grant. Restricted Stock Awards that vest upon the passage of time and provide for accelerated vesting based on performance shall not vest before the first anniversary of the date of grant. This subsection (8)(c)(1) shall not apply to Awards granted pursuant to Section 11(h).

(2)Notwithstanding any other provision of this Plan, the Board may, in its discretion, either at the time a Restricted Stock Award is made or at any time thereafter, waive its right to repurchase shares of Common Stock (or waive the forfeiture thereof) or remove or modify any part or all of the restrictions applicable to the Restricted Stock Award, provided that the Board may only exercise such rights in extraordinary circumstances which shall include, without limitation, death or disability of the Participant; a merger, consolidation, sale, reorganization, recapitalization, or change in control of the Company; or any other nonrecurring significant event affecting the Company, a Participant or the Plan.

(d) Stock Certificates. Any stock certificates issued in respect of a Restricted Stock Award shall be registered in the name of the Participant and, unless otherwise determined by the Board, deposited by the Participant, together with a stock power endorsed in blank, with the Company (or its designee). At the expiration of the applicable restriction periods, the Company (or such designee) shall deliver the certificates no longer subject to such restrictions to the Participant or if the Participant has died, to the beneficiary designated, in a manner determined by the Board, by a Participant to receive amounts due or exercise rights of the Participant in the event of the Participant’s death (the “Designated Beneficiary”). In the absence of an effective designation by a Participant, “Designated Beneficiary” shall mean the Participant’s estate.

9. Other Stock-Based Awards.

Other Awards of shares of Common Stock, and other Awards that are valued in whole or in part by reference to, or are otherwise based on, shares of Common Stock or other property, may be granted hereunder to Participants (“Other Stock Unit Awards”), including without limitation Awards entitling recipients to receive shares of Common Stock to be delivered in the future. Such Other Stock Unit Awards shall also be available as a form of payment in the settlement of other Awards granted under the Plan or as payment in lieu of compensation to which a Participant is otherwise entitled. Other Stock Unit Awards may be paid in shares of Common Stock or cash, as the Board shall determine. Subject to the provisions of the Plan, the Board shall determine the conditions of each Other Stock Unit Awards, including any purchase price applicable thereto. Other stock based awards, with the exception of stock that is delivered in lieu of already earned compensation, shall not vest before the first anniversary date of grant and no more than 33 1/3% shall vest on each anniversary of the date of grant.

10. Changes in Employment or Status

(a) Termination by Death. If any Participant’s employment or service to the Company or its subsidiaries terminates by reason of death, any Award 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 the Award. The Board, in its sole discretion, may accelerate the vesting provisions of any outstanding options held by the participant immediately prior to the date of death.

(b) Termination by Reason of Disability. If any Participant’s employment or service to the Company or its subsidiaries terminates by reason of disability, any Award 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 the Award.

(c) Termination by Reason of Retirement. If any Participant’s employment with the company or its subsidiaries terminates by reason of Retirement, any Award 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 the Award.

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, shall have the privilege of accelerated vesting and an extended exercise period (neither of which may exceed the original expiration date of the Award) according to the following schedule:

Years of Employment In the Company	Years of Accelerated Vesting	Years to Exercise
10 years or more	1 year	2 years
15 years or more	2 years	3 years
20 years or more	3 years	3 years
25 years or more	4 years	4 years

The Retiree must give written notice of Retirement and have a signed Proprietary Rights and Confidentiality Agreement on file with the Company.

(d) Termination for Cause. If any Participant’s employment or service to the Company or its subsidiaries is terminated for Cause, any Award held by such Participant shall terminate immediately; provided that the Board may, at its sole discretion, allow the exercise of the Award 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 the Award.

(e) Leave of Absence. If any Participant’s employment with the Company is interrupted by reason of a leave of absence, whether paid or unpaid, any Award 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 the Award 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, any Awards 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 the Award.

11. General Provisions Applicable to Awards

(a) Transferability of Awards. Except as otherwise provided in this paragraph 11(a), Awards shall not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution or, other than in the case of an Incentive Stock Option, pursuant to a qualified domestic relations order, and, during the life of the Participant, shall be exercisable only by the Participant or, in the event of a Participant’s incapacity, his or her guardian or legal representative. However, the Participant, with the approval of the Board, may transfer a Nonstatutory Stock Option for no consideration to the Participant’s immediate family or a trust for the benefit of the Participant’s immediate family, as defined in Rule 16a-1(e) of the Exchange Act. The transferee shall remain subject to all the terms and conditions applicable to the Stock Option. References to a Participant, to the extent relevant in the context, shall include references to authorized transferees.

(b) Documentation. Each Award shall be evidenced in such form (written, electronic or otherwise), as the Board shall determine. Each Award may contain terms and conditions in addition to those set forth in the Plan.

(c) Board Discretion. Except as otherwise provided by the Plan, each Award may be made alone or in addition or in relation to any other Award. The terms of each Award need not be identical, and the Board need not treat Participants uniformly.

(d) Withholding. Each Participant shall pay to the Company, or make provision satisfactory to the Board for payment of, any taxes required by law to be withheld in connection with Awards to such Participant no later than the date of the event creating the tax liability. Except as the Board may otherwise provide in an Award, when the Common Stock is registered under the Exchange Act, Participants may satisfy such tax obligations in whole or in part by delivery of shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value; provided, however, that the total tax withholding where stock is being used to satisfy such tax obligations cannot exceed the Company’s minimum statutory withholding obligations (based on minimum statutory withholding rates for federal and state tax purposes, including payroll taxes, that are applicable to such supplemental taxable income). The Company may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to a Participant.

(e) Amendment of Award. The Board may amend, modify or terminate any outstanding Award, including but not limited to, substituting therefor another Award of the same or a different type, changing the date of exercise or realization, and converting an Incentive Stock Option to a Nonstatutory Stock Option, provided that (i) the Participant’s consent to such action shall be required unless the Board determines that the action, taking into account any related action, would not materially and adversely affect the Participant. Notwithstanding the foregoing, except for adjustments pursuant to paragraph 13 (“Adjustments for Changes in Common Stock and Certain Other Events”), the exercise price for any outstanding Award granted under the Plan may not be decreased after the date of grant nor may any outstanding Award under the Plan be surrendered to the Company as consideration for the grant of a new Award with a lower exercise price.

(f) Conditions on Delivery of Stock. The Company will not be obligated to deliver any shares of Common Stock pursuant to the Plan or to remove restrictions from shares previously delivered under the Plan until (i) all conditions of the Award have been met or removed to the satisfaction of the Company, (ii) in the opinion of the Company’s counsel, all other legal matters in connection with the issuance and delivery of such shares have been satisfied, including any applicable securities laws and any applicable stock exchange or stock market rules and regulations, and (iii) the Participant has executed and delivered to the Company such representations or agreements as the Company may consider appropriate to satisfy the requirements of any applicable laws, rules or regulations.

(g) Acceleration. Except as otherwise provided in Section 5(d), 8(c) and 9, the Board may at any time provide that any Award shall become immediately exercisable in full or in part, free of some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be.

(h) Performance Conditions.

(1) This Section 11(h) shall be administered by a Committee approved by the Board, all of the members of which are “outside directors” as defined by Section 162(m) (the Compensation Committee”).

(2) Notwithstanding any other provision of the Plan, if the Compensation Committee determines, at the time a Restricted Stock Award or Other Stock Unit Award is granted to a Participant who is then an officer, that such Participant is, or is likely to be as of the end of the tax year in which the Company would claim a tax deduction in connection with such Award, a Covered Employee (as defined in Section 162(m)), then the Compensation Committee may provide that this Section 11 (h) is applicable to such Award.

(3) If a Restricted Stock Award or Other Stock Unit Award is subject to this Section 11(h), then the lapsing of restrictions thereon and the distribution of cash or Shares pursuant thereto, as applicable, shall be subject to the achievement of one or more objective performance goals established by the Compensation Committee, which shall be based on the relative or absolute attainment of specified levels of one or any combination of the following: (a) earnings per share, (b) return on average equity or average assets with respect to a pre-determined peer group, (c) earnings, (d) earnings growth, (e) revenues, (f) expenses, (g) stock price, (h) market share, (i) return on sales, assets, equity or investment, (j) regulatory compliance, (k) improvement of financial ratings, (l) achievement of balance sheet or income statement objectives, (m) total shareholder return, (n) net operating profit after tax, (o) pre-tax or after-tax income, (p) cash flow, or (q) such other objective goals established by the Board, and may be absolute in their terms or measured against or in relationship to other companies comparably, similarly or otherwise situated. Such performance goals may be adjusted to exclude any one or more of (i) extraordinary items, (ii) gains or losses on the dispositions of discontinued operations, (iii) the cumulative effects of changes in accounting principles, (iv) the write-down of any asset, and (v) charges for restructuring and rationalization programs. Such performance goals may vary by Participant and may be different for different Awards. Such performance goals shall be set by the Compensation Committee within the time period prescribed by, and shall otherwise comply with the requirements of, Section 162(m).

(4) Notwithstanding any provision of the Plan, with respect to any Restricted Stock Award or Other Stock Unit Award that is subject to this Section 11(h), the Compensation Committee may adjust downwards, but not upwards, the cash or number of Shares payable pursuant to such Award, and the Compensation Committee may not waive the achievement of the applicable performance goals except in the case of the death or disability of the Participant.

(5) The Compensation Committee shall have the power to impose such other restrictions on Awards subject to this Section 11(h) as it may deem necessary or appropriate to ensure that such Awards satisfy all requirements for “performance-based compensation” within the meaning of Section 162(m)(4)(C) of the Code, or any successor provision thereto.

12. Forfeiture Provision

In the event that a Participant terminates his or her employment with the Company or any of its subsidiaries for any reason whatsoever, and within twenty four (24) months for a Participant in the fields of research and development, engineering, testing, strategic planning or any phase of management or within twelve (12) months for a Participant in all 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. Nothing herein shall limit any other remedies that may be available to the Company under any other agreement(s).

13. Adjustments for Changes in Common Stock and Certain Other Events

(a) Changes in Capitalization. In the event of any stock split, reverse stock split, stock dividend, recapitalization, combination of shares, reclassification of shares, spin-off or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a normal cash dividend, (i) the number and class of securities available under this Plan, (ii) the sub-limits set forth in Section 4(c), (iii) the number and class of securities and exercise price per share of each outstanding Option and each Option issuable under Section 5 and Section 6, (iv) the shares and per-share provisions of each Stock Appreciation Right, (v) the repurchase price per share subject to each outstanding Restricted Stock Award and (vi) the share- and per-share-related provisions of each outstanding Other Stock Unit Award shall be appropriately adjusted by the Company (or substituted Awards may be made, if applicable) to the extent determined by the Board.

(b) Liquidation or Dissolution. In the event of a proposed liquidation or dissolution of the Company, the Board shall upon written notice to the Participants provide that all then unexercised Options will (i) become exercisable in full as of a specified time at least 10 business days prior to the effective date of such liquidation or dissolution and (ii) terminate effective upon such liquidation or dissolution, except to the extent exercised before such effective date.

(c) Reorganization and Change in Control Events

(1) Definitions

(a) A “Reorganization Event” shall mean:

(i) any merger or consolidation of the Company with or into another entity as a result of which all of the Common Stock of the Company is converted into or exchanged for the right to receive cash, securities or other property; or is cancelled;

(ii)any exchange of all of the Common Stock of the Company for cash, securities or other property pursuant to a share exchange transaction.

(iii) any liquidation or dissolution of the Company

(b) A “Change in Control Event” shall mean:

(i) the acquisition by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) of beneficial ownership of any capital stock of the Company if, after such acquisition, such Person beneficially owns (within the meaning of Rule 13d-3 promulgated under the Exchange Act) 25% or more of either (x) the then-outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (y) the combined voting power of the then-outstanding securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change in Control Event: (A) any acquisition directly from the Company (excluding an acquisition pursuant to the exercise, conversion or exchange of any security exercisable for, convertible into or exchangeable for common stock or voting securities of the Company, unless the Person exercising, converting or exchanging such security acquired such security directly from the Company or an underwriter or agent of the Company), (B) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (C) any acquisition by any corporation pursuant to a Business Combination (as defined below) which complies with clauses (x) and (y) of subsection (iii) of this definition; or

(ii)such time as the Continuing Directors (as defined below) do not constitute a majority of the Board (or, if applicable, the Board of Directors of a successor corporation to the Company), where the term “Continuing Director” means at any date a member of the Board (x) who was a member of the Board on the date of the initial adoption of this Plan by the Board or (y) who was nominated or elected subsequent to such date by at least a majority of the directors who were Continuing Directors at the time of such nomination or election or whose election to the Board was recommended or endorsed by at least a majority of the directors who were Continuing Directors at the time of such nomination or election; provided, however, that there shall be excluded from this clause (y) any individual whose initial assumption of office occurred as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents, by or on behalf of a person other than the Board; or

(iii) the consummation of a merger, consolidation, reorganization, recapitalization or share exchange involving the Company or a sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), unless, immediately following such Business Combination, each of the following two conditions is satisfied: (x) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors, respectively, of the resulting or acquiring corporation in such Business Combination (which shall include, without limitation, a corporation which as a result of such transaction owns the Company or substantially all of the Company’s assets either directly or through one or more subsidiaries) (such resulting or acquiring corporation is referred to herein as the “Acquiring Corporation”) in substantially the same proportions as their ownership of the Outstanding Company Common Stock and Outstanding Company Voting Securities, respectively, immediately prior to such Business Combination and (y) no Person (excluding the Acquiring Corporation or any employee benefit plan (or related trust) maintained or sponsored by the Company or by the Acquiring Corporation) beneficially owns, directly or indirectly, 25% or more of the then-outstanding shares of common stock of the Acquiring Corporation, or of the combined voting power of the then-outstanding securities of such corporation entitled to vote generally in the election of directors (except to the extent that such ownership existed prior to the Business Combination); or

(iv) the liquidation or dissolution of the Company.

(c) “Good Reason” shall mean any significant diminution in the Participant’s title, authority, or responsibilities from and after such Reorganization Event or Change in Control Event, as the case may be, or any reduction in the annual cash compensation payable to the Participant from and after such Reorganization Event or Change in Control Event, as the case may be, or the relocation of the place of business at which the Participant is principally located to a location that is greater than 50 miles from the current site.

(d) “Cause” shall mean any (i) willful failure by the Participant, which failure is not cured within 30 days of written notice to the Participant from the Company, to perform his or her material responsibilities to the Company or (ii) willful misconduct by the Participant which affects the business reputation of the Company. The Participant shall be considered to have been discharged for “Cause” if the Company determines, within 30 days after the Participant’s resignation, that discharge for Cause was warranted.

(2) Effect on Options

(a) Reorganization Event. Upon the occurrence of a Reorganization Event (regardless of whether such event also constitutes a Change in Control Event), or the execution by the Company of any agreement with respect to a Reorganization Event (regardless of whether such event will result in a Change in Control Event), the Board shall provide that all outstanding Options shall be assumed, or equivalent options shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof); provided that if such Reorganization Event also constitutes a Change in Control Event, except to the extent specifically provided to the contrary in the instrument evidencing any Option or any other agreement between a Participant and the Company (A) one-half of the number of shares subject to the Option which were not already vested shall be exercisable upon the occurrence of such Reorganization Event and, subject to (B) below, the remaining one-half of such number of shares shall continue to become vested in accordance with the original vesting schedule set forth in such option, with one-half of the number of shares that would otherwise have become vested on each subsequent vesting date in accordance with the original schedule becoming vested on each subsequent vesting date and (B) such assumed or substituted options shall become immediately exercisable in full if, on or prior to the first anniversary of the date of the consummation of the Reorganization Event, the Participant’s employment with the Company or the acquiring or succeeding corporation is terminated for Good Reason by the Participant or is terminated without Cause by the Company or the acquiring or succeeding corporation. For purposes hereof, an Option shall be considered to be assumed if, following consummation of the Reorganization Event, the Option confers the right to purchase, for each share of Common Stock subject to the Option immediately prior to the consummation of the Reorganization Event, the consideration (whether cash, securities or other property) received as a result of the Reorganization Event by holders of Common Stock for each share of Common Stock held immediately prior to the consummation of the Reorganization Event (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Common Stock); provided, however, that if the consideration received as a result of the Reorganization Event is not solely common stock of the acquiring or succeeding corporation (or an affiliate thereof), the Company may, with the consent of the acquiring or succeeding corporation, provide for the consideration to be received upon the exercise of Options to consist solely of common stock of the acquiring or succeeding corporation (or an affiliate thereof) equivalent in fair market value to the per share consideration received by holders of outstanding shares of Common Stock as a result of the Reorganization Event.

Notwithstanding the foregoing, if the acquiring or succeeding corporation (or an affiliate thereof) does not agree to assume, or substitute for, such Options, or in the event of a liquidation or dissolution of the Company, then the Board shall, upon written notice to the Participants, provide that all then unexercised Options will become exercisable in full as of a specified time prior to the Reorganization Event and will terminate immediately prior to the consummation of such Reorganization Event, except to the extent exercised by the Participants before the consummation of such Reorganization Event; provided, however, that in the event of a Reorganization Event under the terms of which holders of Common Stock will receive upon consummation thereof a cash payment for each share of Common Stock surrendered pursuant to such Reorganization Event (the “Acquisition Price”), then the Board may instead provide that all outstanding Options shall terminate upon consummation of such Reorganization Event and that each Participant shall receive, in exchange therefore, a cash payment equal to the amount (if any) by which (A) the Acquisition Price multiplied by the number of shares of Common Stock subject to such outstanding Options (whether or not then exercisable), exceeds (B) the aggregate exercise price of such Options. To the extent all or any portion of an Option becomes exercisable solely as a result of the first sentence of this paragraph, upon exercise of such Option the Participant shall receive shares subject to a right of repurchase by the Company or its successor at the Option exercise price. Such repurchase right (1) shall lapse at the same rate as the Option would have become exercisable under its terms and (2) shall not apply to any shares subject to the Option that were exercisable under its terms without regard to the first sentence of this paragraph

(b) Change in Control Event that is not a Reorganization Event. Upon the occurrence of a Change in Control Event that does not also constitute a Reorganization Event, except to the extent specifically provided to the contrary in the instrument evidencing any Option or any other agreement between a Participant and the Company, the vesting schedule of such Option shall be accelerated in part so that one-half of the number of shares that would otherwise have first become vested on any date after the date of the Change in Control Event shall immediately become exercisable. The remaining one-half of such number of shares shall continue to become vested in accordance with the original vesting schedule set forth in such Option, with one-half of the number of shares that would otherwise have become vested on each subsequent vesting date in accordance with the original schedule becoming vested on each such subsequent vesting date; provided, however, that each such Option shall be immediately exercisable in full if, on or prior to the first anniversary of the date of the consummation of the Change in Control Event, the Participant’s employment with the Company or the acquiring or succeeding corporation is terminated for Good Reason by the Participant or is terminated without Cause by the Company or the acquiring or succeeding corporation.

(3) Effect on Restricted Stock Awards

(a) Reorganization Event that is not a Change in Control Event. Upon the occurrence of a Reorganization Event that is not a Change in Control Event, the repurchase and other rights of the Company under each outstanding Restricted Stock Award shall inure to the benefit of the Company’s successor and shall apply to the cash, securities or other property which the Common Stock was converted into or exchanged for pursuant to such Reorganization Event in the same manner and to the same extent as they applied to the Common Stock subject to such Restricted Stock Award.

(b) Change in Control Event. Upon the occurrence of a Change in Control Event (regardless of whether such event also constitutes a Reorganization Event), except to the extent specifically provided to the contrary in the instrument evidencing any Restricted Stock Award or any other agreement between a Participant and the Company, the vesting schedule of all Restricted Stock Awards shall be accelerated in part so that one-half of the number of shares that would otherwise have first become free from conditions or restrictions on any date after the date of the Change in Control Event shall immediately become free from conditions or restrictions. Subject to the following sentence, the remaining one-half of such number of shares shall continue to become free from conditions or restrictions in accordance with the original schedule set forth in such Restricted Stock Award, with one-half of the number of shares that would otherwise have become free from conditions or restrictions on each subsequent vesting date in accordance with the original schedule becoming free from conditions or restrictions on each subsequent vesting date. In addition, each such Restricted Stock Award shall immediately become free from all conditions or restrictions if, on or prior to the first anniversary of the date of the consummation of the Change in Control Event, the Participant’s employment with the Company or the acquiring or succeeding corporation is terminated for Good Reason by the Participant or is terminated without Cause by the Company or the acquiring or succeeding corporation.

(4) Effect on Stock Appreciation Rights and Other Stock Unit Awards

The Board may specify in an Award at the time of the grant the effect of a Reorganization Event and Change in Control Event on any SAR and Other Stock Unit Award.

14. Miscellaneous

(a) No Right To Employment or Other Status. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment or any other relationship with the Company. The Company expressly reserves the right at any time to dismiss or otherwise terminate its relationship with a Participant free from any liability or claim under the Plan, except as expressly provided in the applicable Award.

(b) No Rights As Stockholder. Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed with respect to an Award until becoming the record holder of such shares. Notwithstanding the foregoing, in the event the Company effects a split of the Common Stock by means of a stock dividend and the exercise price of and the number of shares subject to such Option are adjusted as of the date of the distribution of the dividend (rather than as of the record date for such dividend), thenan optionee who exercises an Option between the record dateand the distribution date for such stock dividend shall be entitled to receive, on the distribution date, the stock dividend with respect to the shares of Common Stock acquired upon such Option exercise, notwithstanding the fact that such shares were not outstanding as of the close of business on the record date for such stock dividend.

(c) Effective Date and Term of Plan. The Plan shall become effective on the date on which it is approved by the Company’s stockholders. No Awards shall be granted under the Plan after the completion of ten years from the date the Plan was approved by the Company’s stockholders, but Awards previously granted may extend beyond that date.

(d) Amendment of Plan. The Board may amend, suspend or terminate the Plan or any portion thereof at any time, provided that (i) to the extent required by Section 162(m), no Award granted to a Participant that is intended to comply with Section 162(m) after the date of such amendment shall become exercisable, realizable or vested, as applicable to such Award, unless and until such amendment shall have been approved by the Company’s stockholders as required by Section 162(m) (including the vote required under Section 162(m); (ii) no amendment may increase the limitations on the number of shares set forth in paragraph 4(a) or decrease the minimum Option exercise price set forth in paragraph 5(c) unless such amendment shall have been approved by the Company’s stockholders; (iii) the provisions relating to Option repricing in paragraph 11(e) may not be amended unless such amendment shall have been approved by the Company’s stockholders; (iv) no other type of Award other than those provided under the Plan may be awarded unless such amendment shall have been approved by the Company’s stockholders and (v) no other changes that require stockholder approval under the rules of the NASDAQ National Market, Inc.® may be made unless approved by the Company’s stockholders. In addition, if at any time the approval of the Company’s stockholders is required as to any modification or amendment under Section 422 of the Code or any successor provision with respect to Incentive Stock Options, the Board may not effect such modification or amendment without such approval. No Award shall be made that is conditioned upon stockholder approval of any amendment to the Plan.

(e) Provisions for Foreign Participants. The Board may modify Awards or Options granted to Participants who are foreign nationals or employed outside the United States or establish subplans or procedures under the Plan to recognize differences in laws, rules, regulations or customs of such foreign jurisdictions with respect to tax, securities, currency, employee benefit or other matters.

(f) Governing Law. The provisions of the Plan and all Awards made hereunder shall be governed by and interpreted in accordance with the laws of the Commonwealth of Massachusetts, without regard to any applicable conflicts of law.

Adopted by the Board of Directors on November 15, 2005

Approved by the Shareholders on February 16, 2006

EX-31

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

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

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

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

5. The registrant’s other certifying officer 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:      May 11, 2006	/s/ Paul A. Lacy
	Paul A. Lacy President and Principal Executive Officer

EX-31

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Mark V. Julien, 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

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

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

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

5. The registrant’s other certifying officer 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:      May 11, 2006	/s/ Mark V. Julien
	Mark V. Julien Chief Financial 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 April 1, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Paul A. Lacy, President and Principal Executive Officer of the Company, and Mark V. Julien, Chief Financial 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.

		____/s/ Paul A. Lacy____________________
Dated:	May 11, 2006	Paul A. Lacy
		President and Principal Executive Officer

		____/s/ Mark V. Julien_________________
Dated:	May 11, 2006	Mark V. Julien
		Chief Financial 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.