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 March 31, 2007

OR

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

For the transition period from                      to                     

Commission file number 0-20109

Kronos Incorporated

(Exact name of registrant as specified in its charter)

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

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

(978) 250-9800

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  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  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨    No  x    

As of April 30, 2007, 32,306,399 shares of the registrant’s common stock, $.01 par value, were outstanding.

KRONOS INCORPORATED

INDEX

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Statements of Income for the Three and Six Months Ended March 31, 2007 and April 1, 2006	1
	Condensed Consolidated Balance Sheets at March 31, 2007 and September 30, 2006	2
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2007 and April 1, 2006	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	36
Item 4.	Controls and Procedures	36
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Submission of Matters to a Vote of Security Holders	43
Item 5.	Other Information	44
Item 6.	Exhibits	44
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
	March 31, 2007			April 1, 2006			March 31, 2007			April 1, 2006
Net revenues:
Product	$	57,371		$	59,038		$	109,558		$	107,025
Maintenance		55,156			47,233			107,304			93,479
Professional services		37,546			37,252			71,348			70,962
Subscription		11,200			—			21,789			—
		161,273			143,523			309,999			271,466
Cost of sales:
Costs of product		12,399			14,883			24,326			25,469
Costs of maintenance		13,468			14,745			26,396			28,766
Costs of professional services		31,856			30,586			62,719			60,510
Costs of subscription		5,836			—			11,697			—
		63,559			60,214			125,138			114,745
Gross profit		97,714			83,309			184,861			156,721
Operating expenses and other income:
Sales and marketing		47,183			42,395			92,107			81,167
Engineering, research and development		18,130			13,910			36,054			26,923
General and administrative		14,882			12,105			28,841			24,082
Amortization of intangible assets		2,783			1,665			5,556			3,207
Transaction costs		2,297			—			2,297			—
Other income, net		(757	)		(1,857	)		(1,820	)		(3,365	)
		84,518			68,218			163,035			132,014
Income before income taxes		13,196			15,091			21,826			24,707
Provision for income taxes		4,253			5,237			7,188			8,629
Net income	$	8,943		$	9,854		$	14,638		$	16,078
Net income per common share:
Basic	$	0.28		$	0.31		$	0.46		$	0.50
Diluted	$	0.28		$	0.31		$	0.46		$	0.50
Weighted-average common shares outstanding:
Basic		31,839,985			31,919,542			31,796,844			31,854,544
Diluted		32,183,822			32,251,370			32,073,227			32,261,262
Stock-based compensation expense included in the above captions:
Costs of product	$	92		$	97		$	187		$	179
Costs of maintenance		602			540			1,197			1,014
Costs of professional services		337			426			722			771
Costs of subscription		8			—			15			—
Sales and marketing		1,375			1,400			2,874			2,656
Engineering, research and development		695			887			1,412			1,670
General and administrative		1,331			1,175			2,609			2,149
Amortization of intangible assets included in the above captions:
Costs of product	$	313		$	201		$	643		$	400
Costs of subscription		1,091			—			2,182			—
Amortization of intangible assets		2,783			1,665			5,556			3,207

See accompanying notes to condensed consolidated financial statements.

1

KRONOS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

UNAUDITED

	March 31, 2007			September 30, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	40,755		$	40,680
Marketable securities		50,085			62,770
Accounts receivable, less allowances of $9,070 at March 31, 2007 and $9,248 at September 30, 2006		111,266			123,537
Deferred income taxes		8,597			8,871
Other current assets		29,050			28,962
Total current assets		239,753			264,820
Marketable securities		2,036			13,192
Property, plant and equipment, net		69,804			69,867
Customer related intangible assets		70,967			72,853
Other intangible assets		41,476			43,568
Goodwill		248,575			241,654
Capitalized software, net		23,654			22,946
Other assets		18,519			18,852
Total assets	$	714,784		$	747,752
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	14,427		$	11,025
Accrued compensation		48,350			48,768
Accrued expenses and other current liabilities		19,449			31,983
Deferred product revenues		2,795			2,950
Deferred professional service revenues		20,281			21,139
Deferred maintenance revenues		127,098			124,485
Total current liabilities		232,400			240,350
Deferred service revenues		8,888			7,990
Deferred income taxes		22,459			22,605
Notes payable, long-term		25,217			80,820
Other liabilities		7,906			7,855
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, 32,210,652 and 31,846,620 shares issued at March 31, 2007 and September 30, 2006, respectively		322			318
Additional paid-in capital		81,287			65,473
Retained earnings		334,072			319,434
Accumulated other comprehensive income:
Foreign currency translation		2,276			3,086
Net unrealized (loss) on available-for-sale investments		(43	)		(179	)
		2,233			2,907
Total shareholders’ equity		417,914			388,132
Total liabilities and shareholders’ equity	$	714,784		$	747,752

See accompanying notes to condensed consolidated financial statements.

2

KRONOS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

UNAUDITED

	Six Months Ended
	March 31, 2007			April 1, 2006
Operating activities:
Net income	$	14,638		$	16,078
Adjustments to reconcile net income to net cash and equivalents provided by operating activities:
Depreciation		10,594			8,001
Amortization of intangible assets		8,383			3,605
Amortization of capitalized software		7,500			7,132
Stock-based compensation		9,016			8,439
Provision for deferred income taxes		439			(534	)
Changes in certain operating assets and liabilities:
Accounts receivable, net		13,771			8,736
Deferred product revenues		(126	)		(1,470	)
Deferred professional service revenues		(354	)		(11,832	)
Deferred maintenance revenues		1,835			11,976
Accounts payable, accrued compensation and other liabilities		100			(3,100	)
Taxes payable		(14,809	)		(783	)
Tax benefit from exercise of stock options		4,634			5,267
Excess tax benefit from exercise of stock options		(3,332	)		(5,267	)
Other		145			(1,959	)
Net cash and equivalents provided by operating activities		52,434			44,289
Investing activities:
Purchase of property, plant and equipment		(10,690	)		(9,911	)
Capitalized internal software development costs		(7,835	)		(6,901	)
Decrease (increase) in marketable securities		23,841			(3,235	)
Acquisitions of businesses and software, net of cash acquired		(8,296	)		(8,592	)
Net cash and equivalents used in investing activities		(2,980	)		(28,639	)
Financing activities:
Net proceeds from exercise of stock options and employee purchase plans		15,172			13,120
Excess tax benefit from exercise of stock options		3,332			5,267
Repurchase of common stock		(12,548	)		(14,112	)
Payments on revolving note payable		(55,603	)		—
Net cash and equivalents (used in) provided by financing activities		(49,647	)		4,275
Effect of exchange rate changes on cash and equivalents		268			(439	)
Increase in cash and equivalents		75			19,486
Cash and equivalents at the beginning of the period		40,680			43,492
Cash and equivalents at the end of the period	$	40,755		$	62,978

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 and adjustments 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, 2006. The results of operations for the six months ended March 31, 2007 are not necessarily indicative of the results for a full fiscal year.

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 (91 days in fiscal 2007 and 92 days in fiscal 2006) and fourth quarter (92 days in fiscal 2007 and 91 days in fiscal 2006) 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 was required to adopt Statement of Financial Accounting Standards 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”). The Company has applied the modified prospective method in adopting FAS 123R and, accordingly, periods prior to adoption have not been restated. Under the modified prospective method, compensation cost recognized in the three and six months ended March 31, 2007 and April 1, 2006 include (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.

On March 31, 2007, 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 months ended March 31, 2007 and April 1, 2006 was approximately $4.4 million and $4.5 million, respectively. The compensation cost that has been charged against income for the Plans during the six months ended March 31, 2007 and April 1, 2006 was approximately $9.0 million and $8.4 million, respectively. During the three and six months ended March 31, 2007, the Company also capitalized approximately $0.2 million and $0.4 million, respectively, of these costs relating to its software development activities; none of these costs were capitalized during the three or six months ended April 1, 2006. As required by FAS 123R, the Company has made an estimate of expected forfeitures and is recognizing compensation cost only for those stock-based compensation awards expected to vest. The total income tax benefit recognized in the income statement for the three and six month periods ended March 31, 2007 for share-based payments was approximately $1.5 million and $3.0 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.

4

Stock Award Plan: In February 2007, the Company’s stockholders approved an amendment to the 2002 Stock Incentive Plan (“Award Plan”), to allow the granting of restricted stock unit awards to non-employee directors. In March 2007, the Board of Directors (the “Board”) approved subsequent amendments to the Award Plan to address some immaterial administrative issues related to the plan. The Award Plan was previously adopted in February 2002, amended in February 2004 and February 2005, and amended and restated in February 2006. The Award Plan, which includes a share counting formula, enables the Compensation Committee of the Board to issue up to 9,000,000 shares of common stock in 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 appropriate. Option awards are generally granted with an exercise price equal to the fair market value of the Company’s stock at the date of grant. Options granted under the Award Plan during the fiscal years of 2007, 2006, 2005, 2004, 2003 and 2002 are exercisable in four equal annual installments 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 six months ended March 31, 2007 vest in four equal annual installments beginning one year from the date of grant.

The fair value of each option award issued under the Award Plan was estimated on the date of grant using a Black-Scholes based option-pricing model with 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
	March 31, 2007	April 1, 2006
Expected Volatility	41.8%	41.8%
Expected Term (in years)	3.42 years	3.42 years
Risk-Free Interest Rate	4.90%	4.39%
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.

A summary of option activity under the Award Plan as of March 31, 2007, and changes during the six months then ended is presented below (excludes restricted stock unit activity):

Options	Shares (000s)		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value ($000s)
Outstanding at September 30, 2006	3,429		$	39.98
Granted	17			34.80
Exercised	(585	)		20.04
Canceled	(142	)		44.90
Outstanding at March 31, 2007	2,719		$	43.98	2.2 years	$	13,421
Exercisable at March 31, 2007	1,374		$	42.52	1.8 years	$	8,783

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

Restricted stock unit awards were granted to our non-employee directors in February 2007. Vesting of the restricted stock units granted to the non-employee directors vest in four equal annual installments beginning on the first anniversary of the date of grant. Restricted stock unit awards were granted to our executive officers in November 2006. Vesting of the restricted stock units granted to the executive officers is subject to a performance goal being met by Kronos for fiscal 2007. If the performance goal is met, the restricted stock units will vest in four equal

5

annual installments beginning on November 16, 2007. If the performance goal is not met, the restricted stock units will not vest and the grant will be cancelled. Restricted stock unit awards granted to employees, other than to executive officers, in fiscal 2006 and 2007 are not subject to a performance goal and vest in four equal annual installments beginning on the first anniversary of the date of grant. All of our awards include a service condition in order for vesting to occur.

Restricted stock units do not have common stock voting rights, and the shares underlying the restricted stock units are not considered issued and outstanding unless they become vested. We expense the cost of the restricted stock unit awards, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restrictions lapse.

A summary of restricted stock unit activity under the Award Plan as of March 31, 2007, and the changes during the six months then ended is presented below:

Restricted Stock Units	Number of Shares (000s)		Weighted- Average Grant Date Fair Value
Non-vested at September 30, 2006	66		$	48.22
Granted	482		$	34.79
Exercised	(17	)	$	48.22
Canceled	(18	)	$	36.11
Non-vested at March 31, 2007	513		$	36.05

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 restricted stock unit grants during the six months ended March 31, 2007 ranged from $33.90 to $39.52.

The weighted-average grant-date fair value of the options granted during the six months ended March 31, 2007 and April 1, 2006, estimated using a Black-Scholes based option pricing model, was $17.10. The total intrinsic value of options exercised was approximately $9.6 million and $12.1 million for the three and six months ended March 31, 2007 and $6.7 million and $14.5 million for the three and six months ended April 1, 2006, respectively.

As a result of Kronos’ definitive agreement to be acquired by Hellman & Friedman Capital Partners VI, L.P., all outstanding stock options to purchase Kronos common stock and all restricted stock units will become vested in full or all restrictions will lapse, as applicable, prior to the effective time of the transaction. Please see Note J, “Recent Developments”, for further information.

Stock Purchase Plan: In February 2007, the stockholders approved an amendment to the 2003 Employee Stock Purchase Plan (“Purchase Plan”) to increase the number of shares available for issuance under the Purchase Plan from 1,250,000 to 2,250,000 shares. In July 2005, the Company’s Board of Directors voted to amend the 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 have been able to 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. As required by FAS 123R, the 15% discount has been charged to income as stock-based employee compensation expense.

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.

As a result of Kronos’ definitive agreement to be acquired as previously discussed, the Company suspended the Employee Stock Purchase Plan retroactive to the beginning of the current purchase period, which began on February 15^th, 2007, and will refund all outstanding contributions to employees (see Note J for further information).

6

Cash received from option exercises and stock purchases under the Plans for the three and six month periods ended March 31, 2007 was $12.8 million and $15.2 million, respectively. For the three and six months ended April 1, 2006 the total cash received from option exercises and stock purchases was $7.9 million and $13.1 million, respectively. The tax benefit realized for the tax deductions from option exercises totaled $3.5 million and $4.6 million for the three and six month periods ended March 31, 2007, respectively. For the three and six months ended April 1, 2006, the tax benefit realized for the tax deductions from option exercises was $2.6 million and $5.3 million, respectively.

The Company has a policy of repurchasing shares on the open market to satisfy share option exercises. The Company repurchased 71,714 and 354,731 shares of its common stock during the three and six months ended March 31, 2007, and does not anticipate repurchasing any additional shares.

NOTE D—Other Current Assets

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

	March 31, 2007		September 30, 2006
Inventory	$	7,113	$	8,254
Prepaid expenses		21,937		20,708
Total	$	29,050	$	28,962

NOTE E—Intangible Assets

Acquired intangible assets subject to amortization are presented in the following table (dollars in thousands). Due to the relative size and 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 March 31, 2007:
Intangible assets:
Customer related	9.4	$	95,278	$	24,311	$	70,967
Maintenance relationships	11.7		10,901		3,952		6,949
Non-compete agreements	3.7		6,648		5,589		1,059
Technology	7.4		38,742		5,274		33,468
Total intangible assets		$	151,569	$	39,126	$	112,443
As of September 30, 2006:
Intangible assets:
Customer related	9.4	$	92,307	$	19,454	$	72,853
Maintenance relationships	11.9		9,814		3,516		6,298
Non-compete agreements	3.7		6,422		5,147		1,275
Technology	7.4		38,474		2,479		35,995
Total intangible assets		$	147,017	$	30,596	$	116,421

7

There was no goodwill acquired in the three months ended March 31, 2007; for the three months ended April 1, 2006, the amount of goodwill acquired is $3.6 million. The amount of goodwill acquired during the six months ended March 31, 2007 and April 1, 2006 is $6.9 million and $8.0 million, respectively. The Company has approximately $248.6 million and $241.7 million of goodwill recorded on its balance sheet as of March 31, 2007 and September 30, 2006, respectively.

For the three months ended March 31, 2007 and April 1, 2006, the Company recorded amortization expense for intangible assets of $4.2 million and $1.9 million, respectively. The Company recorded $8.4 million and $3.6 million of amortization expense for intangible assets for the six months ended March 31, 2007 and April 1, 2006, respectively. The estimated annual amortization expense for intangible assets for the current and next five fiscal years is as follows (in thousands):

Fiscal Year Ending September 30,	Estimated Annual Amortization Expense
2007	$	16,668
2008		16,512
2009		15,685
2010		14,409
2011		14,015
2012		13,986

NOTE F—Acquisitions

On November 6, 2006, the Company purchased all of the outstanding shares of common stock of Time Controls, Inc. (“Time Controls”), a former dealer in the greater Appalachian region of the U.S. The aggregate consideration paid, which includes approximately $7.8 million of cash paid and $2.8 million of liabilities assumed, was approximately $10.6 million. The amounts allocated to identifiable intangible assets and goodwill were approximately $3.9 million and $6.4 million, respectively. Due to the timing of the acquisition, the Company has not finalized the allocation of the purchase price. The Company currently anticipates that the allocation of the purchase price will be completed by September 30, 2007. The results of Time Controls’ 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 Time Controls, the Company expects to enhance its distribution network for time and labor solutions. The deferred revenue related to the maintenance and professional service revenue streams was recorded at the fair value of the Company’s remaining performance obligation. No pro forma results have been presented for 2006 or 2007 as they are immaterial to the Company’s results.

On August 1, 2006, the Company acquired all of the outstanding capital stock of Unicru, Inc., a leading provider of talent management solutions. In accordance with the Agreement and Plan of Merger (the “Merger Agreement”), all shares of Unicru’s preferred stock were converted into shares of common stock immediately prior to the merger taking place. Thereafter, each share of Unicru’s common stock outstanding immediately prior to the merger was converted into the right to receive $4.15 in cash. In addition, at the effective time of the merger, all outstanding options and warrants were converted into the right to receive a cash payment except for one outstanding Unicru warrant, which the Company assumed. The Company paid $149.2 million in cash in the aggregate for all of the outstanding capital stock of Unicru, less certain expenses and other deductions set forth in the Merger Agreement.

The Merger Agreement also enabled the Company to deposit $16 million of the cash consideration paid for Unicru’s outstanding capital stock into an escrow fund to secure certain indemnification and other payments under the terms of the Merger Agreement. On or about August 1, 2008, the balance of the escrow fund in excess of any amounts held for unresolved claims will be distributed to the former holders of Unicru securities.

The results of Unicru’s operations have been included in the Company’s consolidated financial statements beginning on the acquisition date, August 1, 2006. The acquisition was funded in part by a three-year revolving credit facility with Citizens Bank of Massachusetts under which the Company entered into a promissory note dated July 11, 2006 in the principal amount of up to $100 million. The Company drew down $97.9 million from the line of credit in connection with the acquisition, and $25.2 million remains outstanding at March 31, 2007.

8

The Unicru 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 following table summarizes the estimated fair values of the assets acquired and liabilities assumed (in thousands):

Cash	$	5,331
Accounts receivable		6,768
Prepaids and other current assets		2,841
Deferred tax asset		1,071
Fixed assets		4,789
Other assets		1,761
Identifiable intangible assets		70,195
Goodwill		86,208
Total assets acquired		178,964
Accounts payable and other accrued liabilities		5,274
Deferred subscription revenues		536
Deferred tax liabilities		17,521
Other liabilities		1,226
Total liabilities assumed		24,557
Net assets acquired	$	154,407

The deferred revenue related to the maintenance revenue streams, which was recorded at fair value of the Company’s remaining performance obligation, was recorded because 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”).

In performing the preliminary purchase price allocation, the Company considered, among other factors, its intention for future use of acquired assets, analyses of historical financial performance and estimates of future performance of Unicru’s products. The fair value of intangible assets was based, in part, on a valuation completed by a third party using an income approach and estimates and assumptions provided by management. The rates utilized to discount net cash flows to their present values were based on the Company’s weighted average cost of capital and ranged from 17% to 20%. These discount rates were determined after consideration of the Company’s rate of return on debt capital and equity. The following table sets forth the components of intangible assets associated with the acquisition (dollars in thousands):

	Intangible Asset		Estimated Useful Life (years)
Core technology acquired	$	26,429	7.0
Developed technology acquired		1,768	3.0
Subtotal—technology acquired		28,197
Customer contracts and related customer relationships acquired		41,717	9.0
Tradenames acquired		281	0.2
Total intangibles acquired	$	70,195

As a result of this acquisition, and in support of the premium paid for Unicru, Inc., the Company expects to extend its market leadership and accelerate the growth of its Human Capital Management platform. Due to the timing of the acquisition, the Company has not finalized the allocation of the purchase price. The Company currently anticipates that the allocation of the purchase price will be completed by June 30, 2007.

The following table presents the consolidated results of operations for the three months and six months ended April 1, 2006 on an unaudited pro forma basis. It combines Kronos’ statement of operations data with Unicru’s statement of operations data for that period as if the acquisition of Unicru had taken place as of October 1, 2005. The table was prepared on the basis of estimates and assumptions available at the time of this filing that the Company believes are reasonable, and includes purchase price allocations and adjustments for amortization and interest expense that would have been recorded during that period (in thousands, except per share data).

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Unaudited	Three Months Ended April 1, 2006		Six Months Ended April 1, 2006
Total revenues	$	153,512	$	291,208
Net income	$	7,615	$	11,762
Earnings per share—basic	$	0.24	$	0.37
Earnings per share—diluted	$	0.23	$	0.35

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 acquisition occurred at the beginning of the periods presented or the results which may occur in the future.

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 March 31, 2007, the Company has the obligation to pay $3.6 million in guaranteed payments. These payments will be made at various dates in fiscal 2007 and fiscal 2008 and are included in accrued expenses on the balance sheet. 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 2007, 2009 and 2011. During the three and six months ended March 31, 2007, there were approximately $0.1 million and $1.0 million of contingent payments earned, respectively, all of which were recorded as goodwill. During the three and six months ended April 1, 2006, there were no contingent payments earned.

NOTE G—Comprehensive Income

For the three and six months ended March 31, 2007 and April 1, 2006, comprehensive income consisted of the following (in thousands):

	Three Months Ended					Six Months Ended
	March 31, 2007		April 1, 2006			March 31, 2007			April 1, 2006
Comprehensive income:
Net income	$	8,943	$	9,854		$	14,638		$	16,078
Cumulative translation adjustment		153		—			(810	)		(103	)
Unrealized loss on available-for-sale securities		101		(4	)		136			(37	)
Total comprehensive income	$	9,197	$	9,850		$	13,964		$	15,938

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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
	March 31, 2007		April 1, 2006		March 31, 2007		April 1, 2006
Net income	$	8,943	$	9,854	$	14,638	$	16,078
Weighted-average shares		31,839,985		31,919,542		31,796,844		31,854,544
Effect of dilutive securities:
Employee stock options and awards		343,837		331,828		276,383		406,718
Adjusted weighted-average shares and assumed conversions		32,183,822		32,251,370		32,073,227		32,261,262
Basic earnings per share	$	0.28	$	0.31	$	0.46	$	0.50
Diluted earnings per share	$	0.28	$	0.31	$	0.46	$	0.50

NOTE I—Segment Information

FASB Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information”, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision making group is made up of the Company’s Chief Executive Officer and President. While results are evaluated in a number of different ways, the line of business management structure is the primary basis for which the allocation of resources and financial results are assessed. Prior to August 2006, the Company had one line of business and operating segment, “Workforce Management Solutions”. This segment is involved in the development, manufacturing and marketing of workforce management solutions that improve workforce productivity and the utilization of labor resources. On August 1, 2006, the Company completed the acquisition of Unicru and added a second line of business and operating segment, “Talent Management Solutions”, which integrates with Kronos’ workforce management products to link sourcing, selection and hiring strategy with actual performance and labor planning. Unicru activity is reflected in the Company’s results of operations since the acquisition date.

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(in thousands)	Workforce Management Solutions Segment		Talent Management Solutions Segment			Consolidated
Three months ended:
March 31, 2007
Net revenue to unaffiliated customers	$	150,166	$	11,107		$	161,273
Depreciation and amortization		10,584		3,026			13,610
Interest expense		—		747			747
Income before taxes		15,804		(2,608	)		13,196
Stock-based compensation		4,381		59			4,440
April 1, 2006
Net revenue to unaffiliated customers	$	143,523	$	—		$	143,523
Depreciation and amortization		9,525		—			9,525
Interest expense		—		—			—
Income before taxes		15,091		—			15,091
Stock-based compensation		4,525		—			4,525
(in thousands)	Workforce Management Solutions Segment		Talent Management Solutions Segment			Consolidated
Six months ended:
March 31, 2007
Net revenue to unaffiliated customers	$	287,862	$	22,137		$	309,999
Depreciation and amortization		20,488		5,989			26,477
Interest expense		—		1,929			1,929
Income before taxes		28,354		(6,528	)		21,826
Stock-based compensation		8,906		110			9,016
April 1, 2006
Net revenue to unaffiliated customers	$	271,466	$	—		$	271,466
Depreciation and amortization		18,738		—			18,738
Interest expense		—		—			—
Income before taxes		24,707		—			24,707
Stock-based compensation		8,439		—			8,439

Information as to the Company’s revenue and long-lived assets in different geographical areas is as follows (in thousands):

	Three Months Ended				Six Months Ended
	March 31, 2007		April 1, 2006		March 31, 2007		April 1, 2006
Revenue to unaffiliated customers:
United States	$	140,606	$	125,406	$	272,126	$	238,059
International		20,667		18,117		37,873		33,407
Total	$	161,273	$	143,523	$	309,999	$	271,466

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	March 31, 2007		September 30, 2006
Long-lived assets:
United States	$	426,375	$	423,281
International		46,620		48,338
Total	$	472,995	$	471,619

NOTE J—Recent Developments

On March 22, 2007, the Company entered into an agreement to be acquired by the private equity firm Hellman & Friedman Capital Partners VI, L.P. (“H&F”). Under the terms of the agreement, each outstanding share of Kronos common stock will be converted into the right to receive $55.00 in cash. In addition, all outstanding options to purchase Kronos common stock, all shares of restricted stock and all restricted stock units will become vested in full or all restrictions shall lapse, as applicable, prior to the effective time of the transaction. Any outstanding option not exercised prior to the effective time of the transaction will be cancelled in exchange for cash in an amount equal to the excess, if any, of the consideration per share of common stock over the exercise price of the option, multiplied by the number of shares of common stock underlying the option. In addition, at the effective time of the transaction, each restricted stock unit will be cancelled in exchange for cash in an amount equal to the product of (i) the number of shares of Kronos common stock subject to such restricted stock unit prior to consummation of the transaction and (ii) $55.00, plus the value of any deemed dividend equivalents accrued but unpaid with respect to such restricted stock unit.

The Company has made customary representations and warranties and covenants in the agreement, including covenants relating to obtaining the requisite approval of its shareholders, the Company’s conduct of business between the date of the signing of the agreement and the closing of the transaction and, subject to certain exceptions, the Company’s agreement not to solicit, enter into discussions regarding, or provide information in connection with, alternative transactions.

The agreement has been approved by the Company’s board of directors and an independent committee of the board of directors. Consummation of the transaction is not subject to a financing condition, but is subject to customary conditions to closing, including, among other things, the adoption of the agreement by the Company’s shareholders. The U.S. antitrust agencies have granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The agreement contains certain termination rights of both parties and provides that, upon the termination of the agreement under certain circumstances, the Company would be required to pay the buyer a termination fee of $55.0 million or the buyer would be required to pay the Company a termination fee of $55.0 million. A Special Meeting of Shareholders has been scheduled for June 8, 2007 for a vote on the proposed merger and the transaction is expected to close in the third fiscal quarter (second calendar quarter) of 2007.

NOTE K—Recent Issued Accounting Pronouncements

In June 2006, the FASB released Interpretation 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FAS 109”, or FIN 48. The Company is required to adopt FIN 48 for its fiscal year ending September 30, 2008, and is currently assessing its impact.

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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 gross margin, future acquisitions, capital expenditures, capitalization of software development costs, income tax rates, available cash, investments and operating cash flow. Any such statements are subject to risks 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. The risks and uncertainties discussed in this Quarterly Report on Form 10-Q 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 on form 10-Q was filed with the Securities and Exchange Commission (“SEC”) 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.

Business Overview

We provide a suite of solutions that automate employee-centric processes and provide tools to optimize the workforce. Our solutions, which include time and labor, scheduling, talent management, human resources, payroll, absence management, labor activity tracking, data collection, self-service and workforce analytics 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 and subscription services as well as ongoing customer support and maintenance. An overview of our two operating segments follows (see Note I in the “Notes to Condensed Consolidated Financial Statements” in this Quarterly Report on Form 10-Q for additional information relating to our operating segments):

Workforce Management

From the time of Kronos’ organization in 1977 until the end of fiscal 2006, substantially all of our revenues and profits were derived from our workforce management solutions, which include time and labor applications and related products and services. These solutions are designed to enable organizations to reduce costs and increase productivity, improve employee satisfaction, align employee performance with organizational objectives, and put real-time information in the hands of decision makers.

Talent Management

With the acquisition of Unicru, Inc. in August of 2006, we added a talent management solution that integrates with our workforce management products to link sourcing, selection, and hiring strategy with actual performance and labor planning. Our talent management solutions are

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designed to help achieve continuous improvement in workforce quality and performance that can help increase labor productivity, augment customer service levels, reduce absenteeism and turnover rates, cut hiring time, and enhance both top- and bottom-line results.

On March 22, 2007, we entered into an agreement to be acquired by the private equity firm Hellman & Friedman Capital Partners VI, L.P. (“H&F”). Under the terms of the agreement, each outstanding share of Kronos common stock will be converted into the right to receive $55.00 in cash. In addition, all outstanding options to purchase Kronos common stock, all shares of restricted stock and all restricted stock units will become vested in full or all restrictions shall lapse, as applicable, prior to the effective time of the transaction. Any outstanding option not exercised prior to the effective time of the transaction will be cancelled in exchange for cash in an amount equal to the excess, if any, of the consideration per share of common stock over the exercise price of the option, multiplied by the number of shares of common stock underlying the option. In addition, at the effective time of the transaction each restricted stock unit will be cancelled in exchange for cash in an amount equal to the product of (i) the number of shares of Kronos common stock subject to such restricted stock unit prior to consummation of the transaction and (ii) $55.00, plus the value of any deemed dividend equivalents accrued but unpaid with respect to such restricted stock unit.

We have made customary representations and warranties and covenants in the agreement, including covenants relating to obtaining the requisite approval of our shareholders, the conduct of our business between the date of the signing of the agreement and the closing of the transaction and, subject to certain exceptions, our agreement not to solicit, enter into discussions regarding, or provide information in connection with, alternative transactions.

The agreement has been approved by our board of directors and an independent committee of the board of directors. Consummation of the transaction is not subject to a financing condition, but is subject to customary conditions to closing, including, among other things, the adoption of the agreement by our shareholders. The U.S. antitrust agencies have granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The agreement contains certain termination rights of both parties and provides that, upon the termination of the agreement under certain circumstances, we would be required to pay the buyer a termination fee of $55.0 million or the buyer would be required to pay us a termination fee of $55.0 million. A Special Meeting of Shareholders has been scheduled for June 8, 2007 for a vote on the proposed merger and the transaction is expected to close in the third fiscal quarter (second calendar quarter) of 2007.

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Operating Results Overview

SUMMARY (dollars in thousands):

	Three Months Ended						Six Months Ended
	March 31, 2007		April 1, 2006		Percent Change		March 31, 2007		April 1, 2006		Percent Change
Product revenues	$	57,371	$	59,038	(3	%)	$	109,558	$	107,025	2	%
Maintenance revenues		55,156		47,233	17	%		107,304		93,479	15	%
Professional services revenues		37,546		37,252	1	%		71,348		70,962	1	%
Subscription revenues		11,200		—	N/A			21,789		—	N/A
Total revenues	$	161,273	$	143,523	12	%	$	309,999	$	271,466	14	%
Net income	$	8,943	$	9,854	(9	%)	$	14,638	$	16,078	(9	%)
Earnings per share—basic	$	0.28	$	0.31	(10	%)	$	0.46	$	0.50	(8	%)
Earnings per share—diluted	$	0.28	$	0.31	(10	%)	$	0.46	$	0.50	(8	%)

N/A = Not applicable

Our revenues in the three and six month periods ended March 31, 2007 increased 12% and 14%, respectively, over the same periods in fiscal 2006. This growth was principally attributable to acquired businesses and, to a lesser extent, our core business. Revenue growth was due to the addition of subscription revenues in the fourth fiscal quarter of 2006, which we began receiving as a result of the Unicru acquisition, an increase in maintenance revenues and a slight increase in professional services revenues. Product revenues decreased in the three month period ended March 31, 2007 and increased in the six month period ended March 31, 2007.

Net income in the second quarter of fiscal 2007 decreased 9% to $8.9 million from $9.9 million in the prior year quarter, with earnings per share decreasing to $0.28 from $0.31 per diluted share. Net income in the first six months of fiscal 2007 also decreased 9% to $14.6 million from $16.1 million in the prior year, with earnings per share decreasing to $0.46 from $0.50 per diluted share. The decrease in net income as compared to the prior year is primarily due to costs associated with our growth initiatives, which include costs associated with expanding our talent management offerings as well as costs associated with creating a stronger global presence. These costs include an increase in amortization of identifiable intangibles as well as interest expense on the revolving credit line that was used to finance a portion of our acquisition of Unicru. Also contributing to the decrease is approximately $2.3 million in transaction costs related to the proposed acquisition of Kronos by H&F, as previously described.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, or 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

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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

• 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. We have not made any material changes in the policies and estimates previously disclosed in our annual report on Form 10-K for the year ended September 30, 2006.

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 ADP and other independent resellers. The majority 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:

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• Determining whether the fee is fixed or determinable;

• Determining whether collectibility is probable; and

• 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;

• 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 judgments 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 effect 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, with the exception of product revenue recognized under Statement of Position 81-1 or subscription 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.

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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.

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 classify 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.

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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.

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 7.5% to 9.6%. These rates may vary depending upon when the financing arrangement is entered into and the length of the financing arrangement.

We also 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 is 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.

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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.

Commencing upon the completion of our acquisition of Unicru, Inc. during August 2006, we also recognize certain transactions under a subscription revenue accounting model. We follow the provisions of Securities and Exchange Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements”, as amended by Staff Accounting Bulletin No. 104, “Revenue Recognition”. We recognize revenue when persuasive evidence of an arrangement exists, delivery of the service has occurred, the price is fixed or determinable, and collectibility is reasonably assured.

Our subscription arrangements provide customers the right to access our hosted software applications. Customers do not have the right to take possession of our software during the hosting arrangement. Subscription revenues are recognized on a monthly basis over the lives of the contracts. Development and activation revenues and related costs, which generally relate to set up and deployment activities, are deferred and recognized ratably over the term of the arrangement. Contracts generally have a term of between two to five years and are non-cancelable, or provide for significant penalties if cancelled.

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.

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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. 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.

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 2006 we completed the annual testing of the impairment of goodwill on our single reporting unit as of July 2, 2006, the annual goodwill impairment measurement date for fiscal 2006. We have also 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 March 31, 2007. Additionally, the acquisition of Unicru on August 1, 2006 resulted in approximately $86.2 million in goodwill which will be treated as a separate reporting unit for impairment testing purposes in accordance with SFAS 142, “Goodwill and Other Intangible Assets.”

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

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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 determined that, due to the scope of the project and based on the expected estimated economic life of the software, the capitalized costs related to the 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 $25.2 million, including internal personnel related costs of $6.7 million, related to the replacement of information technology systems since the start of this project in fiscal 2004. This project was substantially completed in November, 2006.

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 be sufficient 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

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significant estimates and assumptions, especially with respect to cash flows from 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 were required to adopt SFAS 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.

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; and

• Forfeiture rate.

The value of restricted stock units is based on the intrinsic value of the award at the date of grant.

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”, as permitted by Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation”. We have applied the modified prospective method in adopting FAS 123R.

Results of Operations

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

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Total Revenues (dollars in thousands):

	Three Months Ended						Six Months Ended
	March 31, 2007		April 1, 2006		Percent Change		March 31, 2007		April 1, 2006		Percent Change
Total revenues	$	161,273	$	143,523	12	%	$	309,999	$	271,466	14	%

The principal factors driving revenue growth in the three month period ended March 31, 2007 were the addition of subscription revenues, which we began receiving as a result of the Unicru acquisition in August of 2006, as well as an increase in maintenance revenues. Subscription revenues during the quarter were $11.2 million; there were no subscription revenues in the corresponding period in 2006. Maintenance revenues increased $7.9 million, or 17%, professional services revenues were consistent with the same period in the prior year and product revenues decreased $1.7 million, or 3%. Revenue growth in the six month period ended March 31, 2007 primarily related to the addition of $21.8 million in subscription revenues and a 15% increase in maintenance revenues over the same period in the prior year, with less significant increases in product and professional services (increases of 2% and 1%, respectively). Overall, revenue growth was principally attributed to acquired businesses and, to a lesser extent, our core business.

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.

	Three Months Ended						Six Months Ended
	March 31, 2007			April 1, 2006			March 31, 2007			April 1, 2006
Revenues from acquired businesses*	$	13,442		$	3,942		$	26,409		$	10,619
Percentage of total revenues		8.3	%		2.7	%		8.5	%		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
	March 31, 2007			April 1, 2006			Percent Change		March 31, 2007			April 1, 2006			Percent Change
Product revenues	$	57,371		$	59,038		(3	%)	$	109,558		$	107,025		2	%
Product revenues as a percent of total revenues		36	%		41	%	—			35	%		39	%	—

The decrease in product revenues in the three month period ended March 31, 2007 was due to a decrease in hardware revenues of $6.3 million, or 24%, partially offset by an increase in software revenues of $4.6 million, or 14%. The increase in software revenues was primarily due to an increase in demand for our Workforce Central suite and related software modules, primarily the result of continued innovation of our existing products and, to a lesser extent, the

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introduction of new products and upgrade activity. The increase in product revenues for the six month period ended March 31, 2007 over the prior year was primarily related to an increase in software sales of $8.4 million, or 14% increase, partially offset by a decrease in hardware sales of $5.8 million or 13%. The increase in software revenues in the six month period ending March 31, 2007 as compared to the same period in the prior year was primarily due to an increase in demand for our Workforce Central suite and related software modules. The decrease in hardware revenues in the three and six month periods is primarily driven by the impact of a one-time, promotional terminal upgrade program that took place in the second quarter of fiscal 2006, resulting in approximately $6.0 million of incremental sales of our Kronos 4500 terminal to customers who were using our legacy products at that time. Revenues from acquired businesses also increased in each period, as compared to the same periods in the prior year.

As of March 31, 2007, we had received orders with product value aggregating $4.6 million which we anticipate we will ship during the quarter ended June 30, 2007. In the quarters ended September 30, 2006 and December 30, 2006, we had corresponding unfulfilled product orders in the amounts of $5.1 million and $1.3 million, respectively, which were shipped in the next succeeding quarter.

	Three Months Ended					Six Months Ended
	March 31, 2007			April 1, 2006		March 31, 2007			April 1, 2006
Product revenues from acquired businesses	$	775		$	—	$	1,620		$	647
Percentage of product revenues		1.4	%		—		1.5	%		0.6	%

Maintenance Revenues (dollars in thousands):

	Three Months Ended								Six Months Ended
	March 31, 2007			April 1, 2006			Percent Change		March 31, 2007			April 1, 2006			Percent Change
Maintenance revenues	$	55,156		$	47,233		17	%	$	107,304		$	93,479		15	%
Maintenance revenues as a percent of total revenues		34	%		33	%	—			35	%		34	%	—

The increase in maintenance revenues in the three and six month periods ended March 31, 2007 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, improved customer retention rates and an increase in the value of maintenance contracts. This growth was offset in part by a decline in revenues from acquired businesses. The increase in the value of the maintenance contracts was attributable to sales of capacity upgrade licenses and add-on modules to existing customers as well as contractual cost of living-related increases upon renewal of 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.

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	Three Months Ended				Six Months Ended
	March 31, 2007		April 1, 2006		March 31, 2007		April 1, 2006
Maintenance revenues from acquired businesses	$	402	$	1,818	$	800	$	5,622
Percentage of maintenance revenues		0.7%		3.8%		0.7%		6.0%

Professional Services Revenues (dollars in thousands):

	Three Months Ended					Six Months Ended
	March 31, 2007		April 1, 2006		Percent Change	March 31, 2007		April 1, 2006		Percent Change
Professional services revenues	$	37,546	$	37,252	1%	$	71,348	$	70,962	1%
Professional services revenues as a percent of total revenues		23%		26%	—		23%		26%	—

Professional services revenues in the three and six month periods ended March 31, 2007 were slightly higher than the same periods ended April 1, 2006. The increase is primarily due to higher utilization rates in the second quarter of 2007 as compared with the same period in the prior year, offset in part by a reduction in revenues from acquisitions in the three and six months ended March 31, 2007 as compared to the same periods in the prior year.

	Three Months Ended				Six Months Ended
	March 31, 2007		April 1, 2006		March 31, 2007		April 1, 2006
Professional services revenues from acquired businesses	$	1,224	$	2,124	$	2,425	$	4,350
Percentage of professional services revenues		3.3%		5.7%		3.4%		6.1%

Subscription Revenues (dollars in thousands):

	Three Months Ended				Six Months Ended
	March 31, 2007		April 1, 2006	Percent Change	March 31, 2007		April 1, 2006	Percent Change
Subscription revenues	$	11,200	—	N/A	$	21,789	—	N/A
Subscription revenues as a percent of total revenues		7%	—	—		7%	—	—

Subscription revenues are primarily generated by our Talent Management division, which was added with the acquisition of Unicru, Inc. on August 1, 2006. Our Talent Management customer arrangements provide our customers with the right to access our hosted talent management software applications.

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	Three Months Ended			Six Months Ended
	March 31, 2007		April 1, 2006	March 31, 2007		April 1, 2006
Subscription revenues from acquired businesses	$	11,041	—	$	21,564	—
Percentage of subscription revenues		98.6%	—		99.0%	—

N/A = Not applicable

Gross Profit. Gross profit is the 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, 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 and stock-based compensation. Service (maintenance, professional services and subscription) cost of sales primarily consists of salaries, facilities and related expenses for service personnel as well as the cost of maintenance contracts paid to third-parties for certain products, amortization of acquired technology related to our subscription offerings and stock-based compensation. 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.

(dollars in thousands)	Three Months Ended						Six Months Ended
	March 31, 2007		April 1, 2006		% Change		March 31, 2007		April 1, 2006		% Change
Product gross profit	$	44,972	$	44,155	2%		$	85,232	$	81,556	5%
Stock-based compensation expenses included in product gross profit	$	92	$	97	(5%	)	$	187	$	179	4%
Maintenance gross profit	$	41,688	$	32,488	28%		$	80,908	$	64,713	25%
Stock-based compensation expenses included in maintenance gross profit	$	602	$	540	11%		$	1,197	$	1,014	18%
Professional services gross profit	$	5,690	$	6,666	(15%	)	$	8,629	$	10,452	(17%	)
Stock-based compensation expenses included in professional services gross profit	$	337	$	426	(21%	)	$	722	$	771	(6%	)
Subscription gross profit	$	5,364	$	—	N/A		$	10,092	$	—	N/A
Stock-based compensation expenses included in subscription gross profit	$	8	$	—	N/A		$	15	$	—	N/A
Total service gross profit	$	52,742	$	39,155	35%		$	99,629	$	75,165	33%
Stock-based compensation expenses included in service gross profit	$	947	$	966	(2%	)	$	1,934	$	1,785	8%
Total gross profit	$	97,714	$	83,309	17%		$	184,861	$	156,721	18%
Stock-based compensation expenses included in total gross profit	$	1,039	$	1,063	(2%	)	$	2,121	$	1,964	8%
Product gross margin		78%		75%	—			78%		76%	—
Maintenance gross margin		76%		69%	—			75%		69%	—
Professional services gross margin		15%		18%	—			12%		15%	—
Subscription gross margin		48%		N/A	—			46%		N/A	—
Service gross margin		51%		46%	—			50%		46%	—
Total gross margin		61%		58%	—			60%		58%	—

N/A = Not applicable

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Total gross margin for the three and six month periods ended March 31, 2007 increased as compared with the total gross margin for the comparable periods in the prior year. Service gross margins increased during these periods due to higher maintenance gross margins, offset in part by lower professional services margins. Product gross margins increased during the three and six month periods as compared to the same periods in the prior year. Factors driving the changes in gross margin are described in further detail below. We currently anticipate that gross margins will remain consistent during the remainder of fiscal 2007.

Product gross margin, which consists of hardware and software revenue and costs, increased in the three and six month periods ended March 31, 2007 as compared to the same periods in the prior fiscal year. Although product gross margin increased during these periods due to a lower proportion of hardware revenue, which typically generates a lower gross margin than software, this increase was offset in part by higher amortization of capitalized software and intangible assets recorded in product cost of sales. We currently anticipate that product margins will increase slightly during the remainder of fiscal 2007.

Maintenance gross margin in the three and six months ended March 31, 2007 increased as compared to maintenance gross margin in the same periods in the prior year primarily due to decreased costs associated with the elimination of various non-revenue generating positions, which were partially allocated to maintenance cost of sales in the prior year periods, higher volume and improved customer retention rates as compared to the same periods in the prior year.

Professional services gross margin decreased in the three and six month periods ended March 31, 2007 as compared to the same periods in the prior year due to increased personnel-related spending as well as costs associated with a reduction in force of certain service delivery personnel. This increased spending is offset in part by higher utilization rates and decreased costs associated with the elimination of various non-revenue generating positions, which were also partially allocated to professional services cost of sales in the three and six months ended April 1, 2006.

We currently anticipate that overall services gross margin will remain consistent during the remainder of fiscal 2007.

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

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Total Operating Expenses (dollars in thousands):

	Three Months Ended								Six Months Ended
	March 31, 2007			April 1, 2006			Percent Change		March 31, 2007			April 1, 2006			Percent Change
Operating expenses	$	84,518		$	68,218		24	%	$	163,035		$	132,014		23	%
Stock-based compensation included in operating expenses	$	3,401		$	3,462		(2	%)	$	6,895		$	6,475		6	%
Operating expenses as a % of total revenues		52	%		48	%	—			53	%		49	%	—

The increase in operating expenses for the three and six month periods ended March 31, 2007 was principally attributable to investments in personnel and related compensation, overhead and support costs in response to increased customer demand and to support the development of new products and markets. These costs include expenses from acquired companies as well as our strategic growth initiatives to expand our talent management offerings and to create a stronger global presence and are related to the hiring of additional personnel, annual salary increases, commission costs, overhead and support costs that total approximately $11.2 million and $24.8 million in the three and six month periods ended March 31, 2007, respectively. Also contributing to the increase was amortization of identifiable intangibles, with increases of approximately $1.1 million and $2.3 million, respectively, interest expense on the revolving credit line that was used to finance a portion of our acquisition of Unicru of approximately $0.7 million and $1.9 million, respectively, as well as approximately $2.3 million in transaction costs related to the proposed acquisition of Kronos by H&F, as previously described.

These increases were offset by a decrease in bad debt provisions resulting from our periodic calculation of our bad debt reserve requirements totaling approximately $0.7 million in the six months ending March 31, 2007. 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
	March 31, 2007			April 1, 2006			Percent Change		March 31, 2007			April 1, 2006			Percent Change
Sales and marketing expenses	$	47,183		$	42,395		11	%	$	92,107		$	81,167		13	%
Stock-based compensation included in sales and marketing expenses	$	1, 375		$	1,400		(2	%)	$	2,874		$	2,656		8	%
Sales and marketing expenses as a % of total revenues		29	%		30	%	—			30	%		30	%	—

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The increase in sales and marketing expense for the three and six month periods ended March 31, 2007 was primarily attributable to investments in personnel and related compensation, overhead and support costs in response to increased customer demand and to support the development of new products and markets, including our strategic growth initiatives to expand our talent management offerings and create a stronger global presence. These costs include the hiring of additional personnel, annual salary increases, commission costs, overhead and support costs and total approximately $4.8 million and $10.7 million, respectively.

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
	March 31, 2007			April 1, 2006			Percent Change		March 31, 2007			April 1, 2006			Percent Change
Total engineering, research and development spending	$	22,242		$	17,534		27	%	$	43,889		$	33,824		30	%
Capitalized software development costs		(4,112	)		(3,624	)	(13	%)		(7,835	)		(6,901	)	(14	%)
Engineering, research and development expenses	$	18,130		$	13,910		30	%	$	36,054		$	26,923		34	%
Stock-based compensation included in engineering, research and development expenses	$	695		$	887		(22	%)	$	1,412		$	1,670		(15	%)
Engineering, research and development expenses as a % of total revenues		11	%		10	%	—			12	%		10	%	—

The increase in engineering, research and development spending for the three and six month periods ended March 31, 2007 as compared to the comparable periods in the prior year was primarily attributable to our continued investment in engineering personnel and their compensation, overhead and support costs, which include the addition of engineering personnel from acquisitions in fiscal 2006, including our strategic growth initiative to expand our talent management offerings with the acquisition of Unicru, Inc., in August of 2006. These costs include the hiring of additional personnel, annual salary increases, overhead and support costs and total approximately $4.3 million and $9.3 million, respectively, in the three and six month periods ended March 31, 2007 as compared with those periods in the prior year. This increase in spending was the result of the continued development and support of new products, as well as costs associated with the globalization of these and our other products. The significant project development efforts in the first half of fiscal 2007 were principally related to further development and enhancement of the Workforce Central™ suite, including Workforce Timekeeper™, Workforce Activities™, Workforce Attendance™, Workforce Analytics™, Workforce Acquisition™, Workforce Scheduler™ and Workforce Scheduler™ with Optimization, Workforce HR™, Workforce Payroll™ software, and the Kronos 4500 terminal.

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

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	Three Months Ended								Six Months Ended
	March 31, 2007			April 1, 2006			Percent Change		March 31, 2007			April 1, 2006			Percent Change
General and administrative expenses	$	14,882		$	12,105		23	%	$	28,841		$	24,082		20	%
Stock-based compensation included in general and administrative expenses	$	1,331		$	1,175		13	%	$	2,609		$	2,149		21	%
General and administrative expenses as a % of total revenues		9	%		8	%	—			9	%		9	%	—

The increase in general and administrative expenses in the three and six month periods ended March 31, 2007 was primarily due to investments in personnel and related compensation, overhead and support costs in response to increased customer demand and to support the development of new products and markets, including our strategic growth initiatives to expand our talent management offerings and to create a stronger global presence. These costs, including the hiring of additional personnel, annual salary increases, overhead and support costs, total approximately $2.1 million and $4.8 million, respectively, and were offset in part by a decrease in bad debt provisions, which totaled approximately $0.7 million in the six months ended March 31, 2007, resulting from our periodic calculation of our bad debt reserve requirements. The decrease in reserve requirements is in response to a strengthening of our overall accounts receivable aging.

Amortization of Intangible Assets, Transaction Costs 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. Customer related intangible assets and intangible assets related to maintenance relationships and technology are generally amortized over lives ranging between 7 and 12 years. Intangible assets related to non-compete agreements are generally amortized over the life of the related non-compete agreement.

Transaction costs are related to the proposed acquisition of Kronos by H&F, as previously described.

Other income, net is principally interest income earned from cash as well as investments in marketable securities and financing arrangements, offset by interest expense on borrowings (dollars in thousands).

	Three Months Ended								Six Months Ended
	March 31, 2007			April 1, 2006			Percent Change		March 31, 2007			April 1, 2006			Percent Change
Amortization of intangible assets	$	2,783		$	1,665		67	%	$	5,556		$	3,207		73	%
Amortization of intangible assets as a % of total revenues		2	%		1	%	—			2	%		1	%	—
Transaction costs	$	2,297			—		N/A		$	2,297			—		N/A
Transaction costs as a % of total revenues		1	%		—		—			1	%		—		—
Other income, net	$	757		$	1,857		(59	%)	$	1,820		$	3,365		(46	%)
Other income, net as a % of total revenues		—			1	%	—			1	%		1	%	—

N/A = Not applicable

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The increase in amortization of intangible assets in the three and six month periods ended March 31, 2007, as compared to the same periods in the prior year, is principally attributed to amortization charges related to acquisitions completed since last year, including the acquisition of Unicru, Inc. in August of 2006.

The decrease in other income, net in the three and six month periods ended March 31, 2007 as compared to the same periods in the prior year, is principally attributed to approximately $0.7 million and $1.9 million, respectively, in interest expense related to the revolving credit facility used to finance a portion of the Unicru acquisition. This expense was offset by foreign exchange gains, primarily related to intercompany balances with our foreign subsidiaries, US dollar-denominated cash balances and accounts receivable held by our foreign subsidiaries, totaling approximately $0.7 million for the six months ended March 31, 2007 as compared with the same period in the prior year.

Income Taxes. The provision for income taxes as a percentage of pre-tax income was 32.2% and 32.9% for the three and six month periods ended March 31, 2007 as compared to 34.7% and 34.9% for the comparable periods in the prior year. The provision for income taxes for the six month period ended March 31, 2007 was favorably impacted by certain research and development tax credits in the U.S. and Canada, the deduction for Domestic Manufacturing Activities and tax free interest income. 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. We currently anticipate that the income tax rate will range approximately between 32.5% – 33% for the remainder of the fiscal year.

In June 2006, the FASB released Interpretation 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FAS 109”, or FIN 48. The Company is required to adopt FIN 48 for its fiscal year ending September 30, 2008, and is currently assessing its impact.

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.

On July 11, 2006, we entered into a credit agreement with Citizens Bank of Massachusetts regarding a three-year, $100 million revolving credit facility. On August 1, 2006 we completed the acquisition of Unicru, Inc. for $149.2 million in cash and drew down $97.9 million from the line of credit in order to complete this transaction. We repaid approximately $17.0 million during fiscal 2006 and $55.6 during the first half of fiscal 2007, resulting in a $25.2 million balance as of March 31, 2007.

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

	As of
	March 31, 2007		September 30, 2006		Percent Change
Cash, cash equivalents and marketable securities (including short and long-term)	$	92,876	$	116,642	(20	%)
Working capital	$	7,353	$	24,470	(70	%)

The decrease in cash, cash equivalents and marketable securities was due primarily to payments on our revolving note, repurchases of common stock, purchase of property, plant and equipment, cash paid for acquired businesses and capitalized software development costs. These investments were partially offset by cash generated from operations and cash proceeds from stock option exercises. These same factors also contributed to the decrease in working capital during the period.

Cash Flow Highlights (dollars in thousands):

	Three Months Ended								Six Months Ended
	March 31, 2007			April 1, 2006			Percent Change		March 31, 2007			April 1, 2006			Percent Change
Cash provided by operations	$	22,261		$	21,257		5	%	$	52,434		$	44,289		18	%
Cash used for property, plant and equipment	$	(3,821	)	$	(6,049	)	(37	%)	$	(10,690	)	$	(9,911	)	8	%
Cash used for acquisitions of businesses	$	(348	)	$	(6,629	)	(95	%)	$	(8,296	)	$	(8,592	)	(3	%)
(Increase)/decrease in marketable securities	$	5,763		$	898		(542	%)	$	23,841		$	(3,235	)	(836	%)
Net proceeds from exercise of stock options and employee stock purchase plans	$	12,777		$	7,888		62	%	$	15,172		$	13,120		16	%
Repurchases of common stock	$	(2,548	)	$	(7,734	)	(67	%)	$	(12,548	)	$	(14,112	)	(11	%)
Repayments of debt	$	(29,479	)		—		N/A		$	(55,603	)		—		N/A

N/A = Not applicable

The increase in cash provided by operations in the six month period ended March 31, 2007 was primarily due to lower decreases in deferred professional services revenues as we near completion of our transition to billing our customers in arrears for professional services as the services are delivered, an increase in collections of accounts receivable, an increase in net income before non-cash stock-based compensation, depreciation and amortization of intangible assets, and increases in accounts payable, accrued compensation and other liabilities as well as deferred product revenues. These factors are partially offset by a decrease in taxes payable as well as in the rate of growth of deferred maintenance revenues.

Our use of cash for property, plant and equipment in the six month period ended March 31, 2007 includes investments in information systems and infrastructure to improve and support our expanding operations. To date, we have invested approximately $32.4 million related to the replacement of information technologies, of which

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$25.2 million has been capitalized, with the remainder expensed through operations. This project was substantially completed in November, 2006.

Our use of cash for the acquisition of businesses in the six month period ended March 31, 2007 was principally related to the acquisition of Time Controls on November 8, 2006. 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. Please refer to Note F in the Notes to the Condensed Consolidated Financial Statements for further details. We continue to assess potential acquisition opportunities. Excess cash reserves not required for operations, investments in property, plant and equipment or acquisitions are used to pay down the line of credit.

We are currently exploring the possibility of entering into an arrangement with a third-party financing company to sell our portfolio of customer financing arrangements. The potential sale of this portfolio would allow us to generate cash flow that would be available to fund the proposed acquisition of us by entities affiliated with H&F, as previously discussed. No assets related to our portfolio have been classified as “held-for-sale” at March 31, 2007 as the criteria had not been met in accordance with Statement of Financial Accounting Standard No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

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

	Three Months Ended						Six Months Ended
	March 31, 2007		April 1, 2006		Percent Change		March 31, 2007		April 1, 2006		Percent Change
Shares of common stock repurchased		71,714		197,500	(64	%)		354,731		339,250	5	%
Cost of shares of common stock repurchased	$	2,548	$	7,733	(67	%)	$	12,548	$	14,112	(11	%)

The common stock repurchased under our stock repurchase program has been used to partially cover the shares required for our employee stock award plans and employee stock purchase plan. We do not anticipate repurchasing any additional shares.

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 and our revolving line of credit are as follows:

	Payments Due by Period (in thousands)
Contractual Obligations	Total		Less Than 1 Year		More Than 1 Year, Less Than 3 Years		More Than 3 Years, Less Than 5 Years		More Than 5 Years
Operating lease obligations (1)	$	52,739	$	12,129	$	20,210	$	14,798	$	5,602
Notes payable, long-term (2)		25,217		—		25,217		—		—
Guaranteed payment obligations		3,569		3,569		—		—		—
Total	$	81,525	$	15,698	$	45,427	$	14,798	$	5,602

(1) Represents leases of facilities and equipment.

(2) 3-year revolving credit facility.

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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 and, if any, borrowings for the foreseeable future.

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 borrowings as well as 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, 2006 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 March 31, 2007, 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 to date. For foreign currency exposures existing at March 31, 2007, 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. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. Additionally, a 10% unfavorable movement in the LIBOR rate, on which interest on our borrowings is based, would not expose us to material losses in earnings or cash flows.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our President and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2007. 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 SEC’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

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relationship of possible controls and procedures. Based on this evaluation, our President and our Chief Financial Officer concluded that, as of March 31, 2007, 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 March 31, 2007 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

From time to time, the Company is involved in legal proceedings arising in the normal course of business. None of the legal proceedings in which the Company is currently involved is considered material by the Company.

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, as further described below.

The following discussion includes one new risk factor (“Failure to complete the recently announced acquisition of Kronos could negatively impact the market price of our common stock and our future business and operations”) that reflects developments subsequent to the discussion of risk factors included in our most recent Annual Report on Form 10-K. In addition, we have deleted the risk factor entitled “New Information Technology System Implementation”.

Failure to complete the recently announced acquisition of Kronos could negatively impact the market price of our common stock and our future business and operations.

On March 22, 2007, we announced that we had signed a definitive agreement to be acquired by entities affiliated with Hellman & Friedman LLC. If this transaction is not completed for any reason, we will be subject to a number of material risks, including:

• under circumstances described in the merger agreement, we could be required to pay a termination fee of up to $55 million;

• the market price of our common stock may decline to the extent that the current market price of such shares reflects a market assumption that the transaction will be completed; and

• the costs related to the transaction, such as legal and accounting fees and a portion of the investment banking fees, must be paid even if the transaction is not completed.

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If this proposed transaction is not completed for any reason, including without limitation the inability of the acquirer to obtain the necessary debt financing, we may not be able to identify alternative strategic options that are worth pursuing. Prior to the closing of this proposed transaction, or, if this proposed transaction is not consummated, prior to the identification and closing of an alternative transaction, we will be subject to other uncertainties and risks, including:

• perceived uncertainties as to our future direction may result in the loss of, or failure to attract, customers, employees or business partners; and

• the diversion of management’s attention could have a material adverse effect on our business, financial condition or results of operations.

During the pendency of this proposed transaction, we may not be able to enter into a merger or business combination with another party at a favorable price because of restrictions in the definitive merger agreement. Covenants in that agreement also impede our ability to make acquisitions or complete other transactions that are not in the ordinary course of business but that could be favorable to us and our stockholders. As a result, if this proposed transaction is not consummated, we may be at a disadvantage to our competitors.

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 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.

Integration of Acquired Businesses. As part of our overall growth strategy, we have acquired from time to time resellers of our products and, in certain instances, complementary business lines. Going forward, we anticipate continuing this growth strategy, particularly related to strategic acquisitions of complementary business lines and technologies. This could potentially include material transactions, including some outside of the U.S., which are more complex and may present greater challenges in achieving the intended strategic and financial goals. Even if we are successful in identifying and acquiring businesses strategic to us, these acquisition activities involve a number of risks, including:

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• 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 material acquisitions, foreign acquisitions 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.

Competition. The human capital management market, which includes time and labor, scheduling, talent management, human resources, payroll, absence management, labor activity tracking, data collection, self-service and workforce analytics solutions are 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 through the introduction of our human resources and payroll product suite and the expansion of our scheduling product offerings, as well as our expansion into the talent management market, we will continue to face 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

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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 as well as talent management markets, and our failure to do so could have a material adverse impact on our business, prospects, financial condition and operating results.

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 talent management, 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 human capital 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 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 2007, approximately 8% 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.

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. In December 2004, the FASB issued FAS 123R, which requires all companies to measure compensation cost for all share-based payments, including employee stock options, at fair value. 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. The implementation of FAS 123R has had no adverse effect on our

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balance sheet or total cash flows, but it does impact cash flows from operations, cash flows from financing activities, cost of sales, gross profit, operating expenses, net income and earnings per share. Estimates of and assumptions about forfeiture rates, volatility and interest rates are used to calculate stock-based compensation; a significant change in these estimates could materially affect our operating results.

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

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

Infringement of Intellectual Property Rights. We cannot provide assurance that others will not claim that our developed or acquired intellectual property rights infringe on their intellectual property rights or that we do not in fact infringe on those intellectual property rights. Any litigation regarding intellectual property rights could be costly and time-consuming and divert the attention of our management and key personnel from business operations. The complexity of the technology involved 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. Unre gistered Sales of Equity Securities and Use of Proceeds

In the following table, we provide information about our purchases during the quarter ended March 31, 2007 of equity securities that are registered by the company pursuant to Section 12 of the Exchange Act.

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ISSUER PURCHASES OF EQUITY SECURITIES

	(a)	(b)		(c)	(d)
Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs	Maximum Number of Shares that May Yet Be Purchased Under the Programs (2)
01/01/07—02/02/07	71,714	$	35.54	71,714	1,122,863
02/03/07—03/02/07	—		—	—	1,122,863
03/03/07—03/31/07	—		—	—	1,122,863
Total:	71,714	$	35.54	71,714	1,122,863

(1) We repurchased an aggregate of 71,714 shares of our common stock pursuant to the repurchase programs that were publicly announced on February 16, 2006 and November 16, 2006, which we refer to as the “Repurchase Programs”.

(2) We do not anticipate repurchasing any additional shares.

Item 3. Def aults upon Senior Securities

None

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

(a) The 2007 Annual Meeting of Stockholders of Kronos Incorporated was held on February 16, 2007.

(b) At the Annual Meeting, Messrs. Aron J. Ain, Richard Dumler and Samuel Rubinovitz were elected as Class III Directors for three-year terms expiring in 2010. 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 II Directors: Messrs. Mark S. Ain and David B. Kiser. The tabulation was as follows:

	FOR	WITHHELD
Aron J. Ain	25,754,231	1,838,860
Richard Dumler	26,101,468	1,491,623
Samuel Rubinovitz	25,108,574	2,484,517

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(c)	The amended and restated 2002 Stock Incentive Plan was approved as follows:
	FOR	AGAINST	ABSTAIN/BROKER NON-VOTE
	18,884,017	5,723,111	2,985,963
(d)	The amended and restated 2003 Employee Stock Purchase Plan was approved as follows:
	FOR	AGAINST	ABSTAIN/BROKER NON-VOTE
	21,012,765	3,595,654	2,984,672
(e)	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 2007 fiscal year.
	FOR	AGAINST	ABSTAIN/BROKER NON-VOTE
	27,235,440	347,972	9,679

Item 5. Other Information

None

Item 6. Exhibits

10.1	Amendment #1 to the Kronos Incorporated 2002 Stock Incentive Plan.
10.2	Amendment #2 to the Kronos Incorporated 2002 Stock Incentive Plan.
10.3	Amendment #1 to the Kronos Incorporated 2003 Employee Stock Purchase Plan.
10.4	Form of Senior Executive Retention Agreement with accompanying schedule.
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	Certification 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.

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SIGNATURES

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

	KRONOS INCORPORATED
May 7, 2007	By	/S/    MARK V. JULIEN
		Mark V. Julien
		Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)

KRONOS INCORPORATED

EXHIBIT INDEX

10.1	Amendment #1 to the Kronos Incorporated 2002 Stock Incentive Plan.
10.2	Amendment #2 to the Kronos Incorporated 2002 Stock Incentive Plan.
10.3	Amendment #1 to the Kronos Incorporated 2003 Employee Stock Purchase Plan.
10.4	Form of Senior Executive Retention Agreement with accompanying schedule.
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	Certification 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-10.1

Exhibit 10.1

AMENDMENT #1 TO THE KRONOS INCORPORATED

2002 STOCK INCENTIVE PLAN

The 2002 Stock Incentive Plan, as amended and restated (the “2002 Plan”), of Kronos Incorporated (the “Company”) is hereby amended as follows (capitalized terms used herein and not defined herein shall have the respective meaning ascribed to such terms in the 2002 Plan):

1. The following subsection (e) shall be added to Section 6:

“Notwithstanding the foregoing, the Company may, at the election of the Board, grant Restricted Stock Awards (as defined below) to members of the Board in lieu of the Nonstatutory Stock Options provided for in this Section 6, subject to the limitations set forth in Section 4(c)(2). Such Restricted Stock Awards shall have the same terms and vesting provisions as set forth in Section 8.”

Except as aforesaid, the 2002 Plan shall remain in full force and effect.

Adopted by the Board of Directors on November 16, 2006

Approved by the Stockholders on February 16, 2007

EX-10.2

Exhibit 10.2

AMENDMENT #2 TO THE KRONOS INCORPORATED

2002 STOCK INCENTIVE PLAN

The Kronos Incorporated 2002 Stock Incentive Plan, as amended and restated (the “2002 Plan”), is hereby amended as follows (capitalized terms used herein and not defined herein shall have the respective meaning ascribed to such terms in the 2002 Plan):

1. Section 8(a) of the 2002 Plan is hereby deleted in its entirety and the following is inserted in lieu thereof:

“(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 or an amount in cash equal to the fair market value of the shares of Common Stock, as determined by the Board, 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”).”

2. Section 11(g) of the 2002 Plan is hereby deleted in its entirety and the following is inserted in lieu thereof:

“(g) Acceleration. Notwithstanding the provisions of Sections 5(d), 7(b)(2), 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.

3. Section 13(c)(3)(b) of the 2002 Plan is hereby deleted in its entirety and the following is inserted in lieu thereof:

“(b) Change in Control Event. Upon the occurrence of a Change in Control Event (regardless of whether such event also constitutes a Reorganization Event):

(i) 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; and

(ii) under the terms of which holders of Common Stock will receive upon consummation thereof the Acquisition Price, except to the extent specifically provided to the contrary in the instrument evidencing any Restricted Stock Unit or any other agreement between a Participant and the Company, the Board may provide that all outstanding Restricted Stock Units shall terminate upon consummation of such Change in Control Event and that each Participant shall receive, in exchange therefor, a cash payment equal to (i) the product of (A) the number of shares of Common Stock subject to such Restricted Stock Unit prior to the consummation of the Change in Control Event and (B) the Acquisition Price, plus the value of any deemed dividend equivalents accrued but unpaid with respect to such Restricted Stock Units (less any amounts required to be withheld under any applicable law).”

4. Section 14 of the 2002 Plan is hereby amended by adding a new subsection (g) which shall read as follows:

“The Board shall determine the effect on an Award of the disability, death, retirement, authorized leave of absence or other change in the employment or other status of a Participant and the extent to which, and the period during which, the Participant, or the Participant’s legal representative, conservator, guardian or Designated Beneficiary, may exercise rights under the Award.”

Except as aforesaid, the 2002 Plan shall remain in full force and effect.

Approved by the Board of Directors on March 22, 2007

EX-10.3

Exhibit 10.3

AMENDMENT NO. 1 TO THE KRONOS INCORPORATED

2003 EMPLOYEE STOCK PURCHASE PLAN

Section 9 of the 2003 Employee Stock Purchase Plan is hereby amended to remove the look-back provision and to stipulate that the purchase price will be 85% of the closing price of the common stock on the last business day of the period.

Adopted by the Board of Directors on August 2, 2005

AMENDMENT NO. 2 TO THE KRONOS INCORPORATED

2003 EMPLOYEE STOCK PURCHASE PLAN

The 2003 Employee Stock Purchase Plan, as amended (the “2003 ESPP”), of Kronos Incorporated (the “Company”) is hereby amended as follows (capitalized terms used herein and not defined herein shall have the respective meaning ascribed to such terms in the 2003 ESPP):

1. The second sentence of the introductory paragraph of the 2003 ESPP shall be deleted in its entirety and replaced with the following:

“Two million, one hundred and twenty five thousand (2,125,000) shares of common stock in the aggregate have been approved for this purpose.”

Except as aforesaid, the 2003 ESPP shall remain in full force and effect.

Adopted by the Board of Directors on November 16, 2006

Approved by the Stockholders on February 16, 2007

EX-10.4

Exhibit 10.4

KRONOS INCORPORATED

Senior Executive Retention Agreement

THIS SENIOR EXECUTIVE RETENTION AGREEMENT, by and between Kronos Incorporated, a Massachusetts corporation (the “Company”), and [            ] (the “Executive”) was originally effective as of [            ] and is amended and restated effective                     , 2007 (the “Effective Date”).

WHEREAS, the Company recognizes that, as is the case with many publicly-held corporations, the possibility of a change in control of the Company exists and that such possibility, and the uncertainty and questions which it may raise among key personnel, may result in the departure or distraction of key personnel to the detriment of the Company and its stockholders,

WHEREAS, the Board of Directors of the Company (the “Board”) has determined that appropriate steps should be taken to reinforce and encourage the continued employment and dedication of the Company’s key personnel without distraction from the possibility of a change in control of the Company and related events and circumstances, and

WHEREAS, the Board has determined that it is in the best interests of the Company that the Agreement be amended and restated to clarify certain provisions and to comply with Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”).

NOW, THEREFORE, as an inducement for and in consideration of the Executive remaining in its employ, the Company agrees that the Executive shall receive the severance benefits set forth in this Agreement in the event the Executive’s employment with the Company is terminated under the circumstances described below subsequent to a Change in Control (as defined in Section 1.1).

1. Key Definitions.

As used herein, the following terms shall have the following respective meanings:

1.1 “Change in Control” means an event or occurrence set forth in any one or more of subsections (a) through (d) below (including an event or occurrence that constitutes a Change in Control under one of such subsections but is specifically exempted from another such subsection):

(a) the acquisition by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (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) 20% or more of either (i) the then-outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (ii) 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 (a), the following acquisitions shall not constitute a Change in Control: (i) 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), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i) and (ii) of subsection (c) of this Section 1.1; or

(b) 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 (i) who was a member of the Board on the date of the execution of this Agreement or (ii) 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 (ii) 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

(c) the consummation of a merger, consolidation, reorganization, recapitalization or statutory share exchange involving the Company or a sale or other disposition of all or substantially all of the assets of the Company in one or a series of transactions (a “Business Combination”), unless, immediately following such Business Combination, each of the following two conditions is satisfied: (i) 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, immediately prior to such Business Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, respectively; and (ii) 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, 20% 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

(d) approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.

1.2 “Change in Control Date” means the first date during the Term (as defined in Section 2) on which a Change in Control occurs. Anything in this Agreement to the contrary notwithstanding, if (a) a Change in Control occurs, (b) the Executive’s employment with the Company is terminated prior to the date on which the Change in Control occurs, and (c) it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or in anticipation of a Change in Control, then for all purposes of this Agreement the “Change in Control Date” shall mean the date immediately prior to the date of such termination of employment.

1.3 “Cause” means:

(a) the Executive’s willful and continued failure to substantially perform his reasonable assigned duties as an officer of the Company (other than any such failure resulting from incapacity due to physical or mental illness or any failure after the Executive gives notice of termination for Good Reason), which failure is not cured within 90 days after a written demand for substantial performance is received by the Executive from the Board of Directors of the Company which specifically identifies the manner in which the Board of Directors believes the Executive has not substantially performed the Executive’s duties; or

(b) the Executive’s willful engagement in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company.

For purposes of this Section 1.3, no act or failure to act by the Executive shall be considered “willful” unless it is done, or omitted to be done, in bad faith and without reasonable belief that the Executive’s action or omission was in the best interests of the Company.

1.4 “Good Reason” means the occurrence, without the Executive’s written consent, of any of the events or circumstances set forth in clauses (a) through (g) below. Notwithstanding the occurrence of any such event or circumstance, such occurrence shall not be deemed to constitute Good Reason if, prior to the Date of Termination specified in the Notice of Termination (each as defined in Section 3.2(a)) given by the Executive in respect thereof, such event or circumstance has been fully corrected and the Executive has been reasonably compensated for any losses or damages resulting therefrom (provided that such right of correction by the Company shall only apply to the first Notice of Termination for Good Reason given by the Executive).

(a) the assignment to the Executive of duties inconsistent in any material respect with the Executive’s position (including status, offices, titles and reporting requirements), authority or responsibilities in effect immediately prior to the earliest to occur of (i) the Change in Control Date, (ii) the date of the execution by the Company of the initial

written agreement or instrument providing for the Change in Control or (iii) the date of the adoption by the Board of Directors of a resolution providing for the Change in Control (with the earliest to occur of such dates referred to herein as the “Measurement Date”), or any other action or omission by the Company which results in a material diminution in such position, authority or responsibilities;

(b) a reduction in the Executive’s annual base salary as in effect on the Measurement Date or as the same was or may be increased thereafter from time to time;

(c) the failure by the Company to (i) continue in effect any material compensation or benefit plan or program (including without limitation any life insurance, medical, health and accident or disability plan and any vacation or automobile program or policy) (a “Benefit Plan”) in which the Executive participates or which is applicable to the Executive immediately prior to the Measurement Date, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan or program, (ii) continue the Executive’s participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of the Executive’s participation relative to other participants, than the basis existing immediately prior to the Measurement Date or (iii) award cash bonuses to the Executive in amounts and in a manner substantially consistent with past practice in light of the Company’s financial performance;

(d) a change by the Company in the location at which the Executive performs his principal duties for the Company to a new location that is both (i) outside a radius of 35 miles from the Executive’s principal residence immediately prior to the Measurement Date and (ii) more than 35 miles from the location at which the Executive performed his principal duties for the Company immediately prior to the Measurement Date; or a requirement by the Company that the Executive travel on Company business to a substantially greater extent than required immediately prior to the Measurement Date;

(e) the failure of the Company to obtain the agreement from any successor to the Company to assume and agree to perform this Agreement, as required by Section 6.1;

(f) a purported termination of the Executive’s employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 3.2(a); or

(g) any failure of the Company to pay or provide to the Executive any portion of the Executive’s compensation or benefits due under any Benefit Plan within seven days of the date such compensation or benefits are due, or any material breach by the Company of this Agreement or any employment agreement with the Executive.

(h) In addition, the termination of employment by the Executive for any reason or no reason during the 30-day period beginning on the first anniversary of the Change in Control Date shall be deemed to be termination for Good Reason for all purposes under this Agreement.

The Executive’s right to terminate his employment for Good Reason shall be made in good faith and shall not be affected by his incapacity due to physical or mental illness.

1.5 “Disability” means the Executive’s absence from the full-time performance of the Executive’s duties with the Company for 180 consecutive calendar days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive’s legal representative.

2. Term of Agreement. This Agreement, and all rights and obligations of the parties hereunder, shall take effect upon the Effective Date and shall expire upon the first to occur of (a) the expiration of the Term (as defined below) if a Change in Control has not occurred during the Term, (b) the date 36 months after the Change in Control Date, if the Executive is still employed by the Company as of such later date, or (c) the fulfillment by the Company of all of its obligations under Sections 4 and 5.2 and 5.3 if the Executive’s employment with the Company terminates within 36 months following the Change in Control Date. “Term” shall mean the period commencing as of the Effective Date and continuing in effect through October 4, 2007; provided, however, that commencing on October 5, 2007 and each October 5th thereafter, the Term shall be automatically extended for one additional year unless, not later than 90 days prior to the scheduled expiration of the Term (or any extension thereof), the Company shall have given the Executive written notice that the Term will not be extended.

3. Employment Status; Termination Following Change in Control.

3.1 Not an Employment Contract. The Executive acknowledges that this Agreement does not constitute a contract of employment or impose on the Company any obligation to retain the Executive as an employee and that this Agreement does not prevent the Executive from terminating employment at any time. If the Executive’s employment with the Company terminates for any reason and subsequently a Change in Control shall occur, the Executive shall not be entitled to any benefits hereunder except as otherwise provided pursuant to Section 1.2.

3.2 Termination of Employment.

(a) If the Change in Control Date occurs during the Term, any termination of the Executive’s employment by the Company or by the Executive within 36 months following the Change in Control Date (other than due to the death of the Executive) shall be communicated by a written notice to the other party hereto (the “Notice of Termination”), given in accordance with Section 7. Any Notice of Termination shall: (i) indicate the specific termination provision (if any) of this Agreement relied upon by the party giving such notice, (ii) to the extent applicable, set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated and (iii) specify the Date of Termination (as defined below). The effective date of an employment termination (the “Date of Termination”) shall be the close of business on the date specified in the Notice of Termination (which date may not be less than 15 days or more than 120 days after the date of delivery of such Notice of Termination), in the case of a termination other than one due to the Executive’s death, or the date of the Executive’s death, as the case may

be. In the event the Company fails to satisfy the requirements of Section 3.2(a) regarding a Notice of Termination, the purported termination of the Executive’s employment pursuant to such Notice of Termination shall not be effective for purposes of this Agreement.

(b) The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting any such fact or circumstance in enforcing the Executive’s or the Company’s rights hereunder.

(c) Any Notice of Termination for Cause given by the Company must be given within 90 days of the occurrence of the event(s) or circumstance(s) which constitute(s) Cause. Prior to any Notice of Termination for Cause being given (and prior to any termination for Cause being effective), the Executive shall be entitled to a hearing before the Board of Directors of the Company at which he may, at his election, be represented by counsel and at which he shall have a reasonable opportunity to be heard. Such hearing shall be held on not less than 15 days prior written notice to the Executive stating the Board of Directors’ intention to terminate the Executive for Cause and stating in detail the particular event(s) or circumstance(s) which the Board of Directors believes constitutes Cause for termination. Any such Notice of Termination for Cause must be approved by an affirmative vote of two-thirds of the members of the Board of Directors.

(d) Any Notice of Termination for Good Reason given by the Executive must be given within 90 days of the occurrence of the event(s) or circumstance(s) which constitute(s) Good Reason.

4. Benefits to Executive.

4.1 Compensation. If the Change in Control Date occurs during the Term and the Executive’s employment with the Company terminates within 36 months following the Change in Control Date, the Executive shall be entitled to the following benefits:

(a) Termination Without Cause or for Good Reason Within 12 Months of the Change in Control Date. If the Executive’s employment with the Company is terminated either (1) by the Company (other than for Cause, Disability or Death) or (2) by the Executive for Good Reason, in each case within 12 months of the Change in Control Date, then the Executive shall be entitled to the following benefits:

(i) the Company shall pay to the Executive, in accordance with Section 4.1(e), in cash, either (A) in one lump sum, within 30 days after the Executive’s termination or (B) in 36 equal monthly installments, with an annual interest rate on the unpaid principal balance equal to the minimum applicable Federal rate in effect on the Date of Termination, beginning 30 days after the Date of Termination, the aggregate of the following amounts:

(1) the sum of (A) the Executive’s base salary through the Date of Termination, (B) the product of (x) the annual bonus paid or payable (including any bonus or portion thereof which has been earned but deferred) for the most recently completed

fiscal year and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (C) the amount of any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not previously paid (the sum of the amounts described in clauses (A), (B), and (C) shall be hereinafter referred to as the “Accrued Obligations”); and

(2) the amount equal to (A) three multiplied by (B) the sum of (x) the Executive’s highest annual base salary for any year during the five-year period prior to the Change in Control Date and (y) the Executive’s highest annual bonus for any year during the five-year period prior to the Change in Control Date.

(ii) for 12 months after the Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue to provide benefits to the Executive and the Executive’s family at least equal to those which would have been provided to them if the Executive’s employment had not been terminated, in accordance with the applicable Benefit Plans in effect on the Measurement Date or, if more favorable to the Executive and his family, in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies; provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive a particular type of benefits (e.g., health insurance benefits) from such employer on terms at least as favorable to the Executive and his family as those being provided by the Company, then the Company shall no longer be required to provide those particular benefits to the Executive and his family;

(iii) to the extent not previously paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive following the Executive’s termination of employment under any plan, program, policy, practice, contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the “Other Benefits”); and

(iv) for purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits to which the Executive is entitled, the Executive shall be considered to have remained employed by the Company until 12 months after the Date of Termination.

(b) Termination Without Cause or for Good Reason Following 12 Months After the Change in Control Date. If the Executive’s employment with the Company is terminated either (1) by the Company (other than for Cause, Disability or Death) or (2) by the Executive for Good Reason (including a termination by the Executive in accordance with Section 1.4(h)), in each case on a date which is more than 12 months following the Change in Control Date, then the Executive shall be entitled to the following benefits:

(i) the Company shall pay to the Executive, in accordance with Section 4.1(e), in cash, either (A) in one lump sum, within 30 days after the Executive’s termination or (B) in 36 equal monthly installments, with an annual interest rate on the unpaid

principal balance equal to the minimum applicable Federal rate in effect on the Date of Termination, beginning 30 days after the Date of Termination, the aggregate of the following amounts:

(1) the sum of (A) the Executive’s base salary through the Date of Termination, (B) the product of (x) the annual bonus paid or payable (including any bonus or portion thereof which has been earned but deferred) for the most recently completed fiscal year and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (C) the amount of any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not previously paid (the sum of the amounts described in clauses (A), (B), and (C) shall be hereinafter referred to as the “Accrued Obligations”); and

(2) the amount equal to (A) two multiplied by (B) the sum of (x) the Executive’s highest annual base salary for any year during the five-year period prior to the Change in Control Date and (y) the Executive’s highest annual bonus for any year during the five-year period prior to the Change in Control Date.

(ii) for 12 months after the Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue to provide benefits to the Executive and the Executive’s family at least equal to those which would have been provided to them if the Executive’s employment had not been terminated, in accordance with the applicable Benefit Plans in effect on the Measurement Date or, if more favorable to the Executive and his family, in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies; provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive a particular type of benefits (e.g., health insurance benefits) from such employer on terms at least as favorable to the Executive and his family as those being provided by the Company, then the Company shall no longer be required to provide those particular benefits to the Executive and his family;

(iii) to the extent not previously paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive following the Executive’s termination of employment under any plan, program, policy, practice, contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the “Other Benefits”); and

(iv) for purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits to which the Executive is entitled, the Executive shall be considered to have remained employed by the Company until 12 months after the Date of Termination.

(c) Resignation without Good Reason; Termination for Death or Disability. If the Executive voluntarily terminates his employment with the Company within 12 months following the Change in Control Date, excluding a termination for Good Reason, or if

the Executive’s employment with the Company is terminated by reason of the Executive’s death or Disability within 12 months following the Change in Control Date, then the Company shall (i) pay the Executive (or his estate, if applicable), in accordance with Section 4.1(e), in cash, either (A) in one lump sum, within 30 days after the Executive’s termination or (B) in 36 equal monthly installments, with an annual interest rate on the unpaid principal balance equal to the minimum applicable Federal rate in effect on the Date of Termination, beginning within 30 days after the Date of Termination, the Accrued Obligations and (ii) timely pay or provide to the Executive the Other Benefits.

(d) Termination for Cause. If the Company terminates the Executive’s employment with the Company for Cause within 36 months following the Change in Control Date, then the Company shall (i) pay the Executive, in a lump sum in cash within 30 days after the Date of Termination, the sum of (A) the Executive’s annual base salary through the Date of Termination and (B) the amount of any compensation previously deferred by the Executive, in each case to the extent not previously paid, and (ii) timely pay or provide to the Executive the Other Benefits.

(e) Form of Payment. Any amounts payable under Section 4.1(a)(i), 4.1(b)(i) or 4.1(c)(i) with respect to any termination of employment provided for thereunder shall be paid as follows:

(i) if such termination occurs in 2007 the amounts determined under the applicable subsection will be paid in a lump sum within 30 days after the Executive’s termination; and

(ii) if such termination occurs after 2007 but is subject to the terms of this Agreement then the amounts determined under the applicable subsection shall be paid in a lump sum or in 36 installments as provided in such subsection in accordance with an irrevocable, written election made by the Executive, prior to [May 31, 2007], or if none, then it shall be paid in a lump sum within 30 days after the Executive’s termination.

4.2 Taxes.

(a) Notwithstanding any other provision of this Agreement, except as set forth in Section 4.2(b), in the event that the Company undergoes a “Change in Ownership or Control” (as defined below), the Company shall not be obligated to provide to the Executive a portion of any “Contingent Compensation Payments” (as defined below) that the Executive would otherwise be entitled to receive to the extent necessary to eliminate any “excess parachute payments” (as defined in Section 280G(b)(1) of the Code) for the Executive. For purposes of this Section 4.2, the Contingent Compensation Payments so eliminated shall be referred to as the “Eliminated Payments” and the aggregate amount (determined in accordance with Proposed Treasury Regulation Section 1.280G-1, Q/A-30 or any successor provision) of the Contingent Compensation Payments so eliminated shall be referred to as the “Eliminated Amount.”

(b) Notwithstanding the provisions of Section 4.2(a), no such reduction in Contingent Compensation Payments shall be made if (i) the Eliminated Amount (computed without regard to this sentence) exceeds (ii) 110% of the aggregate present value

(determined in accordance with Proposed Treasury Regulation Section 1.280G-1, Q/A-31 and Q/A-32 or any successor provisions) of the amount of any additional taxes that would be incurred by the Executive if the Eliminated Payments (determined without regard to this sentence) were paid to him (including, state and federal income taxes on the Eliminated Payments, the excise tax imposed by Section 4999 of the Code payable with respect to all of the Contingent Compensation Payments in excess of the Executive’s “base amount” (as defined in Section 280G(b)(3) of the Code), and any withholding taxes). The override of such reduction in Contingent Compensation Payments pursuant to this Section 4.2(b) shall be referred to as a “Section 4.2(b) Override.” For purpose of this paragraph, if any federal or state income taxes would be attributable to the receipt of any Eliminated Payment, the amount of such taxes shall be computed by multiplying the amount of the Eliminated Payment by the maximum combined federal and state income tax rate provided by law.

(c) For purposes of this Section 4.2 the following terms shall have the following respective meanings:

(i) “Change in Ownership or Control” shall mean a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the Company determined in accordance with Section 280G(b)(2) of the Code.

(ii) “Contingent Compensation Payment” shall mean any payment (or benefit) in the nature of compensation that is made or made available (under this Agreement or otherwise) to a “disqualified individual” (as defined in Section 280G(c) of the Code) and that is contingent (within the meaning of Section 280G(b)(2)(A)(i) of the Code) on a Change in Ownership or Control of the Company.

(d) Any payments or other benefits otherwise due to the Executive following a Change in Ownership or Control that could reasonably be characterized (as determined by the Company) as Contingent Compensation Payments (the “Potential Payments”) shall not be made until the dates provided for in this Section 4.2(d). Within 30 days after each date on which the Executive first becomes entitled to receive (whether or not then due) a Contingent Compensation Payment relating to such Change in Ownership or Control, the Company shall determine and notify the Executive (with reasonable detail regarding the basis for its determinations) (i) which Potential Payments constitute Contingent Compensation Payments, (ii) the Eliminated Amount and (iii) whether the Section 4.2(b) Override is applicable. Within 30 days after delivery of such notice to the Executive, the Executive shall deliver a response to the Company (the “Executive Response”) stating either (A) that he agrees with the Company’s determination pursuant to the preceding sentence, in which case he shall indicate, if applicable, which Contingent Compensation Payments, or portions thereof (the aggregate amount of which, determined in accordance with Proposed Treasury Regulation Section 1.280G-1, Q/A-30 or any successor provision, shall be equal to the Eliminated Amount), shall be treated as Eliminated Payments or (B) that he disagrees with such determination, in which case he shall set forth (i) which Potential Payments should be characterized as Contingent Compensation Payments, (ii) the Eliminated Amount, (iii) whether the Section 4.2(b) Override is applicable, and (iv) which (if any) Contingent Compensation Payments, or portions thereof (the aggregate amount of which, determined in accordance with Proposed Treasury Regulation Section 1.280G-1, Q/A-30 or any successor provision, shall be equal to the Eliminated Amount, if any), shall be treated as

Eliminated Payments. In the event that the Executive fails to deliver an Executive Response on or before the required date, the Company’s initial determination shall be final and the Contingent Compensation Payments that shall be treated as Eliminated Payments shall be determined by the Company in its absolute discretion. If the Executive states in the Executive Response that he agrees with the Company’s determination, the Company shall make the Potential Payments to the Executive within three business days following delivery to the Company of the Executive Response (except for any Potential Payments which are not due to be made until after such date, which Potential Payments shall be made on the date on which they are due). If the Executive states in the Executive Response that he disagrees with the Company’s determination, then, for a period of 60 days following delivery of the Executive Response, the Executive and the Company shall use good faith efforts to resolve such dispute. If such dispute is not resolved within such 60-day period, such dispute shall be settled exclusively by arbitration in Boston, Massachusetts, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction. The Company shall, within three business days following delivery to the Company of the Executive Response, make to the Executive those Potential Payments as to which there is no dispute between the Company and the Executive regarding whether they should be made (except for any such Potential Payments which are not due to be made until after such date, which Potential Payments shall be made on the date on which they are due). The balance of the Potential Payments shall be made within three business days following the resolution of such dispute. Subject to the limitations contained in Sections 4.2(a) and (b) hereof, the amount of any payments to be made to the Executive following the resolution of such dispute shall be increased by amount of the accrued interest thereon computed at the prime rate announced from time to time by The Wall Street Journal (or if unavailable, by such other nationally recognized financial publication published daily) compounded monthly from the date that such payments originally were due.

(f) The provisions of this Section 4.2 are intended to apply to any and all payments or benefits available to the Executive under this Agreement or any other agreement or plan of the Company under which the Executive receives Contingent Compensation Payments.

4.3 Mitigation. The Executive shall not be required to mitigate the amount of any payment or benefits provided for in this Section 4 by seeking other employment or otherwise. Further, except as provided in Section 4.1(a)(ii) or (b)(ii), the amount of any payment or benefits provided for in this Section 4 shall not be reduced by any compensation earned by the Executive as a result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company or otherwise.

4.4 Outplacement Services. In the event the Executive is terminated by the Company (other than for Cause, Disability or Death), or the Executive terminates employment for Good Reason, within 36 months following the Change in Control Date, the Company shall provide outplacement services through one or more outside firms of the Executive’s choosing up to an aggregate of $12,000, with such services to extend until the earlier of (i) 12 months following the termination of Executive’s employment or (ii) the date the Executive secures full time employment.

5. Disputes.

5.1 Settlement of Disputes; Arbitration. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board of Directors of the Company and shall be in writing. Any denial by the Board of Directors of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board of Directors shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim. Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Boston, Massachusetts, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction.

5.2 Expenses. The Company agrees to pay as incurred, to the full extent permitted by law, all legal, accounting and other fees and expenses which the Executive may reasonably incur as a result of any claim or contest (regardless of the outcome thereof) by the Company, the Executive or others regarding the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive regarding the amount of any payment or benefits pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code.

5.3 Compensation During a Dispute. If the Change in Control Date occurs during the Term and the Executive’s employment with the Company terminates within 36 months following the Change in Control Date, and the right of the Executive to receive benefits under Section 4 (or the amount or nature of the benefits to which he is entitled to receive) are the subject of a dispute between the Company and the Executive, the Company shall continue (a) to pay to the Executive his base salary in effect as of the Measurement Date and (b) to provide benefits to the Executive and the Executive’s family at least equal to those which would have been provided to them, if the Executive’s employment had not been terminated, in accordance with the applicable Benefit Plans in effect on the Measurement Date, until such dispute is resolved either by mutual written agreement of the parties or by an arbitrator’s award pursuant to Section 5.1. Following the resolution of such dispute, the sum of the payments made to the Executive under clause (a) of this Section 5.3 shall be deducted from any cash payment which the Executive is entitled to receive pursuant to Section 4; and if such sum exceeds the amount of the cash payment which the Executive is entitled to receive pursuant to Section 4, the excess of such sum over the amount of such payment shall be repaid (without interest) by the Executive to the Company within 60 days of the resolution of such dispute.

6. Successors.

6.1 Successor to Company. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform this Agreement to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain an assumption of this Agreement at or prior to the effectiveness of any succession shall be a breach of this Agreement and shall constitute Good Reason if the Executive elects to terminate employment, except that for purposes of implementing the foregoing, the date on which any such succession becomes

effective shall be deemed the Date of Termination. As used in this Agreement, “Company” shall mean the Company as defined above and any successor to its business or assets as aforesaid which assumes and agrees to perform this Agreement, by operation of law or otherwise.

6.2 Successor to Executive. This Agreement shall inure to the benefit of and be enforceable by the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to the Executive or his family hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive’s estate.

7. Notice. All notices, instructions and other communications given hereunder or in connection herewith shall be in writing. Any such notice, instruction or communication shall be sent either (i) by registered or certified mail, return receipt requested, postage prepaid, or (ii) prepaid via a reputable nationwide overnight courier service, in each case addressed to the Company, at Kronos Incorporated, 297 Billerica Road. Chelmsford, Massachusetts, 01824 (Attn: General Counsel) and to the Executive at                                                                   (or to such other address as either the Company or the Executive may have furnished to the other in writing in accordance herewith). Any such notice, instruction or communication shall be deemed to have been delivered five business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, or one business day after it is sent via a reputable nationwide overnight courier service. Either party may give any notice, instruction or other communication hereunder using any other means, but no such notice, instruction or other communication shall be deemed to have been duly delivered unless and until it actually is received by the party for whom it is intended.

8. Miscellaneous.

8.1 Employment by Subsidiary. For purposes of this Agreement, the Executive’s employment with the Company shall not be deemed to have terminated solely as a result of the Executive continuing to be employed by a wholly-owned subsidiary of the Company.

8.2 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, which shall remain in full force and effect.

8.3 Injunctive Relief. The Company and the Executive agree that any breach of this Agreement by the Company is likely to cause the Executive substantial and irrevocable damage and therefore, in the event of any such breach, in addition to such other remedies which may be available, the Executive shall have the right to specific performance and injunctive relief.

8.4 Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the internal laws of the Commonwealth of Massachusetts, without regard to conflicts of law principles.

8.5 Waivers. No waiver by the Executive at any time of any breach of, or compliance with, any provision of this Agreement to be performed by the Company shall be deemed a waiver of that or any other provision at any subsequent time.

8.6 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original but both of which together shall constitute one and the same instrument.

8.7 Tax Withholding. Any payments provided for hereunder shall be paid net of any applicable tax withholding required under federal, state or local law.

8.8 Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of the subject matter contained herein; and any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and cancelled.

8.9 Amendments. This Agreement may be amended or modified only by a written instrument executed by both the Company and the Executive.

8.10 409A Compliance. It is intended that the terms of this Agreement and the benefits provided hereunder comply with Section 409A of the Code and the applicable guidance issued by the Internal Revenue Service (“409A”) including transition guidance set forth in Notice 2006-79 permitting changes in the time and form of payment of such benefits. The Agreement and all related documents shall be construed in accordance with this intent. To the extent any amount subject to 409A is to be paid or provided to the Executive in connection with a separation from service at a time when the Executive is considered a specified employee within the meaning of 409A then such payment shall not be made until the date that is six months and one day following after such separation from service.

IN WITNESS WHEREOF, the parties hereto have executed this Senior Executive Employee Retention Agreement as of the day and year first set forth above.

KRONOS INCORPORATED
By:
Name:	Aron J. Ain
Title:	CEO
Name:

Schedule to Exhibit 10.4

Name	Date of Agreement
Mark S. Ain	March 22, 2007
Aron Ain	March 22, 2007
Paul Lacy	March 22, 2007
James Kizielewicz	March 22, 2007
Peter George	March 22, 2007
Mark Julien	March 22, 2007
Lloyd Bussell	March 22, 2007

EX-31.1

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 7, 2007	/S/    PAUL A. LACY
	Paul A. Lacy President and Principal Executive Officer

EX-31.2

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 7, 2007	/S/    MARK V. JULIEN
	Mark V. Julien Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Kronos Incorporated (the “Company”) for the period ended March 31, 2007 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.

Dated: May 7, 2007	/S/    PAUL A. LACY
	Paul A. Lacy
	President and Principal Executive Officer

Dated: May 7, 2007	/S/    MARK V. JULIEN
	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.