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 December 31, 2005  OR  (    )
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the transition period
from _______________ to ______________  Commission file number
0-20109  Kronos Incorporated (Exact name of registrant as
specified in its charter)  Massachusetts
        
        04-2640942(State or other jurisdiction of
        
        (I.R.S. EmployerIncorporation or organization)
        
        Identification No.)  297 Billerica Road,
Chelmsford, MA  01824 (Address of principal
executive offices)  (Zip Code)  (978) 250-9800 (Registrants telephone
number, including area code)  Indicate by
check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes
        X
        
        NO  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer.  See definition of "accelerated filer and large accelerated filer" in Rule 12b-2
of the Exchange Act. (Check one):  Large accelerated filer
        X
        
        Accelerated filer
        
        Non-accelerated filer  As of January 31, 2006, 31,846,272 shares of the
registrants common stock, $.01 par value, were outstanding.






---





|KRONOS INCORPORATED
|-------------------
|                   
|INDEX              
|                   
|                   
|PART I.            
|                   
|Item 1.            
|                   
|                   
|                   
|                   
|                   
|                   
|                   
|                   
|                   
|                   
|                   
|                   
|Item 2.            
|                   
|                   
|Item 3.            
|                   
|Item 4.            
|                   
|PART II.           
|                   
|Item 1.            
|                   
|Item 1A.           
|                   
|Item 2.            
|                   
|Item 3.            
|                   
|Item 4.            
|                   
|Item 5.            
|                   
|Item 6.            

|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
|---------------------------------------------- | ------------------
|
|Net revenues:                                  |                   
|Product                                        |                   
|Maintenance                                    |                   
|Professional services                          |                   
|                                               |                   
|                                               |                   
|Cost of sales:                                 |                   
|Costs of product                               |                   
|Costs of maintenance and professional services |                   
|                                               |                   
|                                               |                   
|                                               |                   
|Gross profit                                   |                   
|Operating expenses and other income:           |                   
|Sales and marketing                            |                   
|Engineering, research and development          |                   
|General and administrative                     |                   
|Amortization of intangible assets              |                   
|Other income, net                              |                   
|                                               |                   
|                                               |                   
|Income before income taxes                     |                   
|Provision for income taxes                     |                   
|                                               |                   
|Net income                                     |                   
|                                               |                   
|Net income per common share:                   |                   
|Basic                                          |                   
|                                               |                   
|Diluted                                        |                   
|                                               |                   
|Weighted-average common shares outstanding:    |                   
|Basic                                          |                   
|                                               |                   
|Diluted                                        |                   
|                                               |                   
|Stock-based compensation expense:              |                   
|Costs of product                               |                   
|Costs of maintenance and professional services |                   
|Sales and marketing                            |                   
|Engineering, research and development          |                   
|General and administrative                     |                   
|Tax Benefit                                    |                   
|                                               |                   
|                                               |                   
|                                               |                   

See accompanying notes to condensed consolidated financial statements.





1







---



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



|                                                                                      | December 31,
2005 | September 30,
2005
|------------------------------------------------------------------------------------- | ----------------- | ------------------
|ASSETS                                                                                |                   |                   
|Current assets:                                                                       |                   |                   
|Cash and cash equivalents                                                             |                   |                   
|Marketable securities                                                                 |                   |                   
|Accounts receivable, less allowances of $10,620                                       |                   |                   
|at December 31, 2005 and $11,156 at September 30, 2005                                |                   |                   
|Deferred income taxes                                                                 |                   |                   
|Other current assets                                                                  |                   |                   
|                                                                                      |                   |                   
|Total current assets                                                                  |                   |                   
|Marketable securities                                                                 |                   |                   
|Property, plant and equipment, net                                                    |                   |                   
|Customer related intangible assets                                                    |                   |                   
|Other intangible assets                                                               |                   |                   
|Goodwill                                                                              |                   |                   
|Capitalized software, net                                                             |                   |                   
|Other assets                                                                          |                   |                   
|                                                                                      |                   |                   
|Total assets                                                                          |                   |                   
|                                                                                      |                   |                   
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                  |                   |                   
|Current liabilities:                                                                  |                   |                   
|Accounts payable                                                                      |                   |                   
|Accrued compensation                                                                  |                   |                   
|Accrued expenses and other current liabilities                                        |                   |                   
|Deferred product revenues                                                             |                   |                   
|Deferred professional service revenues                                                |                   |                   
|Deferred maintenance revenues                                                         |                   |                   
|                                                                                      |                   |                   
|Total current liabilities                                                             |                   |                   
|Deferred maintenance revenues                                                         |                   |                   
|Deferred income taxes                                                                 |                   |                   
|Other liabilities                                                                     |                   |                   
|Shareholders' equity:                                                                 |                   |                   
|Preferred Stock, par value $1.00 per share:  authorized 1,000,000 shares,             |                   |                   
|no shares issued and outstanding                                                      |                   |                   
|Common Stock, par value $.01 per share:  authorized 50,000,000 shares, 31,868,274 and |                   |                   
|31,724,460 shares issued at December 31, 2005 and September 30, 2005  respectively    |                   |                   
|Additional paid-in capital                                                            |                   |                   
|Retained earnings                                                                     |                   |                   
|Accumulated other comprehensive income:                                               |                   |                   
|Foreign currency translation                                                          |                   |                   
|Net unrealized (loss) on available-for-sale investments                               |                   |                   
|                                                                                      |                   |                   
|                                                                                      |                   |                   
|Total shareholders' equity                                                            |                   |                   
|                                                                                      |                   |                   
|Total liabilities and shareholders' equity                                            |                   |                   
|                                                                                      |                   |                   

See accompanying notes to condensed consolidated financial statements.





2







---



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



|                                                                | Three Months Ended
|--------------------------------------------------------------- | ------------------
|
|Operating activities:                                           |                   
|Net income                                                      |                   
|Adjustments to reconcile net income to net cash and equivalents |                   
|provided by operating activities:                               |                   
|Depreciation                                                    |                   
|Amortization of intangible assets                               |                   
|Amortization of capitalized software                            |                   
|Provision for deferred income taxes                             |                   
|Stock based compensation                                        |                   
|Changes in certain operating assets and liabilities:            |                   
|Accounts receivable, net                                        |                   
|Deferred product revenues                                       |                   
|Deferred professional service revenues                          |                   
|Deferred maintenance revenues                                   |                   
|Accounts payable, accrued compensation                          |                   
|and other liabilities                                           |                   
|Taxes payable                                                   |                   
|Tax benefit from exercise of stock options                      |                   
|Other                                                           |                   
|                                                                |                   
|Net cash and equivalents provided by operating activities       |                   
|Investing activities:                                           |                   
|Purchase of property, plant and equipment                       |                   
|Capitalized internal software development costs                 |                   
|(Increase) decrease in marketable securities                    |                   
|Acquisitions of businesses and software, net of cash acquired   |                   
|                                                                |                   
|Net cash and equivalents used in investing activities           |                   
|Financing activities:                                           |                   
|Net proceeds from exercise of stock options and                 |                   
|employee purchase plans                                         |                   
|Tax benefit from exercise of stock options                      |                   
|Repurchase of common stock                                      |                   
|                                                                |                   
|Net cash and equivalents provided by financing activities       |                   
|Effect of exchange rate changes on cash and equivalents         |                   
|                                                                |                   
|Increase (decrease) in cash and equivalents                     |                   
|Cash and equivalents at the beginning of the period             |                   
|                                                                |                   
|Cash and equivalents at the end of the period                   |                   
|                                                                |                   

See accompanying notes to condensed consolidated financial statements.





3







---



KRONOS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



NOTE A - General



The accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals that management of Kronos Incorporated (the Company or Kronos) considers necessary for a fair presentation of the Companys financial position and results of operations as of and for the interim periods presented pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures in these financial statements are adequate to make the information presented not misleading.  These condensed consolidated financial statements should be read in conjunction with the Companys
audited financial statements for the fiscal year ended September 30, 2005.  The results of operations for the three months ended December 31, 2005 are not necessarily indicative of the results for a full fiscal year.  The Company has reclassified $2.0 million of accrued liabilities which were classified as accounts payable on the September 30, 2005 balance sheet to accrued expenses and other current liabilities to conform with current period presentation.



NOTE B - Fiscal Quarters



The Company utilizes a system of fiscal quarters.  Under this system, the first three quarters of each fiscal year end on a Saturday.  However, the fourth quarter of each fiscal year will always end on September 30.  Because of this, the number of days in the first quarter (92 days in fiscal 2006 and 93 days in fiscal 2005) and fourth quarter (91 days in fiscal 2006 and 90 days in fiscal 2005) of each fiscal year varies from year to year. The second and third quarters of each fiscal year will be exactly thirteen weeks long.  This policy does not have a material effect on the comparability of results of operations between quarters.



NOTE C - Stock-Based Compensation



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



Prior to adopting FAS 123R, the Company accounted for stock-based compensation under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (Opinion 25), as permitted by Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation, (FAS 123).  No stock-based compensation cost was recognized in the Statement of Income for the three-month period ended January 1, 2005, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant.  The Company has applied the modified prospective method in adopting FAS 123R.  Accordingly, periods prior to adoption have not been restated.  Under the modified prospective method, compensation cost recognized in the three-month period ended December 31, 2005 includes (a) compensation cost for all share-based
payments granted prior to, but not yet vested as of October 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of FAS 123, and (b) compensation cost for all share-based payments granted subsequent to October 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of FAS 123R.



As a result of adopting
FAS 123R on October 1, 2005, the Companys income before income taxes and net income for the three
 month period ended December 31, 2005, are $3.9 million and $2.7 million lower, respectively, than if it
 had continued to account for share-based compensation under Opinion 25.  Basic and diluted earnings per
 share for the three month period ended December 31, 2005 would have been $0.28 and $0.27, respectively, if the Company had
not adopted FAS 123R, compared to reported basic and diluted earnings per share of $0.20 and $0.19,
respectively.





4





---





Prior to the adoption of
FAS 123R, the Company presented all tax benefits of deductions resulting from the exercise of stock
options as operating cash flows in the Statement of Cash Flows.  FAS 123R requires the cash flows
resulting from the tax benefits resulting from tax deductions in excess of the compensation cost
recognized for those options (excess tax benefits) to be classified as financing cash flows.
The $2.7 million tax benefit from the exercise of stock options classified as a financing cash inflow
 would have been classified as an operating cash inflow if the Company had not adopted FAS 123R.



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



|                                                                                                                                            | Three Months Ended
|------------------------------------------------------------------------------------------------------------------------------------------- | ------------------
|                                                                                                                                            | December 31,
2005 
|                                                                                                                                            |                   
|Net income, as reported                                                                                                                     | $6,224            
|Add: Stock-based employee compensation expense included in reported net income, net of related
 tax effects                                 | 2,662             
|Deduct: Total stock-based employee compensation expense determined under fair value based
method for all awards, net of related tax effects | (2,662)           
|                                                                                                                                            |                   
|Pro forma net income                                                                                                                        | $6,224            
|                                                                                                                                            |                   
|Earnings per share:                                                                                                                         |                   
|Basicas reported                                                                                                                           | $0.20             
|Basicpro forma                                                                                                                             | $0.20             
|                                                                                                                                            |                   
|Dilutedas reported                                                                                                                         | $0.19             
|Dilutedpro forma                                                                                                                           | $0.19             





On December 31, 2005, 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 first quarter of fiscal 2006 was approximately $3.9 million.   The total income tax benefit recognized in the income statement for the first quarter of fiscal 2006 for share-based payments was approximately $1.3 million.



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





5





---





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



The fair value of each option award issued under the Plans is estimated on the date of grant using a Black-Scholes based option-pricing model that uses the assumptions noted in the following table.  Expected volatilities are based on historical volatility of the Companys stock.  The expected term of the options is based on the Companys historical option exercise data taking into consideration the exercise patterns of the options holders 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.



|                        | Three Month Period Ended
|----------------------- | ------------------------
|                        | December 31, 2005       
|Expected Volatility     | 41.8%                   
|Expected Term           | 3.75 years              
|Risk Free Interest Rate | 4.39%                   
|Dividend Yield          | 0.0%                    



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



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



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



A summary of option activity under the Award Plan as of December 31, 2005, and changes during the three month period then ended is presented below:



|Options                           | Shares (000s) | Weighted-AverageExercise Price | Weighted-Average RemainingContractual Term | Aggregate IntrinsicValue ($000s)
|--------------------------------- | ------------- | ------------------------------ | ------------------------------------------ | --------------------------------
|Outstanding at September 30, 2005 | 3,362         | $33.80                         |                                            |                                 
|Granted*                          | 812           | 48.17                          |                                            |                                 
|Exercised                         | (300)         | 19.91                          |                                            |                                 
|Canceled*                         | (20)          | 42.34                          |                                            |                                 
|Outstanding at  December 31, 2005 | 3,854         | $37.87                         | 2.8 years                                  | $27,227                         
|Exercisable at  December 31, 2005 | 1,372         | $29.99                         | 1.8 years                                  | $17,764                         



*Does not include 70,500 restricted stock units granted to employees and 100 restricted stock units canceled during the three month period ended December 31, 2005.  The restricted stock units were granted with an exercise price of $.01, and vest equally over a four year period.  The market price of the Companys  common stock on the date of grant was $48.22.



The weighted-average
grant-date fair value of options, estimated using a Black-Scholes based option pricing model, granted
during the three month periods ended December 31, 2005 and January 1, 2005 was $17.10 and $20.60
respectively. The total intrinsic value of options exercised during the three month periods ended
 December 31, 2005 and January 1, 2005 was approximately $7.8 million and approximately $15.6 million,
respectively.





6





---





A summary of the status of
the Companys nonvested stock option shares as of December 31, 2005, and changes during the three
 month period ended December 31, 2005, is presented below:



|Nonvested Shares**             | Shares (000s) | Weighted-Average Grant- Date Fair Value*
|------------------------------ | ------------- | ----------------------------------------
|Nonvested at October 1, 2005   | 2,718         | $16.07                                  
|Granted                        | 812           | 17.10                                   
|Vested                         | (1,028)       | 13.54                                   
|Forfeited                      | (20)          | 18.35                                   
|Nonvested at December 31, 2005 | 2,482         | $17.44                                  



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



** Does not include 70,500 restricted stock units granted to employees and 100 restricted stock units canceled during the three month period ended December 31, 2005.



As of December 31, 2005, there was approximately $41.9 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plans, including compensation cost related to stock options, restricted stock units and stock purchase plan shares.  That cost is expected to be recognized over a weighted-average period of 3.0 years.  The total fair value of shares vested during the three month period ended December 31, 2005 was $13.9 million.



Cash received from option exercise under the Plans for the three-month periods ended December 31, 2005 and January 1, 2005 was $5.3 million and $7.8 million, respectively.  The tax benefit realized for the tax deductions from option exercises totaled $2.7 million and $5.4 million, respectively, for the three month periods ended December 31, 2005 and January 1, 2005.



The Company has a policy
of repurchasing shares on the open market to satisfy share option exercises.  The Company repurchased
141,750 shares of its common stock during the three month period ended December 31, 2005.  Under the
Company's current repurchase program up to an additional 161,726 shares may be repurchased.



NOTE D - Other Current Assets



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



|                 |  | December 31,
2005    | September 30,
2005  
|---------------- |  | -------------------- | --------------------
|                 |  |                      |                     
|Inventory        |  | $              5,384 | $              4,995
|Prepaid expenses |  | 13,814               | 15,147              
|Total            |  | $
19,198             | $
20,142            





7





---





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 inYears | Gross CarryingValue | AccumulatedAmortization | Net BookValue
|------------------------- | ----------------------------- | ------------------- | ----------------------- | -------------
|As of December 31, 2005:  |                               |                     |                         |              
|                          |                               |                     |                         |              
|Intangible assets:        |                               |                     |                         |              
|Customer related          | 9.8                           | $46,270             | $15,302                 | $30,968      
|                          |                               |                     |                         |              
|Maintenance relationships | 12.0                          | 9,492               | 2,931                   | 6,561        
|                          |                               |                     |                         |              
|Non-compete agreements    | 3.7                           | 5,907               | 4,373                   | 1,534        
|                          |                               |                     |                         |              
|Technology                | 10.0                          | 7,998               | 900                     | 7,098        
|                          |                               |                     |                         |              
|Total intangible assets   |                               | $69,667             | $23,506                 | $46,161      
|                          |                               |                     |                         |              
|As of September 30, 2005: |                               |                     |                         |              
|                          |                               |                     |                         |              
|Intangible assets:        |                               |                     |                         |              
|Customer related          | 9.8                           | $45,452             | $14,367                 | $31,085      
|                          |                               |                     |                         |              
|Maintenance relationships | 12.0                          | 9,492               | 2,739                   | 6,753        
|                          |                               |                     |                         |              
|Non-compete agreements    | 3.7                           | 5,860               | 4,055                   | 1,805        
|                          |                               |                     |                         |              
|Technology                | 10.0                          | 7,956               | 696                     | 7,260        
|                          |                               |                     |                         |              
|Total intangible assets   |                               | $68,760             | $21,857                 | $46,903      



For the three months ended December 31, 2005 and January 1, 2005, the amount of goodwill acquired is $4.5 million and $27.6 million, respectively.



For the three months ended December 31, 2005 and January 1, 2005, the Company recorded amortization expense for intangible assets of $1.7 million and $1.1 million, respectively. The estimated annual amortization expense for intangible assets for the current and next five fiscal years is as follows (in thousands):





|FiscalYear Ending
September 30, | Estimated Annual
Amortization Expense
|------------------------------- | -------------------------------------
|                                |                                      
|2006                            | $6,661                               
|2007                            | 6,133                                
|2008                            | 5,940                                
|2009                            | 5,338                                
|2010                            | 4,817                                
|2011                            | 4,554                                





8





---





NOTE F  Acquisitions



On December 19, 2005, the
Company assumed certain assets, liabilities and the ongoing business operations of Compu Cash, Systems.
 (Compu Cash), the former Nevada-based Kronos reseller.  The aggregate consideration paid,
which includes actual cash paid (approximately $2.1 million) and the liabilities assumed (approximately
 $0.1 million), was approximately $2.2 million.    The amounts allocated to identifiable intangible assets
 and goodwill are approximately $1.0 million and $1.2 million, respectively.  The goodwill recognized is
deductible for income tax purposes. Due to the timing of the acquisition, the Company has not finalized the allocation of the purchase price.  The Company anticipates that the allocation of the purchase price will be completed by April 1, 2006.  The results of Compu Cashs operations, which are not material to the Companys results of operations, have been included
in the consolidated financial statements since that date.  Compu Cash was engaged in the sale and service of employee time and attendance, employee scheduling, data collection and labor management hardware and software systems, including the resale of the Companys products through a reseller relationship.  As a result of the acquisition, the Company gained access to direct sales and service organizations, as well as access to the entire existing maintenance revenue stream from Compu Cashs customers.  The deferred revenue related to the maintenance revenue streams, which was recorded at fair value of the Companys remaining performance obligation, was recognized as the Company had assumed a legal performance obligation as described in Emerging Issues Task Force 01-03, Accounting in a Business Combination for Deferred Revenue of an Acquiree (EITF 01-03).



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



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



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





9





---





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



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



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





|                             | Three Months Ended
|---------------------------- | ------------------
|Unaudited                    | December 31, 2005 
|                             |                   
|Total revenues               | $127,943          
|Net income                   | 6,224             
|Earnings per share  basic   | $0.20             
|Earnings per share  diluted | $0.19             



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



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



Certain acquisition agreements which were previously entered into contain provisions that require the Company to make a guaranteed payment and/or contingent payments based upon profitability of the business unit or if specified minimum revenue requirements are met. Guaranteed payments are accrued at the time of the acquisition and are included in the purchase price allocation.  As of December 31, 2005, the Company was obligated to pay $3.5 million in guaranteed payments. These payments will be made at various dates through fiscal 2007.    Amounts due to be paid within twelve months of the balance sheet date are included in accrued expenses and amounts due to be paid in excess of twelve months of the balance sheet date are included in other liabilities.  Contingent payments due under the terms of the agreements are recognized when earned and are principally recorded as goodwill. However, under certain
circumstances, a portion of the contingent payment may be recorded as compensation expense.  The provisions for contingent payments expire during fiscal 2006 and 2009.  During the three months ended December 31, 2005, there were no contingent payments earned.  During the three months ended January 1, 2005, there were $424,000 of contingent payments earned of which $405,000 were recorded as goodwill.





10





---





NOTE G - ComprehensiveIncome



For the three months ended December 31, 2005 and January 1, 2005, comprehensive income consisted of the following (in thousands):





|                                                        |                   | Three Months Ended         
|------------------------------------------------------- | ----------------- | ---------------------------
|                                                        | December 31, 2005 | January 1,             2005
|Comprehensive income:                                   |                   |                            
|Net income                                              | $6,224            | $10,658                    
|Cumulative translation adjustment                       | (103)             | 472                        
|Unrealized gain (loss) on available-for-sale securities | (33)              | (250)                      
|Total comprehensive income                              | $6,088            | $10,880                    
|                                                        |                   |                            





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          
|-------------------------------------------------------- | ----------------- | ----------------------------
|                                                         | December 31, 2005 | January 1,     
        2005
|                                                         |                   |                             
|Net income                                               | $6,224            | $10,658                     
|Weighted-average shares                                  | 31,789,546        | 31,571,549                  
|Effect of dilutive securities:                           |                   |                             
|Employee stock options and awards                        | 481,608           | 1,026,025                   
|Adjusted weighted-average shares and assumed conversions | 32,271,154        | 32,597,574                  
|Basic earnings per share                                 | $0.20             | $0.34                       
|Diluted earnings per share                               | $0.19             | $0.33                       
|                                                         |                   |                             





11





---





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



Forward-Looking Statements



This discussion includes certain forward-looking statements about our business and our expectations, including statements relating to revenues, product revenues, revenue growth rates, gross margin, operating expenses, earnings per share, future acquisitions, capital expenditures, capitalization of software development costs, customer purchase patterns, income tax rates, available cash, investments and operating cash flow,  and the current economic climate. Any such statements are subject to risk that could cause the actual results to vary materially from expectations. For a further discussion of the various risks that may affect our business and expectations, see Item 1A. Risk Factors in Part II of this Quarterly Report on Form 10-Q and  Certain Factors That May Affect Future Operating Results in our Annual Report on Form 10-K for the fiscal year ended September
30, 2005.  The risks and uncertainties discussed herein do not reflect the potential future impact of any mergers, acquisitions or dispositions.  In addition, any forward-looking statements represent our estimates only as of the day this Quarterly Report was filed with the Securities and Exchange Commission and should not be relied upon as representing our estimates as of any subsequent date.  While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change.



Overview



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



Our revenues in the three month period ended December 31, 2005 increased $9.7 million, or 8%, over the same period in fiscal 2005.  The growth in our revenues was attributable to revenues from our core business as well as growth in revenues from acquired businesses.  The growth in revenues was due to increases in maintenance and professional services revenue, partially offset by a decline in product revenues.  Maintenance revenues increased $7.6 million, or 20%, professional services revenues increased $7.4 million, or 28%, and product revenues decreased $5.3 million, or 10%. The decline in product revenues is primarily due to a decline in software revenues during the quarter.   Although software revenues declined in the three month period ended December 31, 2005, we believe that this decline in software revenues is primarily the result of a comparison to unusually high software revenue
in the three month period ended January 1, 2005, which was in part the result of a reorganization of our sales force announced during the three month period ended September 30, 2004, and completed during the three month period ended January 1, 2005.  In addition, we experienced a higher proportion of revenues from existing customers in the three month period ended December 31, 2005, as compared to the comparable period in the prior year.  Sales to existing customers typically result in lower product revenues per transaction.





12





---





Net income in the first quarter of fiscal 2006 decreased 42% to $6.2 million from $10.7 million,
with earnings per share decreasing to $0.19 from $0.33 per diluted share.  The decrease in net income
 as compared to the prior year is primarily due to the recording of stock-based compensation during
 the three month period ended December 31, 2005 related to our adoption of Financial Accounting Standards
Board, or FASB, Statement No. 123 (revised 2004), Share-Based Payment, or FAS 123R, on
 October 1, 2005 (approximately $2.7 million) and a weakening of our gross margins due to revenue mix.



Regarding expectations for the second quarter of fiscal 2006 and the remainder of fiscal 2006, we presently anticipate revenue in the range of $136  139 million for the second quarter and $573  583 million for fiscal 2006, with diluted earnings per share in the range of $0.24  0.27 for the second quarter of fiscal 2006 and $1.32  1.40 for the entire fiscal 2006.  Excluding the impact of FAS 123R, amortization of intangible assets, certain business combination accounting adjustments, and net tax benefits, we expect earnings per diluted share in the range of $0.39  0.42 for the second quarter of fiscal 2006 and $1.90 - $1.98 for the entire fiscal 2006.  We expect that the impact of FAS 123R (including outstanding, unvested awards and new awards) will be approximately $0.35  $0.36 for the entire fiscal 2006 and $0.09 for the second quarter.



Critical Accounting Policies and Estimates



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



We have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of consolidated financial statements. This listing is not a comprehensive list of all of our accounting policies. Please refer to Note A in the Notes to Consolidated Financial Statements included as part of this Quarterly Report on Form 10-Q and in Item 15 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2005 for further information.



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



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





13





---





| |  | 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



| |  | A non-cancelable agreement for the services has been signed or a customers purchase order has been received;
| | - | -------------------------------------------------------------------------------------------------------------

| |  | The professional services have been delivered;
| | - | ----------------------------------------------

| |  | The customers fee is deemed to be fixed or determinable and free of contingencies or significant uncertainties; and
| | - | --------------------------------------------------------------------------------------------------------------------

| |  | Collectibility is probable.
| | - | ---------------------------





14





---





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 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, including deferred product revenue. This revenue is recognized, assuming all other conditions for revenue recognition have been satisfied, when the uncertainty regarding acceptance is resolved as generally evidenced by written acceptance or payment of the arrangement fee. If the payment terms for the 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 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.  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.





15





---





Since fiscal 1996, we have had a standard practice of providing creditworthy end-user customers the
option of financing arrangements beyond one year. Our policy for recognizing revenue and the timing of
 the recognition for arrangements that are financed is the same as our non-financed arrangements.
The financed arrangements, which encompass separate fees for software license, data collection hardware
 and ancillary products, maintenance and support contracts, and professional services, are evidenced by
 distinct standard sales, license and maintenance agreements and typically require equal monthly payments.
 The terms of these arrangements typically range between 18 and 48 months.  The short-term component
(amounts due within 12 months) of these financing arrangements is included in accounts receivable on
our balance sheet.  The long-term component is included in other assets. At the time we enter into an
arrangement, we assess the probability of collection and whether the arrangement fee is fixed or
determinable. We consider our history of collection without concessions as well as whether each new
 transaction involves similar customers, products and arrangement economics to ensure that the history
 developed under previous arrangements remains relevant to current arrangements. If the fee is not
 determined to be collectible, fixed or determinable, we will initially defer the revenue and recognize
 it when collection becomes probable, which typically is when payment is due, assuming all other conditions
for revenue recognition have been satisfied.  As a financing arrangement, we apply a present value factor
 using annual interest rates ranging from 5% to 9%.  These rates may vary depending upon when the financing
 arrangement is entered into and the length of the financing arrangement.



As a result of our acquisition of AD OPT Technologies, Inc., or AD OPT, completed on November 18, 2004 and 3i Systems, completed on September 21, 2004, we have begun to provide customized software solutions to our customers.  Revenue related to the sale of customized software solutions is recognized on a contract accounting basis in accordance with the provisions of Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts.  The contract accounting is applied based on a percentage-of-completion basis generally representing labor costs incurred relative to total estimated labor costs.  Provisions for estimated losses on contracts are recorded when identified.  Deferred revenues are recorded when invoicing exceeds recognized revenues.  Revenue derived from the development and delivery of customized software solutions are
included in product revenues.



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





16





---





Valuation of Intangible Assets and Goodwill In assessing the recoverability
 of goodwill and other intangible assets, we must make assumptions regarding the estimated future cash
flows and other factors to determine the fair value of these assets. If these estimates or their related
 assumptions change in the future, we may be required to record impairment charges against these assets
in the reporting period in which the impairment is determined. For intangible assets, this evaluation
 includes an analysis of estimated future undiscounted net cash flows expected to be generated by the
assets over their estimated useful lives. If the estimated future undiscounted net cash flows are
insufficient to recover the carrying value of the assets over their estimated useful lives, we will record
 an impairment charge in the amount by which the carrying value of the assets exceeds their fair value.
 For goodwill, the impairment evaluation includes a comparison of the carrying value of the reporting unit
for which goodwill is attributable to that reporting units fair value. We have only one reporting
 unit. The fair value of the reporting unit is based upon the net present value of future cash flows,
 including a terminal value calculation. 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 2005 we completed the annual testing of the impairment of
 goodwill, and as a result of those tests, we concluded that no impairment of goodwill existed as of
 July 3, 2005, the annual goodwill impairment measurement date for fiscal 2005.  In addition, we have
 determined that no events or circumstances currently exist that would indicate that either the fair value
 of the reporting unit has been reduced, or the carrying value of the intangible assets is no longer
recoverable.  Therefore, no impairment charges have been recorded in the three months ended
December 31, 2005.



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.



In addition to the software development costs described above, costs incurred in the development of software for internal use are charged to expense until it becomes probable that future economic benefits will be realized. Thereafter, certain costs are capitalized and amortized to operating expense on a straight-line basis.  We have determined, due to the scope of the project and based on the expected estimated economic life of the software, that the capitalized costs related to the current replacement of the Companys 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 $17.8 million (including internal personnel related
costs) in costs associated with the replacement of information technology systems since the start of this project in fiscal 2004, and anticipate capitalizing approximately $5.2 million in additional costs for the balance of fiscal 2006.





17





---





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.  We record a
 valuation allowance in accordance with generally accepted accounting principles to reduce our deferred
 tax assets to the amount of future tax benefit that is more likely than not to be realized.  While we
 have considered future taxable income and ongoing prudent and feasible tax planning strategies in
 assessing the need for the valuation allowance, there is no assurance that the valuation allowance will
 not need to be increased to cover additional deferred tax assets that may not be realizable.  Any
 increase in the valuation allowance could have a material adverse impact on our income tax provision
 and net income in the period in which such determination is made.



Results of Operations



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



| | Total Revenues (dollars in thousands):
| | --------------------------------------





| | Three Months Ended |                 
| | ------------------ | ----------------
| |                    | December 31,2005
| | Total revenues     | $127,943        
| |                    |                 



The principal factors driving revenue growth in the three month period ended December 31, 2005 were revenues from acquired businesses and increased demand for our professional services and maintenance solutions, offset by a decrease in product revenues.  The increase in demand for our professional services and maintenance solutions is principally related to the continued expansion of our installed customer base, continued innovation of our existing products, introduction of new products as well as the proven success of our implementation methodology.  The decrease in product revenues is primarily due to a decrease in software revenues when compared to unusually high software revenues reported in the three months ended January 1, 2005 as well as a higher proportion of revenues from existing customers in the three month period ended December 31, 2005, as compared to the comparable period in
the prior year, as discussed further below in the section titled Product Revenues.





18





---





|                                   | Three Months Ended
|---------------------------------- | ------------------
|                                   | December 31,
2005 
|Revenues from acquired businesses* | $6,677            
|Percentage of total revenues       | 5.2%              



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



Product Revenues (dollars in thousands):



|                                                | Three Months Ended
|----------------------------------------------- | ------------------
|                                                | December 31,
2005 
|Product revenues                                | $47,987           
|Product revenues as a percent of total revenues | 38%               



The product revenue decline in the three month period ended December 31, 2005 was due to a decrease in software revenues.  This decline is primarily the result of a comparison to unusually high software revenues reported in the three month period ended January 1, 2005 which was in part the result of a reorganization of our sales force announced during the three month period ended September 30, 2004, and completed during the three month period ended January 1, 2005.  In addition, we experienced a higher proportion of revenues from existing customers in the three month period ended December 31, 2005, as compared to the comparable period in the prior year.  Sales to existing customers typically result in lower product revenues per transaction.   Another factor in the decline in product revenue is that we benefited less from product revenues attributable to acquired businesses in the three
month period ended December 31, 2005 as compared to the same period in the prior year.  Substantially all of our product revenue in each quarter results from orders received in that quarter.  Therefore product revenues are subject to quarterly fluctuations relative to sales volume and the proportion of total revenues, based on the timing of transactions.    Although product revenues from core business decreased in this quarter, we continue to see demand for our products and expect product revenues to increase, as compared to the same periods in the prior year, during the remainder of the 2006 fiscal year.





19





---





|                                          | Three Months Ended
|----------------------------------------- | ------------------
|                                          | December 31,
2005 
|Product revenues from acquired businesses | $647              
|Percentage of product revenues            | 1.3%              





Maintenance Revenues (dollars in thousands):



|                                                    | Three Months Ended
|--------------------------------------------------- | ------------------
|                                                    | December 31,
2005 
|Maintenance revenues                                | $46,246           
|Maintenance revenues as a percent of total revenues | 36%               



The increase in maintenance revenues in the three month period ended December 31, 2005 was principally the result of expansion of our installed base of software solutions, resulting from an increase in demand for our Workforce Central suite and related software modules in the preceding periods, and an increase in the value of maintenance contracts. The increase in the value of the maintenance contracts was principally attributable to the sales of capacity upgrade licenses and add-on modules to existing customers. Capacity upgrade and add-on module sales typically result in an increased value of maintenance contracts due to the increased selling price for the products.  Revenue generated by a particular maintenance contract is typically based on the related products selling price.  Maintenance revenues in the three month period ended December 31, 2005 were also positively impacted by
an increase in maintenance revenues associated with acquired businesses.  The higher proportion of maintenance revenues to total revenues in the three month period ended December 31, 2005 was primarily due to maintenance revenues growing at a faster rate than product revenues.





20





---





|                                              | Three Months Ended
|--------------------------------------------- | ------------------
|December 31,
2005                             | January 1,
2005   
|Maintenance revenues from acquired businesses | $3,804            
|Percentage of maintenance  revenues           | 8.2%              





Professional Services Revenues (dollars in thousands):



|                                                              | Three Months Ended
|------------------------------------------------------------- | ------------------
|                                                              | December 31,
2005 
|Professional services revenues                                | $33,710           
|Professional services revenues as a percent of total revenues | 26%               



The growth in professional services in the three month period ended December 31, 2005 was principally due to an increase in the capacity to deliver professional services, as well as an increase in the utilization rate experienced by our services organization.  The expansion of our complementary product offerings, as well as an expansion of our professional consulting and value added professional services offerings also contributed to the increase in professional services.  In addition, professional services revenue growth in the three month period ended December 31, 2005 was also positively impacted by an increase in professional services revenues associated with acquired businesses.





21





---





|                                                        | Three Months Ended
|------------------------------------------------------- | ------------------
|                                                        | December 31,
2005 
|Professional services revenues from acquired businesses | $2,226            
|Percentage of professional services revenues            | 6.6%              



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





22





---





| | Gross Profit/Gross Margin (dollars in thousands):
| | -------------------------------------------------



|                                  | Three Months Ended
|--------------------------------- | ------------------
|                                  | December 31,
2005 
|Product gross profit              | $37,401           
|Stock-based compensation expenses | 82                
|Net product gross profit          | $37,483           
|Service gross profit              | $36,011           
|Stock-based compensation expenses | 819               
|Net service gross profit          | $36,830           
|Total gross profit                | $73,412           
|Stock-based compensation expenses | 901               
|Net total gross profit            | $74,313           
|Net product gross margin          | 78%               
|Net service gross margin          | 46%               
|Net total gross margin            | 58%               



NM = Not meaningful



Total gross margin for the three month period ended December 31, 2005 declined as compared with the
total gross margin for the comparable period in the prior year.  Both product and service gross margins
 declined as compared to the three month period ended January 1, 2005.    We anticipate total gross
 margin percentage will increase during the remainder of fiscal 2006, although, as compared to the
 prior year, we anticipate total gross margin percentage will continue to decrease in the second quarter and the
 remainder of the fiscal year, principally as a result of our expectation of a higher proportion
of services revenues as compared to product revenues and lower services gross margin as discussed below.





23





---





Software gross margin increased in the three month period ended December 31, 2005 as compared to the comparable period in the prior year due to a lower proportion of product revenues associated with our customized software solutions (which typically generate a lower gross margin), and lower royalty costs associated with certain software products.  This increase, however, was offset by a higher proportion of sales of our hardware.  Product revenues from hardware typically generate lower gross margin than sales of software.  We currently anticipate that our product gross margins for the remainder of Fiscal 2006 will increase when compared to the same period in the prior year.



Service gross margin in the three month period ended December 31, 2005 decreased as compared to service gross margin in the same period in the prior year.  Although we experienced an increase in the utilization rate in the service organization in the three month period ended December 31, 2005 due to an increase in revenues associated with more efficient implementation methodologies, such as remote services, this increase was partially offset by a higher proportion of professional services revenues as compared to the same period in the prior year.  Professional services typically carry a lower gross margin than maintenance services.  In addition, an increase in costs related to account management positions and other non-revenue generating positions, also offset the positive impact on the services margin from the increased utilization rate.  We expect that service gross margin for the
balance of fiscal 2006 will be lower than the comparable periods in fiscal 2005 due to our continued investment in account management and other non-revenue generating positions and an expected higher proportion of professional services revenues, which typically carry a lower gross margin than maintenance services.



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



Total Net Operating Expenses (dollars in thousands):



| | Three Months Ended                                                          |                  
| | --------------------------------------------------------------------------- | -----------------
| |                                                                             | December 31,
2005
| | Net operating expenses                                                      | $63,796          
| | Stock-based compensation expense                                            | (3,013)          
| | Operating expenses net of stock-based compensation                          | $60,783          
| | Operating expenses net of stock-based compensation as a % of total revenues | 48%              
| |                                                                             |                  





24





---





The increase in operating expenses net of stock-based compensation for the three month period ended December 31, 2005 was principally attributable to costs related to the implementation of our new information technology system (approximately $1.6 million), an increase in spending related to marketing programs (approximately $1.4 million), an increase in bad debt provisions (approximately $0.7 million), an increase in amortization expense related to intangible assets (approximately $0.4 million), offset by a decrease in spending related to outside engineering consultants ($0.4 million).  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, as well as costs associated with advertising, promotions, tradeshows, seminars, training and other sales and marketing programs (dollars in thousands).



|                                                          | Three Months Ended
|--------------------------------------------------------- | ------------------
|December 31,
2005                                         | January 1,
2005   
|Sales and marketing expenses                              | $38,772           
|Stock-based compensation expenses                         | (1,256)           
|Net sales and marketing expenses                          | $37,516           
|Net sales and marketing expenses as a % of total revenues | 29%               
|                                                          |                   





The increase in net sales and marketing expense for the three month period ended December 31, 2005 was primarily attributable to an increase in spending related to marketing programs (approximately $1.4 million).





25





---





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



|                                                                            | Three Months Ended
|--------------------------------------------------------------------------- | ------------------
|                                                                            | December 31,
2005 
|Total Engineering, research and development spending                        | $16,290           
|Capitalized software development costs                                      | (3,277)           
|Engineering, research and development expenses                              | 13,013            
|Stock-based  compensation expense                                           | (783)             
|Net engineering, research and development expenses                          | $12,230           
|Net engineering, research and development expenses as a % of total revenues | 10%               





The decrease in net engineering, research and development spending for the three month period ended
 December 31, 2005 as compared to the comparable period in the prior year was primarily attributable
to a decrease in spending related to the use of outside consultant resources (approximately $0.4 million)
 and a decrease in expenses related to compensation, overhead and support costs (approximately $0.1 million).  Although engineering headcount has continued to increase and we continue to invest in engineering resources, the decrease in compensation related spending was due to a decrease in expenses related to management incentive compensation accruals as compared to the prior year.  The management incentive compensation is corporate performance-based and fluctuates from quarter to quarter based on our overall financial performance.  The significant product development efforts in the first
three months of fiscal 2006 were principally related to further development and enhancement of the
Workforce Central® suite, including Workforce HR, Workforce Payroll software, Workforce Scheduler and Workforce Scheduler with Optimization, Altitude®, Total Care, and the Kronos 4500 terminal.





26





---





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



|                                                             | Three Months Ended
|------------------------------------------------------------ | ------------------
|                                                             | December 31,
2005 
|General and administrative expenses                          | $11,977           
|Stock-based compensation expense                             | (974)             
|Net general and administrative expenses                      | $11,003           
|General and administrative expenses as a % of total revenues | 9%                





The increase in net general and administrative expenses in the three month period ended December 31, 2005 was primarily due to an increase in costs and lower capitalization of internal costs related to the implementation of our new information technology system (approximately $1.6 million), an increase in bad debt provisions (approximately $0.7 million) resulting from our periodic calculation of our bad debt reserve requirements, and an increase in professional fees related to audit fees and Sarbanes-Oxley compliance efforts (approximately $0.1 million).





27





---





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



|                                                           | Three Months Ended
|---------------------------------------------------------- | ------------------
|                                                           | December 31,
2005 
|Amortization of intangible assets                          | $1,542            
|Amortization of intangible assets as a % of total revenues | 1%                
|Other income, net                                          | 1,508             
|Other income, net as a % of total revenues                 | 1%                





The increase in amortization of intangible assets in the three month period ended December 31, 2005, as compared to the same period in the prior year, is principally attributed to amortization charges related to acquisitions which were completed during the last twelve months.  The decrease in other income, net in the three month period ended December 31, 2005 as compared to the same period in the prior year, is principally attributed to foreign exchange losses incurred during the three month period ended December 31, 2005 related to our inter-company balances with our foreign subsidiaries as a result of less favorable changes in foreign exchange rates as compared to the three month period ended January 1, 2005. We experienced foreign exchange gains during the three month period ended January 1, 2005.



Income Taxes.The provision for income taxes as a percentage of pre-tax income was 35.3% for the three month period ended December 31, 2005 as compared to 32.2% for the comparable period in the prior year.  The provision for income taxes for the three month period ended December 31, 2005 was unfavorably impacted by the expiration on December 31, 2005 of the research and development credit and the impact of a permanent item related to the employee stock purchase plan expense under FAS 123R. The provision for income taxes for the three month period ended January 1, 2005 was favorably impacted as a result of the retroactive reinstatement of legislation related to certain research and development tax credits as well as the impact of certain research and development tax credits related to the AD OPT operations. We currently anticipate that the income tax rate will
range approximately between 34  35% for the remainder of the fiscal year.





28





---





Liquidity and Capital Resources



We fund our business through cash generated by operations. If near-term demand for our products weakens or if significant anticipated sales in any quarter do not close when expected, the availability of such funds may be adversely impacted.  To be more in line with competitive practices, effective April 2, 2005, we completed the change in our business process to a process in which our customers are billed in arrears for professional services as the services are delivered, rather than being billed in advance of service delivery.  As a result of this change, we have experienced and expect to continue to experience a short-term negative impact on our cash flow from operations.  However, we do believe that this practice will ultimately generate more service revenues.



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



|                                                                                 | As of            |                  
|-------------------------------------------------------------------------------- | ---------------- | -----------------
|                                                                                 | December 31,2005 | September 30,2005
|Cash, cash equivalents and marketable securities (including short and long-term) | $155,461         | $140,435         
|Working capital                                                                  | $21,548          | $9,620           





The increase in cash, cash equivalents and marketable securities is primarily due to cash generated from operations, partially offset by cash paid for the repurchase of common stock, the purchase of property, plant, equipment and capitalized software development costs as well as cash paid for acquired businesses during the three month period ended December 31, 2005. The increase in working capital is primarily due to an increase in cash and short-term marketable securities balances, a decrease in accrued expenses and other current liabilities and a decrease in deferred professional services revenues.  These factors were partially offset by a decrease in accounts receivable.  A portion of our cash reserves is invested in long-term marketable securities.





29





---





Cash Flow Highlights (dollars in thousands):



|                                                                              | Three Months Ended
|----------------------------------------------------------------------------- | ------------------
|                                                                              | December 31,
2005 
|Cash provided by operations                                                   | $23,032           
|Cash used for property, plant and equipment                                   | ($3,862)          
|Cash used for acquisitions of businesses                                      | ($1,963)          
|(Increase)/decrease in marketable securities                                  | ($4,133)          
|Net proceeds from exercise of stock options and employee stock purchase plans | $5,251            
|Repurchases of common stock                                                   | ($6,378)          





The increase in cash provided by operations in the three month period ended December 31, 2005, as compared to the comparable period in the prior year, is primarily due to an increase in collections of accounts receivable during the three month period ended December 31, 2005 as compared to the comparable period in the prior year, and an increase in deferred product revenues as compared to the prior year.  These factors are partially offset by a decrease in net income (which is partially offset by non-cash stock-based compensation charges), decreases in deferred professional services revenues (due to the impact of billing our customers in arrears for professional services as the services are delivered), a decrease in the rate of growth of deferred maintenance revenues, and a decrease in accounts payable and accrued compensation and other liabilities.





30





---





Our use of cash for property, plant and equipment in the three month period ended December 31, 2005 includes investments in information systems and infrastructure to improve and support our expanding operations. We anticipate making significant capital investments during the remainder of fiscal 2006 in conjunction with the replacement of our information technology systems.  To date, we have invested approximately $19.4 million (excluding internal personnel related costs) related to the replacement of our information technology systems of which $13.5 million has been capitalized, with the remainder expensed through operations.  We expect our total investment in this project (excluding internal personnel related costs) to range between $25.0 million and $27.0 million.  Our use of cash for the acquisition of businesses in the three month period ended December 31, 2005 was principally
related to the acquisition of Compu-Cash Systems on December 19, 2005.  Our use of cash for the acquisition of businesses in the three month period ended January 1, 2005 was principally related to the acquisition of AD OPT on November 18, 2004.  Please refer to Note F in the Notes to the Condensed Consolidated Financial Statements for further details.    We are assessing several acquisition opportunities that may be completed over the next twelve months, although there can be no assurance that these acquisitions will be completed.Excess cash reserves not required for operations, investments in property, plant and equipment or acquisitions are invested in marketable securities.



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



|                                           | Three Months Ended
|------------------------------------------ | ------------------
|                                           | December 31,
2005 
|Shares of common stock repurchased         | 141,750           
|Cost of shares of common stock repurchased | $6,379            





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



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





31





---





|Payments Due by Period (in thousands)
|-------------------------------------
|ContractualObligations               
|                                     
|Operating lease obligations          
|Guaranteed payment obligations       
|Total                                





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



Item 3.  Quantitative and Qualitative Disclosures About Market Risk



We are exposed to a variety of market risks, including changes in interest rates affecting the return on our investments and foreign currency fluctuations. Refer to Note A, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended September 30, 2005 for further discussion regarding marketable securities and foreign currency forward exchange contracts. Our marketable securities that expose us to market rate risks are comprised of debt securities. A decrease in interest rates would not adversely impact interest income or related cash flows pertaining to securities held at December 31, 2005, as all of these securities have fixed rates of interest. A 100 basis point increase in interest rates would not adversely impact the fair value of these securities by a material amount due to the size and
average duration of the portfolio. Our exposure to market risk for fluctuations in foreign currency relate primarily to the amounts due from subsidiaries. Exchange gains and losses related to amounts due from subsidiaries have not been material. For foreign currency exposures existing at December 31, 2005, a 10% unfavorable movement in the foreign exchange rates for each subsidiary location would not expose us to material losses in earnings or cash flows. The calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar.





32





---





Item 4.  Controls and Procedures



(a)
Evaluation of Disclosure Controls and Procedures.Our management, with the
participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures as of December 31, 2005.  The term disclosure controls and
 procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives
and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2005, 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 December 31, 2005 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.





33





---





|Part II. | OTHER INFORMATION
|-------- | -----------------



Item 1. Legal Proceedings



| | None
| | ----



Item 1A. Risk Factors



Certain Factors That May Affect Future Operating Results



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



Actual operating results may differ from those indicated by forward-looking statements made in this Quarterly Report on Form 10-Q and presented elsewhere by us from time to time because of a number of factors including the potential fluctuations in quarterly results, timing and acceptance of new product introductions by us and our competitors, the dependence on our time and labor product line, the ability to attract and retain sufficient technical personnel, the protection of our intellectual property and the potential infringement on our intellectual property rights, competitive pricing pressure, and the dependence on alternate distribution channels and on key vendors, as further described below and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2005.



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





34





---





New Information Technology System Implementation.We completed the first phase of the implementation of our new information technology system in April 2005, and therefore have begun incurring certain recurring costs that were not incurred prior to completion of this first phase, including amortization and depreciation related costs.  During the implementation of and transition to our new information technology systems we may experience some short-term erosion to our productivity resulting from duplicate data entry, troubleshooting and mitigation of any issues related to the rollout of these systems as well as increased costs related to the completion of the implementation, which may have an impact on our cash flows.

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

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

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

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

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

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


Litigation by terminated employees or third parties; and

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

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





35





---





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

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

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





36





---





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



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



Dependence on Alternate Distribution Channels.We market and sell our products through our direct sales organization, independent resellers and ADP under an original equipment manufacturer agreement. In the first three months of fiscal 2006, 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.



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.





37





---





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. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------



In the following table, we provide information about our purchases during the quarter ended December 31, 2005 of equity securities that are registered by the company pursuant to Section 12 of the Exchange Act.



ISSUER PURCHASES OF EQUITY SECURITIES



|                  | (a)                                 | (b)                         | (c)                                                                                          | (d)                                                                  
|----------------- | ----------------------------------- | --------------------------- | -------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------
|Period            | Total Number of SharesPurchased (1) | Average PricePaid per Share | Total Number of Shares  Purchased as Part of Publicly Announced
                Programs (2) | Maximum Number  of Shares that May Yet Be PurchasedUnder the Programs
|                  |                                     |                             |                                                                                              |                                                                      
|10/01/05-11/01/05 | 54,750                              | $42.76                      | 54,750                                                                                       | 248,726                                                              
|11/02/05-12/02/05 | 45,250                              | $46.88                      | 45,250                                                                                       | 203,476                                                              
|12/03/05-12/31/05 | 41,750                              | $45.90                      | 41,750                                                                                       | 161,726                                                              
|Total:            | 141,750                             | $45.00                      | 141,750                                                                                      | 161,726                                                              



(1) We repurchased an aggregate of 141,750 shares of our common stock pursuant to the repurchase program that we publicly announced on May 13, 2005, which we refer to as the repurchase program.



(2) Our board of directors approved the repurchase by us of up to an aggregate of 750,000 shares of our common stock pursuant to the repurchase program.  Unless terminated earlier by resolution of our board of directors, the repurchase program will expire when we have repurchased all shares authorized for repurchase thereunder.



Item 3. Defaults Upon Senior Securities



| | None
| | ----



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



| | None
| | ----





38





---







Item 5. Other Information



| | None
| | ----





39





---





|Item 6.     
Exhibits | 
|--------------------- | 
|31.1                  | 
|                      | 
|31.2                  | 
|                      | 
|32.1                  | 
|                      | 





40





---





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
| | -------------------





|February 9, 2006 | By                                    | /s/  Paul A. Lacy | 
|---------------- | ------------------------------------- | ----------------- | 
|                 | Paul A. Lacy                          |                  
|                 | President and Chief Financial Officer
|                 | (Duly Authorized Officer and          |                  
|                 | Principal Financial Officer)          |                  
|                 |                                       |                   | 







---





# KRONOS INCORPORATED

# EXHIBIT INDEX

|ExhibitNumber | Description
|------------- | -----------
|31.1          |            
|              |            
|31.2          |            
|              |            
|32.1          |            
|              |            





---