UNITED STATES SECURITIES AND EXCHANGE COMMISSION  Washington, D.C. 20549  Form 10-Q  (X)
        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the quarterly period
ended April 1, 2006  OR  (    )
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the transition period
from _______________ to ______________  Commission file number
0-20109  Kronos Incorporated (Exact name of registrant as
specified in its charter)  Massachusetts
        
        04-2640942(State or other jurisdiction of
        
        (I.R.S. 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 May 5, 2006, 32,049,795 shares of the
registrants common stock, $.01 par value, were outstanding.






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





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# PART I.    FINANCIAL
INFORMATION

Item 1.
     Condensed Consolidated Financial Statements (Unaudited)

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



|                                                                 | Three Months Ended | Six Months Ended
|---------------------------------------------------------------- | ------------------ | ----------------
|
|Net revenues:                                                    |                    |                 
|Product                                                          |                    |                 
|Maintenance                                                      |                    |                 
|Professional services                                            |                    |                 
|                                                                 |                    |                 
|                                                                 |                    |                 
|Cost of sales:                                                   |                    |                 
|Costs of product                                                 |                    |                 
|Costs of maintenance                                             |                    |                 
|Costs of 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 included in the above captions: |                    |                 
|Costs of product                                                 |                    |                 
|Costs of maintenance                                             |                    |                 
|Costs of professional services                                   |                    |                 
|Sales and marketing                                              |                    |                 
|Engineering, research and development                            |                    |                 
|General and administrative                                       |                    |                 
|                                                                 |                    |                 
|                                                                 |                    |                 
|                                                                 |                    |                 









1





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

|                                                                                      | April 1,
2006 | September 30,
2005
|------------------------------------------------------------------------------------- | ------------- | ------------------
|ASSETS                                                                                |               |                   
|Current assets:                                                                       |               |                   
|Cash and cash equivalents                                                             |               |                   
|Marketable securities                                                                 |               |                   
|Accounts receivable, less allowances of $10,584                                       |               |                   
|at April 1, 2006 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, 32,079,145 and |               |                   
|31,724,460 shares issued at April 1, 2006 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                                            |               |                   
|                                                                                      |               |                   









2





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

|                                                                | Six 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                   |                 
|                                                                |                 









3





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KRONOS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



NOTE A - General



The accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals that management of Kronos Incorporated (the Company or Kronos) considers necessary for a fair presentation of the Companys financial position and results of operations as of and for the interim periods presented pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures in these financial statements are adequate to make the information presented not misleading.  These condensed consolidated financial statements should be read in conjunction with the Companys
audited financial statements for the fiscal year ended September 30, 2005.  The results of operations for the six months ended April 1, 2006 are not necessarily indicative of the results for a full fiscal year.  The Company has reclassified $2.0 million of accrued liabilities which were classified as accounts payable on the September 30, 2005 balance sheet to accrued expenses and other current liabilities to conform with current period presentation.



NOTE B - Fiscal Quarters



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



NOTE C - Stock-Based Compensation



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



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



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





4





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



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



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





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



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







5





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



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



|                        | Six Month Period Ended |              
|----------------------- | ---------------------- | -------------
|                        |                        | April 1, 2006
|Expected Volatility     |                        | 41.8%        
|Expected Term           |                        | 3.42 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 April 1, 2006, and changes during the six month period then ended is presented below:

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



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





6





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





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



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



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



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





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



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





7





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



NOTE D - Other Current Assets



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



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



NOTE E  Intangible Assets



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



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





8





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



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



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



NOTE F  Acquisitions



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



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





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



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



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



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



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



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



|                             | Three Months Ended | Six Months Ended | 
|---------------------------- | ------------------ | ---------------- | 
|Unaudited                    |                    | April 2, 2005    | 
|                             |                    |                  | 
|Total revenues               |                    | $120,621         | 
|Net income                   |                    | 11,223           | 
|Earnings per share  basic   |                    | $0.35            | 
|Earnings per share  diluted |                    | $0.34            | 
|                             |                    |                  | 





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



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



Certain acquisition agreements which were previously entered into contain provisions that require the Company to make a guaranteed payment and/or contingent payments based upon profitability of the business unit or if specified minimum revenue requirements are met. Guaranteed payments are accrued at the time of the acquisition and are included in the purchase price allocation.  As of April 1, 2006, the Company was obligated to pay $2.3 million in guaranteed payments. These payments will be made at various dates through fiscal 2008.  Amounts due to be paid within twelve months of the balance sheet date are included in accrued expenses and amounts due to be paid in excess of twelve months of the balance sheet date are included in other liabilities.  Contingent payments due under the terms of the agreements are recognized when earned and are principally recorded as goodwill. However, under certain
circumstances, a portion of the contingent payment may be recorded as compensation expense.  The provisions for contingent payments expire during fiscal 2006 and 2009.  During the three and six months ended April 1, 2006, there were no contingent payments earned.  During the three months ended April 2, 2005, there were $80,000 of contingent payments earned, all of which was recorded as compensation expense. During the six months ended April 2, 2005 there were $207,000 of contingent payments earned of which $108,000 were recorded as goodwill.  The remainder was recorded as compensation expense.





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NOTE G  Comprehensive Income



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



|                                                 | Three Months Ended |  | Six Months Ended
|------------------------------------------------ | ------------------ |  | ----------------
|                                                 | April 1,
2006      |  | April 2,
2005   
|Comprehensive income:                            |                    |  |                 
|                                                 |                    |  |                 
|Net income                                       | $9,854             |  | $11,223         
|                                                 |                    |  |                 
|Cumulative translation adjustment                | --                 |  | (541)           
|                                                 |                    |  |                 
|Unrealized loss on available-for-sale
Securities | (4)                |  | (416)           
|                                                 |                    |  |                 
|Total comprehensive income                       | $9,850             |  | $10,266         





NOTE H - Earnings Per Share



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



|                                                         | Three Months Ended |  | Six Months Ended
|-------------------------------------------------------- | ------------------ |  | ----------------
|                                                         | April 1,
2006      |  | April 2,
2005   
|                                                         |                    |  |                 
|Net income                                               | $9,854             |  | $11,223         
|                                                         |                    |  |                 
|Weighted-average shares                                  | 31,919,542         |  | 31,910,961      
|                                                         |                    |  |                 
|Effect of dilutive securities:                           |                    |  |                 
|                                                         |                    |  |                 
|Employee stock options and awards                        | 331,828            |  | 924,913         
|                                                         |                    |  |                 
|Adjusted weighted-average shares
and assumed conversions | 32,251,370         |  | 32,835,874      
|                                                         |                    |  |                 
|Basic earnings per share                                 | $0.31              |  | $0.35           
|                                                         |                    |  |                 
|Diluted earnings per share                               | $0.31              |  | $0.34           





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



Forward-Looking Statements



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



Overview



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



|SUMMARY:                       |                    |                 
|------------------------------ | ------------------ | ----------------
|                               | Three Months Ended | Six Months Ended
|                               | April 1,
2006      | April 2,
2005   
|Product revenues               | $59,038            | $46,317         
|Maintenance revenues           | 47,233             | 42,451          
|Professional services revenues | 37,252             | 31,853          
|Total revenues                 | $143,523           | $120,621        
|Net income                     | $9,854             | $11,223         
|Earnings per share - basic     | $0.31              | $0.35           
|Earnings per share - diluted   | $0.31              | $0.34           







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



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



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



Critical Accounting Policies and Estimates



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



| |  |  | Revenue Recognition
| | - |  | -------------------



| |  |  | Allowance for Doubtful Accounts and Sales Returns Allowance
| | - |  | -----------------------------------------------------------







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| |  |  | Valuation of Intangible Assets and Goodwill
| | - |  | -------------------------------------------



| |  |  | Capitalization of Software Development Costs
| | - |  | --------------------------------------------



| |  |  | Income Taxes
| | - |  | ------------



| |  |  | Business Combinations
| | - |  | ---------------------



| |  |  | Stock-Based Compensation
| | - |  | ------------------------



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



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

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

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

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

| |  | Collectibility is probable; and
| | - | -------------------------------

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



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

| |  | Determining whether the fee is fixed or determinable              | 
| | - | ----------------------------------------------------------------- | 
| |  | Determining whether collectibility is probable                    | 
| |  | When multiple elements exist and there is an undelivered element:
| |   |                                                                   | 

| |  | determining whether undelivered elements are non-essential
| | - | ----------------------------------------------------------

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

| |  | determining vendor specific objective evidence
| | - | ----------------------------------------------





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| |  | determining the amount of revenue to be recognized on shipment and
| | - | ------------------------------------------------------------------

| |  | determining the timing of the recognition of any revenue that is deferred
| | - | -------------------------------------------------------------------------

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



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



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



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



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



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

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

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

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

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





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



Our arrangements with end-user customers and indirect channel customers do not include any contractual rights of return or price protection, nor do arrangements with indirect channel customers include any acceptance provisions. Our arrangements with end-user customers generally include our standard acceptance provision. Our standard acceptance provision provides the end-user customer with a right to a refund if the arrangement is terminated because the product did not meet our published technical specifications. Generally, we determine that these acceptance provisions are not substantive and therefore should be accounted for as a warranty in accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies.



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



If the arrangement includes a substantive acceptance provision, we defer revenue not meeting the criterion for recognition under Statement of Position 97-2, Software Revenue Recognition, and classifies this revenue as deferred revenue.  We report the allocated fair value of revenues related to the product element of arrangements as a current liability because of the expectation that these revenues will be recognized within 12 months of the balance sheet date.   Revenue that is deferred due to a substantive acceptance provision is recognized, assuming all other conditions for revenue recognition have been satisfied, when the uncertainty regarding acceptance is resolved as generally evidenced by written acceptance or payment of the arrangement fee.



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





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



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



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





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Allowance for Doubtful Accounts and Sales Returns Allowance We maintain an allowance for doubtful accounts to reflect estimated losses resulting from the inability of customers to make required payments. This allowance is based on estimates made by us after consideration of factors such as the composition of the accounts receivable aging and bad debt history.  If the historical data we use to calculate the allowance for doubtful accounts does not reflect the future ability to collect outstanding receivables, or if the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances and bad debt expense may be required and our future results could be materially affected.   Historically, there has not been a significant amount of deviation between our estimates and actual results and
we do not anticipate that this will change in the future.



In addition, we maintain a sales returns allowance to reflect estimated losses for sales returns and adjustments. Sales returns and adjustments are generally due to incorrect ordering of product, general customer satisfaction issues or incorrect billing. This allowance is established by us using estimates based on historical experience. If we experience an increase in sales returns and adjustments, additional allowances and charges against revenue may be required.  Estimates used to establish the allowance for doubtful accounts and sales returns allowance have been consistently applied.If the historical data we use to calculate these estimates do not properly reflect future returns, then a change in the allowances would be made in the period in which such a determination is made and revenues in that period could be materially affected. Historically, we
have not seen a significant amount of deviation between our estimates and actual results and we do not anticipate that this will change in the future.



Valuation of Intangible Assets and Goodwill In assessing the recoverability
 of goodwill and other intangible assets, we must make assumptions regarding the estimated future cash
flows and other factors to determine the fair value of these assets. If these estimates or their related
assumptions change in the future, we may be required to record impairment charges against these assets in
 the reporting period in which the impairment is determined. For intangible assets, this evaluation includes
 an analysis of estimated future undiscounted net cash flows expected to be generated by the assets over
 their estimated useful lives. If the estimated future undiscounted net cash flows are insufficient to
recover the carrying value of the assets over their estimated useful lives, we will record an impairment
 charge in the amount by which the carrying value of the assets exceeds their fair value. For goodwill,
 the impairment evaluation includes a comparison of the carrying value of the reporting unit for which
 goodwill is attributable to that reporting units fair value. We have only one reporting unit. The
fair value of the reporting unit is based upon the net present value of future cash flows, including a
 terminal value calculation. Determining these amounts is judgmental in nature and involves the use of
 significant estimates and assumptions.  These estimates and assumptions include revenue growth rates and
operating margins used to calculate projected cash flows, risk-adjusted discount rates as well as future
economic and market conditions.  We base our fair value estimates on assumptions we believe to be
reasonable but that are unpredictable and inherently uncertain.  Actual future results may differ from
those estimates.  However, a 100 basis point increase in the assumed discount rate, which is a
 significant assumption that affects terminal value and the net present value of the cash flows, would not
 have a material effect on our financial statements.If the reporting
units estimated fair value exceeds the reporting units carrying value, no impairment of
goodwill exists. If the
fair value of the reporting unit does not exceed its carrying value, then further analysis would be
required to determine the amount of the impairment, if any.





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If we determine that there is an impairment in either an intangible asset or goodwill, we will be required to record an impairment charge in the reporting period in which the impairment is determined.  During fiscal 2005 we completed the annual testing of the impairment of goodwill, and as a result of those tests, we concluded that no impairment of goodwill existed as of July 3, 2005, the annual goodwill impairment measurement date for fiscal 2005.  In addition, we have determined that no events or circumstances currently exist that would indicate that either the fair value of the reporting unit has been reduced, or the carrying value of the intangible assets is no longer recoverable.  Therefore, no impairment charges have been recorded in the three or six months ended April 1, 2006.



Capitalization of Software Development Costs- Costs incurred in the research, design and development of software for sale to others, which we refer to as software development costs, are charged to expense until technological feasibility is established. Thereafter, software development costs are capitalized and amortized to product cost of sales on a straight-line basis over the lesser of three years or the estimated economic lives of the respective products.



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



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





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Income Taxes We account for income taxes under the liability method.  Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and the tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.  When necessary, we record a valuation allowance in accordance with generally accepted accounting principles to reduce our deferred tax assets to the amount of future tax benefit that is more likely than not to be realized.  Significant judgment and estimates are used in determining our income tax assets and liabilities as well as our income tax provision.  The interim tax provision is dependent on the forecast of consolidated current year earnings, tax credits and other permanent items, the most
significant of which are meals and entertainment, the deduction for qualified production activities, permanent effects of FAS 123R and tax free interest income.  While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, there is no assurance that the valuation allowance will not need to be increased to cover additional deferred tax assets that may not be realizable.  Any increase in the valuation allowance could have a material adverse impact on our income tax provision and net income in the period in which such determination is made.  Additionally, although we believe that our estimates are reasonable, no assurance can be given that our final tax outcome will not be different from that which is reflected in our historical income tax provisions and accruals.  Such differences could have a material effect on our income tax provision and net income in the period in which such a determination
is made. Historically, we have not seen a significant amount of deviation between our estimates and actual rates and we do not anticipate that this will change in the future.



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



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





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

| |  | Expected volatility, which is based on historical volatility of our stock
| | - | -------------------------------------------------------------------------

| |  | Expected option term, which is based on our historical option exercise data taking into consideration the exercise patterns of the option holders during the options life
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | Forfeiture rate
| | - | ---------------



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



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



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



Results of Operations



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



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



|               | Three Months Ended | Six Months Ended
|-------------- | ------------------ | ----------------
|               | April 1,
2006      | April 2,
2005   
|Total revenues | $143,523           | $120,621        





22





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



|                                   | Three Months Ended | Six Months Ended
|---------------------------------- | ------------------ | ----------------
|                                   | April 1,
2006      | April 2,
2005   
|Revenues from acquired businesses* | $3,942             | $6,644          
|Percentage of total revenues       | 2.7%               | 5.5%            



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



Product Revenues (dollars in thousands):



|                                                | Three Months Ended | Six Months Ended
|----------------------------------------------- | ------------------ | ----------------
|                                                | April 1,
2006      | April 2,
2005   
|Product revenues                                | $59,038            | $46,317         
|                                                |                    |                 
|Product revenues as a percent of total revenues | 41%                | 38%             



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





23





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





Maintenance Revenues (dollars in thousands):



|                                                    | Three Months Ended | Six Months Ended
|--------------------------------------------------- | ------------------ | ----------------
|                                                    | April 1,
2006      | April 2,
2005   
|Maintenance revenues                                | $47,233            | $ 42,451        
|Maintenance revenues as a percent of total revenues | 33%                | 35%             



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



|                                              | Three Months Ended | Six Months Ended
|--------------------------------------------- | ------------------ | ----------------
|                                              | April 1,
2006      | April 2,
2005   
|Maintenance revenues from acquired businesses | $1,818             | $2,420          
|Percentage of maintenance revenues            | 3.8%               | 5.7%            





24





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Professional Services Revenues (dollars in thousands):



|                                                              | Three Months Ended | Six Months Ended
|------------------------------------------------------------- | ------------------ | ----------------
|                                                              | April 1,
2006      | April 2,
2005   
|Professional services revenues                                | $37,252            | $31,853         
|Professional services revenues as a percent of total revenues | 26%                | 26%             



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



|                                                        | Three Months Ended | Six Months Ended
|------------------------------------------------------- | ------------------ | ----------------
|                                                        | April 1,
2006      | April 2,
2005   
|Professional services revenues from acquired businesses | $2,124             | $1,009          
|                                                        |                    |                 
|Percentage of professional services revenues            | 5.7%               | 3.2%            



Gross Profit.Gross profit is the net result of revenues, less cost of sales.  Product cost of sales primarily
 consists of salaries, facilities and related expenses for manufacturing personnel and personnel
developing and delivering customized software solutions, including stock-based compensation, costs of
materials for the manufacturing of certain hardware products, amortization of capitalized software
costs and acquired technology, as well as the cost of royalties paid to third-parties for certain
 products.  Service cost of sales primarily consists of salaries, facilities and related expenses
 for service personnel, including stock-based compensation, as well as the cost of maintenance contracts
 paid to third-parties for certain products.  As the costs incurred related to the development of our
products cannot be segregated between development for existing customers and new customers, the cost of
 developing unspecified product upgrades, which are received by our
 customers who maintain a current maintenance program, are included in Net Operating Expenses as
Engineering, Research and Development Costs.





25





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|                                                                                 | Three Months Ended | Six Months Ended |        
|-------------------------------------------------------------------------------- | ------------------ | ---------------- | -------
|                                                                                
|                                                                                 | April 1,           | April 2,         | Percent
|2006                                                                             | 2005               | Change           | 2006   
|Product gross profit                                                             | $44,155            | $34,666          | 27%    
|Stock-based compensation expenses included in product gross profit               | $97                | ---              | NM     
|                                                                                 |                    |                  |        
|Maintenance  gross profit                                                        | $32,487            | $31,428          | 3%     
|Stock-based compensation expenses included in maintenance gross profit           | $290               | ---              | NM     
|                                                                                 |                    |                  |        
|Professional Services gross profit                                               | $6,667             | $5,774           | 15%    
|Stock-based compensation expenses included in professional services gross profit | $676               | ---              | NM     
|                                                                                 |                    |                  |        
|Service gross profit                                                             | $39,154            | $37,202          | 5%     
|Stock-based compensation expenses included in service gross profit               | $966               | ---              | NM     
|                                                                                 |                    |                  |        
|Total gross profit                                                               | $83,309            | $71,868          | 16%    
|Stock-based compensation expenses included in total gross profit                 | $1,063             | ---              | NM     
|                                                                                 |                    |                  |        
|Product gross margin                                                             | 75%                | 75%              | ---    
|Maintenance gross margin                                                         | 69%                | 74%              | ---    
|Professional services gross margin                                               | 18%                | 18%              | ---    
|Service gross margin                                                             | 46%                | 50%              | ---    
|Total gross margin                                                               | 58%                | 60%              | ---    



NM = Not meaningful



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





26





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



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



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



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



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





27





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Total Net Operating Expenses (dollars in thousands):

|                                                             |                    |                 
|------------------------------------------------------------ | ------------------ | ----------------
|                                                             | Three Months Ended | Six Months Ended
|                                                             | April 1,
2006      | April 2,
2005   
|Net operating expenses                                       | $68,218            | $54,772         
|                                                             |                    |                 
|Stock-based compensation  included in net operating expenses | $3,462             | ---             
|Net operating expenses as a % of total revenues              | 48%                | 45%             



NM = Not meaningful



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



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

|                                                                   |                    |                 
|------------------------------------------------------------------ | ------------------ | ----------------
|                                                                   | Three Months Ended | Six Months Ended
|                                                                   | April 1,
2006      | April 2,
2005   
|                                                                   |                    |                 
|Sales and marketing expenses                                       | $42,395            | $34,616         
|                                                                   |                    |                 
|Stock-based compensation  included in sales and marketing expenses | $1,400             | ---             
|Sales and marketing expenses as a % of total revenues              | 30%                | 29%             



NM = Not meaningful



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





28





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

|                                                                                     |                    |                 
|------------------------------------------------------------------------------------ | ------------------ | ----------------
|                                                                                     | Three Months Ended | Six Months Ended
|                                                                                     | April 1,
2006      | April 2,
2005   
|Total engineering, research and development spending                                 | $17,534            | $16,001         
|Capitalized software development costs                                               | (3,624)            | (3,974)         
|Engineering, research and development expenses                                       | $13,910            | $12,027         
|Stock-based compensation  included in engineering, research and development expenses | $887               | ---             
|Engineering, research and development expenses as a % of total revenues              | 10%                | 10%             

NM = Not meaningful



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



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



|                                                                         | Three Months Ended | Six Months Ended
|------------------------------------------------------------------------ | ------------------ | ----------------
|                                                                         | April 1,
2006      | April 2,
2005   
|General and administrative expenses                                      | $12,105            | $8,546          
|Stock-based compensation included in general and administrative expenses | $1,175             | ---             
|General and administrative expenses as a % of total revenues             | 8%                 | 7%              



NM = Not meaningful







29





---







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



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

|                                                           |                    |                 
|---------------------------------------------------------- | ------------------ | ----------------
|                                                           | Three Months Ended | Six Months Ended
|                                                           | April 1,
2006      | April 2,
2005   
|Amortization of intangible assets                          | $1,665             | $1,194          
|Amortization of intangible assets as a % of total revenues | 1%                 | 1%              
|                                                           |                    |                 
|Other income, net                                          | $1,857             | $1,611          
|Other income, net as a % of total revenues                 | 1%                 | 1%              



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





30





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



Liquidity and Capital Resources



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



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



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



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





31





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Cash Flow Highlights (dollars in thousands):

|                                                                        |                    |                 
|----------------------------------------------------------------------- | ------------------ | ----------------
|                                                                        | Three Months Ended | Six Months Ended
|                                                                        | April 1,
2006      | April 2,
2005   
|Cash provided by operations                                             | $21,257            | $20,392         
|Cash used for property, plant and equipment                             | ($6,049)           | ($8,526)        
|Cash used for acquisitions of businesses                                | ($6,629)           | ($9,814)        
|(Increase)/decrease in marketable securities                            | $898               | ($9,109)        
|Net proceeds from exercise of stock options and employee stock purchase | $7,869             | $10,794         
|Repurchases of common stock                                             | ($7,734)           | ($6,564)        



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



Our use of cash for property, plant and equipment in the six month period ended April 1, 2006 includes investments in information systems and infrastructure to improve and support our expanding operations. We anticipate making significant capital investments during the remainder of fiscal 2006 in conjunction with the replacement of our information technology systems.  To date, we have invested approximately $20.6 million (excluding internal personnel related costs) related to the replacement of our information technology systems of which $14.0 million has been capitalized, with the remainder expensed through operations.  We expect our total investment in this project (excluding internal personnel related costs) to range between $25.0 million and $27.0 million.  Our use of cash for the acquisition of businesses in the first half of 2006 was principally related to the acquisition of
TimeWorks, Inc. on January 17, 2006 and Compu-Cash Systems on December 19, 2005.  Our use of cash for the acquisition of businesses during the same periods ended April 2, 2005 was principally related to the acquisition of AD OPT on November 18, 2004 and Nextime, Inc. on February 28, 2005.  Please refer to Note F in the Notes to the Condensed Consolidated Financial Statements for further details. We are assessing several acquisition opportunities that may be completed over the next twelve months, although there can be no assurance that these acquisitions will be completed.Excess cash reserves not required for operations, investments in property, plant and equipment or acquisitions are invested in marketable securities.





32





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



|                                           | Three Months Ended | Six Months Ended
|------------------------------------------ | ------------------ | ----------------
|                                           | April 1,
2006      | April 2,
2005   
|Shares of common stock repurchased         | 197,500            | 133,200         
|Cost of shares of common stock repurchased | $7,733             | $6,564          



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



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





|Payments Due by Period (in thousands)
|-------------------------------------
|Contractual Obligations              
|                                     
|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.





33





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Item 3.  Quantitative and Qualitative Disclosures About Market Risk



We are exposed to a variety of market risks, including changes in interest rates affecting the return on
 our investments and foreign currency fluctuations. Refer to Note A, Summary of Significant
Accounting Policies, in the Notes to Consolidated Financial Statements in the Annual Report on
Form 10-K for the year ended September 30, 2005 for further discussion regarding marketable securities
 and foreign currency forward exchange contracts. Our marketable securities that expose us to market rate
 risks are comprised of debt securities. A decrease in interest rates would not adversely impact interest
 income or related cash flows pertaining to securities held at April 1, 2006, as all of these securities
 have fixed rates of interest. A 100 basis point increase in interest rates would not adversely impact the
 fair value of these
securities by a material amount due to the size and average duration of the portfolio. Our exposure to
 market risk for fluctuations in foreign currency relate primarily to the amounts due from subsidiaries.
 Exchange gains and losses related to amounts due from subsidiaries have not been material. For foreign
 currency exposures existing at April 1, 2006, a 10% unfavorable movement in the foreign exchange rates
 for each subsidiary location would not expose us to material losses in earnings or cash flows. The
 calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar.



Item 4.  Controls and Procedures.



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



(b)Changes in Internal Controls.No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended April 1, 2006 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.





34





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



Item 1. Legal Proceedings



| | None
| | ----



Item 1A. Risk Factors



Certain Factors That May Affect Future Operating Results



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



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



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



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





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

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

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

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

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

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

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

Litigation by terminated employees or third parties; and

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

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





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

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

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





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



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



Dependence on Alternate Distribution Channels.We market and sell our products
through our direct sales organization, independent resellers and ADP under an original equipment
 manufacturer agreement. In the first six months of fiscal 2006, approximately 7% of our revenue
 was generated through sales to resellers and ADP.  A reduction in the sales efforts of either our
 major resellers or ADP, or termination or changes in their relationships with us, could have a
 material adverse effect on the results of our operations.



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



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



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





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



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



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



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



ISSUER PURCHASES OF EQUITY SECURITIES



|Period              | (a)


Total Number of Shares  Purchased (1) | (b)



Average Price Paid per Share | (c)
Total Number of Shares
  Purchased as Part of Publicly Announced Programs (2) | (d)

Maximum Number  of Shares that May Yet Be Purchased Under the Programs
|------------------- | ------------------------------------------- | ----------------------------------- | --------------------------------------------------------------------------------- | ---------------------------------------------------------------------------
|01/01/06 - 02/01/06 | 72,500                                      | $38.80                              | 72,500                                                                            | 89,226                                                                     
|02/02/06 - 03/02/06 | 58,750                                      | $40.07                              | 58,750                                                                            | 780,476                                                                    
|03/03/06 - 04/01/06 | 66,250                                      | $38.73                              | 66,250                                                                            | 714,226                                                                    
|Total:              | 197,500                                     | $39.16                              | 197,500                                                                           | 714,226                                                                    



(1) We repurchased an aggregate of 197,500 shares of our common stock pursuant to the repurchase programs that we publicly announced on May 13, 2005 and February 16, 2006 (the Programs).



(2) Our board of directors approved the repurchase by us of up to an aggregate of 1,500,000 shares of our common stock pursuant to the Programs.  All shares authorized for repurchase under the Program announced on May 13, 2005 have been repurchased.





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Unless terminated earlier by resolution of our board of directors, the Program announced on February 16, 2006 will expire when we have repurchased all shares authorized for repurchase thereunder.



Item 3. Defaults Upon Senior Securities



| | None
| | ----





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



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



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



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



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



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





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



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





Item 5. Other Information



| | None
| | ----





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|Item 6. | Exhibits |                                                                                                                                                                                  
|------- | -------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |          |                                                                                                                                                                                  
|        | 10.1     | Form of Kronos Incorporated Restricted Stock Unit Agreement Granted under
2002 Stock Incentive Plan.                                                                             
|        |          |                                                                                                                                                                                  
|        | 10.2     | Kronos Incorporated 2002 Stock Incentive Plan, as amended.                                                                                                                       
|        |          |                                                                                                                                                                                  
|        | 31.1     | Certification by Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.                                                      
|        |          |                                                                                                                                                                                  
|        | 31.2     | Certification by Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.                                                          
|        |          |                                                                                                                                                                                  
|        | 32.1     | Certificate by Principal Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.





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SIGNATURES



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





| | KRONOS INCORPORATED
| | -------------------





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





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|KRONOS INCORPORATED
|-------------------
|                   
|EXHIBIT INDEX      
|                   
|                   
|                   
|Exhibit            
|Number             
|                   
|10.1               
|                   
|10.2               
|                   
|31.1               
|                   
|31.2               
|                   
|32.1               





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