##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



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

For the quarterly period ended July 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



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Kronos Incorporated

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Massachusetts                                                  |  | 04-2640942                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|297 Billerica Road, Chelmsford, MA                             |  | 01824                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(978) 250-9800

(Registrants telephone number, including area code)



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



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b - 2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer ̈Non-accelerated
filer ̈

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

As of August 4, 2006, 31,869,620 shares of the registrants
common stock, $.01 par value, were outstanding.



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##### Table of Contents

KRONOS INCORPORATED

INDEX



|           |  |                                                                                                               |  |     
|---------- |  | ------------------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                               |  | Page
|PART I.    |  | FINANCIAL INFORMATION                                                                                         |  |     
|           |  |                                                                                                              
|Item 1.    |  | Condensed Consolidated Financial Statements (Unaudited)                                                       |  |     
|           |  |                                                                                                              
|           |  | Condensed Consolidated Statements of Income for the Three and Nine Months Ended July 1, 2006 and July 2, 2005 |  | 1   
|           |  |                                                                                                              
|           |  | Condensed Consolidated Balance Sheets at July 1, 2006 and September 30, 2005                                  |  | 2   
|           |  |                                                                                                              
|           |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended July 1, 2006 and July 2, 2005       |  | 3   
|           |  |                                                                                                              
|           |  | Notes to Condensed Consolidated Financial Statements                                                          |  | 4   
|           |  |                                                                                                              
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                         |  | 13  
|           |  |                                                                                                              
|Item 3.    |  | Quantitative and Qualitative Disclosure About Market Risk                                                     |  | 34  
|           |  |                                                                                                              
|Item 4.    |  | Controls and Procedures                                                                                       |  | 34  
|           |  |                                                                                                              
|PART II.   |  | OTHER INFORMATION                                                                                             |  |     
|           |  |                                                                                                              
|Item 1.    |  | Legal Proceedings                                                                                             |  | 35  
|           |  |                                                                                                              
|Item 1A.   |  | Risk Factors                                                                                                  |  | 35  
|           |  |                                                                                                              
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                   |  | 39  
|           |  |                                                                                                              
|Item 3.    |  | Defaults Upon Senior Securities                                                                               |  | 39  
|           |  |                                                                                                              
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                           |  | 40  
|           |  |                                                                                                              
|Item 5.    |  | Other Information                                                                                             |  | 40  
|           |  |                                                                                                              
|Item 6.    |  | Exhibits                                                                                                      |  | 41  
|           |  |                                                                                                              
|Signatures |  |                                                                                                               |  |     



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##### Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

KRONOS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share amounts)

UNAUDITED



|                                                                 |  |                    |            |   |                   |   |            |              |  |   |              |   |  |   |            |  
|---------------------------------------------------------------- |  | ------------------ | ---------- | - | ----------------- | - | ---------- | ------------ |  | - | ------------ | - |  | - | ---------- | -
|                                                                 |  | Three Months Ended |            |   | Nine Months Ended |  
|                                                                 |  | July 1, 2006       |            |   | July 2, 2005      |   |            | July 1, 2006 |  |   | July 2, 2005 |  
|Net revenues:                                                    |  |                    |            |   |                   |   |            |              |  |   |              |   |  |   |            |  
|Product                                                          |  | $                  | 53,639     |   |                   | $ | 53,366     |              |  | $ | 160,664      |   |  | $ | 152,949    |  
|Maintenance                                                      |  |                    | 49,103     |   |                   |   | 43,780     |              |  |   | 142,582      |   |  |   | 124,899    |  
|Professional services                                            |  |                    | 38,636     |   |                   |   | 32,845     |              |  |   | 109,598      |   |  |   | 91,040     |  
|                                                                 |  |                    |            |   |                   |   |            |              |  |   |              |   |  |   |            |  
|                                                                 |  |                    | 141,378    |   |                   |   | 129,991    |              |  |   | 412,844      |   |  |   | 368,888    |  
|Cost of sales:                                                   |  |                    |            |   |                   |   |            |              |  |   |              |   |  |   |            |  
|Costs of product                                                 |  |                    | 10,900     |   |                   |   | 11,988     |              |  |   | 36,369       |   |  |   | 35,012     |  
|Costs of maintenance                                             |  |                    | 14,889     |   |                   |   | 11,293     |              |  |   | 43,655       |   |  |   | 33,416     |  
|Costs of professional services                                   |  |                    | 31,024     |   |                   |   | 26,920     |              |  |   | 91,534       |   |  |   | 76,591     |  
|                                                                 |  |                    |            |   |                   |   |            |              |  |   |              |   |  |   |            |  
|                                                                 |  |                    | 56,813     |   |                   |   | 50,201     |              |  |   | 171,558      |   |  |   | 145,019    |  
|                                                                 |  |                    |            |   |                   |   |            |              |  |   |              |   |  |   |            |  
|Gross profit                                                     |  |                    | 84,565     |   |                   |   | 79,790     |              |  |   | 241,286      |   |  |   | 223,869    |  
|Operating expenses and other income:                             |  |                    |            |   |                   |   |            |              |  |   |              |   |  |   |            |  
|Sales and marketing                                              |  |                    | 42,631     |   |                   |   | 36,547     |              |  |   | 123,798      |   |  |   | 107,025    |  
|Engineering, research and development                            |  |                    | 14,841     |   |                   |   | 12,707     |              |  |   | 41,764       |   |  |   | 37,523     |  
|General and administrative                                       |  |                    | 11,571     |   |                   |   | 11,590     |              |  |   | 35,653       |   |  |   | 28,582     |  
|Amortization of intangible assets                                |  |                    | 1,479      |   |                   |   | 1,160      |              |  |   | 4,686        |   |  |   | 3,450      |  
|Other income, net                                                |  |                    | (1,653     | ) |                   |   | (1,119     | )            |  |   | (5,018       | ) |  |   | (4,432     | )
|                                                                 |  |                    |            |   |                   |   |            |              |  |   |              |   |  |   |            |  
|                                                                 |  |                    | 68,869     |   |                   |   | 60,885     |              |  |   | 200,883      |   |  |   | 172,148    |  
|Income before income taxes                                       |  |                    | 15,696     |   |                   |   | 18,905     |              |  |   | 40,403       |   |  |   | 51,721     |  
|Provision for income taxes                                       |  |                    | 5,363      |   |                   |   | 6,276      |              |  |   | 13,992       |   |  |   | 17,211     |  
|                                                                 |  |                    |            |   |                   |   |            |              |  |   |              |   |  |   |            |  
|Net income                                                       |  | $                  | 10,333     |   |                   | $ | 12,629     |              |  | $ | 26,411       |   |  | $ | 34,510     |  
|                                                                 |  |                    |            |   |                   |   |            |              |  |   |              |   |  |   |            |  
|Net income per common share:                                     |  |                    |            |   |                   |   |            |              |  |   |              |   |  |   |            |  
|Basic                                                            |  | $                  | 0.32       |   |                   | $ | 0.39       |              |  | $ | 0.83         |   |  | $ | 1.08       |  
|                                                                 |  |                    |            |   |                   |   |            |              |  |   |              |   |  |   |            |  
|Diluted                                                          |  | $                  | 0.32       |   |                   | $ | 0.39       |              |  | $ | 0.82         |   |  | $ | 1.06       |  
|                                                                 |  |                    |            |   |                   |   |            |              |  |   |              |   |  |   |            |  
|Weighted-average common shares outstanding:                      |  |                    |            |   |                   |   |            |              |  |   |              |   |  |   |            |  
|Basic                                                            |  |                    | 32,030,501 |   |                   |   | 31,985,327 |              |  |   | 31,913,196   |   |  |   | 31,822,612 |  
|                                                                 |  |                    |            |   |                   |   |            |              |  |   |              |   |  |   |            |  
|Diluted                                                          |  |                    | 32,294,587 |   |                   |   | 32,583,532 |              |  |   | 32,272,370   |   |  |   | 32,672,326 |  
|                                                                 |  |                    |            |   |                   |   |            |              |  |   |              |   |  |   |            |  
|Stock-based compensation expense included in the above captions: |  |                    |            |   |                   |   |            |              |  |   |              |   |  |   |            |  
|Costs of product                                                 |  | $                  | 98         |   |                   | $ |           |              |  | $ | 277          |   |  | $ |           |  
|Costs of maintenance                                             |  |                    | 313        |   |                   |   |           |              |  |   | 902          |   |  |   |           |  
|Costs of professional services                                   |  |                    | 651        |   |                   |   |           |              |  |   | 1,847        |   |  |   |           |  
|Sales and marketing                                              |  |                    | 1,393      |   |                   |   |           |              |  |   | 4,049        |   |  |   |           |  
|Engineering, research and development                            |  |                    | 677        |   |                   |   |           |              |  |   | 2,347        |   |  |   |           |  
|General and administrative                                       |  |                    | 1,066      |   |                   |   |           |              |  |   | 3,215        |   |  |   |           |  
|                                                                 |  |                    |            |   |                   |   |            |              |  |   |              |   |  |   |            |  
|                                                                 |  | $                  | 4,198      |   |                   | $ |           |              |  | $ | 12,637       |   |  | $ |           |  
|                                                                 |  |                    |            |   |                   |   |            |              |  |   |              |   |  |   |            |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

KRONOS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

UNAUDITED



|                                                                                                                                                                  |  |             |         |   |                   |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                  |  | July 1,2006 |         |   | September 30,2005 |  
|ASSETS                                                                                                                                                            |  |             |         |   |                   |   |         |  
|Current assets:                                                                                                                                                   |  |             |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                                         |  | $           | 80,965  |   |                   | $ | 43,492  |  
|Marketable securities                                                                                                                                             |  |             | 74,182  |   |                   |   | 37,078  |  
|Accounts receivable, less allowances of $9,734 at July 1, 2006 and $11,156 at September 30, 2005                                                                  |  |             | 107,524 |   |                   |   | 120,746 |  
|Deferred income taxes                                                                                                                                             |  |             | 7,281   |   |                   |   | 10,937  |  
|Other current assets                                                                                                                                              |  |             | 23,168  |   |                   |   | 20,142  |  
|                                                                                                                                                                  |  |             |         |   |                   |   |         |  
|Total current assets                                                                                                                                              |  |             | 293,120 |   |                   |   | 232,395 |  
|                                                                                                                                                                  |  |            
|Marketable securities                                                                                                                                             |  |             | 23,064  |   |                   |   | 59,865  |  
|Property, plant and equipment, net                                                                                                                                |  |             | 59,735  |   |                   |   | 56,158  |  
|Customer related intangible assets                                                                                                                                |  |             | 30,952  |   |                   |   | 31,085  |  
|Other intangible assets                                                                                                                                           |  |             | 15,242  |   |                   |   | 15,818  |  
|Goodwill                                                                                                                                                          |  |             | 157,760 |   |                   |   | 142,665 |  
|Capitalized software, net                                                                                                                                         |  |             | 22,792  |   |                   |   | 23,092  |  
|Other assets                                                                                                                                                      |  |             | 20,927  |   |                   |   | 18,348  |  
|                                                                                                                                                                  |  |             |         |   |                   |   |         |  
|Total assets                                                                                                                                                      |  | $           | 623,592 |   |                   | $ | 579,426 |  
|                                                                                                                                                                  |  |             |         |   |                   |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                              |  |             |         |   |                   |   |         |  
|Current liabilities:                                                                                                                                              |  |             |         |   |                   |   |         |  
|Accounts payable                                                                                                                                                  |  | $           | 10,320  |   |                   | $ | 9,013   |  
|Accrued compensation                                                                                                                                              |  |             | 45,764  |   |                   |   | 43,379  |  
|Accrued expenses and other current liabilities                                                                                                                    |  |             | 24,316  |   |                   |   | 27,877  |  
|Deferred product revenues                                                                                                                                         |  |             | 2,739   |   |                   |   | 3,938   |  
|Deferred professional service revenues                                                                                                                            |  |             | 21,506  |   |                   |   | 36,530  |  
|Deferred maintenance revenues                                                                                                                                     |  |             | 120,712 |   |                   |   | 102,038 |  
|                                                                                                                                                                  |  |             |         |   |                   |   |         |  
|Total current liabilities                                                                                                                                         |  |             | 225,357 |   |                   |   | 222,775 |  
|                                                                                                                                                                  |  |            
|Deferred maintenance revenues                                                                                                                                     |  |             | 7,215   |   |                   |   | 4,921   |  
|Deferred income taxes                                                                                                                                             |  |             | 13,036  |   |                   |   | 15,261  |  
|Other liabilities                                                                                                                                                 |  |             | 5,052   |   |                   |   | 4,435   |  
|                                                                                                                                                                  |  |            
|Shareholders equity:                                                                                                                                             |  |             |         |   |                   |   |         |  
|Preferred Stock, par value $1.00 per share: authorized 1,000,000 shares, no shares issued and outstanding                                                         |  |             |        |   |                   |   |        |  
|Common Stock, par value $.01 per share: authorized 50,000,000 shares, 31,970,308 and 31,724,460 shares issued at July 1, 2006 and
September 30, 2005 respectively |  |             | 320     |   |                   |   | 317     |  
|Additional paid-in capital                                                                                                                                        |  |             | 65,848  |   |                   |   | 52,802  |  
|Retained earnings                                                                                                                                                 |  |             | 304,406 |   |                   |   | 277,995 |  
|Accumulated other comprehensive income:                                                                                                                           |  |             |         |   |                   |   |         |  
|Foreign currency translation                                                                                                                                      |  |             | 2,771   |   |                   |   | 1,307   |  
|Net unrealized (loss) on available-for-sale investments                                                                                                           |  |             | (413    | ) |                   |   | (387    | )
|                                                                                                                                                                  |  |             |         |   |                   |   |         |  
|                                                                                                                                                                  |  |             | 2,358   |   |                   |   | 920     |  
|Total shareholders equity                                                                                                                                        |  |             | 372,932 |   |                   |   | 332,034 |  
|                                                                                                                                                                  |  |             |         |   |                   |   |         |  
|Total liabilities and shareholders equity                                                                                                                        |  | $           | 623,592 |   |                   | $ | 579,426 |  
|                                                                                                                                                                  |  |             |         |   |                   |   |         |  

See accompanying notes to condensed consolidated financial statements.



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KRONOS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

UNAUDITED



|                                                                                                  |  |                   |         |   |             |   |         |  
|------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ----------- | - | ------- | -
|                                                                                                  |  | Nine Months Ended |        
|                                                                                                  |  | July 1,2006       |         |   | July 2,2005 |  
|Operating activities:                                                                             |  |                   |         |   |             |   |         |  
|Net income                                                                                        |  | $                 | 26,411  |   |             | $ | 34,510  |  
|Adjustments to reconcile net income to net cash and equivalents provided by operating activities: |  |                   |         |   |             |   |         |  
|Depreciation                                                                                      |  |                   | 12,102  |   |             |   | 10,287  |  
|Amortization of intangible assets                                                                 |  |                   | 5,350   |   |             |   | 3,634   |  
|Amortization of capitalized software                                                              |  |                   | 10,638  |   |             |   | 10,431  |  
|Provision for deferred income taxes                                                               |  |                   | 606     |   |             |   | 220     |  
|Stock-based compensation                                                                          |  |                   | 12,933  |   |             |   |        |  
|Changes in certain operating assets and liabilities:                                              |  |                   |         |   |             |   |         |  
|Accounts receivable, net                                                                          |  |                   | 15,854  |   |             |   | (4,943  | )
|Deferred product revenues                                                                         |  |                   | (1,485  | ) |             |   | (6,340  | )
|Deferred professional service revenues                                                            |  |                   | (16,860 | ) |             |   | (10,093 | )
|Deferred maintenance revenues                                                                     |  |                   | 19,213  |   |             |   | 8,379   |  
|Accounts payable, accrued compensation and other liabilities                                      |  |                   | 67      |   |             |   | (770    | )
|Taxes payable                                                                                     |  |                   | 3,782   |   |             |   | 2,598   |  
|Tax benefit from exercise of stock options                                                        |  |                   | (5,808  | ) |             |   | 11,235  |  
|Other                                                                                             |  |                   | (6,671  | ) |             |   | (1,323  | )
|                                                                                                  |  |                   |         |   |             |   |         |  
|Net cash and equivalents provided by operating activities                                         |  |                   | 76,132  |   |             |   | 57,825  |  
|Investing activities:                                                                             |  |                   |         |   |             |   |         |  
|Purchase of property, plant and equipment                                                         |  |                   | (15,473 | ) |             |   | (20,325 | )
|Capitalized internal software development costs                                                   |  |                   | (10,337 | ) |             |   | (10,966 | )
|(Increase) decrease in marketable securities                                                      |  |                   | (303    | ) |             |   | 29,342  |  
|Acquisitions of businesses and software, net of cash acquired                                     |  |                   | (13,136 | ) |             |   | (52,433 | )
|                                                                                                  |  |                   |         |   |             |   |         |  
|Net cash and equivalents used in investing activities                                             |  |                   | (39,249 | ) |             |   | (54,382 | )
|Financing activities:                                                                             |  |                   |         |   |             |   |         |  
|Net proceeds from exercise of stock options and employee purchase plans                           |  |                   | 14,946  |   |             |   | 19,298  |  
|Tax benefit from exercise of stock options                                                        |  |                   | 5,808   |   |             |   |        |  
|Repurchase of common stock                                                                        |  |                   | (20,633 | ) |             |   | (27,392 | )
|                                                                                                  |  |                   |         |   |             |   |         |  
|Net cash and equivalents provided by financing activities                                         |  |                   | 121     |   |             |   | (8,094  | )
|Effect of exchange rate changes on cash and equivalents                                           |  |                   | 469     |   |             |   | 344     |  
|                                                                                                  |  |                   |         |   |             |   |         |  
|Increase (decrease) in cash and equivalents                                                       |  |                   | 37,473  |   |             |   | (4,307  | )
|Cash and equivalents at the beginning of the period                                               |  |                   | 43,492  |   |             |   | 45,877  |  
|                                                                                                  |  |                   |         |   |             |   |         |  
|Cash and equivalents at the end of the period                                                     |  | $                 | 80,965  |   |             | $ | 41,570  |  
|                                                                                                  |  |                   |         |   |             |   |         |  

See accompanying notes to condensed consolidated financial statements.



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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 nine months ended July 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 was required to adopt 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 nine-month periods ended July 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 nine-month periods ended July 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 July 1, 2006, are $4.2 million and $2.9 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 nine-month period ended July 1, 2006, are $12.6 million and $8.7 million lower, respectively,
than if the Company had continued to account for share-based compensation under Opinion 25. Basic and diluted earnings per share are each $0.09 lower for the three-month period ended July 1, 2006 and $0.27 lower for the nine-month period ended
July 1, 2006, than if the Company had not adopted FAS 123R.

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



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##### Table of Contents

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 $5.8 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 EndedJuly 2, 2005 |        |   | Nine Months EndedJuly 2, 2005 |  
|Net income, as reported                                                                                                                     |  | $                              | 12,629 |   |                               | $ | 34,510 |  
|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 |  |                                | (3,094 | ) |                               |   | (8,692 | )
|                                                                                                                                            |  |                                |        |   |                               |   |        |  
|Pro forma net income                                                                                                                        |  | $                              | 9,535  |   |                               | $ | 25,818 |  
|                                                                                                                                            |  |                                |        |   |                               |   |        |  
|Earnings per share:                                                                                                                         |  |                                |        |   |                               |   |        |  
|Basicas reported                                                                                                                           |  | $                              | 0.39   |   |                               | $ | 1.08   |  
|                                                                                                                                            |  |                                |        |   |                               |   |        |  
|Basicpro forma                                                                                                                             |  | $                              | 0.30   |   |                               | $ | 0.81   |  
|                                                                                                                                            |  |                                |        |   |                               |   |        |  
|Dilutedas reported                                                                                                                         |  | $                              | 0.39   |   |                               | $ | 1.06   |  
|                                                                                                                                            |  |                                |        |   |                               |   |        |  
|Dilutedpro forma                                                                                                                           |  | $                              | 0.29   |   |                               | $ | 0.79   |  
|                                                                                                                                            |  |                                |        |   |                               |   |        |  

On July 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 nine month periods ended July 1, 2006 was approximately $4.2 million and $12.6 million, respectively. As required by FAS 123R, the
Company has made an estimate of expected forfeitures and is recognizing compensation cost only for those stock-based compensation awards expected to vest. The total income tax benefit recognized in the income statement for the three and nine month
periods ended July 1, 2006 for share-based payments was approximately $1.3 million and $3.9 million, respectively.

Stock Award Plan: In
February 2006, the stockholders approved an amended and restated 2002 Stock Incentive Plan (Award Plan), which was previously adopted in February 2002 and amended in February 2004 and February 2005. The amended and restated award plan
increased the number of shares available for issuance under the 2002 plan from 5,000,000 to 9,000,000, clarified the right of the board to issue restricted stock units, replaced the limit on the number of shares which may be granted with respect to
awards other than options and stock appreciation rights with a share counting formula, and eliminated the ability to add to the number of shares available for grant any shares of common stock tendered to us to exercise an award or any shares
withheld from the exercise of an award to cover the resulting tax liability. The Award Plan enables 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. 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 nine month periods ended July 1, 2006 and during the fiscal years of 2005, 2004, 2003 and 2002 are exercisable in equal annual 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 nine month periods ended July 1, 2006 vest in equal annual installments over a four-year period beginning one year from the
date of grant.



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##### Table of Contents

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. As required by FAS 123R, the 15% discount is charged to income as stock-based employee compensation expense.

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.



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

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

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

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

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



|                                  |  |               |   |  |                                |       |                                           |           |                                  |   |       
|--------------------------------- |  | ------------- | - |  | ------------------------------ | ----- | ----------------------------------------- | --------- | -------------------------------- | - | ------
|Options                           |  | Shares (000s) |   |  | Weighted-AverageExercise Price |       | Weighted-AverageRemainingContractual Term |           | Aggregate IntrinsicValue ($000s)
|Outstanding at September 30, 2005 |  | 3,362         |   |  | $                              | 33.80 |                                           |           |                                  |   |       
|Granted*                          |  | 861           |   |  |                                | 47.69 |                                           |           |                                  |   |       
|Exercised                         |  | (684          | ) |  |                                | 19.51 |                                           |           |                                  |   |       
|Canceled*                         |  | (87           | ) |  |                                | 41.99 |                                           |           |                                  |   |       
|                                  |  |               |   |  |                                |       |                                           |           |                                  |   |       
|Outstanding at July 1, 2006       |  | 3,452         |   |  | $                              | 39.90 |                                           | 2.6 years |                                  | $ | 11,559
|                                  |  |               |   |  |                                |       |                                           |           |                                  |   |       
|Exercisable at July 1, 2006       |  | 1,041         |   |  | $                              | 34.26 |                                           | 1.8 years |                                  | $ | 6,188 
|                                  |  |               |   |  |                                |       |                                           |           |                                  |   |       

---

|* | Does not include restricted stock units.
|- | ----------------------------------------

A summary of restricted stock
unit activity under the Award Plan as of July 1, 2006, and the changes during the nine month period then ended is presented below:



|                                  |  |              |  
|--------------------------------- |  | ------------ | -
|Restricted Stock Units            |  | Shares(000s) |  
|Outstanding at September 30, 2005 |  |             |  
|Granted                           |  | 70           |  
|Exercised                         |  |             |  
|Canceled                          |  | (2           | )
|                                  |  |              |  
|Outstanding at July 1, 2006       |  | 68           |  
|                                  |  |              |  
|Exercisable at July 1, 2006       |  |             |  
|                                  |  |              |  



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##### Table of Contents

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.

The weighted-average grant-date fair value of the
options granted during the three and nine month periods ended July 1, 2006, estimated using a Black-Scholes based option pricing model, was $17.10 for both periods. For the three and nine month periods ended July 2, 2005, the
weighted-average grant-date fair value was $21.81 and $20.72, respectively, using a Black-Scholes based option pricing model. The total intrinsic value of options exercised was approximately $1.5 million and $16.0 million for the three and nine
month periods ended July 1, 2006 and $1.1 million and $32.7 million for the three and nine month periods ended July 2, 2005.

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



|                             |  |               |   |  |                                        |      
|---------------------------- |  | ------------- | - |  | -------------------------------------- | -----
|Nonvested Shares             |  | Shares (000s) |   |  | Weighted-AverageGrant-Date Fair Value*
|Nonvested at October 1, 2005 |  | 2,718         |   |  | $                                      | 16.07
|Granted                      |  | 861           |   |  |                                        | 17.10
|Vested                       |  | (1,079        | ) |  |                                        | 13.68
|Forfeited                    |  | (87           | ) |  |                                        | 17.70
|                             |  |               |   |  |                                        |      
|Nonvested at July 1, 2006    |  | 2,413         |   |  | $                                      | 17.05
|                             |  |               |   |  |                                        |      

---

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

As of
July 1, 2006, there was approximately $34.6 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 2.7 years. The total fair value of shares vested during the three and nine month periods ended July 1, 2006 was $0.2 million
and $14.9 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 nine month periods ended July 1, 2006 was $1.8 million and $14.9 million, respectively. For the three and nine month periods ended July 2,
2005 the total cash received from option exercises was $0.7 million and $19.3 million, respectively. The tax benefit realized for the tax deductions from option exercises totaled $0.5 million and $5.8 million for the three and nine month periods
ended July 1, 2006, respectively. For the three and nine month periods ended July 2, 2005, the tax benefit realized for the tax deductions from option exercises was $0.1 million and $11.2 million, respectively.

The Company has a policy of repurchasing shares on the open market to satisfy share option exercises. The Company repurchased 164,607 shares of its common stock during
the three month period ended July 1, 2006 and 503,857 shares of its common stock during the nine month period ended July 1, 2006. Under the Companys current repurchase program up to an additional 549,619 shares may be repurchased.



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##### Table of Contents

NOTE D - Other Current Assets

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



|                 |  |             |        |                    |   |       
|---------------- |  | ----------- | ------ | ------------------ | - | ------
|                 |  | July 1,2006 |        | September 30, 2005
|Inventory        |  | $           | 5,972  |                    | $ | 4,995 
|Prepaid expenses |  |             | 17,196 |                    |   | 15,147
|                 |  |             |        |                    |   |       
|Total            |  | $           | 23,168 |                    | $ | 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.



|                          |  |                             |  |                     |        |                         |   |               |  |   |       
|------------------------- |  | --------------------------- |  | ------------------- | ------ | ----------------------- | - | ------------- |  | - | ------
|                          |  | WeightedAverageLife inYears |  | Gross CarryingValue |        | AccumulatedAmortization |   | Net BookValue
|As of July 1, 2006:       |  |                             |  |                     |        |                         |   |               |  |   |       
|Intangible assets:        |  |                             |  |                     |        |                         |   |               |  |   |       
|Customer related          |  | 9.8                         |  | $                   | 48,465 |                         | $ | 17,513        |  | $ | 30,952
|Maintenance relationships |  | 11.8                        |  |                     | 10,738 |                         |   | 3,354         |  |   | 7,384 
|Non-compete agreements    |  | 3.7                         |  |                     | 6,219  |                         |   | 4,959         |  |   | 1,260 
|Technology                |  | 9.6                         |  |                     | 7,993  |                         |   | 1,395         |  |   | 6,598 
|                          |  |                             |  |                     |        |                         |   |               |  |   |       
|Total intangible assets   |  |                             |  | $                   | 73,415 |                         | $ | 27,221        |  | $ | 46,194
|                          |  |                             |  |                     |        |                         |   |               |  |   |       
|As of September 30, 2005: |  |                             |  |                     |        |                         |   |               |  |   |       
|Intangible assets:        |  |                             |  |                     |        |                         |   |               |  |   |       
|Customer related          |  | 9.8                         |  | $                   | 45,452 |                         | $ | 14,367        |  | $ | 31,085
|Maintenance relationships |  | 12.0                        |  |                     | 9,492  |                         |   | 2,739         |  |   | 6,753 
|Non-compete agreements    |  | 3.7                         |  |                     | 5,860  |                         |   | 4,055         |  |   | 1,805 
|Technology                |  | 10.0                        |  |                     | 7,956  |                         |   | 696           |  |   | 7,260 
|                          |  |                             |  |                     |        |                         |   |               |  |   |       
|Total intangible assets   |  |                             |  | $                   | 68,760 |                         | $ | 21,857        |  | $ | 46,903
|                          |  |                             |  |                     |        |                         |   |               |  |   |       

For the three months ended July 1, 2006 and July 2, 2005, the amount of goodwill acquired is $7.3
million and $0.3 million, respectively. The amount of goodwill acquired during the nine months ended July 1, 2006 and July 2, 2005 is $15.1 million and $41.0 million, respectively. The Company has approximately $157.8 million and $142.7
million of goodwill recorded on its balance sheet as of July 1, 2006 and September 30, 2005, respectively.



8



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##### Table of Contents

For the three months ended July 1, 2006 and July 2, 2005, the Company recorded amortization expense for
intangible assets of $1.7 million and $1.3 million, respectively. The Company recorded $5.3 million and $3.6 million of amortization expense for intangible assets for the nine months ended July 1, 2006 and July 2, 2005, respectively. The
estimated annual amortization expense for intangible assets for the current and next five fiscal years is as follows (in thousands):



|                                 |  |                                       |      
|-------------------------------- |  | ------------------------------------- | -----
|Fiscal Year Ending September 30, |  | Estimated Annual Amortization Expense
|2006                             |  | $                                     | 7,083
|2007                             |  |                                       | 6,666
|2008                             |  |                                       | 6,492
|2009                             |  |                                       | 5,813
|2010                             |  |                                       | 5,123
|2011                             |  |                                       | 4,723

NOTE F  Acquisitions

On April 25, 2006, the Company purchased the outstanding shares of common stock of ClarityMatters Inc. (ClarityMatters). ClarityMatters was a workforce analytics solution provider and business
analytics consulting firm. The aggregate consideration paid, which includes actual cash paid (approximately $5.3 million, including a $0.8 million holdback) and the liabilities assumed (approximately $2.5 million) was approximately $7.8 million. The
amounts allocated to identifiable intangible assets and goodwill were approximately $1.6 million and $4.9 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 ClarityMatters 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 ClarityMatters,
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 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 were approximately $1.8 million and $3.9 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 was recorded at fair value of the Companys remaining performance obligation.

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.



9



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##### Table of Contents

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 was recorded at fair value of the Companys remaining legal performance obligation.

The acquisitions described above were not material to the Companys results of operations.

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 was recorded at estimated fair value of the Companys remaining performance obligation.

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).



10



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##### Table of Contents

|                             |  |                                |         |                               |   |        
|---------------------------- |  | ------------------------------ | ------- | ----------------------------- | - | -------
|Unaudited                    |  | Three Months EndedJuly 2, 2005 |         | Nine Months EndedJuly 2, 2005
|Total revenues               |  | $                              | 129,991 |                               | $ | 372,742
|Net income                   |  |                                | 12,629  |                               |   | 35,321 
|Earnings per share  basic   |  | $                              | 0.39    |                               | $ | 1.11   
|Earnings per share  diluted |  | $                              | 0.39    |                               | $ | 1.08   

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 began 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 July 1, 2006, the
Company was obligated to pay $3.0 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 nine months ended July 1, 2006, there were no
contingent payments earned. During the three months ended July 2, 2005, there were no contingent payments earned; during the nine months ended July 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.

NOTE G  Comprehensive Income

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



|                                                 |  |                    |        |             |                   |        |             |  |   |              |   |  |   |        |  
|------------------------------------------------ |  | ------------------ | ------ | ----------- | ----------------- | ------ | ----------- |  | - | ------------ | - |  | - | ------ | -
|                                                 |  | Three Months Ended |        |             | Nine Months Ended |       
|                                                 |  | July 1,2006        |        | July 2,2005 |                   |        | July 1,2006 |  |   | July 2, 2005 |  
|Comprehensive income:                            |  |                    |        |             |                   |        |             |  |   |              |   |  |   |        |  
|Net income                                       |  | $                  | 10,333 |             | $                 | 12,629 |             |  | $ | 26,411       |   |  | $ | 34,510 |  
|Cumulative translation adjustment                |  |                    | 1,567  |             |                   | (924   | )           |  |   | 1,464        |   |  |   | (724   | )
|Unrealized loss on available-for-sale securities |  |                    | 11     |             |                   | 394    |             |  |   | (26          | ) |  |   | (414   | )
|                                                 |  |                    |        |             |                   |        |             |  |   |              |   |  |   |        |  
|Total comprehensive income                       |  | $                  | 11,911 |             | $                 | 12,099 |             |  | $ | 27,849       |   |  | $ | 33,372 |  
|                                                 |  |                    |        |             |                   |        |             |  |   |              |   |  |   |        |  



11



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##### Table of Contents

NOTE H - Earnings Per Share

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



|                                                         |  |                    |            |                   |   |              |  |              |            |  |   |           
|-------------------------------------------------------- |  | ------------------ | ---------- | ----------------- | - | ------------ |  | ------------ | ---------- |  | - | ----------
|                                                         |  | Three Months Ended |            | Nine Months Ended
|                                                         |  | July 1, 2006       |            | July 2, 2005      |   | July 1, 2006 |  | July 2, 2005
|Net income                                               |  | $                  | 10,333     |                   | $ | 12,629       |  | $            | 26,411     |  | $ | 34,510    
|                                                         |  |                    |            |                   |   |              |  |              |            |  |   |           
|Weighted-average shares                                  |  |                    | 32,030,501 |                   |   | 31,985,327   |  |              | 31,913,196 |  |   | 31,822,612
|Effect of dilutive securities:                           |  |                    |            |                   |   |              |  |              |            |  |   |           
|Employee stock options and awards                        |  |                    | 264,086    |                   |   | 598,205      |  |              | 359,174    |  |   | 849,714   
|                                                         |  |                    |            |                   |   |              |  |              |            |  |   |           
|Adjusted weighted-average shares and assumed conversions |  |                    | 32,294,587 |                   |   | 32,583,532   |  |              | 32,272,370 |  |   | 32,672,326
|                                                         |  |                    |            |                   |   |              |  |              |            |  |   |           
|Basic earnings per share                                 |  | $                  | 0.32       |                   | $ | 0.39         |  | $            | 0.83       |  | $ | 1.08      
|                                                         |  |                    |            |                   |   |              |  |              |            |  |   |           
|Diluted earnings per share                               |  | $                  | 0.32       |                   | $ | 0.39         |  | $            | 0.82       |  | $ | 1.06      
|                                                         |  |                    |            |                   |   |              |  |              |            |  |   |           

NOTE I  Recently Issued Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income TaxesAn
Interpretation of FASB Statement No. 109,which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
The Company is in the process of evaluating the impact of implementation on its consolidated financial statements and will incorporate the results in the first quarter of fiscal year 2008.

NOTE J  Subsequent Events

On August 1, 2006, we acquired
all of the outstanding capital stock of Unicru, Inc. (Unicru), a leading provider of talent management solutions. In accordance with the Agreement and Plan of Merger (the Merger Agreement), all shares of Unicrus
preferred stock were converted into shares of common stock immediately prior to the merger taking place. Thereafter, each share of Unicrus common stock outstanding immediately prior to the merger was converted into the right to receive $4.15
in cash. In addition, at the effective time of the merger, all outstanding options and warrants were converted into the right to receive a cash payment except for one outstanding Unicru warrant, which we assumed. We paid $150 million in cash in
the aggregate for all of the outstanding capital stock of Unicru, less certain expenses and other deductions set forth in the Merger Agreement.

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

The results of Unicrus operations will be included in our consolidated financial statements beginning on the acquisition date, August 1, 2006. The acquisition was funded in part by a three-year revolving
credit facility with Citizens Bank of Massachusetts under which we delivered a promissory note dated July 11, 2006 in the principal amount of up to $100 million. The entire amount was drawn down on August 1, 2006, in connection with the
acquisition.



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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, stock-based 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. 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 |         |              | Nine Months Ended |               
|                               |  | July 1, 2006       |         | July 2, 2005 |                   | Percent Change |  |     | July 1, 2006 |  | July 2, 2005 |         | Percent Change |  
|Product revenues               |  | $                  | 53,639  |              | $                 | 53,366         |  | 1   | %            |  | $            | 160,664 |                | $ | 152,949 |  | 5   | % 
|Maintenance revenues           |  |                    | 49,103  |              |                   | 43,780         |  | 12  | %            |  |              | 142,582 |                |   | 124,899 |  | 14  | % 
|Professional services revenues |  |                    | 38,636  |              |                   | 32,845         |  | 18  | %            |  |              | 109,598 |                |   | 91,040  |  | 20  | % 
|                               |  |                    |         |              |                   |                |  |     |              |  |              |         |                |   |         |  |     |   
|Total revenues                 |  | $                  | 141,378 |              | $                 | 129,991        |  | 9   | %            |  | $            | 412,844 |                | $ | 368,888 |  | 12  | % 
|                               |  |                    |         |              |                   |                |  |     |              |  |              |         |                |   |         |  |     |   
|Net income                     |  | $                  | 10,333  |              | $                 | 12,629         |  | (18 | )%           |  | $            | 26,411  |                | $ | 34,510  |  | (23 | )%
|                               |  |                    |         |              |                   |                |  |     |              |  |              |         |                |   |         |  |     |   
|Earnings per share - basic     |  | $                  | 0.32    |              | $                 | 0.39           |  | (18 | )%           |  | $            | 0.83    |                | $ | 1.08    |  | (23 | )%
|Earnings per share - diluted   |  | $                  | 0.32    |              | $                 | 0.39           |  | (18 | )%           |  | $            | 0.82    |                | $ | 1.06    |  | (23 | )%

Subsequent Events

On August 1, 2006, we acquired all of the outstanding capital stock of Unicru, Inc. (Unicru), a leading provider of talent management solutions. In accordance with the Agreement and Plan of Merger
(the Merger Agreement), all shares of Unicrus preferred stock were converted into shares of common stock immediately prior to the merger taking place.



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Thereafter, each share of Unicrus common stock outstanding immediately prior to the merger was converted into the
right to receive $4.15 in cash. In addition, at the effective time of the merger, all outstanding options and warrants were converted into the right to receive a cash payment except for one outstanding Unicru warrant, which we assumed. We paid
$150 million in cash in the aggregate for all of the outstanding capital stock of Unicru, less certain expenses and other deductions set forth in the Merger Agreement.

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

The results of Unicrus operations will be included in our consolidated financial statements beginning
on the acquisition date. The acquisition was funded in part by a three-year revolving credit facility with Citizens Bank of Massachusetts under which we delivered a promissory note dated July 11, 2006 in the principal amount of up to $100
million. The entire amount was drawn down on August 1, 2006, in connection with the acquisition.

Operations Overview

Total revenues in the three and nine month periods ended July 1, 2006 increased 9% and 12%, 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 increases of 12% and 18%, respectively, in maintenance and professional services revenues as well as a slight increase in product revenues. Product revenues increased 5% in the nine month period ended July 1, 2006 as compared
to the same period in 2005, and maintenance and professional service revenues increased 14% and 20%, respectively, during that same period.

Net income in the third quarter of fiscal 2006 decreased 18% to $10.3 million from $12.6 million in the prior year third quarter, with earnings per share decreasing to $0.32 from $0.39 per diluted share. Net income in the first nine months
of fiscal 2006 decreased 23% to $26.4 million from $34.5 million in the prior year, with earnings per share decreasing to $0.82 from $1.06 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 nine month periods ended July 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 $2.9 million and $8.7 million, respectively, net of tax benefits.

Regarding
expectations for the fourth quarter, we presently anticipate revenue in the range of $157  $165 million for the fourth quarter and $570  $578 million for fiscal 2006, with diluted earnings per share in the range of $0.41  $0.47 for
the fourth quarter of fiscal 2006 and $1.23  $1.29 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 $0.09 per diluted share
for the fourth quarter and $0.36 for the entire fiscal 2006. We expect amortization of intangible assets to be approximately $0.07 per diluted share for the fourth quarter of fiscal 2006 and $0.18 per diluted share for the entire fiscal 2006.



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



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



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



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



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



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

In many cases, the accounting
treatment of a particular transaction is specifically dictated by GAAP and does not require managements judgment in its application. There are also areas in which managements judgment in selecting among available alternatives would not
produce a materially different result. Our senior management has reviewed these critical accounting policies and related disclosures with our Audit Committee. We have not made any material changes in the risk factors previously disclosed in our
annual report on Form 10-K for the year ended September 30, 2005.

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;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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
| | - |  | ----------------------------------------------



| |  |  | 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.



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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.
| | - |  | ---------------------------

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.



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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.

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 began 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



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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.

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



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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.

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 nine months ended July 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.



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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
that, due to the scope of the project and based on the expected estimated economic life of the software, the capitalized costs related to the 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 $21.0
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 $2.0 million in additional
costs for the balance of fiscal 2006.

Income Taxes We account for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences between financial reporting and the tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. When necessary, we record a valuation allowance in accordance with generally accepted accounting principles to reduce our deferred tax assets to the amount of future tax benefit that is more likely than not to be
realized. Significant judgment and estimates are used in determining our income tax assets and liabilities as well as our income tax provision. The interim tax provision is dependent on the forecast of consolidated current year earnings, tax credits
and other permanent items, the most significant of which are meals and entertainment, the deduction for qualified production activities, permanent effects of FAS 123R and tax free interest income. While we have considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, there is no assurance that the valuation allowance will 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



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management of the acquired companies, and we believe them to be reasonable at the time they are made. However, these
estimates are inherently uncertain, and if unanticipated events and/or circumstances should occur they may affect the accuracy or validity of these assumptions and estimates. We also make significant estimates when determining the useful lives of
our intangible assets, based on the expected period over which we anticipate generating economic benefits from these assets. Changes to any of these judgments, estimates and assumptions could materially affect the fair values of these assets and
require us to record an impairment loss, which could have a material affect on our future results. Historically, we have not seen a significant amount of deviation between our estimates and actual results and we do not anticipate that this will
change in the future.

Stock-Based Compensation - On October 1, 2005, we were required to adopt SFAS 123R, which requires all
share-based payments, including grants of stock options, to be recognized in the income statement as an operating expense, based on their fair values.

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



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



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



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



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



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Results of Operations

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

Total Revenues (dollars in thousands):



|               |  |                    |         |              |                   |                |  |   |              |  |              |         |                |   |         |  |    |  
|-------------- |  | ------------------ | ------- | ------------ | ----------------- | -------------- |  | - | ------------ |  | ------------ | ------- | -------------- | - | ------- |  | -- | -
|               |  | Three Months Ended |         |              | Nine Months Ended |               
|               |  | July 1, 2006       |         | July 2, 2005 |                   | Percent Change |  |   | July 1, 2006 |  | July 2, 2005 |         | Percent Change |  
|Total revenues |  | $                  | 141,378 |              | $                 | 129,991        |  | 9 | %            |  | $            | 412,844 |                | $ | 368,888 |  | 12 | %

Revenue growth in the three month period ended July 1, 2006 was primarily related to service
revenue growth (12% in maintenance and 18% in professional services), with a slight increase in product revenue. 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 6% during this three month period. The increase in demand for our maintenance and professional services solutions was principally related to the continued expansion of our installed customer base, the
success of our implementation methodology, continued innovation of our existing products and, to a lesser extent, introduction of new products. Revenue growth in the nine month period ended July 1, 2006 was also principally driven by
maintenance and professional services (increases of 14% and 20%, respectively), due to those factors described above. Product revenues also contributed to the increase, growing 5% over the same period in the prior year. Overall, revenues from our
core business grew during the nine month period while revenues from acquired businesses decreased, principally due to the timing of when those acquisitions were completed.

During the third quarter we experienced extended sales cycles for larger, more significant customer deals due to our products competing with a number of other high priority IT projects for customer investment and
resource allocation. Additionally, many of our customers are choosing to purchase licenses in smaller increments, rather than doing a bulk software purchase as they have done in the past. We expect these conditions to continue for the foreseeable
future.



|                                   |  |                    |       |   |                   |   |       |              |  |   |              |   |  |   |        |  
|---------------------------------- |  | ------------------ | ----- | - | ----------------- | - | ----- | ------------ |  | - | ------------ | - |  | - | ------ | -
|                                   |  | Three Months Ended |       |   | Nine Months Ended |  
|                                   |  | July 1, 2006       |       |   | July 2, 2005      |   |       | July 1, 2006 |  |   | July 2, 2005 |  
|Revenues from acquired businesses* |  | $                  | 3,493 |   |                   | $ | 7,879 |              |  | $ | 14,112       |   |  | $ | 17,254 |  
|Percentage of total revenues       |  |                    | 2.5   | % |                   |   | 6.1   | %            |  |   | 3.4          | % |  |   | 4.7    | %

---

|* | 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.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Product Revenues (dollars in thousands):



|                                                |  |                    |        |   |                   |   |        |                |  |   |              |  |   |              |   |  |                |         |   |  |   |  
|----------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | -------------- |  | - | ------------ |  | - | ------------ | - |  | -------------- | ------- | - |  | - | -
|                                                |  | Three Months Ended |        |   | Nine Months Ended |  
|                                                |  | July 1, 2006       |        |   | July 2, 2005      |   |        | Percent Change |  |   | July 1, 2006 |  |   | July 2, 2005 |   |  | Percent Change |        
|Product revenues                                |  | $                  | 53,639 |   |                   | $ | 53,366 |                |  | 1 | %            |  | $ | 160,664      |   |  | $              | 152,949 |   |  | 5 | %
|Product revenues as a percent of total revenues |  |                    | 38     | % |                   |   | 41     | %              |  |  |              |  |   | 39           | % |  |                | 41      | % |  |  |  

Product revenues for the three month period ended July 1, 2006 were comparable to the same
period for the prior year. During the three months ended July 1, 2006 we experienced a shift in product mix from hardware (which decreased $1.4 million or 6%) to software (which increased $1.7 million or 5%). During the second quarter of 2006
we implemented a promotional terminal upgrade program that accelerated the sales cycle and close rate of a significant volume of hardware transactions into that quarter. This acceleration had more of an adverse impact on the third quarters
hardware revenue volume than we had previously anticipated. The increase in product revenues for the nine month period ended July 1, 2006 over the prior year was primarily related to an increase in hardware sales of $7.3 million or 12%,
primarily driven by the one-time, sales incentive-related, promotional terminal upgrade program in the second quarter which resulted in approximately $6.0 million in sales of our Kronos 4500 terminals to customers who were using our legacy products.
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.



|                                          |  |                    |     |   |                   |   |       |              |  |   |              |   |  |   |       |  
|----------------------------------------- |  | ------------------ | --- | - | ----------------- | - | ----- | ------------ |  | - | ------------ | - |  | - | ----- | -
|                                          |  | Three Months Ended |     |   | Nine Months Ended |  
|                                          |  | July 1, 2006       |     |   | July 2, 2005      |   |       | July 1, 2006 |  |   | July 2, 2005 |  
|Product revenues from acquired businesses |  | $                  | 50  |   |                   | $ | 3,176 |              |  | $ | 697          |   |  | $ | 7,970 |  
|Percentage of product revenues            |  |                    | 0.1 | % |                   |   | 6.0   | %            |  |   | 0.4          | % |  |   | 5.2   | %

Maintenance Revenues (dollars in thousands):



|                                                    |  |                    |        |   |                   |   |        |                |  |    |              |  |   |              |   |  |                |         |   |  |    |  
|--------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | -------------- |  | -- | ------------ |  | - | ------------ | - |  | -------------- | ------- | - |  | -- | -
|                                                    |  | Three Months Ended |        |   | Nine Months Ended |  
|                                                    |  | July 1, 2006       |        |   | July 2, 2005      |   |        | Percent Change |  |    | July 1, 2006 |  |   | July 2, 2005 |   |  | Percent Change |        
|Maintenance revenues                                |  | $                  | 49,103 |   |                   | $ | 43,780 |                |  | 12 | %            |  | $ | 142,582      |   |  | $              | 124,899 |   |  | 14 | %
|Maintenance revenues as a percent of total revenues |  |                    | 35     | % |                   |   | 34     | %              |  |   |              |  |   | 35           | % |  |                | 34      | % |  |   |  

The increase in maintenance revenues in the three and nine month periods ended July 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



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products selling price. Maintenance revenues in the nine month period ended July 1, 2006 were also positively
impacted by an increase in revenues associated with acquired businesses. Maintenance revenues were slightly higher in relation to total revenues in the three and nine month periods ended July 1, 2006 as compared with the same periods from the
prior fiscal year due to a lower proportion of product revenues in the mix.



|                                              |  |                    |       |   |                   |   |       |              |  |   |              |   |  |   |       |  
|--------------------------------------------- |  | ------------------ | ----- | - | ----------------- | - | ----- | ------------ |  | - | ------------ | - |  | - | ----- | -
|                                              |  | Three Months Ended |       |   | Nine Months Ended |  
|                                              |  | July 1, 2006       |       |   | July 2, 2005      |   |       | July 1, 2006 |  |   | July 2, 2005 |  
|Maintenance revenues from acquired businesses |  | $                  | 1,079 |   |                   | $ | 2,451 |              |  | $ | 6,701        |   |  | $ | 5,523 |  
|Percentage of maintenance revenues            |  |                    | 2.2   | % |                   |   | 5.6   | %            |  |   | 4.7          | % |  |   | 4.4   | %

Professional Services Revenues (dollars in thousands):



|                                                              |  |                    |        |   |                   |   |        |                |  |    |              |  |   |              |   |  |                |        |   |  |    |  
|------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | -------------- |  | -- | ------------ |  | - | ------------ | - |  | -------------- | ------ | - |  | -- | -
|                                                              |  | Three Months Ended |        |   | Nine Months Ended |  
|                                                              |  | July 1, 2006       |        |   | July 2, 2005      |   |        | Percent Change |  |    | July 1, 2006 |  |   | July 2, 2005 |   |  | Percent Change |       
|Professional services revenues                                |  | $                  | 38,636 |   |                   | $ | 32,845 |                |  | 18 | %            |  | $ | 109,598      |   |  | $              | 91,040 |   |  | 20 | %
|Professional services revenues as a percent of total revenues |  |                    | 27     | % |                   |   | 25     | %              |  |   |              |  |   | 27           | % |  |                | 25     | % |  |   |  

The growth in professional services revenues in the three and nine month periods ended
July 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 revenues. In
addition, professional services revenue growth in the nine month period ended July 1, 2006 was positively impacted by an increase in professional services revenues associated with acquired businesses.



|                                                        |  |                    |       |   |                   |   |       |              |  |   |              |   |  |   |       |  
|------------------------------------------------------- |  | ------------------ | ----- | - | ----------------- | - | ----- | ------------ |  | - | ------------ | - |  | - | ----- | -
|                                                        |  | Three Months Ended |       |   | Nine Months Ended |  
|                                                        |  | July 1, 2006       |       |   | July 2, 2005      |   |       | July 1, 2006 |  |   | July 2, 2005 |  
|Professional services revenues from acquired businesses |  | $                  | 2,365 |   |                   | $ | 2,252 |              |  | $ | 6,715        |   |  | $ | 3,761 |  
|Percentage of professional services revenues            |  |                    | 6.1   | % |                   |   | 6.9   | %            |  |   | 6.1          | % |  |   | 4.1   | %

Gross Profit. Gross profit is the result of revenues, less cost of sales. Product cost of sales primarily
consists of salaries, facilities and related expenses for manufacturing personnel and personnel developing and delivering customized software solutions, 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



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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.



|                                                                                 |  |                    |        |   |                   |   |        |               |  |     |             |  |   |             |   |  |               |         |   |  |     |  
|-------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | ------------- |  | --- | ----------- |  | - | ----------- | - |  | ------------- | ------- | - |  | --- | -
|                                                                                 |  | Three Months Ended |        |   | Nine Months Ended |  
|                                                                                 |  | July 1,2006        |        |   | July 2,2005       |   |        | PercentChange |  |     | July 1,2006 |  |   | July 2,2005 |   |  | PercentChange |        
|Product gross profit                                                             |  | $                  | 42,739 |   |                   | $ | 41,378 |               |  | 3   | %           |  | $ | 124,295     |   |  | $             | 117,937 |   |  | 5   | %
|                                                                                 |  |                    |        |   |                   |   |        |               |  |     |             |  |   |             |   |  |               |         |   |  |     |  
|Stock-based compensation expenses included in product gross profit               |  | $                  | 98     |   |                   |   |       |               |  | N/A |             |  | $ | 277         |   |  |               |        |   |  | N/A |  
|Maintenance gross profit                                                         |  | $                  | 34,214 |   |                   | $ | 32,487 |               |  | 5   | %           |  | $ | 98,927      |   |  | $             | 91,483  |   |  | 8   | %
|                                                                                 |  |                    |        |   |                   |   |        |               |  |     |             |  |   |             |   |  |               |         |   |  |     |  
|Stock-based compensation expenses included in maintenance gross profit           |  | $                  | 313    |   |                   |   |       |               |  | N/A |             |  | $ | 902         |   |  |               |        |   |  | N/A |  
|Professional Services gross profit                                               |  | $                  | 7,612  |   |                   | $ | 5,925  |               |  | 28  | %           |  | $ | 18,064      |   |  | $             | 14,449  |   |  | 25  | %
|                                                                                 |  |                    |        |   |                   |   |        |               |  |     |             |  |   |             |   |  |               |         |   |  |     |  
|Stock-based compensation expenses included in professional services gross profit |  | $                  | 651    |   |                   |   |       |               |  | N/A |             |  | $ | 1,847       |   |  |               |        |   |  | N/A |  
|Service gross profit                                                             |  | $                  | 41,826 |   |                   | $ | 38,412 |               |  | 9   | %           |  | $ | 116,991     |   |  | $             | 105,932 |   |  | 10  | %
|                                                                                 |  |                    |        |   |                   |   |        |               |  |     |             |  |   |             |   |  |               |         |   |  |     |  
|Stock-based compensation expenses included in service gross profit               |  | $                  | 964    |   |                   |   |       |               |  | N/A |             |  | $ | 2,749       |   |  |               |        |   |  | N/A |  
|Total gross profit                                                               |  | $                  | 84,565 |   |                   | $ | 79,790 |               |  | 6   | %           |  | $ | 241,286     |   |  | $             | 223,869 |   |  | 8   | %
|                                                                                 |  |                    |        |   |                   |   |        |               |  |     |             |  |   |             |   |  |               |         |   |  |     |  
|Stock-based compensation expenses included in total gross profit                 |  | $                  | 1,062  |   |                   |   |       |               |  | N/A |             |  | $ | 3,026       |   |  |               |        |   |  | N/A |  
|Product gross margin                                                             |  |                    | 80     | % |                   |   | 78     | %             |  |    |             |  |   | 77          | % |  |               | 77      | % |  |    |  
|Maintenance gross margin                                                         |  |                    | 70     | % |                   |   | 74     | %             |  |    |             |  |   | 69          | % |  |               | 73      | % |  |    |  
|Professional services gross margin                                               |  |                    | 20     | % |                   |   | 18     | %             |  |    |             |  |   | 16          | % |  |               | 16      | % |  |    |  
|Total service gross margin                                                       |  |                    | 48     | % |                   |   | 50     | %             |  |    |             |  |   | 46          | % |  |               | 49      | % |  |    |  
|Total gross margin                                                               |  |                    | 60     | % |                   |   | 61     | %             |  |    |             |  |   | 58          | % |  |               | 61      | % |  |    |  

N/A = Not applicable

Total gross margin for the three and nine month periods ended July 1, 2006 declined as compared with the total gross margin for the comparable periods in the prior year. In the three months ending July 1,
2006, product gross margins increased two percentage points, from 78% to 80%. Total service gross margins declined as compared to the three month period ended July 2, 2005, with a decline in maintenance margins being partially offset by an
increase in professional services margins. Product gross margins were consistent in the nine month period ended July 1, 2006 as compared to the nine month period ended July 2, 2005. Service gross margins declined during that same period,
with maintenance gross margins declining and professional services



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##### Table of Contents

margins remaining consistent with the prior year. Total gross margins were negatively impacted by stock-based
compensation of $1.1 million and $3.0 million, respectively, for the three and nine months ended July 1, 2006. Other factors driving the changes in gross margin are described in further detail below. We anticipate that the total gross margins
will increase sequentially during the fourth quarter of fiscal 2006, including the effect of the acquisition of Unicru in August 2006 as described above. 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 as well as stock-based compensation.

Product gross margin, which consists of hardware and software revenue and costs, increased two percentage points in the three month period ended
July 1, 2006 as compared to the same period in the prior fiscal year. This increase is principally due to product revenues containing a higher proportion of software than hardware, as software typically generates a higher gross margin than
hardware and third party product sales. Additionally, our revenues include a lower proportion of customized software products (which typically generate a lower gross margin) than other software products during the period. Although software gross
margin also increased in the nine month period ended July 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
during this period by lower margins resulting from a one-time, sales incentive-related, promotional terminal upgrade program and an accrual related to a loss associated with a strategic customer contract, both recorded in the second quarter. The
strategic customer 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 future 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 $2.3 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 certain of our scheduling applications. Stock-based compensation also reduced product gross
margin in the three and nine month periods ending July 1, 2006. We currently anticipate that our product gross margins for the fourth quarter of fiscal 2006 will increase when compared to the same period in the prior year.

Maintenance gross margin in the three and nine month periods ended July 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 partially allocated to our maintenance line of business. Our account managers are responsible for
both customer satisfaction and for generating revenue opportunities within our installed base.

Professional services gross margin
increased in the three month period and remained consistent in the nine month period ended July 1, 2006 as compared to 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 also partially allocated to this line of business.



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We expect that gross margin for maintenance as well as professional services for the fourth quarter of
fiscal 2006 will be lower than the comparable period 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.

Total Net Operating
Expenses (dollars in thousands):



|                                                            |  |                    |        |   |                   |   |        |                |  |     |              |  |   |              |   |  |                |         |   |  |     |  
|----------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | -------------- |  | --- | ------------ |  | - | ------------ | - |  | -------------- | ------- | - |  | --- | -
|                                                            |  | Three Months Ended |        |   | Nine Months Ended |  
|                                                            |  | July 1, 2006       |        |   | July 2, 2005      |   |        | Percent Change |  |     | July 1, 2006 |  |   | July 2, 2005 |   |  | Percent Change |        
|Net operating expenses                                      |  | $                  | 68,869 |   |                   | $ | 60,885 |                |  | 13  | %            |  | $ | 200,883      |   |  | $              | 172,148 |   |  | 17  | %
|                                                            |  |                    |        |   |                   |   |        |                |  |     |              |  |   |              |   |  |                |         |   |  |     |  
|Stock-based compensation included in net operating expenses |  | $                  | 3,136  |   |                   |   |       |                |  | N/A |              |  | $ | 9,611        |   |  |                |        |   |  | N/A |  
|Net operating expenses as a % of total revenues             |  |                    | 49     | % |                   |   | 47     | %              |  |    |              |  |   | 49           | % |  |                | 47      | % |  |    |  

N/A = Not applicable

The increase in operating expenses for the three and nine month periods ended July 1, 2006 was principally attributable to an increase in stock-based compensation expense (approximately $3.1 million and $9.6
million, respectively), compensation, overhead and support costs (approximately $5.3 million and $11.8 million, respectively) which include increased headcount from acquisitions, costs related to the implementation of our new information technology
system (approximately $0.4 million and $3.4 million, respectively), and an increase in spending related to marketing programs (approximately $0.7 million and $3.0 million, respectively), offset by a decrease in bad debt provisions (approximately
$0.9 and $0.2 million, respectively) and consulting fees. 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 |        |   | Nine Months Ended |  
|                                                                  |  | July 1, 2006       |        |   | July 2, 2005      |   |        | Percent Change |  |     | July 1, 2006 |  |   | July 2, 2005 |   |  | Percent Change |        
|Sales and marketing expenses                                      |  | $                  | 42,631 |   |                   | $ | 36,547 |                |  | 17  | %            |  | $ | 123,798      |   |  | $              | 107,025 |   |  | 16  | %
|                                                                  |  |                    |        |   |                   |   |        |                |  |     |              |  |   |              |   |  |                |         |   |  |     |  
|Stock-based compensation included in sales and marketing expenses |  | $                  | 1,393  |   |                   |   |       |                |  | N/A |              |  | $ | 4,049        |   |  |                |        |   |  | N/A |  
|Sales and marketing expenses as a % of total revenues             |  |                    | 30     | % |                   |   | 28     | %              |  |    |              |  |   | 30           | % |  |                | 29      | % |  |    |  

N/A = Not applicable



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The increase in sales and marketing expenses for the three and nine month periods ended July 1, 2006
was primarily attributable to an increase in expenses related to compensation, overhead and support costs (approximately $4.2 million and $8.2 million, respectively), which includes higher commission costs associated with our sales
incentive-related, promotional terminal upgrade program in the second quarter, the hiring of additional personnel (including increased headcount from acquisitions) and increases in salaries and fringe benefits due to annual salary increases,
stock-based compensation (approximately $1.4 million and $4.0 million, respectively), and an increase in spending related to marketing programs (approximately $0.7 million and $3.0 million, respectively).

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



|                                                                                    |  |                    |        |   |                   |   |        |                |  |     |              |  |   |              |   |  |                |         |   |  |     |   
|----------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | -------------- |  | --- | ------------ |  | - | ------------ | - |  | -------------- | ------- | - |  | --- | --
|                                                                                    |  | Three Months Ended |        |   | Nine Months Ended |  
|                                                                                    |  | July 1, 2006       |        |   | July 2, 2005      |   |        | Percent Change |  |     | July 1, 2006 |  |   | July 2, 2005 |   |  | Percent Change |        
|Total engineering, research and development spending                                |  | $                  | 18,277 |   |                   | $ | 16,435 |                |  | 11  | %            |  | $ | 52,101       |   |  | $              | 48,489  |   |  | 7   | % 
|Capitalized software development costs                                              |  |                    | (3,436 | ) |                   |   | (3,728 | )              |  | (8  | )%           |  |   | (10,337      | ) |  |                | (10,966 | ) |  | (6  | )%
|                                                                                    |  |                    |        |   |                   |   |        |                |  |     |              |  |   |              |   |  |                |         |   |  |     |   
|Engineering, research and development expenses                                      |  | $                  | 14,841 |   |                   | $ | 12,707 |                |  | 17  | %            |  | $ | 41,764       |   |  | $              | 37,523  |   |  | 11  | % 
|                                                                                    |  |                    |        |   |                   |   |        |                |  |     |              |  |   |              |   |  |                |         |   |  |     |   
|Stock-based compensation included in engineering, research and development expenses |  | $                  | 677    |   |                   |   |       |                |  | N/A |              |  | $ | 2,347        |   |  |                |        |   |  | N/A |   
|Engineering, research and development expenses as a % of total revenues             |  |                    | 10     | % |                   |   | 10     | %              |  |    |              |  |   | 10           | % |  |                | 10      | % |  |    |   

N/A = Not applicable

The increase in engineering, research and development spending for the three and nine month periods ended July 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 $1.1 million and $2.3 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 ($0.7 million and $2.3 million, respectively), partially offset by a decrease in spending related to the use of outside consultant resources (approximately $0.7 million in the nine months ended July 1,
2006). The significant product development efforts in the first nine 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.



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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 |        |   | Nine Months Ended |  
|                                                                         |  | July 1, 2006       |        |   | July 2, 2005      |   |        | Percent Change |  |     | July 1, 2006 |  |   | July 2, 2005 |   |  | Percent Change |       
|General and administrative expenses                                      |  | $                  | 11,571 |   |                   | $ | 11,590 |                |  |    | %            |  | $ | 35,653       |   |  | $              | 28,582 |   |  | 25  | %
|                                                                         |  |                    |        |   |                   |   |        |                |  |     |              |  |   |              |   |  |                |        |   |  |     |  
|Stock-based compensation included in general and administrative expenses |  | $                  | 1,066  |   |                   |   |       |                |  | N/A |              |  | $ | 3,215        |   |  |                |       |   |  | N/A |  
|General and administrative expenses as a % of total revenues             |  |                    | 8      | % |                   |   | 9      | %              |  |    |              |  |   | 9            | % |  |                | 8      | % |  |    |  

N/A = Not applicable

General and administrative expenses were consistent in the three month period ended July 1, 2006 as compared to the same period in the prior year as the increase in stock-based compensation (approximately $1.1
million) as well as an increase in costs and lower capitalization of internal costs related to the implementation of our new information technology system (approximately $0.4 million) were offset by a reduction in bad debt expense (approximately
$0.9 million) as well as legal and audit fees (approximately ($0.4 million). The increase in general and administrative expenses in the nine month period ended July 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 $3.4 million), 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 $1.3 million) and stock-based compensation (approximately $3.2 million), offset by a decrease in bad debt provisions (approximately $0.2 million) 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 |       |   | Nine Months Ended |  
|                                                           |  | July 1, 2006       |       |   | July 2, 2005      |   |       | Percent Change |  |    | July 1, 2006 |  |   | July 2, 2005 |   |  | Percent Change |      
|Amortization of intangible assets                          |  | $                  | 1,479 |   |                   | $ | 1,160 |                |  | 28 | %            |  | $ | 4,686        |   |  | $              | 3,450 |   |  | 36 | %
|Amortization of intangible assets as a % of total revenues |  |                    | 1     | % |                   |   | 1     | %              |  |   |              |  |   | 1            | % |  |                | 1     | % |  |   |  
|Other income, net                                          |  | $                  | 1,653 |   |                   | $ | 1,119 |                |  | 48 | %            |  | $ | 5,018        |   |  | $              | 4,432 |   |  | 13 | %
|Other income, net as a % of total revenues                 |  |                    | 1     | % |                   |   | 1     | %              |  |   |              |  |   | 1            | % |  |                | 1     | % |  |   |  



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The increase in amortization of intangible assets in the three and nine month periods ended July 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 and
nine month periods ended July 1, 2006, as compared to the same periods in the prior year, was principally attributed to interest income earned on our cash and investment balances.

Income Taxes. The provision for income taxes as a percentage of pre-tax income was 34.2% and 34.6% for the three and nine month periods ended July 1, 2006 as compared to 33.2% and 33.3% for the comparable
periods in the prior year. The provision for income taxes for the nine month period ended July 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 nine month period ended July 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.

Newly Issued Accounting Standards.During the quarter, the FASB released Interpretation 48, Accounting for
Uncertainty in Income Taxes  an Interpretation of FAS 109, or FIN 48, which we must adopt for our fiscal year ending September 30, 2008. We are currently assessing the impact of the adoption of FIN 48 and will incorporate the
results in the first quarter of our Fiscal 2008.

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.

On July 11, 2006, we entered into a credit agreement with Citizens Bank of Massachusetts regarding a three-year, $100,000,000 revolving credit
facility. On August 1, 2006 we completed the acquisition of Unicru, a leading provider of talent management solutions, for approximately $150 million in cash. Approximately $100 million was drawn down on the line of credit in order to complete
this transaction.



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



|                                                                                 |  |              |         |                    |   |                |  |     |  
|-------------------------------------------------------------------------------- |  | ------------ | ------- | ------------------ | - | -------------- |  | --- | -
|                                                                                 |  | As of        |        
|                                                                                 |  | July 1, 2006 |         | September 30, 2005 |   | Percent Change | 
|Cash, cash equivalents and marketable securities (including short and long-term) |  | $            | 178,211 |                    | $ | 140,435        |  | 27  | %
|Working capital                                                                  |  | $            | 67,763  |                    | $ | 9,620          |  | 604 | %

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 and equipment and capitalized software development costs as well as cash paid for acquired businesses during the nine
month period ended July 1, 2006. The increase in working capital was primarily due to an increase in cash and short-term marketable securities balances, partially offset by a decrease in accounts receivable. A portion of our cash reserves is
invested in long-term marketable securities.

Cash Flow Highlights (dollars in thousands):



|                                                                        |  |                    |        |   |                   |   |         |                |  |      |              |  |   |              |   |  |                |         |   |  |     |   
|----------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------- | -------------- |  | ---- | ------------ |  | - | ------------ | - |  | -------------- | ------- | - |  | --- | --
|                                                                        |  | Three Months Ended |        |   | Nine Months Ended |  
|                                                                        |  | July 1, 2006       |        |   | July 2, 2005      |   |         | Percent Change |  |      | July 1, 2006 |  |   | July 2, 2005 |   |  | Percent Change |        
|Cash provided by operations                                             |  | $                  | 31,842 |   |                   | $ | 21,788  |                |  | 46   | %            |  | $ | 76,132       |   |  | $              | 57,825  |   |  | 32  | % 
|Cash used for property, plant and equipment                             |  | $                  | (5,562 | ) |                   | $ | (5,472  | )              |  | 2    | %            |  | $ | (15,473      | ) |  | $              | (20,325 | ) |  | (24 | )%
|Cash used for acquisitions of businesses                                |  | $                  | (4,544 | ) |                   | $ | (55     | )              |  | 8162 | %            |  | $ | (13,136      | ) |  | $              | (52,433 | ) |  | (75 | )%
|(Increase)/decrease in marketable securities                            |  | $                  | 2,932  |   |                   | $ | (12,213 | )              |  | (125 | )%           |  | $ | (303         | ) |  | $              | 29,342  |   |  | 101 | % 
|Net proceeds from exercise of stock options and employee stock purchase |  | $                  | 1,826  |   |                   | $ | 714     |                |  | 156  | %            |  | $ | 14,946       |   |  | $              | 19,298  |   |  | (23 | )%
|Repurchases of common stock                                             |  | $                  | (6,521 | ) |                   | $ | (16,994 | )              |  | (62  | )%           |  | $ | (20,633      | ) |  | $              | (27,392 | ) |  | (25 | )%

N/A = Not applicable

The increase in cash provided by operations in the nine month period ended July 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 nine month period ended July 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 $22.8 million (excluding internal personnel related costs) related to the replacement of our
information technology systems of which $15.8 million has been capitalized, with the remainder expensed through operations. We expect our total investment in this project



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(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 nine months of 2006 was principally related to the acquisition of ClarityMatters on April 25, 2006, 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 period ended July 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 continue to assess potential acquisition opportunities; however, we currently do not have any major acquisitions planned. Excess cash reserves not required for operations,
investments in property, plant and equipment or acquisitions are invested in marketable securities.

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



|                                           |  |                    |         |              |                   |                |  |     |              |  |              |         |                |   |         |  |     |   
|------------------------------------------ |  | ------------------ | ------- | ------------ | ----------------- | -------------- |  | --- | ------------ |  | ------------ | ------- | -------------- | - | ------- |  | --- | --
|                                           |  | Three Months Ended |         |              | Nine Months Ended |               
|                                           |  | July 1, 2006       |         | July 2, 2005 |                   | Percent Change |  |     | July 1, 2006 |  | July 2, 2005 |         | Percent Change |  
|Shares of common stock repurchased         |  |                    | 164,607 |              |                   | 394,802        |  | (58 | )%           |  |              | 503,857 |                |   | 606,396 |  | (17 | )%
|Cost of shares of common stock repurchased |  | $                  | 6,520   |              | $                 | 16,994         |  | (62 | )%           |  | $            | 20,633  |                | $ | 27,392  |  | (25 | )%

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 from acquisitions are as follows:

Payments Due by Period (in thousands)



|                               |  |       |        |                 |   |                                   |  |                                    |        |                  |   |        |  |   |      
|------------------------------ |  | ----- | ------ | --------------- | - | --------------------------------- |  | ---------------------------------- | ------ | ---------------- | - | ------ |  | - | -----
|Contractual Obligations        |  | Total |        | Less Than 1Year |   | More Than 1Year, LessThan 3 Years |  | More Than 3Years, LessThan 5 Years |        | More Than 5Years
|Operating lease obligations    |  | $     | 44,649 |                 | $ | 11,707                            |  | $                                  | 14,986 |                  | $ | 11,384 |  | $ | 6,572
|Guaranteed payment obligations |  |       | 2,991  |                 |   | 2,496                             |  |                                    | 496    |                  |   |       |  |   |     
|                               |  |       |        |                 |   |                                   |  |                                    |        |                  |   |        |  |   |      
|Total                          |  | $     | 47,640 |                 | $ | 14,203                            |  | $                                  | 15,482 |                  | $ | 11,384 |  | $ | 6,572
|                               |  |       |        |                 |   |                                   |  |                                    |        |                  |   |        |  |   |      

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



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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to a variety of market
risks, including changes in interest rates affecting the return on our investments and foreign currency fluctuations. Refer to Note A, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements in the
Annual Report on Form 10-K for the year ended September 30, 2005 for further discussion regarding marketable securities and foreign currency forward exchange contracts. Our marketable securities that expose us to market rate risks are comprised
of debt securities. A decrease in interest rates would not adversely impact interest income or related cash flows pertaining to securities held at July 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 July 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 July 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 July 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 July 1, 2006 that has materially
affected, or is reasonably likely to materially affect our internal control over financial reporting.



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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A. Risk Factors

Certain Factors That May Affect Future Operating Results

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

Actual operating results may differ from
those indicated by forward-looking statements made in this Quarterly Report on Form 10-Q and presented elsewhere by us from time to time because of a number of factors including the potential fluctuations in quarterly results, timing and acceptance
of new product introductions by us and our competitors, the dependence on our time and labor product line, the ability to attract and retain sufficient technical personnel, the protection of our intellectual property and the potential infringement
on our intellectual property rights, competitive pricing pressure, and the dependence on alternate distribution channels and on key vendors, as further described. We have not made any material changes in the risk factors previously disclosed in our
annual report on Form 10-K for the 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.

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



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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, the 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 results 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 Condensed 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 nine month periods
ended July 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.

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.



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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 nine 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.

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.



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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 July 1, 2006 of equity securities that are registered by the company pursuant to Section 12 of the Exchange Act.

ISSUER PURCHASES OF EQUITY SECURITIES



|                    |  |                                |  |                            |       |                                                                    |         |                                                                    |        
|------------------- |  | ------------------------------ |  | -------------------------- | ----- | ------------------------------------------------------------------ | ------- | ------------------------------------------------------------------ | -------
|                    |  | (a)                            |  | (b)                        |       | (c)                                                                |         | (d)                                                               
|Period              |  | Total Numberof SharesPurchased |  | Average PricePaid perShare |       | Total Numberof SharesPurchased asPart of PubliclyAnnouncedPrograms |         | Maximum Numberof Shares that MayYet Be PurchasedUnder the Programs
|04/02/06 - 05/02/06 |  | 67,907                         |  | $                          | 39.05 |                                                                    | 67,907  |                                                                    | 646,319
|05/03/06 - 06/03/06 |  | 42,950                         |  | $                          | 41.79 |                                                                    | 42,950  |                                                                    | 603,369
|06/04/06 - 07/01/06 |  | 53,750                         |  | $                          | 38.58 |                                                                    | 53,750  |                                                                    | 549,619
|                    |  |                                |  |                            |       |                                                                    |         |                                                                    |        
|Total:              |  | 164,607                        |  | $                          | 39.61 |                                                                    | 164,607 |                                                                    | 549,619
|                    |  |                                |  |                            |       |                                                                    |         |                                                                    |        

Our board of directors approved the repurchase by us of up to an aggregate of 750,000 shares of our common stock
pursuant to the repurchase program that we publicly announced on February 16, 2006 (the Program). We repurchased an aggregate of approximately 165,000 shares of our common stock pursuant to the Program in the third fiscal quarter.
Unless terminated earlier by resolution of our board of directors, the Program will expire when we have repurchased all shares authorized for repurchase thereunder.

Item 3. Defaults Upon Senior Securities

None



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

None

Item 5. Other Information

On May 11, 2006, we entered into senior executive retention
agreements with each of Stuart Itkin, our Vice President of Marketing, and Mark Julien, our Chief Financial Officer. The retention agreements generally provide that, if within 12 months following a change in control the executives
employment is terminated for reasons other than for cause (as defined in the retention agreement) or by the executive for good reason (as defined in the retention agreement), the executive will receive a cash payment equal to three times the sum of
the executives highest base salary and highest bonus, received in any year for the five-year period prior to such change in control. The executive has the option to receive this cash payment in one lump sum or in 36 equal monthly installments,
with an annual interest rate on the unpaid principal balance equal to the minimum applicable federal rate in effect on the date of termination. The retention agreements also provide that we will continue to provide benefits to each executive for a
period of one year after the date of his termination. The form of senior executive retention agreement entered into between us and Messrs. Itkin and Julien has been filed with the Securities and Exchange Commission with our
Annual Report on Form 10-K for the year ended September 30, 2003.



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Item 6. Exhibits



|     |  |                                                                                                                                                                                 
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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
|                |  |                    
|August 10, 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



|              |  |                                                                                                                                                                                 
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                     
|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.