# UNITED STATES SECURITIES AND
EXCHANGE COMMISSION

# Washington, D.C. 20549

# Form 10-Q

# (X)  QUARTERLY
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 1, 2005

OR

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

For the transition period from ______________ to _______________

Commission file number   
 0-20109

# Kronos Incorporated

(Exact name of registrant as specified in its charter)

|                                                                |  |                                      
|--------------------------------------------------------------- |  | -------------------------------------
|Massachusetts                                                   |  | 04-2640942                           
|(State or other jurisdiction of  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)

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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes __X__   
        No ____

As of February 4, 2005, 31,807,835 shares
 of the registrants common stock, $.01 par value, were outstanding.

---

# KRONOS INCORPORATED

# INDEX

|PART I.    | FINANCIAL INFORMATION                                                                                                                 | Page
|---------- | ------------------------------------------------------------------------------------------------------------------------------------- | ----
|           |                                                                                                                                       |     
|Item 1.    | Condensed Consolidated Financial
        Statements (Unaudited)                                                                       |     
|           |                                                                                                                                       |     
|           | Condensed Consolidated Statements of
        Income for the Three       Months Ended January 1, 2005
        and January 3, 2004      | 1   
|           |                                                                                                                                       |     
|           | Condensed Consolidated Balance Sheets
        at January 1, 2005      and September 30, 2004                                          | 2   
|           |                                                                                                                                       |     
|           | Condensed Consolidated Statements of
        Cash Flows for the Three        Months Ended
        January 1, 2005 and January 3, 2004 | 3   
|           |                                                                                                                                       |     
|           | Notes to Condensed Consolidated
        Financial Statements                                                                          | 4   
|           |                                                                                                                                       |     
|Item 2.    | Management's Discussion and Analysis
        of Financial Condition and       Results of
        Operations                           | 11  
|           |                                                                                                                                       |     
|Item 3.    | Quantitative and Qualitative Disclosure
        About Market Risk                                                                     | 34  
|           |                                                                                                                                       |     
|Item 4.    | Evaluation of Disclosure Controls
        and Procedures                                                                              | 34  
|           |                                                                                                                                       |     
|PART II.   | OTHER INFORMATION                                                                                                                     |     
|           |                                                                                                                                       |     
|Item 1.    | Legal Proceedings                                                                                                                     | 35  
|           |                                                                                                                                       |     
|Item 2.    | Changes in Securities,
        Use of Proceeds and Issuer Purchases of        
        Equity Securities                              | 35  
|           |                                                                                                                                       |     
|Item 3.    | Defaults Upon Senior Securities                                                                                                       | 35  
|           |                                                                                                                                       |     
|Item 4.    | Submission of Matters to a Vote of Security
        Holders                                                                           | 35  
|           |                                                                                                                                       |     
|Item 5.    | Other Information                                                                                                                     | 35  
|           |                                                                                                                                       |     
|Item 6.    | Exhibits                                                                                                                              | 36  
|           |                                                                                                                                       |     
|Signatures |                                                                                                                                       |     

---

# PART I.     
FINANCIAL INFORMATION

Item 1.     
Condensed Consolidated Financial Statements (Unaudited)

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

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

See accompanying notes to condensed
consolidated financial statements.

---

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

|                                                                                                                                  | January 1,
2005 | September 30,
2004
|--------------------------------------------------------------------------------------------------------------------------------- | --------------- | ------------------
|ASSETS                                                                                                                            |                 |                   
|Current assets:                                                                                                                   |                 |                   
|Cash and cash equivalents                                                                                                         |                 |                   
|Marketable securities                                                                                                             |                 |                   
|Accounts receivable, less allowances of $9,249                                                                                    |                 |                   
|at January 1, 2005 and $9,143 at September 30, 2004                                                                               |                 |                   
|Deferred income taxes                                                                                                             |                 |                   
|Other current assets                                                                                                              |                 |                   
|                                                                                                                                  |                 |                   
|Total current assets                                                                                                              |                 |                   
|Marketable securities                                                                                                             |                 |                   
|Property, plant and equipment, net                                                                                                |                 |                   
|Intangible assets                                                                                                                 |                 |                   
|Goodwill                                                                                                                          |                 |                   
|Capitalized software, net                                                                                                         |                 |                   
|Other assets                                                                                                                      |                 |                   
|                                                                                                                                  |                 |                   
|Total assets                                                                                                                      |                 |                   
|                                                                                                                                  |                 |                   
|LIABILITIES AND SHAREHOLDERS'
         EQUITY                                                                                     |                 |                   
|Current liabilities:                                                                                                              |                 |                   
|Accounts payable                                                                                                                  |                 |                   
|Accrued compensation                                                                                                              |                 |                   
|Accrued expenses and other current liabilities                                                                                    |                 |                   
|Deferred product revenues                                                                                                         |                 |                   
|Deferred professional service revenues                                                                                            |                 |                   
|Deferred maintenance revenues                                                                                                     |                 |                   
|                                                                                                                                  |                 |                   
|Total current liabilities                                                                                                         |                 |                   
|Deferred maintenance revenues                                                                                                     |                 |                   
|Deferred income taxes                                                                                                             |                 |                   
|Other liabilities                                                                                                                 |                 |                   
|Shareholders' equity:                                                                                                             |                 |                   
|Preferred Stock, par value $1.00 per share:  authorized 1,000,000                                                                 |                 |                   
|shares, no shares issued and outstanding                                                                                          |                 |                   
|Common Stock, par value $.01 per share:  authorized 50,000,000                                                                    |                 |                   
|shares, 31,734,592 and 31,335,340 shares issued at  
                 January 1, 2005 and September 30, 2004
        respectively |                 |                   
|Additional paid-in capital                                                                                                        |                 |                   
|Retained earnings                                                                                                                 |                 |                   
|Accumulated other comprehensive income:                                                                                           |                 |                   
|Foreign currency translation                                                                                                      |                 |                   
|Net unrealized (loss) on available-for-sale investments                                                                           |                 |                   
|                                                                                                                                  |                 |                   
|                                                                                                                                  |                 |                   
|Total shareholders' equity                                                                                                        |                 |                   
|                                                                                                                                  |                 |                   
|Total liabilities and shareholders' equity                                                                                        |                 |                   
|                                                                                                                                  |                 |                   

See
accompanying notes to condensed consolidated financial statements.

---

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

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

See
accompanying notes to condensed consolidated financial statements.

---

# 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, 2004. The results of
operations for the three months ended January 1, 2005 are not necessarily indicative of
the results for a full fiscal year. The Company has reclassified certain support services
that are billed on a time and materials basis out of professional services revenues and
into maintenance services revenues. These reclassified support services relate to support
services charged on a time and materials basis for customers not on maintenance support contracts.
This resulted in a reclassification of approximately $1.2 million for the three month period
ended January 3, 2004.

# 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 (93 days in fiscal 2005 and 95
days in fiscal 2004) and fourth quarter (90 days in fiscal 2005 and 89 days in fiscal
2004) 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

The Company accounts for its
stock-based compensation plan under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees and related
Interpretations. We have adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based Compensation Transition and
Disclosure, an amendment of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, (Statement No. 123).
Therefore, no stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates the effect
on net income and earnings per share if the Company had applied the fair value recognition
provisions of Statement No. 123 to stock-based employee compensation (in thousands, except
per share data).

---

|                                 | Three Months Ended
|-------------------------------- | ------------------
|
|Net income, as reported          |                   
|Deduct: Total stock-based        |                   
|employee compensation expense    |                   
|determined under fair value      |                   
|based method for all awards, net |                   
|of related tax effects           |                   
|                                 |                   
|Pro forma net income             |                   
|                                 |                   
|Earnings per share:              |                   
|Basic--as reported               |                   
|                                 |                   
|Basic--pro forma                 |                   
|                                 |                   
|Diluted--as reported             |                   
|                                 |                   
|Diluted--pro forma               |                   
|                                 |                   

On December 16, 2004 the Financial
Accounting Standards Board issued Statement No. 123 (revised 2004), Share-Based
Payment, which is a revision of Statement No. 123.  Please refer to Note I for
additional information.

# NOTE D  Other
Current Assets

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

|                 | January 1, 2005 | September 30, 2004
|---------------- | --------------- | ------------------
|Inventory        |                 | $7,369            
|Prepaid expenses |                 | 21,578            
|                 |                 |                   
|Total            |                 | $28,947           
|                 |                 |                   

# NOTE E  Intangible
Assets

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

---

|                          | Weighted Average
        Life in Years | Gross Carrying Value | Accumulated
        Amortization | Net Book Value
|------------------------- | -------------------------------------- | -------------------- | -------------------------------- | --------------
|As of January 1, 2005:    |                                        |                      |                                  |               
|Intangible assets:        |                                       
|Customer related          |                                        | 9                    | .9                               | $29,256       
|Maintenance relationships |                                        | 12                   | .0                               | 9,492         
|Technology                |                                        | 10                   | .0                               | 7,768         
|Non-compete agreements    |                                        | 4                    | .1                               | 4,503         
|                          |                                        |                      |                                  |               
|Total intangible assets   |                                        |                      |                                  | $51,019       
|                          |                                        |                      |                                  |               
|As of September 30, 2004: |                                       
|Intangible assets:        |                                       
|Customer related          |                                        | 9                    | .9                               | $23,212       
|Maintenance relationships |                                        | 12                   | .0                               | 9,492         
|Non-compete agreements    |                                        | 3                    | .9                               | 4,403         
|                          |                                        |                      |                                  |               
|Total intangible assets   |                                        |                      |                                  | $37,107       
|                          |                                        |                      |                                  |               

For the three months ended January 1,
2005 and January 3, 2004, the amount of goodwill acquired is $27.6 million and $2.1
million, respectively.

For the three months ended January 1,
2005 and January 3, 2004, the Company recorded amortization expense for intangible assets
of $1.1 million and $1.0 million, respectively. The estimated annual amortization expense
for intangible assets for the current and next five fiscal years is as follows (in
thousands):

---

|Fiscal Year EndingSeptember 30, | Estimated AnnualAmortization Expense
|------------------------------- | ------------------------------------
|2005                            |                                     
|2006                            |                                     
|2007                            |                                     
|2008                            |                                     
|2009                            |                                     
|2010                            |                                     

# NOTE F 
Acquisitions

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.

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

|                               | 
|------------------------------ | 
|Accounts receivable            | 
|Fixed assets                   | 
|Deferred taxes                 | 
|Other assets                   | 
|Identifiable intangible assets | 
|Goodwill                       | 
|                               | 
|Total assets acquired          | 
|Accounts payable               | 
|Deferred product revenues      | 
|Deferred maintenance revenues  | 
|Deferred tax liabilities       | 
|Other liabilities              | 
|                               | 
|Total liabilities assumed      | 
|                               | 
|Net assets acquired            | 
|                               | 

The preceding table reflects the
payment of approximately $1.2 million in transaction costs related to the AD OPT
acquisition.

---

The deferred revenue included in the
table above, which was recorded at estimated fair value of the Companys remaining
performance obligation, was recorded as the Company had assumed a legal performance
obligation as described in EITF 01-03, Accounting in a Business Combination for
Deferred Revenue of an Acquiree.

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
July 2, 2005.

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

|                             | Three Month Period Ended
|---------------------------- | ------------------------
|
|Total revenues               |                         
|Net income                   |                         
|Earnings per share - basic   |                         
|Earnings per share - diluted |                         

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
acquisition, the Company has begun to provide customized software solutions to its
customers.  Revenue related to the sale of customzied software solutions is recognized on
a contract accounting basis in accordance with the provisions of Statement of Position
81-1, Accounting for Performance of Construction-Type and Certain Production-Type
Contracts.  The contract accounting is applied based on a percentage-of-completion
basis generally representing costs incurred relative to total estimated costs.
 Provisions for estimated losses on contracts are recorded when identified.  Deferred
revenues are recorded when invoicing exceeds recognized revenues.  Revenue derived from
the development and delivery of customized software solutions are included in product
revenues and were immaterial in the three month period ended January 1, 2005.

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. These provisions expire during fiscal 2005
and 2006. Guaranteed payments are accrued at the time of the acquisition and are included
in the purchase price allocation. As of January 1, 2005, the Company has the obligation to
pay $2.9 million in guaranteed payments. These payments will be made at various dates
through fiscal 2006. 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. During the three months ended January 1, 2005 there were
$424,000 of contingent payments earned of which $405,000 were recorded as goodwill. The
remainder was recorded as compensation expense. There were no contingent payments earned
during the three months ended January 3, 2004.

---

# NOTE G 
Comprehensive Income

For the three months ended January 1,
2005 and January 3, 2004, comprehensive income consisted of the following (in thousands):

|                                      | Three Months Ended
|------------------------------------- | ------------------
|
|Comprehensive income:                 |                   
|Net income                            |                   
|Cumulative translation adjustment     |                   
|Unrealized loss on available-for-sale |                   
|securities                            |                   
|                                      |                   
|Total comprehensive income            |                   
|                                      |                   

# 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
|------------------------------------ | ------------------
|
|Net income                           |                   
|                                     |                   
|Weighted-average shares              |                   
|Effect of dilutive securities:       |                   
|Employee stock options               |                   
|                                     |                   
|Adjusted weighted-average shares and |                   
|assumed conversions                  |                   
|                                     |                   
|Basic earnings per share             |                   
|                                     |                   
|Diluted earnings per share           |                   
|                                     |                   

---

# NOTE I  New
Accounting Pronouncements

On December 16, 2004, the Financial
Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised
2004), Share-Based Payment, which is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB
Statement No. 95, Statement of Cash Flows. Generally, the approach in
Statement 123(R) is similar to the approach described in Statement 123. However, Statement
123(R) requires all share-based payments to employees, including the grants of employee
stock options, to be recognized in the income statement based on their fair values. Pro
forma disclosure is no longer an alternative.

Statement 123(R) must be adopted no
later than the first interim period beginning after June 15, 2005. Early adoption will be
permitted in periods in which financial statements have not been issued. The Company expects to
adopt Statement 123(R) on July 3, 2005, the beginning of its fourth fiscal quarter.

As permitted by Statement 123, the Company
currently accounts for share-based payments to employees using Opinion 25s intrinsic
value method and, as such, generally recognizes no compensation cost for employee stock
options. Accordingly, the adoption of Statement 123(R)s fair value method will have
a significant impact on the Company's results of operations, although it will have no impact on its
overall financial position. The impact of adoption of Statement 123(R) cannot be predicted
at this time because it will depend on levels of share-based payments granted in the
future. However, had the Company adopted Statement 123(R) in prior periods, the impact of that
standard would have approximated the impact of Statement 123 as described in the
disclosure of pro forma net income and earnings per share in Note C to the consolidated
financial statements.  The Company currently uses the Black-Scholes option pricing model for the
valuation of options under Statement 123.  The Company is currently assessing valuation model options
to be used under Statement 123(R) and has not yet determined which valuation model to adopt.
Statement 123(R) also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as required under current literature. This requirement will
reduce net operating cash flows and increase net financing cash flows in periods after
adoption. While the Company cannot estimate what those amounts will be in the future (because they
depend on, among other things, when employees exercise stock options), the amount of
operating cash flows recognized in prior periods for such excess tax deductions were $10.7
million, $9.1 million, and $9.2 million in fiscal 2004, 2003 and 2002, respectively.

---

# 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 product and service revenues, revenue
growth rates, gross margin, product and service gross profit, operating expenses, earnings per share,
future acquisitions, capital expenditures, 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 Certain Factors That May Affect Future Operating
Results at the end of Managements Discussion and Analysis of Financial
Condition and Results of Operations and in our Annual Report on Form 10-K for the fiscal
year ended September 30, 2004. 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 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.

We were successful in increasing our revenues in the three month period ended January 1,
2005, as compared to the same period in the prior year. While we believe that the current
economic environment is improving, certain factors such as a lack of job creation in the current economic
recovery, as well as the
diversion of resources towards compliance with new regulatory requirements on internal
controls may result in many customers deferring or reducing their technology purchases in
the future.

Total revenue for the three month period ended January 1, 2005 increased 19% over the
comparable period of the prior year. Our product revenue growth of 36% in the three month
period ended January 1, 2005 was a significant factor in the revenue growth, as was continued
growth in maintenance revenues (9%) and professional services revenues (5%).

---

Net income for the three month period ended January 1, 2005 increased 44% to $10.7 million
from $7.4 million for the same period last year, with earnings per share increasing to $0.33
from $0.23 per diluted share as compared to the same period last year. Net income growth for the
three month period ended January 1, 2005 was primarily
the result of continued growth in revenues, particularly product revenues, a significant
improvement in product margin, as well as continued corporate-wide efforts to contain
costs, and to a lesser extent, a reduction in the income tax rate, primarily resulting
from the retroactive reinstatement of legislation related to certain research and development tax credits.
Although we will continue our efforts to contain costs, our ongoing investments in
infrastructure and the costs associated with the integration of acquired businesses may
partially offset these efforts in the near-term.

Regarding expectations for the remainder of the current fiscal year, we presently anticipate that
revenue growth for the second quarter and for the entire fiscal 2005, including revenues
from customers obtained in the acquisition of businesses, will range between 13% 
17% and 15%  18%, respectively, with earnings per share in the range of $0.34 
$0.38 for the second quarter and $1.64  $1.70 for the entire fiscal 2004.

The
Financial Accounting Standards Board recently concluded that Statement 123R, Share-Based
Payment, which would require all companies to measure compensation cost for all
share-based payments (including employee stock options) at fair value, would be effective
for public companies for interim or annual periods beginning after June 15 ,2005.  The
effect of adopting this new accounting pronouncement has not been included in our fiscal
2005 earnings forecast.  The impact of adopting Statement 123R will reduce our net
income.  We have not yet determined the magnitude of the impact of adopting Statement
123R.

# Critical Accounting
Policies and Estimates

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

We have identified the following critical accounting policies that affect the more
significant judgments and estimates used in the preparation of consolidated financial
statements. This listing is not a comprehensive list of all of our accounting policies.
Please refer to Note A in the Notes to Consolidated Financial Statements in this Quarterly
Report on Form 10-Q and in Item 15 of our Annual Report on Form 10-K for the fiscal year
ended September 30, 2004 for further information.

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

---

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

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

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

| | o | Collectibility
is probable; and
| | - | -------------------------------

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

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

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

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

---

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

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

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

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

| | o | 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 therefore have classified deferred professional services as a current
liability.

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

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 a deposit and subsequent payments, based on specific due dates, such that all
payments for the software license, data collection hardware and related ancillary
products, as well as services included in the original arrangement, are ordinarily due
within one year of contract signing. Our payment terms for indirect channel customers are
less than 90 days and payments are typically due within 30 days of the invoice date.

If the arrangement includes a substantive acceptance provision, we defer revenue not meeting
the criterion for recognition under Statement of Position 97-2, Software Revenue
Recognition, and classify this revenue as deferred revenue, including deferred
product revenue. This revenue is recognized, assuming all other conditions for revenue
recognition have been satisfied, when the uncertainty regarding acceptance is resolved as
generally evidenced by written acceptance or payment of the arrangement fee. If the
payment terms for the arrangement are considered extended, other than those arrangements
that are financing arrangements as discussed below, we defer revenue on the arrangement
until the payment of the arrangement fee becomes due. The deferred amounts related to
arrangements with extended payment terms are removed from deferred revenue and accounts
receivable, as we have determined that these amounts do not represent either a receivable
or deferred revenue until the payment becomes due. We report the allocated fair value of
revenues related to the product element of arrangements as a current liability because of
the expectation that these revenues will be recognized within 12 months of the balance
sheet date.

---

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. 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 8%. These rates may vary depending
upon when the financing arrangement is entered into and the length of the financing
arrangement.

As a result of recent acquisitions, we have begun to provide customized software solutions to
our customers. Revenue related to the sale of customized software solutions is recognized
on a contract accounting basis in accordance with the provisions of Statement of Position
81-1, Accounting for Performance of Construction-Type and Certain Production-Type
Contracts. The contract accounting is applied based on a percentage-of-completion
basis generally representing costs incurred relative to total estimated costs. Provisions
for estimated losses on contracts are recorded when identified. Deferred revenues are
recorded when invoicing exceeds recognized revenues. Revenue derived from the development
and delivery of customized software solutions are included in product revenues and were
immaterial in the three month period ended January 1, 2005.

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

---

Valuation of Intangible Assets and Goodwill In assessing the recoverability of goodwill
and other intangible assets, we must make assumptions regarding the estimated future cash
flows and other factors to determine the fair value of these assets. If these estimates or
their related assumptions change in the future, we may be required to record impairment
charges against these assets in the reporting period in which the impairment is
determined. For intangible assets, this evaluation includes an analysis of estimated
future undiscounted net cash flows expected to be generated by the assets over their
estimated useful lives. If the estimated future undiscounted net cash flows are
insufficient to recover the carrying value of the assets over their estimated useful
lives, we will record an impairment charge in the amount by which the carrying value of
the assets exceeds their fair value. For goodwill, the impairment evaluation includes a
comparison of the carrying value of the reporting unit that houses goodwill to that
reporting units fair value. We have only one reporting unit. The fair value of the
reporting unit is based upon the net present value of future cash flows, including a
terminal value calculation. If the reporting units estimated fair value exceeds the
reporting units carrying value, no impairment of goodwill exists. If the fair value
of the reporting unit does not exceed its carrying value, then further analysis would be
required to determine the amount of the impairment, if any. If we determine that there is
an impairment in either an intangible asset or goodwill, we will be required to record an
impairment charge in the reporting period in which the impairment is determined. During
fiscal 2004 we completed the annual testing of the impairment of goodwill, and as a result
of these tests, we concluded that no impairment of goodwill existed as of July 4, 2004 the
annual goodwill impairment measurement date for fiscal 2004.  In addition, we have
determined that no events or circumstances currently exist that would indicate that either
the fair value of the reporting unit has been reduced, or the carrying value of the
intangible assets is no longer recoverable.  Therefore, no impairment charges have
been recorded in the three months ended January 1, 2005.

Capitalization of Software Development Costs Costs incurred in the research, design and
development of software for sale to others 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. 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 over the lesser of three years
or the estimated economic life of the software. We have capitalized approximately
$9.6 million in costs associated with the replacement of information technology systems
since the start of the project.

Income Taxes We account for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences between
financial reporting and the tax basis of assets and liabilities, and are measured using
the enacted tax rates and laws that will be in effect when the differences are expected to
reverse. We record a valuation allowance in accordance with generally accepted accounting
principles to reduce our deferred tax assets to the amount of future tax benefit that is
more likely than not to be realized. While we have considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for the
valuation allowance, there is no assurance that the valuation allowance will not need to
be increased to cover additional deferred tax assets that may not be realizable. Any
increase in the valuation allowance could have a material adverse impact on our income tax
provision and net income in the period in which such determination is made.

---

# Results of Operations

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

Total Revenues (dollars in thousands):

|               | Three Months Ended
|-------------- | ------------------
|
|Total revenues |                   

The principal factor driving revenue growth in the three month period ended January 1, 2005
was increased demand for our software and hardware products from new and existing
customers. To a lesser extent increased demand for our professional and maintenance
services also contributed to overall growth in revenues, as well as revenues from acquired
businesses.

|                       | Three Months Ended
|---------------------- | ------------------
|
|Revenues from acquired |                   
|businesses*            |                   
|Percentage of total    |                   
|revenues               |                   

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

---

Product Revenues (dollars in thousands):

|                    | Three Months Ended
|------------------- | ------------------
|
|Product revenues    |                   
|Product revenues as |                   
|a percent of total  |                   
|revenues            |                   

The product revenue growth and the increase in the proportion of product revenue to total
revenues in the three month period ended January 1, 2005 was primarily the result of an
increase in demand for our Workforce Central® suite and related software modules as
well as our Kronos 4500 Terminal. The increased demand is primarily the result of
the introduction of new products and software modules, as well as new and
platform conversion sales. Also contributing to the growth in product revenues, to a
lesser extent, are product revenues attributable to acquired businesses.

|                       | Three Months Ended
|---------------------- | ------------------
|
|Revenues from acquired |                   
|businesses             |                   
|Percentage of product  |                   
|revenues               |                   

Maintenance Revenues (dollars in thousands):

|                     | Three Months Ended
|-------------------- | ------------------
|
|Maintenance revenues |                   
|Maintenance revenues |                   
|as a percent of      |                   
|total revenues       |                   

---

The increase in maintenance revenues in the three month period ended January 1, 2005 was
principally the result of expansion of our installed base of software solutions 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 platform and capacity upgrade licenses to
existing customers. Platform and capacity upgrade sales typically result in an increased
value of maintenance contracts due to the higher contract price typically associated with the new
platforms product or increased value in the product resulting from the additional
capacity. The maintenance value is typically based on the related products value.
The decrease in revenues associated with acquired businesses is attributable to the timing
of acquisitions in the respective periods. The lower proportion of maintenance revenues to
total revenues in the three months period ended January 1, 2005 is primarily due to the
increased proportion of product revenue.

|                          | Three Months Ended
|------------------------- | ------------------
|
|Revenues from acquired    |                   
|businesses                |                   
|Percentage of maintenance |                   
|revenues                  |                   

Professional Services Revenues (dollars in thousands):

|                  | Three Months Ended
|----------------- | ------------------
|
|Professional      |                   
|services revenues |                   
|Professional      |                   
|services revenues |                   
|as a percent of   |                   
|total revenues    |                   

In conjunction with the increase in demand for our products, there has been an increase
in customer demand for professional services in the three month period ended January 1,
2005, as compared to the same period in the prior year. However, the growth in
professional services in the three month period ended January 1, 2005 was principally due
to an increased utilization rate experienced by the services organization as
the capacity to deliver professional services was relatively consistent with the prior year.  The growth
in professional services revenues was partially offset by a decrease in revenues from acquired
businesses in the three month period ended January 1, 2005.

---

|                           | Three Months Ended
|-------------------------- | ------------------
|
|Revenues from acquired     |                   
|businesses                 |                   
|Percentage of professional |                   
|services revenues          |                   

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

Gross Profit/Gross Margin (dollars in thousands):

|                     | Three Months Ended
|-------------------- | ------------------
|
|Product gross profit |                   
|Service gross profit |                   
|                     |                   
|Total gross profit   |                   
|                     |                   
|Product gross margin |                   
|Service gross margin |                   
|Total gross margin   |                   

---

Total gross margin for the three month period ended January 1, 2005 increased to 61% from 58% in
the comparable period in the prior year. This increase was the result of a higher content
of product revenues and an increase in product gross margin for the three month period
ended January 1, 2005. We anticipate total gross margin to increase in the second quarter
of fiscal 2005 as compared to the prior year principally as a result of our expectation of
continued favorable mix of product revenues, resulting in a higher proportion of product revenues
as compared to services revenues.  Product revenues typically generate a higher
gross margin than service revenues.

Product gross margin increased in the three month period ended January 1, 2005 principally due to
a favorable product mix during the periods, which resulted in a higher proportion of product revenues
from hardware and software as compared to sales of third-party product for resale. Product revenues from
hardware and software, which typically generate a higher gross margin than sales of third-party product for
resale, were a greater proportion of total product revenues in the three month period
ended January 1, 2005 as compared to the comparable period in the prior year (94% and 92%
for the three month periods ended January 1, 2005 and January 3, 2004, respectively). The
amortization of capitalized software costs also contributed favorably to product margin in
the three month period ended January 1, 2005, as compared to the same period in the prior
year due to an increase in sales volume as these costs are relatively
consistent from year to year.

Service gross margin in the three month period ended January 1, 2005 remained unchanged as compared to
service gross margin in the same period in the prior year. Although maintenance revenues
increased as a proportion to total service revenues and professional services utilization
improved in the three month period ended January 1, 2005, these positive impacts on
service gross margin (maintenance revenues typically carry a higher gross margin than
professional services revenues) were offset by investments in our Customer Relationship
program. This program includes providing a designated resource to certain customers with
the goal of developing and maintaining pre- and post-implementation relationships with the
customers.

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

Total Net Operating Expenses (dollars in thousands):

|                   | Three Months Ended
|------------------ | ------------------
|
|Net operating      |                   
|expenses           |                   
|Net operating      |                   
|expenses as a % of |                   
|total revenues     |                   

---

The increase in total net operating expenses for the three month period ended January 1, 2005
was principally attributable to investments in personnel and related compensation and
overhead costs in response to increased customer demand and to support the development of
new products (approximately $8.5 million). The increase was also attributable to an
increase in spending related to marketing programs (approximately $0.7 million); and an
increase in professional fees and other costs associated with the replacement of
information systems (approximately $0.6 million).

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

|                    | Three Months Ended
|------------------- | ------------------
|
|Sales and marketing |                   
|expenses            |                   
|Sales and marketing |                   
|expenses as a % of  |                   
|total revenues      |                   

The increase in sales and marketing expense for the three month period ended January 1, 2005
was primarily attributable to compensation and related costs associated with higher sales volume
and support costs to add new
customers and to maximize the penetration of existing customer accounts (approximately $4.2
million). An increase in spending related to marketing programs (approximately $0.7
million) also contributed to the increase in sales and marketing spending. The decrease in
sales and marketing expense as a percentage of total revenues for the three month period
ended January 1, 2005 was primarily attributable to leveraging the investments in
infrastructure to generate higher sales volumes.

---

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

|                         | Three Months Ended
|------------------------ | ------------------
|
|Total Engineering,       |                   
|research and             |                   
|development spending     |                   
|Capitalized software     |                   
|development costs        |                   
|                         |                   
|Engineering, research    |                   
|and development expenses |                   
|                         |                   
|Engineering, research    |                   
|and development          |                   
|expenses as a % of       |                   
|total revenues           |                   

The increase in engineering, research and development spending for the three month period
ended January 1, 2005 was primarily attributable to continued investment in engineering personnel
and their compensation-related expenses (approximately $3.0 million). This increase is the
result of the continued development and support of new products. The significant product
development efforts in the first three months of fiscal 2005 were principally related to
further development and enhancement of the Workforce Central® suite, including
scheduling, activities and workflow modules as well as Workforce HR, Workforce
Payroll and the Kronos 4500 terminal.

---

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

|                   | Three Months Ended
|------------------ | ------------------
|
|General and        |                   
|administrative     |                   
|expenses           |                   
|General and        |                   
|administrative     |                   
|expenses as a % of |                   
|total revenues     |                   

The increase in general and administrative expenses in the three month period ended January 1,
2005 was primarily due to investment in personnel and related compensation and support
costs required for the continued support of our growing operations (approximately $1.3
million), and an increase in fees related to consulting services, training and other costs
associated with the replacement of information technology systems (approximately $0.6
million).

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
|---------------------- | ------------------
|
|Amortization of        |                   
|intangible assets      |                   
|Amortization of        |                   
|intangible assets as a |                   
|% of total revenues    |                   
|Other income, net      |                   
|Other income, net as a |                   
|% of total revenues    |                   

The increase in amortization of intangible assets in the three month period ended January 1,
2005, as compared to the same period in the prior year, is principally attributed to
amortization charges related to acquisitions which were completed during the last twelve months.
The increase in other income, net in the three month period ended January 1,
2005 is principally due to an increase in interest income generated from the larger
portfolio of marketable securities and financing arrangements.

Income Taxes. The provision for income taxes as a percentage of pre-tax income was
32.2% for the three month period ended January 1, 2005. For the comparable period in the
prior fiscal year, the provision for income taxes as a percentage of pre-tax income was
34.9%. The provision for income taxes 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 on certain research and development tax credits related to the Ad Opt acquisition completed
during the three month period ended January 1, 2005. We currently anticipate that the
income tax rate will approximate 33% for the remainder of the fiscal year.

Newly Issued Accounting Standards. On December 16, 2004, the Financial Accounting Standards
Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based
Payment, which is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and amends FASB Statement No. 95,
Statement of Cash Flows. Generally, the approach in Statement 123(R) is
similar to the approach described in Statement 123. However, Statement 123(R) requires all
share-based payments to employees, including the grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro forma disclosure is no
longer an alternative.

---

Statement 123(R) must be adopted no
later the first interim period beginning after June 15, 2005. Early adoption will be
permitted in periods in which financial statements have not been issued. We expect to
adopt Statement 123(R) on July 3, 2005, the beginning of our fourth fiscal quarter.

As permitted by Statement 123, we
currently account for share-based payments to employees using Opinion 25s intrinsic
value method and, as such, generally recognize no compensation cost for employee stock
options. Accordingly, the adoption of Statement 123(R)s fair value method will have
a significant impact on our results of operations, although it will have no impact on our
overall financial position. The impact of adoption of Statement 123(R) cannot be predicted
at this time because it will depend on levels of share-based payments granted in the
future. However, had we adopted Statement 123(R) in prior periods, the impact of that
standard would have approximated the impact of Statement 123 as described in the
disclosure of pro forma net income and earnings per share in Note C to our consolidated
financial statements. Statement 123(R) also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as required under current literature. This requirement will
reduce net operating cash flows and increase net financing cash flows in periods after
adoption. While we cannot estimate what those amounts will be in the future (because they
depend on, among other things, when employees exercise stock options), the amount of
operating cash flows recognized in prior periods for such excess tax deductions were $10.7
million, $9.1 million, and $9.2 million in fiscal 2004, 2003 and 2002, respectively.

# 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.

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

|                                      | As of |         
|------------------------------------- | ----- | --------
|
|Cash, cash equivalents and marketable |       |         
|securities (including short and       |      
|long-term)                            |       | $157,694
|Working capital                       |       | $7,641  

The decrease in cash, cash equivalents and marketable securities is primarily due to cash paid
for acquired businesses during the three month period ended January 1, 2005, partially
offset by cash generated from operations. The decrease in working capital is primarily due
to a decrease in cash, cash equivalents and short-term marketable securities. A portion of
our cash reserves is invested in long-term marketable securities.

---

Cash Flow Highlights (dollars in thousands):

|                      | Three Months Ended
|--------------------- | ------------------
|
|Cash provided by      |                   
|operations            |                   
|Cash used for         |                   
|property, plant and   |                   
|equipment             |                   
|Cash used for         |                   
|acquisitions of       |                   
|businesses            |                   
|(Decrease) Increase   |                   
|in marketable         |                   
|securities            |                   
|Net proceeds from     |                   
|exercise of stock     |                   
|options and employee  |                   
|stock purchase plans  |                   
|Repurchases of common |                   
|stock                 |                   

* Not meaningful

The increase in cash provided by operations in the three month period ended January 1, 2005
was principally attributable to an increase in net income, an increased rate of growth in
our deferred maintenance revenues, and a reduced use of cash due to the timing of certain
vendor payments and certain compensation related payments. These are
partially offset by a reduced rate of cash collected from accounts receivable during the
three month period ended January 1, 2005 as compared to the same period in the prior year due to the growth
of our financing arrangements, as well as a reduction in deferred product revenues.

---

Our use of cash for property, plant and equipment in the three month period ended January 1,
2005 includes investments in information systems and infrastructure to improve and support
our expanding operations. We anticipate making significant capital investments during the
remainder of fiscal 2005 in conjunction with the replacement of our information technology
systems. To date, we have invested approximately $10.6 million (excluding internal
personnel related costs) related to the replacement of our information technology systems of which
$7.2 million has been
capitalized, with the remainder expensed through operations. We expect our total
investment in this project (excluding internal personnel related costs) to range between
$20.0 million and $22.0 million through the end of fiscal 2006. Our use of cash for the
acquisition of businesses in all periods presented was principally related to the
acquisition of AD OPT Technologies, Inc. on November 18, 2004. Please refer to Note F in
the Notes to the Condensed Consolidated Financial Statements for further details. We are
assessing several acquisition opportunities that may be completed over the next twelve
months, although there can be no assurance that these acquisitions will be completed.
Excess cash reserves not required for operations, investments in property, plant and
equipment or acquisitions are invested in marketable securities.

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

|                         | Three Months Ended
|------------------------ | ------------------
|
|Shares of common stock   |                   
|repurchased              |                   
|Cost of shares of common |                   
|stock repurchased        |                   

* Not meaningful

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 with non-cancelable terms of one
year or more, and future payment obligations related to guaranteed payments are as
follows:

---

Payments Due by
Period (in thousands)

|Contractual 
         Obligations | Total | Less Than 1 Year | More Than 
1 Year,  Less Than 3 Years | More Than
3 Years, Less Than 5 Years | More Than 
5 Years
|--------------------------------- | ----- | ---------------- | ------------------------------------- | ------------------------------------ | ------------------
|Operating lease obligations       |       | $43,334          |                                       | $10,641                              |                   
|Guaranteed payment                |      
|obligations                       |       | 2,921            |                                       | 2,521                                |                   
|                                  |       |                  |                                       |                                      |                   
|Total                             |       | $46,255          |                                       | $13,162                              |                   
|                                  |       |                  |                                       |                                      |                   

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.

# Certain Factors That May
Affect Future Operating Results

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

Actual operating results may differ from those indicated by forward-looking statements made in
this Quarterly Report on Form 10-Q and presented elsewhere by us from time to time because
of a number of factors including the potential fluctuations in quarterly results, timing
and acceptance of new product introductions by us and our competitors, the dependence on
our time and labor product line, the ability to attract and retain sufficient technical
personnel, the protection of our intellectual property and the potential infringement on
our intellectual property rights, competitive pricing pressure, and the dependence on
alternate distribution channels and on key vendors, as further described below and in our
Annual Report on Form 10-K for the fiscal year ended September 30, 2004, which are
specifically incorporated by reference herein.

---

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 effect 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, 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, competitive pricing pressure and costs
associated with the transition related to the replacement of our information technology
systems. We currently anticipate completing the transition to our new information
technology systems during fiscal 2005 and 2006. 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. We historically have realized a
relatively larger percentage of our annual revenues and profits in the third and fourth
quarters and a relatively smaller percentage in the first and second quarters of each
fiscal year, although there can be no assurance that this pattern will continue. In
addition, substantially all of our product revenue and profits in each quarter result from
orders received in that quarter. If near-term demand for our products weakens or if
significant anticipated sales in any quarter do not close when expected, our revenues for
that quarter will be adversely affected. We believe that our operating results for any one
period are not necessarily indicative of results for any future period.

Integration of Acquired Businesses.As part of our overall growth strategy, we
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:

| | o | 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;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | o | 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;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Difficulties
maintaining uniform standards, controls, procedures and policies across locations and
businesses;
| | - | --------------------------------------------------------------------------------------------------------------

| | o | Litigation
by terminated employees or third parties; and
| | - | --------------------------------------------------------

| | o | 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 any acquisition or investment. To the extent we issue shares
of capital stock or other rights to purchase capital stock, including options and
warrants, existing stockholders may be diluted and earnings per share may decrease. In
addition, acquisitions and investments may result in the incurrence of debt, large
one-time write-offs, such as acquired in-process research and development costs, and
restructuring charges. They may also result in goodwill and other intangible assets that
are subject to impairment tests, which could result in future impairment charges.

Competition.
          The 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 and/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 upon our business, prospects,
          financial condition and operating results.

Dependence on Time and Labor Product Line. To date, more than 90% of our revenues have been
attributable to sales of time and labor systems and related services. Although we have
introduced products for scheduling solutions, and the licensed human resources and payroll
market, we expect that our dependence on the time and labor product line for revenues will
continue for the foreseeable future. Competitive pressures or other factors could cause
our time and labor products to lose market acceptance or experience significant price
erosion, adversely affecting the results of our operations.

---

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

Dependence on Alternate Distribution Channels. We market and sell our products through our direct
sales organization, independent resellers and ADP under an OEM agreement. In the first
three months of fiscal 2005, approximately 11% 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.

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 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 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,
2004 for further discussion regarding marketable securities, foreign currency forward
exchange contracts and capped call option arrangements. 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 January 1, 2005, as all of these securities have fixed rates of
interest. A 100 basis point increase in interest rates would not adversely impact the fair
value of these securities by a material amount due to the size and average duration of the
portfolio. Our exposure to market risk for fluctuations in foreign currency relate
primarily to the amounts due from subsidiaries. Exchange gains and losses related to
amounts due from subsidiaries have not been material. For foreign currency exposures
existing at January 1, 2005, a 10% unfavorable movement in the foreign exchange rates for
each subsidiary location would not expose us to material losses in earnings or cash flows.
The calculation assumes that each exchange rate would change in the same direction
relative to the U.S. dollar.

# Item 4.     
Controls and Procedures.

(a)    
Evaluation of Disclosure Controls and Procedures

The Companys management, with
the participation of the Companys Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the Companys disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended (the Exchange Act)) as of January 1, 2005. Based on this
evaluation, the Companys Chief Executive Officer and Chief Financial Officer
concluded that, as of January 1, 2005, the Companys disclosure controls and
procedures were (1) designed to ensure that material information relating to the Company,
including its consolidated subsidiaries, is made known to the Companys Chief
Executive Officer and Chief Financial Officer by others within those entities,
particularly during the period in which this report was being prepared and (2) effective,
in that they provide reasonable assurance that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SECs
rules and forms.

(b)     
Changes in Internal Controls

No change in the Companys
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 January 1, 2005 that has
materially affected, or is reasonably likely to materially affect, the Companys
internal control over financial reporting.

---

# Part II.     
OTHER INFORMATION

Item 1.     
Legal Proceedings

| | None
| | ----

Item 2.      
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

In the following table, we provide information about our purchases during the quarter ended
January 1, 2005 of equity securities that are registered by us pursuant to
Section 12 of the Exchange Act.

ISSUER PURCHASES OF
EQUITY SECURITIES

|                    | (a) | (b)    | (c) | (d)
|------------------- | --- | ------ | --- | ---
|
|10/01/04 - 11/01/04 |     | --     |     | -- 
|11/02/04-12/02/04   |     | 15,394 |     | $49
|12/03/04-01/01/05   |     | 63,000 |     | $48
|Total:              |     | 78,394 |     | $48

(1)    
          We repurchased an aggregate of 78,394 shares of our common stock pursuant to the
          repurchase program that we publicly announced on May 13, 2003 (the
          Program).

(2)    
          Our board of directors approved the repurchase by us of up to an aggregate of
          750,000 shares of our common stock pursuant to the Program. 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
| | ----

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

| | None
| | ----

Item 5.     
Other Information

| | None
| | ----

---

Item 6.   Exhibits

| | 2.1(1) | Acquisition Agreement, dated
        as of October 5, 2004, by and amoung the Registrant, Kronos Acquisition Inc., a corporation
        organized under Canadian law and wholly-owned subsidiary of the Registrant, and AD OPT Technologies
        Inc., a corporation organized under Canadian law.
| | ------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 31.1 | Certification
by Chief 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 Chief 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.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (1)
Incorporated by reference to the Company's Current Report on Form 8-K filed with the SEC
on October 5, 2004.
| | ----------------------------------------------------------------------------------------------------------------

---

SIGNATURE

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.

|Date: February 9, 2005 |  | KRONOS INCORPORATED                                                                                                                                                 | 
|---------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|                       |  | By:  /s/ Paul A. Lacy
Paul A. Lacy
Executive Vice President, Chief Financial and
Administrative Officer  (Duly Authorized Officer and  Principal Financial Officer)

---

# KRONOS INCORPORATED

# EXHIBIT INDEX

|ExhibitNumber | Description                                                                                                                                                                                                                                                                                           
|------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1(1)        | Acquisition Agreement, dated
        as of October 5, 2004, by and amoung the Registrant, Kronos Acquisition Inc., a corporation
        organized under Canadian law and wholly-owned subsidiary of the Registrant, and AD OPT Technologies
        Inc., a corporation organized under Canadian law.
|31.1          | Certification by Chief 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 Chief 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.                                                                                                          

(1) Incorporated by reference to the
Company's Current Report on Form 8-K filed with the SEC on October 5, 2004.