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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

or

Commission file number     0-20109

Kronos Incorporated

(Exact name of registrant as specified in its charter)

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

Registrant's telephone number, including area code (978) 250-9800

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
Series A Junior Preferred Participating Stock, $1.00 par value per share

         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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

         Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)

Yes X      No___

         State the aggregate market value of the voting stock held by non-affiliates of the registrant.

         Shares of voting stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The registrant has no shares of non-voting stock authorized or outstanding.

         Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

DOCUMENTS INCORPORATED BY REFERENCE.

         Portions of the registrant’s definitive Proxy Statement for the 2005 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year end, are incorporated by reference into Items 10-14 of Part III hereof. With the exceptions of the portions of the Proxy Statement expressly incorporated by reference, such document shall not be deemed filed with this Form 10-K.

PART I

Item 1. Business

Kronos Incorporated (the “Company” or “Kronos”) was organized in 1977 as a Massachusetts corporation. As part of our workforce management solution, we develop, manufacture, and market human resources, payroll, scheduling, and time and labor systems. These solutions enable organizations to automate employee-centric processes, engage the workforce in a more positive, dynamic, and productive fashion, and optimize the workforce in order to achieve maximum business performance. The results include reduced costs and increased productivity, higher employee satisfaction, better alignment of employee performance with organizational objectives, and the placement of real-time information in the hands of decision makers.

Our solutions are designed for a wide range of businesses, from single-site companies to large, multi-site enterprises. These solutions can be purchased or financed from us. In addition, we maintain an extensive services and technical support organization that maintains systems and provides professional and educational services. These services can be delivered on-site or via the Web.

We also collaborate with many industry-leading vendors that market products and services that are synergistic with our solutions. These include major enterprise resource planning system (ERP) providers; consulting firms; niche workforce management application vendors; and technology vendors. To date, substantially all of our revenues and profits have been derived from our time and labor applications and related products and services. We introduced our human resources and payroll products during the course of fiscal 2002. We introduced our newest line of scheduling products in fiscal 2004.

   Kronos Products

The Kronos Workforce Management Solution

Our workforce management solution enables organizations to reduce costs and increase productivity, improve employee satisfaction, align employee performance with organizational objectives and put real-time information in the hands of decision makers.

Our workforce management solution consists of the following components: human resources, payroll, scheduling, time and labor, data collection and self-service, as well as analytics. These components can be deployed together or independently to meet the unique needs of various organizations.

The Workforce Central® Suite

Using Web-based technology, the Workforce Central suite is a closely integrated system of human resources, payroll, scheduling and time and labor applications. It can be deployed individually or as a comprehensive solution for workforce management. The Workforce Central suite incorporates powerful applications for analytics and employee self-service, and employs a broad range of our own industry-leading data collection devices. Each component of the Workforce Central suite provides unmatched functionality, streamlined workflow technology, and an intuitive user interface.

The Workforce Central solutions include:

    Human resources

       Payroll

       Scheduling

       Time and labor

       Data collection

       Self-service

       Analytics

The Kronos iSeries Central suite

The Kronos iSeries Central suite is comprised of time and labor applications designed specifically for the IBM eServer iSeries. The Kronos iSeries Central suite automates time and labor management processes on the frontline and provides access to real-time data for better decision-making. It employs a broad range of our own data collection devices.

Kronos iSeries Central product solutions include:

The Timekeeper Central® system

The Timekeeper Central® system is an advanced time and attendance system for small and medium sized companies deploying on a site by site basis. It is designed to automate the capture, management, and distribution of critical employee labor data. The Timekeeper Central system runs on a Windows platform. It eliminates the need for manual timesheets and helps ensure an organization’s ability to produce an accurate payroll, measure variations in labor productivity, and administer time-related benefits.

Timekeeper Central software modules include a:

        Scheduling module designed to speed the process of creating and assigning employee schedules.

        Accruals module designed to ensure consistent benefit time administration.

        CardSaver^® module designed to store individual punch history data for easy retrieval.

        Archive module designed to store historical work totals for easy retrieval.

        Database Poster designed to export time and attendance data to other software applications.

        Messaging module designed to download messages to employee terminals.

Complementary products

In addition to our core products, we offer a variety of solutions designed to help maximize workforce management capabilities.

Services and Support

        We maintain an extensive professional service and technical support organization that provides a suite of maintenance, professional and educational services. These services are designed to support our customers throughout the product life cycle. Maintenance service options are delivered through our centralized Global Support operation or through local service personnel. We also provide a wide range of customer self-service options through the Internet. Our professional services include implementation support, technical and business consulting as well as system integration and optimization. Our educational services offer a full range of curriculae that are delivered through local training centers or via computer based training courses.

Marketing and Sales

         We market and sell our products to the mid-market (organizations up to 2,500 employees), the enterprise market (organizations with 2,500+ employees) and the national market (organizations with 15,000 or more employees). We market and sell in the United States and other countries through our direct sales and support organization and through independent resellers. In addition, we have a joint marketing agreement with Automatic Data Processing, Inc. , or ADP, under which ADP markets rebranded versions of our Timekeeper Central system, Workforce Central suite and data collection terminals. Our direct sales force is organized to focus on the distinct market segments (mid-market, enterprise, national) and in some cases on distinct vertical industries or product lines. The direct sales force is organized by geographic region and the marketing department is organized into functional groups.

Marketing Organization:

The responsibilities of the marketing organization include:

Direct Sales Organization

         We have 45 direct sales and support offices located in the United States. In addition, we have four sales and support offices located in Canada, three in the United Kingdom, one in Mexico, five in Australia, and one in New Zealand. Each direct sales office covers a defined geographic region, and has sales and support functions. We have sales executives assigned to mid-market, enterprise and national accounts. There are also teams dedicated to the government, retail and healthcare markets. To capitalize on the specialization of our Visionware product, we also have a dedicated sales and support operation focusing on this product.

        For the fiscal years ended September 30, 2004, 2003, and 2002, our direct sales and support offices in the U.S. generated net revenues of $358.8 million, $320.6 million, and $279.1 million, respectively. For the fiscal years ended September 30, 2004, 2003, and 2002, our international subsidiaries generated net revenues of $46.7 million, $37.5 million, and $25.8 million, respectively. Total assets at our international subsidiaries for these periods were $37.0 million, $29.8 million, and $24.8 million, respectively. The increase in total assets in fiscal 2004 is attributable to increases in cash and accounts receivable balances in certain of the international subsidiaries.

Resellers

         We also market and sell our products through independent resellers within designated geographic territories generally not covered by our direct sales offices. These resellers provide sales, support and installation services for our products. There are presently approximately 6 resellers in the United States actively selling and supporting our products. Sales to independent U.S. resellers for the years ended September 30, 2004, 2003, and 2002 were $9.7 million, $10.8 million, and $14.5 million, respectively. The decrease in revenues in fiscal 2004 and 2003 was principally due to the acquisitions by us of various resellers during fiscal 2004, 2003 and 2002. We also have resellers in Argentina, Bahamas, Bahrain, Barbados, Bermuda, Brazil, Chile, Columbia, Ghana, Guam, Guyana, Holland, Jamaica, Lebanon, Netherlands Antilles, Norway, Panama, The Philippines, Puerto Rico, Singapore, South Africa, Trinidad, and United Arab Emirates. Sales to independent international resellers were not material in any of the fiscal years 2002– 2004. We support our resellers with training, technical assistance, and marketing assistance.

Original Equipment Manufacturers (OEM)

         We have a joint marketing agreement with ADP under which ADP markets rebranded versions of our Timekeeper Central system, Workforce Central Suite and data collection terminals manufactured by us.

         During fiscal 2003, we signed an agreement with ADP extending the business relationship for an additional term of five years, and during fiscal 2004, signed an amendment to that agreement which provides for minimum purchasing requirements, and further extends the agreement for an additional six months. A reduction in the sales efforts of our major resellers and/or ADP, or termination or changes in their relationships with us, could have a material adverse effect on our results from operations.

Customers

         End-users of our products include companies of virtually all sizes from many varied sectors such as manufacturing, healthcare, service, retail and government sectors.

Product Development

         Our product development efforts are focused on enhancing the capabilities and increasing the performance of our existing products as well as developing new products and standard interfaces to third party products on a timely basis to meet the increasingly sophisticated needs of our customers. During fiscal 2004, 2003, and 2002, our engineering, research and development expenses were $44.1 million, $38.5 million, and $37.0 million, respectively. We intend to continue to commit substantial resources to enhance and extend our product lines and develop interfaces to third party products. Although we continually seek to further enhance our product offerings and to develop new products and interfaces, including products for the workforce management market, 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 which are superior to our products or achieve greater market acceptance. We also depend upon the reliability and viability of a variety of software products owned by third parties to develop our products. If these products are inadequate or not properly supported, our ability to release competitive products in a timely manner could be adversely impacted.

Competition

         The workforce management market, which includes human resources, payroll, scheduling, and time and labor, 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 recent introduction of our human resources, payroll, and advanced scheduling products, we will continue to meet strong competition. Many of our 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, payroll, and scheduling products. Some of our human resources and payroll competitors have significantly greater financial, technical and sales and marketing resources than we have, as well as more experience in delivering human resources and payroll solutions. We believe that the principal methods of competition include product features and functionality, price, customer service, resources, manner of delivery and company stability and reputation. We believe we have competitive advantages over a number of our competitors. Some of these advantages include our product features, that we are a single source provider of workforce management solutions, and our proven service approach. Although we believe we have core competencies that position us strongly in the marketplace, maintaining our technological and other advantages over competitors will require continued investment by us in research and development and 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, payroll and scheduling marketplace, and our failure to do so could have a material adverse impact upon our business, prospects, financial condition and operating results.

Proprietary Rights

         We have developed, and through our acquisitions of businesses and technology, 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.

         We have registered trademarks for Kronos, Kronos TouchID, My Genies, Timekeeper, Timekeeper Central, TimeWeb, Jobkeeper Central, Datakeeper, Datakeeper Central, Gatekeeper, Gatekeeper Central, Imagekeeper, TeleTime, CardSaver, ShopTrac, ShopTrac Pro, the ShopTrac logo, Keep.Trac, Solution In A Box, Visionware, the Visionware logo, Workforce Central, Workforce Genie, Workforce Accruals, Workforce TeleTime, Workforce Express, Workforce Decisions, eForce, PeoplePlanner, PeoplePlanner design, StarComm, StarPort, StarSaver, StarTimer, and our logo in the United States and other countries. In addition, Kronos eCentral, Timekeeper Web, Workforce Connect, FasTrack, Workforce Activities, Workforce Scheduler, Workforce Smart Scheduler, Workforce Manager, Workforce MobileTime, Workforce Timekeeper, FasTrack, Hyperfind, Kronos 4500, Kronos 4500 Touch ID, Labor Plus, Schedule Assistant, Winstar, Winstar Elite, WIP Plus, Workforce HR, Workforce View, Workforce Employee, Workforce Mobiletime, Smart Scheduler, StartLabor, StartQuality, StartWIP, Starter Series, Timekeeper Decisions, VisionPlus, Workforce Payroll, Workforce Record Manager, Workforce Recruiter, Workforce Tax Filing, and Workforce Web are our trademarks. Certain trademarks have been obtained or are in process in various foreign countries.

         IBM is a registered trademark of, and iSeries and eServer are trademarks of, International Business Machines Corporation. ADP is a registered trademark of Automatic Data Processing, Inc. Microsoft is a registered trademark of Microsoft Corporation. PeopleSoft is a registered trademark of PeopleSoft, Inc. J.D. Edwards is a registered trademark of J.D. Edwards and Company. Lawson is a registered trademark of Lawson Associates, Inc. SAP is a trademark of SAP AG.

Manufacturing and Sources of Supply

         The duplication of our software and the printing of documentation are outsourced to suppliers. We currently have two suppliers who have been certified to our manufacturing specifications to perform the software duplication process. The majority of the assembly of the printed circuit boards used in our data collection terminals is completed at our facility in Chelmsford, Massachusetts. A portion of this assembly is completed by approved suppliers. All final assembly and testing of our data collection terminals is completed at our Chelmsford facility. Although most of the parts and components included within our products are available from multiple suppliers, certain parts and components are purchased from single suppliers. We have chosen to source these items from single suppliers because we believe that the supplier chosen is able to consistently provide us with the highest quality product at a competitive price on a timely basis. While we have to date been able to obtain adequate supplies of these parts and components, our inability to transition to alternate sources on a timely basis if and as required in the future could result in delays or reductions in product shipments which could have a material adverse effect on our operating results.

Acquisitions

         We completed several acquisitions during fiscal 2004, none of which are material to our business. Please refer to Note H of the Notes to Consolidated Financial Statements for further information.

         In December 2001, we completed the acquisition of certain assets and the ongoing business operations of the Integrated Software Business of SimplexGrinnell’s Workforce Solutions Division (“SimplexGrinnell”). The aggregate purchase price paid was $22.1 million in cash. SimplexGrinnell was engaged in the development, sales and support of integrated workforce management software solutions. As a result of this acquisition, we increased our presence in the mid-market sector.

         On March 15, 2002, we entered into an agreement with Best Software Inc. (“Best”) to acquire a limited license to the source code and object code for Best’s human resources and payroll software (Abra Enterprise™). Under the terms of the agreement, Best provided us with the Abra Enterprise source code, and gave us the right to reproduce, market and sublicense the software. We have integrated Abra Enterprise into our Workforce Central suite and are marketing and sublicensing the resulting products as Workforce HR™ and Workforce Payroll™. Per the terms of the agreement, we paid Best a one-time technology delivery fee that is being amortized over a five-year period. This fee is included in capitalized software on the balance sheet. The agreement also requires us to pay minimum royalties for the first five years of the agreement with royalty payments based on the number of licensed employees continuing for an aggregate period of ten years.

Employees

         As of September 30, 2004, we had approximately 2,500 employees. None of our employees are represented by a union or other collective bargaining agreement, and we consider our relations with our employees to be good. We have historically 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.

Available Information

         We maintain an internet website at www.kronos.com. We make available, free of charge through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and each amendment to these reports. Each such report is posted on our website as soon as reasonably practicable after such report is filed with the SEC via the EDGAR system.

         The information on our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered a part of this Annual Report. Our website address is included in this Annual Report as an inactive textual reference only.

Item 2.      Properties

         We own our 129,000 square foot corporate headquarters facility and lease approximately 292,000 square feet in four additional facilities, all located in Chelmsford, Massachusetts. Our manufacturing operations, Global Support Center and various engineering, sales, service, and administrative operations are located in these leased facilities. Expiration dates of leases on these offices range from 2005 to 2013. We additionally lease 60 sales and support offices located throughout North America, Europe, Australia and New Zealand. Expiration dates of leases on these offices range from 2004 to 2018. Our aggregate rental expense for all of our facilities in fiscal 2004 was approximately $11.3 million. We consider our facilities to be adequate for our current requirements and believe that additional space will be available as needed in the future.

Item 3.      Legal Proceedings

         From time to time, we are involved in legal proceedings arising in the normal course of business. We do not consider any of the legal proceedings in which we are currently involved to be material.

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

          None.

Item 4A.      Executive Officers

Executive Officers of the Registrant

         Mark S. Ain, one of our founders, has served as Chief Executive Officer and Chairman since our organization in 1977. He also served as President from 1977 through September, 1996. Mr. Ain sits on the Board of Directors for the following public companies: KVH Industries, Inc., LTX Corporation and Park Electrochemical Corp. Mr. Ain is the brother of Aron J. Ain, Executive Vice President, Chief Operating Officer.

         Paul A. Lacy has served as Executive Vice President, Chief Financial and Administrative Officer since April 2002. Previously, Mr. Lacy served as Vice President, Finance and Administration, Treasurer and Clerk from 1988 until April 2002.

         Aron J. Ain has served as Executive Vice President, Chief Operating Officer since April 2002. Previously, Mr. Ain served as Vice President, Worldwide Sales and Service from November 1998 until April 2002, as Vice President, Marketing and Worldwide Field Operations from September 1996 until November 1998, and as Vice President, Sales and Service from 1988 through September, 1996. Mr. Ain is the brother of Mark S. Ain, Chief Executive Officer and Chairman.

         Lloyd B. Bussell has served as Vice President, Manufacturing since 1987.

         James J. Kizielewicz has served as Vice President Corporate Strategy since March, 2004. Previously, Mr. Kizielewicz served as Vice President, Marketing and Corporate Strategy from January, 1997 until March, 2004. Mr. Kizielewicz served in a variety of capacities at the Company from 1981 until his appointment as Vice President, Marketing and Corporate Strategy in January, 1997.

         Peter C. George has served as Vice President, Engineering, Chief Technology Officer since February 2002. Previously, Mr. George served as Vice President, Software Development since 1997 where he was responsible for the management of the development of our software products.

         Joseph R. DeMartino has served as Vice President, Worldwide Service since June 2002. Previously, Mr. DeMartino served as Vice President, North America Field Service since 1998 where he was responsible for the management of the customer service delivery functions, including consulting, education and technical support, for our North America operations.

         Laura L. Vaughan has served in a variety of capacities from 1992 until her appointment as Vice President, Worldwide Sales in 2000. In this role, Ms. Vaughan is responsible for worldwide sales and international operations. Ms. Vaughan was appointed to her current position as an executive officer in June 2002.

         Officers of the Company hold office until the first meeting of directors following the next annual meeting of stockholders at which time officers are appointed for the following fiscal year.

PART II

Item 5. Market for Registrant’s Common Equity and Stockholder Matters

Stock Market Information

         Our common stock is traded on the NASDAQ National Market under the symbol KRON. The following table sets forth the high and low sales prices for fiscal 2004 and 2003. These over-the-counter market quotations reflect interdealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

Holders

         There were approximately 300 stockholders of record of our common stock as of December 2, 2004. The number of record holders reported as of December 2, 2004 is lower than prior years because historically we have reported the number of record holders as the estimated number of beneficial holders of our common stock, rather than actual record holders.

Dividends

         We have not paid cash dividends on our common stock, and our present policy is to retain earnings for use in our business.

Issuer Purchases of Equity Securities

In the following table, we provide information about our purchases during the quarter ended September 30, 2004 of equity securities that are registered by the company pursuant to Section 12 of the Exchange Act.

(1)     We repurchased an aggregate of 135,541 shares of our common stock pursuant to the repurchase program that was 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 6.      Selected Financial Data

The following selected consolidated financial data should be read in conjunction with the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations included elsewhere in this Annual Report on Form 10-K. The balance sheet data as of September 30, 2004 and 2003 and the statements of operations data for the years ended September 30, 2004, 2003, and 2002 have been derived from the audited consolidated financial statements for such years, included elsewhere in this Annual Report on Form 10-K. The balance sheet data as of September 30, 2002, 2001, and 2000 and the statements of operations data for the years ended September 30, 2001 and 2000 have been derived from the audited consolidated financial statements for such years, not included in this Annual Report on Form 10-K.

Financial Highlights

(1)     In accordance with Statements of Financial Accounting Standards No. 141, “Business Combinations,” and No. 142, “Goodwill and Other Intangible Assets,” which were issued in June 2001, the Company changed its method of accounting for acquisitions consummated subsequent to June 30, 2001 and effective October 1, 2001, the Company changed its method of accounting for goodwill.

(2)     The presentation of amounts per share have been restated to reflect the Company's three-for-two stock split that was paid on October 31, 2003 to stockholders of record as of October 20, 2003.

Selected Quarterly Financial Data

Item 7.      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 revenues, international revenues, revenue growth rates, service gross profit, operating expenses, cash flow, capital expenditures, customer purchase patterns 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. 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 Annual 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 multisite 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 have been successful in continuing to increase revenues in all periods presented. While we believe that the current economic environment is improving, certain factors such as a lack of job creation and the apparent lag in technology purchasing in the current economic recovery, as well as the diversion of resources toward compliance with new regulatory requirements on internal controls, may result in many customers deferring or reducing their technology purchases in the future.

         Our revenues in fiscal 2004 increased $53.3 million, or 13% over fiscal 2003. Continued growth in all components of our business contributed to this growth. Product revenues increased $18.1 million, or 10%, maintenance revenues increased $15.4 million, or 12%, and professional services revenues increased $19.8 million, or 21%.

         Net income for fiscal 2004 increased 33% to $46.3 million from $34.7 million, with earnings per share increasing to $1.44 from $1.12 per diluted share. Net income growth for fiscal 2004 was primarily the result of our leveraging growth in revenues to increase gross margins, an improvement in productivity in sales and marketing to drive higher volume of revenues, and to a lesser extent continued corporate-wide efforts to contain costs, and a reduction in the income tax rate, primarily resulting from the resolution of certain tax audits during fiscal 2004. 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 fiscal 2005, we presently anticipate that revenue growth, excluding revenues from customers obtained in the acquisition of businesses to range between 11% — 13% for the entire fiscal 2005 and 11% — 15% for the first quarter of fiscal 2005, with earnings per share in the range of $1.58 — $1.65 for the entire fiscal 2005 and $0.26 — $0.28 for the first quarter.

Critical Accounting Policies and Estimates

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

         We have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of consolidated financial statements. This listing is not a comprehensive list of all of our accounting policies. Please refer to Note A in the Notes to Consolidated Financial Statements 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:

         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:

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 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.

         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 and fiscal 2003, 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 or June 29, 2003, the annual goodwill impairment measurement dates for fiscal 2004 and 2003, respectively.  In addition, we have determined that no events or circumstances currently exist or existed during fiscal 2004 or fiscal 2003 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 fiscal 2004 or 2003.

         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.

         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):

         The principal factors driving revenue growth in fiscal 2004 and 2003 were increased demand for our software and hardware products from new customers, and continued demand for our professional and maintenance services from new and existing customers, as well as revenues from acquired businesses.

        * 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):

         Product revenues grew in fiscal 2004 primarily due to an increase in customer demand for our Workforce Central® suite and related software modules, our Kronos iSeries Central suite, as well as our Kronos 4500™ terminal. The increased demand was primarily the result of the introduction of new software modules, as well as new and platform conversion sales. The rate of product revenue growth and the decline in the proportion of product revenues to total revenues was principally due to the high product sales volume in fiscal 2003. Also impacting the rate of product revenue growth was the growth in deferred product revenues recorded on our balance sheet. Deferred product revenue increased 295% from $2.5 million at September 30, 2003, to $9.8 million at September 30, 2004. In addition, the product revenues in fiscal 2004 benefited less from incremental revenues from acquired businesses due to the timing of acquisitions than in fiscal 2003. The principal factors driving product revenue growth in fiscal 2003 were increased demand for our Kronos 4500 terminal, as well as software capacity upgrades and platform conversions (e.g., conversions by our customers from our Windows product to the current Workforce Central product, which is Web-based).

Maintenance Revenues (dollars in thousands):

         The increase in maintenance revenues in fiscal 2004 and fiscal 2003 was principally the result of expansion of the installed base and an increase in the dollar value of maintenance contracts. The increase in the dollar 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 increase in the dollar value of maintenance contracts due to the higher dollar value typically associated with the new platform’s product or increased dollar value in the product resulting from the additional capacity. The maintenance dollar value is typically based on the related product’s dollar value. The reduced rate of maintenance revenue growth experienced in fiscal 2004 as compared to the rate of growth experienced in fiscal 2003 was primarily due to the large proportion of maintenance renewals from our existing installed base, which annual growth rate is substantially lower than the growth experienced from new customers, as well as the timing of acquisitions.

Professional Services Revenues (dollars in thousands):

         The growth in professional services revenues in fiscal 2004 and fiscal 2003 was principally due to an increase in customer demand for professional services, which was the result of an increase in product sales to new customers. Also contributing to the growth in professional services revenue was an increase in the level of professional services accompanying new and platform conversion sales, which resulted in the delivery of additional professional services hours during the implementations. Further contributing to the growth of the professional services revenue in fiscal 2004 and fiscal 2003 was an increase in the utilization rate experienced in the services organization in both years as compared to the prior fiscal year.

International Revenues (dollars in thousands):

International revenues include revenues from our international subsidiaries and sales to independent international resellers.

         The growth in international revenues in fiscal 2004 and fiscal 2003 was primarily attributable to the timing of several large customer orders that were executed during both fiscal 2004 and 2003. We presently anticipate that international revenues in 2005, excluding revenue from customers obtained in the acquisition of businesses, to remain relatively consistent with fiscal 2004.

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, 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):

         Total gross margin increased in fiscal 2004 to 61% from 60% in fiscal 2003 due to an increase in product gross margin in fiscal 2004. This increase in product gross margin was partially offset by a higher proportion of services revenues, which typically carry a lower gross margin. Total gross margin in fiscal 2003 decreased to 60% from 61% in fiscal 2002 primarily due to a higher proportion of service revenues.

         Product gross margin increased in fiscal 2004 primarily due to a favorable product mix during the periods. Product revenues from hardware and software, which typically carry a higher gross margin than sales of third-party product for resale, were a greater proportion of total product revenues in fiscal 2004 as compared to fiscal 2003 (94% and 92% for fiscal 2004 and fiscal 2003, respectively). In fiscal 2003, a decrease in product gross margin related to a greater proportion of hardware revenues, which typically carry a lower gross margin than software revenues, was offset by a lower proportion of sales of third-party product for resale.

         Although the proportion of professional services revenues (which carries a lower gross profit than maintenance revenues) to total service revenues in fiscal 2004 increased as compared to fiscal 2003, the impact on service gross margin related to this unfavorable service mix was offset by an increase in the utilization rate of the service personnel as compared to fiscal 2003. The utilization rate increase was in part due to an increase in the productivity in our implementations related to sales of our human resources and payroll products. Although we anticipate continued productivity increases in our human resources and payroll implementations in fiscal 2005 due to improvements in our service delivery tools and processes, we expect these benefits to be partially offset by our continued investments in personnel and programs related to the promotion of Kronos products and services to our largest 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):

         The increase in total net operating expenses in fiscal 2004 and 2003 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. The increase in total net operating expenses in fiscal 2004 was also attributable to an increase in the investments in information systems and infrastructure. The increase in total net operating expenses in fiscal 2003 was also attributable to increased spending for outside consultants and professional fees related to engineering consulting fees and legal, audit and tax consulting fees. The reduction in total net operating expenses as a percentage of revenues in both fiscal 2004 and fiscal 2003 was attributable to the leveraging of investments in infrastructure to generate higher sales volumes, and continued corporate-wide efforts to contain costs. Although we intend to continue efforts to contain costs and to leverage our infrastructure to generate higher sales volume, we anticipate that spending associated with the replacement of certain information systems, spending related to the development and introduction of new products, spending related to the introduction of a new sales force structure, as well as costs associated with compliance efforts related to new regulatory requirements on internal controls, will offset any savings realized through general corporate cost containment efforts, and we believe that net operating expenses as a percentage of revenues will remain relatively consistent to fiscal 2004.

         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).

         The increase in sales and marketing expenses in fiscal 2004 and fiscal 2003 was primarily attributable to investment in sales personnel and related compensation and support costs to add new customers and to maximize the penetration of existing accounts, which includes the hiring of additional personnel. In addition, the increase in sales and marketing expenses in fiscal 2003 was also due to additional spending on programs related to the expansion of market awareness of our products and services, as well as additional spending for personnel training. The decrease in sales and marketing expenses as a percentage of total revenues for both fiscal 2004 and fiscal 2003 was primarily attributable to leveraging the investments in infrastructure to generate higher sales volumes, as well as an improvement in productivity.

         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).

         The increase in engineering, research and development spending in both fiscal 2004 and fiscal 2003 was attributable to continued investment in engineering personnel and their compensation-related expenses. This increase in spending was the result of the continued development and support of new products. In addition, the increase in spending in fiscal 2003 was also attributable to an increase in training expenses, partially offset by the reallocation of certain engineering resources focused upon information systems support to general and administrative expenses. The decrease in spending as a percentage of revenues in fiscal 2003, as compared to fiscal 2002, was primarily due to higher sales volume in fiscal 2003. The significant project development efforts in fiscal 2004 were principally related to further development and enhancement of the Workforce Central suite, including scheduling, activities and workflow modules as well as Workforce HR™ and Workforce Payroll™ software, and the Kronos 4500 terminal.

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

         The increase in general and administrative expenses in fiscal 2004 was primarily due to investment in personnel and related compensation and support costs required for the continued support of our growing operations, which includes the hiring of additional personnel, and an increase in fees related to consulting services and training associated with the replacement of information technology systems. The increase in general and administrative expenses in fiscal 2003 was primarily due to Kronos’ investment in personnel and related compensation and support costs (including those costs associated with the previously discussed reallocation of engineering resources to general and administrative expenses), an increase in fees related to tax planning and other professional services, and continued investment in infrastructure to support the growth of operations.

         Amortization of Intangible Assets and Other Income, Net: Amortization of intangible assets includes the amortization expense related to the identified intangible assets recorded by us related to acquisitions of other 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).

         The increase in amortization of intangible assets in both fiscal 2004 and fiscal 2003 was principally attributable to amortization charges related to acquisitions that were completed during those years. The increase in other income, net in fiscal 2004, as compared to fiscal 2003, was principally attributable to the reversal of excess interest and other tax-related accruals as a result of the favorable completion of certain tax audits during fiscal 2004, as well as an increase in interest income generated from the increased portfolio of marketable securities. These increases were partially offset by lower levels of foreign exchange gains realized during fiscal 2004 as a result of less favorable changes in foreign exchange rates experienced as compared to fiscal 2003.

          Income Taxes. The provision for income taxes as a percentage of pre-tax income was 33.5% in fiscal 2004, 36.5% in fiscal 2003 and 35.2% in fiscal 2002. The provision for income taxes was favorably impacted in fiscal 2004 as a result of the completion of certain tax audits during fiscal 2004 and certain tax planning strategies. We currently anticipate that the income tax rate will range approximately between 34.0% and 35.0% in fiscal 2005. Our effective income tax rate may fluctuate between periods as a result of various factors, including income tax credits, foreign tax rate differentials, state income taxes, and the resolution of tax audits or accruals for tax exposures.

         Newly Issued Accounting Standards. In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which requires the consolidation of a variable interest entity (as defined) by its primary beneficiary. Primary beneficiaries are those companies that are subject to a majority of the risk of loss or entitled to receive a majority of the variable interest entity’s residual returns, or both. In determining whether it is the primary beneficiary of a variable interest entity, a company with a variable interest must also treat a variable interest held by the Company’s related parties in that same entity as its own interest. In December 2003, the FASB published a revision to FIN 46 to clarify some of the provisions of FIN 46 and to exempt certain entities from its requirements. FIN 46, as revised, applies to variable interest entities that are commonly referred to as special-purpose entities for periods ending after December 15, 2003 (our fiscal 2004 first quarter) and for all other types of variable interest entities for periods ending after March 15, 2004 (our fiscal 2004 second quarter).

         We currently have no contractual relationship or other business relationship with a variable interest entity and therefore the adoption of FIN No. 46 and No. 46-6 did not have an effect on our consolidated financial position, results of operations or cash flows.

On October 13, 2004, the FASB concluded that Statement of Financial Accounting Standard (“SFAS”) No. 123R, “Share-Based Payment”, (“SFAS 123R”) 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. Retroactive application of the requirements of SFAS No. 123 (not SFAS No. 123R) to the beginning of the fiscal year that includes the effective date would be permitted, but not required.

We would be required to apply SFAS No. 123R beginning with the fiscal quarter commencing on July 3, 2005, and could choose to apply SFAS No. 123 retroactively from October 1, 2004 to July 2, 2005.  The cumulative effect of applying SFAS No. 123, if any, would be measured and recognized upon adoption.  We have not yet determined the impact of SFAS 123R on our Consolidated Financial Statements.

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):

         The increase in cash, cash equivalents and marketable securities was due primarily to cash generated from operations. The decrease in working capital was primarily due to an increase in deferred revenues of $19.7 million, which includes increases in deferred product ($7.4 million), professional services ($0.9 million) and maintenance revenues ($11.4 million). Although cash, cash equivalents and marketable securities increased by approximately $58 million in fiscal 2004 as compared to fiscal 2003, this increase had limited impact on working capital as of September 30, 2004, as a significant portion of our cash reserves (approximately $98 million) is invested in long-term marketable securities.

Cash Flow Highlights (dollars in thousands):

         The increase in cash provided by operations in fiscal 2004 was principally attributable to an increase in net income, an increased rate of growth in our deferred product and maintenance revenues, and an increased rate of growth of accounts payable and accrued expenses due to the timing of vendor payments and incentive payments. These were partially offset by an increase in accounts receivable during fiscal 2004 as compared to the same period in the prior year, which was attributable to an increase in sales volume associated with trade accounts receivable and financing arrangements beyond one year. The accounts receivable balance from the prior year benefited from significant collection efforts, which offset any increases related to sales volume. A decrease in the rate of growth in our deferred professional services revenues further offset the increases in net income, deferred product and maintenance revenue, and accounts payable and accrued expenses discussed above. This decrease was attributable to an increase in our practice of billing customers in arrears as professional services are delivered rather than billing customers in advance of service delivery. Although cash flow from operations may be negatively impacted in the short term as our practice of billing in arrears increases, we believe this practice will benefit the sales cycle as it is consistent with industry practice. The increase in cash provided by operations in fiscal 2003 was principally attributable to higher net income, an increase in accruals related to taxes and compensation expenses due to the timing of payments, as well as increased non-cash charges that are added back in the calculation of cash flow from operations. These were partially offset by an increase in accounts receivable due to higher sales volume.

         Our use of cash for property, plant and equipment in fiscal 2004 includes investments in information systems and infrastructure to improve and support expanding operations. We anticipate making significant capital investments during fiscal 2005 in conjunction with the replacement of information technology systems. To date, we have invested approximately $9.0 million (excluding internal personnel-related costs) related to this project, of which $6.3 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 $21.0 million through the end of fiscal 2006. Our use of cash for property, plant and equipment in fiscal 2003 includes investments in information systems and infrastructure to improve and support expanding operations. Our use of cash for the acquisition of businesses in all periods presented was principally related to the acquisitions of specified assets and/or businesses of our resellers and/or other providers of labor management solutions. On November 18, 2004, we acquired, through Kronos Acquisition Inc., a Canadian corporation and our 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 CDN $46.6 million (approximately USD $39.1 million), net of cash and short-term investments acquired of CDN $19.1 million (approximately USD $16.0 million). The Company intends to exercise its rights to acquire all AD OPT common shares that were not tendered to us through the compulsory acquisition provisions of the Canada Business Corporations Act. The Company anticipates that the aggregate purchase price for these common shares will be approximately CDN $3.0 million (approximately USD $2.5 million). The purchase price paid on November 18, 2004 was funded through the use of cash and investments shown on our balance sheet. The purchase price anticipated to be paid for the remaining shares will also be funded through the use of cash and investments shown on our balance sheet. We are assessing several other acquisition opportunities that may be completed over the next 12 months, although there can be no assurance that these acquisitions will be completed. Excess cash reserves not required for operations, stock repurchases, investments in property, plant and equipment or acquisitions are invested in marketable securities.

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

         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.

         During the first quarter of fiscal 2003, we received $2.6 million upon the maturity of a call option arrangement. Since the first quarter of fiscal 2003, we have not had any outstanding call option arrangements. Please refer to Note A in the Notes to Condensed Consolidated Financial Statements for further details regarding call option arrangements.

         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 (dollars in thousands)

         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 Annual Report and/or Form 10-K 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 Annual Report and/or Form 10-K 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.

         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.

         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.

         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.

         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:

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.

         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 fiscal 2004, approximately 9% of our revenue was generated through sales to resellers and ADP. During fiscal 2003 we signed an agreement with ADP extending our business relationship for an additional term of five years, and during fiscal, 2004 signed an amendment to that agreement which provides for minimum purchasing requirements and further extends the agreement for an additional six months. 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.

Additional Stock Option Program Information

         Option Program Description. We intend that our stock option program be our primary vehicle for offering long-term incentives and rewarding executives and key employees. Stock options are granted to key employees based upon prior performance, the importance of our retaining their services and the potential for their performance to help us attain our long-term goals. However, there is no set formula for the award of options to individual executives or employees.

         Stock options are generally granted annually in conjunction with the compensation committee’s formal review of the individual performance of key executives, including our chief executive officer, and their contributions to the Company. In fiscal 2004, 76% of the options granted went to employees other than our “Named Executive Officers” (as set forth in the table that follows). All the options awarded are granted from the same plan. Options, which are granted at the fair market value on the date of grant, typically vest in four equal annual installments beginning one year from the date of grant and have a contractual life of four years and six months.

          Distribution and Dilutive Effect of Options.

Employee and Executive Option Grants:

        * The following individuals are Kronos’ Named Executive Officers for fiscal 2004:

          General Option Information.

Summary of Option Activity (in thousands, except per share data)

In-the-Money and Out-of-the-Money Option Information as of September 30, 2004 (in thousands, except per share data)

         Executive Options. The following tables summarize option grants and exercises during the fiscal year ended September 30, 2004 to our Named Executive Officers and the value of the options held by such persons at the end of fiscal 2004.

Options Granted to Named Executive Officers

Option Exercises and Remaining Holdings of Named Executive Officers

Item 7A. 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, foreign currency fluctuations and decreases in our common stock price affecting capped call options. Refer to Note A, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements 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 September 30, 2004, 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 September 30, 2004, 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 8. Financial Statements and Supplementary Data

         The financial statements and supplementary data are included herein under Item 6 and in the Consolidated Financial Statements and related notes thereto. See Item 15 of this Form 10-K.

Item 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure

          Not Applicable.

PART III

Item 9A. 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 September 30, 2004. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2004, 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 year ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

          Not Applicable.

Item 10. Directors and Executive Officers of the Registrant

         Information required by this Item pursuant to Item 401 relating to the executive officers of the Registrant appears under the caption “Executive Officers of the Registrant” in Part I of this annual Report on Form 10-K, following Item 4.

         Information required by this Item pursuant to Item 401 of Regulation S-K relating to the directors of the Registrant (including Item 401(h) and (i) relating to audit committee financial experts and identification of audit committees) will appear under the headings “Election of Directors-Class I Directors, -Nominees for Class III Directors and -Class II Directors” and “Corporate Governance-The Board and Board Meetings, -Board Committees, -Audit Committee and - -Code of Conduct and Ethics,” in the Company’s definitive proxy statement for the 2005 Annual Meeting of Stockholders to be held on February 10, 2005, which sections are incorporated herein by reference.

         Information required by this Item pursuant to Item 405 of Regulation S-K will appear under the heading “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in the Company’s definitive proxy statement for the 2005 Annual Meeting of Stockholders to be held February 10, 2005, which section is incorporated herein by reference.

         We have adopted a written code of ethics that applies to our principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions. Our code of ethics, which also applies to our directors and all of our officers and employees, can be found on our web site, which is located at www.kronos.com. We intend to make all required disclosures concerning any amendments to, or waivers from , our code of ethics on our web site.

Item 11. Executive Compensation

         Information required by this Item pursuant to Item 402 of Regulation S-K relating to director and officer compensation will appear under the heading “Election of Directors -Director compensation,” "“Executive Compensation -Summary Compensation, -Option Grants and Exercises, - -Retention Agreements” and “Corporate Governance -Compensation Committee Interlocks and Insider Participation” in the Company’s definitive proxy statement for the 2005 Annual Meeting of Stockholders to be held February 10, 2005, which sections are incorporated herein by reference The informaiton required by Items 402(k) and (l) of Regulation S-K is not incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

         Information required by this Item pursuant to Item 403 of Regulation S-K relating to beneficial ownership of the Registrant’s common stock will appear under the heading “Security Ownership of Certain Beneficial Owners and Management” in the Company’s definitive proxy statement for the 2005 Annual Meeting of Stockholders to be held February 10, 2005, which section is incorporated herein by reference.

         Information required by this Item pursuant to Item 201(d) of Regulation S-K relating to equity compensation plans will appear under the heading “Equity Compensation Plan Information” in the Company’s definitive proxy statement for the 2005 Annual Meeting of Stockholders to be held February 10, 2005, which section is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

         Information required by this Item pursuant to item 404 of Regulation S-K relating to related party transactions will appear under the heading “Retention Agreements” in the Company’s definitive proxy statement for the 2005 Annual Meeting of Stockholders to be held on February 10, 2005, which section is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

         Information required by this Item pursuant to Item 9(e) of Schedule 14A relating to auditor fees will appear under the heading “Relationship with Independent Auditors-Independent Auditors Fees” in the Company’s definitive proxy statement for the 2005 Annual Meeting of Stockholders to be held on February 10, 2005, which section is incorporated herein by refernce.

PART IV

Item 15. Exhibits and Financial Statement Schedules

Information required by schedule II is shown in the Notes to Consolidated Financial Statements. All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.

(b) Exhibits         

         The Exhibits filed as part of this Form 10-K are listed on the Exhibit Index following the audit report to this Form 10-K and are incorporated herein by reference.

SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) 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 on December 14, 2004.

         Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on December 14, 2004.

Consolidated Statements of Income

In thousands, except share and per share data

See accompanying notes to consolidated financial statements.

Consolidated Balance Sheets

In thousands, except share and per share data

See accompanying notes to consolidated financial statements.

Consolidated Statements of Shareholders' Equity

                                                                      In thousands