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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

                                ----------------

                                    
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

(Mark One)

(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 1999

                                       OR

(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from _________ to _________

                          
(Mark One)

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

OR

o

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

For the transition period from                            to                             
Commission file number 1-7516
KEANE, INC
                                   ----------
             (Exact
(Exact Name of Registrant as Specified in Its Charter)

Massachusetts                                             04-2437166
- -------------                                             ----------
(State or Other Jurisdiction                              (I.R.S. Employer
of Incorporation or Organization)                         Identification Number)

Ten City Square, Boston, Massachusetts                    02129
- --------------------------------------                    -----
(Address of Principal Executive Offices)                  (Zip Code)

Massachusetts
(State or Other Jurisdiction
of Incorporation or Organization)
04-2437166
(I.R.S. Employer
Identification Number)

100 City Square, Boston, Massachusetts
(Address of Principal Executive Offices)


02129
(Zip Code)
Registrant's telephone number, including area code:(617) 241-9200
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class                   
Title of Each Class
Common Stock, $.10 par value
Name of Each Exchange on Which Registered
- -------------------                   -----------------------------------------
Common Stock, $.10 par value          American Stock Exchange on Which Registered
American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONENone
        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 Xý    No ___o
        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 the 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. (_)Yes o    No ý
        Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended. Yes ý    No o
        The aggregate market value of the Common Stockcommon stock held by nonaffiliatesnon-affiliates of the registrant, based on the last sale price of the Common Stockcommon stock on the AMEX on March 10, 2000,June 28, 2002, was $1,508,163,647.$749,037,388. As of March 10, 2000, 69,862,4467, 2003, 68,331,059 shares of Common Stock,common stock, $.10 par value per share, and 284,987284,599 shares of Classclass B Common
Stock,common stock, $.10 par value per share, were issued and outstanding.
        Documents Incorporated by Reference. The Registrant intends to file a definitive proxy statement pursuant to Regulation 14A, promulgated under the Securities Exchange Act of 1934, as amended, to be used in connection with the Registrant's Annual Meeting of Stockholders to be held on May 31, 2000.28, 2003. The information required in response to Items 10-1310–13 of Part III of this Form 10-K is hereby incorporated by reference to such proxy statement.
PART I
        This Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. For purposes of these Acts, any statement that is not a statement of historical fact may be deemed a forward-looking statement. For example, statements containing the words "believes," "anticipates," "plans," "expects," and similar expressions may be forward-looking statements. However, Keane cautions investors not to place undue reliance on any forward-looking statements in this Report because these statements speak only as of the date when made. Keane undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. There are a number of factors that could cause our actual results to differ materially from those indicated by these forward-looking statements, including without limitation, the factors set forth under the caption "Certain Factors That May Affect Future Results."
ITEM 1.    BUSINESS

GENERAL
OVERVIEW
        Keane, Inc. (together(collectively with its subsidiaries, "Keane" or "the Company," unless the context requires otherwise) is a leading provider of e-business, Information Technology (IT), and business consulting services. In business since 1965, Keane's mission is to help clients optimize the performance of their IT organizations. The Company helps clients plan, build,
and manage business systems and implement business processes, organizational
change, and change management programs to realize value from their IT and
e-business initiatives.

In business since 1965, Keane has steadily focused on helping clients leverage
technology to improve business performance. Today, this focus is the thread
tying together all of the Company's service offerings. Keane's clients are
increasingly looking to harness the power of the Internet and newer
technologies, and integrate these technologies with existing systems to
transition to a business-to-business (B2B) e-commerce environment. At the same
time, effectivelyperformance by planning, building, managing, and improving existing systems has become more
critical than ever, given the importance of these systems to e-commerce
initiatives.

As a result, Keane seesrationalizing application software through its e-businessBusiness Consulting, Application Development and applications developmentIntegration (AD&I), and management services as key drivers of growth. To meet this market need, the
Company expanded its e-Solutions capability in 1999 to offer clients a full
life-cycle solution from strategy development through design, implementation,
integration, and management of e-business solutions. Keane also continues to
invest in its ApplicationsApplication Development and Management Outsourcing solution,
which it considers among(Applications Outsourcing) services.
        Keane delivers its services through an integrated network of local branch offices in North America and the bestUnited Kingdom, and through Advanced Development Centers (ADCs) in the industry.United States, Canada, and India. This conclusion is based on
consultationsglobal delivery model enables Keane to provide its services to customers on-site, at its near-shore facilities in Canada, and through its offshore development centers in India. Branch offices work in conjunction with industry analyst firms, audits of Keane's projects by the Center for Systems Management (against the Capability Maturity Model--the CMM)Company's business consulting arm, Keane Consulting Group (KCG), and benchmarking Keane's productivity against the Quantitative Software
Management's (QSM) metrics repository of 20,000 completed IT projects within the
industry.are supported by centralized Strategic Practices and Quality Assurance Groups.
        Keane's clients consist primarily of Fortune 1000 organizationsGlobal 2000 companies across every major industry, healthcare organizations, and government agencies. The Company
servicesKeane strives to build long-term relationships with customers by providing a broad range of service offerings that enable clients to optimize their portfolio of software applications throughout their useful life. Keane also achieves recurring revenue as a result of its multi-year outsourcing contracts and its focus on process, management disciplines, and metrics as a local level through branch offices in major markets of the
United States, Canada, and the United Kingdom. These offices are supported by
centralized practices representing Keane's core services and key competencies.means to consistently generate high business value for its customers.
        Keane is a Massachusetts corporation headquartered in Boston. Its common stock is traded on the American Stock Exchange under the symbol KEA. InformationKeane maintains a website with the address www.keane.com. Keane is not including the information contained in its website as part of, or incorporating it by reference into, this annual report on Form 10-K. Keane can be accessed on the Company's web site at www.keane.com ormakes available, free of charge, through its Investor Relations line at 1-800-75-KEANE.

SERVICESwebsite its annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practical after Keane offers an integrated mix of end-to-end businesselectronically files these materials with, or otherwise furnishes them to, the Securities and IT solutions. The
Company divides its business into three main lines: BusinessExchange Commission.
        Keane's registered trademarks include EZ-Access®. Keane's trademarks include: Keane, Enterprise Application Integration, Keane InSight and IT Consulting,
e-Solutions (including itsVistaKeane. Keane's registered service marks include: Applications RationalizationSM Service and Application Lifecycle OptimizationSM Services. Keane's service marks include: Application Development and Integration services)services and Application
2

Development and Management Outsourcing Services. All other trademarks, service marks, or tradenames referenced in this Form 10-K are the property of their respective owners.
SERVICES
        Keane helps clients plan, build, manage, and rationalize their application software. Specifically, Keane focuses on three synergistic service offerings: Business Consulting, Application Development and Integration (AD&I), and Applications DevelopmentOutsourcing, which is Keane's flagship service offering. As part of its Build services, the Company also provides a full-line of healthcare information systems and Management Outsourcing. For each business line,
Keane offers a full life cycle solution.related IT consulting and IT integration services for healthcare organizations. Keane believes its comprehensivebroad range of service positions the Companyservices position it as a strategic partner to clients, because these
services enable Keaneenabling it to identify and implement completecomprehensive solutions that meet clients' specific business requirements.

The paragraphs below outline
Business Consulting (Plan services)
        Keane's core business lines and some of the key
competencies it draws on to deliver its solutions.

Business and IT Consulting (plan services)

Keane's consulting services represent a critical componentplay an important role in the Company's ability to help clients achievealign their businesses for today's economy. Business Consulting revenue is reported within the Company's Plan sector. The Company provides its business value from IT investments. These consulting services through Keane Consulting Group (KCG), the Company's business and management consulting arm. KCG helps companies maximize productivity, reduce costs, and create capacity for future growth by identifying high-value business opportunities and implementing its operations improvement recommendations. In addition, KCG enables customers to lower costs and improve the flexibility and scalability of their IT assets through Keane's Applications Rationalization Service. As part of this service, the Company analyzes a client's applications portfolio and helps the company to identify and eliminate software with redundant functionality, end-of-life systems, and software that uses non-core technology.
        KCG delivers its services by taking a broad view of business processes, organizational design, and technology architecture. KCG provides operations improvement services in four core competency areas: insurance and financial services, manufacturing and distribution, technology, and public sector services. Typical KCG client engagements include: streamlining customer processes and operations, optimizing supply chains, and aligning IT and business strategies. KCG helps Keane develop strong relationships with senior business executives because their assignments often involve work for these decision makers who may, in the future, request that the Company perform critical services. In addition, KCG consulting engagements can lead to follow-on IT projects as clients rely on Keane to support an idea or concept from its genesis through implementation and eventual management.
Application Development and Integration (AD&I) (Build services)
        As application software becomes more complex, it requires sophisticated integration between front-end and back-end systems to enhance access to critical corporate data, enable process improvements, and improve customer service. Many of Keane's AD&I projects focus on assisting companies in transforming their strategy,
processes, organization,solutions for Enterprise Application Integration (EAI), supply chain, and IT infrastructure for competitive advantage.
Findingscustomer service problems. AD&I revenue is reported within the Company's Build sector.
        As a result of its significant expertise and recommendations oftentimesexperience, Keane has become the foundation for successful
transitions to e-business as well as key IT decisions, such as implementationa top-tier provider of new technologies, overhauls of existing systems, and integration of
customer-facing business systems with back-office platforms and applications.
The Keane Consulting


                                       2


Group offers the following services: e-Strategy (e-business strategy
development), Operations Improvement, e-Transformation (services that focus on
updating a client's business model and processes in alignment with e-business
requirements), and Customer Relationship Management Strategy services. Clients
undergoing organizational change associated with transforming their business to
leverage the Internet, integrating mergers and acquisitions, or adapting to
governmental deregulation may benefit from these services.

e-Solutions (e-Architecture, Online Branding, Applications Development and
Integration) (build services)

Keane's e-business services (marketed under the e-Solutions name) help clients
exploit new technology to meet their business objectives. Offerings and
capabilities range from e-architecture planning and implementation, to creative
web design and development, applicationlarge, complex software development and integration architecture planning, data warehousing, implementation of customer relationship
management (CRM) technologies,projects for Global 2000 companies. The Company also provides AD&I services to the public sector, which includes agencies within the United States Federal Government, various states, and enterprise application integration. This
range of services respondsother local government entities.
        Given the recent economic downturn, many clients have deferred investments in new information systems. As a result, Keane has concentrated its short-term marketing efforts on helping clients to clients, which are increasingly concentratingbetter integrate and enhance existing applications, and on ways they can leverage Internet technologies in their organizations. Many of
Keane's clients are focused on supply chain optimization, e-markets, exchanges,projects that rapidly improve efficiency and e-procurement initiatives due to their tremendous return on investment.immediately lower costs.
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        Keane believes that it is well positioned to manage suchcapture large-scale AD&I projects because offrom both the strength ofcommercial and public sector markets due to its programcore competencies in project management, integration, and global delivery. The Company anticipates that these competencies, delivery
methodologies,together with its long-term relationships with Global 2000 companies, particularly those clients for which Keane provides Applications Outsourcing services, will enable it to benefit from an economic recovery and quality assurance processes.

This business line also includes Keane's Healthcare Solutions practice, which
offers a suite of Healthcare Information Systems (HIS) and related consulting
and IT services. Keane's HIS products provide the architecture to streamline and
link financial, patient care, and clinical operations across hospitals, group
practices, long-term care facilities, and HMOs. The systems are compatible with
the operating systems used by healthcare institutions nationwide, including an open UNIX platform as well as IBM's AS/400 and RS/6000 environments. In
addition, Keane's broad range of services can help healthcare clients address
ongoing HIPAA requirements, a legislative act which is expected to have
far-reaching implicationsincrease in spending on the industry's IT infrastructure and business
operations.

Applicationsinformation technology.
Application Development and Management (ADM) Outsourcing (manage(Applications Outsourcing) (Manage services)
        Keane's ADMApplications Outsourcing services helpservice helps clients effectively manage and enhance existing business systems to improvemore efficiently and more reliably, improving the performance of these applications while better controllingfrequently reducing costs. Application Outsourcing revenue is reported within the Company's Manage sector. Under this service offering, Keane manages clients'assumes responsibility for managing a client's business applications with commitmentsthe goal of instituting operational efficiencies that enhance flexibility, freeing up client personnel resources, and achieving higher user satisfaction.
        Keane seeks to improving software quality, processes,obtain competitive advantages in the application outsourcing market by targeting its Global 2000 client base and costs.generating measurable client business benefit. The Company achieves this client benefit through the use of its world-class methodologies, continuous process improvement, and its global delivery model. On March 15, 2002, Keane acquired SignalTree Solutions, a United States-based corporation with offshore development capabilities in India. The addition of SignalTree Solutions' delivery capability, now called Keane India Ltd., expanded Keane's delivery model to include two Advanced Development Centers (ADCs) in India. Keane's global delivery model now offers customers the flexibility and economic advantage of allocating work between a variety of delivery options, including on-site at a client's facility, near-shore in Halifax, Nova Scotia, and offshore in India. Keane believes the addition of offshore ADCs strengthens its Applications Outsourcing offering.
        Forty-three of the Company's Applications Outsourcing engagements may also encompass developmenthave been independently assessed at Level 3 or 4 on the Software Engineering Institute's (SEI) Capability Maturity Model (CMM). In addition, Keane's ADCs in India, located in Hyderabad and Delhi, are independently evaluated at Level 5 on the SEI CMM and comply with ISO 9001: 2000 standards. Keane's ADC in Halifax, Nova Scotia, has been independently evaluated at Level 3 on the SEI CMM, and is transitioning its processes in alignment with SEI CMM Level 5. The SEI CMM has five levels of new applications, as directed by
clients.process maturity, and many IT organizations typically operate at Level 1, the lowest level of maturity. Since 1997, Keane has used the Software Engineering Institute's
Capability Maturity Model (CMM)SEI CMM as a standard for objectively measuring its success in improving its client'sclients' application management. This movemanagement environments. The SEI CMM has givenbecome the industry's standard method for evaluating the effectiveness of an IT environment and the process maturity of outsourcing vendors.
        Applications Outsourcing provides Keane with larger, longer-term contracts. These client engagements usually span three-to-five years. Outsourcing projects typically supply Keane with contractually-obligated recurring revenue, and with an incumbent position from which to cross-sell other solutions. The Company has observed historically that consistently providing measurable business value within an existing client account strongly positions it to win additional outsourcing engagements and development and integration projects.
Healthcare Solutions (Build services)
        Keane's Healthcare Solutions Division (HSD) develops and markets a strategic advantagecomplete line of open-architecture financial management, patient care, clinical operations, enterprise information, long-term care, and practice management systems for healthcare organizations. In addition, HSD provides healthcare-related IT consulting, outsourcing, and IT integration services. Because the healthcare market is less cyclical in nature than most of the commercial IT market, Keane's HSD
4

business compliments the Company's commercial AD&I revenue and typically acts as a stabilizing influence on Build revenue during periods of slower economic growth. HSD revenue is reported within Keane's AD&I (Build) sector.
        HSD's products help healthcare organizations overcome the challenge of providing higher quality patient care while administering more efficient operations through the use of information technology. HSD's core healthcare solutions include EZ-Access, Keane InSight, and VistaKEANE. EZ-Access is a browser-based family of healthcare information systems designed to improve access to patient data, reduce the occurrence of medical errors, and protect client investment in information technology. EZ-Access includes Keane's highly rated and widely installed Patcom Plus, a patient management system. Keane InSight is a comprehensive healthcare information system that provides immediate access to patient information using secure, browser-based technology. VistaKEANE is a fully integrated financial and clinical solution for long-term and post-acute care providers. HSD's customers include integrated delivery networks, hospitals, long-term care facilities, and physician group practices. HSD currently provides proprietary software and services to more than 300 hospital-based clients and 4,300 long-term care facilities throughout the United States.
        In addition, Keane's broad range of services help healthcare clients address ongoing Health Insurance Portability and Accountability Act (HIPAA) requirements. HIPAA is Federal legislation designed to improve efficiency in the application outsourcing area,national healthcare system and protect the privacy of health information. It is expected to have far-reaching implications on the healthcare industry's IT infrastructure and business operations. The Company's HIPAA related services include Enterprise Assessment and Planning, Compliance Implementation, and Ongoing Compliance Management.
STRATEGY
        Keane's vision is to be recognized as Keane is one of the only leading ADM outsourcing providersworld's great IT services firms by its clients, employees, and shareholders. The Company believes it can achieve this vision by leveraging its position as a provider of Application Lifecycle Optimization Services to actively gaugebuild strong long-term relationships with clients. To support its delivery
against this industry standard. To date,customers in better managing their application portfolios over a long period of time, Keane's Application Lifecycle Optimization framework has three phases: Application Development, Application Management, and Applications Rationalization. Through its rigorous adherence to process management disciplines, and performance metrics, Keane believes it can deliver measurable business benefit to its clients, and ultimately grow per share value by consistently generating cash from operations.
        The Company has earned CMM Level 3 or greater
distinction on 27 engagements. In addition,four major strategic priorities for 2003. Keane is expanding its metrics
strategy to incorporate QSM Productivity Index.

SERVICE DELIVERY MODEL

Throughout the 1990s as Keane refined its end-to-end solutions,believes these strategic priorities will enable the Company transformed its service delivery model to accommodate profitable growth and
optimal customer service. The transition combines service delivery via local
branch offices with expertise provided by centralized practice groups. These
practices represent core service offerings (e.g., Consulting, e-Solutions, and
ADM Outsourcing) and critical competencies, such as vertical specialization and
Keane's application development center.

Keane considers this client-centric delivery model an important means for
achievinggain competitive strength during the following:
1. increasing sales and revenue growth,
2. providing higher value services and thereby enhancing margins,
3. strengthening client relationships and recurring revenues,
4. cross-selling the full breadth of its services,
5. lowering the costs of doing business, and


                                       3


6. maintaining employee satisfaction and thus retention.

This delivery model presents advantages to clientscurrent economic downturn, as well among them
responsive and proactive service, cost efficiencies, and a greater level of
staffing continuity. Keane client's benefit from the convenience and
attentiveness of being served locally by its branch offices while also
benefiting from Keane's company-wide knowledge and experience through its
centralized practice groups. Each of these factors contributesas to client
satisfaction levels. Keane's intent is to maximize synergies between its strong
field organization and its enterprise practices to fuel sales and support
world-class delivery across the organization.

STRATEGIC DIFFERENTIATORS AND STRENGTHS

Keane considers the following competitive strengths vis-a-vis new entrants and
existing competitors.

1.   End-to-end solutions. Keane's integrated line of services equip it with the
     capabilities to partner with clients in their mission to leverage
     Information Technology to improve business performance. Specifically, Keane
     can design, develop, integrate, and manage business-critical software
     applications and advise clients on process and organizational improvementsstrongly position itself to take advantage of these applications. This rangefuture increases in IT spending.
        Grow long-term per share value.    The Company is focused on continuing to increase operating cash flow, which it believes is the ultimate driver of competenciesvaluation. The Company plans to use excess cash to repurchase shares and to complete attractive acquisitions. In order to maximize cash flow, the Company is focused on increasing revenue, improving operating margins, and continuing to aggressively manage its balance sheet. The Company believes that long-term revenue growth will be achieved by Keane's Applications Outsourcing business as well as the Company's strong position in less cyclical vertical industries such as healthcare and the public sector. The Company expects to increase its operating margins over the short-term by aggressively controlling its Selling, General, and Administrative (SG&A) spending and by improving billing rates and utilization as the economy recovers. Finally, Keane's ability to effectively manage its balance sheet, most notably Days Sales Outstanding (DSO) and capital spending, is expected to enable the Company to generate strong operating cash flow in the current economic climate.
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        Expand offshore global delivery.    Global sourcing has become an important component of our clients' overall sourcing strategies. Use of offshore delivery enables Keaneclients to help clients overcomegain access to a large pool of cost-effective technical personnel, while enhancing productivity via a 24 hours a day, 7 days a week development approach. As a result, the challenge of "enterprise integration"
     whichCompany believes offshore delivery is essential tocritical for success in such areas as business to business
     ("B2B"), e-commerce, and customer relationship management. Enterprise
     integration encompasses the integrationtoday's IT services market. During 2002, Keane added an offshore sourcing component through its acquisition of new technologies across multiple
     platforms, with existing systems, and with core business processes. The
     Company's comprehensive offerings and enterprise integration expertise,
     together with its high customer intimacy, is a significant combination
     distinguishingSignalTree Solutions, now called Keane from existing competitors and establishing barriers to
     entry for new competitors.

2.   Strong customer relationships.India Ltd. Keane India has more than 1,400 client
     relationships, which provides a strong channel for developing a deep
     understandingover 20 years of client business and IT requirements, marketing the full
     scope of its integrated service offerings, and enabling a high percentage
     of recurring revenues. Keane seeks to build long-term relationships with
     its clients

3.   Strong distribution. The demand for e-business application development and
     management services,experience servicing customers in particular, are mass market opportunities. Keane's
     extensive branch office distribution (across North America and the United
     Kingdom) allows it to captureEurope and deliver business in each of the
     geographic markets where it operates. This allows Keane to cost-effectively
     deliver solutions with a minimum of sales, general, and administrative
     (SG&A) expense. It also enables the development of high-level customer
     intimacy and satisfaction.

4.   Expertise integrating new and old technology. Keane's technical
     competencies cut across newer Internet technologies and older legacy
     platforms, and in integrating the two. This range of expertise enables
     Keane to develop customer-facing e-business applications that are
     integrated with the back office and data warehouses--a fundamental
     technological challenge that virtually all companies face as they try to
     implement e-business initiatives. Keane has extensive experience with
     enterprise application integration gained fromis known for its efforts in extending the
     value of clients' existing business systems.

5.   Project management competencies. Unlike newer entrants to the market, Keane
     has extensive competencies in project management along with a comprehensive
     set of mature delivery methodologies.expertise and quality initiatives. During 2003, Keane also has a strong quality
     assuranceplans to target both existing clients and program management system. Thenew customers for development and outsourcing engagements that involve an offshore component. In addition, the Company continuesplans to invest in these disciplines and assetsexpand its two ADCs in India, as well as its ADC in Halifax, Nova Scotia, to support new opportunities. In addition to offshore solutions, components of Keane's next generation global delivery model include on-site and near-shore solutions.
        Strengthen position as leading provider of Applications Outsourcing services.    Industry analysts and clients recognize Keane as one of the leading application outsourcing vendors in North America. Given changes in customer buying behavior, Keane's ability to provide high-quality service to its clients has been significantly enhanced by the addition of an offshore delivery capability in India. As a result, Keane is intensifying its efforts during 2003 to position itself as a full lifecycle, global provider of outsourcing, and a means for clients to gain the economic advantage of offshore delivery while reducing their associated risks. The Company also seeks opportunities to proactively target its existing customer base of Global 2000 customers to cross-sell its Applications Outsourcing service.
        Improve Organizational Effectiveness and operational leverage.    Keane endeavors to continuously build its sales and management team by hiring, developing, and retaining high-potential employees. During 2003, Keane plans to add valuehigh-potential personnel resources to its individual service
     offerings and tofurther strengthen its capabilitiessales and management team. In addition, Keane plans to enhance its sales and management processes as well as its information systems to boost the effectiveness of these critical functions. Keane is currently implementing a PeopleSoft suite of enterprise software applications, which when completed and installed, will provide real-time data on sales pursuits and significant sales trends. In addition, during 2003, Keane plans to better align its internal focus, measurement processes, and compensation systems to promote a high performance culture, encouraging intra-company cooperation, and create a more positive and supportive work environment for its employees. The Company anticipates that the results of these efforts will be the elimination of bureaucracy, a more efficient response system to client needs, and an increased focus on client satisfaction.
COMPETITION
        The IT services market is highly competitive and driven by continual changes in assuming a "prime
     contractor" role onclient business requirements and advances in technology. The Company's competition varies by the type of service provided and by geographic markets.
        The Company competes with traditional players in the IT services industry, including large e-business initiatives involving a seriesintegrators (such as Accenture (ACN), Electronic Data Systems (EDS), Computer Sciences Corporation (CSC), IBM Global Services (IBM), and Perot Systems (PER)); IT solutions providers (such as Sapient Corporation (SAPE), American Management Systems (AMSY), BearingPoint (BP), and Ciber (CBR)); and management consulting firms (such as McKinsey and Booz Allen). Some of complexthese competitors are larger and concurrent projects.

have greater financial resources than the Company.
        The Company believes that the basis for competition in the IT services industry includes the ability to create an integrated solution that best meets the needs of an individual customer, provide competitive cost pricing models, develop strong client relationships, generate recurring revenue, and offer flexible client-service delivery options. The Company believes that it competes favorably with respect to these factors. There can be no assurance that the Company will continue to compete
6

successfully with its existing competitors or will be able to compete successfully with any new competitors.
CLIENTS AND MARKETPLACE DRIVERS
        Keane's clients consist primarily of the Fortune 1,000Global 2000 organizations, but also
include government agencies, and healthcare organizations, and "dot com" or Internet
start-ups.organizations. These organizations generally have significant IT budgets and/orand frequently depend on service providers to help them fulfill their business optimization and
software design, development, implementation, and management needs.


                                       4
for Application Lifecycle Optimization services.
        In 1999,2002, the Company derived its revenue from the following industry groups:

           Industry                            Percentage of Revenue
           --------                            ---------------------
           Manufacturing                                      21.3%
           Financial Services                                 17.5%
           Government                                         16.6%
           Energy/Utilities                                    7.1%
           Healthcare                                         11.7%
           High Technology/Software                           10.7%
           Telecommunications                                  5.7%
           Retail/Consumer Goods                               5.6%
           Other                                               3.8%
Industry
Percentage of Revenue
Financial services
20.2
%
Manufacturing
19.8
%
Government
18.5
%
Healthcare
17.8
%
High Technology/Software
8.1
%
Energy/Utilities
6.5
%
Retail/Consumer goods
4.7
%
Other
2.7
%
Telecommunications
1.7
%
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        The following table is a representative list of clients for which Keane provided services in 1999.

3M Corporation                    GMAC
Aldus Corp.                       GTE Data Service Incorporated
American Express Co., Inc.        Guardian Life Insurance
Ameritech                         Hoffmann-La Roche, Inc
AT&T Corporation                  International Business Machines Corporation
Bose Corporation                  J.D. Edwards
BankBoston Corporation            J.P. Morgan
Baxter Healthcare Corporation     Jewel Food Stores, Inc.
Baylor Health Care System         Johns Hopkins Hospital
Bell Atlantic                     Liberty Mutual Insurance Co.
BMW                               Life Care Centers of America
British Airways                   McDonald's Corporation
b-there.com                       McKesson Corporation
Cargill                           Microsoft Corporation
Carrier                           Miller Brewing
CIGNA Corporation                 National Assn. of Security Dealers
Cincinnati Bell Telephone         Northern Mutual Life Insurance
Department of Justice             Northern Telecom, Inc.
Discover Card                     The Pillsbury Company
Eastman Kodak Company             Princess Cruise Lines
Elf Atochem North America         Procter & Gamble Company
EMC Corporation                   The Putnam Companies, Inc.
Energizer Battery Co.             Reader's Digest Association, Inc.
Exxon Corporation                 Robert Wood Johnson Hospital
Fidelity                          SD Warren
Farmers Insurance Group           Sony
First Bank                        Transquest
Ford                              U.S. Customs
General Electric Company          Whirlpool Corporation

The markets Keane services are experiencing major changes in business climate.
Increased competition, globalization, and deregulation are forcing companies to
devise new ways to differentiate their products and services and more
effectively acquire and retain customers. For most companies, this will require
a major transformation of the organizational structure and business processes,
and significant investments in information technology.

In this environment, Internet technologies are becoming a channel for continuous
and real-time business transactions, including interaction with customers,
distribution of product and materials, and exchange of information with
suppliers, trading partners, and employees. In addition, companies must optimize
and integrate their back-office and legacy systems with newer technologies to
realize the potential of new technology implementations.


                                       5
2002:
3M Corporation
Massachusetts General Hospital
Allmerica
MemorialCare
American Honda Motors
Miller Brewing
Aon
State of Missouri
AT&T Corporation
Moody's Investor Services
AXA
MPO
Baylor Health Care System
NOAA
Biogen
New York State Division of Budget
Blue Cross & Blue Shield of South Carolina
State of North Carolina
Britannic
PacifiCare
Carrier
PBGC
City of Chicago
Pfizer
Countrywide Home Loans
Procter & Gamble Company
Crawford & Company
Prudential
CSX Technologies
PSE&G
Defense Commissary Agency
Putnam Investments
Defense Logistics Agency
Royal & Sun Alliance
DEA
Square D
District of Columbia
State Street Bank & Trust
Exxon Corporation
SUPERVALU
Fidelity
State of Tennessee
First National Bank
Toyota
State of Florida
Tufts Health Plan
Gateway
Unipart
GEICO
United States Air Force
General Electric Company
United States Customs Service
GMAC
United States Marine Corps
Great American Insurance
United States State Department
HBOS
Unisys
HealthSouth
Wachovia
State of Indiana
Warner Bros.
International Business Machines Corporation
Wawa
Invacare
Whirlpool Corporation
Legal & General
The Williams Companies, Inc.
State of Maine
Zurich Financial Services Group
State of Maryland
        Keane's executive management, recognizing the implications of these forces,
expects the Company's primary revenue drivers will be its business consulting,
e-Solutions, and applications outsourcing services through 2002. E-business
includes B2B initiative as well as business-to-customer (B2C) projects. Industry
research firm Gartner Group forecasts the B2B market worldwide to grow from $145
billion in 1999 to $7.29 trillion in 2004. Moreover, by 2004, B2B e-commerce
will represent 7% of the forecasted $105 trillion total global sales
transactions, according to Gartner.

The Company has historically derived, and may in the future derive, a
significant percentage of its total revenue from a relatively small number of
clients. Keane's fiveten largest clients accounted for approximately 19%29% and 32% of the Company's total revenuesrevenue during each of the years ended December 31, 19982002 and 1999.2001, respectively. The Company's two largest clients during 19982002 and 19992001 were various organizationsagencies within the Federal Government and IBM. Federal Government contracts accounted for approximately 5%7.6% and 6%6.9% of the Company's total revenuesrevenue in 19982002 and 1999,2001, respectively. IBM accounted for approximately 6%4.4% and 6.5% of the Company's total revenuesrevenue for 19982002 and 1999.2001, respectively. A significant decline in revenuesrevenue from IBM or the Federal Government couldwould have a material adverse effect upon the Company's total revenues.revenue. With the exception of IBM and the Federal Government, no single client accounted for more than 5% of the Company's revenuestotal revenue during any of the three years ended on or before December 31, 1999.2002.
        In accordance with industry practices, nearly allpractice, many of the Company's orders are terminable by either the client or the Company on short notice. Moreover, any and all orders relating to the Federal Government may be subject to renegotiation of profits or termination of contract or subcontractors at
8

the election of the Federal Government. The Company had orders at December 31, 2002 of approximately $1.46 billion, in comparison to orders of approximately $843 million at December 31, 2001. Because Keane's clients can cancel or reduce the scope of their engagements on short notice, the Company does not believe that backlog is material to thea reliable indication of future business. The Company had orders at
December 31, 1999 of approximately $786 million, in comparison to orders of
approximately $900 million at December 31, 1998.

GROWTH STRATEGY

Keane's growth strategy unites a series of complementary initiatives all focused
on increasing revenue, enhancing margins, cross-selling services to existing
accounts, and developing new customers. The core elements of this strategy, as
described below, build on Keane's strengths and strategic programs that have
been under way throughout much of the 1990s:

o    Build an operating model capable of generating 25% CAGR. Keane has made
     significant strides over the past three years in developing and enhancing a
     complete line of services (its end-to-end solutions) to help clients derive
     business value from IT. These efforts have enabled Keane to evolve its
     revenue mix into higher margin solutions business. Through its operating
     model, the Company is focused on positioning itself as a premier provider
     of end-to-end solutions. Senior management attention is focused on the
     following areas:
     o    seamlessly integrating its strategic practices and branch operations
          to augment sale and delivery of the Company's full range of services,
     o    leveraging its vast geographic presence in the U.S., as well as its
          presence in Canada and the U.K.,
     o    leveraging its relationships and reputation with its large customer
          base,
     o    developing repeatable solutions to accelerate growth, and
     o    building scalable systems and processes to accommodate growth.

o    Leverage strategic practices to accelerate revenue and margin growth.
     Keane's strategic practices are an important means for targeting
     mass-market opportunities (e.g., e-business and application outsourcing)
     and expanding capabilities at the local level. These practices gather,
     refine, and disseminate Keane's best practices, including repeatable
     solutions that can be used across multiple client engagements throughout
     Keane's branches. Keane will continue to expand the value of these
     practices with vertical and domain expertise. The Company has a senior
     management team in place to direct integration of these practices with
     branch operations to enable Keane to sell and deliver its full
     "Plan-Build-Manage" capabilities across local markets.

o    Leverage branch structure to drive sales growth. Keane has made significant
     strides in developing "critical mass" in its branch organization and
     expanding its geographic reach. Today, the Company has branch offices in
     major markets across the United States, and in Canada and the United
     Kingdom. Through these branches, the Company has cultivated relationships
     with more than 1,400 clients. Keane incentivizes its local sales and
     management teams to proactively manage their client relationships, by
     maintaining a deep understanding of clients' business and operational needs
     and marketing the full range of Keane's services to respond to their
     requirements. The Company believes its end-to-end solutions are synergistic
     in that delivery from one service line (for instance, e-Strategy, a "plan"
     service) positions Keane to deliver services in another business line (for
     instance, development of web-based applications, a "build" service).


                                       6


o    Build a world-class organization. Keane recognizes that a world-class
     organization embodying top people, processes, and IT infrastructure assets
     is necessary for the Company's continued success. To enhance its
     organization, Keane is focusing on the following:
     o    attracting, developing, and retaining top business, technical and
          managerial talent,
     o    continuously upgrading corporate support functions, including finance,
          marketing, IT, HR and knowledge management, toward a customer
          (internal and external) orientation,
     o    investing in its strategic practices to continually improve its
          services, and
     o    institutionalizing key operational and delivery processes and best
          practices.

o    Build awareness and strength of the Keane brand. Keane has established
     world-class capabilities and key strengths in business, operational, and IT
     consulting, e-business, applications development and integration, and
     applications management. The Company plans to devote resources to branding
     to make its capabilities and its value proposition better known in the
     marketplace. Initiatives in 2000 are focused on:
     o    communicating a unified brand that supports Keane's
          "plan-build-manage" services,
     o    increasing awareness of Keane's presence and competitive advantages in
          the e-business space, and
     o    building on its current brand which embodies reliable,
          results-oriented delivery of IT services.

SALES, MARKETING AND ACCOUNT MANAGEMENT
        Keane markets its services and software products through its direct sales force, which is based in its branch offices and regional areas, as well as through its centralized practices.Applications Outsourcing Corporate Practice. Keane's account executives (AEs) are assigned to a limited number of accounts so they can develop an in-depth understanding of each client's individual needs and form strong client relationships. These AEsUnder the direction of Regional Sales Vice Presidents, these account executives identify IT services needs within clients and are responsible for ensuringcreating a solution that meets these requirements better than any other alternative. In addition, account executives ensure that clients receive responsive service that achieves their objectives. Account executives receive in-depth training in Keane's sales processes and that Keane's software solutions achieve
client objectives. AEsservice offerings and are supported by enterprise knowledge management systems in order to efficiently share organizational learning. Account executives collaborate with Keane's Applications Outsourcing Practice, Groups and other branch offices, and Global Services Group as needed to address specialized customer requirements.
        Keane's Applications Outsourcing Practice employs specialized senior sales professionals to respond to client requirements.requirements and to pursue and close large, strategic outsourcing engagements. Applications Outsourcing engagements provide a strong base of recurring revenue and afford the opportunity to cross-sell Keane's other strategic services.
        Keane focuses its marketing efforts on organizations with significant IT budgets and recurring software development and outsourcing needs. In 1998, theThe Company launchedmaintains a corporate branding campaign focused on communicating Keane's value proposition of reliably delivering application solutions with quantifiable business results. These branding efforts are actively executed through multiple channels. In 2000, the Company plans to develop and extend its branding program
to reflect Keane's strategic intent.

EMPLOYEES
        On December 31, 1999,2002, Keane had 8,9817,331 employees, including 6,9026,175 business and technical professionals' staffprofessionals whose services are billable to clients. The Company sometimes supplements its technical staff by utilizing sub contractors.subcontractors.
        Management believes Keane's growth and success are attributable todependent on the caliber of its people and will continue to dedicate significant resources to hiring, training and development, and career advancement programs. Keane's efforts in these areas are grounded in the Company's core values, namely respect for the individual, commitment to client success, achievement through teamwork, integrity, continuous improvement, and the drive for continuous improvement.commitment to shareholder value. Keane strives to hire, promote, and recognize individuals and teams who embody these values.

Keane recognizes that there is significant competition for employees with the
skills and competencies required for its continued success. The Company believes
it has been successful in efforts to hire and retain the managerial, technical,
sales, and support personnel required to deliver its services and manage its
growth. One significant factor advancing Keane's ability to attract and retain
professionals is its branch office network, which allows its staff to minimize
travel time on client projects. At the same time, this network of branch offices
provides employees with broader career growth options through transfers across
the organization or into its corporate practice groups.

Keane also recognizes that it's growing share of multimillion-dollar outsourcing
engagements and its mergers and acquisitions (M&A) strategy are two significant
factors in its growth. As a result, Keane's corporate human resources
organization is directly involved in major outsourcing engagements and M&A
activities in addition to recruiting and career development functions.
        The Company generally does not have employment contracts with its key employees. None of the Company's employees isare subject to a collective bargaining agreement. The Company believes that its relations with its employees are good.


                                       7


COMPETITION

The IT services market is highly competitive and driven by continual change in
clients' business requirements and advances in technology. The Company's
competition varies by the type of service provided and by geographic markets.

Competitors typically include traditional players in the IT services industry,
including large integrators (e.g., Andersen Consulting, EDS, CSC, and IBM Global
Services); IT solutions providers (e.g., Sapient, Cambridge Technology Partners,
AMS, and Whittman-Hart); pure-play Internet solutions providers (e.g.,
Razorfish, Scient, and Viant); niche players (e.g., companies focused on
specific domain or vertical expertise); and management consulting firms (e.g.,
McKinsey and Booz Allen). Some of these competitors are larger and have greater
financial resources than the Company. In addition, clients may seek to increase
their internal IT resources to satisfy their customer software development.

The Company believes that the bases for competition in the IT services industry
include the ability to compete cost-effectively, develop strong client
relationships, generate recurring revenue, use comprehensive delivery
methodologies, and achieve organizational learning by implementing standardized
operational processes. The Company believes that it competes favorably with
respect to those factors. There can be no assurance that the Company will
continue to compete successfully with its existing competitors or will be able
to compete successfully with any new competitors.

9
ITEM 2.    PROPERTIES
        The principal executive office of the Company isas of December 31, 2002, was located at Ten City Square, Boston, Massachusetts 02129, in an approximately 34,000 square foot office building which is owned byleased from City Square Limited Partnership. The limited
partnership is comprised of an officerSome of the Company, someCompany's officers and directors and
shareholders. Seeare limited partners in this partnership. (See Item 13 -- "Certain Relationships and Related Transactions.Transactions)." At December 31, 1999,2002, the Company leased and maintained sales and support offices in more than 50seventy locations in North America, the United StatesKingdom, and five locations in the
United Kingdom.India. The aggregate annual rental expense for the Company's sales and support offices was approximately $19.4$27.7 million in 1999.2002. The aggregate annual rental expense for all of the Company's facilities was approximately $21.8$30.8 million in 1999.2002. For additional information regarding the Company's lease obligations, see Note J of Notes to Consolidated Financial Statements.
        In October 2001, the Company entered into a lease with Gateway Developers LLC ("Gateway LLC") for a term of twelve years, pursuant to which the Company agreed to lease approximately 95,000 square feet of office and development space in a building located at 100 City Square in Boston, Massachusetts (the "New Facility"). The Company leases approximately 57% of the New Facility and the remaining 43% is or will be occupied by other tenants. John Keane Family LLC is a member of Gateway LLC. The members of John Keane Family LLC are trusts for the benefit of John F. Keane, Chairman of the Board of the Company, and his immediate family members.
        On October 31, 2001, Gateway LLC entered into a $39.4 million construction loan with Citizens Bank of Massachusetts (the "Gateway Loan") in connection with the New Facility and an adjacent building located at 20 City Square, Boston, Massachusetts. John Keane Family LLC and John F. Keane are each liable for certain obligations under the Gateway Loan if and to the extent Gateway LLC requires funds to comply with its obligations under the Gateway Loan. Stephen D. Steinour, a director of the Company, is Chief Executive Officer of Citizens Bank of Pennsylvania. Citizens Bank of Massachusetts and Citizens Bank of Pennsylvania are subsidiaries of Citizens Financial Group, Inc. Mr. Steinour was not involved in the process of approving the loan.
        The Company began occupying the New Facility and vacating its offices at Ten City Square in March 2003. Based upon its knowledge of rental payments for comparable facilities in the Boston area, the Company believes that the rental payments under the lease for the New Facility, which will be approximately $3.2 million per year ($33.00 per square foot for the first 75,000 square feet and $35.00 per square foot for the remainder of the premises) for the first six years of the lease term and approximately $3.5 million per year ($36.00 per square foot for the first 75,000 square feet and $40.00 per square foot for the remainder of the premises) for the remainder of the lease term, plus specified percentages of any annual increases in real estate taxes and operating expenses, were, at the time the Company entered into the lease, as favorable to the Company as those which could have been obtained from an independent third party.
ITEM 3.    LEGAL PROCEEDINGS
        In April 1998, United Services Planning Association, Inc. and Independent Research Agency for Life Insurance, Inc. filed a complaint in the District Court for Tarrant County, Texas (Civil Action No. 96-173235-98) against the Company and two of its employees alleging that the Company misrepresented its ability to complete a project contracted for by the plaintiffs and concealed from the plaintiffs material facts related to the status of the project. The parties are currently engaged in discovery. It is not likely that the case will go to trial before the fall of 2003. The plaintiffs seek monetary relief. The Company believes that its facilities are adequateit has a meritorious defense to the plaintiff's complaint and intends to contest the claims vigorously. However, the Company is presently unable to assess the likely outcome of the matter.
        On September 25, 2000, the United States Equal Employment Opportunity Commission ("EEOC") commenced a civil action against the Company in the United States District Court for its current needsthe
10
District of Massachusetts alleging that the Company discriminated against former employee Michael Randolph and that suitable additional space will be available as needed.

ITEM 3. LEGAL PROCEEDINGSother unspecified "similarly-situated individuals" by acts of racial harassment, retaliation and constructive discharge. This matter was settled and dismissed, and a consent decree entered by the Court, in May 2002. This settlement was not material to the Company's financial position or results of operations.
        The Company is involved in other litigation and various legal matters, which have arisen in the ordinary course of business. The Company does not believe that the ultimate resolution of any existing matterthese matters will have a material adverse effect on its financial condition, results of operations, or cash flows. The Company believes these litigation matters are without merit and intends to defend these matters vigorously.
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

A special meeting of Stockholders
        No matters were submitted to a vote of the Company was held onCompany's security holders during the fourth quarter of the year ended December 2, 1999.
The Stockholders approved an amendment to the Company's 1998 Stock Incentive
Plan increasing the number of shares of Common Stock which the Company is
authorized to issue under the 1998 Stock Incentive Plan from 2,000,000 to
7,000,000. Set forth below is the number of votes cast for, against or
abstained.

                 For               Against                  Abstained
             40,658,329           9,670,367                 2,421,151


                                       8
31, 2002.
        DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY:    The executive officers and directors of the Company are as follows:

                 NAME                    AGE                            POSITION
                 ----                    ---                            --------

           
           John F. Keane                  68        Chairman President, and Chief Executive Officer
           Brian T. Keane                 39       Executive Vice President, Office of the President,
                                                                      and Director*
           John F. Keane Jr.              40       Executive Vice President, Office of the President,
                                                                      and Director*
           John J. Leahy                  42              Senior Vice President - Finance and
                                                       Administration and Chief Financial Officer
           Raymond W. Paris               62     Senior Vice President - Healthcare Solutions Practice
           Renee Southard                 45            Senior Vice President - Human Resources
           Philip J. Harkins(1)           52                              Director
           Winston R. Hindle, Jr.(1)(2)   69                              Director
           John F. Rockart(1)(2)          68                              Director
           Robert A. Shafto(1)(2)         64                              Director


*
Name
 
Committee
 
Age
 
Position
John F. Keane
 
(3)(4)
 
71
 
Chairman of the Board and Director
Brian T. Keane
 
 
 
42
 
President, Chief Executive Officer and Director
John J. Leahy
 
 
 
45
 
Senior Vice President of Finance and Chief Financial Officer
Donald E. Hillier
 
 
 
55
 
Senior Vice President of Human Resources
Robert B. Atwell
 
 
 
54
 
Senior Vice President
Russell A. Cappellino
 
 
 
61
 
Senior Vice President
Raymond W. Paris
 
 
 
65
 
Senior Vice President
Laurence D. Shaw
 
 
 
41
 
Senior Vice President
Linda B. Toops
 
 
 
48
 
Senior Vice President
Maria A. Cirino
 
(1)(2)
 
39
 
Director
John H. Fain
 
(3)(4)
 
54
 
Director
Philip J. Harkins
 
(2)(3)(4)(5)
 
55
 
Director
Winston R. Hindle, Jr.
 
(1)(3)(4)(5)
 
72
 
Director
John F. Keane, Jr.
 
(3)(4)
 
43
 
Director
John F. Rockart
 
(1)(2)(5)
 
71
 
Director
Stephen D. Steinour
 
(1)(2)
 
44
 
Director
(1)
Audit Committee
(2)
Compensation Committee
(3)
Former Governance and Nominating Committee (The Company had, until February 2003, a Governance and Nominating Committee. The Company has previously announced its plan to appoint Mr. Brian T. Keane as
the Company's Chief Executive OfficerGovernance and Mr. John F. Keane, Jr., as the
Company's President. The Company's Board of Directors intends to effect these
appointments immediately following the Company's 2000 Annual Meeting of
Stockholders, subject to approval ofNominating Committee was reconstituted in February 2003 into two separate committees, a proposed amendmentNominating Committee and restatement of the
Company's by-laws at that meeting.

- ----------
(1) Member of Audita Governance Committee.
(2) Member of Compensation Committee.)
(4)
Governance Committee
(5)
Nominating Committee
        All Directors hold office until the next annual meetingAnnual Meeting of the stockholdersStockholders and until their successors have been elected and qualified. The Company has no
standing nominating committee. Officers of the Company serve at the discretion of the Board of Directors.
11
        Mr. John Keane, the founder of the Company, has been Chief Executive Officer,
President and a directorChairman of the CompanyBoard of Directors since the Company's incorporation in March 1967. Mr. Keane served as Chief Executive Officer and President of the Company from 1967 to November 1999. Prior to joining the Company, Mr. Keane worked for IBM's Data Processing Division and was employed as a consultant by Arthur D. Little, Inc., a Cambridge, Massachusetts management consulting firm. Mr. Keane is also a director orof Firstwave Technologies, Inc. and EG&G,APC, Inc.
        Mr. Brian Keane joined the Company in 1986 and was appointedhas served as the Company's President and Chief Executive Officer since November 1999. From September 1997 to November 1999, Mr. Keane served as Executive Vice President and a member of the Office of the President in September 1997.of the Company. From December 1996 to September 1997, Mr. Keane had beenhe served as Senior Vice President. From December 1994 to December 1996, he was an Area Vice President. From July 1992 to December 1994, Mr. Keane served as a Business Area Manager, and from January 1990 to July 1992, he served as a Branch Manager. Mr. Keane has been a director of the Company since May 1998. Mr. Keane has served as a trustee of Mount Holyoke College since May 2000. Brian Keane is a son of John Keane, the founder, and Chairman of the Company, and athe brother of John Keane, Jr., a director.
        Mr. Leahy joined the Company in August 1999 as Senior Vice President—Finance and Administration and Chief Financial Officer. From 1982 to August 1999, Mr. Leahy was employed by PepsiCo, during which time he held a number of positions, serving most recently as Vice President of Business Planning and Development for Pepsi-Cola International.
        Mr. Hillier joined the Company in July 2002 as Senior Vice President, Human Resources. From June 1999 to February 2002, Mr. Hillier was Senior Vice President of Human Resources for CGU/One Beacon, an insurance company. From June 1990 to May 1999, Mr. Hillier served as Senior Vice President of Human Resources and Operations for Zurich Financial Services Group.
        Mr. Atwell joined the Company in 1974 and served as a Branch Manager from 1974 to 1985 and as head of Seminars Projects & Services (SPS), formerly Productivity Management Services Group (PMSG), from 1985 to 1986. Mr. Atwell left the Company from 1986 to 1991. During that time, he served as Regional Sales Vice President for Palladian Software, Vice President of Sales for Applied Expert Systems, Vice President of Sales and Marketing for Access Development Corporation, and Vice President of Broadway and Seymour. In 1991, Keane acquired Broadway and Seymour and appointed Mr. Atwell Managing Director of the Company's Raleigh/Durham Branch. Since that time, Mr. Atwell has served as Area Manager from 1993 to 1994, Area Vice President from 1995 to 1999, and Senior Vice President of North American Branch Operations from 1999 to present.
        Mr. Cappellino joined the Company as Senior Vice President, Offshore Solutions in March of 2002. From 1995 to March 2002, Mr. Cappellino served as Chairman and CEO of SignalTree Solutions, Inc. From 1993 to 1995, Mr. Cappellino was President of Network Solutions and Vice President/General Manager of Worldwide Telecommunications Marketing at Tandem Computers.
        Mr. Paris joined the Company in November 1976. Mr. Paris has served as Senior Vice President—Healthcare Solutions since January 2000 and as Vice President and General Manager of the Healthcare Solutions Practice from August 1986 to January 2000. Mr. Paris also served as Area Manager of the Healthcare Solutions Practice from 1981 to 1986.
        Mr. Shaw joined the Company in September 2002 as Senior Vice President and Managing Director of Keane Ltd. From 1996 to September 2002, Mr. Shaw was employed by Headstrong, a global restructuring corporation, during which time he held a number of positions, serving most recently as Chief Operating Officer of European Operations.
        Ms. Toops joined the Company in August of 1992. Ms. Toops has served as President of Keane Consulting Group (KCG) and Senior Vice President of Keane, Inc. since June 2000. From 1992 to June 2000, Ms. Toops served as Executive Vice President of KCG. From 1977 through 1992, Ms. Toops held a variety of sales and management positions within the IBM Corporation.
12
        Ms. Cirino has been a director of the Company since July 2001. Since 2000, Ms. Cirino has held the position of CEO and Chairman of Guardent, Inc., a managed security services corporation. Prior to 2000, Ms. Cirino served as Vice President of Sales and Marketing for Razorfish, an internet company. From 1997 to 1999, Ms. Cirino held the same position of Vice President of Sales and Marketing for I-cube, an internet company, which was acquired by Razorfish in October of 1999. Prior to 1997, Ms. Cirino held the position of Vice President of Sales for Shiva Corporation, a developer of remote access products for enterprise networks.
        Mr. Fain has been a director of the Company since November 2001 and served as Senior Vice President of the Company from November 2001 through March 2002. Prior to joining the Company, Mr. Fain was the founder, Chief Executive Officer and Chairman of the Board of Directors of Metro Information Services, which was acquired by the Company in November 2001. Mr. Fain's role at Metro Information Services also included serving as President until January 2001 and Chairman of the Compensation Committee until February 1999.
        Mr. Harkins has been a director of the Company since February 1997. Mr. Harkins is currently the President and Chief Executive Officer of Linkage, Inc., an organizational development company founded by Mr. Harkins in 1988. Prior to 1988, Mr. Harkins was Vice President of Human Resources of the Company.
        Mr. Hindle has been a director of the Company since February 1995. Mr. Hindle is currently retired. From September 1962 to July 1994, Mr. Hindle served as a Vice President and, subsequently, Senior Vice President of Digital Equipment Corporation. Mr. Hindle is also a director of Mestek, Inc. and CareCentric, Inc.
        Mr. John Keane, Jr. joinedhas been a director of the Company in 1987since May 1998. Mr. Keane is the founder of ArcStream Solutions, Inc., a consulting and systems integration firm focusing on cable and wireless solutions, and has been its President and Chief Executive Officer since July 2000. From September 1997 to July 2000, he was appointed Executive Vice President and a member of the Office of the President in September 1997.of the Company. From December 1996 to September 1997, Mr. Keane had beenhe served as Senior Vice President. From December 1994 to December 1996, he was an Area Vice President. From January 1994 to December 1994, Mr. Keane served as a Business Area Manager. From July 1992 to January 1994, he acted as manager of Software Reengineering, and from January 1991 to July 1992, he served as Director of Corporate Development. Mr. Keane has
been a director of the Company since May 1998. John Keane, Jr. is a son of John Keane, the founder and Chairman of the Company, and a brother of Brian Keane. 9
Mr. Leahy joined the Company in August 1999 and was appointed to the position of
Senior Vice President and Chief Financial Officer. Prior to these roles, Mr.
Leahy was Vice President of Business Planning and Development for Pepsi-Cola
International.

Mr. Paris joined the Company in November 1976. Mr. Paris became Area Manager of
the Healthcare Solutions Practice in 1981 and has served as Vice President and
General Manager of the Healthcare Solutions Practice since August 1986.

Ms. Southard joined the Company in July 1983 and has been Vice President - Human
Resources since December 1995. Ms. Southard served as Director of HR Operations
from August 1994 to December 1995, Manager of Human Resources and Administration
from September 1993 to August 1994, and Staffing and Employment Manager from
August 1988 to September 1993.

Mr. Harkins has been a director since February 1997. Mr. Harkins is currently
the President and Chief Executive Officer of Linkage, Inc., an organizational
development company founded by Mr. Harkins in 1988. Prior to 1988, Mr. Harkins
was Vice President of Human Resources of the Company.

Mr. Hindle has been a director since February 1995. Mr. Hindle is currently
retired. From September 1962 to July 1994, Mr. Hindle served as a Vice President
and, subsequently, Senior Vice President of Digital Equipment Corporation. Mr.
HindleKeane is also a director of CP Clare Corporation, Mestek,Ezenia! Inc. and Simione
Central Holdings, Inc., a collaboration software company.
        Dr. Rockart has been a director of the Company since the Company's incorporation in March 1967. Dr. Rockart has been a Senior Lecturer Emeritus at the Alfred J. Sloan School of Management of the Massachusetts Institute of Technology (MIT) since July 2002. Dr. Rockart served as a Senior Lecturer at the Alfred J. Sloan School of Management of MIT from 1974 to July 2002 and has beenwas the Director of the Center for Information Systems Research since 1976.from 1976 to 2000. Dr. Rockart is also a director of ComShareComshare, Inc. and Selective Insurance Group.
Mr. ShaftoSteinour has been a director of the Company since July 1994.2001. Since July 2001, Mr. Shafto is currently retired.
From January 1998 to April 1998, Mr. Shafto was Chairman of New England
Financial. Through December 31, 1997, he was Chairman,Steinour has served as the Chief Executive Officer and President of New England Life Insurance Company, an insurance and investment
firm, which he joined in 1972Citizens Bank of Pennsylvania. From January 1997 to July 2001, Mr. Steinour served as Second Vice President for Computer Systems
Development and Information Systems.Chairman of Citizens Financial Group, a commercial bank holding company. From October 1992 to December 1996, Mr. Shafto was namedSteinour served as the Executive Vice President and Chief OperatingCredit Officer of New England Life Insurance Company in 1989 and assumed the
positionCitizens Wholesale Banking Group of Chief Executive Officer in January 1992. He was elected to the
office of Chairman of New England Life Insurance Company effective July 1, 1993.Citizens Financial Group.
        Compensation of the Company's non-employee directors currently consists of an annual director'sdirectors' fee of $4,000 plus $1,000 and expensesexpense reimbursement for each meeting of the Board of Directors
13
attended. Effective for the annual directors term beginning with the Company's 2003 Annual Meeting of Stockholders, the compensation of the members of the Board of Directors will be as follows:
Compensation
Amount
Annual retainer
$20,000
Additional compensation:
Fee per Board Meeting
  2,000
Annual fee for Chairperson of Nominating Committee
��
  5,000
Annual fee for Chairperson of Governance Committee
  5,000
Annual fee for Chairperson of Compensation Committee
  15,000
Annual fee for Chairperson of Audit Committee
  25,000
Committee meetings and telephonic meetings of the Board
No additional fee (part of annual retainer)
Initial stock option grant for a new Director
10,000 shares of common stock to be granted on the date of election. Such options shall vest in 3 equal annual installments and the exercise price shall be the closing price of the Company's common stock on the American Stock Exchange on the date of grant.
Annual stock option grant
5,000 shares of common stock to be granted on the date of the Annual Meeting. Such options shall vest in 3 equal annual installments and the exercise price shall be the closing price of the Company's common stock on the American Stock Exchange on the date of grant.
        The compensation of the Company's non-employee directors is determined on an approximate fifty-two week period (the "Annual Directors Term") that runs from annual meeting date to annual meeting date rather than on a calendar year. A director may elect to receive his or her annual fee or meeting attendance fees for an Annual Directors Term in the form of shares of common stock in lieu of cash payments. If a director elects to receive shares of common stock in lieu of cash as payment for the annual fee or meeting attendance fees, the number of shares to be received by the director will be determined by dividing the dollar value of the annual fee or the meeting attendance fees owed by the closing price of Keane's common stock as reported on the American Stock Exchange on the last day of the Annual Directors Term.
        Directors generally make their elections as to the form of compensation for his or her annual fee or meeting attendance fees in July of each year and such election is valid for the Annual Directors Term beginning in the calendar year in which the election is made.
        Non-employee directors are also eligible to receive stock options under the Company's stock incentive plans. During 2002, the Company did not grant stock options to non-employee directors. Directors who are officers or employees of the Company do not receive any additional compensation for their services as directors.


                                       10
14
PART II
ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
        The Company's authorized capital stock consists of 200,000,000 shares of Common
Stock,common stock, $.10 par value per share; 503,797 shares of Classclass B Common Stock,common stock, $.10 par value per share; and 2,000,000 shares of Preferred Stock, $.01 par value per share. As of March 10, 2000,7, 2003, there were 69,862,44668,331,059 shares of Common Stockcommon stock outstanding and held of record by approximately 60,0002,843 registered stockholders; 284,987284,599 shares of Classclass B Common Stockcommon stock outstanding and held of record by approximately 120108 registered stockholders; and no shares of Preferred Stockpreferred stock outstanding.
COMMON STOCK AND CLASS B COMMON STOCK:STOCK
        Voting.    Each share of Common Stockcommon stock is entitled to one vote on all matters submitted to stockholders and each share of Classclass B Common Stockcommon stock is entitled to ten votes on all such matters.matters submitted to stockholders. The holders of Common Stockcommon stock and Classclass B Common
Stockcommon stock vote as a single class on all actions submitted to a vote of the Company's stockholders, except that separate class votes of the holders of Common Stockcommon stock and Classclass B Common Stockcommon stock are required with respect to authorize further issuanceamendments to the articles of Class B
Common Stockorganization that alter or change the powers, preferences, or special rights of their respective classes or as to affect them adversely, and certain charter amendments.with respect to such other matters as may require class votes under Massachusetts law. Voting for directors is non-cumulative.
        As of March 10, 1999,7, 2003, the Classclass B Common Stockcommon stock represented less than 1%1.0% of the Company's outstanding equity, but had approximately 4%4.0% of the combined voting power of the Company's outstanding Common Stockcommon stock and Classclass B Common Stock.common stock. The
substantial voting rights of the Classclass B Common Stockcommon stock may make the CompanyKeane less attractive as the potential target of a hostile tender offer or other proposal to acquire the stock or business of the CompanyKeane and render merger proposals more difficult, even if such actions would be in the best interests of the holders of the Common Stock.common stock.
        Dividends and Other Distributions.    The holders of Common Stockcommon stock and Classclass B Common Stockcommon stock are entitled to receive ratably such dividends, if any, as may be declared by theKeane's Board of Directors, out of funds legally available therefore, except that the Board of Directors may not declare and pay a regular quarterly cash dividend on the shares of Classclass B Common Stockcommon stock unless a noncumulativenon-cumulative per share dividend which is $.05 per share greater than the per shares dividend paid on the class B common stock is paid at the same time on the shares of Common
Stock.common stock. In the event of a liquidation, dissolution, or winding up of the Company,Keane, holders of Common Stockcommon stock and Classclass B Common Stockcommon stock have the right to ratable portions of theKeane's net assets of the Company available after the payment of all debts and other liabilities.
        Trading Markets. The Company's Common Stock is traded on the American Stock
Exchange. The Common Stock is also registered pursuant to the Securities
Exchange Act of 1934, as amended. The Company furnishes to the holders of its
Common Stock and Class B Common Stock the same information and reports
concerning the Company.    Shares of Classclass B Common Stockcommon stock are not transferable by a stockholder except for transfers (i) bytransfers:
•
By gift, (ii) in

•
In the event of the death of a stockholder, or (iii) by

•
By a trust to a person who is the grantor or a principal beneficiary of such trust (individualsthat trust.
        Individuals or entities receiving Classshares of class B Common
Stockcommon stock pursuant to suchthese transfers beingare referred to as "Permitted Transferees")."permitted transferees." The Classclass B Common Stockcommon stock is not listed or traded on any exchange or in any market, and no trading market exists for shares of the Classclass B Common Stock.common stock. The Classclass B Common Stockcommon stock is, however, convertible at all times, and without cost to the stockholder, into shares of Common Stockcommon stock on a share-for-share basis. Shares of Classclass B Common Stockcommon stock are automatically converted into an equal number of such
shares of Common Stockcommon stock in connection with any transfer of suchthose shares other than to a Permitted Transferee.permitted transferee. In addition, all of the outstanding shares of Classclass B
Common Stock
15

common stock are convertible into shares of Common Stockcommon stock upon a majority vote of the Board of Directors.
        Future Issuance of Class B Common Stock; Retirement of Class B Common Stock Upon Conversion into Common Stock.    The Company may not issue any additional shares of Classclass B Common Stockcommon stock without the approval of a majority of the votes of the
outstanding shares of Common Stock and Class B Common Stock voting as separate
classes. The Board of Directors may issue shares of authorized but unissued
Common Stock and Preferred Stock without further stockholder action.approval. All shares of Classclass B Common Stockcommon stock converted into Common Stockcommon stock are retired and may not be reissued.
        Other Matters.    The holders of Common Stockcommon stock and Classclass B Common Stockcommon stock have no preemptive rights or, (exceptexcept as described above)above, rights to convert their stock into any other securities and are not subject to future calls or assessments by the Company. The common stock is listed on the American Stock Exchange under the symbol "KEA." All outstanding shares of common stock and class B common stock are fully paid and non-assessable. The rights, preferences, and privileges of holders of Common Stockcommon stock and class B common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stockpreferred stock which the Company may designate and issue in the future. See "Preferred Stock" below.


                                       11
PREFERRED STOCK:STOCK
        The Company's Articles of Organization authorize the issuance of up to 2,000,000 shares of Preferred Stock, $.01 par value per share.Stock. Shares of Preferred Stock may be issued from time to time in one or more series, and the Board of Directors is authorized to determine the rights, preferences, privileges, and restrictions, including the dividend rights, conversion rights, voting rights, terms of redemption, redemption price or prices, and liquidation preferences, of any such series of Preferred Stock, and to fix the number of shares of any such series of Preferred Stock without any further vote or action by the stockholders. The voting and other rights of the holders of Common Stockcommon stock and Classclass B Common Stockcommon stock will be subject to, and may be adversely affected by, the rights of holders of any Preferred Stock that may be issued in the future. IssuancesThe issuance of shares of Preferred Stock, while providing desirable flexibility in connection with acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding voting stock of the Company. The Company has no present plans to issue any shares of Preferred Stock.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY:POLICY
        The Company's Common Stockcommon stock is traded on the American Stock Exchange under the symbol "KEA." The following table sets forth, for the periods indicated, the high and low closing pricessales price per share as reported by the American Stock Exchange.

                                   Stock Price

                                          High              Low
                                          ----              ---
        1999
        First Quarter                    $42.50            $21.31
        Second Quarter                    31.69             18.00
        Third Quarter                     28.75             20.50
        Fourth Quarter                    32.75             20.06

        1998
        First Quarter                    $56.50            $35.25
        Second Quarter                    59.00             42.75
        Third Quarter                     60.94             36.00
        Fourth Quarter                    39.94             28.12
Stock Price
Period
 
High
 
Low
2002
 
 
 
 
 
 
First Quarter
 
$
19.18
 
$
14.30
Second Quarter
 
 
16.82
 
 
12.30
Third Quarter
 
 
12.70
 
 
5.99
Fourth Quarter
 
 
10.10
 
 
5.29

2001

 

 

 

 

 

 
First Quarter
 
$
18.75
 
$
9.28
Second Quarter
 
 
22.00
 
 
11.40
Third Quarter
 
 
21.01
 
 
12.45
Fourth Quarter
 
 
20.05
 
 
13.25
16
        The closing price of the Common Stockcommon stock on the American Stock Exchange on March 10, 20007, 2003 was $25.625.$7.67.
        The Company has not paid any cash dividend since June 1986. The Company currently intends to retain all of its earnings to finance future growth and therefore does not anticipate paying any cash dividend in the foreseeable future. The Company's new $50.0 million credit facility with two banks contains restrictions that may limit its ability to pay cash dividends in the future.
        The Company's Articles of Organization restrict the ability of the Board of Directors to declare regular quarterly dividends on the Classclass B Common Stock.


                                       12
common stock.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

                                      First Quarter       Second Quarter       Third Quarter        Fourth Quarter
Year Ended December 31, 1999

Total revenues                             $285,004             $280,465            $255,601              $220,022
Income (Loss) before income taxes            51,147               44,761              32,649               (5,744)
Net income (Loss)                            30,178               26,633              19,426               (3,163)
Net income per share (basic)                    .42                  .37                 .27                 (.04)
Net income per share (diluted)                  .42                  .37                 .27                 (.04)

Year Ended December 31, 1998
Total revenues                             $230,056             $266,904            $285,465              $293,773
Income before income taxes                   38,300               42,402              48,314                45,140
Net income                                   22,784               22,700              27,249                23,616
Net income per share (basic)                    .32                  .32                 .38                   .33
Net income per share (diluted)                  .32                  .31                 .38                   .33



                                       13
 
 
First quarter
 
Second quarter
 
Third quarter
 
Fourth quarter
 
For the year ended December 31, 2002
 
 
 
 
 
 
 
 
 
 
 
 
 

Total revenues

 

$

221,259

 

$

226,062

 

$

213,383

 

$

212,499

 
Gross profit
 
 
63,426
 
 
64,157
 
 
58,669
 
 
56,904
 
Income (loss) before income taxes
 
 
9,254
 
 
9,200
 
 
6,517
 
 
(11,335
)
Net income (loss)
 
 
5,553
 
 
5,521
 
 
3,910
 
 
(6,803
)
Net income (loss) per share (basic)
 
 
0.07
 
 
0.07
 
 
0.05
 
 
(0.10
)
Net income (loss) per share (diluted)
 
 
0.07
 
 
0.07
 
 
0.05
 
 
(0.10
)

For the year ended December 31, 2001

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

208,346

 

$

196,995

 

$

186,637

 

$

187,181

 
Gross profit
 
 
63,197
 
 
59,208
 
 
57,223
 
 
51,648
 
Income (loss) before income taxes
 
 
14,211
 
 
11,256
 
 
8,908
 
 
(5,154
)
Net income (loss)
 
 
8,454
 
 
6,698
 
 
5,302
 
 
(3,067
)
Net income (loss) per share (basic)
 
 
0.12
 
 
0.10
 
 
0.08
 
 
(0.04
)
Net income (loss) per share (diluted)
 
 
0.12
 
 
0.10
 
 
0.08
 
 
(0.04
)
17
ITEM 6.    SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


Year Ended December 31,                    1995        1996          1997         1998          1999
- --------------------------------------------------------------------------------------------------------

Income Statement Data:
  Total revenues                          $394,619    $505,982     $706,801    $1,076,198    $1,041,092
  Operating income                          33,659      47,403       85,163       170,187       116,466
  Net income                                20,148      28,173       51,371        96,349        73,074
  Net income per share (basic)                 .30         .40          .73          1.36          1.02
  Net income per share (diluted)               .30         .40          .72          1.33          1.01
  *Weighted average common                  67,036      69,780       70,096        71,053        71,571
   shares outstanding (basic)
  *Weighted average common                  67,728      70,540       71,603        72,284        72,395
   shares and common share
   equivalents outstanding
   (diluted)
- --------------------------------------------------------------------------------------------------------

Balance Sheet Data:
  Total assets                            $198,191    $251,771     $329,176      $458,959      $514,825
  Total debt                                 9,146      16,502        9,493         3,930        11,403
  Stockholders' equity                     169,526     201,768      257,037       363,784       422,799
  Book value per share                        2.53        2.89         3.65          5.10          5.95
  *Number of shares                         67,114      69,792       70,342        71,336        71,051
   outstanding
- --------------------------------------------------------------------------------------------------------

Financial Performance:
  Total revenue growth(decline)              12.3%       28.2%        39.7%         52.3%        (3.3)%
  Net margin                                  5.1%        5.6%         7.3%          9.0%          7.0%
  Return on average equity                   12.8%       15.2%        22.4%         31.0%         18.6%


*Adjusted to reflect the 2-for-1 stock split that was distributed on August 29,
1997 to shareholders of record as of August 14, 1997.

For the years ended December 31,
 
2002
 
2001
 
2000
 
1999
 
1998
 
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

 
 
 
 
 
 
 
Income Statement Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
 
$
873,203
 
$
779,159
 
$
871,956
 
$
1,041,092
 
$
1,076,198
 
Operating income
 
 
10,357
 
 
19,753
 
 
27,921
 
 
116,466
 
 
170,187
 
Net income
 
 
8,181
 
 
17,387
 
 
20,354
 
 
73,074
 
 
96,349
 
Net income per share (basic)
 
 
0.11
 
 
0.25
 
 
0.29
 
 
1.02
 
 
1.36
 
Net income per share (diluted)
 
 
0.11
 
 
0.25
 
 
0.29
 
 
1.01
 
 
1.33
 
Weighted average common shares outstanding (basic)
 
 
74,018
 
 
68,474
 
 
69,646
 
 
71,571
 
 
71,053
 
Weighted average common share equivalents outstanding (diluted)
 
 
74,406
 
 
69,396
 
 
69,993
 
 
72,395
 
 
72,284
 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Total cash and marketable securities
 
$
68,255
 
$
129,243
 
$
115,212
 
$
142,763
 
$
129,229
 
Total assets
 
 
685,674
 
 
679,903
 
 
463,594
 
 
519,307
 
 
458,959
 
Total debt
 
 
45,647
 
 
15,357
 
 
8,616
 
 
11,403
 
 
3,930
 
Stockholders' equity
 
 
490,584
 
 
529,173
 
 
370,677
 
 
422,799
 
 
363,784
 
Book value per share
 
 
7.06
 
 
7.00
 
 
5.48
 
 
5.95
 
 
5.10
 
Number of shares outstanding
 
 
69,521
 
 
75,509
 
 
67,675
 
 
71,051
 
 
71,336
 

Financial Performance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Total revenue growth (decline)
 
 
12.1
%
 
(10.6
)%
 
(16.2
)%
 
(3.3
)%
 
52.3
%
Net margin
 
 
0.9
%
 
2.2
%
 
2.3
%
 
7.0
%
 
9.0
%
All amounts prior to 1999 have been restated to reflect the acquisitions of Bricker & Associates, Inc., Icom Systems Limited, and Fourth Tier, Inc., which were accounted for as poolings-of-interests.


                                       14
ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
        This Annual Report on Form 10-K contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects""expects," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Company's actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth below under the caption "Certain Factors That May Affect Future Results."

RESULTS
OVERVIEW
        Keane plans, builds, manages, and rationalizes application software through its Business Consulting, Application Development and Integration (AD&I), and Application Development and Management Outsourcing (Applications Outsourcing) services. Keane develops long-term relationships with customers by providing a broad range of service offerings delivered on a local basis through an integrated network of branch offices in North America and in the United Kingdom. Branch offices work in conjunction with the Company's business consulting arm, Keane Consulting Group (KCG), and are supported by centralized Strategic Practices. The practices focus on developing repeatable approaches to common customer needs and challenges and help to gather and institutionalize the Company's best practices. Branch offices are also supported by Advanced Development Centers
18

(ADCs) in the United States, Canada, and India, which enable the Company to further improve the efficiency and economic advantage of the services it provides customers.
        Given the recent economic downturn, many customers have deferred their investments in new information systems. As a result, Keane has concentrated its short-term efforts on helping customers to more efficiently manage their existing applications. This mix of services includes Applications Outsourcing and Applications Rationalization, a service that helps customers to identify and eliminate higher cost, non-core, and end-of-life applications. Applications Outsourcing is the Company's flagship service offering, because it represents a large, growing market, and provides Keane with long-term contracts and a high percentage of recurring revenue. Keane has also increased its focus on providing services to vertical markets, such as healthcare and the public sector, that have been less impacted by reductions in technology spending. In addition, the Company seeks to provide cost-effective services and to enhance its operating margins through the use of its near-shore Advanced Development Center in Halifax, Nova Scotia, and its offshore Advanced Development Centers in Hyderabad and Delhi, India. The Company acquired its offshore facilities as a result of its acquisition of SignalTree Solutions Holding, Inc. (SignalTree). The Company anticipates that use of its near-shore and offshore facilities will increase as a result of its focus on global delivery and the need of customers to continue to decrease costs associated with investments in technology. Finally, Keane has maintained tight control of its costs while executing a strategy that has created a business model with high operating leverage.
        In order for Keane to remain successful in the near term, Keane must continue to maintain and grow its client base, provide high quality service and satisfaction to its existing clients, and continue to take advantage of cross selling opportunities. In the current economic environment, Keane must also provide clients with service offerings that are appropriately priced, satisfy clients' IT needs, and provide clients with measurable business benefit.
        Keane believes that maximizing the generation of cash from operations is fundamental to building long-term per share value. To accomplish this, Keane believes that its ability to sell and deliver Applications Outsourcing and to cross-sell other services is critical to its long-term success. Attracting, retaining, and developing talented sales, management, and technical professionals is another essential component. In addition, the Company's ability to leverage Selling, General & Administrative (SG&A) expense over a broader base of revenue is crucial to increasing net income and cash provided from operations. Keane's management measures Keane's performance on a quarter by quarter and year-over-year basis by comparing plan, build, and manage revenues, Applications Outsourcing revenues, the number of billable personnel, gross margins, and SG&A as a percentage of revenues for such periods. Another key metric used by Keane's management is bookings, or new sales to customers.
APPLICATION OF OPERATIONS, 1999 VS. 1998:CRITICAL ACCOUNTING POLICIES AND ESTIMATES
        The discussion and analysis of Keane's financial condition and results of operations are based on consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Keane to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of its financial statements. Actual results may differ from these estimates under different assumptions or conditions.
        Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. Application of these policies is particularly important to the portrayal of Keane's financial condition and results of operations. The Company believes that the accounting policies described below meet these characteristics. Keane's significant accounting policies are more fully described in the notes to the consolidated financial statements.
19

Revenue Recognition
        Keane recognizes revenue as services are performed or products are delivered in accordance with contractual agreements and generally accepted accounting principles. For general consulting engagements, revenue is recognized on a time and materials basis as services are delivered. For the majority of our outsourcing engagements, the Company provides a specific level of service each month for which it bills a standard monthly fee. Revenue for these engagements is recognized in monthly installments over the billable portion of the contract. These installments may be adjusted to reflect changes in staffing requirements and service levels consistent with terms of the contract.
        For fixed price engagements, revenue is recognized on a percentage of completion basis over the life of the contract. The Company uses estimated labor-to-complete to measure the percentage of completion. Percentage of completion recognition relies on accurate estimates of the cost, scope, and duration of each engagement. If the Company does not accurately estimate the resources required or the scope of the work to be performed, then future revenues may be negatively affected or losses on existing contracts may need to be recognized. All future anticipated losses are recognized in the period they are identified.
        Revenue associated with application software products is recognized as the software products are installed and as implementation services are delivered. Software maintenance fees on installed products are recognized on a pro-rated basis over the term of the agreement.
        For the majority of outsourcing engagements, the Company provides a specific level of service each month for which it bills a standard monthly amount. Revenue for these engagements can be recognized in monthly installments over the billable portion of the contract or on a time and materials basis. Installment amounts may be adjusted to reflect changes in staffing requirements or service level agreements. Costs of transitioning the employees and ensuring the Company meets required service level agreements may be capitalized over defined periods of time.
        In all consulting engagements, outsourcing engagements, and software application sales, the risk of issues associated with satisfactory service delivery exists. Although management believes these risks are adequately addressed by the Company's adherence to proven project management methodologies, proprietary frameworks, and internal project audits, the potential exists for future revenue charges relating to service delivery issues.
Allowance for Bad Debts
        Each accounting period, Keane evaluates accounts receivable for risk associated with a client's inability to make contractual payments or unresolved issues with the adequacy of Keane's services. Billed and unbilled receivables that are specifically identified as being at risk are provided for with a charge to revenue in the period the risk is identified. Considerable judgment is used in assessing the ultimate realization of these receivables including reviewing the financial stability of the client, evaluating the successful mitigation of service delivery disputes, and gauging current market conditions. If the Company's evaluation of service delivery issues or a client's ability to pay is incorrect, the Company may incur future adjustments to revenue.
Property and Equipment
        The Company periodically reviews its property and equipment for impairment in accordance with Statement of Financial Accounting Standards No. 144 (FAS 144), "Accounting for the Impairment or Disposal of Long-Lived Assets." In determining whether an asset is impaired, the Company must make assumptions regarding recoverability of costs, estimated future cash flows from the asset, intended use of the asset, and other related factors. If these estimates or their related assumptions change, the Company may be required to record impairment charges for these assets.
20

Goodwill and Intangible Assets
        In assessing the recoverability of the Company's goodwill and other intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. This process is subjective and requires judgment at many points throughout the analysis. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets not previously recorded.
        On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 (FAS 142), "Goodwill and Other Intangible Assets," and was, therefore, required to perform an impairment test on its goodwill and other intangibles with indefinite lives during the first six months of 2002, and then on a periodic basis thereafter. The Company's initial goodwill impairment analysis was completed during the second quarter of 2002, and was based on January 1, 2002 balances. Through this analysis it was determined that there was no impairment as of that date. Subsequently, during the fourth quarter of 2002, the company completed its annual impairment review based on September 30, 2002 balances and determined that there was no impairment as of that date. Future changes in estimates may result in a non-cash goodwill impairment that could have a material adverse impact on our financial condition and results of operations.
        The Company periodically reviews its identifiable intangible assets for impairment in accordance with Statement of Financial Accounting Standards No. 144 (FAS 144), "Accounting for the Impairment of Disposal of Long-lived Assets." In determining whether an intangible asset is impaired, the Company must make assumptions regarding estimated future cash flows from the asset, intended use of the asset and other related factors. If the estimates or the related assumptions used to determine the value of the intangible assets change, the Company may be required to record impairment charges for these assets.
Income Taxes
        Keane accounts for income taxes in accordance with FAS No. 109, "Accounting for Income Taxes," which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. FAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. Based on prior taxable income and estimates of future taxable income, the Company has determined that it is more likely than not that its net deferred tax assets will be fully realized in the future. If actual taxable income varies from these estimates, the Company may be required to record a valuation allowance against its deferred tax assets resulting in additional income tax expense which will be recorded in the Company's consolidated statement of operations.
Stock-based Compensation
        The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the closing price of the shares at the date of grant. The Company adopted the disclosure provisions of FAS 123, (FAS 123) "Accounting for Stock-Based Compensation," and applies APB Opinion 25, "Accounting for Stock Issued to Employees," to its grants of stock options and accordingly, recognizes no compensation expense for stock-based employee compensation provided options are issued at the current market value. The Company also grants restricted stock for a fixed number of shares to employees for nominal consideration. Compensation expense related to restricted stock awards is recorded ratably over the restriction period.
21
Restructuring
        Keane has recorded restructuring charges and reserves associated with restructuring plans approved by management over the last four years. These reserves include estimates pertaining to employee separation costs and real estate lease obligations. The reserve associated with lease obligations could be materially affected by factors such as the ability to obtain subleases, the creditworthiness of sub-lessees, market value of properties, and the ability to negotiate early termination agreements with lessors. While the Company believes that its current estimates regarding lease obligations are adequate, future events could necessitate significant adjustments to these estimates. Future changes in estimates may result in adjustments to the Company's consolidated financial statements.
Results of Operations, 2002 vs. 2001
        The Company's total revenue for 19992002 was $1.04
billion,$873.2 million, a 3.3%12% increase from revenue of $779.2 million for 2001. This increase in total revenue was primarily the result of new clients and new client billings due to the acquisition of Metro Information Services, Inc. (Metro), which was completed on November 30, 2001, and the acquisition of SignalTree Solutions Holding, Inc., which was completed on March 15, 2002.
        Revenue from the Company's Plan services was $66.9 million in 2002, a decrease of 11% from $1.08 billion$75.3 million in 1998.2001. Plan revenue is comprised primarily of business consulting services delivered by KCG, the Company's business consulting arm, and IT consulting services, which are sold and implemented out of Keane's network of branch offices. Plan services include Keane's Applications Rationalization Service. The decrease in Plan revenue was primarily athe result of the rapiddeferral of consulting projects and anticipateda decrease in billing rates caused by general economic conditions.
        Revenue from the Company's Build services was $216.2 million in 2002, a decrease of 19% from $265.9 million in 2001. Keane's Build revenue, which consists primarily of Application Development and Integration (AD&I) business, was also adversely affected during 2002 by the deferral of software development projects in both North America and the United Kingdom, as well as by reduced billing rates due to the current reduction in capital spending related to technology. However, the decline in Year 2000 compliance
revenue. Year 2000 compliancethe Company's Build services revenue decreased 44.2% to $206.1was offset in part by revenue generated from the less cyclical public sector and healthcare related vertical markets, which contributed growing and more stable revenue streams within the Build services sector.
        Revenue from the Company's Manage services, which consist primarily of Keane's Applications Outsourcing service, as well as Staff Augmentation services and other Maintenance and Migration services, were $590.1 million for 1999during 2002, an increase of 35% from $369.5$437.9 million in 1998. However,2001. This improvement was the Company's 1999result of increasing revenue from Keane's Applications Outsourcing service, and the acquisitions of Metro Information Services, Inc. and SignalTree Solutions Holding, Inc. Although not immune from economic fluctuations, Applications Outsourcing revenues are more stable than those associated with Plan or Build due to the long-term and recurring nature of outsourcing contracts and the cost-saving benefits related to outsourcing. Generally, under an Applications Outsourcing agreement, the Company receives a fixed monthly fee in return for meeting or exceeding a contractually agreed upon service level. Applications Outsourcing agreements generally do not require any capital outlay from the Company, which recognizes outsourcing revenue and expense on a monthly basis consistent with the service provided to its core
Plan, Buildcustomers. The Company does not employ percentage-of-completion accounting on its outsourcing agreements.
        Applications Outsourcing revenue was $408.5 million during 2002, and Manage services, excluding Year 2000 compliance, was $835.0
million,represented 47% of total revenue, up 18.2%4% from $706.7$393.9 million in 1998. Plan, Build, and Manage revenue
refer to the Company's three core business lines, Business and IT Consulting,
e-Solutions,2001. The increase in Applications Development and Management Outsourcing. The growth in
non-Y2K revenueOutsourcing was a result of clients' ongoing needs to efficiently manage existing software portfolios.
22

        The Company observed no clear trend of an increase in discretionary IT spending during 2002 or the first two months of 2003. As a result, the Company anticipates continuing softness in its AD&I business, which represents a majority of its Build sector, and its Plan sector, until economic conditions improve and customers once again begin funding technology projects. However, the Company continues to see ongoing opportunities in its Applications Outsourcing business, which represents a majority of its Manage sector as well as opportunities within the healthcare sector. The Company believes that outsourcing provides greater stability of revenue due to long-term contracts and recurring revenue.
        Total billable employees for all operations were 6,175 billable employees as of December 31, 2002, down from 6,566 total billable as of December 31, 2001. This year-over-year decrease resulted from a need to bring personnel resources, which account for the vast majority of Keane's direct costs, in alignment with anticipated revenue. The Company's strategic repositioning executedbase of billable employees within its India operation was 413 billable employees as of December 31, 2002. The Company did not have billable employees in India during 2001.
        On March 15, 2002, Keane acquired SignalTree Solutions Holding, Inc., a privately-held, United States-based corporation with two software development facilities in India and additional operations in the United States, by the merger of a wholly-owned subsidiary of Keane into SignalTree Solutions. Under the terms of the merger agreement, Keane paid $68.2 million in cash for SignalTree Solutions. Keane expects the addition of SignalTree Solutions to enhance its value proposition to customers by providing access to world-class software development processes as well as the economic advantage of a large pool of cost-effective technical professionals.
        As of December 31, 2002, in connection with a third quarter acquisition, the Company had a recorded contingent liability of $895,000 related to certain earn-out considerations. The $895,000 is expected to be paid out during the year. This repositioning has yielded growth in important areas such
as e-Solutions, which totaled $108first quarter of 2003. Future earn-outs are based on specific net revenue targets. Payments for achieving these goals will range from $1.0 to $2.0 million in future periods. The Company also recorded $3.0 million as deferred revenue during 1999. Growth in
Keane's core Plan, Build,related to contingent service credits and Manage revenue was negatively impacted during the
second half of 1999 due toissued a cross-industry Y2K-related freeze among many of
Keane's clients, which deferred the start of new development projects to lower
their Y2K-related risk. Despite the Y2K freeze, Keane's 1999 Plan, Build, and
Manage revenue was up 34.0%, 21.0%, and 11.1% to $110.9$3.0 million $331.1 million,
and $370.9 million, respectively, from 1998.non-interest bearing note payable as partial consideration. The note has a one-year term with a possible one-year extension based on additional acquisition service credits.
        Salaries, wages, and other direct costs for 19992002 were $702.8$630.0 million, or 67.5%72.2% of total revenue, compared to $696.8$547.9 million, or 64.7%70.3% of total revenue, for 1998, an2001. The increase of 2.8%. This increasein direct costs was primarily attributable to the Metro and SignalTree Solutions acquisitions. The Company's gross margins for 2002 were 27.8%, as a percentage of revenue is due primarilycompared to 29.7% for 2001. The decrease in gross margins reflects continuing softness in the demand for IT services resulting in lower billing rates and utilization of Company billable headcount, caused by the rapid decline of
Y2K revenue and the Y2K-related deferral of new projects. Due to the
extraordinary nature of expenses related to Keane's transition from Y2K and to
bring costs in closer alignment with revenues, in the Fourth Quarter of 1999,
the Company incurred a onetime restructuring charge of $13.7 million or 1.3% of
revenue. These charges are related to employee severance costs, costs associated
with asset impairments, payments to certain employees and consolidation of less
profitable business units and the closing of certain facilities. It is expected
that approximately $4.1 million, associated with severance costs and payments to
certain employees, will be paid in 2000. The remaining $2.9 million will be paid
out as branch office closures occur.personnel.
        Selling, General & Administrative ("SG&A") expenses for 19992002 were $199.0$198.8 million, or 19.1%22.8% of total revenue, as compared to $193.4$186.7 million, or 18.0%24.0% of total revenue, for 2001. The decrease in 1998, an increase of 1.1%. This increaseSG&A as a percentage of revenue was the result of cost synergies obtained from the acquisition of Metro Information Services, Inc. as well as the Company's continuing focus on tightly controlling discretionary expenses. The increase in SG&A expenses was attributable to personnel costs incurred in connection with the Metro and SignalTree Solutions acquisitions, as more fully described below.
        During the first quarter of 2002, the Company completed the integration of Metro's corporate functions with its own, and during the second quarter of 2002, the Company completed the consolidation and relocation of overlapping branch offices. During the second quarter of 2002, the Company also integrated United States-based operations acquired from SignalTree Solutions with its own. During the third quarter of 2002, the Company integrated all corporate functions of SignalTree Solutions into its corporate headquarters in Boston, Massachusetts.
        During the fourth quarter of 2002, due to changes in assumptions and pursuant to plans and acquisitions, Keane recorded a restructuring charge of $17.6 million, including $12.8 million associated
23

with real estate, $1.9 million associated with fixed assets, and $2.9 million associated with workforce reductions. The real estate charges represent consolidation of both corporate and field properties, as well as changes in estimates for previously recorded restructuring charges. During the fourth quarter of 2001, Keane recorded a restructuring charge of $10.4 million relating to the costs of workforce reductions, consolidation of branch offices, impaired assets, and certain other expenditures.
        Amortization of intangible assets for 2002 was $16.4 million, or 1.9% of total revenue, compared to $14.5 million, or 1.9% of total revenue, for 2001. The increase in amortization of intangible assets was primarily attributable to additional intangible assets resulting from the Company's acquisitions of Metro Information Services, Inc, and SignalTree Solutions offset by the impact of the adoption of FAS 142, under which goodwill is no longer amortized.
        Interest and dividend income totaled $2.5 million for 2002, compared to $7.0 million for 2001. The decrease in interest and dividend income was attributable to fewer cash reserves earning interest and dividends due to the use of cash to retire debt associated with the acquisition of Metro Information Services, Inc., the acquisition of SignalTree Solutions, and the repurchase of shares of the Company's common stock, as well as interest rate declines. Other income was $1.0 million for 2002, as compared to other income of $2.7 million in 2001. Other income during 2001 related to (i) a gain of $4.0 million from the sale of the Company's Help Desk business partially offset by the Company's decision to write-off certain equity investments totaling $2.0 million, and (ii) gains from the sale of investments.
        The Company's effective tax rate was 40.0% for 2002, down from 40.5% in 2001. This decrease was a direct result of the adoption of FAS 142, offset by an adjustment of prior year's estimated tax liability.
        Net cash provided from operations was $56.7 million during 2002, as compared to $83.2 million during 2001. Cash provided from operations in 2002 includes the effects of payments related to restructuring in the amount of $16.5 million. The decrease in net cash from operations was primarily attributable to a decrease in net income. The Company continues to focus on using cash flow to fund potential acquisitions, stock repurchases, and to build long-term per share value.
Results of Operations, 2001 vs. 2000
        The Company's revenue for 2001 was $779.2 million compared to $876.9 million in 2000. Revenue from Keane's divested Help Desk business totaled $5.2 million and $43.3 million for 2001 and 2000, respectively. Keane's revenue during 2001 was negatively impacted by the economic slowdown and the related reduction in technology spending. However, this was partially offset by a $16.8 million increase in revenue from the Company's public sector business and a $31.0 million increase in revenue from its Applications Outsourcing service. Applications Outsourcing revenue represented 51% of total revenue during 2001 or $393.9 million, an increase of 8.5% from $363.0 million during 2000.
        Revenue from the Company's Plan services was $75.3 million, a decrease of 30% from $107.1 million in 2000. Plan revenue for 2001 was negatively impacted by a general deferral of capital expenditures and consulting projects.
        Revenue from the Company's Build services was $265.9 million in 2001, a decrease of 17% from $322.2 million in 2000. During the fourth quarter of 2000, Keane incurred a charge of $13.5 million, of which $8.6 million was related to the consolidation and/or closing of certain non-profitable branch offices, employee severance costs, facility leases, and for other miscellaneous purposes with the balance related to increased reserves against accounts receivable. During the fourth quarter of 2001, Keane booked $10.4 million in restructuring charges relating to the costs of workforce reductions, consolidation of branch offices, impaired assets, and certain other expenditures.
        As anticipated, Keane's Build revenue was also adversely affected in 2001 by the challenging economic environment and the related deferral of new software development projects in both North
24

America and the United Kingdom. This decline was offset in part by ongoing Build project revenue from existing Global 2000 customers and revenue of $128.4 million attributable to public sector business from federal and state governments. Engagements within the public sector represented approximately 16.5% of Keane's total revenue in 2001.
        Revenue from the Company's Manage services was $437.9 million in 2001 and $437.6 million in 2000. Keane's 2001 revenue from Manage services included approximately $16.0 million as a result of its acquisition of Metro Information Services, on November 30, 2001. Revenue from the Company's divested Help Desk business was approximately $5.2 million during 2001 and $43.3 million during 2000. On February 12, 2001, the Company sold its Help Desk operation to Convergys Corporation in return for $15.7 million in cash.
        The increase in Keane's Manage revenue during 2001 was driven by continuing sales growth in the Company's revenueApplications Outsourcing business, as Global 2000 customers sought to improve productivity and investmentsefficiencies associated with the management and enhancement of their application portfolios. This business has not been as negatively impacted by the economy as Keane's Build business.
        In response to this challenging business climate, the Company continuedexpanded its customer base and critical mass with its acquisition of Metro Information Services. Metro provided Keane with hundreds of new customers to make inwhom the development and marketingCompany can cross-sell its services. Of Metro's 300 largest customers that accounted for 90% of its core
service offerings.revenue for the twelve months ended June 30, 2001, 236 were new customers for Keane. In addition, the Company improved operational leverage by combining corporate functions and consolidating overlapping branch offices. Of Metro's 33 branch offices, 26 were within geographic markets currently served by Keane.
        Salaries, wages, and other direct costs for 2001 were $547.9 million, or 70.3% of total revenue, compared to $621.2 million, or 71.2% of total revenue, for 2000. The decline in costs resulted from the sale of the Company's objective islower margin Help Desk operations and its ongoing efforts to aggressively managebring costs in alignment with revenue. As a result, Keane's gross margins for 2001 increased to 29.7%, up from 28.8% during 2000.
        Selling, General & Administrative ("SG&A") expenses for 2001 were $186.7 million, or 24.0% of total revenue, compared to $201.9 million, or 23.1% of total revenue, for 2000. The decline in SG&A asexpenditures during 2001 was a percentageresult of revenue, by realizing the economiessale of scale associatedthe Company's Help Desk operations and aggressive control of discretionary spending to bring cost in alignment with increasing revenue without proportionately increasing SG&A.revenue. The Company intends to continue to control aggressively its discretionary expenditures until economic conditions improve and spending on IT projects increases.
        Amortization of goodwill and other intangible assets for 19992001 was $9.2$14.5 million, or 0.9%1.9% of total revenue, compared to $12.4 million, or 1.4% of total revenue, in 2000. The increase in amortization for 2001 was attributable to additional intangible assets as a result of the Company's acquisition of Metro Information Services in November of 2001 and the acquisitions of Denver Management Group and Care Computer Systems in July and September of 2000.
        Interest and dividend income totaled $7.0 million for 2001, compared to $7.7 million or 0.7% of revenue,for 2000. The slight decrease in 1998. The
increase is primarily attributable to the acquisitions executed during the
current and prior year.

Interest and other expenses for 1999 totaled $1.5 million, compared to $1.2
million in 1998. Interestinterest and dividend income was attributable to having less cash earning interest and dividend income as a result of using cash for 1999 totaled $7.8acquisitions and the repurchase of Keane stock, and as a result of interest rate declines. Other income was $2.7 million for 2001 as compared to $5.2other expense of $0.9 million in 1998. The2000. This increase in interestother income was related to a gain of $4.0 million from the sale of Keane's Help Desk operation, partially offset by the Company's decision to write-off certain equity investments totaling $2.0 million during the first quarter of 2001, and other related
income can be attributed togains from the increase in investments, which grew to $89.7
million at year-end 1999 from $77.5 million at year-end 1998.

Pretax income for 1999 was $122.8 million, or 11.8%sale of revenue, down 29.5% from
pretax income of $174.2 million, or 16.2% of revenue in 1998.investments.
        The Company's effective tax rate for 1999 was 40.5% compared to 44.7% in 1998.
The decrease is primarily attributable to2001 and 2000.
25

        Net cash provided from operations was $83.2 million during 2001, before proceeds from the high tax rate incurred in 1998
which was impacted by non-deductible merger costssale of $8.1the Help Desk business of $15.7 million and $1.7the investment of $4.0 million for the repurchase of Keane shares, and $96.1 million during 2000. The Company is focused on continuing to optimize cash flow in order to fund potential mergers and acquisitions, stock repurchases, and to build long-term shareholder value.
RECENT ACCOUNTING PRONOUNCEMENTS
        In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145 (FAS 145), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Under FAS 145, gains and losses on extinguishments of debt are to be classified as income or loss from continuing operations rather than extraordinary items. The Company is required to adopt FAS 145 in the first quarter of 2003 and does not expect the adoption of this statement to have a material impact on its financial condition or results of operations.
        In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146 (FAS 146), "Accounting for Costs Associated with Exit or Disposal Activities." The statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to exit or disposal plan. Costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, branch closing, or other exit disposal activity. This statement is effective for exit or disposal activities initiated after December 31, 2002. FAS 146 may affect the timing of the Company's recognition of future exit or disposal costs, if any.
        In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." The statement requires a guarantor to record certain guarantees at fair value and to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote. The interpretation and its disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The interpretation's initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The guarantor's previous accounting for guarantees issued prior to December 31, 2002 should not be revised or restated as a result of this interpretation.
        On December 31, 2002, the conversionFinancial Accounting Standards Board issued Statement of Fourth Tier, Inc from cashFinancial Accounting Standards No. 148 (FAS 148) "Accounting for Stock-Based Compensation—Transition and Disclosure," an amendment to accrual
basisFAS 123, "Accounting for tax reporting.

NetStock-Based Compensation." The statement provides three transition methods for entities electing to adopt the fair value recognition provisions of Statement 123 for stock-based employee compensation. FAS 148 also amends the disclosure provisions of FAS 123 to require prominent disclosure about the effects of an entity's accounting policy decisions with respect to stock-based compensation on reported net income and earnings per share in annual and interim financial statements. The statement is effective for 1999 were $73.1 million and $1.01 per
share diluted, respectively, down 24.2%fiscal years ending after December 15, 2002. Currently, the Company does not elect to transition from $96.3 million and $1.33 per share
diluted, respectively, in 1998.


                                       15


RESULTS OF OPERATIONS, 1998 VS. 1997: The Company's revenuethe intrinsic value method of accounting for 1998 was $1.08
billion, a 52.3% increase from $706.8 million in 1997. The increase in revenue
was a resultstock-based compensation to the fair value method. Adoption of strong growth generated bydisclosure provisions of this statement will not impact the Company's service offerings,financial condition or results of operations.
        In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities," 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 entity's residual returns, or both. In determining whether it is the primary beneficiary of a variable interest entity, an entity with a
26

variable interest shall treat variable interests in that same entity held by its related parties as its own interests.
        The Company is presently evaluating whether or not City Square and by five strategic acquisitions madeGateway LLC are variable interest entities and, if so, whether or not the Company is the primary beneficiary of these entities.
        If the Company determines that City Square or Gateway LLC, or both, are variable interest entities of which they are the primary beneficiary, the Company will be required to consolidate the financial position and results of operation of the entities for which it determines it is the primary beneficiary. Such consolidation will be required beginning July 1, 2003.
        If the Company concludes it is not required to consolidate either of these entities, the Company will continue to account for its lease with City Square consistent with its past practice. As for its lease with Gateway LLC, if the Company concludes it is not required to consolidate this entity, the Company will amortize the asset and liability recorded during the year. The Company experienced the
largest revenue growth in Year 2000 Compliance Services and Application
Outsourcing. Year 2000 Compliance revenue increased 146.4% to $369.4 million,
Application Outsourcing revenue increased 48.8% to $155.3 million and
Application Development increased 32.8% to $130.1 million. IT Consulting
increased 48.4% to $54.0 million, primarily as a resultconstruction of the acquisitionfacility, and believes the net effect of Bricker & Associates, Inc. Help Desk revenue increased 25.5%such amortization included in its operating results will approximate the rent expense resulting from payments it is required to $49.2 million,
Health Care Services and Sales increased 22.4% to $37.1 million, Supplemental
Staffing revenue increased 13.5% to $263.9 million, and all other services
increased 6.8% to $17.2 million.

Salaries, wages, and other direct costs for 1998 were $696.8 million, or 64.7%
of revenue, compared to $469.4 million, or 66.4% of revenue for 1997, a decrease
of 1.7%. This decrease as a percentage of revenue was due tomake under the Company's
ability to increase average billing rates by more than the increase in related
technical salary costs, as a result of the increase in strategic services work
being performed by the Company.

Selling, General, & Administrative ("SG&A") expenses for 1998 were $193.4
million or 18.0% of revenue, compared to $138.2 million or 19.5% of revenue in
1997, a decrease of 1.5% as a percentage of revenue. The Company's objective is
to continue to reduce SG&A, as a percentage of revenue, by realizing the
economies of scale associated with increasing revenue without proportionately
increasing SG&A, investing in MIS to increase productivity, and continuing to
implement cost saving programs such as national purchasing for volume purchase
discounts in such areas as travel, office supplies, and computer equipment.

Amortization of goodwill and other intangible assets for 1998 was $7.7 million,
or 0.7% of revenue, compared to $14.0 million, or 2.0% of revenue, in 1997. The
decrease is primarily attributable to certain assets becoming fully amortized at
the end of 1997.

Merger costs for 1998 were $8.1 million as compared to $0 for 1997. This
increase was the result of investment banking, legal, accounting and other
professional fees associated with the acquisitions of Bricker & Associates,
Inc., Icom Systems Ltd and Fourth Tier, Inc., which were all accounted for as
poolings-of-interests.

Interest and other expenses for 1998 totaled $1.2 million, compared to $1.3
million in 1997. Interest and dividend income for 1998 totaled $5.2 million,
compared to $4.2 million in 1997. The increase in interest and other related
income was attributed to the increase in investments, which grew to $77.5
million at year-end 1998 from $50.7 million at year-end 1997.

Pretax income for 1998 was $174.2 million, or 16.2% of revenue, up 97.7% from
pretax income of $88.1 million, or 12.5% of revenue in 1997.

The Company's effective tax rate for 1998 was 44.7% compared to 41.7% in 1997.
This increase is due to $8.1 million of merger costs that are not deductible for
state and federal taxes and a one-time tax expense of $1.7 million as the result
of the requirement to convert Fourth Tier, Inc. from cash to accrual basis for
tax reporting.

Net income and earnings per share for 1998 were $96.3 million and $1.33 per
share diluted, respectively, up 87.6% and 84.7%, respectively from $51.4 million
and $.72 per share diluted, respectively, in 1997.

lease.
LIQUIDITY AND CAPITAL RESOURCES:RESOURCES
        The Company's cash and investments at December 31, 1999 increased2002 decreased to $142.8$68.3 million from $129.2 million at December 31, 1998.2001. This increasedecrease was primarily attributable to net income,the cost of the SignalTree Solutions acquisition of $68.2 million, which occurred in March of 2002, along with the cost associated with the Company's stock repurchase program, which totaled $54.1 million for the year. The Company experienced strong operating cash flow of $56.7 million, of which, $50.0 million was related to its continuing effort to decrease its Days Sales Outstanding (DSO), which helped fund its stock repurchase programs. The decrease in accounts receivable was offset additionally by purchases of approximately $37.6property and equipment of $7.8 million.
        On September 21, 2001, the Company announced that its Board of Directors had authorized the Company to repurchase up to 1,542,800 shares of its common stock over the next 12 months. A total of 175,000 shares of common stock were repurchased under this authorization during the second quarter of 2002, at an average price of $12.88 for a cost to $2.2 million. The remaining authorized amount of 1,367,800 shares, which would have expired on September 18, 2002, was added to the July 25, 2002 share authorization amount of 3,632,200 shares, for a total of 5 million offset by decreasesshares authorized. The Company completed the purchase of the total authorized amount during the fourth quarter of 2002. The Company's total investment in accounts
payable and accrued expensesthis authorized share repurchase was $39.1 million at an average price per share of approximately $37.6 million and payments for
acquisitions of $61.0 million.$7.83.
        On May 26, 1999,October 25, 2002, the Company's Board of Directors authorized the Company to repurchase of up to 1,000,000an additional 5 million shares of Common Stock lasting
until May 25, 2000. This repurchase program was completed duringits common stock over the next 12 months. The repurchases may be made on the open market or in negotiated transactions, and the timing and amount of shares repurchased will be determined by the Company's management based on its evaluation of market and economic conditions and other factors. During the fourth quarter of 2002 the Company purchased 1,323,600 shares of its common stock under this authorization for a total investment of $12.7 million at an average price per share of $9.59. The remaining authorized amount is 3,676,400 shares.
        Between May 1999 totaling approximately $23.9and December 31, 2002, the Company has invested $163.0 million to repurchase 11,955,800 shares of its common stock under seven separate authorizations.
        During 2002, the Company paid $16.5 million associated with restructuring charges from previous years. Refer to Note N to the audited condensed consolidated financial statements for a summary of the restructuring activity.
27

        On September 25, 2002, the Company completed an acquisition of a business complementary to the Company's business strategy. The Company purchased all of the stock of the acquired business at a total cost of $6.2 million, consisting of $2.9 million in cash along with a note payable for $3.0 million and the remaining balance related to transaction costs. The note payable has an initial term of one year and may be settled, at the option of the holder, through cash payments or through services rendered by the Company to the holder. Based upon certain earn-out targets and other criteria, future consideration related to the acquisition could amount to $6.9 million.
        On February 10, 2000,2003, the Company announcedreceived a $7.3 million award in connection with an additional repurchase programarbitration proceeding initiated by the Company in 2000 against Signal Corporation for a breach of up to 2,000,000 shares of
Common Stock lasting untilan agreement between Signal Corporation and the Company's Federal Systems subsidiary.
        On February 9, 2001.The buyback program is expected to
cost approximately $53 million.28, 2003, the Company entered into a new $50.0 million revolving credit agreement with two banks. The Company maintains and has available a $20credit facility replaces the previous $10 million unsecured demand line of credit, withwhich expired in July 2002. The terms of the credit facility require the Company to maintain a major Boston bank for operationsmaximum total funded debt and acquisition opportunities.


                                       16
other financial ratios. Based on itsthe Company's current operating plan, the Company believes that its cash, cash equivalents, and investments on hand,marketable securities, cash flows from operations, and current
available linesits new line of credit will be sufficient to meet its workingcurrent capital requirements for at least the next twelve months.
        In 2002, the Company financed its operations exclusively through its ability to generate cash from operations. If the Company were to experience a decrease in revenue as a result of a decrease in demand for its services or a decrease in its ability to collect receivables, the Company would be required to curtail discretionary spending related to SG&A expenses and adjust its workforce in an effort to maintain profitability. The Company has no significant debt but does have commitments for cash as follows:
 
 
Payments due by period (in millions)
Contractual obligations
 
Less than
1 year
 
1-3 years
 
4-5 years
 
After 5 years
 
Total
Capital lease obligations
 
$
0.9
 
0.9
 
 
 
 
 
$
1.8
Operating leases
 
 
25.7
 
35.6
 
15.2
 
28.4
 
 
104.9
 
 
 
 
 
 
Total contractual cash obligations
 
$
26.6
 
36.5
 
15.2
 
28.4
 
$
106.7
 
 
 
 
 
 
        The Company's material commitments are primarily related to office rentals and capital expenditures. Contractual obligations related to operating leases reflect existing rental leases and the proposed new corporate facility as noted in Footnote J "Related Parties, Commitments and Contingencies."
OFF-BALANCE SHEET ARRANGEMENTS
        In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities," which requires the consolidation of a variable interest entity, as defined, by its primary beneficiary. Currently the Company does not consider any off balance sheet arrangements with respect to any variable interest entities. However, the Company is presently evaluating whether or not City Square or Gateway LLC, or both, are variable interest entities and, if so, whether or not the Company is the primary beneficiary of these entities.
        If the Company determines that City Square or Gateway LLC, or both, are variable interest entities, the Company will be required to consolidate the financial position and results of operations of the entities. Such consolidation will be required beginning July 1, 2003.
        In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect
28

Guarantees of Indebtedness of Others." The statement requires a guarantor to record certain guarantees at fair value and to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote. The interpretation and its disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The interpretation's initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Under FIN 45, the guarantor's previous accounting for guarantees issued prior to December 31, 2002 will not be revised or restated.
        The Company is a guarantor with respect to a line of credit for Innovate EC, an entity in which the Company acquired a minor equity position as a result of a previous acquisition. The total line of credit is for $600,000. The Company guarantees $300,000 of this obligation. The line is subject to review by the lending institution. The Company would be required to meet its guarantor obligation in the event the lending institution refuses to extend the credit facility and Innovate EC is unable to satisfy its obligation.
IMPACT OF INFLATION AND CHANGING PRICES:PRICES
        Inflationary increases in costs have not been material in recent years and, to the extent permitted by competitive pressures, are passed on to the clients through increased billing rates. Rates charged by the Company are based on the cost of labor and market conditions within the industry. The Company was able to increase its billing rates over its
increases in direct labor in 1999. This is due primarily to our increase in
client strategic services in which competition is less and the quality of
services commands higher rates.

YEAR 2000 ISSUES

The "Year 2000" issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Keane's computer
equipment and software and devices with embedded technology that are time
sensitive may recognize "00" as the year 1900 rather than the Year 2000. This
could result in a system failure or miscalculations causing disruptions of
Keane's operations, including, among other things, a temporary inability to
perform mission critical functions like billing and time reporting. Although the
transition from 1999 to 2000 has passed and Keane is not aware of any unresolved
Year 2000 problems relating to the services provided by Keane, its internal
systems, the products developed by Keane's Healthcare Solutions Practice or
third party products used by Keane in its Healthcare Solutions Practice, it is
possible that Year 2000 problems could be discerned in the future.

Keane generally delivers services and not products to its customers. The Company
believes that the services provided by its professionals to its customers are
provided in a Year 2000 compliant manner.

Keane's Healthcare Solutions Practice develops, markets, and sells software
products. In 1999, Keane notified its customers that it did not intend to offer
Year 2000 compliant versions or patches for certain of its products that were
known to be Year 2000 non-compliant. Instead, Keane encouraged its clients to
migrate to new products offered by Keane. Keane believes that it may have had an
immaterial loss of customers in the Healthcare Solution Practice due to clients
who failed to migrate to its newer products.

In addition to its own products, Keane markets certain third party software
products through its Healthcare Solutions Practice. During 1999, the Company
received assurances from substantially all of the vendors of these products that
they are Year 2000 compliant. Customer claims regarding Year 2000 issues related
to these products were immaterial.

In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
incurred approximately $1,635,000 during 1999 in connection with remediating its
systems. The Company is not aware of any material problems resulting from Year
2000 issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the Year 2000 to ensure that any latent Year 2000 matters that may arise are
addresses promptly.

Among the services that Keane provided in 1999 was the assessment, planning,
migration/remediation, and testing for Year 2000 compliance. Keane has devoted
significant resources to, and earned significant revenue from, providing
services to address the Year 2000 problem. The market for these services
declined significantly during 1999 and is expected to further diminish and
disappear after the first quarter of 2000. Further, Keane's services addressing
the Year 2000 problem involve key aspects of its client's computer systems. A
failure in a client's system could result in a claim for substantial damages
against Keane, regardless of Keane's responsibility for the failure. Keane could
incur substantial costs in connection with any resulting litigation, regardless
of the outcome.

The total cost of Keane's Year 2000 compliance activities was not material to
its business, results of operations and financial condition. While Keane
believes that it has completed its Year 2000 readiness process, Keane cannot
assure you that it has identified and remedied all significant Year 2000
problems, that Keane will not incur significant additional time and expense or
that such problems will not harm Keane's business.


                                       17
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS:RESULTS
        The following important factors, among others, could cause actual results to differ materially from those indicated by forward-looking statements made in this Annual Report on Form 10-K and presented elsewhere by management from time to time.

Fluctuations
        Keane's quarterly operating results have varied, and are likely to continue to vary significantly. This may result in Operating Results.volatility in the market price of Keane's shares.    Keane has experienced and expects to continue to experience fluctuations in its quarterly results. Keane's gross margins vary based on a variety of factors including employee utilization rates and the number and type of services performed by Keane during a particular period. A variety of factors influence Keane's revenue in a particular quarter, including:

o    
•
general economic conditions which may influence investment decisions or cause downsizing;

o    

•
the number and requirements of client engagements;

o    

•
employee utilization rates;

o    

•
changes in the rates Keane can charge clients for services;

o    

•
acquisitions; and

o    

•
other factors, many of which are beyond Keane's control.
        A significant portion of Keane's expenses doesdo not vary relative to revenue. As a result, if revenue in a particular quarter does not meet expectations, Keane's operating results could be materially adversely affected, which in turn may have a material adverse impact on the market price of Keane common stock. In addition, many of Keane's engagements are terminable without client penalty. An unanticipated termination of a major project could result in an increase in underutilized employees and a decrease in revenue and profits.

Risks Relating
        Keane has pursued, and intends to Acquisitions.continue to pursue, strategic acquisitions. Failure to successfully integrate acquired businesses or assets may adversely affect Keane's financial performance.    In the past five years, Keane has grown significantly through acquisitions. SinceFrom January 1, 1999 through December 31, 2002, Keane has completed theeleven acquisitions. The aggregate
29

merger and consideration costs of these acquisitions of Emergent Corporation in San Mateo, California, Amherst
Consulting Group, Inc, in Boston, Massachusetts, Advanced Solutions Inc. in New
York, New York, Anstec, Inc. of Maclean, Virginia, First Coast Systems, Inc. of
Jacksonville, Florida, Jamison/Gold, LLC, of Marina Del Ray, California and
Parallax Solutions Limited, of Birmingham, England.totaled approximately $359.8 million. Keane's future growth may be based in part on selected acquisitions. At any given time, Keane may be in various stages of considering suchacquisition opportunities. Keane can provide no assurances that it will be able to find and identify desirable acquisition targets or that it will be successful in entering into a definitive agreement with any one target. Also,In addition, even if Keane reaches a definitive agreement is reached,with a target, there is no assurance that Keane will complete any future acquisition will be completed.acquisition.
        Keane typically anticipates that each acquisition will bring certain benefits, such as an increase in revenue. Prior to completing an acquisition, however, it is difficult to determine if such benefitsKeane can actually be realized.realize these benefits. Accordingly, there is a risk that an acquired company may not achieve an increase in revenue or other benefits for Keane. In addition, an acquisition may result in unexpected costs, expenses, and expenses.liabilities. Any of these events could have a material adverse effect on Keane's business, financial condition, and results of operations.
        The process of integrating acquired companies into Keane's existing business may also result in unforeseen difficulties. Unforeseen operating difficulties may absorb significant management attention, which Keane might otherwise devote to its existing business. Also,In addition, the process may require significant financial resources that Keane might otherwise allocate to other activities, including the ongoing development or expansion of Keane's existing operations.
        Finally, future acquisitionacquisitions could result in Keane having to incur additional debt and/or contingent liabilities. AllAny of these possibilities mightcould have a material adverse effect on Keane's business, financial condition, and result of operations.

Dependence
        Keane may not realize the expected benefits or synergies of its acquisitions of Metro and SignalTree Solutions.    Although the integration of the operations and personnel of Metro, which Keane acquired in November 2001, and SignalTree Solutions, Inc., which Keane acquired in March 2002, are complete, Keane may not achieve the anticipated benefits or synergies of each acquisition. Achieving the benefits of these acquisitions will depend in part on Personnel.Keane's ability to retain clients acquired through the mergers and cross-sell services to these new clients and the ability of Keane's sales organization to satisfactorily meet the needs of these new clients. If Keane is unable to retain Metro and SignalTree Solutions clients or effectively cross-sell to such clients, the combined company could suffer a loss of momentum in the activities of its business, which could have a material adverse effect on Keane's business, financial condition, and results of operations.
        Keane faces significant competition for its services, and its failure to remain competitive could limit its ability to maintain existing clients or attract new clients.    The market for Keane's services is highly competitive. The technology for custom software services can change rapidly. The market is fragmented, and no company holds a dominant position. Consequently, Keane's competition for client assignments and experienced personnel varies significantly from city to city and by the type of service provided. Some of Keane's competitors are larger and have greater technical, financial, and marketing resources and greater name recognition in the markets they serve than does Keane. In addition, clients may elect to increase their internal information systems resources to satisfy their custom software development and integration needs.
        In the healthcare software systems market, Keane competes with some companies that are larger in the healthcare market and have greater financial resources than Keane. Keane believes that significant competitive factors in the healthcare software systems market include size and demonstrated ability to provide service to targeted healthcare markets.
        Keane may not be able to compete successfully against current or future competitors. In addition, competitive pressures faced by Keane may materially adversely affect its business, financial condition, and results of operations.
30

        Keane conducts business in the United Kingdom, Canada, and India, which exposes it to a number of difficulties inherent in international activities.    As a result of its acquisition of SignalTree Solutions in March 2002, Keane has two software development facilities in India and has added approximately 400 technical professionals to its professional services organization. India is currently experiencing conflicts with Pakistan over the disputed territory of Kashmir as well as clashes between different religious groups within the country. These conflicts, in addition to other unpredictable developments in the political, economic, and social conditions in India, could eliminate or reduce the availability of these development and professional services. If access to these services were to be unexpectedly eliminated or significantly reduced, Keane's ability to meet development objectives important to its new strategy would be hindered, and its business could be harmed.
        If Keane fails to manage its geographically dispersed organization, it may fail to meet or exceed its financial objectives and its revenues may decline. Keane performs development activities in the United States, Canada, and in India, and has offices throughout the United States, the United Kingdom, Canada, and India. This geographic dispersion requires substantial management resources that locally-based competitors do not need to devote to their operations.
        Keane's operations in the United Kingdom, Canada, and India are subject to currency exchange rate fluctuations, foreign exchange restrictions, changes in taxation, and other difficulties in managing operations overseas. Keane may not be successful in its international operations.
        Keane may be unable to redeploy its professionals effectively if engagements are terminated unexpectedly, which would adversely affect its results of operations.    Keane's clients can cancel or reduce the scope of their engagements with Keane on short notice. If they do so, Keane may be unable to reassign its professionals to new engagements without delay. The cancellation or reduction in scope of an engagement could, therefore, reduce the utilization rate of Keane's professionals, which would have a negative impact on Keane's business, financial condition, and results of operations.
        As a result of these and other factors, the Company's past financial performance should not be relied on as an indication of future performance. Keane believes that period-to-period comparisons of its financial results are not necessarily meaningful and it expects that results of operations may fluctuate from period to period in the future.
        Keane's growth could be limited if it is unable to attract personnel in the Information Technology and business consulting industries.    Keane believes that its future success will depend in large part on its ability to continue to attract and retain highly skilled technical and management personnel. The competition for such personnel is intense. Keane may not succeed in attracting and retaining the personnel necessary to develop its business. If Keane does not, its business, financial condition, and result of operations could be materially adversely affected.

Highly Competitive Market. The market for Keane's services is highly
competitive. The technology for custom software services can change rapidly. The
market is fragmented, and no company holds a dominant position. Consequently,
Keane's


                                       18


competition for client assignments and experienced personnel varies
significantly from city to city and by the type of service provided. Some of
Keane's competitors are larger and have greater technical, financial and
marketing resources and greater name recognition in the markets they serve than
does Keane. In addition, clients may elect to increase their internal
information systems resources to satisfy their custom software development
needs.

Keane believes that in order to compete successfully in the software services
industry it must be able to:

o    compete cost-effectively;

o    develop strong client relationships;

o    generate recurring revenues;

o    utilize comprehensive delivery methodologies; and

o    achieve organizational learning by implementing standard operational
     processes.

In the healthcare software systems market, Keane competes with some companies
that are larger in the healthcare market and have greater financial resources
than Keane. Keane believes that significant competitive factors in the
healthcare software systems market include size and demonstrated ability to
provide service to targeted healthcare markets.

Keane may not be able to compete successfully against current or future
competitors. In addition, competitive pressures faced by Keane may materially
adversely affect its business, financial condition and results of operations.

Risks Associated with Provision of Year 2000 Services. The Company's business
may suffer as a result of defects to Year 2000 compliance issues that have not
yet been detected. We have not had any independent verification of our year 2000
compliance efforts. We have not procured any Year 2000 specific insurance or
made any contingency plans to address any undetected year 2000 risks.

Among the services that Keane provided in 1999 was the assessment, planning,
migration/remediation, and testing for Year 2000 compliance. Keane has devoted
significant resources to, and earned significant revenue from, providing
services to address the Year 2000 problem. The market for these services
declined significantly during 1999 and is expected to further diminish and
disappear after the first quarter of 2000. Further, Keane's services addressing
the Year 2000 problem involve key aspects of its client's computer systems. A
failure in a client's system could result in a claim for substantial damages
against Keane, regardless of Keane's responsibility for the failure. Keane could
incur substantial costs in connection with any resulting litigation, regardless
of the outcome.

International Operations. In August 1998, Keane commenced operations in the
United Kingdom with its acquisition of Icom Systems Ltd, now known as Keane
Limited. Keane's international operations will be subject to political and
economic uncertainties, currency exchange rate fluctuations, foreign exchange
restrictions, changes in taxation and other difficulties in managing operations
overseas. Keane may not be successful in its international operations.

As a result of these and other factors, the Company's past financial performance
should not be relied on as an indication of future performance. Keane believes
that period to period comparisons of its financial results are not necessarily
meaningful and it expects that results of operations may fluctuate from period
to period in the future.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
        The Company does not engage in trading market riskmarket-risk, sensitive instruments or purchasing hedging instruments or "other than trading" instruments that are likely to expose the Company to market risk, whether interest rate, foreign currency exchange, and commodity price or equity price risk. The Company has not purchased options or entered into swaps or forward or futures contracts. The Company's primary market risk exposure is that of interest rate risk on its investments, which would affect the carrying value of those investments. 19
Since January 1, 2001, the United States Federal Reserve Board has significantly decreased certain benchmark interest rates, which has led to a general decline in market interest rates. The decline in market interest rates has resulted in a significant decline in the Company's interest income. Additionally, the Company transacts business in the United Kingdom, Canada, and India and as such has exposure associated with movement in foreign currency exchange rates.
31
ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                         Page(s)

Reports of Independent Auditors............................................21-22

Consolidated Balance Sheets as of December 31, 1998 and 1999..................23

Consolidated Statements of Income
For the Years Ended December 31, 1997, 1998 and 1999..........................24

Consolidated Statements of Stockholders' Equity for the
For the Years Ended December 31, 1997, 1998 and 1999..........................25

Consolidated Statements of Cash Flows for the Years
For the Years ended December 31, 1997, 1998 and 1999..........................26

Notes to Consolidated Financial Statements.................................27-38


                                       20

Report of independent auditors
33

Consolidated balance sheets as of December 31, 2002 and 2001


34

Consolidated statements of income for the years ended December 31, 2002, 2001, and 2000


35

Consolidated statements of stockholders' equity for the years ended December 31, 2002, 2001, and 2000


36

Consolidated statement of cash flows for the years ended December 31, 2002, 2001, and 2000


37

Notes to consolidated financial statements


38-67
32
REPORT OF INDEPENDENT AUDITORS

TO 
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF KEANE, INC.:
        We have audited the accompanying consolidated balance sheetsheets of Keane, Inc. as of December 31, 19992002 and 2001, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the year then ended.three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.audits.
        We conducted our auditaudits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit providesaudits provide a reasonable basis for our opinion.
        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Keane, Inc. at December 31, 1999,2002 and 2001, and the consolidated results of its operations and its cash flows for each of the year thenthree years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.

                                                         /s/
        As discussed in Note E to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill and other intangible assets in accordance with the adoption of Statement of Financial Accounting Standards No. 142.
/s/ Ernst and Young LLP
Boston, Massachusetts
March 13, 2000


                                       21


REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF 
February 10, 2003, except for Note P,
as to which the date is February 28, 2003
33

KEANE, INC.:

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Keane, Inc.
and its subsidiaries at December 31, 1998, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
1998, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

                                                  /s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
February 26, 1999


                                       22


KEANE INC.


CONSOLIDATED BALANCE SHEETS

December 31,                                                                   1998         1999
- --------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)

Assets
Current:
          Cash and cash equivalents                                         $  51,696    $  53,018
           Short term investments                                               6,165        8,582
          Accounts receivable, net:
            Trade                                                             230,856      213,767
            Other                                                               1,573        2,248
          Prepaid expenses and other current assets                            23,376       19,845
                                                                            ---------    ---------
            Total current assets                                              313,666      297,460

Long term investments                                                          71,368       81,163
Property and equipment, net                                                    29,973       27,330
Goodwill, net                                                                  15,446       81,110
Other intangible assets, net                                                   20,268       12,775
Other assets, net                                                               8,238       14,987
                                                                            ---------    ---------
                                                                            $ 458,959    $ 514,825
                                                                            =========    =========
Liabilities
Current:
          Accounts payable                                                     20,222       18,500
          Accrued expenses and other liabilities                               30,647       35,466
          Accrued compensation                                                 25,429       18,288
          Notes payable                                                         1,000        7,564
          Accrued income taxes                                                 13,548           --
          Unearned income                                                       1,399        8,369
          Current capital lease obligations                                       954        1,080
                                                                            ---------    ---------
            Total current liabilities                                          93,199       89,267

Long-term portion of capital lease obligations                                  1,976        2,610
Notes payable                                                                                  149

Commitments and contingencies (Note J)

Stockholders' Equity
Preferred stock, par value $.01, authorized
          2,000,000 shares, issued none
Common stock, par value $.10, authorized
          200,000,000 shares, issued and outstanding
          71,363,272 in 1998 and 72,085,356 in 1999                             7,136        7,208
Class B common stock, par value $.10, authorized
          503,797 shares, issued and outstanding
          285,303 in 1998 and 285,112 in 1999                                      29           29
Additional paid-in capital                                                    109,606      120,810
Accumulated other comprehensive income                                           (764)      (2,027)
Retained earnings                                                             250,546      323,620
Less treasury stock at cost, 313,064 shares of Common
  Stock in 1998 and 1,319,396 shares of Common Stock in 1999                   (2,769)     (26,841)
                                                                            ---------    ---------
Total stockholders' equity                                                    363,784      422,799
                                                                            ---------    ---------

                                                                            $ 458,959    $ 514,825
                                                                            =========    =========

 
 
As of December 31,
 
 
 
2002
 
2001
 
 
 
(In thousands except share amounts)

 
Assets
 
 
 
 
 
 
 
Current:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
46,383
 
$
65,556
 
 
Marketable securities
 
 
21,872
 
 
63,687
 
 
Accounts receivable, net:
 
 
 
 
 
 
 
 
 
 
Trade
 
 
129,432
 
 
160,172
 
 
 
 
Other
 
 
1,004
 
 
3,109
 
 
Prepaid expenses and deferred taxes
 
 
37,430
 
 
20,026
 
 
 
 
 
 
 
 
Total current assets
 
 
236,121
 
 
312,550
 
Property and equipment, net
 
 
24,729
 
 
20,701
 
Construction in progress
 
 
40,888
 
 
13,000
 
Goodwill, net
 
 
277,435
 
 
224,891
 
Customer lists, net
 
 
69,193
 
 
53,659
 
Other intangible assets, net
 
 
17,613
 
 
26,292
 
Deferred taxes and other assets, net
 
 
19,695
 
 
28,810
 
 
 
 
 
 
 
$
685,674
 
$
679,903
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Current:
 
 
 
 
 
 
 
 
Accounts payable
 
 
11,986
 
 
13,723
 
 
Accrued expenses and other liabilities
 
 
61,152
 
 
51,980
 
 
Accrued compensation
 
 
36,346
 
 
34,161
 
 
Note payable
 
 
3,100
 
 
—
 
 
Accrued income taxes
 
 
81
 
 
4,675
 
 
Unearned income
 
 
11,535
 
 
5,178
 
 
Current capital lease obligations
 
 
887
 
 
1,154
 
 
 
 
 
 
 
 
Total current liabilities
 
 
125,087
 
 
110,871
 
Accrued long-term construction-in-progress costs
 
 
40,888
 
 
13,000
 
Deferred income taxes
 
 
28,343
 
 
25,656
 
Long-term portion of capital lease obligations
 
 
772
 
 
1,203
 

Stockholders' equity

 

 

 

 

 

 

 
Preferred stock, par value $.01, authorized 2,000,000 shares, issued none
 
 
—
 
 
—
 
Common stock, par value $.10, authorized 200,000,000 shares, issued and outstanding 75,545,386 at December 31, 2002 and 75,223,971 at December 31, 2001
 
 
7,555
 
 
7,522
 
Class B common stock, par value $.10, authorized 503,797 shares, issued and outstanding 284,604 at December 31, 2002 and 284,891 at December 31, 2001
 
 
28
 
 
28
 
Additional paid-in capital
 
 
166,598
 
 
162,269
 
Accumulated other comprehensive income
 
 
(1,411
)
 
(2,007
)
Retained earnings
 
 
369,542
 
 
361,361
 
Less treasury stock at cost, 6,309,416 shares at December 31, 2002
 
 
(51,728
)
 
—
 
 
 
 
 
 
 
 
Total Stockholders' equity
 
 
490,584
 
 
529,173
 
 
 
 
 
 
 
$
685,674
 
$
679,903
 
 
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.


                                       23
34

KEANE, INC.

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31,                           1997        1998         1999
- -------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

Total revenues                                         $  706,801   $1,076,198   $1,041,092

Salaries, wages and other direct costs                    469,433      696,752      702,795
Selling, general and administrative expenses              138,168      193,438      199,009
Amortization of goodwill and other intangible assets       14,037        7,701        9,169
Restructuring charge                                           --           --       13,653
Merger costs                                                   --        8,120           --
                                                       ----------   ----------   ----------
Operating income                                           85,163      170,187      116,466

Interest and dividend income                                4,212        5,189        7,827
Interest expense                                              244          163           --
Other expenses, net                                         1,048        1,057        1,480
                                                       ----------   ----------   ----------

Income before income taxes                                 88,083      174,156      122,813

Provision for income taxes                                 36,712       77,807       49,739
                                                       ----------   ----------   ----------

Net income                                             $   51,371   $   96,349   $   73,074
                                                       ==========   ==========   ==========

Net income per share (basic)                           $     0.73   $     1.36   $     1.02
                                                       ==========   ==========   ==========
Net income per share (diluted)                         $     0.72         1.33   $     1.01
                                                       ==========   ==========   ==========

Weighted average common shares outstanding (basic)         70,096       71,053       71,571
                                                       ==========   ==========   ==========

Weighted average common shares and common share
equivalents outstanding (diluted)                          71,603       72,284       72,395
                                                       ==========   ==========   ==========

 
 
For the years ended December 31,
 
 
2002
 
2001
 
2000
 
 
(In thousands except per share amounts)

Total revenues
 
$
873,203
 
$
779,159
 
$
871,956
Salaries, wages and other direct costs
 
 
630,047
 
 
547,883
 
 
621,208
Selling, general, and administrative expenses
 
 
198,813
 
 
186,708
 
 
201,852
Amortization of goodwill and other intangible assets
 
 
16,382
 
 
14,457
 
 
12,351
Restructuring charges
 
 
17,604
 
 
10,358
 
 
8,624
 
 
 
 
Operating income
 
 
10,357
 
 
19,753
 
 
27,921
Interest and dividend income
 
 
2,526
 
 
7,043
 
 
7,725
Interest expense
 
 
255
 
 
295
 
 
588
Other (income) expenses, net
 
 
(1,008
)
 
(2,720
)
 
872
 
 
 
 
Income before income taxes
 
 
13,636
 
 
29,221
 
 
34,186
Provision for income taxes
 
 
5,455
 
 
11,834
 
 
13,832
 
 
 
 
Net income
 
$
8,181
 
$
17,387
 
$
20,354
 
 
 
 
Net income per share (basic)
 
$
0.11
 
$
0.25
 
$
0.29
 
 
 
 
Net income per share (diluted)
 
$
0.11
 
$
0.25
 
$
0.29
 
 
 
 
Weighted average common shares outstanding (basic)
 
 
74,018
 
 
68,474
 
 
69,646
 
 
 
 
Weighted average common shares and common share equivalents outstanding (diluted)
 
 
74,406
 
 
69,396
 
 
69,993
 
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.


                                       24
35

KEANE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

For the Years Ended
December 31, 1997, 1998 and 1999
(IN THOUSANDS EXCEPT SHARE AMOUNTS)


                                                            Class B
                                     Common Stock        Common Stock
                                     ------------        ------------
                                   Shares     Amount   Shares      Amount
- -------------------------------------------------------------------------

Balance January 1, 1997          69,810,652   $6,981   287,613       $29

Common Stock issued under           549,704       55
   stock option and employee
   purchase plans
Conversions of Class B Common           998               (998)
  Stock into Common Stock
Income tax benefit from stock
  option plans
Dividends paid to shareholders
Foreign translation adjustment
Net income
Comprehensive income
                                 ----------------------------------------
Balance December 31, 1997        70,361,354    7,036   286,615        29

Pooling of interests with Omega
  (Note L)
Common Stock issued under           769,795       77
   stock option and employee
   purchase plans
Issuance  of common stock for       230,811       23
  business acquisitions
Merger expenses paid by
  Shareholders
Conversions of Class B Common
  Stock into Common Stock             1,312             (1,312)
Income tax benefit from stock
  option plans
Dividends paid to shareholders
Foreign translation adjustment
Net income
Comprehensive income
                                 ----------------------------------------
Balance December 31, 1998        71,363,272    7,136    285,303       29
                                 ========================================
Common Stock issued under           721,893       72
   stock option and employee
   purchase plans
Conversions of Class B Common           191               (191)
  Stock into Common Stock
Income tax benefit from stock
  option plans
Repurchase of Common Stock
Unrealized loss on securities
Net income
Comprehensive income
                                 ----------------------------------------
Balance December 31, 1999        72,085,356   $7,208    285,112      $29
                                 ========================================
                                 ========================================

                                             Accum.
                                             Other                    Treasury Stock         Total
                                Additional   Compre-                     at Cost             Stock-
                                  Paid-in    hensive  Retained           -------            holders'
                                  Capital    Income   Earnings      Shares      Amount      Equity
- ----------------------------------------------------------------------------------------------------

Balance January 1, 1997           $92,646     ($45)   $104,570     (305,615)    ($2,413)    $201,768

Common Stock issued under           4,006                                                      4,061
   stock option and employee
   purchase plans
Conversions of Class B Common                                                                     --
  Stock into Common Stock
Income tax benefit from stock       1,028                                                      1,028
  option plans
Dividends paid to shareholders                            (864)                                 (864)
Foreign translation adjustment                (327)                                             (327)
Net income                                              51,371                                51,371
                                                                                              ------
Comprehensive income                                                                          51,044
                               ---------------------------------------------------------------------
Balance December 31, 1997          97,680     (372)    155,077     (305,615)     (2,413)     257,037

Pooling of interests with Omega                            589                                   589
  (Note N)
Common Stock issued under           6,191                            (7,449)       (356)       5,912
   stock option and employee
   purchase plans
Issuance  of common stock for         (23)                                                        --
  business acquisitions
Merger expenses paid by             1,571                                                      1,571
  Shareholders
Conversions of Class B Common                                                                     --
  Stock into Common Stock
Income tax benefit from stock       4,187                                                      4,187
  option plans
Dividends paid to shareholders                          (1,469)                               (1,469)
Foreign translation adjustment                (392)                                             (392)
Net income                                              96,349                                96,349
                                                                                              ------
Comprehensive income                                                                          95,957
                               ---------------------------------------------------------------------
Balance December 31, 1998         109,606     (764)    250,546     (313,064)     (2,769)     363,784
                               =====================================================================
Common Stock issued under          10,689                            (6,332)       (162)      10,599
   stock option and employee
   purchase plans
Conversions of Class B Common                                                                     --
  Stock into Common Stock
Income tax benefit from stock         515                                                        515
  option plans
Repurchase of Common Stock                                       (1,000,000)    (23,910)     (23,910)
Unrealized loss on securities               (1,263)                                           (1,263)
Net income                                              73,074                                73,074
                                                                                              ------
Comprehensive income                                                                          71,811
                               ---------------------------------------------------------------------
Balance December 31, 1999        $120,810  ($2,027)   $323,620   (1,319,396)   ($26,841)    $422,799
                               =====================================================================
                               =====================================================================

 
 
 
 
 
 
Class B
Common stock
 
 
 
 
 
 
 
Treasury stock
at cost
 
 
 
For the years ended
December 31,
2000, 2001 and 2002
 
Common stock
 
 
 
Other
Compre-
hensive
income
 
 
 
 
 
 
Additional
paid-in
capital
 
Retained
earnings
 
Total
stockholders'
equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
(In thousands except share amounts)

 
Balance January 1, 2000
 
72,085,356
 
$
7,208
 
285,112
 
$
29
 
$
120,810
 
$
(2,027
)
$
323,620
 
(1,319,396
)
$
(26,841
)
$
422,799
 
Common stock issued under stock option and employee purchase plans
 
360,524
 
 
36
 
 
 
 
 
 
 
320
 
 
 
 
 
 
 
394,794
 
 
10,389
 
 
10,745
 
Conversions of class B common stock into common stock
 
221
 
 
1
 
(221
)
 
(1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—
 
Income tax benefit from stock option plans
 
 
 
 
 
 
 
 
 
 
 
 
314
 
 
 
 
 
 
 
 
 
 
 
 
 
314
 
Repurchase of common stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(4,131,000
)
 
(80,925
)
 
(80,925
)
Investments valuation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
538
 
 
 
 
 
 
 
 
 
 
538
 
Foreign currency translation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(3,148
)
 
 
 
 
 
 
 
 
 
(3,148
)
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
20,354
 
 
 
 
 
 
 
20,354
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
17,744
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2000
 
72,446,101
 
 
7,245
 
284,891
 
 
28
 
 
121,444
 
 
(4,637
)
 
343,974
 
(5,055,602
)
 
(97,377
)
 
370,677
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock issued under stock option and employee purchase plans
 
18,000
 
 
1
 
 
 
 
 
 
 
(8,894
)
 
 
 
 
 
 
737,348
 
 
15,186
 
 
6,293
 
Common stock issued in connection with acquisition of Metro Information Services, Inc.
 
2,759,870
 
 
276
 
 
 
 
 
 
 
49,460
 
 
 
 
 
 
 
4,644,454
 
 
86,236
 
 
135,972
 
Income tax benefit from stock option plans
 
 
 
 
 
 
 
 
 
 
 
 
259
 
 
 
 
 
 
 
 
 
 
 
 
 
259
 
Repurchase of common stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(326,200
)
 
(4,045
)
 
(4,045
)
Investments valuation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,181
 
 
 
 
 
 
 
 
 
 
1,181
 
Foreign currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,449
 
 
 
 
 
 
 
 
 
 
1,449
 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
17,387
 
 
 
 
 
 
 
17,387
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
20,017
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2001
 
75,223,971
 
 
7,522
 
284,891
 
 
28
 
 
162,269
 
 
(2,007
)
 
361,361
 
—
 
 
—
 
 
529,173
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock issued under stock option and employee purchase plans
 
321,128
 
 
33
 
 
 
 
 
 
 
4,045
 
 
 
 
 
 
 
189,184
 
 
2,364
 
 
6,442
 
Conversions of common stock into common stock
 
287
 
 
—
 
(287
)
 
—
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—
 
Income tax benefit from stock option plans
 
 
 
 
 
 
 
 
 
 
 
 
284
 
 
 
 
 
 
 
 
 
 
 
 
 
284
 
Repurchase of common stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(6,498,600
)
 
(54,092
)
 
(54,092
)
Minimum pension liability
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,159
)
 
 
 
 
 
 
 
 
 
(1,159
)
Investments valuation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(273
)
 
 
 
 
 
 
 
 
 
(273
)
Foreign currency translation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2,028
 
 
 
 
 
 
 
 
 
 
2,028
 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8,181
 
 
 
 
 
 
 
8,181
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8,777
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2002
 
75,545,386
 
$
7,555
 
284,604
 
$
28
 
$
166,598
 
$
(1,411
)
$
369,542
 
(6,309,416
)
$
(51,728
)
$
490,584
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.


                                       25
36

KEANE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31,                           1997         1998         1999
- -------------------------------------------------------------------------------------------
(IN THOUSANDS)


Cash Flows From Operating Activities:
Net income                                             $   51,371   $   96,349   $   73,074
Adjustments to reconcile net income to net cash
provided by operating activities:
   Depreciation and amortization                           22,659       21,018       31,519
   Deferred income taxes                                   (6,896)     (10,553)       4,996
   Provision for doubtful accounts                          3,391        5,332         (625)
   Loss on sale of property and equipment                      14           25           14
   Non-cash interest on long-term debt                        197           --           --
   Non-cash restructuring charge                               --           --        5,572
   Tax benefit from stock options                           1,028        4,187           --
   Changes in operating assets and liabilities,
     net of acquisitions:
   (Increase) decrease in accounts receivable             (59,993)     (75,253)      37,580
   Increase in prepaid expenses and other assets             (451)      (1,995)      (6,395)
   Increase (decrease) in accounts payable, accrued
     expenses, unearned income and other liabilities       29,098       16,627      (24,064)
   Increase (decrease) in income taxes payable             (3,990)      10,493      (13,548)
                                                       ----------   ----------   ----------

Net cash provided by operating activities                  36,428       66,230      108,123
                                                       ----------   ----------   ----------

Cash Flows From Investing Activities:
Purchase of investments                                   (60,080)     (97,592)    (110,915)
Sale of investments                                        39,577       70,805       96,542
Purchase of property and equipment                        (17,502)     (16,740)     (16,418)
Proceeds from the sale of property and equipment              519          385           77
Payments for acquisitions                                      --       (9,150)     (60,996)
                                                       ----------   ----------   ----------

Net cash used for investing activities                    (37,486)     (52,292)     (91,710)
                                                       ----------   ----------   ----------

Cash Flows From Financing Activities:
Payments under long-term debt, net                         (4,161)      (7,292)        (563)
Principal payments under capital lease obligations           (921)      (1,240)      (1,217)
Proceeds from issuance of common stock                      4,061        7,483       10,761
Repurchase of common stock                                     --           --      (24,072)
Dividends paid                                               (864)      (1,469)          --
                                                       ----------   ----------   ----------


Net cash used for financing activities                     (1,885)      (2,518)     (15,091)
                                                       ----------   ----------   ----------

Net increase (decrease) in cash and cash equivalents       (2,943)      11,420        1,322
Cash and cash equivalents at beginning of year             43,219       40,276       51,696
                                                       ----------   ----------   ----------
Cash and cash equivalents at end of year               $   40,276   $   51,696   $   53,018
                                                       ==========   ==========   ==========

Supplemental information:
Income taxes paid                                      $   45,922   $   68,540   $   62,140

 
 
For the years ended December 31,
 
 
 
2002
 
2001
 
2000
 
 
 
(In thousands)

 
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
Net income
 
$
8,181
 
$
17,387
 
$
20,354
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
27,452
 
 
26,113
 
 
28,991
 
 
Deferred income taxes
 
 
(3,796
)
 
1,808
 
 
(5,444
)
 
Provision for doubtful accounts
 
 
(5,514
)
 
2,024
 
 
3,086
 
 
Loss on sale of property and equipment
 
 
(46
)
 
(167
)
 
—
 
 
Gain on sale of investments
 
 
(387
)
 
(1,233
)
 
—
 
 
Non-cash restructuring charges
 
 
1,847
 
 
825
 
 
3,403
 
 
Impairment of long-term investments
 
 
—
 
 
2,000
 
 
—
 
 
Gain on sale of business unit
 
 
—
 
 
(4,302
)
 
—
 
 
Income tax benefit from stock options
 
 
284
 
 
259
 
 
314
 
 
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
 
 
 
 
 
 
 
 
 
Decrease in accounts receivable
 
 
49,888
 
 
41,691
 
 
48,432
 
 
 
(Decrease) increase in prepaid expenses and other assets
 
 
(10,754
)
 
(1,065
)
 
6,748
 
 
 
(Decrease) increase in accounts payable, accrued expenses, unearned income and other liabilities
 
 
(5,789
)
 
758
 
 
(18,415
)
 
 
(Decrease) increase in income taxes payable
 
 
(4,695
)
 
(2,916
)
 
8,609
 
 
 
 
 
 
Net cash provided by operating activities
 
 
56,671
 
 
83,182
 
 
96,078
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
Purchase of investments
 
 
(27,859
)
 
(104,591
)
 
(30,875
)
Sale and maturities of investments
 
 
69,788
 
 
102,340
 
 
60,191
 
Purchase of property and equipment
 
 
(7,802
)
 
(7,609
)
 
(11,386
)
Proceeds from the sale of property and equipment
 
 
410
 
 
419
 
 
182
 
Proceeds from sale of business unit
 
 
—
 
 
16,087
 
 
—
 
Payments for current year acquisitions
 
 
(63,236
)
 
(7,148
)
 
(32,516
)
Payments for prior years acquisitions
 
 
(184
)
 
(1,266
)
 
(3,756
)
 
 
 
 
 
Net cash used for investing activities
 
 
(28,883
)
 
(1,768
)
 
(18,160
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
Payments on acquired debt
 
 
—
 
 
(65,938
)
 
—
 
Payments under long-term debt, net
 
 
—
 
 
(5,006
)
 
(3,523
)
Principal payments under capital lease obligations
 
 
(1,227
)
 
(1,303
)
 
(1,376
)
Proceeds from issuance of common stock
 
 
6,330
 
 
6,293
 
 
10,745
 
Repurchase of common stock
 
 
(54,092
)
 
(4,045
)
 
(80,925
)
 
 
 
 
 
Net cash used for financing activities
 
 
(48,989
)
 
(69,999
)
 
(75,079
)
 
 
 
 
 
Effect of exchange rate changes on cash
 
 
2,028
 
 
358
 
 
(2,074
)
Net (decrease) increase in cash and cash equivalents
 
 
(19,173
)
 
11,773
 
 
765
 
Cash and cash equivalents at beginning of year
 
 
65,556
 
 
53,783
 
 
53,018
 
 
 
 
 
 
Cash and cash equivalents at end of year
 
$
46,383
 
$
65,556
 
$
53,783
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
Income taxes paid
 
$
16,511
 
$
14,922
 
$
10,469
 
The accompanying notes are an integral part of the consolidated financial statements.


                                       26
37

KEANE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years

For the years ended December 31, 1999, 19982002, 2001, and 1997
(All2000

(All amounts in thousands unless stated otherwise and except for share and per share amounts).
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION:
        The consolidated financial statements include the accounts of Keane, Inc. (the "Company") and all of its wholly owned subsidiaries. AllUpon consolidation, all significant intercompany accounts and transactions have beenare eliminated. As described in Note L, during 1998 the Company completed five acquisitions.
Four of the acquisitions were accounted for as poolings-of-interests and one was
accounted for as a purchase. The accompanying financial statements and notes
have been restated for all periods presented for the three material
pooling-of-interests acquisitions.

Certain priorCompany's fiscal year amounts have been reclassified to conform to the current year
presentation.ends on December 31st.
        NATURE OF OPERATIONS:    Keane is a leading provider of e-business,provides Information Technology (IT), and business consulting services. The Company divides its business into three main lines: Business Consulting, Application Development and IT Consulting, e-Solutions (including its
e-architecture, applications development and integration services)Integration (AD&I), and ApplicationsApplication Development and Management Outsourcing.Outsourcing (Applications Outsourcing).
        Keane's clients consist primarily of Fortune 1000Global 2000 organizations, across every
major industry,government agencies, and healthcare organizations, and government agencies.organizations. The Company services clients through branch office operations in major markets of the United
States, Canada,North America and the United Kingdom. These offices are supported by Keane Consulting Group (KCG), a centralized practicesStrategic Practices Group representing Keane's core services and key competencies.competencies, and seven Advanced Development Centers ("ADC") in the United States, Canada, and India. This delivery structure allows the Company to provide clients with world-class capabilities representing the organizational experience and best practices of the entire Company on a responsive and cost-effective local level.
        REVENUE RECOGNITION:    The Company provides system design, implementationthree synergistic service offerings: Business Consulting, AD&I, and support services under fixed price andApplications Outsourcing. The Company recognizes revenue primarily through either time and materials contracts.or fixed price basis for each type of offering.
        Revenue on time and materials contracts is recorded at contractually agreed upon rates. For these types of contracts, revenue is recognized as the services are performed. In some cases, the Company invoices customers prior to performing the service, resulting in deferred revenues, which is reported as a current liability in the consolidated financial statements.
        For fixed price contracts, revenue is recorded onrecognized using the basis of the estimated percentage of completion method. The Company uses estimated labor-to-complete to measure percentage complete. Percentage of services rendered.completion recognition relies on accurate estimates of cost, scope, and duration of each engagement. If the Company does not accurately estimate the cost or scope or does not manage its projects properly within the expected period of the project, future revenues may be negatively impacted. Adjustments to revenue are recorded in the period of which the over/under estimate is detected. Management regularly reviews profitability and underlying estimates for fixed price contracts. Losses, if any, on fixed price contracts are recognized whenrecorded in the period in which the loss is determined.identified.
        Revenue associated with application software products is recognized as the software products are installed and as implementation services are delivered. Software maintenance fees on installed products are recognized on a pro-rated basis over the term of the agreement.
        For the majority of outsourcing engagements, the Company provides a specific level of service each month for which it bills a standard monthly amount. Revenue for these engagements can be recognized in monthly installments over the billable portion of the contract or on a time and materials contracts,basis. Installment amounts may be adjusted to reflect changes in staffing requirements or service level agreements. Costs of transitioning the employees and ensuring the Company meets required service level agreements may be capitalized over defined periods of time.
38

        ALLOWANCE FOR BAD DEBTS:    Each accounting period, Keane evaluates accounts receivable for risk associated with a client's inability to make contractual payments or unresolved issues with the adequacy of Keane's services. Billed and unbilled receivables that are specifically identified as being at risk are provided for with a charge to revenue is recorded at contractually agreed upon rates as the costs are
incurred. Revenues for software application sales are recognized on the basis of
customer acceptance overin the period the risk is identified. Considerable judgment is used in assessing the ultimate realization of software implementation.these receivables including reviewing the financial stability of the client, evaluating the successful mitigation of service delivery disputes, and gauging current market conditions. If the Company's evaluation of service delivery issues or a client's ability to pay is incorrect, the Company may incur future charges to revenue.
        FOREIGN CURRENCY TRANSLATION:    For the Company's subsidiaries in Canada, the United Kingdom, and England,India, the Canadian dollar, and British pound, and Indian rupee, respectively, are the functional currencies. All assets and liabilities of the Company's Canadian, English, and EnglishIndian subsidiaries are translated at exchange rates in effect at the end of the period. Income and expenses are translated at rates that approximate those in effect on transaction dates. The translation differences are charged or credited directly to the translation adjustment account included as part of stockholders' equity. Realized foreign exchange gains and losses are included in other income (expense).
        CASH AND CASH EQUIVALENTS:    Cash and cash equivalents consist of highly liquid investments with a maturity of three months or less at the time of purchase. Cash equivalents are currently designated as available-for-sale. Cash equivalents at December 31, 19992002 included investments in commercial paper ($24.9
million), municipal bonds ($.924.5 million) and money market funds ($4.812.8 million). Cash equivalents at December 31, 19982001 included investments in commercial paper ($41.2 million), municipal bonds ($1.015.0 million) and money market funds ($1.133.8 million).
        FINANCIAL INSTRUMENTS:    The amounts reflected in the consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate their fair value due to their short maturities. Based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities, the fair value of the company'sCompany's debt obligations approximates their carrying value. Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of investments and trade receivables. The Company's cash, cash equivalents, and investments are held with a local financial institutions with high credit standings.institution. The


                                       27
 Company's customer base consists of geographically dispersedispersed customers in severalmany different industries, thereforeindustries. Therefore, concentration of credit risk with respect to trade receivables is not considered significant.

INVESTMENTS: Investments with maturities between three and twelve months at time
of purchase are considered short-term investments. Investments
        MARKETABLE SECURITIES:    Marketable securities are stated at fair value as reported by the investment custodian. The Company determines the appropriate classification of debt and equity securities at the time of purchase and re-evaluates such designations as of each balance sheet date. InvestmentsMarketable securities are currently designated as available-for-sale, and as such, unrealized gains and losses are reported in Other Comprehensive Income. The Company invests primarily in tax-exempt municipal bonds with at least a separate componentsingle A rating by Moody's grading service. In addition, the Company invests in United States government obligations and corporate bonds. All investments must have a maturity date of stockholders' equity.not more than five years. In the case of a puttable security, the put date will be within five years. The Company views its marketable securities portfolio as available for use in its current operations, and accordingly, these marketable securities are classified as current assets in the
39

accompanying balance sheet. As of December 31, 1999,2002, the Company's investments experienced declinemarketable securities reflect an increase in market value of $2.2$0.3 million, which has been reflected in the statement of stockholder'sstockholders' equity. At December 31, 1998,2001, the Company's marketable securities reflected an increase in market value of the investments approximated
cost.$0.8 million. Realized gains and losses, as well as interest, dividends, and capital gain/loss distributions on all securities, are included in earnings.income.
        PROPERTY AND EQUIPMENT:    Property and equipment is statedcarried at cost. Repaircost less accumulated depreciation and maintenance costsamortization. Property and equipment are charged to expense.reviewed periodically for indicators of impairment and assets are written down as appropriate. Depreciation is computed on a straight-line basis over estimated useful lives of 25 to 40 years for buildings and improvements, and 2two to 5seven years for office equipment, computer equipment, and software. Leasehold improvements are amortized over the shorter of the estimated useful life of the improvement or the term of the lease.lease not to exceed seven years. Repair and maintenance costs are charged to expense. Upon disposition, the cost and related accumulated depreciation are removed from the accounts, and any gain or loss is included in income.
        GOODWILL AND INTANGIBLE ASSETS:    Statement of Financial Accounting Standards No. 142 (FAS 142), "Goodwill and Other Intangible Assets," clarified criteria to recognize intangible assets consist principally offrom goodwill and acquired customer-basedestablished requirements to cease amortizing goodwill and indefinite lived intangibles noncompetition agreements, and software initially recorded at fair value.to begin an annual review for impairment. On January 1, 2002, the Company adopted FAS 142 and was, therefore, required to perform an impairment test on its goodwill and other intangibles with indefinite lives during the first six months of 2002, and then on a periodic basis thereafter. The Company's initial goodwill impairment analysis was completed during the second quarter of 2002, and was based on January 1, 2002 balances. Through this analysis it was determined that there was no impairment as of that date. Subsequently, during the fourth quarter of 2002, the Company completed its annual impairment review based on September 30, 2002 balances and determined that there was no impairment as of that date. Future changes in estimates may result in a non-cash goodwill impairment that could have a material adverse impact on the Company's financial condition and results of operations. As of December 31, 2002 and 2001, respectively, the Company reported total intangibles of customer lists and other intangibles of $86.8 million and $79.9 million. Intangibles are amortized on a straight-line basis over 14 or 15 years for goodwill and 3three to 15 yearsyears.
        The Company periodically reviews its identifiable intangible assets for other
intangibles. At each reporting date, management assesses whether there has been
a permanent impairment in accordance with Statement FAS 144. In determining whether an intangible asset is impaired, the Company must make assumptions regarding estimated future cash flows from the asset, intended use of the asset, and other related factors. If the estimates or the related assumptions used to determine the value of its long-termthe intangible assets change, the Company may be required to record impairment charges for these assets.
        INCOME TAXES:    Keane accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes," which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the amounteffect of such impairmenttemporary differences between the book and tax basis of recorded assets and liabilities. FAS 109 also requires that deferred tax assets be reduced by comparing anticipated undiscounted future operating income
from acquired business units with the carrying valuea valuation allowance if it is more likely than not that some portion or all of the related goodwill.
The factors considered by management in performing this assessment include
current operating results, trends and prospects, as well as the effects of
demand, competition and other economic factors. Accumulated amortization at
December 31, 1998 and 1999 was $40.6 million and $44.7 million, respectively.

INCOME TAXES:deferred tax asset will not be realized. The Company accounts for income taxes under the asset and
40

liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
        COMPREHENSIVE INCOME:    Statement of Financial Accounting Standards No. 130"
Reporting (FAS 130), "Reporting Comprehensive Income",Income," establishes rules for the reporting and display of comprehensive income and its components. Components of comprehensive income include net income and certain transactions that have generally been reported in the consolidated statement of stockholders' equity. Other comprehensive income is comprised of net income, currency translation adjustments, and
available-for-sale securities valuation adjustments.adjustments, and adjustments related to a foreign defined benefit plan. At December 31, 1998, the
only component of accumulated other comprehensive income was foreign currency
translation adjustment of $.8 million. At December 31, 1999,2002, accumulated other comprehensive income was comprised of foreign currency translation adjustment of $.8$0.4 million, securities valuation adjustment of ($0.2) million, net of tax, and defined benefit plan adjustment of $1.2 million, net of tax. At December 31, 2001, accumulated other comprehensive income was comprised of foreign currency translation adjustment of $2.5 million and securities valuation adjustment of $1.3$(0.5) million, net of tax.
        STOCK-BASED COMPENSATION:    The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the closing price of the shares at the date of grant. The Company adopted the disclosure provisions of Statement of Financial Accounting Standards 123 (FAS 123), "Accounting for Stock-Based Compensation," and applies APB Opinion 25, "Accounting for Stock Issued to Employees," to its grants of stock options. Accordingly, the Company recognizes no compensation expense for stock-based employee compensation, provided options are issued at the current market value. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates as calculated in accordance with FAS 123, the Company's net income and earnings per share for the years ended December 31, 2002, 2001 and 2000 would have been reduced to the pro forma amounts indicated below:
 
 
For the years ended December 31,
 
 
2002
 
2001
 
2000
Gross income—as reported
 
$
8,181
 
$
17,387
 
$
20,354
Less: Total stock-based employee compensation expense determined under the fair value method for all awards, net of tax effects
 
 
9,882
 
 
9,342
 
 
17,758
 
 
 
 
Net income—pro forma
 
 
(1,701
)
 
8,045
 
 
2,596
 
 
 
 
Net income per share—as reported (diluted)
 
 
0.11
 
 
0.25
 
 
0.29
Net (loss) income per share—pro forma (diluted)
 
 
(0.02
)
 
0.12
 
 
0.04
        The Company also grants restricted stock for a fixed number of shares to employees for nominal consideration. Compensation expense related to restricted stock awards is recorded ratably over the restriction period.
41

        LEGAL COSTS:    The Company accrues costs of settlement, damages, and under certain conditions, costs of defense when such costs are probable and estimable. Otherwise, such costs are expensed as incurred.
        USE OF ESTIMATES:    The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
        INDUSTRY SEGMENT INFORMATION: The Company adopted    Based on qualitative and quantitative criteria established by Statement of Financial Accounting Standards No. 131 "Disclosure(FAS 131), "Disclosures about Segments of an Enterprise and Related Information". TheInformation," the Company operates within one reportable segment:Professional Services. In this segment, the Company offers an integrated mix of end-to-end business solutions, such as Business and IT consultingConsulting (Plan), e-Solutions
including e-architecture, online branding, developmentApplication Development and integrationIntegration (Build), and Application Development and Management Outsourcing (Manage). Approximately
96%
RECENT ACCOUNTING PRONOUNCEMENTS
        In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145 (FAS 145), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Under FAS 145, gains and losses on extinguishments of debt are to be classified as income or loss from continuing operations rather than extraordinary items. The Company is required to adopt FAS 145 in the first quarter of 2003 and does not expect the adoption of this statement to have a material impact on its financial condition or results of operations.
        In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146 (FAS 146), "Accounting for Costs Associated with Exit or Disposal Activities." The statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to exit or disposal plan. Costs covered by FAS 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, branch closing, or other exit disposal activity. This statement is effective for exit or disposal activities initiated after December 31, 2002. FAS 146 may affect the timing of the Company's revenue was derived from these offerings,recognition of future exit or disposal costs, if any.
        In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to record certain guarantees at fair value and to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote. The interpretation and its disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The interpretation's initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The guarantor's previous accounting for guarantees issued prior to December 31, 2002 should not be revised or restated due to the adoption of this interpretation.
42

        On December 31, 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148 (FAS 148), "Accounting for Stock-Based Compensation—Transition and Disclosure," an amendment to FAS 123, "Accounting for Stock-Based Compensation." The statement provides three transition methods for entities electing to adopt the fair value recognition provisions of Statement 123 for stock-based employee compensation. FAS 148 also amends the disclosure provisions of FAS 123 to require prominent disclosure about the effects of an entity's accounting policy decisions with respect to stock-based compensation on reported net income and earnings per share in annual and interim financial statements. The statement is effective for fiscal years ending after December 15, 2002. Currently, the balanceCompany does not elect to transition from the healthcare industry. Effectively,intrinsic value method of accounting for stock-based compensation to the Company operates in one
reportable segment.


                                       28


B. INVESTMENTS

At December 31, 1999,fair value method. Adoption of disclosure provisions of this statement will not impact the Company's investments included obligationsfinancial condition or results of operations.
        In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities," 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 U.S.
Government ($32.9 million), municipal bonds ($7.3 million), corporate pass
through ($16.9 million), corporate bonds ($29.2 million) and commercial paper
($3.5 million). At December 31, 1998, the Company's investments included
obligationsrisk of loss or entitled to receive a majority of the U.S. government ($33.6 million), municipal bonds ($10.9),
corporate pass through ($12.8 million)entity's residual returns, or both. In determining whether it is the primary beneficiary of a variable interest entity, an entity with a variable interest shall treat variable interests in that same entity held by its related parties as its own interests. The Company is currently evaluating the existence of variable interest entities, if any, and corporate bonds ($20.2 million).
There wasthe impact of adopting the interpretation on the consolidated financial statements. Refer to Note J to the audited condensed consolidated financial statements for additional disclosures regarding related parties, commitments, and contingencies.
43

B. MARKETABLE SECURITIES
        The following is a summary of available-for-sale securities:
 
 
 
 
Gross unrealized
 
 
 
 
 
 
Estimated
fair value
 
 
Cost
 
Gains
 
Losses
As of December 31, 2002
 
 
 
 
 
 
 
 
 
 
 
 
United States Government obligations
 
$
2,827
 
$
103
 
$
1
 
$
2,929
Corporate bonds
 
 
2,251
 
 
39
 
 
17
 
 
2,273
Municipal bonds
 
 
16,489
 
 
181
 
 
—
 
 
16,670
 
 
 
 
 
Total
 
 
21,567
 
 
323
 
 
18
 
 
21,872
 
 
 
 
 
Due in one year or less
 
 
3,960
 
 
—
 
 
—
 
 
3,946
Due after one year through three years
 
 
6,054
 
 
—
 
 
—
 
 
6,170
Due after three years
 
 
11,553
 
 
—
 
 
—
 
 
11,756
 
 
 
 
 
 
 
 
21,567
 
 
—
 
 
—
 
 
21,872
 
 
 
 
 
As of December 31, 2001
 
 
 
 
 
 
 
 
 
 
 
 
United States Government obligations
 
 
30,017
 
 
338
 
 
11
 
 
30,344
Corporate bonds
 
 
27,906
 
 
651
 
 
285
 
 
28,272
Corporate passthroughs
 
 
4,997
 
 
75
 
 
1
 
 
5,071
 
 
 
 
 
Total
 
 
62,920
 
 
1,064
 
 
297
 
 
63,687
 
 
 
 
 
Due in one year or less
 
 
8,517
 
 
—
 
 
—
 
 
8,705
Due after one year through three years
 
 
22,927
 
 
—
 
 
—
 
 
23,133
Due after three years
 
 
31,476
 
 
—
 
 
—
 
 
31,849
 
 
 
 
 
 
 
$
62,920
 
$
—
 
$
—
 
$
63,687
 
 
 
 
 
        Proceeds from the sale and maturity of available for sale securities were approximately $69.7 million, with $0.4 million realized as net gains, $102.3 million with $1.2 million realized as net gains, and $60.2 million with no gainrealized gains or loss,losses based on a specific identification basis, realized on
the sale of availablemethod for sale securities during the years ended December 31,
1997, 19982002, 2001, and 1999.

2000, respectively.
C. TRADE ACCOUNTS RECEIVABLE

Accounts
        Trade accounts receivable consists of the following:
 
 
As of December 31,
 
 
 
2002
 
2001
 
Billed
 
$
103,820
 
$
144,896
 
Unbilled
 
 
33,491
 
 
28,290
 
Allowance for doubtful accounts
 
 
(7,879
)
 
(13,014
)
 
 
 
 
Total
 
$
129,432
 
$
160,172
 
 
 
 
 
44
        Trade accounts receivable is presented net of andoubtful accounts. The activity in the allowance for doubtful accounts of
$8.1 million and $7.9 million at December 31, 1998 and 1999, respectively. The
provisions charged to the statement of operations were $3.3 million, $5.3
million and $7.8 million in 1997, 1998, and 1999, respectively, and write-offs
against the allowances were $2.1 million, $2.1 million and $8.0 million in 1997,
1998, and 1999, respectively.

account is as follows:
 
 
For the years ended December 31,
 
 
 
2002
 
2001
 
2000
 
Beginning of year balance
 
$
13,014
 
$
10,990
 
$
7,904
 
Provision charged, net
 
 
1,893
 
 
10,258
 
 
6,778
 
Write-offs
 
 
(7,028
)
 
(8,234
)
 
(3,692
)
 
 
 
 
 
End of year balance
 
$
7,879
 
$
13,014
 
$
10,990
 
 
 
 
 
 
D. PROPERTY AND EQUIPMENT
        Property and equipment consist of the following:

                                                                December 31,
                                                             1998         1999
                                                          ---------    ---------

Buildings and improvements                                $     772    $     772
Office equipment                                             50,191       64,448
Computer equipment and software                               8,946       13,678
Leasehold improvements                                        7,387        8,691
                                                          ---------    ---------
                                                             67,296       87,589

Less accumulated depreciation and amortization               37,323       60,259
                                                          ---------    ---------
                                                          $  29,973    $  27,330
                                                          =========    =========
 
 
As of December 31,
 
 
2002
 
2001
Buildings and improvements
 
$
6,768
 
$
2,599
Office equipment
 
 
63,955
 
 
52,537
Computer equipment and software
 
 
14,064
 
 
12,019
Leasehold improvements
 
 
10,504
 
 
10,752
Construction in progress
 
 
40,888
 
 
13,000
 
 
 
 
 
 
136,179
 
 
90,907
Less accumulated depreciation and amortization
 
 
70,562
 
 
57,206
 
 
 
Total
 
$
65,617
 
$
33,701
 
 
 
        Depreciation expense totaled $8,622, $13,317$11.0 million, $11.7 million, and $22,350$16.2 million in 1997, 19982002, 2001, and 1999,2000, respectively. Computer equipment and software includes assets arising from capital lease obligations at a cost of $1,510$3.1 million, $5.2 million, and $5,672,$6.6 million with accumulated amortization totaling $1,030$1.8 million, $3.1 million, and $2,496, at$3.3 million in 2002, 2001, and 2000, respectively. Please see Footnote J Related Parties, Commitments, and Contingencies for additional information.
        Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144 (FAS 144), "Accounting for the Impairment or Disposal of Long-lived Assets." FAS No. 144 supersedes Statement of Financial Accounting Standards No. 121 (FAS 121), "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed of," and provides a single accounting model for long-lived assets to be disposed of. Adoption of this statement did not have a material effect on the Company's results of operations for the year ended December 31, 19982002.
E. GOODWILL AND OTHER INTANGIBLE ASSETS
        Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 (FAS 142), "Goodwill and 1999,
respectively.

E.Other Intangible Assets." Under FAS 142, goodwill and indefinite
45

lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amortization provisions of FAS 142 apply to goodwill and intangible assets acquired on or after June 30, 2001. With respect to goodwill and intangible assets acquired prior to June 30, 2001, companies are required to adopt FAS 142 in their first fiscal year beginning after December 15, 2001. Because of the different transition dates for goodwill and intangible assets acquired on or before June 30, 2001 and those acquired after that date, pre-existing goodwill and intangibles will be amortized during this transition period until adoption whereas new goodwill and indefinite lived intangible assets acquired after June 30, 2001 will not.
        The following table discloses the reconciliation of reported net income to the adjusted net income.
GOODWILL AND OTHER INTANGIBLE ASSETS—ADOPTION OF FAS 142
 
 
For the years ended December 31,
 
 
2002
 
2001
 
2000
Reported net income
 
$
8,181
 
$
17,387
 
$
20,354
Goodwill amortization
 
 
—
 
 
3,177
 
 
3,133
Closing costs amortization
 
 
—
 
 
43
 
 
32
Employee value amortization
 
 
—
 
 
1,165
 
 
944
 
 
 
 
Adjusted net income
 
 
8,181
 
 
21,772
 
 
24,463
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
Reported net income
 
 
0.11
 
 
0.25
 
 
0.29
 
Goodwill amortization
 
 
—
 
 
0.05
 
 
0.05
 
Closing costs amortization
 
 
—
 
 
—
 
 
—
 
Employee value amortization
 
 
—
 
 
0.02
 
 
0.01
 
 
 
 
 
Adjusted net income per share
 
 
0.11
 
 
0.32
 
 
0.35
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
Reported net income
 
 
0.11
 
 
0.25
 
 
0.29
 
Goodwill amortization
 
 
—
 
 
0.05
 
 
0.05
 
Closing costs amortization
 
 
—
 
 
—
 
 
—
 
Employee value amortization
 
 
—
 
 
0.02
 
 
0.01
 
 
 
 
 
Adjusted net income per share
 
$
0.11
 
$
0.32
 
$
0.35
 
 
 
 
46
Amortized intangible assets:
 
Gross carrying
amount
 
Accumulated
amortization
 
Net
As of December 31, 2002
 
 
 
 
 
 
 
 
 
Customer lists
 
$
81,532
 
$
(12,339
)
$
69,193
Contracts
 
 
29,250
 
 
(19,158
)
 
10,092
Non-compete agreements
 
 
7,524
 
 
(4,601
)
 
2,923
Technology
 
 
7,775
 
 
(3,177
)
 
4,598
 
 
 
 
Total
 
$
126,081
 
$
(39,275
)
$
86,806
 
 
 
 
As of December 31, 2001
 
 
 
 
 
 
 
 
 
Customer lists
 
$
56,132
 
$
(2,473
)
$
53,659
Contracts
 
 
29,250
 
 
(16,261
)
 
12,989
Non-compete agreements
 
 
4,824
 
 
(2,320
)
 
2,504
Technology
 
 
7,775
 
 
(2,066
)
 
5,709
 
 
 
 
Total
 
$
97,981
 
$
(23,120
)
$
74,861
 
 
 
 
 
 
For the years ended December 31,
 
 
2002
 
2001
Aggregate amortization expense
 
$
16,382
 
$
14,457
Estimated amortization expense
 
 
 
 
 
 
 
For the year ended December 31, 2003
 
$
14,831
 
 
 
 
For the year ended December 31, 2004
 
 
14,470
 
 
 
 
For the year ended December 31, 2005
 
 
13,518
 
 
 
 
For the year ended December 31, 2006
 
 
13,286
 
 
 
 
For the year ended December 31, 2007
 
 
11,258
 
 
 
CHANGES IN CARRYING AMOUNTS OF GOODWILL
 
 
For the year ended
December 31, 2002
Balance as of January 1, 2002
 
$
224,891
Goodwill acquired during the year
 
 
47,454
Unamortizable intangible assets reclassified as goodwill
 
 
5,090
 
 
Balance as of December 31, 2002
 
$
277,435
 
 
47
F. ACCRUED EXPENSES AND OTHER LIABILITIES
        Accrued expenses and other liabilities consist of the following:

                                                               December 31,
                                                             1998         1999
                                                          ---------    ---------

Deferred savings and profit sharing plan                  $   5,250    $     620
Accrued employee benefits                                     3,412        1,776
Employee stock withholdings                                   4,265        3,803
Accrued payroll taxes                                         6,164          876
Accrued rent obligations                                      2,130        2,905
Y2K warranties                                                   --        4,637
Accrued restructuring                                            --        7,081
Other                                                         9,426       13,768
                                                          ---------    ---------
                                                          $  30,647    $  35,466
                                                          =========    =========



                                       29


F.  CAPITAL LEASE OBLIGATIONS

The Company finances certain equipment through capital leases. At December 31,
1999, future minimum lease payments under non-cancelable capital leases,
together
 
 
As of December 31,
 
 
2002
 
2001
Accrued employee benefits
 
$
12,830
 
$
8,322
Accrued restructuring
 
 
26,235
 
 
21,723
Other
 
 
22,087
 
 
21,935
 
 
 
 
 
$
61,152
 
$
51,980
 
 
 
        Please refer to Footnote O for additional information on restructuring.
G. NOTES PAYABLE
        In connection with the present valuepurchase of minimum lease payments, are summarized below:


Years ended December 31:

2000                                                                  $ 1,430
2001                                                                    1,257
2002                                                                    1,132
2003                                                                      556
                                                                      -------

Total minimum payments                                                  4,375
Less amount representing future interest                                  685

Present value of net minimum payments                                   3,690
Less current portion                                                    1,080

Long-term portion of capital lease payments                           $ 2,610
                                                                      =======


G.  NOTES PAYABLE

In conjunction witha business complimentary to the Company's acquisitionown operations during the third quarter of GSE Erudite Software, Inc. on
April 20, 1998,2002, the Company issued a $1.0$3.0 million non-interest bearing note payable dueas partial consideration. The note has a one-year fromterm with a possible one-year extension based on additional acquisition service credits. Additionally, the purchase date. ThisCompany acquired an existing $100,000 non-interest bearing note is subject to reduction
to the extent required by the purchase agreement and was paid during 1999.

Inpayable in connection with the Company's acquisition of Parallax Solutions Ltd.,employment credits. During 2001, the Company issuedpaid the remaining balance of a $6.6$4.0 million note payablerelated to the former owners. This note is
payable in May of 2001 and bears interest at 7.05 %.

At December 31, 1997, Icom Systems Ltd, a company acquired by Keane in 1998 and
was accounted for as a pooling-of-interests, had $3.9 million of outstanding
debt and was paid during 1998.

previous acquisition.
H. CAPITAL STOCK

In May 1998, the stockholders approved an amendment to the Company's Articles of
Organization increasing the number of shares of Common Stock authorized for
issuance to 200,000,000 shares.
        The Company has three classes of stock: Preferred Stock, Common Stockpreferred stock, common stock, and Classclass B Common Stock.common stock. Holders of Common Stockcommon stock are entitled to one vote for each share held. Holders of Classclass B Common Stockcommon stock generally vote together with holders of common stock as a single class with holders of Common Stock but are entitled to 10 votes for each share held. The Board of Directors is authorized to determine the rights, preferences, privileges and restrictions of any series of Preferred Stock, and to fix the number of shares of any such series. The Common
Stockcommon stock and Classclass B Common Stockcommon stock have equal liquidation and dividend rights except that any regular quarterly dividend declared shall be $.05 per share less for holders of class B common stock. Class B Common Stock. Class B Common Stockcommon stock is nontransferable, except under certain conditions, but may be converted into Common Stockcommon stock on a share-for-share basis at any time. Conversions to common stock totaled 998,
1,312287 and 191221 shares in 1997, 19982002 and 1999,2000, respectively. There were no conversions during 2001. Shares of common stock reserved for conversions totaled 285,112284,604 at December 31, 1999.


                                       30
2002.
        On September 21, 2001, the Company announced that its Board of Directors had authorized the Company to repurchase up to 1,542,800 shares of its common stock over the next 12 months. A total of 175,000 shares of common stock was repurchased under this authorization during the second quarter of 2002, at an average price of $12.88 for a cost to $2.2 million. The remaining authorized amount of 1,367,800 shares, which would have expired on September 18, 2002, was added to the July 25, 2002 share authorization amount of 3,632,200 shares, for a total of 5 million shares authorized. The Company completed the purchase of the total authorized amount during the fourth quarter of 2002. The Company's total investment in this authorized share repurchase was $39.1 million at an average price per share of $7.83.
48
H. CAPITAL STOCK (Continued)
        On October 25, 2002, the Board of Directors authorized the Company to repurchase an additional 5 million shares of its common stock over the next 12 months. The repurchases may be made on the open market or in negotiated transactions, and the timing and amount of shares repurchased will be determined by the Company's management based on its evaluation of market and economic conditions and other factors. During the fourth quarter, the Company purchased 1,323,600 shares of its common stock under this authorization for a total investment of $12.7 million at an average price per share of $9.59. The remaining authorized amount at December 31, 2002 was 3,676,400 shares. Between May 1999 and December 31, 2002, the Company has invested $163.0 million to repurchase 11,955,800 shares of its common stock under seven separate authorizations.
I. BENEFIT PLANS
        STOCK OPTION PLANS: The Company has    On December 31, 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148 (FAS 148), "Accounting for Stock-Based Compensation—Transition and Disclosure," an amendment to Statement of Financial Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based Compensation." FAS 148 provides three transition methods for entities electing to adopt the fair value recognition provisions of Statement 123 for stock-based compensation plans, which
are described below. The Company adoptedemployee compensation. FAS 148 also amends the disclosure provisions of SFASFAS 123 "Accounting for Stock-Based Compensation," and has continued to apply APB
Opinion 25 and related Interpretations inrequire prominent disclosure about the effects of an entity's accounting for its plans. Had
compensation cost for the Company'spolicy decisions with respect to stock-based compensation plans been
determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, the Company'sreported net income and earnings per share in annual and interim financial statements. The statement is effective for fiscal years ending after December 15, 2002. Currently, the years ended December 31, 1997, 1998Company does not elect to transition from the intrinsic value method of accounting for stock-based compensation proscribed by Accounting Principles Board No. 25 (APB 25), "Accounting for Stock Issued to Employees," and 1999 would have been reducedrelated Interpretations to this fair value method proscribed by FAS 148. In addition, the pro forma amounts indicated below:


                                                              Years Ended December 31,
                                                           1997         1998         1999
                                                      ---------------------------------------
                                                      (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

Net income - as reported                               $   51,371   $   96,349   $   73,074
Net income - pro forma                                     49,386       91,020       61,811
Net income per share - as reported (diluted)                  .72         1.33         1.01
Net income per share - pro forma (diluted)                    .69         1.26          .85


The effectsCompany will continue to apply the disclosure provisions of applying SFAS 123 in this pro formaFAS 123. Accordingly, the Company's adoption of disclosure areprovisions of FAS 148 will not likely to
be representativeimpact the Company's financial condition or results of effects on reported net income for future yearsoperations.
        The fair market value of each stock option is estimated using the Black Scholes option pricing method, assuming no expected dividends with the following weighted-average assumptions:

                                                Years Ended December 31,
                                             1997         1998         1999
                                           ----------------------------------

Expected life (years)                         4.0          4.0          4.0
Expected stock price volatility                41%          47%          96%
Risk-free interest rate                      6.24%        4.83%        5.27%
 
 
For the years ended December 31,
 
 
 
2002
 
2001
 
2000
 
Expected life
 
4.9
 
4.8
 
4.4
 
Expected stock price volatility
 
65
%
65
%
93
%
Risk-free interest rate
 
4.24
%
5.00
%
5.00
%
        The Company has four stock-based compensation plans, which are described below.
        The 1992 Stock Option Plan provides for grants of stock options for up to 3,600,000 shares of the Company's Commoncommon stock to employees, officers and directors of, and consultants and advisors to, the Company. Generally, options expire five years from the date of grant, require a purchase price of not less than 100% of the fair market value of the stock as of the date of grant, and are exercisable at such time or times as the Board of Directors in each case determines. The Company may grant options that
49
are intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code ("incentive stock options") or nonstatutory options not intended to qualify as incentive stock options.
        The 1998 Stock Incentive Plan, amended in December 1999, provides for grants of stock options for up to 7,000,000 shares of the Company's common stock to employees, officers and directors of, and consultants and advisors to, the Company. Generally, options expire five years from the date of grant, require a purchase price of not less than 100% of the fair market value of the stock as of the date of grant, and are exercisable at such time or times as the Board of Directors in each case determines. The Company may grant options that are intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code
("incentive stock options") or nonstatutory options, not intended to qualify as
incentiverestricted stock options.

Theawards and other stock-based awards.
        In December 2000, the Company initiated a new "Time Accelerated Restricted Stock Award Plan" (TARSAP) under its 1998 Stock Incentive Plan, amendedwhereby the vesting of certain stock options is directly impacted by the performance of the Company. The vesting of stock options granted under the TARSAP accelerates upon the meeting of certain profitability criteria. If these criteria are not met, such options will vest five years after the date of grant and expire at the end of 10 years.
        The Company believes that tying the vesting of larger blocks of certain stock options directly to financial performance more effectively utilizes options that would have been granted in Decemberfuture years, while making employees true stakeholders. The Company also anticipates that more closely aligning the interest of management and key employees with shareholders will focus employees on the goals and objectives most important to shareholders, and that the granting of such options was an important factor in securing employee confidence, commitment, and trust at a critical junction in the implementation of its strategic plans. Finally, the Company believes that the cost to shareholders of these additional options can be kept reasonable as a result of its stock repurchase program. Since May of 1999, the Company has invested $163.0 million to repurchase 11,955,800 million shares of its common stock under seven separate authorizations.
        The 2001 Stock Incentive Plan provides for grants of stock options for up to 7,000,000 shares of the Company's Common Stockcommon stock to employees, officers and directors of, and consultants and advisors to, the Company. Generally, options expire five years from the date of grant, require a purchase price of not less than 100% of the fair market value of the stock as of the date of grant, and are exercisable at such time or times as the Board of Directors in each case determines. The Company may grant options that are intended to qualify as incentive stock options under Section 422 of the Internal
Revenue Code ("incentive stock options") or nonstatutory options, restricted stock awards and other stock-based awards, including the grant of shares based
upon certain conditions not intended to qualify as incentive stock options.awards.
        The weighted-average fair value of options granted under both Plansthe option plans during the years ended December 31, 1997, 19982002, 2001, and 19992000 was $8.40, $14.73$13.43, $11.96, and $14.39,$11.53, respectively.


                                       31
        In November 2001, the Company completed its merger with Metro Information Services, Inc. In connection with the merger, the Company assumed all options, whether vested or unvested, to purchase Metro's common stock, issued under Metro's stock option plans. Each option to purchase shares of Metro's common stock outstanding as of November 30, 2001 became an option to acquire a number of shares of Keane common stock equal to the number of shares of Metro's common stock subject to such option, multiplied by a conversion ratio of 0.48. The option price has been proportionally adjusted. The
50
number of adjusted shares under the Metro plan is 571,058, of which, 13,394 were exercised during 2002.
        In September of 2002, the Company completed the purchase of a business complementary to the Company's business strategy. In connection with this acquisition, the Company assumed all options, whether vested or unvested, to purchase the stock of the acquired company, under the respective stock option plans. Each option to purchase shares of the acquired company as of September 25, 2002 became an option to acquire a number of shares of Keane common stock equal to the number of shares of the acquired company subject to such option, multiplied by conversion ratio of 0.1766. The option price has been proportionally adjusted. The number of adjusted shares under the acquired company's plan is 87,502. During the fourth quarter of 2002, there were 14,184 shares exercised from this plan.
        On September 26, 2002, the Company filed a Tender Offer Statement in connection with its offer to exchange currently held stock options with new options. The downturn in the stock market and the corresponding impact on the Company's stock price created a potential motivation and retention issue with key employees and executives of the Company. Consistent with the Company's philosophy of using stock options to motivate and retain management and employees, on August 20, 2002, the Company's Board of Directors approved the opportunity for employees to request that the Company exchange outstanding options to purchase shares of the Company's common stock, which were granted on or after January 1, 2000 and have an exercise price of $12.00 or greater per share, for new options to purchase shares of common stock on substantially the following terms ("the Offer"). Pursuant to the terms of the Offer:
i.
all eligible and outstanding options issued under all of the Company's stock option plans could be exchanged for new options at an exchange rate of four for every five surrendered;
ii.
the grant date of the new options would be the first business day that is at least six months and one day after the date of the expiration of the Offer; and
iii.
the exercise price of each new option would be the closing price of the Company's common stock on the new grant date.
        The Offer expired on October 7, 2002 ("expiration date"). Options for 1,888,394 shares of the Company's common stock with a weighted average exercise price of $20.45 were eligible for the Offer. Of this amount, 1,458,298 options were surrendered for exchange, with 324,902 options being retained, with the balance of the 105,194 being cancelled because of terminations. As a result, the Company anticipates that on April 8, 2003, the first business day that is at least six months and one day from the expiration date, the Company will grant new options for 1,166,638 shares of the Company's common stock.
51
        Information with respect to activity under the Company's stock option plans is set forth below:

                                                                     Weighted
                                                       Common        Average
                                                       Stock      Exercise Price

Outstanding at December 31, 1996                      2,118,665    $    4.84
  Granted                                               575,432        19.91
  Exercised                                            (413,004)        3.73
  Canceled/Expired                                      (93,998)        6.83
                                                      ---------

Outstanding at December 31, 1997                      2,187,095         8.93
  Granted                                               953,789        34.15
  Exercised                                            (782,577)        4.21
  Canceled/Expired                                     (120,247)       18.80
                                                      ---------

Outstanding at December 31, 1998                      2,238,060        20.80
  Granted                                             1,582,300        20.60
  Exercised                                            (409,112)        6.69
  Canceled/Expired                                     (517,389)       25.91
                                                      ---------

Outstanding at December 31, 1999                      2,893,859    $   21.76
 
 
Common stock
 
Weighted average
exercise price
Outstanding at December 31, 1999
 
2,893,859
 
$
21.76
Granted
 
3,580,618
 
 
16.58
Exercised
 
(382,078
)
 
8.75
Canceled/Expired
 
(870,830
)
 
25.36
Outstanding at December 31, 2000
 
5,221,569
 
 
18.55
Granted
 
1,723,024
 
 
20.14
Exercised
 
(192,095
)
 
8.98
Canceled/Expired
 
(475,328
)
 
20.13
Outstanding at December 31, 2001
 
6,277,170
 
 
19.20
Granted
 
689,342
 
 
13.43
Exercised
 
(145,734
)
 
13.08
Canceled/Expired
 
(2,466,150
)
 
21.16
 
 
 
Outstanding at December 31, 2002
 
4,354,628
 
$
17.25
 
 
 
        Shares available for future issuance under the Company's stock option plans at December 31, 1999 is 5,718,978.2002 are 11,178,189.
        The following table summarizes information about stock options that were outstanding at December 31, 1999:


                                           Weighted Average     Weighted Average                        Weighted Average
                                               Remaining         Exercise Price                          Exercise Price
     Range of                   Number        Contractual          Of Options            Number          Of Exercisable
  Exercise Prices            Outstanding         Life              Outstanding        Exercisable            Options
  ---------------            -----------         -----             -----------        -----------            -------

$0.04    --    $5.19           147,876         0.5 years               $4.61             147,876              $4.61
 5.42    --     7.25           245,988         1.1 years                6.02             100,672               6.04
 7.35    --    15.06           262,780         2.0 years               14.35              68,800              13.93
15.32    --    28.19         1,439,400         4.3 years               20.07              37,523              28.13
28.56    --    38.38           669,000         3.5 years               33.82             180,978              34.03
39.50    --    53.00           128,815         3.6 years               42.81              23,000              44.14
                              --------

$0.04    --   $53.00         2,893,859         3.4 years               $21.76            558,849             $18.75
2002:
Range of exercise prices
 
Number
outstanding
 
Weighted
average
remaining
contractual
life
 
Weighted
average
exercise
price
of options
outstanding
 
Number
exercisable
 
Weighted
average
exercise
price of
exercisable
options
$  0.04–$  4.99  
 
22,744
 
4.4
 
$
2.89
 
22,744
 
$
2.89
  5.00–    9.99
 
1,881,331
 
7.4
 
 
9.56
 
846,351
 
 
9.66
10.00–  14.99
 
171,363
 
8.0
 
 
11.95
 
64,264
 
 
11.92
15.00–  19.99
 
1,224,152
 
4.6
 
 
17.64
 
617,404
 
 
17.89
20.00–  24.99
 
266,625
 
1.9
 
 
22.47
 
156,500
 
 
22.53
25.00–  29.99
 
175,255
 
1.3
 
 
27.59
 
135,005
 
 
27.69
30.00–  39.99
 
517,028
 
4.2
 
 
34.37
 
493,579
 
 
34.44
40.00–  49.99
 
54,100
 
1.3
 
 
44.25
 
52,372
 
 
44.16
50.00–  59.99
 
41,070
 
4.2
 
 
57.14
 
37,231
 
 
57.13
60.00–  74.99
 
960
 
—
 
 
74.48
 
960
 
 
74.48
 
 
 
 
 
 
 
 
 
 
 
$  0.04–$74.99  
 
4,354,628
 
 
 
 
 
 
2,426,410
 
 
 
 
 
 
 
 
 
 
 
 
 
 
52
        STOCK PURCHASE PLANS: The Company's 1983 Restricted Stock Purchase Plan provides
for grants of 2,025,000 shares of Common Stock to be made to key employees at
the discretion of the compensation committee of the Board of Directors. No
grants were issued during 1996 through 1999. At December 31, 1999, 1,377,760
shares remained available for future grants. Restrictions on the sale or
transfer of shares lapse three years after the date of grant. As grants are
issued, deferred compensation equivalent to the market value at the date of
grant, less the $.10 per share of the purchase price, is amortized to
compensation expense over the three-year vesting period. The amount of
amortization for 1997 was $47. There was no amortization in 1998 and 1999.    The Company's 1992 Employee Stock Purchase Plan provides for the purchase of 2,550,0004,550,000 shares of Common Stockcommon stock by qualifying employees at a purchase price of 85% of the market value of the stock on the purchase date. During 1997, 19982002, 2001, and 1999,2000 participants in this plan purchased 136,700, 72,832378,333, 575,841, and 310,051384,209 shares, respectively. Shares available for future purchases totaled 923,9811,585,598 at December 31, 1999.


                                       32
2002.
        INCENTIVE COMPENSATION PLANS: During 1988, the    The Company has established incentive compensation plans for certain officers and selected employees. Payments under the plans are based on actual performance compared to stated plan objectives. Compensation expense under the plans in 1997, 19982002, 2001, and 19992000 approximated $6,661,
$9,505$16.8 million, $18.3 million, and $8,336,$11.2 million, respectively. In addition, management may award discretionary bonuses based upon an individual's performance and/or contribution to the Company.
        DEFERRED SAVINGS AND PROFIT SHARING PLAN:    During 1984, the Company established a deferred savings and profit sharing plan under Section 401(k) of the Internal Revenue Code. The plan enables eligible employees to reduce their taxable income by contributing up to 15% of their salary to the plan. The Company makes discretionary contributions to the plan based on a percentage of contributions made by the eligible employees and profits of the Company. The Company's contributions vest after the employee has completed 42 months of service and for 1997, 19982002, 2001, and 19992000 amounted to approximately $3,156, $4,818$8.4 million, $4.5 million, and $5,065,$5.0 million, respectively.
        DEFINED BENEFIT PLAN:    The Company has a defined benefit pension plan that provides pension benefits to employees of the Company's subsidiary located in the United Kingdom. Such benefits are available to employees who were active on August 4, 1998 and not to employees who joined the Company after that date, and are based on the employees' compensation and service. The Company's policy is to fund amounts required by applicable government regulations. Total pension expense for 2002, 2001, and 2000 was approximately $1.3 million, $1.2 million and $1.4 million, respectively.
        The following table sets forth the benefit obligation, fair value of plan assets, and the funded status of the Company's Plan; amounts recognized in the Company's financial statements; and the principal weighted average assumptions used:
 
 
For the years ended December 31,
 
 
 
2002
 
2001
 
Change in projected benefit obligation:
 
 
 
 
 
 
 
Benefit obligation at January 1,
 
$
16,780
 
$
15,140
 
 
Service cost
 
 
1,518
 
 
1,604
 
 
Interest cost
 
 
1,159
 
 
956
 
 
Employee contributions
 
 
301
 
 
348
 
 
Actuarial loss (gain)
 
 
1,942
 
 
(984
)
 
Benefits paid
 
 
(423
)
 
(284
)
 
 
 
 
Benefit obligation at December 31,
 
 
21,277
 
 
16,780
 
 
 
 
 
53
Change in plan assets:
 
 
 
 
 
 
 
Fair value of plan assets at January 1,
 
 
15,546
 
 
16,949
 
 
Actual return on plan assets
 
 
(4,221
)
 
(2,606
)
 
Employer contributions
 
 
979
 
 
1,139
 
 
Employee contributions
 
 
301
 
 
348
 
 
Benefits paid
 
 
(423
)
 
(284
)
 
 
 
 
Fair value of plan assets at end of year
 
 
12,182
 
 
15,546
 
 
 
 
 
Funded status
 
 
(9,095
)
 
(1,234
)
 
Unrecognized net loss (gain)
 
 
8,725
 
 
1,234
 
 
 
 
 
Accrued pension cost
 
 
(370
)
 
—
 
 
 
 
 

Amounts recognized in the statement of financial position consist of:

 

 

 

 
 
Deferred tax asset, long term
 
 
773
 
 
—
 
 
Accrued benefit liability
 
 
(2,302
)
 
—
 
 
Other comprehensive income
 
 
1,159
 
 
—
 
 
 
 
 
Net amount recognized
 
$
(370
)
$
—
 
 
 
 
 
 
 
For the years ended December 31,
 
 
 
2002
 
2001
 
Weighted average assumptions
 
 
 
 
 
 
Discount rate at end of the year
 
5.75
%
6.00
%
 
Expected return on plan assets for the year
 
8.00
%
8.25
%
 
Rate of compensation increase at end of the year
 
3.75
%
4.00
%
 
Discretionary pension increased LPI pension increases
 
0.00
%
2.00
%
 
LPI pension increases
 
2.25
%
2.25
%
 
Statutory revaluation of benefits (GMP)*
 
3.50
%
3.50
%
*
(Guaranteed Minimum Pension)
54
 
 
For the years ended December 31,
 
 
 
2002
 
2001
 
Components of net periodic benefit cost
 
 
 
 
 
 
 
 
Service cost—benefits earned during the period
 
$
1,518
 
$
1,604
 
 
Interest cost on projected benefit obligations
 
 
1,159
 
 
957
 
 
Expected return on plan assets
 
 
(1,420
)
 
(1,397
)
 
Net amortization and deferral
 
 
 
 
 
 
 
 
 
—amortization of unrecognized net loss (gain)
 
 
92
 
 
(6
)
 
 
 
 
Total net periodic benefit cost
 
$
1,349
 
$
1,158
 
 
 
 
 
J. RELATED PARTIES, COMMITMENTS, AND CONTINGENCIES
        The Company's corporate offices are located in Boston, Massachusetts. The
building is leased from a partnership in which an officer, some directors, and
shareholdersprincipal executive office of the Company are limited partners. The lease is for a termas of twenty yearsDecember 31, 2002, was located at annual rentals considered to be at prevailing market ratesTen City Square in Boston, Massachusetts and lasting through 2006. The Company is also required to pay specified percentages
of annual increases in real estate taxes and operating expenses.leased from the City Square Limited Partnership as described below. The Company leases additional office space and apartments in more than seventy locations in North America, the United Kingdom, and India under operating leases and capital leases, some of which may be renewed for periods up to five years, subject to increased rentals.rental fees. Rental expense for all of the Company's facilities amounted to approximately $13.0$30.8 million in 1997, $16.12002, $19.4 million in 19982001, and $21.8$22.4 million in 1999.2000. The Company is committed to minimum annual rental payments under all leases of approximately $18.9$26.7 million in 2000, $18.12003, $20.8 million in 2001, $15.52004, $15.6 million in 2002, $11.12005, $9.6 million in 20032006, $5.6 million in 2007, and an aggregate of $14.2$28.4 million for 2008 and thereafter.
        In February 1985, the Company entered into a lease, which subsequently was extended to a term of 20 years, with City Square Limited Partnership ("City Square"), pursuant to which the Company leased approximately 34,000 square feet of office and development space in a building located at Ten City Square, in Boston, Massachusetts. The Company now leases approximately 88% of this building and the remaining 12% is leased by other tenants. At December 31, 2002, the leased space was used as the Company's corporate offices. John F. Keane, Chairman of the Board of the Company, and Philip J. Harkins, a director of the Company, are limited partners of City Square. Based upon its knowledge of rental payments for comparable facilities in the Boston area, the Company believes that the rental payments under this lease, which will be approximately $0.8 million per year ($25.00 per square foot) for the remainder of the lease term (until February 2006), plus specified percentages of any annual increases in real estate taxes and operating expenses, were, at the time the Company entered into the lease, as favorable to the Company as those which could have been obtained from 2004an independent third party. As a result of its occupancy of the New Facility (as described below), the Company is in the process of finding a third party to 2006.sublease the space it occupies at Ten City Square.
        As a result of the planned vacancy at Ten City Square, the Company has reserved the remaining lease payments due to City Square during the remainder of the lease term, resulting in a charge of approximately $3.9 million in the accompanying 2002 financial statements.
        In October 2001, the Company entered into a lease with Gateway Developers LLC ("Gateway LLC") for a term of twelve years, pursuant to which the Company agreed to lease approximately
55

95,000 square feet of office and development space in a building located at 100 City Square in Boston, Massachusetts (the "New Facility"). The Company leases approximately 57% of the New Facility and the remaining 43% is or will be occupied by other tenants. John Keane Family LLC is a member of Gateway LLC. The members of John Keane Family LLC are trusts for the benefit of John F. Keane, Chairman of the Board of the Company, and his immediate family members.
        On October 31, 2001, Gateway LLC entered into a $39.4 million construction loan with Citizens Bank of Massachusetts (the "Gateway Loan") in connection with the New Facility and an adjacent building to be located at 20 City Square, Boston, Massachusetts. John Keane Family LLC and John F. Keane are each liable for certain obligations under the Gateway Loan if and to the extent Gateway LLC requires funds to comply with its obligations under the Gateway Loan. Stephen D. Steinour, a director of the Company, is Chief Executive Officer of Citizens Bank of Pennsylvania. Citizens Bank of Massachusetts and Citizens Bank of Pennsylvania are subsidiaries of Citizens Financial Group, Inc. Mr. Steinour was not involved in the process of approving the loan.
        The Company began occupying the New Facility and making lease payments in March 2003. Based upon its knowledge of lease payments for comparable facilities in the Boston area, the Company believes that the lease payments under the lease for the New Facility, which will be approximately $3.2 million per year ($33.00 per square foot for the first 75,000 square feet and $35.00 per square foot for the remainder of the premises) for the first six years of the lease term and approximately $3.5 million per year ($36.00 per square foot for the first 75,000 square feet and $40.00 per square foot for the remainder of the premises) for the remainder of the lease term, plus specified percentages of any annual increases in real estate taxes and operating expenses, were, at the time the Company entered into the lease, as favorable to the Company as those which could have been obtained from an independent third party.
        In view of the related party ownership of the New Facility, the Company concluded that during the construction phase of the New Facility, the estimated construction in progress costs for the project would be capitalized in accordance with EITF No. 97-10, "The Effect of Lessee Involvement in Asset Construction." A credit for the same amount is reflected in the accrued long-term construction-in-progress costs in the accompanying balance sheet. For purposes of the consolidated statement of cash flows, the Company characterizes this treatment as a non-cash financing activity.
        In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities," 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 entity's residual returns, or both. In determining whether it is the primary beneficiary of a variable interest entity, an entity with a variable interest shall treat variable interests in that same entity held by its related parties as its own interests.
        The Company is currently evaluating whether or not City Square and Gateway LLC are variable interest entities as defined by FIN 46 and, if so, whether or not the Company is the primary beneficiary of these entities.
56

        If the Company determines that City Square or Gateway LLC, or both, are variable interest entities, and that it is the primary beneficiary, the Company will be required to consolidate the financial position and results of operation of the entities for which it determines it is the primary beneficiary. Such consolidation will be required beginning July 1, 2003.
        If the Company concludes it is not required to consolidate either of these entities, the Company will continue to account for its leases with City Square and Gateway LLC in accordance with generally accepted accounting principles. With respect to the Gateway LLC lease, if the Company concludes it is not required to consolidate this entity, the Company will amortize the asset and liability recorded during the construction of the facility, and estimates that the net effect of such amortization included in its operating results will approximate the rent expense resulting from contractual payments it is required to make under the lease.
        In December 2002, the Company's Audit Committee and Board of Directors each approved two related party transactions involving directors of the Company. The Company has subcontracted with Guardent, Inc. ("Guardent") for a customer project involving the State of California. Ms. Cirino, a director of the Company, is an executive officer and shareholder of Guardent. The payments from the Company to Guardent are not expected to exceed approximately $160,000. The Company repurchased 400,000 shares of common stock from Mr. Fain, a director of the Company. These shares were repurchased on December 6, 2002 in a negotiated transaction at a price of $9.50 per share for an aggregate purchase price of $3.8 million. The closing price for the Company's common stock on the American Stock Exchange on December 6, 2002 was $9.65.
        As of December 31, 2002, in connection with a third quarter acquisition, the Company had a recorded contingent liability of $895,000 related to certain earn-out considerations. The $895,000 is expected to be paid out during the first quarter of 2003. Future earn-outs are based on specific net revenue targets. Payments for achieving these goals will range form $1.0 to $2.0 million in future periods. The Company also recorded $3.0 million as deferred revenue related to contingent service credits and issued a $3.0 million non-interest bearing note payable as partial consideration. The note has a one-year term with a possible one-year extension based on additional acquisition service credits.
        The Company is a guarantor with respect to a line of credit for Innovate EC, an entity in which the Company acquired a minor equity position as a result of a previous acquisition. The total line of credit is for $600,000. The Company guarantees $300,000 of this obligation. The line is subject to review by the lending institution. The Company would be required to meet its guarantor obligation in the event the lending institution refuses to extend the credit facility and Innovate EC is unable to satisfy its obligation.
57
J. RELATED PARTIES, COMMITMENTS AND CONTINGENCIES (Continued)
        In April 1998, United Services Planning Association, Inc. and Independent Research Agency for Life Insurance, Inc. filed a complaint in the District Court for Tarrant County, Texas (Civil Action No. 96-173235-98) against the Company and two of its employees alleging that the Company misrepresented its ability to complete a project contracted for by the plaintiffs and concealed from the plaintiffs material facts related to the status of the project. The parties are currently engaged in discovery. It is not likely that the case will go to trial before the fall of 2003. The plaintiffs seek monetary relief. The Company believes that it has meritorious defenses to the plaintiff's complaint and intends to contest the claims vigorously. However, the Company is presently unable to assess the likely outcome of the matter.
        The Company is involved in litigation and various legal matters, which have arisen in the ordinary course of business. The Company does not believe that the ultimate resolution of any existing matterthese matters will have a material adverse effect on its financial condition, results of operations, or cash flows. The Company believes these litigation matters are without merit and intends to defend these matters vigorously. Refer to Note P to the audited condensed consolidated financial statements for additional disclosures with respect to legal matters.
K. INCOME TAXES

The provision for
        For financial reporting purposes, income before income taxes includes federal, state and foreign income taxes
currently payable and those deferred because of temporary differences between
the financial statement and tax bases of assets and liabilities.following components:
 
 
For the year ended
December 31, 2002
Income before income taxes:
 
 
 
Domestic
 
$
13,085
Foreign
 
 
551
 
 
Total income before provision for income taxes
 
$
13,636
 
 
58
        The provision for income taxes consists of the following:

                                                 Years Ended December 31,
                                              1997         1998         1999
                                           ----------   ----------   ----------

Current:
  Federal                                  $   35,236   $   67,740   $   34,230
  State                                         8,161       15,499        9,283
  Foreign                                         211        5,121        1,230
                                           ----------   ----------   ----------
     Total                                     43,608       88,360       44,743

Deferred:
  Federal                                      (7,073)      (7,626)       3,570
  State                                           251       (2,717)         626
  Foreign                                         (74)        (210)         800
                                           ----------   ----------   ----------
    Total                                      (6,896)     (10,553)       4,996
                                           ----------   ----------   ----------
                                           $   36,712   $   77,807   $   49,739
                                           ==========   ==========   ==========



                                       33
 
 
For the years ended December 31,
 
 
 
2002
 
2001
 
2000
 
Current:
 
 
 
 
 
 
 
 
 
 
Federal
 
$
5,996
 
$
8,993
 
$
16,748
 
State
 
 
2,573
 
 
147
 
 
1,958
 
Foreign
 
 
682
 
 
886
 
 
570
 
 
 
 
 
 
Total
 
 
9,251
 
 
10,026
 
 
19,276
 

Deferred:

 

 

 

 

 

 

 

 

 

 
Federal
 
 
(2,960
)
 
1,605
 
 
(4,283
)
State
 
 
(836
)
 
412
 
 
(898
)
Foreign
 
 
—
 
 
(209
)
 
(263
)
 
 
 
 
 
Total
 
 
(3,796
)
 
1,808
 
 
(5,444
)
Total income tax provision
 
$
5,455
 
$
11,834
 
$
13,832
 
 
 
 
 
 
        A reconciliation of the statutory income tax provision with the effective income tax provision is as follows:

                                                 Years Ended December 31,
                                              1997         1998         1999
                                           ----------   ----------   ----------


Federal income taxes at 35%                $   30,829   $   60,955   $   42,985
State income taxes,                             5,164        8,307        6,530
net of federal tax benefit
Merger related costs                               --        2,916           --
Tax credits                                       (35)          --           --
Other, net                                        754        5,629          224
                                           ----------   ----------   ----------
                                           $   36,712   $   77,807   $   49,739
                                           ==========   ==========   ==========
 
 
For the years ended December 31,
 
 
 
2002
 
2001
 
2000
 
Federal income taxes at 35%
 
$
4,772
 
$
10,228
 
$
11,965
 
State income taxes, net
 
 
1,129
 
 
363
 
 
1,060
 
Disallowed meals expense
 
 
508
 
 
506
 
 
806
 
Foreign tax
 
 
489
 
 
(81
)
 
(594
)
Adjustment of prior year's estimated tax liability
 
 
(1,532
)
 
—
 
 
—
 
Merger related costs
 
 
—
 
 
1,048
 
 
856
 
Other, net
 
 
89
 
 
(230
)
 
(261
)
 
 
 
 
 
Total
 
$
5,455
 
$
11,834
 
$
13,832
 
 
 
 
 
 
59
        The components of the net deferred tax assets and liabilities are as follows:

                                                             Years Ended December 31,
                                                                 1998        1999
                                                              ---------    ---------

Current:
 Allowance for doubtful accounts and other reserves           $  14,206    $   3,687
 Employee medical benefits                                         (367)      (1,079)
 Accrued expenses                                                   946        3,741
                                                              ---------    ---------
Total current assets                                          $  14,785    $   6,349
                                                              =========    =========

Long-term:
 Customer based intangibles                                   $  (4,980)   $  (4,482)
 Amortization of intangible assets                               11,913       12,438
 Depreciation and other                                             117        3,449
                                                              ---------    ---------
Long-term assets (liabilities)                                $   7,050    $  11,405
                                                              =========    =========
 
 
As of December 31,
 
 
 
2002
 
2001
 
Deferred tax assets:
 
 
 
 
 
 
 
Allowance for doubtful accounts and other reserves
 
$
2,022
 
$
2,208
 
Accrued expenses
 
 
17,490
 
 
9,167
 
Amortization of intangible assets
 
 
975
 
 
12,453
 
Depreciation and other
 
 
9,108
 
 
11,496
 
Acquired United States net operating loss carry-forwards
 
 
3,214
 
 
2,298
 
 
 
 
 
Total deferred tax assets
 
 
32,809
 
 
37,622
 

Deferred tax liabilities:

 

 

 

 

 

 

 
Intangibles
 
 
(28,343
)
 
(28,150
)
 
 
 
 
Total deferred tax liabilities
 
 
(28,343
)
 
(28,150
)
Total net deferred tax asset
 
$
4,466
 
$
9,472
 
 
 
 
 
        At December 31, 2002, the Company had domestic net operating loss (NOL) carry forwards for tax purposes of $7.9 million expiring in 2017 through 2021. These NOL carry forward amounts relate to prior acquisitions and are subject to limitation pursuit to IRC Section 382.
        Cumulative undistributed earnings of the Company's foreign subsidiaries amounted to approximately $16 million at December 31, 2002. No provision for United States income tax has been made for the repatriation of these earnings because the Company considers the earnings to be indefinitely reinvested. If such earnings were distributed, tax expense would increase by approximately $500,000. Additionally, the Company's India subsidiary, part of the SignalTree Solutions acquisition, has tax holidays in India, which reduce or eliminate the income tax in that country. The current component is included in prepaid expensesholidays expire between 2006 and other current assets2009. Based on the balance sheet.currently enacted regular corporate income tax rate in India, the benefit to the Company of the tax holidays was approximately $325,000, of which the per diluted share amount is immaterial, for the year ended December 31, 2002.
L. BUSINESS ACQUISITIONS
        On March 15, 2002, Keane acquired SignalTree Solutions Holding, Inc. (SignalTree), a privately held, United States-based corporation with two software development facilities in India and additional operations in the United States. Under the terms of the merger agreement, Keane paid $68.2 million in cash for SignalTree Solutions.
        The long-term component isCompany accounted for the acquisition as a purchase, pursuant to which the assets and liabilities of SignalTree Solutions, including intangible assets, were recorded at their respective fair values. All identifiable intangible assets are being amortized over their estimated useful life with the exception of goodwill. The financial position, results of operations and cash flows of SignalTree Solutions were included in the Company's financial statements effective as of the purchase date.
60

        The total cost of the merger was $78.9 million. Portions of the purchase price, including intangible assets, were identified by independent appraisers utilizing proven valuation procedures and techniques. Goodwill was recorded at $41.3 million and other identified intangible assets were valued at $21.5 million. At the date of acquisition, the Company entered a plan to exit certain activities and consolidate facilities. As a result, the Company recorded a restructuring liability of $1.6 million related to the lease obligation and certain other costs for those facilities. In accordance with EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain costs Incurred in a Restructuring)," these costs have been reflected in the purchase price.
        The components of the purchase price allocation is as follows:
Consideration and merger costs:
 
 
Consideration paid
 
$
66,927
Transaction costs
 
 
1,303
Restructuring
 
 
1,553
Deferred tax liability
 
 
9,120
 
 
Total
 
$
78,903
 
 
Allocation of purchase price:
 
 
Net asset value acquired
 
$
16,133
Customer lists (seven-year life)
 
 
18,800
Non-compete agreements (three-year life)
 
 
2,700
Goodwill
 
 
41,270
 
 
Total
 
$
78,903
 
 
        The following table presents the condensed balance sheet disclosing the amounts assigned to each of the major assets acquired and liabilities assumed of SignalTree Solutions at the acquisition date:
Condensed balance sheet:
 
 
Cash
 
$
2,650
Accounts receivable
 
 
7,304
Other current assets
 
 
3,562
Property, plant, equipment, net
 
 
8,011
 
 
Total assets
 
 
21,527
Accounts payable
 
 
569
Accrued compensation
 
 
1,569
Other liabilities
 
 
3,256
 
 
Net assets
 
$
16,133
 
 
61
        On November 30, 2001, the Company completed the merger of Metro Information Services, Inc. (Metro), a provider of information technology, or IT, consulting and custom software development services and solutions. The merger was completed by exchanging all of the common stock of Metro for 7.4 million shares of the Company's common stock. Each share of Metro was exchanged for 0.48 of one share of Keane common stock. In addition, outstanding Metro stock options were converted at the same ratio into options to purchase 571,058 shares of Keane common stock.
        The Company accounted for the acquisition as a purchase, pursuant to which the assets and liabilities of Metro, including identifiable intangible assets, were recorded at their respective fair values. All identifiable intangible assets will be amortized over their estimated useful life with the exception of goodwill. The financial position, results of operations and cash flows of Metro were included in the Company's financial statements effective as of the merger date.
        The total cost of the merger was $164.5 million. Portions of the purchase price, including intangible assets, were identified by independent appraisers utilizing proven valuation procedures and techniques. Initial goodwill was recorded at $154.3 million and other identified intangible assets were valued at $46.1 million. At the date of acquisition, the Company entered a plan to exit certain activities and consolidate facilities. As a result, the Company recorded a restructuring liability of $11.0 million in 2001 related to the lease obligation and certain other costs for those facilities. In accordance with EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)," these costs, which are not associated with the generation of future revenues and have no future economic benefit, be reflected as assumed liabilities in the allocation of the purchase price to the net assets acquired. During 2002, the Company adjusted the purchase price allocation principally as a result of an adjustment in the valuation of the liability assumed for the restructured facilities and for other matters unresolved at the time of acquisition. As a result of these non-cash adjustments, the goodwill balance was increased by $3.1 million.
62

        The components of the purchase price allocation as of date of merger with 2002 adjustments is as follows:
Consideration and merger costs:
 
November 30, 2001
 
2002 adjustments
 
Total
 
Value of stock issued
 
$
130,796
 
$
—
 
$
130,796
 
Fair value of options exchanged
 
 
4,754
 
 
—
 
 
4,754
 
Transaction costs
 
 
7,786
 
 
258
 
 
8,044
 
Restructuring
 
 
10,972
 
 
3,052
 
 
14,024
 
Deferred tax liability
 
 
8,141
 
 
—
 
 
8,141
 
Deferred tax asset
 
 
—
 
 
(1,249
)
 
(1,249
)
 
 
 
 
 
Total
 
$
162,449
 
$
2,061
 
$
164,510
 
 
 
 
 
 
Allocation of purchase price:
 
November 30, 2001
 
2002 adjustments
 
Total
 
Net liabilities assumed
 
$
(37,984
)
$
(1,034
)
$
(39,018
)
Customer lists (seven-year life)
 
 
45,200
 
 
—
 
 
45,200
 
Non-compete agreements (three-year life)
 
 
900
 
 
—
 
 
900
 
Goodwill
 
 
154,333
 
 
3,095
 
 
157,428
 
 
 
 
 
 
Total
 
$
162,449
 
$
2,061
 
$
164,510
 
 
 
 
 
 
        The following table presents the condensed balance sheet disclosing the amounts assigned to each of the major assets acquired and liabilities assumed of Metro as of the date of the acquisition and adjustments:
Condensed balance sheet:
 
November 30, 2001
 
2002 adjustments
 
Total
 
Cash
 
$
622
 
$
—
 
$
622
 
Accounts receivable
 
 
40,820
 
 
141
 
 
40,961
 
Other current assets
 
 
1,004
 
 
—
 
 
1,004
 
Property, plant, equipment, net
 
 
2,780
 
 
(401
)
 
2,379
 
 
 
 
 
 
Total assets
 
 
45,226
 
 
(260
)
 
44,966
 
Accounts payable
 
 
3,583
 
 
13
 
 
3,596
 
Accrued compensation
 
 
9,800
 
 
65
 
 
9,865
 
Other liabilities
 
 
3,889
 
 
696
 
 
4,585
 
Note payable
 
 
65,938
 
 
—
 
 
65,938
 
 
 
 
 
 
Net liabilities
 
$
(37,984
)
$
(1,034
)
$
(39,018
)
 
 
 
 
 
        The unaudited pro forma combined condensed statements of income below present the historical statements of the Company and its acquisitions of Metro on November 30, 2001 and SignalTree Solutions on March 15, 2002 as if the balance sheet.

L.  BUSINESS ACQUISITIONS

Fiscal 1999purchases had occurred at January 1, 2001. Unaudited pro forma combined condensed financial information is presented for comparative purposes only and is not
63

necessarily indicative of the results of operations that would have actually been reported had the purchase occurred at the beginning of the periods presented, nor is it necessarily indicative of future financial position or results of operations.
 
 
For the years ended December 31,
 
 
2002
 
2001
Total revenues
 
$
883,412
 
$
1,070,451
Net income
 
 
8,910
 
 
16,013
Net income per share (basic)
 
 
0.12
 
 
0.23
Net income per share (diluted)
 
 
0.12
 
 
0.23
        In addition to the SignalTree Solutions and Metro acquisitions, the Company completed several acquisitions of businesses complementary to the Company's business strategy during the third quarter of 2002 and during 2000. The Company did not complete any acquisitions other than Metro during 2001. The merger and consideration costs of these acquisitions, which were accounted for using the purchase method of accounting, totaled $13.4 million in 2002 and $35.3 million in 2000. In certain cases, the purchase price included contingent consideration based upon operating performance of the acquired business. During 2001, the Company paid an additional $1.2 million related to earn-outs and has recorded these amounts as additional purchase price. As of December 31, 2002, in connection with a third quarter acquisition, the Company had a recorded contingent liability of $895,000 related to certain earn-out considerations. The $895,000 is expected to be paid out during the first quarter of 2003. Future earn-outs are based on specific net revenue targets. Payments for achieving these goals will range from $1.0 to $2.0 million in future periods. The Company also recorded $3.0 million as deferred revenue related to contingent service credits and issued a $3.0 million non-interest bearing note payable as partial consideration. The note has a one-year term with a possible one-year extension based on additional acquisition service credits.
        The results of operations of thethese acquired companies and businesses acquired during fiscal 1999 have been included in the accompanyingCompany's consolidated financial statementsstatement of income from their
respective dates of acquisition.

Amherst Consulting Group

In May 1999, the Company purchased substantially all of the assets of Amherst
Consulting Group, Inc. ("Amherst") for approximately $8 million, including $2
million payable to the former owner in equal installments at the second and
third anniversary of the purchase. Amherst is a privately held management
consulting firm specializing in change management. The acquisition was accounted
for by the purchase method of accounting. Accordingly, the assets acquired have
been recorded at their fair values at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired has been allocated to identifiable intangiblesintangible assets and goodwill and is being amortized on a
straight-line basis over a 3 to 15-year period.

Parallax Solutions Ltd.

In May 1999, the Company purchased the stock of Parallax Solutions Ltd.
("Parallax") for approximately $18.7 million. Parallax provides software
services and is based in Conventry England. The acquisition of Parallax has been
accounted for by the purchase method of accounting. Accordingly, the assets
acquired have been recorded at their fair values at the date of acquisition. The
excess of the purchase price over the fair value of the net assets acquired has


                                       34


been allocated to identifiable intangibles and goodwill and is being amortized
on a straight-line basis over a 3 to 20-year period.

Anstec, Inc.

In December 1999, the Company purchased the outstanding stock of Anstec, Inc.
("Anstec") for approximately $4.6 million, including approximately $2.8 million
issuable at the end of the contingency period defined in the purchase agreement.
Anstec is a privately held information technology company that provides
solutions to both the Federal Government and commercial enterprises. The
acquisition of Anstec has been accounted for by the purchase method of
accounting. Accordingly, the assets acquired have been recorded at their fair
values at the date of acquisition. The excess of the purchase price over the
fair value of the net assets acquired has been allocated to identifiable
intangibles and goodwill and is being amortized on a straight-line basis over a
3 to 15-year period.

First Coast Systems, Inc.

In December 1999, the Company purchased substantially all of the assets of First
Coast Systems, Inc. ("First Coast") for approximately $29.5 million, including
approximately $2.7 million held in escrow issuable at the end of the contingency
period defined in the purchase agreement and $3 million that may be issued based
upon future earnings. First Coast is a privately held information technology
company that provides software solutions for the healthcare industry. The
acquisition of First Coast has been accounted for by the purchase method of
accounting. Accordingly, the assets acquired have been recorded at their fair
values at the date of acquisition. The excess of the purchase price over the
fair value of the net assets acquired has been allocated to identifiable
intangibles and goodwill and is being amortized on a straight-line basis over a
3 to 15-year period.

Other Acquisitions

During 1999, the Company completed three other acquisitions for approximately
$9.9 million, including approximately $2 million and approximately 102,000
shares of Keane common stock that may be issued based upon future earnings. The
acquisitions were accounted for by the purchase method accounting. Accordingly,
the assets acquired have been recorded at their fair values at the date of
acquisition. The excess of the purchase price over the fair value of the net
assets acquired have allocated to identifiable intangibles and goodwill and is
being amortized on a straight-line basis over a 3 to 15-year period.

Fiscal 1998

Omega Systems, Inc.

In February 1998, the Company acquired all outstanding shares of Omega Systems,
a privately held IT services company in exchange for approximately 190,000
shares of Keane common stock. The transaction was accounted for as a
pooling-of-interests. Acquired net assets of approximately $800,000 have been
recorded at historical amounts. Prior periods were not restated due to
immateriality, and accordingly, results of operations have been included since
the date of acquisition.

GSE Erudite Software, Inc.

On April 30, 1998, the Company purchased substantially all of the assets of GSE
Erudite Software, Inc. The aggregate purchase price of this acquisition was
approximately $9.8 million. The acquisition was accounted for by the purchase
method of accounting. Accordingly, the assets acquired, including primarily
customer-based intangibles and non-competition agreements have been recorded at
their fair values at the date of acquisition. The customer-based intangibles and
non-competition agreements are being amortized on a straight-line basis over periods ranging from three to five15 years. Bricker & Associates, Inc.

On June 1, 1998,Pro forma results of operations for these acquisitions have not been provided, as they were not material to the Company completed its acquisition of Bricker & Associates,
Inc. ("Bricker"),on either an operations improvement consulting firm, underindividual or an Agreement
and Plan of Merger by and among the Company, Beta Acquisition Corp. and Bricker,
whereby the Company agreed to acquire all of the outstanding capital stock and
options of Bricker in exchange for approximately 2,336,196 million shares of
Keane, Inc. common stock (the "merger"). The merger has been accounted for as
pooling-of-interests.


                                       35


During the quarter ended June 30, 1998, the Company incurred a $4.1 million
charge to operations to reflect investment banking, legal, accounting and other
professional fees associated with the Bricker transaction. Revenue and net
income of the combined entities for the three-month period prior to the merger
and the corresponding period in the prior year are presented in the following
table. Prior to the merger, there were no inter-company transactions between the
two companies.


                                                         Three months ended
                                                    March 31, 1998  March 31, 1997

Revenue
     Keane, Inc.                                       $ 209,162       $ 141,110
     Bricker & Associates, Inc.                            5,800           3,191
                                                       ---------       ---------
Combined revenue                                       $ 214,962       $ 144,301
                                                       =========       =========

Net income
     Keane, Inc.                                       $  19,080       $   9,848
     Bricker & Associates, Inc.                            1,846             168
                                                       ---------       ---------
Combined net income                                    $  20,926       $  10,016
                                                       =========       =========


On August 4, 1998, the Company acquired the issued and outstanding capital stock
of Icom Systems Ltd ("Icom"), parent company of Icom Solutions Limited, a
privately-held provider of information technology business solutions in
Birmingham, England, and issued or reserved for issuance approximately 894,500
shares of Keane common stock in connection with the acquisition, 835,545 of
which were issued in exchange for shares of Icom capital stock which Keane
acquired at the closing of the transaction, and up to approximately 58,955 of
which will be issuable upon the exercise of options to acquire shares of Keane
common stock that Keane issued in exchange for certain options to acquire shares
of Icom capital stock held by the Icom option holders. The merger has been
accounted for as a pooling-of-interest.

During the quarter ended September 30, 1998, the Company incurred a $1.9 million
charge to operations to reflect investment banking, legal, accounting and other
professional fees associated with the Icom transaction. Revenue and net income
of the combined entities for the six-month period prior to the merger and the
corresponding period in the prior year are presented in the following table.
Prior to the acquisition, there were no inter-company transactions between the
two companies.


                                                           Six months ended
                                                    June 30, 1998   June 30, 1997

Revenue
     Keane, Inc.                                       $ 465,655      $ 299,795
     Icom Systems Ltd.                                    25,861         12,746
                                                       ---------      ---------
Combined revenue                                       $ 491,516      $ 312,541
                                                       =========      =========

Net income
     Keane, Inc.                                       $  41,594      $  21,450
     Icom Systems Ltd.                                     1,697            425
                                                       ---------      ---------
Combined net income                                    $  43,291      $  21,875
                                                       =========      =========


On October 9, 1998 the Company acquired all of the outstanding capital stock of
Fourth Tier, Inc. ("Fourth Tier"), a privately-held provider of enterprise
relationship management consulting services based in Los Angeles, California, in
exchange for 915,571 shares of Keane, Inc. common stock. The merger has been
accounted for as a pooling-of-interest.

During the quarter ended December 30, 1998, the Company incurred a $2.1 million
charge to operations to reflect investment banking, legal, accounting and other
professional fees associated with the Fourth Tier transaction. In addition, an
additional charge for $1.7 million was incurred as a result of the requirement
to convert Fourth Tier, Inc. from cash to accrual basis for tax reporting.


                                       36


Revenue and net income of the combined entities for the nine-month period prior
to the merger and the corresponding period in the prior year are presented in
the following table. Prior to the acquisition, there were no inter-company
transactions between the two companies.


                                                        Nine Months Ended
                                               September 30, 1998  September 30, 1997

Revenue
     Keane, Inc.                                     $ 772,056         $ 492,895
     Fourth Tier, Inc.                                  10,369             4,322
                                                     ---------         ---------
Combined revenue                                     $ 782,425         $ 497,217
                                                     =========         =========

Net income
     Keane, Inc.                                     $  68,568         $  34,637
     Fourth Tier, Inc.                                   4,205             2,179
                                                     ---------         ---------
Combined net income                                  $  72,773         $  36,816
                                                     =========         =========
aggregate basis.
64

M.  BANK DEBT

In July 1995, the Company secured a $20 million demand line of credit from a
major Boston bank, and expires in May of 2000. Borrowings will bear interest at
the bank's base rate (the prime rate). There were no borrowings under this line
during 1998 or 1999.

N. EARNINGS PER SHARE
        A summary of the Company's calculation of earnings per share is as follows:

                                                                       Years Ended December 31,
                                                                    1997         1998         1999
                                                                 ----------   ----------   ----------
                                                                (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

Net income                                                       $   51,371   $   96,349   $   73,074
Weighted average number of common shares
   Outstanding used in calculation of basic earnings per
   Share                                                             70,096       71,053       71,571
Incremental shares from the assumed exercise of
   Dilutive stock options                                             1,507        1,231          824
                                                                 ----------   ----------   ----------
Weighted average number of common shares
   Outstanding used in calculation of diluted earnings
   Per share                                                         71,603       72,284       72,395
                                                                 ==========   ==========   ==========
Earnings per share
   Basic                                                         $      .73   $     1.36   $     1.02
                                                                 ==========   ==========   ==========
   Diluted                                                       $      .72   $     1.33   $     1.01
                                                                 ==========   ==========   ==========
 
 
Years Ended December 31,
 
 
2002
 
2001
 
2000
Net income
 
$
8,181
 
$
17,387
 
$
20,354
Weighted average number of common shares outstanding used in calculation of basic earnings per share
 
 
74,018
 
 
68,474
 
 
69,646
Incremental shares from the assumed exercise of dilutive stock options
 
 
388
 
 
922
 
 
347
 
 
 
 
Weighted average number of common shares outstanding used in calculation of diluted earnings per share
 
 
74,406
 
 
69,396
 
 
69,993
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
 
 
Basic
 
$
0.11
 
$
0.25
 
$
0.29
 
 
 
 
Diluted
 
$
0.11
 
$
0.25
 
$
0.29
 
 
 
 
        For the period ending December 31, 1999,2002, 2001, and 2000, there were 950,3152,373,570, 2,348,368, and 3,063,740 options for common stock, respectively, which were excluded because they were anti-dilutive.

O.
N. RESTRUCTURING CHARGECHARGES
        In the fourth quarter of 1999,2002, 2001, and 2000, the Company recorded a restructuring chargecharges of $13.7 million.$17.6 million, $10.4 million, and $8.6 million, respectively. Of this charge $3.8these charges, $3.2 million, $4.4 million, and $1.7 million related to a workforce reduction of approximately 600229, 900, and 200 employees primarily consultants.for the years 2002, 2001, and 2000, respectively. In addition,2002, the Company also released excess accruals of $251,000 in connection with workforce reduction, which resulted in a net workforce restructuring charge of $2.9 million. Cash expenditures in 2002 of $10.2 million related to prior-year's income statement charges and acquisition expenditures were $3.9 million and $6.3 million, respectively.
        The Company also performed a review of its business strategy and concluded that consolidating some of its branch offices was key to its success. As a result of this review, the Company charges included $12.1 million in 2002, $4.0 million in 2001, and $3.5 million in 2000 for branch office closings and certain other expenditures. In conjunction with the review during the fourth quarter, the Company also performed a review of accrual balances for properties restructured in prior years. As a result, the Company determined that the cost to consolidate and/or close certain non-profitable offices would be higher than the original estimate. The change in estimates resulted in a net charge to the Company's restructuring liability of $756,000 and $1.2 million in 2002 and 2001, respectively. The resulting net charge in 2002 and 2001 was $12.9 million and $5.1 million, respectively. Cash expenditures in 2002 of $6.3 million related to prior-year's income statement charges and acquisition expenditures were $3.8 million and $2.5 million, respectively.
65

        The Company also wrote off $4.8$1.9 million, $0.8 million, and $3.4 million in 2002, 2001, and 2000, respectively, of impaired assets, which included the
carrying valuebecame impaired as a result of specific assets associated with these branch offices, and
incurred charges of $3.8 million for branch closings and $1.3 million for
payments to certain employees.


                                       37
restructuring actions.
        A summary of restructuring activity during the restructuring chargeyears 2002, 2001 and 2000, which is reported in the consolidated accrued expenses in the accompanying balance sheet, is as follows:

                                                   Branch
                      Workforce     Impaired       Office     Payments to
                      Reduction      Assets       Closures  Certain Employees  Total

Special charge        $  3,800      $  4,753      $  3,800      $  1,300     $ 13,653

Cash expenditures       (1,000)           --            --            --       (1,000)

Non cash charges            --        (4,753)         (819)           --       (5,572)
                      --------      --------      --------      --------     --------

Balance 12/31/99      $  2,800      $     --      $  2,981      $  1,300     $  7,081
                      ========      ========      ========      ========     ========
 
 
Workforce
reduction
 
Branch office
closures
& other
expenditures
 
Impaired assets
 
Total
 
Beginning balance in fiscal 2000
 
$
2,800
 
$
4,281
 
$
—
 
$
7,081
 
Charges in fiscal 2000
 
 
1,743
 
 
3,478
 
 
3,403
 
 
8,624
 
Cash expenditures in fiscal 2000
 
 
(3,138
)
 
(2,832
)
 
—
 
 
(5,970
)
Fixed asset impairment charges in fiscal 2000
 
 
—
 
 
—
 
 
(3,403
)
 
(3,403
)
 
 
 
 
 
 
Beginning balance in fiscal 2001
 
 
1,405
 
 
4,927
 
 
—
 
 
6,332
 
 
 
 
 
 
 
Charges in fiscal 2001
 
 
4,417
 
 
3,957
 
 
825
 
 
9,199
 
Change in prior year's estimate
 
 
—
 
 
1,159
 
 
—
 
 
1,159
 
Cash expenditures in fiscal 2001
 
 
(2,620
)
 
(2,494
)
 
—
 
 
(5,114
)
Acquisition related charge in fiscal 2001
 
 
7,226
 
 
3,746
 
 
—
 
 
10,972
 
Fixed asset impairment charges in fiscal 2001
 
 
—
 
 
—
 
 
(825
)
 
(825
)
 
 
 
 
 
 
Beginning balance in fiscal 2002
 
 
10,428
 
 
11,295
 
 
—
 
 
21,723
 
 
 
 
 
 
 
Charges in fiscal 2002
 
 
3,192
 
 
12,060
 
 
1,847
 
 
17,099
 
Change in prior year's estimate
 
 
(251
)
 
756
 
 
—
 
 
505
 
Cash expenditures in fiscal 2002
 
 
(10,177
)
 
(6,318
)
 
—
 
 
(16,495
)
Acquisition related charge in fiscal 2002
 
 
93
 
 
1,760
 
 
187
 
 
2,040
 
Acquisition related charge in fiscal 2002:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition related charges to increase prior year estimate
 
 
—
 
 
3,397
 
 
—
 
 
3,397
 
Fixed asset impairment charges in fiscal 2002
 
 
—
 
 
—
 
 
(2,034
)
 
(2,034
)
 
 
 
 
 
 
Balance as of December 31, 2002
 
$
3,285
 
$
22,950
 
$
—
 
$
26,235
 
 
 
 
 
 
 
        As of December 31, 2002, the balance in the branch office closures reserve consisted of amounts for properties identified in 2002, 2001, 2000, and 1999 in the amounts of $15.4, $6.1, $0.8, and $0.6 million, respectively.
O. SEGMENT REPORTING
        Based on qualitative and quantitative criteria established by Statement of Financial Accounting Standards No. 131 (FAS 131), "Disclosures about Segments of an Enterprise and Related Information," the Company operates within one reportable segment: Professional Services.
66

        In accordance with the enterprise wide disclosure requirements of FAS 131, the Company's geographic information is as follows:
 
 
Geographic Location
 
 
 
 
Balance per
consolidated
financial
statements
 
 
Domestic
 
Domestic
deferred
tax assets
 
International
 
International
deferred
tax assets
2002
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
843,918
 
 
 
 
$
29,285
 
 
 
 
$
873,203
Long-lived assets
 
 
409,513
 
$
11,609
 
 
26,601
 
$
1,830
 
 
449,553
2001
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
730,714
 
 
 
 
 
48,445
 
 
 
 
 
779,159
Long-lived assets
 
 
322,307
 
 
22,684
 
 
21,304
 
 
1,058
 
 
367,353
2000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
808,783
 
 
 
 
 
63,173
 
 
 
 
 
871,956
Long-lived assets
 
 
126,295
 
 
18,761
 
 
22,996
 
 
913
 
 
168,965
        The Company has no single customer that provides revenues that equal or exceed 10 percent of its consolidated revenues.
P. SUBSEQUENT EVENT

The Company announced onEVENTS
        On February 10, 2003, the Company received a $7.3 million award in connection with an arbitration proceeding initiated by the Company in 2000 that it intends to repurchase up to
two million sharesagainst Signal Corporation for a breach of its Common Stock lasting until February 9, 2001.an agreement between Signal Corporation and the Company's Federal Systems subsidiary. The Company will useaccount for this award in the first quarter of 2003.
        On February 13, 2003, the Company's Board of Directors approved a new United Kingdom Employee Stock Purchase Plan. The Company has allocated 500,000 shares of the total number of shares reserved under the Company's 1992 Employee Stock Purchase Plan for its stock plansissuance under the United Kingdom Employee Stock Purchase Plan.
        On February 28, 2003, the Company entered into a new three-year, $50 million credit facility with two banks. This new credit facility replaces the Company's previous $10 million demand line credit, which expired in July 2002. The terms of the credit facility require the Company to maintain certain financial ratios and other general corporate
purposes.


                                       38
earnings before interest, taxes, depreciation, and amortization (EBITDA). Borrowings will bear interest at one of the bank's base rate or the Euro currency reserve rate.
67
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
        Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
        The response to this Item is contained in part under the caption "Directors and Executive Officers of the Company" in Item 4 of Part I hereof and the remainder is incorporated herein by reference to the Company's Proxy Statement for the Annual Meeting of Stockholders to be held May 31, 200028, 2003 (the "2000"2003 Proxy Statement") under the caption "Election of Directors."
ITEM 11. EXECUTIVE COMPENSATION
        The response to this Item is incorporated herein by reference to the Company's 20002003 Proxy Statement under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
        The response to this Item is incorporated herein by reference to the Company's 20002003 Proxy Statement under the caption "Stock Ownership of Certain Beneficial Owners and Management.Management" and "Equity Compensation Plan Information."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
        The response to this Item is incorporated herein by reference to the Company's 20002003 Proxy Statement under the caption "Certain Related Party Transactions."


                                       39


PART IV

ITEM 14. CONTROLS AND PROCEDURES
a)
Evaluation of Disclosure Controls and Procedures. Based on their evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days of the filing date of this Annual Report on Form 10-K, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are designed to ensure 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 Securities and Exchange Commission's (SEC) rules and forms and are operating in an effective manner.

b)
Changes in Internal Controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation.
68
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements

The following consolidated financial statements are included in Part II, Item 8:

                                                                         Page(s)

Reports of Independent Auditors...........................................21-22

Consolidated Balance Sheets as of December 31, 1998 and 1999.................23

Consolidated Statements of Income
For the Years Ended December 31, 1997, 1998 and 1999.........................24

Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1997, 1998 and 1999.........................25

Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1998 and 1999.........................26

Notes to Consolidated Financial Statements................................27-38

Report of independent auditors
33
Consolidated balance sheets as of December 31, 2002 and 2001
34
Consolidated statements of income for the years ended December 31, 2002, 2001, and 2000
35
Consolidated statements of stockholders' equity for the years ended December 31, 2002, 2001, and 2000
36
Consolidated statement of cash flows for the years ended December 31, 2002, 2001, and 2000
37
Notes to consolidated financial statements
38-67
(b) Exhibits
The Exhibits set forth in the attached Exhibit Index are filed as part of this Annual Report.
(c) Reports on Form 8-K

None


                                       40
The Company filed the following Current Reports on Form 8-K during the three-month period ended December 31, 2002.
i.
Current Report on Form 8-K filed with the SEC on October 30, 2002 announcing the Board of Directors authorization for the Company to purchase 5,000,000 shares of common stock.
69

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.

                                                    KEANE, INC.
                                                    (Registrant)

                                                    s/s John F Keane
                                                    ----------------
                                                    By:  John F. Keane
                                                    Chairman, President, and
                                                    Chief Executive Officer

Date:      March 23, 2000

KEANE, INC.
(Registrant)



/s/  BRIAN T. KEANE      
Brian T. Keane
President and Chief Executive Officer
Date: March 21, 2003
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 and on the dates indicated.
/s/s    JOHN F. KEANE      
John F. Keane              March 23, 2000        
Chairman
/s/s   JOHN J. LEAHY      
John J. Leahy                      March 23, 2000
- ----------------------------                          ----------------------------------
John F. Keane                                         John J. Leahy
Chairman, President, and                              
Senior Vice President and
Chief Executive Officer Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer)

/s/s  BRIAN T. KEANE      
Brian T. Keane             March 23, 2000        
President, Chief Executive Officer and Director


/s/s JOHN F. KEANE, JR.      
John F. Keane, Jr.                 March 23, 2000
- ----------------------------                          ----------------------------------
Brian T. Keane                                        John
Director

/s/  JOHN F. Keane, Jr.
Executive Vice President,                             Executive Vice President,
Office of the President,                              Office of the President,
and Director                                          and Director

s/s  ROCKART      
John F. Rockart            March 23, 2000        
Director


/s/s  RobertMARIA A. Shafto                  March 23, 2000
- ----------------------------                          ----------------------------------
John F. Rockart                                       RobertCIRINO      
Maria A. Shafto
Cirino
Director                                              Director


/s/s  PHILIP J. HARKINS      
Philip J. Harkins          March 23, 2000        
Director


/s/s  WINSTON R. HINDLE, JR.      
Winston R. Hindle, Jr.            March 23, 2000
- ----------------------------                          ----------------------------------
Philip J. Harkins                                     Winston R. Hindle, Jr.

Director

/s/  STEPHEN D. STEINOUR      
Stephen D. Steinour
Director


/s/  JOHN H. FAIN      
John H. Fain
Director



                                       41


Exhibit Index

3.1    Articles of Organization of the Registrant, as amended, are incorporated
       herein by reference to Exhibit 4.1 to the Registrant's Registration
       Statement on Form S-3 (File No. 33-85206).

3.2    Articles of Amendment to Registrant's Articles of Organization, effective
       as of May 29, 1998.

3.3    By-Laws of the Registrant, as amended, are incorporated herein by
       reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form
       10-Q for the fiscal quarter ended June 30, 1994.

*10.1  Key Employees Deferred Compensation Plan is incorporated herein by
       reference to Exhibit 10.1 to the Company's Registration Statement on Form
       S-1 (File No. 33-33557), as filed with the Securities and Exchange
       Commission (the "Commission") on February 21, 1990 and declared effective
       by the Commission on March 8, 1990 (as amended, the "Registration
       Statement").

*10.2
70

CERTIFICATIONS
I, Brian T. Keane, Inc. 401(k) Deferred Savings and Profit Sharing Plan is
       incorporated herein by reference to Exhibit 10.2 to the Registration
       Statement.

*10.3  1982 Incentive Stock Option Plan (the "Option Plan") is incorporated
       herein by reference to Exhibit 10(c) to the Registrant's Annual Reportcertify that:
1.
I have reviewed this annual report on Form 10-K of Keane, Inc.;

2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the year ended December 31, 1988 (the "1988 Form 10-K"). On
       January 9, 1990,periods presented in this annual report;

4.
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Board of Directorsregistrant and we have:

a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)
evaluated the effectiveness of the Registrant adopted an
       Amendmentregistrant's disclosure controls and procedures as of a date within 90 days prior to Section 4the filing date of this annual report (the "Evaluation Date"); and

c)
presented in this annual report our conclusions about the effectiveness of the Option Plan increasingdisclosure controls and procedures based on our evaluation as of the number of shares
       eligible for issuance thereunder to 900,000.

*10.4  AmendmentsEvaluation Date;

5.
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Option Plan effective asregistrant's auditors and the audit committee of February 15, 1990registrant's board of directors (or persons performing the equivalent functions):

a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and March
       7, 1990 are incorporated herein by reference to Exhibit 10.4report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.
The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the Registrant's Annual Reportdate of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Dated: March 21, 2003
/s/  BRIAN T. KEANE      
Brian T. Keane
President and Chief Executive Officer
71
I, John J. Leahy, certify that:
1.
I have reviewed this annual report on Form 10-K of Keane, Inc.;

2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the year ended December 31,
       1990 (the "1990 Form 10-K").

*10.5  1978 Employee Stock Purchase Plan (the "Stock Purchase Plan") is
       incorporated herein by referenceperiods presented in this annual report;

4.
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)
designed such disclosure controls and procedures to Exhibit 10(b)ensure that material information relating to the 1988 Form 10-K.

*10.6  Amendmentsregistrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the Stock Purchase Plan effectivefiling date of this annual report (the "Evaluation Date"); and

c)
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of February 15, 1990
       are incorporated herein by reference to Exhibit 10.6the Evaluation Date;

5.
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's
       Annual Report on Form 10-Kregistrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the year ended December 31, 1992 (the
       "1992 Form 10-K").

*10.7  1983 Restricted Stock Plan (the "Restricted Stock Plan") is incorporated
       herein by reference to Exhibit 10.5registrant's auditors any material weaknesses in internal controls; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.
The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the Registration Statement.

*10.8  Amendmentdate of our most recent evaluation, including any corrective actions with regard to the Restricted Stock Plan effective as of February 15, 1990
       is incorporated herein by reference to Exhibit 10-4 of the 1990 Form
       10-K.

*10.9  1998 Equity Incentive Plan is incorporated herein by reference to Exhibit
       10 to the Company's Registration Statement on Form S-8 (File No.
       333-56119), as filed withsignificant deficiencies and declared effective by the Commission on
       June 5, 1998.

*10.10 Amendment to 1998 Equity Incentive Plan.

*10.11 1992 Employee Stock Purchase Plan is incorporated herein by reference to
       Exhibit 10.10 to the 1992 Form 10-K.

10.12  Lease dated February 20, 1985, between the Registrant and Jonathan G.
       Davis, as Trustee of City Square Development Trust (the "Trust"), is
       incorporated herein by reference to Exhibit 10.6 to the Registration
       Statement.

material weaknesses.

Dated: March 24, 2003
/s/  JOHN J. LEAHY      
John J. Leahy
Senior Vice President of Finance and
Chief Financial Officer
72
Exhibit Index

2.1
Agreement and Plan of Merger, dated as of August 20, 2001, by and among the Registrant, Veritas Acquisition Corp., and Metro Information Services, Inc. is incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated August 20, 2001, filed on August 21, 2001.
3.1
Articles of Organization of the Registrant, as amended, are incorporated herein by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-3 (File No. 33-85206) (the "Registration Statement").
3.2
Articles of Amendment to Registrant's Articles of Organization, filed on May 29, 1998, are incorporated herein by reference to Exhibit 99.1 to the Registrant's Current Report on 8-K, filed on June 3, 1998.
3.3
Second Amended and Restated By-Laws of the Registrant are incorporated herein by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2000.
3.4
Amendment to Second Amended and Restated Bylaws of the Registrant is incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001.
*10.1
Keane, Inc. 401(k) Deferred Savings and Profit Sharing Plan is incorporated herein by reference to Exhibit to the Registration Statement.
*10.2
1992 Stock Option Plan is incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992.
*10.3
1998 Stock Incentive Plan is incorporated herein by reference to Exhibit 10 to the Company's Registration Statement on Form S-8 (File No. 333-56119), as filed with and declared effective by the Commission on June 5, 1998.
*10.4
Amendment to 1998 Stock Incentive Plan is incorporated herein by reference to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000.
*10.5
Amended and Restated 1992 Employee Stock Purchase Plan, as amended, is incorporated herein by reference to Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2001.
10.6
Metro Information Services, Inc. Amended and Restated 1997 Stock Option Plan is incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001.
10.7
Lease dated February 20, 1985, between the Registrant and Jonathan G. Davis, as Trustee of City Square Development Trust (the "Trust"), is incorporated herein by reference to Exhibit 10.6 to the Registration Statement.
10.8
First Amendment of Lease dated March 19, 1985, between the Registrant and the Trust, is incorporated herein by reference to Exhibit 10.7 to the Registration Statement.
10.9
Second Amendment of Lease dated November 1985, between the Registrant and the Trust, is incorporated herein by reference to Exhibit 10.8 to the Registration Statement.
*10.10
Keane, Inc. 2001 Stock Incentive Plan is incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001.
*10.11
Keane, Inc. United Kingdom Employee Stock Purchase Plan.
10.12
Revolving Credit Agreement dated February 28, 2003, by and between the Registrant, Fleet National Bank, as Agent, and several lenders party thereto.
73
10.13
Lease, dated October 25, 2001 between the Registrant and Gateway Developers LLC.
21.0
Schedule of Subsidiaries of the Registrant.
23.1
Consent of Ernst & Young LLP.
99.1
Certification by the Registrant's President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2
Certification by the Registrant's Senior Vice President of Finance and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*
Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(A) and (C) of this report.

10.13  First Amendment of Lease dated March 19, 1985, between


QuickLinks
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
KEANE, INC. CONSOLIDATED BALANCE SHEETS
KEANE, INC. CONSOLIDATED STATEMENTS OF INCOME
KEANE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
KEANE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
KEANE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Registrant and
       the Trust, is incorporated herein by reference to Exhibit 10.7 to the
       Registration Statement.


                                       42


10.14  Second Amendment of Lease dated November 1985, between the Registrant and
       the Trust, is incorporated herein by reference to Exhibit 10.8 to the
       Registration Statement.

10.15  Documents relating to the Demand Lines of Credit with Shawmut Bank, N.A.
       and the First National Bank of Boston (the "Banks") are incorporated
       herein by reference to Exhibit 10.19 to the Registrant's Quarterly Report
       on Form 10-Q for the quarter ended June 30, 1995:

(a)    Demand Money Market Promissory Note dated as of May 1, 1995, in the
       amount of $10,000,000, between the Registrant and Shawmut Bank.

(b)    Loan Agreement dated July 20, 1995, in the amount of $10,000,000, between
       the Registrant and Bank of Boston.

21.    Schedule of Subsidiaries of the Registrant.......................Ex 21-1

23.1   Consent of Ernst & Young LLP.....................................Ex 23-1

23.2   Consent of PriceWaterhouseCoopers LLP............................Ex 23-2

27.10  Financial Data Schedule for the yearyears ended December 31, 1999.............................................................Ex 27-10


                                       43