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

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

                                    Form
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, 2001

                                       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, 2004

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
                                   ----------
             (ExactINC.
(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
New York 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 [X]ý    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 Exchange Act Rule 12b-2) 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 AMEXNew York Stock Exchange on March 8, 2002,June 30, 2004, was $1,019,651,000.approximately $653,965,000. As of March 8, 2002, 75,475,0713, 2005, there were 62,367,269 shares of Common Stock,common stock, $.10 par value per share and 284,891no shares of Class B Common
Stock,common stock, $.10 par value per share, were issued and outstanding.

Documents Incorporated by Reference.
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 29, 2002.12, 2005. The information required in response to Items 10-1310-14 of Part III of this Form 10-K is hereby incorporated by reference to such proxy statement.


                                       1



TABLE OF CONTENTS


Page
PART I
Item 1.BUSINESS3
Item 2.PROPERTIES9
Item 3.LEGAL PROCEEDINGS10
Item 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS10
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY10



PART II

Item 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES14
Item 6.SELECTED FINANCIAL DATA16
Item 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS17
Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK42
Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA44
Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE90
Item 9A.CONTROLS AND PROCEDURES90
Item 9B.OTHER INFORMATION92



PART III

Item 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT92
Item 11.EXECUTIVE COMPENSATION92
Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT92
Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS93
Item 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES93



PART IV

Item 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES93
SIGNATURES94


PART I
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        This annual 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," "estimates," "intends," "may," "projects," "will," "would," and similar expressions may be forward-looking statements. However, we caution investors not to place undue reliance on any forward-looking statements in this annual report because these statements speak only as of the date when made. We undertake 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 in this Annual Report on Form 10-K under the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS."

ITEM 1. BUSINESS
OVERVIEW
        Keane, Inc. (collectively with its subsidiaries, "Keane" or "the Company,"
unless the context requires otherwise) is a leading provider of information
technology (IT)Information Technology ("IT") and business consulting services.Business Process Services. In business since 1965, the
Company helpsour mission is to help clients optimizeimprove business performanceand IT effectiveness through the innovative useoutsourcing, development and management of information technology. Keane's clients consist primarily of
Global 2000 companies across every major industry, healthcare organizations,integration, and government agencies. Keane provides itsother IT services.
        We deliver our IT services through an extensiveintegrated network of local branchregional offices in North America and in the United Kingdom ("UK"), and through Advanced Development Centers ("ADCs") in the United States ("U.S."), Canada, and India. This integrated client serviceglobal delivery model enables Keaneus to deliverprovide our services to customers on-site, off-site,onsite, at its near-shoreour nearshore facilities in Canada, and through itsour offshore development centers in India. BranchOur regional offices work in conjunction with
the Company's business consulting arm, Keane Consulting Group, and are supported by centralized Strategic Practices and Quality Assurance Groups. The Company
develops a high percentage
        Our clients consist primarily of Global 2000 companies across several industries. We have specific expertise and depth of capability in financial services, insurance, healthcare, and the public sector and other verticals. We strive to build long-term relationships with our customers by improving their business and IT performance, reducing their costs, and increasing their organizational flexibility. We achieve recurring revenue as a result of itsour multi-year outsourcing contracts broad range of service offerings, and track record of
delivering quality IT solutions consistently and reliably.

Keane seeks to improve its cash position by marketing services that encourageour long-term relationships with customers. The Company rigorously manages its
internal investments and looks to gain economies of scale by enhancing critical
mass to increase revenues in order to decrease Selling, General, &
Administrative ("SG&A") expenses as a percentage of revenue. The Company also
attempts to continuously improve and accelerate the collection of its
receivables. The Company had $129.2 million in cash and investments at the end
of 2001 after the payment of approximately $73.1 million of cash related to
Keane's acquisition of Metro Information Services, Inc. on November 30, 2001.

Keane isclient relationships.
        We are a Massachusetts corporation headquartered in Boston. ItsOur common stock is traded on the AmericanNew York Stock Exchange ("NYSE") under the symbol KEA. Information"KEA." We maintain a Web site with the address www.keane.com. Our Web site includes links to our Corporate Governance Guidelines, our Code of Business Conduct, and our Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee charters, which are available in print to any shareholder upon request. We are not including the information contained in our Web site as part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available, free of charge, through our Web site our 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 we electronically file these materials with, or otherwise furnish them to, the Securities and Exchange Commission ("SEC").
        Our registered trademarks or service marks include: Application Lifecycle Optimization, EZ-Access, Keane, can be accessed on the Company's web site at www.keane.comKeane logo, Patcom and We Get IT Done. Other trademarks and service marks include: Application Development and Integration Services, Application Development and Management Outsourcing Services, Enterprise Application Integration, Keane InSight and VistaKeane.


All other trademarks, service marks, or through its
Investor Relations line at 1-800-75-KEANE.

SERVICES

Keane offers a full rangetradenames referenced in this Form 10-K are the property of services that spantheir respective owners.
SERVICES
        We seek to improve our clients' business performance by maximizing the full Plan, Buildeffectiveness of their business and Manage
life cycle. Specifically, Keane focusesIT operations. We apply our rigorous processes and management disciplines to our client engagements, enabling clients to reduce costs and increase organizational flexibility and efficiency. We focus on three highly synergistic service offerings:
        Services are delivered using our global delivery model, from operations in the Build sector. As part of
its Build services, the Company also provides a full-line of healthcare
information systemsU.S., UK, Canada, and related IT consulting and IT integration services for
healthcare organizations. ADM Outsourcing revenue is reportedIndia. See Note 16 "SEGMENT INFORMATION" in the Company's
Manage sector. Keane believes its broad rangenotes to the accompanying consolidated financial statements for discussion of services position it asour domestic and international revenues.
        We experience a strategic partner to clients, enabling it to identifymoderate amount of seasonality. Our consulting revenue and implement
comprehensive solutions that meet clients' specific business requirements.

Business Consulting (Plan services)

Keane's management consulting services representprofitability are affected by the number of workdays in a critical componentquarter. Typically our billable hours are reduced in the Company's ability to help clients optimize their businesses for today's economy.
The Company provides its business consulting services through Keane Consulting
Group (KCG), the Company's business and management consulting arm. A recent
study by International Data Corporation (IDC), an independent research firm,
forecasts that the worldwide market for business consulting services is expected
to grow at a compounded annual growth ratesecond half of 11% through 2005. KCG helps
companies to maximize productivity, increase revenue, reduce costs, and create
capacity for future growth by identifying high-value business opportunities and
providing clients with both strategy and implementation services. KCG delivers
its services by taking a holistic view of business processes, organizational
design and technology architecture. Its operations improvement services can be
divided into three core competency areas: insurance and financial services,
manufacturing and distribution, and technology services. Typical client
engagements include: assisting with the integration of mergers and acquisitions,
streamlining customer operations, optimizing supply chains, enhancing
customer-facing processes, and aligning IT and business strategies. KCG helps
Keane develop strong relationships with senior executives and other
decision-makers. In addition, consulting engagements often lead to follow-on IT
projects as clients rely on Keane to support an idea from its genesis through
implementation and eventual management.


                                       2



Application Development & Integration (Build services)

In an increasingly global, networked and information-based economy, application
software is becoming more complex, requiring tighter and more sophisticated
integration between front-end and back-end systems to enhance access to critical
corporate data, enable high-value process improvements, and enhance customer
service. As a result, Keane focuses its project-based Application Development
and Integration (ADI) business on the rapidly growing Enterprise Application
Integration (EAI), supply chain, and customer service areas. A recent study by
IDC forecasts that the worldwide market for systems integration services is
expected to grow at a compounded annual growth rate of 15% through 2005. As a
firm with broad-based expertise across the full spectrum of technical
requirements, Keane has become a top-tier provider of large, complex software
development and integration projects for Global 2000 companies. The Company also
provides ADI services for the public sector, which includes agencies within the
U.S. Federal government, various states and other local government entities.
Revenue from public sector business represented approximately 16.5% of Keane's
total revenue in the year, 2001. Typical client engagements includeespecially during the development of software to create an integrated supply or value chain, the
implementation of an enterprise Customer Relationship Management (CRM) solution
and its integration with an Enterprise Resource Planning (ERP) system, and the
design and implementation of an integrated online state vehicle registration and
motor carrier services system.

Keane believes that it is well positioned to capture large-scale, ADI projects
from both the commercial and public sector marketsfourth quarter, due to its core competencies
in projectthe large number of holidays and program management, IT architecture, advanced application
development, and legacy system integration. The Company anticipates that these
competencies, together with its long-term relationships with Global 2000
companies, will enable it to benefit from an economic recovery and an increase
in spending on information technology.vacation time.
Outsourcing Services
        Application Development and Management (ADM)Outsourcing.    Our Application Outsourcing (Manage services)

The need to manage critical business applications continues to expand rapidly as
companies add systems to their application portfolios. Given the need to focus
on core competencies and a growing dependence on information technology,
maximizing return on investment from existing application portfolios has become
a critical objective of many organizations. As a result, Global 2000 companies
are turning to best-of-breed outsourcing as an effective solution for building
and supporting their IT systems better, faster, and more cost-effectively.
According to IDC, the market for application outsourcing is expected to grow at
a compounded annual growth rate of 29% through 2005.

Keane's ADM Outsourcing service helpsservices help clients manage existing business systems more efficiently and more reliably, improving the performance of these applications while better controllingfrequently reducing costs. Under this service offering, Keane
assumesIn a typical Application Outsourcing engagement, we assume responsibility for the management ofmanaging a client's business applications with goals of:the goal of instituting operational efficiencies that provide cost savings
over current operations; implementing improvements that reduce time-to-market
and enhance flexibility, in responding to changing business needs; freeing up client personnel resources, and management attention for other strategic priorities; and achieving higher user satisfaction. Some outsourcing engagements include the
hiring of a client's IT personnel as part of the agreement. In these instances,
Keane trains client staff in its proprietary methodologies and processes to work
on the client outsourcing engagement.

Keane seeksWe seek to obtain competitive advantages in the ADM Outsourcingapplication outsourcing market by generating measurable client benefit, using world class methodologies,
referencing itstargeting our Global 2000 client base and emphasizing itsgenerating measurable operational and financial benefits to our clients. We achieve these client benefits through the use of our world-class methodologies, continuous process improvement, and seamless client serviceour global delivery model. On March 15, 2002, Keane
acquired SignalTree Solutions,
        Our global delivery model offers customers the flexibility and economic advantage of allocating work among a U.S.-based corporation with two development
facilitiesvariety of delivery options, including onsite at a client's facility, nearshore in Halifax, Nova Scotia and Toronto, Ontario, and offshore at one of our four locations in India. This integrated, highly flexible mix of cost-effective onsite, nearshore, and offshore delivery is now a component of most of our new outsourcing engagements. The additiondistribution of SignalTree's delivery capability expanded
Keane's flexible delivery model to include two offshore software development
centers in India. Since the benefit that Keane seeks to provide its customerswork across multiple locations is typically based on a client's cost, technology, and risk management requirements. Our project management approach ensures common methodologies and process improvements,disciplines across locations, and provides a single point of accountability to the Company's ADMclient.
        Forty-seven of our Application Outsourcing
business spans multiple vertical industries and includes a broad range of
technologies.

The effectiveness of Keane's ADM Outsourcing capability is demonstrated by the
fact that 37 of its outsourcing engagements have been independently assessed at Level 3 or 4 on the Software Engineering Institute's (SEI)("SEI") Capability Maturity Model (CMM)("CMM"). In addition, SignalTree's technology centersour four ADCs in India, located in Hyderabad, Delhi and Delhi
areGurgaon, were independently evaluated at Level 5 on the SEI CMMCMMI and comply with ISO 90019001: 2000 standards. Our ADC in Halifax, Nova Scotia, has also been independently evaluated at Level 5 on the SEI CMMI. The SEI CMM has five levels of process maturity, and many IT organizations typically operate at Level 1, the lowest level of maturity. Since 1997, Keane haswe have used the SEI CMM as a standard for objectively measuring itsour success in improving its client'sour clients' application management environment.environments. The SEI CMM


has become the industry's standard method for evaluating the effectiveness of an IT environment and the process maturity of outsourcing vendors.


                                       3



ADM outsourcing provides Keane with
        We enter into large, long-term contracts for the provision of Application Outsourcing services. These client engagements that usually span three-to-five years in duration. In addition, outsourcingthree to five years. Application Outsourcing projects typically supply Keaneus with contractually-obligatedcontractually obligated recurring revenue and with an incumbent position from whichability to cross-sell other solutions. The Company has
observed historicallysolutions to those clients. We believe that our ability to consistently providingprovide measurable business value withinfor an existing client accountfosters profitable, long-term client relationships and strongly positions itus to win additional outsourcing engagements, andas well as development and integration projects.
        Business Process Outsourcing.    We provide Business Process Outsourcing ("BPO") services through Keane Worldzen, our majority owned subsidiary. Keane Worldzen specializes in providing BPO services to clients with complex operational processes in the financial services, insurance, and healthcare industries, and to clients with back office processes in several industries. Keane Worldzen's deep expertise in process redesign and optimization is an important competitive differentiator. Keane Worldzen's BPO services are designed to reduce the cost of processing and increase the efficiency of our clients' business transactions, enabling companies to focus on their more strategic activities, and avoid the overhead and management distraction of non-core back-office processes. Keane Worldzen provides these low-cost, high-value outsourcing services from operations in both the U.S. and India.
Development and Integration Services
        AD&I.    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 our AD&I projects leverage "best of breed" technology platforms to support integrated development, Application Outsourcing and BPO solutions for our clients. These "best of breed" solutions are often industry-specific, and therefore leverage Keane's vertical expertise. AD&I services include custom development, Enterprise Resource Planning ("ERP") implementations, and other vertically aligned solutions.
        As a result of our significant expertise and experience, including our deep technical experience in leading edge and commercially accepted tools, we have become a top-tier provider of large, complex software development and integration projects for Global 2000 companies. We also provide AD&I services to the public sector, which includes agencies within the U.S. Federal Government, various states, and other local government entities. We believe that we are well positioned to bid on and win large-scale AD&I projects from both the commercial and public sector markets due to our core competencies in project management, integration, and global delivery. We believe that these competencies, together with our long-term relationships with Global 2000 companies, particularly with those clients for which we provide Application Outsourcing services, will provide a foundation for future growth through cross selling of Keane's complementary service offerings.
        Healthcare Solutions

Keane'sSolutions.    Our Healthcare Solutions Division (HSD)("HSD") develops and markets a complete line of patient management,open-architecture financial management, patient care, clinical operations, enterprise information, long-term care, and practice management systems for healthcare organizations, as well as related ITorganizations. The consulting, development, and IT integration of these systems is included in Development and Integration services. Keane helpsIn addition, HSD provides long-term management of these applications, which is included in Outsourcing Services.
        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. In addition, Keane's broad rangeHSD's core healthcare solutions include EZ-Access, Keane InSight, and VistaKeane. EZ-Access is a browser-based family of services help healthcare clients
address ongoing Health Insurance Portability and Accountability Act (HIPAA)
requirements. HIPAA is Federal legislationinformation systems designed to improve efficiency inaccess to patient data, reduce the national healthcare systemoccurrence of medical errors, and protect client investment in information technology. EZ-Access includes our widely installed Patcom Plus, a patient management system that is considered a


market leader by industry analysts. 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 280 hospital-based clients and approximately 4,000 long-term care facilities throughout the privacy of health information. It is
expected to have far-reaching implications on the healthcare industry'sU.S.
Other IT infrastructureServices
        IT Consulting.    Our IT Consulting services include several offerings that help companies develop and implement their IT and business operations. HSD revenuesprocess improvement strategies. Many clients engage us to provide Project Management services to ensure consistency of quality and delivery over multiple projects within a client organization. Other IT Services also includes Network Integration Planning, Strategic Information Planning, and Package Selection.
        Staff Augmentation.    Our Staff Augmentation service provides clients with a team of professionals with specialized technical skills to augment their in-house staffs. These professionals help clients develop or manage their applications or assist with short-term IT services requirements without adding to their fixed personnel costs. In many instances, we provide staff augmentation resources to clients who are currently reported
under Keane's ADI (Build) business line.

STRATEGY/DISTINCTIVE CAPABILITIES

Keane's mission is to help companies optimize business performance through the
innovative use and management of information technology (IT).also utilizing our outsourcing or AD&I services. In addition, Keane
aligns its internal focus, measurement processes,we believe that staff augmentation services provide us with a foundation from which to establish new client relationships and compensation systems to
promote the consistent generationultimately expand our base of long-term shareholder value. The Company's
visionservices by cross-selling our other offerings.
STRATEGY
        Our goal is to be recognized as one of the world's greatpremier IT services firmsand business service providers by its
customers,our clients, employees, and shareholders. Keane seeksWe believe that we can achieve this goal by helping clients improve their business and IT effectiveness through the consistent delivery of high-value development and outsourcing services. Specifically, we believe that applications services and business process services are large and synergistic growth markets, and that a significant emerging business trend is corporations leveraging Application Outsourcing, BPO, and global delivery to accomplishachieve meaningful cost reductions and business improvement. We believe that our depth of capability in each of these areas, along with our vertical expertise, strong customer relationships and process management capabilities, will enable us to capitalize on this market opportunity. We have five major strategic priorities for 2005:
Achieve sustainable revenue and earnings growth.
        Our objective is to achieve long-term revenue expansion by growing our Application Outsourcing, AD&I and BPO businesses, as well as by leveraging our strong position in less cyclical industries such as healthcare and in the public sector. We expect to increase our operating margins over the short-term by improving billing rates and utilization as the IT services sector continues its economic recovery, and by aggressively controlling selling, general, and administrative ("SG&A") expenses. Longer term, we intend to increasingly leverage lower-cost offshore resources in providing high qualityoutsourcing and effective IT solutions for its customers. The
Company endeavorsAD&I services, while continuously adjusting our expenses to create a positiveensure cost-effective delivery. We expect our ability to effectively manage our working capital, most notably Days Sales Outstanding ("DSO"), and supportive work environment for its
employeescapital spending will enable us to foster creativity, teamwork, and individual excellence.

Distinctive capabilities that enable Keanegenerate strong operating cash flow. We plan to deliver valueuse excess cash to its customers,complete attractive acquisitions and to reach its financial milestones, include a relentless focus on processes
improvement, mature competencies in projectcontinue to repurchase shares of our common stock from time-to-time.
Enhance and program management, consistent
use of methodologies, a strong quality assurance function,leverage our vertical go-to-market approach
        We are recognized by industry analysts and a seamless client
service delivery model. This model currently includes providing services to
customers on-site at a client's facility, off-site at a separate location,
near-shore at Keane's Advanced Development Center in Canada, and offshore atclients as one of the Company's two Software Development Centersleading application outsourcing vendors in India. The Company believes
that the benefits of its seamless delivery model include: the use of common
processes, management, and metrics to improve predictability; a single point of
contact to enhance accountability; the flexibility to move and balance workload
based on business need; and theNorth America, for our ability to optimize economic benefit. The
Company continuesconsistently generate measurable business value. With our entrance into the BPO market through our majority owned subsidiary, Keane Worldzen, we believe that


BPO represents a significant additional future growth opportunity for us. We have observed the convergence of applications outsourcing and BPO to be an increasing trend in client buying behavior, and feel that deep industry knowledge is increasingly an important strategic differentiator as clients decide to outsource a broader portfolio of IT and business initiatives. Accordingly, we plan to capitalize on our expertise in the financial services, insurance, healthcare and public sector verticals to go to market with integrated business solutions allowing Keane to go beyond simply delivering cost and performance improvements to our clients and allow us to deliver transformational business benefits.
Build scale and market share in growing business process outsourcing market
        We entered the BPO market in October 2003 through our majority investment in Keane Worldzen, which provides clients with high-value business process services, including process optimization and transaction outsourcing. We believe that client demand for these transformational business process services, often bundled with applications outsourcing, represents a significant future growth opportunity. As a result, in 2005, we plan to invest in itsadditional capability and scale in our BPO operations, both through Keane Worldzen and potential additional investments.
Strengthen our position as an industry leader in advanced global delivery model
        Global sourcing has become an important component of our clients' overall sourcing strategies. Use of nearshore and competencies in orderoffshore delivery enables clients to add value to its strategic service offerings and to further strengthen its
capabilities.

Keane's goal is to leverage its core competencies and financial capabilities to
gain market share and competitive strength as well as to increase shareholder
value during the current economic downturn, and to strongly position itself to
take advantageaccess a large pool of future increases in IT spending.cost-effective technical personnel, while enhancing productivity via a 24 hours a day, seven days a week development approach. As a result, the Company has
intensified its internal focusglobal delivery capability is critical for success in today's IT services market. During 2004, we significantly enhanced our global sourcing capabilities, opening a fourth offshore development center in India and a second nearshore development center in Canada. During 2005, we expect to strengthen the differentiationexpand our efforts to position Keane as a leading provider of global AD&I and outsourcing solutions by continuing to invest in our India and Canada operations.
Enhance growth and market position of its ADM Outsourcing services.positioning through Mergers and Acquisitions
        Our long-term growth strategy includes both a strong focus on organic expansion and enhanced growth through mergers and acquisitions ("M&A"). In addition,2003 and 2004, we acquired several companies that met specific strategic criteria, including enhancing Keane's capabilities and client relationships. In 2005, we will continue to proactively focus resources on identifying, evaluating, and, when appropriate, consummating M&A transactions that have the Company has
concentrated its Business Consultingpotential to create long term per share value. We proactively target applications services and Application Development and Integration
(ADI)business process services within market segments where it believes demand for such services
will increase in the event of an economic recovery. To enhance its efforts, the
Company is seekingfirms that provide scale and/or are additive to acquire otherKeane's strategic positioning.
COMPETITION
        The IT services firms, at what it considers
favorable purchase prices,market is highly competitive and driven by continual changes in order to increase its critical massclient business requirements and obtain
additional customers to which it can cross-sell its services.

Business Model

Keane remains focused on its core strengthsadvances in technology. Our competition varies by the type of service provided and follows a business model that is
intended to help the Company achieve sustainable growth. This business model
includes five major elements: recurring revenue, critical mass, operational
excellence, synergy across business units and repeatable solutions. The
combination of these elements helps Keane to mitigate short-term fluctuationsby geographic markets.
        We compete with traditional players in the IT services marketindustry, including large integrators (such as Accenture ("ACN"), Electronic Data Systems ("EDS"), Computer Sciences Corporation ("CSC"), IBM Global Services ("IBM"), and generate significant long-term per share value.

1.    Recurring Revenue - Keane believes the most important ingredient for
      long-term successPerot Systems ("PER")); offshore solution providers, including Wipro ("WIT") and Infosys ("INFY"); IT solutions providers (such as Sapient Corporation ("SAPE"), BearingPoint ("BE"), and Ciber ("CBR")); and management consulting firms (such as McKinsey and Booz Allen). Some of these competitors are larger and have greater financial resources than we do.
        We believe that competition in the IT services industry is recurring revenue. The
      Company seeksbased on firms' ability to builddeliver integrated solutions that best meet the needs of customers, provide competitive pricing, develop strong


client relationships, generate recurring revenue, through a combination of services
      provided over multi-year contracts and close customer relationships. The
      Company attemptsoffer flexible delivery options. We believe that we compete favorably with respect to increase contractually obligated recurring revenue
      with its ADM Outsourcing service, through which Keane


                                       4



      typically manages and enhances applications under three-to-five year
      contracts. These contracts provide Keane with significant opportunities
      for expansion and add-on business, while the Company's broad range of
      Plan, Build, and Manage services enables cross-selling opportunities.
      Keane's local branch presence allows the Company to gain a high degree of
      customer intimacy and an understanding of customers' evolving needs,
      providing a ready market for new services. Keane earns customer loyalty by
      providing concrete and measurable business value through the consistent,
      high quality delivery of its services.

2.    Critical Mass - Critical mass is essential for gaining market and
      financial leverage. Increasing critical mass drives down SG&A cost as a
      percentage of revenue, allows depth and breadth of capabilities, and
      builds market presence and mind share to support sales and recruiting
      efforts. Keane's strategy to achieve critical mass is to concentrate on
      business lines and geographic markets where the Company has or can
      establish leadership. These business lines are Business Consulting,
      Application Development & Integration, and ADM Outsourcing. Keane plans to
      focus on geographic markets within North America and Western Europe and
      strives to achieve significant market share in those markets through
      organic growth, supplemented by acquisitions.

3.    Operational Excellence - Already a recognized leader in providing cost
      effective and predictable delivery of services to clients, Keane is
      committed to operational excellence and continuous process improvement in
      all of its functions. Being efficient enables Keane to offer its customers
      high value services at competitive rates without compromising the
      Company's performance margins. Keane achieves operational excellence
      through critical mass, lower travel costs due to its local branch
      presence, process improvements, high utilization of staff, and its
      flexible and integrated client service delivery model. Keane's dedication
      to continuous process improvement is demonstrated through investments in
      measurement programs and the creation of the Keane Center for Excellence
      focused on quality and efficiency enhancements. Operational efficiency
      enables Keane to maintain profitability regardless of macro-economic
      conditions.

4.    Synergy Across Business Units - As a services company dedicated to turning
      customer technology challenges into business opportunities, it is
      imperative that Keane share resources and organizational experience. No
      single business unit can have all of the necessary talent and knowledge to
      meet every possible challenge. Keane strives to be a boundaryless
      organization serving its customers through a local relationship while
      providing access to the best solutions and resources across the Company.
      Keane seeks to accomplish this goal through knowledge management processes
      and systems, methodologies, comprehensive training programs, and strategic
      practices. The responsibilities of strategic practices include collecting,
      refining, and disseminating Keane's intellectual capital through the
      identification of best practices and the development of world-class
      methodologies. These practices enable Keane's branch offices to better
      sell and deliver the Company's business solutions.

5.    Repeatable Solutions - Well-defined, repeatable solutions enable Keane to
      leverage its extensive distribution channel and address widespread market
      needs. Based on extensive organizational experience, Keane's solutions are
      process intensive and backed by well defined methodologies and management
      disciplines. When combined with a strong project management capability,
      these characteristics ensure solutions that are repeatable, measurable,
      and trainable. These factors, in turn, enhance quality, customer
      satisfaction, and profitability.

factors.
CLIENTS

Keane's
        Our clients consist primarily of Global 2000 organizations, government agencies, and healthcare organizations. These organizations generally have significant IT budgets and frequently depend on service providers to help them fulfill
their business optimization and software design, development, implementation,
and management needs.


                                       5

for outsourcing services.
        In 2001, the Company2004, we derived itsour revenue from the following industry groups:

Industry                                  
Industry
Percentage of Revenue
Financial services30.9%
Healthcare19.2
Government18.7
Manufacturing12.0
High Technology/Software8.8
Other3.8
Energy/Utilities2.8
Retail/Consumer goods2.7
Telecommunications1.1
        Our 10 largest clients, including various agencies of Revenue
- --------                                  ---------------------
Manufacturing                                      21.7%
Financial Services                                 21.6%the Federal Government,                                         16.5%
Healthcare                                         12.3%
Energy/Utilities                                    9.5%
High Technology/Software                            8.9%
Retail/Consumer Goods                               5.2%
Other                                               2.8%
Telecommunications                                  1.5%

The following table is a representative list of clients for which Keane provided
services in 2001:

- --------------------------------------------------------------------------------
3M Corporation                               McDonald's Corporation
- --------------------------------------------------------------------------------
Allmerica                                    MemorialCare
- --------------------------------------------------------------------------------
Aon                                          Miller Brewing
- --------------------------------------------------------------------------------
AT&T Corporation                             State of Missouri
- --------------------------------------------------------------------------------
Bose Corporation                             National Assn. of Security Dealers
- --------------------------------------------------------------------------------
Baxter Healthcare Corporation                State of New York
- --------------------------------------------------------------------------------
Baylor Health Care System                    State of North Carolina
- --------------------------------------------------------------------------------
Cargill                                      Northern Telecom, Inc.
- --------------------------------------------------------------------------------
Carrier                                      State of Ohio
- --------------------------------------------------------------------------------
Centrica                                     Optimum Logistics
- --------------------------------------------------------------------------------
CGU                                          Pfizer
- --------------------------------------------------------------------------------
City of Chicago                              Pharmacia & Upjohn
- --------------------------------------------------------------------------------
Crawford & Company                           Princess Cruise Lines
- --------------------------------------------------------------------------------
U.S. Department of Justice                   Procter & Gamble Company
- --------------------------------------------------------------------------------
Eastman Kodak Company                        Putnam Investments
- --------------------------------------------------------------------------------
Ecolab                                       Reader's Digest Association, Inc.
- --------------------------------------------------------------------------------
Executive Office for U.S. Attorneys          Robert Wood Johnson Hospital
- --------------------------------------------------------------------------------
Fidelity                                     Security Benefit Group
- --------------------------------------------------------------------------------
Farmers Insurance Group                      State Street Bank & Trust
- --------------------------------------------------------------------------------
First Bank                                   Sony
- --------------------------------------------------------------------------------
Ford                                         Square D
- --------------------------------------------------------------------------------
General Electric Company                     Supervalu
- --------------------------------------------------------------------------------
Great American Insurance                     TracFone
- --------------------------------------------------------------------------------
GMAC                                         Transcontinental Gas Pipeline
- --------------------------------------------------------------------------------
Guardian Life Insurance                      Tufts Health Plan
- --------------------------------------------------------------------------------
Honeywell                                    Unipart
- --------------------------------------------------------------------------------
International Business Machines Corporation  U.S. Air Force
- --------------------------------------------------------------------------------
Invacare                                     U.S. Customs
- --------------------------------------------------------------------------------
J.P. Morgan                                  West Publishing
- --------------------------------------------------------------------------------
Johns Hopkins Hospital                       Whirlpool Corporation
- --------------------------------------------------------------------------------
Liberty Mutual Insurance Co.                 Zurich Financial Services
- --------------------------------------------------------------------------------
State of Maine
- --------------------------------------------------------------------------------

Keane's ten largest clients accounted for approximately 32%35.9%, 35.6%, and 30%29.0% of the
Company'sour total revenuerevenues during each of the years ended December 31, 20012004, 2003, and 2000,2002, respectively. The Company'sOur two largest clients during 20012004 and 20002003 were
various agencies within the Federal Government and IBM.PacifiCare Health Systems, Inc. ("PacifiCare"), with approximately 9.4% and 5.3% of our total revenues in 2004, respectively and approximately 9.2% and 6.5% of our total revenues in 2003, respectively. In 2002, the Federal Government and IBM were our two largest clients. Federal Government contracts accounted for approximately 6.9%7.6% of our total revenues in 2002 and 7.5% of the Company's total
revenue in 2001 and 2000, respectively. IBM accounted for approximately 6.5% and
6%4.4% of the Company'sour total revenue for 2001 and 2000, respectively.revenues in 2002. A significant decline in revenue from IBM or the Federal Government or PacifiCare would have a material adverse effect upon the Company'son our total revenue.


                                       6

 With the exception of IBM and the Federal Government, PacifiCare, and IBM, no single client accounted for more than 5% of the Company'sour total revenuerevenues during any of the three years ended on or before December 31, 2001.2004.
        In accordance with industry practice, many of the Company'sour orders are terminable by either the client or the Companyus on short notice. The Company doesMoreover, any and all orders relating to the Federal Government may be subject to renegotiation of profits or termination of contract or subcontractors at the election of the Federal Government. We had orders at December 31, 2004 of approximately $600.4 million, representing backlog for the fiscal year ended December 31, 2005. Because our clients can cancel or reduce the scope of their engagements on short notice, we do not believe that backlog is material to itsa reliable indication of future business. The Company had orders at
December 31, 2001 of approximately $843 million, in comparison to orders of
approximately $740 million at December 31, 2000.


SALES, MARKETING, AND ACCOUNT MANAGEMENT

Keane markets its
        We market our services and software products through itsour direct sales force, which is based in its branchour field offices and regional areas, as well as through its
centralized Strategic Practices Group. Keane'sour Application Outsourcing, BPO and vertical practices. Our account executives are vertically aligned, and 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. TheseUnder the direction of Regional Sales Vice Presidents, these account executives identify IT services needs within clients and are responsible for ensuringdeveloping solutions that meet these requirements. In addition, account executives ensure that clients receive responsive service and that Keane's software solutions achieve clientachieves their objectives. Account executives receive in-depth training in Keane'sour sales processes and service


offerings and are supported by enterprise knowledge management systems in order to efficiently share organizational learning. Account executives are empowered
to collaborate with Keane's Strategic Practice Group,our Application Outsourcing and BPO practices, vertical practices, other branchregional offices, and Advanced Development Centersour Global Services Group as needed to address specialized customer requirements.
        Our Outsourcing Business Development Group employs specialized senior sales professionals to respond to client requirements and to pursue and close large, strategic outsourcing engagements. Application Outsourcing engagements provide a strong base of recurring revenue and afford the opportunity to cross-sell our other strategic services, including Business Process Services delivered through Keane focuses itsWorldzen.
        We focus our marketing efforts on organizations with significant IT budgets and recurring software development and outsourcing needs. The Company maintainsWe maintain a corporate branding campaign focused on communicating Keane'sour value proposition of reliably delivering application solutions with quantifiable business results. These branding efforts are actively executed through multiple channels.
EMPLOYEES

On
        As of December 31, 2001, Keane2004, we had 7,8718,548 total employees, including 6,5667,235 business and technical professionals whose services are billable to clients. The CompanyThis includes a base of 1,733 employees in India, including our Keane Worldzen operations. We sometimes supplements itssupplement our technical staff by utilizing subcontractors.

Management believes Keane'ssubcontractors, which as of December 31, 2004, consisted of 585 full-time professionals.
        We believe our growth and success are dependent on the caliber of itsour people and will continue to dedicate significant resources to hiring, training and development, and career advancement programs. Keane'sOur efforts in these areas are grounded in the Company'sour core values, namelynamely: respect for the individual, commitment to client success, achievement through teamwork, integrity, continuous improvement, and continuous improvement. Keane strivescommitment to shareholder value. We strive to hire, promote, and recognize individuals and teams who embody these values.

The Company
        We generally doesdo not have employment contracts with itsour key employees. None of the Company'sour employees are subject to a collective bargaining agreement. The Company believesagreement and we believe that itsour relations with itsour employees are good.

COMPETITION

The IT services market is highly competitive and driven by continual changes in
client 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 (such as Accenture, Electronic Data Systems (EDS),
Computer Sciences Corporation (CSC), and IBM Global Services); IT solutions
providers (including Sapient Corporation, American Management Systems, Logica,
and KPMG); and management consulting firms (e.g., KPMG Consulting, 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 software development and management
requirements.

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, compete cost effectively, develop strong client
relationships, generate recurring revenue, offer flexible client service
delivery options and use of disciplined methodologies. The Company believes that
it competes favorably with respect to those factors. There can be no


                                       7



assurance that the Company will continue to compete successfully with its
existing competitors or will be able to compete successfully with any new
competitors.



ITEM 2. PROPERTIES

The
        Our principal executive office as of the Company isDecember 31, 2004, was located at Ten100 City Square, Boston, Massachusetts 02129, in an approximately 34,00095,000 square foot office building which is leased from City Square Limited Partnership. Some of the
Company's officers, directors, and shareholders are limited partners in this
partnership. See Item 13 -- "Certain Relationships and Related Transactions." At
December 31, 2001, the Company leased and maintained sales and support offices
in more than fifty locations in the United States and three locations in the
United Kingdom. The aggregate annual rental expense for the Company's sales and
support offices was approximately $16.6 million in 2001. The aggregate annual
rental expense for all of the Company's facilities was approximately $19.4
million in 2001. For additional information regarding the Company's lease
obligations, see Note I 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 under construction at One Chelsea Street in Boston, Massachusetts (the
"New Facility"). The Company will lease approximately 57% of the New Facility
and the remaining 43% 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,Keane, and his immediate family members. On October 31, 2001, Gateway LLC entered into a $39.4 million construction loan
(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.

The Company currently expects to occupy the new facility in January 2003. The
Company will consolidate several existing facilities it has in the Boston area
as part of this move.See Item 13 "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
        Based upon itsour knowledge of rental payments for comparable facilities in the Boston area, the Company believeswe believe that the rental payments under the lease for the New Facility,100 City Square, 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
Companywe entered into the lease, as favorable to the Companyus as those which could have been obtained from an independent third party.
        On December 31, 2004, we leased and maintained sales and support offices in more than 70 locations in North America, the UK, and India. The aggregate annual rental expense for our sales and support offices was approximately $15.7 million in 2004. The aggregate annual rental expense for all of our facilities was approximately $16.4 million in 2004. For additional information regarding our lease obligations, see Note 15 "RELATED PARTIES, COMMITMENTS, AND CONTINGENCIES" in the notes to the accompanying consolidated financial statements.


ITEM 3. LEGAL PROCEEDINGS

On September 25, 2000, the U.S. Equal Employment Opportunity Commission ("EEOC")
commenced a civil action against Keane in the United States District Court for
the District of Massachusetts alleging that the Company discriminated against
former employee Michael Randolph and other unspecified "similarly-situated
individuals" by acts of racial harassment, retaliation and constructive
discharge. The EEOC has not specified the amount of damages it is seeking. The
parties
        We are presently engaged in discovery. Because the lawsuit is in pre-trial
stages, management is unable to estimate the effect, if any, it may have on its
consolidated financial position or consolidated results of operations.

The Company is involved in othervarious litigation and various legal matters, which have arisen in the ordinary course of business. The Company doesWe do not believe that the ultimate resolution of these matters will have a material adverse effect on itsour financial condition, results of operations, or cash flows. The
Company believes these litigation matters are without merit and intends to
defend these matters vigorously.


                                       8



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's security holders during the
fourth quarter of the year ended December 31, 2001.


        None.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY:        The executive officers and directors of the CompanyKeane as of March 3, 2005 are as follows:

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

John F. Keane (3)                               70                 Chairman of the Board and Director
Brian T. Keane                                  41           President, Chief Executive Officer and Director
John J. Leahy                                   44          Senior Vice President and Chief Financial Officer
Robert B. Atwell                                53      Senior Vice President - North American Branch Operations
Irene Brown                                     47                        Senior Vice President
Raymond W. Paris                                64            Senior Vice President - Healthcare Solutions
Renee Southard                                  47               Senior Vice President - Human Resources
Linda B. Toops                                  47                        Senior Vice President
John H. Fain                                    53                 Senior Vice President and Director
Maria A. Cirino (1)(2)                          38                              Director
Philip J. Harkins(2)(3)                         54                              Director
Winston R. Hindle, Jr. (1)(3)                   71                              Director
John F. Keane, Jr. (3)                          42                              Director
John F. Rockart (1)(2)                          70                              Director
Stephen D. Steinour (1)(2)                      43                              Director

Name
 Committee
 Age
 Position
John F. Keane   73 Chairman of the Board and Director
Brian T. Keane   44 President, Chief Executive Officer and Director
John J. Leahy   46 Senior Vice President of Finance and Administration and Chief Financial Officer
Russell J. Campanello   49 Senior Vice President
Robert B. Atwell   56 Senior Vice President
Georgina L. Fisk   36 Vice President
Raymond W. Paris   67 Senior Vice President
Laurence D. Shaw   43 Senior Vice President
Maria A. Cirino (2)(3) 41 Director
John H. Fain   56 Director
Philip J. Harkins (2)(3) 57 Director
Winston R. Hindle, Jr. (1)(3) 74 Director
John F. Keane, Jr.   45 Director
John F. Rockart (1)(2) 73 Director
Stephen D. Steinour (1)(2) 46 Director
James D. White (2)(3) 44 Director
(1) Member of 
Audit Committee.
Committee

(2) Member of 
Compensation Committee.
Committee

(3) Member of
Nominating and Corporate Governance and Nominating Committee
        All Directors hold office until the next annual meetingAnnual Meeting of the stockholdersStockholders and until their successors have been elected and qualified. Officers of the CompanyKeane serve at the discretion of theour Board of Directors.
        Mr. John Keane, the founder of the Company,Keane, has beenserved as Chairman of the Board of Directors since the Company'sKeane's incorporation in March 1967. Mr. Keane served as Chief Executive Officer and President of the CompanyKeane 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.John Keane is also a director of Firstwave Technologies, Inc.American Power Conversion Corporation, a designer, developer, and Perkin Elmer, Inc.manufacturer of power protection and management solutions for computer, communications, and electronic applications. Mr. John Keane is the father of Mr. Brian Keane, the President, Chief Executive Officer, and a director of Keane, and Mr. John Keane, Jr., a director of Keane.
        Mr. Brian Keane joined the CompanyKeane in 1986 and has served as the Company'sKeane's President and Chief Executive Officer since November 1999.1999 and as a director of Keane since May 1998. From September 1997 to November 1999, Mr. Keane served as Executive Vice President and a member of the Office of the President of the Company.Keane. From December 1996 to September 1997, he served as Senior Vice President. From December 1994 to December 1996, he was an Area Vice President.President of Keane. 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,Keane, and athe brother of John Keane, Jr., a director.
        Mr. Leahy joined Keane in August 1999 as Senior Vice President of Finance and Administration and Chief Financial Officer. From 1982 to August 1999, Mr. Leahy was employed by PepsiCo, Inc., a multinational consumer products corporation, 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. Campanello joined Keane in September 2003 as Senior Vice President of Human Resources. From July 2000 to February 2003, he served as Chief People Officer at NerveWire, a technology and business consulting company. From January 1998 to July 2000, he led the human resource function at Genzyme Corporation, a biotechnology company.
        Mr. Atwell initially joined Keane in 1974 and held a number of positions through 1986. Mr. Atwell left Keane from 1986 to 1991. In 1991, Mr. Atwell rejoined Keane when we acquired a branch of Broadway and Seymour, a regional applications services company where Mr. Atwell was serving as Vice President. Since that time, Mr. Atwell has held several positions with Keane and has held the position of Senior Vice President of North American Branch Operations since 1999.
        Ms. Fisk joined Keane in August 1998 as Marketing Manager of Keane Ltd in the UK. From October 2000 to January 2001, Ms. Fisk served as the Director of Marketing of Keane Ltd in the UK. Since January 2001, Ms. Fisk has served as Director of Marketing for Keane, Inc. and in January 2004, was promoted to Vice President, Marketing of Keane, Inc.
        Mr. Paris joined Keane in November 1976. Mr. Paris has served as Senior Vice President of Healthcare Solutions since January 2000 and served 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 Keane in September 2002 as 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. During 2004, Mr. Shaw was promoted to Senior Vice President, International Operations for Keane, Inc.
        Ms. Cirino has served as a director of Keane since July 2001. From February 2000 to February 2004, Ms. Cirino was CEO and Chairman of Guardent, Inc., ("Guardent") a managed security services corporation. On February 27, 2004, Guardent was acquired by VeriSign, Inc., ("VeriSign"), a provider of critical infrastructure services for Internet and telecommunications networks. Since then, Ms. Cirino has held the position of Senior Vice President of VeriSign Managed Security Services, a division of VeriSign. From November 1999 to February 2000, Ms. Cirino served as Vice President of Sales and Marketing for Razorfish Inc., a strategic digital communications company. From July 1997 to November 1999, Ms. Cirino served as Vice President of Sales and Marketing for iCube, Inc., a systems integration company, which was acquired by Razorfish in November 1999.
        Mr. Fain has served as a director of Keane since November 2001 and served as Senior Vice President of Keane from November 2001 to March 2002. Prior to joining Keane, Mr. Fain was the founder, Chief Executive Officer, and Chairman of the Board of Directors of Metro Information Services Inc. ("Metro"), a provider of IT consulting, and custom software development services and solutions, which was acquired by Keane in November 2001. Mr. Fain's role at Metro also included serving as President from July 1979 until January 2001.
        Mr. Harkins has served as a director of Keane 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 Keane.
        Mr. Hindle has served as a director of Keane 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, a computer systems and services firm. Mr. Hindle is also a director of Mestek, Inc., a public company that manufactures and markets industrial products.
        Mr. John Keane, Jr. has beenserved as a director of the CompanyKeane since May 1998. Mr. Keane is the founder of ArcStream Solutions, Inc., a consulting and systems integration firm focusing on mobile and wireless solutions, and has been its President and Chief Executive Officer since July 2000. From September 1997 to July 2000, he was Executive Vice President and a member of the Office of the President of the
Company.Keane. From December 1996 to September 1997, he 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 9

served as Director of Corporate Development. John Keane, Jr. is a son of John Keane, the founder and Chairman of the Company,Keane, and athe brother of Brian Keane.

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. Atwell joined the Company in 1974, served as Branch Manager from 1974 to
1985 and as head of 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 as Senior Vice President of
North American Branch Operations from 1999 to present.

Ms. Irene Brown joined the Company in August 1998 and
        Dr. Rockart has served as a Senior
Vice President since January 2001. From January 2000 to December 2000, Ms. Brown
served as a Vice President of the Company. From August 1998 to December 1999 she
served as Managing Director -Keane Limited and from August 1975 to July 1998 Ms.
Brown was employed by Icom Solutions, most recently as Managing Director.

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.

Ms. Southard joined the Company in July 1983. Ms. Southard has served as Senior
Vice President - Human Resources since December 1999. Prior to this, Ms.
Southard was Vice President - Human Resources from December 1995 to December
1999. 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.

Ms. Linda Toops joined the Company in August of 1992. Ms. Toops has served as
Presidentdirector 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.

Mr. Fain has been a director and Senior Vice President of the Company since
November 2001. 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.

Ms. Cirino has been a director since July 2001. Since 2000, Ms. Cirino has held
the position of CEO and Chairman of Guardent. Prior to 2000, Ms. Cirino served
as Vice President of Sales and Marketing for Razorfish. From 1997 to 1999, Ms.
Cirino held the same position of Vice President of Sales and Marketing for
I-cube, 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. Ms.
Cirino is also a director of Corex Technologies, Inc.

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.
Hindle is also a director of Clare Corporation, Mestek, Inc. and CareCentric,
Inc.


                                       10



Dr. Rockart has been a director since the Company'sKeane'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 was the Director of the Center for Information Systems Research from 19761998 to 2000. Dr. Rockart is also a director of Comshare, Inc.Selective Insurance Group, a public holding company for property and casualty insurance companies.
        Mr. Steinour has beenserved as a director of Keane since July 2001. He currently servesSince July 2001, Mr. Steinour has served as the Chief Executive Officer of Citizens Bank of Pennsylvania. PriorFrom January 1997 to his appointment as Chief
Executive,July 2001, Mr. Steinour served as Vice Chairman of the Wholesale and Regional
Banking Division at Citizens Bank. Before joining Citizens Bank, heFinancial Group, a commercial bank holding company. From October 1992 to December 1996, Mr. Steinour served as the Division Executive at Recoll Management in Boston and as Executive Vice President at Bankand Chief Credit Officer, as well as Managing Director, of New England's Controlled Loan Department.

Compensationthe Citizens Wholesale Banking Division within Citizens Financial Group.
        Mr. White has served as director of Keane since February 2004. Since July 2002, Mr. White has served as the Senior Vice President of Business Development for The Commercial Operations North America of The Gillette Company. From June 1986 to May 2002, Mr. White was employed by Nestlé, during which time he held a number of positions, serving most recently as the Vice President of Customer Interface for Nestlé Purina Pet Care Company.


        The compensation of the non-employee directors currently consists of an annual
director's fee of $4,000 plus $1,000 and expenses for each meetingmembers of the Board of Directors attended.is as follows:
Compensation
Amount
Annual retainer$20,000

Additional compensation:

Fee per Board Meeting    2,000
Annual fee for Chairperson of Nominating and Corporate 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 BoardNo additional fee (part of annual retainer)
Initial stock option grant for a new Director10,000 shares of common stock to be granted on the date of election. These options vest in three equal annual installments and have an exercise price equal to the closing price of our common stock on the NYSE on the date of grant.
Annual stock option grant5,000 shares of common stock to be granted on the date of each Annual Meeting. These options vest in three equal annual installments and have an exercise price equal to the closing price of our common stock on the NYSE on the date of grant.
        The compensation of our non-employee directors is determined on an approximate 52-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 our common stock as reported on the NYSE 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 periodic stock option grantsoptions under the Company'sour stock incentive plans. In July 2001, Ms.
Cirino and Mr. Steinour, who joined the Board of Directors in July 2001, each
receivedDuring 2004, we did not grant stock options to purchase 10,000 shares ofnon-employee directors, other than the Company's Common Stock. In
December 2000, all other outside directors received options to purchase 10,000
shares ofinitial stock option grant or the Company's Common Stock.annual stock option grant discussed above. Directors who are officers or employees of the CompanyKeane do not receive any additional compensation for their services as directors.


                                       11




PART II
- -------


ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS The Company'sAND ISSUER PURCHASES OF EQUITY SECURITIES
        Our authorized capital stock consists of 200,000,000 shares of Common
Stock,common stock, $.10 par value per share; 503,797 shares of Class B Common Stock,common stock, $.10 par value per share;share, and 2,000,000 shares of Preferred Stock,preferred stock, $.01 par value per share. As of March 8, 2002,3, 2005, there were 75,475,07162,367,269 shares of Common Stockcommon stock outstanding and held of record by approximately 2,4822,135 registered stockholders;
284,891stockholders and no shares of Class B Common Stock outstanding and heldcommon stock or preferred stock outstanding. Effective February 1, 2004, each share of record by
approximately 110 registered stockholders; and no sharesour Class B common stock, $.10 par value per share, was automatically converted into one share of Preferred Stock
outstanding.

common stock.
COMMON STOCK AND CLASS B COMMON STOCK:
        Voting.    Each share of Common Stockour common stock is entitled to one vote on all matters submitted to stockholders and each share of Class B Common Stock is entitled to
ten votes on all matters submitted to stockholders. The holders of Common Stock
and Class B Common 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 Stock and Class B Common Stock are required with respect to
amendments to the articles of organization that alter or change the powers,
preferences or special rights of their respective classes or as to affect them
adversely, and with respect to such other matters as may require class votes
under Massachusetts law. Voting for directors is non-cumulative.
        On January 13, 2004, we announced that our Board of Directors voted to convert all of the outstanding shares of Class B common stock into shares of our common stock on a one-for-one basis, effective February 1, 2004. As of March 8, 2002,December 31, 2003, the Class B Common Stockcommon stock represented less than 1% of the
Company'sour outstanding equity, but had approximately 4%4.3% of the combined voting power of the Company's outstanding Common Stock and Class B Common Stock. The
substantial voting rights of the Class B Common Stock may make Keane less
attractive as the potential target of a hostile tender offer or other proposal
to acquire the stock or business of Keane and render merger proposals more
difficult, even if such actions would be in the best interests of the holders of
the Common Stock.our combined stock.
        Dividends and Other Distributions.    The holders of Common Stock and Class B
Common Stockcommon stock are entitled to receive ratably such dividends, if any, as may be declared by Keane'sour Board of Directors, out of funds legally available therefor,
except that the Board of Directors may not declare and pay a regular quarterly
cash dividend on the shares of Class B Common Stock unless a noncumulative 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.therefore. In the event of a liquidation, dissolution, or winding up of Keane, holders of Common Stock and Class B Common Stockcommon stock have the right to ratable portions of Keane'sour net assets after the payment of all debts and other liabilities.

Trading Markets. Shares of Class B common Stock are not transferable by a
stockholder except for transfers:

            .     By gift,
            .     In the event of the death of a stockholder, or
            .     By a trust to a person who is the grantor or a principal
                  beneficiary of that trust.

Individuals or entities receiving shares of Class B Common Stock pursuant to
these transfers are referred to as "permitted transferees." The Class B Common
Stock is not listed or traded on any exchange or in any market, and no trading
market exists for shares of the Class B Common Stock. The Class B Common Stock
is, however, convertible at all times, and without cost to the stockholder, into
shares of Common Stock on a share-for-share basis. Shares of Class B Common
Stock are automatically converted into an equal number of shares of Common Stock
in connection with any transfer of those shares other than to a permitted
transferee. In addition, all of the outstanding shares of Class B Common Stock
are convertible into shares of Common 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
Class B Common Stock without stockholder approval. All shares of Class B Common
Stock converted into Common Stock are retired and may not be reissued.
        Other Matters.    The holders of Common Stock and Class B Common Stockcommon stock have no preemptive rights or except as described above, rights to convert their stock into any other securities and are not subject to future calls or assessments by the Company.Keane. The Common Stock iscommon stock was listed on the American Stock Exchange ("AMEX") under the symbol "KEA" through October 29, 2003. On October 30, 2003, we began trading our common stock on the NYSE under the symbol "KEA." All 12

outstanding shares of Common Stock and Class B Common Stockcommon stock are fully paid and nonassessable.non-assessable. The rights, preferences, and privileges of holders of Common Stock
and Class B Common Stockcommon stock are subject to, , and may be adversely affected by, the rights of the holders of shares of any series of preferred stock, which the
Companywe may designate and issue in the future.
PREFERRED STOCK: The Company's ArticlesSTOCK
        Our articles of Organizationorganization authorize the issuance of up to 2,000,000 shares of Preferred Stock.preferred stock. Shares of Preferred Stockpreferred stock may be issued from time to timetime-to-time in one or more series, and theour 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 series of Preferred Stock,preferred stock, and to fix the number of shares of any such series of Preferred Stockpreferred stock without any further vote or action by the stockholders. The voting and other rights of the holders of Common Stock and Class B Common Stockcommon stock will be subject to, and may be adversely affected by, the rights of holders of any Preferred Stockpreferred stock that may be issued in the future. The issuance of shares of Preferred Stock,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 hasKeane. We have no present plans to issue any shares of Preferred Stock.

preferred stock.


PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY: The Company's Common Stock isPOLICY
        Our common stock was traded on the American Stock ExchangeAMEX from January 1, 2003 to October 29, 2003 under the symbol "KEA." We began trading our common stock on the NYSE under the symbol "KEA" on October 30, 2003. The following table sets forth, for the periods indicated, the high and low closingsales price per share as reported by AMEX and NYSE, as the American Stock Exchange.

                                   Stock Price

                                                        High               Low
                                                       -------           -------

2001
First Quarter                                          $ 18.63           $  9.76
Second Quarter                                           22.00             11.80
Third Quarter                                            19.90             12.95
Fourth Quarter                                           19.70             13.41

2000
First Quarter                                          $ 30.94           $ 22.19
Second Quarter                                           29.38             20.38
Third Quarter                                            25.00             15.84
Fourth Quarter                                           15.95              9.75case may be.
Stock Price
Period
 High
 Low
2004      
First Quarter $18.20 $14.00
Second Quarter  16.44  12.68
Third Quarter  15.67  12.70
Fourth Quarter  16.39  14.52

2003
 
 
 
 
 
 
First Quarter $10.09 $6.90
Second Quarter  14.00  7.80
Third Quarter  15.19  12.30
Fourth Quarter  15.13  12.72
        The closing price of the Common Stockour common stock on the American Stock ExchangeNYSE on March 8,
20023, 2005 was $16.85.

The Company has$13.32.
        We have not paid any cash dividend since June 1986. The CompanyWe currently intendsintend to retain all of itsour earnings to finance future growth and therefore doesdo not anticipate paying any cash dividend in the foreseeable future. Our $50.0 million credit facility with two banks contains restrictions that may limit our ability to pay cash dividends in the future.
The Company's Articlesfollowing table provides information about purchases by Keane during the three months ended December 31, 2004 of Organization restrict the abilityequity securities that are registered by Keane pursuant to Section 12 of the Exchange Act:
ISSUER PURCHASES OF EQUITY SECURITIES
Period
Total
Number of
Shares (or Units)
Purchased (1)
Average Price
Paid per Share
(or Unit)
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or Programs (2)
Maximum Number of Shares that
May Yet Be Purchased
Under the Plans or Programs

(a)

(b)

(c)

(d)

10/01/04-10/31/04—$——2,871,600
11/01/04-11/30/04—$——2,871,600
12/01/04-12/31/04—$——2,871,600
Total:—$——2,871,600
(1)
For the three months ended December 31, 2004, we did not repurchase any of our common stock

(2)
Our Board of Directors approved the repurchase by us of 3.0 million shares of our common stock pursuant to declare regular quarterly dividendsthe June 2003 Program and 3.0 million shares of our common stock pursuant to the June 2004 Program. The repurchases may be made on the Class B Common Stock.open market or in negotiated transactions, and the timing and amount of shares to be purchased will be determined by our management based on its evaluation of market and economic conditions and other factors. The expiration date of the June 2003 Program was June 12, 2004; as of the expiration date of the June 2003 program we had purchased 1,817,700 shares. Unless terminated earlier by resolution of our Board of Directors, the June 2004 Program will expire upon the earlier of the date we repurchase all shares authorized for repurchase thereunder or June 13, 

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)



                                         First Quarter    Second Quarter   Third Quarter    Fourth Quarter
                                         -------------    --------------   -------------    --------------

Year Ended December 31, 2001

Total revenues                               $ 208,346        $ 196,995        $ 186,637        $ 187,181
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)                .12              .10              .08             (.04)
Net income (Loss) per share (diluted)              .12              .10              .08             (.04)

Year Ended December 31, 2000

Total revenues                               $ 216,208        $ 221,799        $ 219,671        $ 214,278
Income (Loss) before income taxes                9,265           13,400           13,884           (2,363)
Net income (Loss)                                5,511            7,975            8,260           (1,392)
Net income (Loss) per share (basic)                .08              .11              .12             (.02)
Net income (Loss) per share (diluted)              .08              .11              .12             (.02)




                                       14

2005.


ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(IN THOUSANDS EXCEPT
Years ended December 31,
 2004
 2003
 2002
 2001
 2000
 
(IN THOUSANDS, EXCEPT PER SHARE DATA)

  
  
  
 
Income Statement Data:                
Revenues $911,543 $804,976 $873,203 $779,159 $871,956 
Operating income  51,433  42,180  10,357  19,753  27,921 
Net income (3)  32,282  29,222  8,181  17,387  20,354 
Basic earnings per share  0.52  0.44  0.11  0.25  0.29 
Diluted earnings per share (1) $0.48 $0.43 $0.11 $0.25 $0.29 
Basic weighted average common shares outstanding  62,601  65,771  74,018  68,474  69,646 
Diluted weighted average common shares and common share equivalents outstanding (1)  71,807  70,817  74,406  69,396  69,993 

Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total cash and marketable securities $199,152 $206,136 $68,255 $129,243 $115,212 
Total assets  804,194  793,101  685,674  679,903  463,594 
Total debt (2)  190,952  193,371  45,647  15,357  8,616 
Stockholders' equity  461,703  458,132  490,584  529,173  370,677 
Book value per share $7.42 $7.20 $7.06 $7.00 $5.48 
Number of shares outstanding  62,184  63,629  69,521  75,509  67,675 

Financial Performance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue (decline) growth  13.2% (7.8)% 12.1% (10.6)% (16.2)%
Net margin  3.5% 3.6% 0.9% 2.2% 2.3%
(1)
Reflects the adoption of Emerging Issues Task Force ("EITF") Issue No. 04-8, "The Effect of Contingently Convertible Debt on Diluted Earnings per Share." See Note 12 "EARNINGS PER SHARE AMOUNTS)



Year Ended December 31,                    2001               2000               1999                1998               1997
- ------------------------------------------------------------------------------------------------------------------------------

Income Statement Data:
  Total revenues                        $ 779,159          $ 871,956          $ 1,041,092          $1,076,198         $706,801
  Operating income                         19,753             27,921              116,466             170,187           85,163
  Net income                               17,387             20,354               73,074              96,349           51,371
  Net income per share (basic)                .25                .29                 1.02                1.36              .73
  Net income per share (diluted)              .25                .29                 1.01                1.33              .72
  Weighted average common                  68,474             69,646               71,571              71,053           70,096
      shares outstanding (basic)
  Weighted average common                  69,396             69,993               72,395              72,284           71,603
     shares and common share
     equivalents outstanding
     (diluted)
- ------------------------------------------------------------------------------------------------------------------------------

Balance Sheet Data:
  Total cash and investments            $ 129,243          $ 115,212          $   142,763          $  129,229         $ 91,022
  Total assets                            679,903            463,594              519,307             458,959          329,176
  Total debt                               15,357              8,616               11,403               3,930            9,493
  Stockholders' equity                    529,173            370,677              422,799             363,784          257,037
  Book value per share                       7.00               5.48                 5.95                5.10             3.65
  Number of shares                         75,509             67,675               71,051              71,336           70,342
     outstanding

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

Financial Performance:
  Total revenue growth (decline)            (10.6)%            (16.2)%               (3.3)%              52.3%            39.7%
  Net margin                                  2.2%               2.3%                 7.0%                9.0%             7.3%
  Return on average equity                    3.9%               5.1%                18.6%               31.0%            22.4%



AllSHARE" in the notes to the accompanying consolidated financial statements for further discussion.

(2)
Includes $40,042, $40,500, $40,888, and $13,000 in accrued building costs for the years ended December 31, 2004, 2003, 2002, and 2001, respectively.

(3)
Net income for 2004 includes an adjustment recorded in the Fourth Quarter of 2004 for an additional deferred tax asset totaling approximately $2.2 million and a corresponding decrease to the provision for income taxes. See Note 14 "INCOME TAXES" in the notes to the accompanying consolidated financial statements for further discussion. Net income for 2003 includes a $7.3 million, $4.4 million after tax, favorable judgment in an arbitration award proceeding related to damages for breach of an agreement between Signal Corporation and our Federal Systems subsidiary.


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 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," "estimates," "intends," "may," "projects," "will," "would," and similar expressions may be forward-looking statements. We caution investors not to place undue reliance on any forward-looking statements in this Annual Report on Form 10-K. 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 below under the caption "CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS." These factors and the other cautionary statements made in this annual report should be read as being applicable to all related forward-looking statements wherever they appear in this annual report. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance, or achievements may vary materially from any future results, performance, or achievements expressed or implied by these forward-looking statements. We undertake no obligation to publicly update any forward-looking statements in this annual report, whether as a result of new information, future events, or otherwise.
        The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and related notes included in this annual report.
OVERVIEW
Components of Revenues
        We seek to help clients improve their business and information technology ("IT") effectiveness. In order to align our reporting with our strategic priorities, beginning January 1, 2004, we classified our service offerings into the following three categories: Outsourcing, Development & Integration, and Other IT Services. These services were previously classified within our Plan, Build, and Manage service offerings in our Annual Report on Form 10-K for the year ended December 31, 2003. Prior period amounts prior to 1999 have been restatedreclassified to reflectconform to the acquisitionscurrent presentation. Below is a description of Brickereach of our service offerings:
        Outsourcing:    Our outsourcing services include Application and Business Process Outsourcing, as well as ongoing maintenance related to Development & Associates,Integration work for our Healthcare Solutions Division. Our Application Outsourcing services help clients manage existing business systems more efficiently and more reliably, improving the performance of these applications while frequently reducing costs. Under our Application Outsourcing service offering, we assume responsibility for managing a client's business applications with the goal of instituting operational efficiencies that enhance flexibility, free up client personnel resources, and achieve higher user satisfaction. We enter into large, long-term contracts for the provision of Application Outsourcing services, which generally do not require any capital outlay by us. These contracts usually span three to five years with the ability to renew. We typically receive a fixed monthly fee in return for meeting or exceeding a contractually agreed upon service level. However, because our customers typically have the ability to reduce services under their contracts, our monthly fees may be reduced from the stated contract amounts.
        Through our global delivery model we can offer customers the flexibility and economic advantage of allocating work among a variety of delivery options. These include onsite at a client's facility, nearshore in Halifax, Nova Scotia, and Toronto, Ontario, and offshore at one of our four development centers in India. In 2004, we extended our Global network of Advanced Development Centers with the opening of new facilities in Toronto, Ontario and Hyderabad, India. This integrated, highly flexible mix


of cost-effective onsite, nearshore, and offshore delivery is now a component of most of our new Application Outsourcing engagements. The distribution of work across multiple locations is typically based on a client's cost, technology, and risk management requirements. Our successful track record in absorbing the local staff of our clients is particularly attractive to many prospective clients.
        Our Business Process Outsourcing ("BPO") services are provided by our majority owned subsidiary, Worldzen, Inc., Icom Systems Limited and Fourth Tier,now Keane Worldzen, Inc. ("Keane Worldzen"), which we acquired on October 17, 2003. Keane Worldzen specializes in providing BPO services to clients with complex processes in the financial services, insurance, and healthcare industries, and to clients with back-office processes in several industries. Keane Worldzen's BPO services are designed to reduce the cost and increase the efficiency of our clients' business transactions, enabling companies to focus on their more profitable activities and avoid the distraction of non-core back-office processes. Keane Worldzen provides these low-cost, high-value outsourcing services from operations in both the United States ("U.S.") and India.
        Development & Integration:    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 our Development & Integration projects focus on solutions for the integration of enterprise applications, supply chain, and customer service problems. We also provide Development & Integration services to the public sector, which includes agencies within the U.S. Federal Government, various states, and other local government entities. Additionally, our Healthcare Solutions Division provides software solutions and integration support to both acute and long-term care providers.
        Other IT Services:    Other IT Services are primarily comprised of IT consulting, project management, and supplemental staff engagements that are principally billed on a time and materials basis.
        Global economic and political conditions may cause companies to be cautious about increasing their use of consulting and IT services, but we continue to see a demand for our services. We continue to experience pricing pressure from competitors as well as from clients facing pressure to control costs. In addition, the growing use of offshore resources to provide lower-cost service delivery capabilities within our industry continues to be a source of pressure on revenues. We also experience wage inflation, primarily in India, as the demand for those resources increases. In order for us to remain successful in the near term, we must continue to maintain and grow our client base, provide high-quality service and satisfaction to our existing clients, and take advantage of cross-selling opportunities. In the current economic environment, we must provide our clients with service offerings that are appropriately priced, satisfy their needs, and provide them with measurable business benefits. While we have recently experienced a more steady demand for our services, and gross margin as a percentage of revenue has stabilized over the past two years, we believe that it is too early to determine if developments will translate into sustainable improvements in our pricing or margins for 2005 and over the longer term.
        There is a great deal of competition in provision of Outsourcing services. We believe our evolving go-to-market strategy, where we seek to provide high value, repeatable business solutions to our clients, differentiates us from our competitors. The solutions sets that we offer to our clients have five major elements. They are:

        While, we are still in the early stages of implementing this new market approach, we believe that our deep industry knowledge will differentiate us from our competitors, allow us to go beyond simply delivering cost and performance improvements to our clients, and allow us to deliver transformational business benefits and ultimately, help grow our business and integrate our comprehensive capabilities.
Components of Operating Expenses
        The primary categories of our operating expenses include: salaries, wages, and other direct costs; selling, general and administrative expenses; and amortization of intangible assets. Salaries, wages, and other direct costs are primarily driven by the cost of client-service personnel, which consists mainly of compensation, sub-contractor, and other personnel costs, and other non-payroll costs. Selling expenses are driven primarily by business development activities and client targeting, image-development, and branding activities. General and administrative expenses primarily include costs for non-client facing personnel, information systems, and office space, which we seek to manage at levels consistent with changes in the activity levels in our business. We continue to anticipate changes in demand for our services and to identify cost management initiatives to balance our mix of resources to meet current and projected future demand in our markets. We will also continue to use our global sourcing as part of our cost effective delivery model.
        We evaluate our improvement in profitability by comparing gross margins, and selling, general, and administrative ("SG&A") expenses as a percentage of revenues. Other key metrics that we use to manage and evaluate the performance of our business include new contract bookings, the number of billable personnel, and utilization rates. We calculate utilization rates by dividing the total billable hours per consultant by the total hours available, including sick, holiday, and vacation, from the consultant.
NEW CONTRACT BOOKINGS
        New contract bookings for the year ended December 31, 2004 were accounted$1.1 billion, an increase of $230.4 million, or 26.5%, over new bookings of $868.5 million for as poolings-of-interests.the year ended December 31, 2003. For the year ended December 31, 2004, Outsourcing bookings increased 37.7% to $574.7 million, Development & Integration bookings increased 20.1% to $124.8 million, and Other IT bookings increased 15.0% to $399.4 million compared to the same period in 2003.
        We provide information regarding our bookings because we believe it represents useful information regarding changes in the volume of our new business over time. However, information regarding our new bookings is not comparable to, nor should it be substituted for, an analysis of our revenues. Cancellations and/or reductions in existing contracted amounts are not reflected in new contract bookings.
APPLICATION OF CRITICAL ACCOUNTING POLICIES TheAND ESTIMATES
        Our discussion and analysis of Keane'sour financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.U.S. The preparation of these financial statements requires Keaneus to make estimates and judgmentsassumptions that affect the reported amountamounts of assets and liabilities, revenues and expenses, and relatedthe disclosure of contingent liabilities and the reported amounts of revenue and expenses. On an on-going basis, we


evaluate our estimates including those related to revenue earned but not yet billed, costs to complete fixed-price projects, the collectibility of accounts receivable, acquisition accounting, the valuation of goodwill, certain accrued liabilities and other reserves, income taxes, and others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities at the date of its financial statements.that are not readily apparent from other sources. Actual results maycould differ materially from these estimates under different assumptions or conditions.those estimates. 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'sour financial condition and results of operations. The Company believesWe believe that the accounting policies described below meet these characteristics. Keane'sOur significant accounting policies are more fully described in the notes to the accompanying consolidated financial statements.
Revenue Recognition:

Keane recognizesRecognition
        We recognize revenue as services are performed or products are delivered in accordance with contractual agreements and generally accepted accounting principals.principles. For general consulting engagements, we recognize revenue is recognized on a time and materials basis as services are delivered. For the majority of our outsourcing engagements, the Company


                                       15



provideswe provide a specific level of service each month for which it billswe bill a standard monthly fee. RevenueWe recognize 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,Costs of transitioning the employees may be capitalized over defined periods of time and amortized over the period in which the associated revenue is recognizedrecognized.
        For fixed-price engagements, we recognize revenue on a percentage of completionproportional performance basis over the life of the contract. Percentage of completionWe use estimated labor-to-complete to measure the proportional performance. Proportional performance recognition relies on accurate estimates of the cost, scope, and duration of each engagement. If the
Company doeswe do not accurately estimate the resources required or the scope of the work to be performed, then future consulting marginsrevenues 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
        We recognize revenue associated with application software products is recognized as the software products are delivered or installed on a milestone basis. Softwareand as implementation services are delivered. We recognize software maintenance fees on installed products are recognized on a pro-rated basis over the term of the service agreement. In multiple element arrangements, Keane uses the residual value method in accordance with Statement of Position ("SOP") SOP 97-2 ("SOP 97-2"), "Software Revenue Recognition," and SOP 98-9 ("SOP 98-9"), "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions." Revenue earned on software arrangements involving multiple elements which qualify for separate element accounting treatment is allocated to each undelivered element using the relative fair values of those elements based on vendor-specific objective evidence with the remaining value assigned to the delivered element, the software license.
        In all consulting engagements, outsourcing engagements, and software application sales, the risk of issues associated with satisfactory service delivery exists. Although management feelswe believe these risks are adequately addressed by the Company'sour adherence to proven project management methodologies, proprietary frameworks, and internal project audits, the potential exists for future revenue charges relating to unresolvedservice delivery issues. Historically, we have not experienced major service delivery issues.
Allowance for Bad Debt:Debts
        We maintain an allowance for doubtful accounts at an amount we estimate to be sufficient to cover the risk of collecting less than full payment on our receivables. Our allowance for bad debts is


based upon specific identification of likely and probable losses. Each accounting period, Keane evaluateswe evaluate accounts receivable for risk associated with a client's inability to make contractual payments or unresolved issues with the adequacy of Keane's services delivered under maintenance agreements.our 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. ConsiderableWe use 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'sour evaluation of service delivery issues or a client's ability to pay is incorrect, the Companywe may incur future chargesreductions to revenue.

Goodwill
Business Combinations
        In connection with acquisitions, we estimate the fair value of assets acquired and Intangible Impairment:

Keane evaluates goodwillliabilities assumed. Some of the items, including accounts receivable, property and equipment, other intangible assets, associatedcertain accrued liabilities, and legal and other reserves require a high degree of management judgment. Certain estimates may change as additional information becomes available. In particular, restructuring liabilities are subject to change as we complete our assessment of the acquired operations and finalize our integration plan.
Valuation of Goodwill
        We have recorded a significant amount of goodwill resulting from acquisitions. Effective January 1, 2002, goodwill is no longer amortized but is subject to annual impairment testing. The impairment test involves the use of estimates related to the fair value of the business operations with acquisition
activitywhich the goodwill is associated. The estimate of fair value requires significant judgment. We estimate the fair value of the business operations using a discounted cash flow model based on the future annual operating plan of each reporting unit. This model determines the present value of the estimated cash flows of the reporting unit. Any loss resulting from an impairment test would be reflected in operating income in our consolidated statement of income. The annual impairment testing process is subjective and requires judgment at many points throughout the analysis. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets not previously recorded. As of December 31, 2004, our goodwill totaled $306.0 million.
Valuation of Intangible Assets
        In connection with our acquisitions, we are required to recognize other intangible assets separate and apart from goodwill if such assets arise from contractual or other legal rights or if such assets are separable from the acquired business. Other intangible assets include, among other things, customer-related assets such as order backlog, customer contracts, and customer relationships. Determining a periodic basis. This evaluation relies onfair value for such items requires a high degree of judgment, assumptions, and estimates. In most situations, we use third parties to assist us with such valuations. In addition, these intangible assets are amortized over the best estimate of their useful life.
        We review our identifiable intangible assets for impairment in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." In determining whether an intangible asset is impaired, we must make assumptions regarding estimated future cash flows from the asset, intended use of the asset, and other factorsrelated factors. If the estimates or the related assumptions used to determine the fair value of the respective assets. If these estimates or related assumptionsintangible assets change, the Companywe may be required to recognizerecord impairment charges.

Deferred Taxes:

Keane accountscharges for these assets. As of December 31, 2004, our intangible assets totaled $62.9 million.


Income Taxes
        To record income tax expense, we are required to estimate our income taxes in each of the jurisdictions in which we operate. We account for income taxes in accordance with SFAS No. 109 ("SFAS 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. SFAS 109 alsoIn addition, income tax expense at interim reporting dates requires us to estimate our expected effective tax rate for the entire year. This involves estimating our actual current tax liability together with assessing temporary differences that result in deferred tax assets be reduced byand liabilities and expected future tax rates.
        We record a valuation allowance if itto reduce our deferred tax assets to an amount we believe is more likely than not that some portion or all of the deferred tax asset will notto be realized. Based on priorWe consider future taxable income and estimates of future taxable
income,prudent and feasible tax planning strategies in assessing 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 recordneed for a valuation allowance. We have recorded a valuation allowance against its deferredfor the tax assets resultingbenefits of certain subsidiary net operating losses and the minimum pension liability.
        Our policy is to establish reserves for taxes that may become payable in additionalfuture years as a result of an examination by the tax authorities. In accordance with SFAS No. 5 ("SFAS 5"), "Accounting for Contingencies," we establish the reserves based upon our assessment of exposure associated with permanent tax differences and interest expense applicable to both permanent and temporary difference adjustments. The tax reserves are analyzed periodically and adjusted, as events occur to warrant the adjustment to the reserve. If we determine that we will require more or less of our reserves in the future, such adjustment would be recorded as an increase or reduction of income tax expense which will be recorded in the Company's consolidated
statementperiod such determination is made. Circumstances that could cause our estimates of operations.

Restructuring:

Keane hasincome tax expense to change include: the impact of information that subsequently becomes available as we prepare our tax returns; revision to tax positions taken as a result of further analysis and consultation; the actual level of pre-tax income; changes in tax rules, regulations, and rates; and changes mandated as a result of audits by taxing authorities.
Stock-based Compensation
        We grant 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. We also grant restricted stock for a fixed number of shares to employees for nominal consideration.
        We adopted the disclosure provisions of SFAS No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation—Transition and Disclosure," an amendment to SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." As permitted by SFAS 148 and SFAS 123, we account for our stock-based compensation in accordance with Accounting Principles Board ("APB") Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." In accordance with APB 25, we recognize compensation expense based on the difference between the market value at grant date and the grant price and record the compensation expense ratably over the restriction period. We do not recognize compensation expense on our stock option grants as the stock options are granted at the market price at the date of grant.
        Had expense been recognized using the fair value method described in SFAS 123, using the Black-Scholes option-pricing model, we would have recorded additional compensation expense and reduced net income by approximately $3.8 million, $4.6 million, and $11.3 million in 2004, 2003, and 2002, respectively.
        See "RECENT ACCOUNTING PRONOUNCEMENTS" for discussion on SFAS No. 123 (revised 2004) ("SFAS 123(R)") "Share-Based Payment," which was issued in December 2004 and is a revision of SFAS 123 and supersedes APB 25 and its related implementation guidance.


Restructuring
        We have recorded restructuring charges and reserves associated with restructuring plans approved by management overin the last threesix years. As of January 1, 2003, we adopted SFAS No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities," which requires us 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 exists. 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 our sub-lessees, market value of properties, and the ability to negotiate early termination agreements with lessors. While the Company believeswe believe that itsour current estimates regarding lease obligations are adequate, future events could necessitate significantrequire adjustments to these estimates. 16



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDBased on the assumptions included in our analysis as of December 31, 2004, to the extent that we are unable to maintain all of our current, contractual subleases, we could incur an additional restructuring charge up to approximately $2.3 million. In addition, if we are able to negotiate early terminations of our operating leases or to obtain a sublessee, we would record a reduction to the restructuring liability and a corresponding expense reduction. In 2004 and 2003, we recorded an expense reduction of $2.4 million and $1.0 million, respectively, associated with early lease terminations and unanticipated subleases.
Accrued Compensation and Other Liabilities
        Employee compensation costs are our largest expense category. We have a number of different variable compensation programs, which are highly dependent on estimates and judgments, particularly at interim reporting dates. Some programs are discretionary while others have quantifiable performance metrics. Certain programs are annual, while others are quarterly or monthly. Often, actual compensation amounts cannot be determined until after we report our results. We believe we make reasonable estimates and judgments using all significant information available. We also estimate the amounts required for incurred but not reported health claims under our self-insured employee benefit programs. Our accrual for health costs is based on historical experience and actual amounts may vary from these estimates. In addition, with respect to our potential exposure to losses from litigation, claims and other assessments, we record a liability when such amounts are believed to be probable and can be reasonably estimated.
        We have a foreign defined benefit plan that provides pension benefits to employees of our subsidiary located in the UK, ("UK DBP"). Assumptions used in determining projected benefit obligations and the fair values of plan assets for our UK DBP are evaluated periodically by management in consultation with outside actuaries and investment advisors. Changes in assumptions are based on relevant Company data. Critical assumptions, such as the discount rate used to measure the benefit obligations, the expected long-term rate of return on plan assets and healthcare cost projections, are evaluated and updated annually. We have assumed that the expected long-term rate of return on plan assets will be 7.75%.
        At the end of each year, we determine the discount rate that reflects the current rate at which the pension liabilities could be effectively settled. This rate should be in line with rates for high quality fixed income investments available for the period to maturity of the pension benefits, and changes as long-term interest rates change. At December 31, 2004, we determined this rate to be 5.40%.
        During 2004, we closed the UK DBP to future salary accruals effective April 1, 2004. Accordingly, we accounted for the closing of the UK DBP as a curtailment under SFAS No. 88 ("SFAS 88"), "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits." As a result, we recorded a curtailment loss of approximately $0.2 million to expense the unrecognized prior service cost, and we recorded an additional required minimum pension liability of approximately $6.6 million as a non-cash adjustment through accumulated other


comprehensive loss in the accompanying consolidated balance sheets. As of December 31, 2004, the minimum pension liability was $13.5 million and is included in accrued expenses and other liabilities in the accompanying consolidated balance sheet. See Note 13 "BENEFIT PLANS" in the notes to the accompanying consolidated financial statements for further discussion.
CONSOLIDATED 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
2004 Compared to 2003
 
 REVENUES (Dollars in thousands)
 
 
 Years Ended December 31,
 Increase (Decrease)
 
 
 2004
 %
 2003
 %
 $
 %
 
Outsourcing $465,077 51 $371,294 46 $93,783 25.3 
Development & Integration  176,781 19  162,113 20  14,668 9.0 
Other IT Services  269,685 30  271,569 34  (1,884)(0.7)
  
 
 
 
 
 
 
Total $911,543 100%$804,976 100%$106,567 13.2 
  
 
 
 
 
 
 
Revenues
        Revenues for the foregoing,
the words "believes," "anticipates," "plans," "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 below under the caption "Certain
Factors That May Affect Future Results."

RESULTS OF OPERATIONS, 2001 vs. 2000: The Company's revenue for 2001 was $774.0
million, a 7% decrease from revenue of $833.6 million in 2000, excluding revenue
associated with Keane's divested help desk business, or $779.2 million in 2001
compared to $876.9 million in 2000, including $43.3 million of revenue from this
divested business. 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 Application Development and Management (ADM) Outsourcing service. ADM
Outsourcing revenue represented 51% of total revenue during 2001 or $393.9year ended December 31, 2004 were $911.5 million, an increase of 8.5%$106.6 million, or 13.2%, compared to revenues of $805.0 million for the year ended December 31, 2003. Revenues in 2004 increased compared to 2003 due primarily to the growth in Outsourcing services and revenues from $363.0 million during 2000.

For 2001, revenue from the Company's Plan services was $75.3 million, down from
$107.1 million in 2000. Plan revenue is primarily comprisedour acquired businesses. We completed our acquisition of business
innovation consulting delivered via Keane Consulting Group (KCG)Nims Associates, Inc. ("Nims"), the Company's
business consulting arm,an IT and IT consulting services which are soldcompany with offices in the Midwest, on February 27, 2004, and implemented outas a result, the operating results of Keane's network of branch offices. Plan revenue for 2001 was
negatively impacted by a general deferral of capital expenditures and consulting
projects.

For 2001, revenue from the Company's Build Services was $265.9 million, down
from $327.1 millionNims have been included in 2000, prior to all one-time charges or $322.2 million in
2000 including all one-time charges. 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 one-time charges relating
to the costs of terminations, office closures, and asset write-downs associated
with gaining synergies fromour consolidated financial statements beginning March 1, 2004. In addition, we completed the acquisition of Metro Information Services.

As anticipated, Keane's Build revenue, which consists primarily of application
developmentFast Track Holdings Limited ("Fast Track") on July 13, 2004, and integration business,have included its operating results in our consolidated financial statements beginning July 14, 2004. Fast Track was also adversely affecteda privately held consulting firm based in 2001 by the
challenging economic environment and the related deferral of new software
development projects in both North America and the United Kingdom. This decline
was offset in part by ongoing Build project revenue from existing Global 2000
customersKingdom that manages the design, integration, and revenuerapid deployment 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, which consist primarily of Keane's
ADMlarge-scale SAP implementations.
        Outsourcing.    Outsourcing service as well as Application Maintenance and Migration
services, grew to $432.7revenues for the year ended December 31, 2004 were $465.1 million, during 2001, an increase of 8% from $399.2$93.8 million, in 2000, excluding revenue from divested businesses and one-time
charges. Manage revenue was $437.9 million in 2001 and $437.6 million in 2000,
includingor 25.3%, compared to the divested help desk business and one time charges. 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 $43.3 million
during 2000 and $5.2 million during 2001. On February 12, 2001 the Company sold
its Help Desk operation to Convergys Corporation in return for $15.7 million in
cash.year ended December 31, 2003. The increase in Keane's Manage revenue during 2001Outsourcing service revenues was driven by continuing
sales growth in the Company's ADM Outsourcing business, as Global 2000 customers
seekprimarily due to improve productivity and efficiencies 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. Based on the
increase in ADM Outsourcing bookings and growth of the sales pipeline during
2001, the Company anticipates that this


                                       17



business will continue to increase in 2002. One significant example of such
business is Keane's new, ten-year $500 million ADM Outsourcing contract with
PacifiCare Health Systems signed in January of 2002.

However, the Company has observed no indication of a healthier economic climate
or growth in IT spending over the first two months of 2002. As a result, Keane
anticipates continued softness in its Application Development and Integration
business, which represents a majority of its Build sector, and within its Plan
sector, until economic conditions improve and customers begin funding capital
projects once again.

In response to this challenging business climate, the Company expanded its
customer base and critical mass with its acquisition of Metro Information
Services. Metro provides Keane with hundreds of new customers to whom the
Company can cross-sell its services. Of Metro's 300 largest customers that
accounted for 90% of its revenue for the twelve months ended June 30, 2001, 236
were new customers for Keane. In addition, the Company expects to improve
operational leverage by combining corporate functions and consolidating
overlapping branch offices. Of Metro's 33 branch offices, 26 are within
geographic markets currently served by Keane. The Company has identified a
minimum of $15 million in redundant SG&A expenses that can be eliminated and
expects to realize at least $11 million of these savings during 2002.

On March 15, 2002, Keane acquired SignalTree Solutions Holding, Inc., a
privately-held, U.S.-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. Under the terms of the merger
agreement, Keane paid $64.5 million in cash for SignalTree, which purchase price
is subject to adjustment. The enterprise value of the transaction is
approximately 1.2 times SignalTree's 2001 revenue, which was approximately $50
million. Keane expects the addition of SignalTree to enhance its value
proposition to customers by providing access to world-class software development
processesincreased revenues from large outsourcing contracts, as well as the economic advantagerevenues generated by Nims. PacifiCare, one of our largest clients, has reduced the level of service from the stated baseline contract amounts in accordance with its right under the contract terms, thereby reducing the contract value. During the Second Quarter ended June 30, 2004, PacifiCare requested that we further reduce service levels to levels below the minimums provided in our contract. The requested change was not consistent with the terms of our contract with PacifiCare and would have resulted in a reduction in our monthly billings to PacifiCare. Accordingly, we did not agree to this change. Since then, through the year ended on December 31, 2004, we have continued providing services at or above the minimum levels set forth in the contract. In accordance with the contract terms, we and PacifiCare jointly engaged an independent third party to conduct a study to compare our billing rates with benchmark rates. The results assert that our rates are higher than the benchmark rates. To the extent that the lower rates identified in the study would go in effect in the Second Quarter of 2005, our annual revenues and operating income would decline. We have thirty days to evaluate the results of the study and expect that we will enter into discussions with PacifiCare thereafter.

        Development & Integration.    Development & Integration service revenues for the year ended December 31, 2004 were $176.8 million, an increase of $14.7 million, or 9.0%, compared to the year ended December 31, 2003 partly due to the revenues associated with the acquisition of Fast Track in the Third Quarter ended September 30, 2004.
        Other IT Services.    Other IT Services revenues for the year ended December 31, 2004 were $269.7 million, a decrease of $1.9 million, or 0.7%, compared to the year ended December 31, 2003. During the Second Quarter ended June 30, 2004 we agreed to a 5% price reduction for one of our large customers and mitigated the impact of that price reduction on gross margin by negotiating lower pricing of our subcontractor personnel. Additionally, this customer also notified us in the Fourth Quarter of 2004 that they would be reducing their purchasing requirements, which will have an impact of reducing annual revenues by approximately $7.0 million to $8.0 million in 2005 from that customer. In addition, a large poolclient in the UK has notified us that they would be reducing their purchasing requirements, which will have an impact of cost-effective
technical professionals.reducing annual revenue by approximately $10.0 million to $14.0 million in 2005.
        The following table summarizes certain line items from our consolidated statements of income (dollars in thousands):
 
 Years Ended December 31,
 Increase (Decrease)
 
 2004
 2003
 $
 %
Revenues $911,543 $804,976 $106,567 13.2

Salaries, wages, and other direct costs
 
 
637,240
 
 
554,375
 
 
82,865
 
14.9
  
 
 
  
Gross margin $274,303 $250,601 $23,702 9.5
  
 
 
  
Gross margin %  30.1% 31.1%    
  
 
     
Salaries, wages, and other direct costs
        Salaries, wages, and other direct costs for 2001the year ended December 31, 2004 were $547.9$637.2 million, an increase of $82.9 million compared to $554.4 million for the year ended December 31, 2003. The increase was primarily attributable to costs of client service personnel to support the increased service revenues as well as an increase in direct costs to support the revenues generated by our acquired Nims business. Salaries, wages, and other direct costs were 69.9% of total revenues for the year ended December 31, 2004 compared to 68.9% of total revenues for the year ended December 31, 2003.
        Total billable employees for all operations were 7,235 as of December 31, 2004, compared to 6,369 total billable employees as of December 31, 2003. This includes a base of billable employees within our India operations of 1,454, which represents an increase of 421 employees, or 40.8%, over the year ended December 31, 2003. We added our India operation in March 2002 with our acquisition of SignalTree Solutions. In addition, total billable employees include a base of 370 billable employees within our Keane Worldzen operations. We acquired our controlling interest in Keane Worldzen in October 2003. In addition to these employees, we occasionally use subcontract personnel to augment our billable staff, which represented 585 subcontractors as of December 31, 2004. Overall utilization rates for all three periods remained stable as we increased the number of billable employees.
Gross margin
        Our management believes gross margin(revenues less salaries, wages, and other direct costs) provides an important measure of our profitability. Gross margin for the year ended December 31, 2004 increased $23.7 million, or 70.3%9.5%, compared to the year ended December 31, 2003. Gross margin as a percentage of revenues for the year ended December 31, 2004 was 30.1% compared to 31.1% for


the year ended December 31, 2003. Although gross margin for the year ended December 31, 2004 decreased by approximately 100 basis points compared to the year ended December 31, 2003, we believe that the relatively constant gross margin percentage over the past two years is indicative of a more stable environment for IT services, and firmer utilization rates, as well as the benefit of our global delivery capabilities. The lower labor cost associated with the increased use of offshore resources at our India facilities helped reduce the impact of lower pricing of our services on gross margin. We continue to closely monitor utilization rates and other direct costs in an effort to avoid adverse impacts on our gross margin.
Selling, general, and administrative expenses
 
 Years Ended December 31,
 Increase
 
 2004
 2003
 $
 %
Selling, general, and administrative expenses (SG&A) $206,747 $192,900 $13,847 7.2
  
 
     
SG&A as a % of revenue  22.7% 24.0%    
  
 
     
        SG&A expenses include salaries for our corporate and branch administrative employees, sales and marketing expenses, as well as the cost of our administrative facilities, including related depreciation expense. SG&A expenses for the year ended December 31, 2004 increased $13.8 million, or 7.2%, compared to the year ended December 31, 2003. The increase in SG&A expenses was due to higher compensation costs in 2004 compared to 2003, resulting from higher headcount associated with our acquired business, Keane Worldzen in the Fourth Quarter ended December 31, 2003, Nims in the First Quarter ended March 31, 2004 and Fast Track in the Third Quarter ended September 30, 2004. Also contributing to the increase in SG&A expenses were higher costs associated with the growth of our India operations. SG&A expenses for the year ended December 31, 2004 were 22.7% of total revenue,revenues, as compared to $621.2 million, or 71.2% of total revenue, for 2000.
The decline in costs is a result of the sale of the Company's lower margin Help
Desk operations and its ongoing efforts to bring costs in alignment with
revenue. As a result, Keane's gross margins for 2001 increased to 29.7%, up from
29.2% during 2000 prior to all one-time charges, or 28.7% during 2000 including
all one-time charges.

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,revenues for 2000.the year ended December 31, 2003. The declinedecrease in SG&A expenditures during 2001 isexpenses as a resultpercentage of revenue in 2004 was due in part to the acquisition of Nims, the integration of the saleoperations of the Company's Help Desk operationsNims, and aggressive control
of discretionary spending to bring cost in alignment with revenue. The Company
will seek to continue to control aggressively its discretionary expenditures
until economic conditions improve and spending on IT projects increases.

increasing revenues.
Amortization of goodwill and otherintangible assets
        Amortization of intangible assets for 2001the year ended December 31, 2004 was $14.5$16.2 million,
or 1.9% of total revenue, compared to $12.4$15.8 million or 1.4%for the year ended December 31, 2003. The amortization of total revenue,
in 2000. The increase in amortizationintangible assets for 2001 was attributable2004 increased $0.4 million due to the additional intangible assets resulting from our Nims acquisition in the First Quarter ended March 31, 2004 and, to a lesser extent, our Fast Track acquisition in the Third Quarter ended September 30, 2004. These amounts were offset in part by certain intangibles that have become fully amortized.
Restructuring charges, net
        During the Fourth Quarter of 2004, we reevaluated our estimates recorded for the restructuring charge taken in 2002 and 2003 and as a result recorded an expense reduction of $2.4 million and a charge of $2.3 million, resulting in a net expense reduction of $0.1 million. During 2003, we reevaluated our estimates recorded for the Company's acquisitionrestructuring charge taken in 2002 and as a result recorded an expense reduction of Metro Information
Services$1.5 million for workforce reductions, and $1.0 million related to the costs of consolidating and/or closing certain non-profitable offices. In addition, during 2003 we recorded a restructuring charge of $2.2 million. Of this charge, $1.3 million was for an additional workforce reduction of 75 employees and $0.9 million was for the costs associated with a branch office closing. The net impact of these actions resulted in Novembera net expense reduction to the restructuring charge of 2001$326,000 in our consolidated statement of income.


Interest and the acquisitions of Denver Management Group and
Care Computer Systems in July and September of 2000.dividend income
        Interest and dividend income totaled $7.0for the year ended December 31, 2004 was $3.9 million compared to $3.0 million for 2001, compared to $7.7
million for 2000.the year ended December 31, 2003. The slight decreaseincrease in interest and dividend income was attributablethe result of higher average cash balances and marketable securities. The higher average cash balances and marketable securities was due to having lessthe investment of the net proceeds from the issuance of our 2.0% Convertible Subordinate Debentures due 2013 ("Debentures") issued in June 2003 and strong cash earningflow, offset in part by the impact of our share repurchases during 2003 and the year ended December 31, 2004. To the extent we use our cash and marketable securities to fund acquisitions, our operations, and capital investments, our interest income will decline in future periods.
Interest expense
        Interest expense for the year ended December 31, 2004 was $5.7 million compared to $4.2 million for the year ended December 31, 2003. The increase in interest expense was primarily related to a full year of interest recognized on our Debentures and dividend incomethe imputed interest expense on the accrued building costs as a result of using cashour occupation of our corporate facility. As explained in Note 15 "RELATED PARTIES, COMMITMENTS, AND CONTINGENCIES" in the notes to the accompanying consolidated financial statements, the accounting for acquisitionsthe facility requires us to impute interest expense on the accrued building costs.
Other (expense) income, net
        Other expense, net was $0.7 million for the year ended December 31, 2004 and other income, net was $7.1 million for the year ended December 31, 2003. Other income, net during the First Quarter of 2003 included a $7.3 million, $4.4 million after tax, favorable judgment in an arbitration award proceeding related to damages for breach of an agreement between Signal Corporation and our Federal Systems subsidiary.
Minority Interest
        During the Fourth Quarter of 2003, we completed our acquisition of a controlling interest in Keane Worldzen, a privately held BPO firm. Our initial investment resulted in an equity position of approximately 62% of the issued and outstanding capital stock of Keane Worldzen with the right to increase our ownership position over time. As a result of this transaction, we began to consolidate Keane Worldzen's financial results with ours in the Fourth Quarter of 2003. The amount in minority interest represents the loss attributable to minority shareholders for the period that we consolidated Keane Worldzen.
Income taxes
        The provision for income taxes represents the amounts owed for federal, state, and foreign taxes. Our effective tax rate was 37.3% for the year ended December 31, 2004. Our effective tax rate was 40% for the year ended December 31, 2003. The determination of the provision for income tax expense, deferred tax assets and liabilities and related valuation allowance involves judgment. As a global company, we are required to calculate and provide for income taxes in each of the tax jurisdictions where we operate. This involves making judgments regarding the recoverability of deferred tax assets, which can affect the overall effective tax rate. In addition, changes in the geographic mix or estimated level of pre-tax income can affect the overall effective tax rate. During the Third Quarter ended September 30, 2004, certain events occurred, which impacted our tax provision. These events include the expiration of certain state statutes and changes in estimates, which resulted in a reduction to our tax provision of approximately $1.1 million, and the repurchaseenactment of Keane stock,certain tax laws, which resulted in an imposition of tax retroactive to January 1, 2004 and that resulted in an


increase to our tax provision of approximately $0.6 million. The net impact of these events was a reduction of our tax provision by approximately $0.5 million. In accordance with SFAS 5 and SFAS No. 109 ("SFAS 109"), "Accounting for Income Taxes," we adjusted our tax reserves in the period where the conditions under SFAS 5 were no longer met and as of the enactment date of the new tax laws.
        For the year ended December 31, 2004, the Company identified errors relating to deferred tax balances arising from transactions in prior years. As a result, an adjustment to reduce goodwill by approximately $2.1 million has been recorded in the accompanying consolidated balance sheet as of December 31, 2004 with a corresponding reduction to deferred tax liabilities. Furthermore, as of December 31, 2004, the Company recorded an adjustment to record an additional deferred tax asset totaling approximately $2.2 million and a corresponding decrease to the provision for income taxes. This income tax adjustment results from book to tax timing differences related to depreciation expense that management believes relate to a period, or periods prior to 2004. Since the specific period to which this adjustment relates cannot be identified with certainty, the adjustment has been recorded in the year ended December 31, 2004.
Net income
        Net income for the year ended December 31, 2004 was $3.1 million higher compared to the year ended December 31, 2003. The increase is due to higher income before taxes and the lower effective tax rate for the year ended December 31, 2004.
2003 Compared to 2002
 
 REVENUES (Dollars in thousands)
 
 
 Years Ended December 31,
 Increase (Decrease)
 
 
 2003
 %
 2002
 %
 $
 %
 
Outsourcing $371,294 46 $344,497 40 $26,797 7.8 
Development & Integration  162,113 20  185,830 21  (23,717)(12.8)
Other IT Services  271,569 34  342,876 39  (71,307)(20.8)
  
 
 
 
 
 
 
Total $804,976 100%$873,203 100%$(68,227)(7.8)
  
 
 
 
 
 
 
Revenues
        Revenues in 2003 compared to 2002 decreased as a result of interest rate declines. Other income was $2.7 million for 2001 as
comparedclients' decisions to other expensecontinue to defer discretionary technology-related expenditures during a period of $0.9 million in 2000. This increase in other income
was related to a gain of $4.0 million fromeconomic uncertainty. However, throughout 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
gains from the sale of investments.

The Company's effective tax rate was 40.5% in 2001 and 2000.


                                       18



Net cash provided from operations was $83.2 million during 2001, and $96.1
million during 2000, before proceeds from the salecourse of the Help Desk businessyear, we experienced a more stable demand for our services and believe that we are beginning to see some indications of $15.7 million and the investment of $4.0 millionincreases in discretionary IT spending.
        Outsourcing.    Outsourcing service revenues for the repurchase of Keane
shares. 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.

RESULTS OF OPERATIONS, 2000 VS. 1999: The Company's revenue for 2000 was $872.0
million, a 16% decrease from $1.04 billion in 1999. The decrease in revenue was
primarily a result of the rapid decline in the Company's Year 2000 (Y2K)
compliance revenue. Y2K-related revenue for 2000 was $5.4 million, down 97.4%
from $206.1 million in 1999. Excluding Y2K-related business, revenue for 2000
was $871.5year ended December 31, 2003 were $371.3 million, an increase of 4.4%$26.8 million, or 7.8%, compared to the year ended December 31, 2002. The increase in Outsourcing service revenues was primarily due to increased revenues from large outsourcing contracts.
        Development & Integration.    Development & Integration service revenues for the year ended December 31, 2003 were $162.1 million, a decrease of $23.7 million, or 12.8%, compared to the year ended December 31, 2002. Development and Integration service revenues were adversely affected during 2003 by customers' decisions to defer software development projects due to the reduction in capital spending related to technology.


        Other IT Services.    Other IT Services revenues for the year ended December 31, 2003 were $271.6 million, a decrease of $71.3 million, or 20.8%, compared to the year ended December 31, 2002, largely due to lower revenues associated with staff augmentation and other services.
        The following table summarizes certain line items from our consolidated statements of income (dollars in thousands):
 
 Years Ended December 31,
 Increase (Decrease)
 
 
 2003
 2002
 $
 %
 
Revenues $804,976 $873,203 $(68,227)(7.8)

Salaries, wages, and other direct costs
 
 
554,375
 
 
630,047
 
 
(75,672
)
(12.0
)
  
 
 
   
Gross margin $250,601 $243,156 $7,445 3.1 
  
 
 
   
Gross margin %  31.1% 27.8%     
  
 
      
Salaries, wages, and other direct costs
        The decrease in salaries, wages, and other direct costs in 2003, as compared to similar core non-Y2K
revenue2002, was primarily attributable to ongoing efforts to bring our costs in 1999. The Company believes this increase was indicative of the
Company's strong positioning in its three core business lines, Business
Innovation Consulting (Plan), Application Developmentalignment with anticipated revenues through workforce reductions and Integration (Build),
and Application Development and Management Outsourcing (Manage). Keane's Plan,
Build, and Manage revenue for 2000, excluding Y2K-related revenue, was $107.1
million, $327.1 million, and $437.3 million, respectively.increased offshore staffing, primarily at our India facilities. Salaries, wages, and other direct costs for 2000 were $621.2$554.4 million, or 71.2%68.9%, of revenue,total revenues, for 2003 and $630.0 million, or 72.2%, of total revenues in 2002. Total billable employees for all operations were 6,182 at the end of 2003, compared to $702.8 million,6,175 total billable employees at the end of 2002. In addition to these employees, we occasionally use subcontractors to augment our billable staff. The base of billable employees within our India operation was 876 at the end of 2003, an increase of 463 employees, or 67.5%112.1%, compared to 2002. We added our India operation in March 2002 with our acquisition of SignalTree Solutions. We closely monitor utilization rates, billable employees, and other direct costs in an effort to avoid adverse impacts to our gross margin.
Gross margin
        We believe gross margin(revenues less salaries, wages, and other direct costs) provides an important measure of our profitability. Gross margin as a percentage of revenue for 1999. This2003 was 31.1%, compared to 27.8% in 2002. The increase in gross margin as a percentage of revenue was largely the result of a more stable environment for IT services and improved utilization related to our base of billable personnel in North America. Also contributing to the improvement in the gross margin percentage was our lower labor cost due to increased use of offshore resources at our India facilities.
Selling, general and administrative expenses
 
 Years Ended December 31,
 Decrease
 
 
 2003
 2002
 $
 %
 
Selling, general, and administrative expenses (SG&A) $192,900 $198,813 $(5,913)(3.0)
  
 
      
SG&A as a % of revenue  24.0% 22.8%     
  
 
      
        SG&A expenses include salaries for our corporate and branch administrative employees, sales and marketing expenses, as well as the cost of our administrative facilities, including related depreciation expense. SG&A expenses for 2003 decreased $5.9 million, or 3.0%, compared to 2002. SG&A expenses for 2003 were $192.9 million, or 24.0%, of total revenue, compared to $198.8 million, or 22.8%, of total revenue for 2002. The decrease in SG&A expenses in 2003 was the result of our


Fourth Quarter of 2002 workforce reduction, our continued focus on tightly controlling discretionary expenses, and the cost synergies of fully integrating the acquisitions that we made in 2001 and 2002.
Amortization of intangible assets
        Amortization of intangible assets for 2003 was $15.8 million, a decrease of $0.5 million, or 3.3%, compared to 2002. The decrease in amortization of intangible assets in 2003 was primarily due to lower utilization of
the Company's billable headcount, causedfully amortizing intangibles associated with prior year acquisitions offset in part by the declinefull year amortization of Y2K revenue. In orderadditional intangible assets resulting from the acquisitions of SignalTree Solutions in March 2002 and one other acquisition complementary to bring costsour business strategy made during the Third Quarter of 2002.
Restructuring charges, net
        During 2003, we reevaluated our estimates recorded for the restructuring charge taken in closer alignment with revenue, in the fourth quarter2002 and as a result recorded an expense reduction of 2000,
the Company incurred a charge of $13.5$1.5 million of which $8.6for workforce reductions, and $1.0 million or 1.0%
of revenue, is related to the consolidationcosts of consolidating and/or closing of certain non-profitable offices. In addition, during 2003 we recorded a restructuring charge of $2.2 million. Of this charge, $1.3 million was for an additional workforce reduction of 75 employees and $0.9 million was for the costs associated with a branch offices, employee severance costs, facility leases,office closing. The net impact of these actions resulted in a net expense reduction to the restructuring charge of $326,000 in our consolidated statement of income.
        During 2002, we recorded a restructuring charge of $17.6 million. This charge consisted of $3.2 million related to a workforce reduction of approximately 229 employees, $12.1 million for branch office closings and forcertain other miscellaneous purposes.

During the second quarterexpenditures, $1.8 million of 2000, the Company identified ten under-performing
branch offices,assets which had lost critical massbecame impaired as a result of the Y2K transitionthese restructuring actions, and were no longer profitable. Throughout the year, Keane took action to address
these under-performing business units through the consolidation of operations,
internal growth, the upgrading of management and sales personnel and office
closures.

Selling, General, & Administrative ("SG&A") expense$0.5 million for 2000 were $201.9 million
or 23.1% of revenue, compared to $199.0 million or 19.1% of revenue in 1999.
This increase was primarily attributable to the decreasea net change in the Company's
revenue and investments the Company continued to make in the development and
marketing of its core business lines.

Amortization of goodwillprior year's estimate for workforce reductions, branch office closures, and other intangible assets for 2000 was $12.4 million,
or 1.4% of revenue, compared to $9.2 million, or 0.9% of revenue, in 1999. The
increase was primarily attributable to acquisitions made during the current and
prior year.

Keane completed two small acquisitions during 2000 at a cost of $32.5 million,
net of cash acquired. On July 19, Keane acquired Denver Management Group, a
management consulting firm focused on supply chain management and integrated
distribution. Denver Management has been incorporated into Keane Consulting
Group. On September 7, Keane acquired Care Computer Systems, Inc., a provider of
software for the long-term care industry, which expanded the healthcare
solutions marketed by Keane's Healthcare Solutions Division.

expenditures.
Interest and other expense for each of 2000 and 1999 were $1.5 million.dividend income
        Interest and dividend income for 2000 totaled $7.72003 was $3.0 million compared to $7.8$2.2 million in 1999.2002. The Company'sincrease in interest and dividend income was the result of higher average cash balances and marketable securities offset in part by overall lower interest rates compared to the same period in 2002. The higher average cash balances and marketable securities was due to the investment of the net proceeds from the issuance of Debentures in June 2003 and our strong cash flow. Our cash balances were reduced by cash used to repurchase shares of our common stock in 2003.
Interest expense
        Interest expense for 2003 was $4.2 million compared to $255,000 in 2002. The interest expense increase is primarily related to the issuance of our Debentures and our new corporate facility. The accounting for the facility as explained in Note 15 "RELATED PARTIES, COMMITMENTS, AND CONTINGENCIES" in the notes to the accompanying consolidated financial statements, requires us to impute interest expense on the accrued building costs.
Other income, net
        Other income was $7.1 million for 2003 compared to $1.3 million in 2002. Other income in 2003 included a $7.3 million payment received for a favorable judgment in an arbitration award proceeding related to damages for breach of an agreement between Signal Corporation and our Federal Systems subsidiary.


Minority interest
        During the Fourth Quarter of 2003, we completed our acquisition of a controlling interest in Keane Worldzen, a privately held BPO firm. Our initial investment resulted in an equity position of approximately 62% of the issued and outstanding capital stock of Keane Worldzen with the right to increase our ownership position over time. As a result of this transaction, we began to consolidate Keane Worldzen's financial results with ours in the Fourth Quarter of 2003. The amount in minority interest represents the loss attributable to minority shareholders for the period that we consolidated Worldzen.
Income taxes
        We generated income before taxes of $48.7 million for 2003 compared to $13.6 million in 2002. The provision for income taxes represents the amounts owed for federal, state, and foreign taxes. The effective income tax rate is the provision for income taxes as a percentage of income before the provision for income taxes. Our effective tax rate was 40.0% for 2003 and 2002, and reflects an adjustment of prior year's estimated tax liability in 2003 and 2002. A reconciliation of the statutory federal income tax rate to the effective rate for each of 2000 and 1999 was 40.5%.period is included in Note 14 "INCOME TAXES" in the notes to the accompanying consolidated financial statements.
Net income
        Net income and earnings per share for 2000 were $20.4increased to $29.2 million and $.29 per
diluted share including all charges, and $28.4in 2003 compared to $8.2 million and $.41 per diluted
share excluding all charges. This compares toin 2002. The improvement in net income is the result of $73.1 millionthe absence of a restructuring charge in 2003, improved operating income margins, and $1.01 per diluted share including all charges, and net income of $81.2 and $1.12
per diluted share excluding all charges for 1999.

On February 5, 2001, Keane announced the sale of its help desk businessfavorable judgment in a
cash transaction valued at $15.7 million. Revenue from its divested help desk
business and from business units closed as part of its restructuring represented
approximately $52 millionan arbitration award in unprofitable revenue for the year 2000.


                                       19



Net cash provided from operations was at $96 million during 2000, before the
expenditure of $81 million for the repurchase of Keane shares and $32.5 million
in acquisitions, net of cash acquired.

2003.
RECENT ACCOUNTING PRONOUNCEMENTS:PRONOUNCEMENTS
        In June 1998,January 2003, the Financial Accounting Standards Board ("FASB") issued StatementInterpretation No. 46 ("FIN 46"), "Consolidation of Financial
Accounting StandardsVariable Interest Entities," as amended by FASB Interpretation No. 133, (FAS 133)46(R) ("FIN 46(R)"), 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. FIN 46(R) is effective prospectively for all variable interests obtained subsequent to December 31, 2002. For variable interests existing prior to December 31, 2002, consolidation is required for periods ending after March 15, 2004, with the exception of interests in special purpose entities, which were required in financial statements of public companies for periods ending after December 15, 2003.
        We have evaluated the applicability of FIN 46(R) to our relationship with each of City Square Limited Partnership ("City Square") and Gateway LLC and determined that these entities are not required to be consolidated within our unaudited condensed consolidated financial statements. We have determined that Gateway LLC is not a variable interest entity as the equity investment is sufficient to absorb the expected losses and the holders of the equity investment do not lack any of the characteristics of a controlling interest. We have concluded that as we no longer occupy the space at Ten City Square and no longer derive any benefit from leasing the space, we would not be determined to be the related party most closely associated with City Square. As a result, we will continue to account for our leases with City Square and Gateway LLC consistent with our historical practices in accordance with generally accepted accounting principles. We believe that we do not have an interest in any variable interest entities that would require consolidation.
        In May 2003, the EITF reached a consensus on Issue No. 01-08 ("EITF 01-8"), "Determining Whether an Arrangement Contains a Lease." EITF 01-08 provides guidance on how to determine


whether an arrangement contains a lease that is within the scope of SFAS No. 13 ("SFAS 13"), "Accounting for Derivative Instruments
and Hedging Activities.Leases." which required adoptionThe guidance in periods beginning after June
15, 1999. FAS 133 was subsequently amended by Statement of Financial Accounting
Standards No. 137, " Accounting for Derivative Instruments and Hedging
Activities- Deferral ofEITF 01-08 is based on whether the Effective Date of FASB Statement No. 133" and will
now bearrangement conveys to the purchaser (lessee) the right to use a specific asset. EITF 01-08 is effective for fiscal years beginning after June 15, 2000, with earlier
adoption permitted. In June 2000, the FASB issued Statement No. 138. "
Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
an amendment to FAS 133 and effective simultaneously with FAS 133. The Company
adopted FAS 133 as amended by FAS 138arrangements entered into or modified in the first quarterSecond Quarter of 2001, and FAS133
has2004. The adoption of this statement did not hadhave a significant impacteffect on itsour unaudited condensed consolidated financial position or results of operations.
        In July 2001, the FASB issued FAS No. 141, "Business Combinations", and FAS No.
142, "Goodwill and Other Intangible Assets." FAS 141 eliminates the
pooling-of-interests method of accounting for business combinations except for
qualifying business combinations that were initiated prior to July 2001. FAS 141
further clarifies the criteria to recognize intangible assets separately from
goodwill. The requirements of Statement 141 are effective for any business
combination that is initiated after June 30, 2001. Under FAS 142, goodwill and
indefinite lived intangible assets are no longer amortized but are reviewed
annually (or more frequently if impairment indictors 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
Statement 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 Statement 142 in their 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
Company is currently in the process of evaluating the impact of FAS 142 will
have on its financial position and results of operations.

In October 2001,2003, the FASB issued SFAS No. 144, "Accounting132 (revised 2003) ("SFAS 132 as revised"), "Employers' Disclosures about Pensions and Other Post Retirement Benefits." This Statement revises employers' disclosures about pension plans and other postretirement benefit plans but does not change the measurement or recognition provisions of SFAS No. 87, "Employers' Accounting for the Impairment or
Disposal of Long-Lived Assets.Pensions," SFAS No. 144 supersedes88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" and SFAS No. 121,
"Accounting106, "Employer's Accounting for Postretirement Benefits Other than Pensions." SFAS 132 as revised requires additional disclosures about the Impairmentassets, obligations, cash flows, and net periodic benefit cost of Long-Lived Assetsdefined benefit pension plans and other postretirement plans. This Statement is effective for Long-Lived Assets to
Be Disposed Of" and provides a single accounting model for long-lived assets to
be disposed of. The Company is required to adopt SFAS No. 144 for thefinancial statements with fiscal year beginningyears ending after December 15, 20012003, except the additional disclosure information about foreign plans is effective for fiscal years ending after June 15, 2004. We have a foreign defined benefit plan and, is currentlyas a result, have included the required additional disclosures in the processnotes to the accompanying consolidated financial statements.
        In March 2004, the EITF reached consensuses on Issue No. 03-6 ("EITF 03-6"), "Participating Securities and the Two-Class Method" under FASB Statement No. 128, "Earnings per Share," which requires that convertible participating securities should be included in the computation of evaluatingbasic earnings per share using the two-class method. Our Debentures are not participating securities under the provisions of EITF 03-6 as they do not participate in undistributed earnings with our common stock. No separate disclosure of basic or diluted earnings per share has been made for the Class B common stock as the impact was immaterial and, effective February 1, 2004, all of the Class B common stock was converted into shares of our common stock. In addition, there was no impact on itsthe basic and diluted earnings per share for our common stock for all periods presented in the accompanying unaudited condensed consolidated statements of income. See Note 8 "Capital Stock" in the notes to the accompanying unaudited condensed consolidated financial statements.

statements for additional disclosure.
        In September 2004, the EITF reached consensus on Issue No. 04-8 ("EITF 04-8"), "The Effect of Contingently Convertible Debt on Diluted Earnings per Share," which requires that contingently convertible debt should be included in the calculation of diluted earnings per share using the if-converted method regardless of whether the market price trigger has been met. Under the if-converted method, the debt is considered converted to shares, with the resulting number of shares included in the denominator of the earnings per share calculation and the related interest expense (net of tax) added back to the numerator of the earnings per share calculation. See Note 2 "Earnings Per Share Data" in the notes to the accompanying consolidated financial statements for additional disclosure. In accordance with this Issue, we have adopted the consensus as of December 31, 2004 and have restated all prior periods presented. The adoption of EITF 04-8 resulted in a reduction of diluted earnings per share for the years ended December 31, 2004 and 2003, but did not have any impact on diluted earnings per share for the year ended December 31, 2002 as our Debentures were issued in 2003.
        In December 2004, the FASB issued SFAS No. 123 (revised 2004) ("SFAS 123(R)") "Share-Based Payment," which is a revision of SFAS 123 and supersedes APB 25 and its related implementation guidance. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values at the date of grant. Pro forma disclosure is no longer an alternative. SFAS 123(R) is effective for public companies (excluding small business issuer as defined in SEC Regulation S-B) at the beginning of the first interim or annual period beginning after June 15, 2005.

         SFAS 123(R) permits public companies to adopt its requirements using one of two methods. A "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date. A "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. We have yet to determine which method we will use in adopting SFAS 123(R). As permitted by SFAS 123, we currently account for share-based payments to employees using APB 25's intrinsic value method. Accordingly, the adoption of SFAS 123(R)'s fair value method will have a significant impact on our results of operations. We are evaluating SFAS 123(R) and have not yet determined the impact in future periods.
LIQUIDITY AND CAPITAL RESOURCES: The Company'sRESOURCES
Consolidated Financial Condition (Dollars in thousands)
Years Ended December 31,

 2004
 2003
 2002
 
 Cash Flows Provided By (Used in)          
 Operating activities $51,919 $77,572 $62,525 
 Investing activities  (16,436) (150,202) (34,737)
 Financing activities  (25,240) 82,437  (48,989)
 Effect of exchange rate on cash  509  546  2,028 
  
 
 
 
Increase (Decrease) in Cash and Cash Equivalents $10,752 $10,353 $(19,173)
  
 
 
 
        We have historically financed our operations with cash and investments at December
31, 2001 increased to $ 129.2 milliongenerated from $ 115.2 million at December 31, 2000.
This increase was primarily attributable to the continuing efforts by the
Company to decrease its Days Sales Outstanding ("DSO"). The decrease in accounts
receivable was offset by payments for acquired debt related to the Metro
acquisition of $65.9 million and purchases of property, plant and equipment of
$7.6 million.operations. In addition, to these payments, the Company spent $ 4.0 million on
the purchase of 326,200 shares of its stock at an average price of $12.40 per
share.

On March 15, 2002 the Company acquired SignalTree Solutions Holding, Inc., a
privately -held, U.S. based corporation with two software development facilities
in India and additional operations in the United States. The Company paid
approximately $64.5we raised $150.0 million in proceeds from the issuance of our Debentures. We use the net cash for the acquisition. As a result, this
transaction will reduce the Company's cash position at the end of the first
quarter of 2002.

On September 19, 2001, the Company announced that its Board of Directors had
authorized the Companygenerated from these sources to repurchase up to 1,542,800 shares of its commonfund capital expenditures, mergers and acquisitions, and stock over the next 12 months. Since May of 1999, the Company has invested $108.9
million to repurchase 5,457,200 million shares of its common stock under three
separate authorizations. The timing and amount of additional share repurchases
will be determined by the Company's management based on its evaluation of market
and economic conditions and other factors. A total of 326,200 shares of Common
Stock were repurchased during the first quarter of 2001. There were no shares
repurchased during the second, third or fourth quarter of 2001. The Company
maintains and has


                                       20



available a $10 million unsecured demand line of credit with a major Boston bank
for operations and acquisition opportunities.

Based on the Company's current operating plan, the Company believes that its
cash and cash equivalents on hand, cash flows from operations, and its current
available line of credit will be sufficient to meet its current capital
requirements for at least the next twelve months.

The Company financed its operations exclusively through its ability to generate
cash from operations.repurchases. If the Companywe were to experience a decrease in revenue as a result of a decrease in demand for itsour services or a decrease in itsour ability to collect receivables, the Companywe would be required to curtailreduce discretionary spending related to SG&A expenses and adjusts itsadjust our workforce in an effort to maintain profitability. At December 31, 2004, we had $198.2 million in cash and cash equivalents and marketable securities. We intend to continue to use our cash and cash equivalents and marketable securities for general corporate purposes, which may include additional repurchases of our common stock under existing or future share repurchase programs and the funding of future acquisitions and other corporate transactions.
Cash flows from operating activities
        Net cash provided by operating activities totaled $51.9 million in 2004 as compared to net cash provided by operations of $77.6 million in 2003. The Company hasdecrease in net cash provided by operating activities was driven in part by the absence of a $7.3 million payment that we received in connection with an arbitration proceeding in the First Quarter of 2003, $10.4 million of higher tax payments during 2004 and higher working capital requirements due to the timing of payroll and subcontractor costs. Accounts receivable increased $13.2 million to $126.5 million in 2004 compared to 2003. The accounts receivable increase was largely driven by the revenue growth experienced in 2004. However, Day Sales Outstanding ("DSO"), an indicator of the effectiveness of our accounts receivable collections, was 52 days as of December 31, 2004 compared to 53 days as of December 31, 2003 and 59 days as of December 31, 2002. We calculate DSO using the trailing three months total revenues divided by the number of days in the quarter to determine daily revenues. The average accounts receivable balance for the three-month period is then divided by daily revenues. Changes in accounts receivable have a


significant effect on our cash flow. Items that can affect our accounts receivable DSO include, contractual payment terms, client payment patterns (including approval or processing delays and cash management), fluctuations in the level of IT product sales and our level of collection efforts. Many individual reasons are outside of our control. As a result, our DSO will normally fluctuate from period to period affecting our liquidity.
        Net cash provided by operating activities in 2003 increased $15.0 million compared to 2002 due to higher net income and improvements in working capital. We drove the improvements in working capital through our continuing efforts to increase collections of accounts receivable. The improvement in collections is evident by a reduction in DSO. Cash provided by operating activities also improved due to a $7.3 million award that we received in the First Quarter of 2003. This award was the result of an arbitration proceeding that we initiated in 2000 for a breach of an agreement between Signal Corporation and our Federal Systems subsidiary. Partially offsetting this increase is approximately $11.9 million that we paid associated with prior and current restructuring charges and $3.5 million that we paid in connection with settling a legal claim in the Third Quarter of 2003. During 2002, we paid $16.5 million associated with prior and current restructuring charges.
        We believe that cash generated from our operating activities will be sufficient to fund our working capital requirements through the next 12 months and beyond. However, in order to protect against the current economic conditions persisting in 2005 and beyond, we have taken and will continue to take, as we deem necessary, steps to reduce our expenses and align our cost structure to our revenue. We anticipate that current cash on hand and cash generated from operations will be adequate to fund our planned capital and financing expenditures for the next 12 months and beyond.
Cash flows used in investing activities
        Net cash used in investing activities in each of 2004, 2003, and 2002 was primarily for investments, acquisitions, and capital expenditures.
        During 2004, we purchased $62.6 million and sold $77.6 million in marketable securities, generating a net source of cash of $15.0 million. In addition, we invested $10.3 million in property and equipment, and capitalized software costs in connection with the implementation of our PeopleSoft Enterprise Resource Planning applications in 2004. On February 27, 2004, we acquired Nims, an information technology and consulting services company. We paid $18.1 million in cash, including transaction costs and net of cash acquired, for all of the outstanding capital stock of Nims. The purchase price may increase with the potential to pay up to an additional $15.0 million in earn-out consideration over the next three years, contingent upon the achievement of certain future financial targets. Based on the forecasted financial performance related to the first earn-out, we expect to pay approximately $3.3 million contingent consideration in April of 2005. On July 13, 2004, we acquired Fast Track, a privately held consulting firm based in the United Kingdom that manages the design, integration, and rapid deployment of large-scale SAP implementations. In exchange for all of Fast Track's outstanding capital stock, we paid approximately $3.4 million in cash, including transactions costs, with the potential to pay up to approximately $5.0 million, additionally, in earn-out consideration over the next two years, contingent upon the achievement of certain future financial targets.
        During 2003, we purchased $144.2 million and sold $18.1 million in marketable securities, generating a net use of cash of $126.1 million. In addition, we invested $15.3 million on property and equipment, and capitalized software costs in connection with the implementation of our PeopleSoft Enterprise Resource Planning applications. We also invested $7.5 million, net of cash acquired, for the controlling interest in Keane Worldzen and paid $0.9 million related to prior year's acquisitions.
        During 2002, we purchased $27.9 million and sold $69.8 million in marketable securities, generating net cash of $41.9 million, which we used to partially fund acquisitions. In 2002, we paid $63.2 million, net of cash acquired, to acquire SignalTree Solutions, and another smaller business that is


complementary to our business strategy. In connection with the smaller complementary business acquisition, we 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. As of December 31, 2004, the deferred revenue and non-interest bearing note each had a balance of $0.6 million, which reflects an aggregate reduction of $4.8 million resulting from the delivery of related service credits. The note had a one-year term with a one-year extension expiring on September 25, 2004. Effective September 25, 2004, the term of the contingent service credits was extended one year through September 25, 2005. During 2002, we also invested $13.7 million on property and equipment, and capitalized software costs in connection with the implementation of our PeopleSoft Enterprise Resource Planning applications.
Cash flows provided by (used in) financing activities
        Net cash flows used for financing activities was $25.2 million in 2004 compared to net cash flows provided by financing activities of $82.4 million in 2003. Net cash flows used for financing activities were primarily for the repurchase of our common stock.
        In June 2003, we received $150.0 million in proceeds from our issuance of convertible subordinated debentures. From these proceeds, we simultaneously invested approximately $37.3 million to repurchase approximately 3.0 million shares of our common stock from authorizations approved by our Board of Directors in October of 2002 and May of 2003. Net proceeds after the repurchase of shares and approximately $4.4 million debt issuance costs were approximately $108.3 million. See Note 9 "CONVERTIBLE SUBORDINATED DEBENTURES" in the notes to the accompanying consolidated financial statements for additional information on our Debentures.
        Additionally during 2004 and 2003, we were authorized to repurchase shares of our common stock on the open market or in negotiated transactions, with the timing and amount of shares purchased determined by our management based on its evaluation of market and economic conditions and other factors. From January 1, 2002 through December 31, 2004, our Board of Directors authorized us to repurchase up to 17.6 million shares of our common stock. The following is a summary of our repurchase activity for 2004, 2003, and 2002 (dollars in thousands):
 
 2004
 2003
 2002
 
 Shares
 Amount
 Shares
 Amount
 Shares
 Amount
Prior year authorizations at January 1, 3,181,200    3,676,400    1,542,800   
Authorizations 3,000,000    6,000,000    8,632,200   
Repurchases (2,127,300)$30,096 (6,495,200)$66,696 (6,498,600)$54,092
Expirations (1,182,300)   —    —   
  
    
    
   
Shares remaining as of December 31, 2,871,600    3,181,200    3,676,400   
  
    
    
   
        Between May 1999 and December 31, 2004, we have invested approximately $259.8 million to repurchase approximately 20.6 million shares of our common stock under ten separate authorizations. These share repurchases more than offset the shares issued under our various stock ownership programs. Under these stock ownership programs, we issued 682,250 shares, 603,235 shares, and 510,312 shares and received proceeds of $5.6 million, $4.4 million, and $6.4 million for the years ended December 31, 2004, 2003, and 2002, respectively.
        In February 2003, we entered into a $50.0 million unsecured revolving credit facility ("credit facility") with two banks. The credit facility replaced a previous $10.0 million demand line of credit, which expired in July 2002. The terms of the credit facility require us to maintain a maximum total funded debt and other financial ratios. The credit facility also includes covenants that, subject to certain specific exceptions and limitations, among other things, restrict our ability to incur additional debt, make certain acquisitions or disposition of assets, create liens, and pay dividends. On June 11,


2003, we and the two banks amended certain provisions of the credit facility relating to financial covenants. These covenants, which include total indebtedness and leverage ratios, are no significantmore restrictive than those initially contained in the credit facility. On October 17, 2003 and February 5, 2004, we and the two banks further amended certain provisions of the credit facility to expand our ability to make certain acquisitions. The annual commitment fee for maintaining the credit facility is 30 basis points on the unused portion of the credit facility, up to a maximum of $150,000. As of December 31, 2004, we had no debt but doesoutstanding under the credit facility. We may draw upon the credit facility up to $50.0 million less any outstanding letters of credit that have commitmentsbeen issued against the credit facility. Any amounts drawn upon the credit facility constitute senior indebtedness for purposes of our Debentures. Borrowings bear interest at one of the bank's base rate or the Euro currency reserve rate. Based on our current operating plan, we believe that our cash and cash equivalents on hand, marketable securities, cash flows from operations, and our line of credit will be sufficient to meet our current capital requirements for at least the next 12 months.
        Net cash used in financing activities in 2002 was primarily the result of our share repurchase program. During 2002, we repurchased 6,498,600 shares of our common stock for a total investment of approximately $54.1 million at an average per share price of $8.32, which was partially offset by $6.3 million in cash proceeds from our various stock ownership programs.
Increase (Decrease) in Cash and Cash Equivalents
        Our cash and cash equivalents totaled $67.5 million, $56.7 million, and $46.4 million at December 31, 2004, 2003, and 2002, respectively.
        The following table summarizes our contractual obligations by year as follows:



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

Contractual Obligations          Payments Due by Period (in millions)
- --------------------------------------------------------------------------------------------------------------------------
                                 Total           Less than 1 year     1-3 years       4-5 years       After 5 years
- --------------------------------------------------------------------------------------------------------------------------

Capital Lease Obligations             2.3               1.1              1.2
- --------------------------------------------------------------------------------------------------------------------------
Operating Leases                    129.5              27.0             46.6             22.9             33.0
- --------------------------------------------------------------------------------------------------------------------------
Other Obligations                     8.5               7.4              1.1
- --------------------------------------------------------------------------------------------------------------------------
Total Contractual Cash              140.3              35.5             48.9             22.9             33.0
Obligations
- --------------------------------------------------------------------------------------------------------------------------



The Company'sof December 31, 2004:
 
 Payments due by Period (Dollars in thousands)
Contractual obligations
 2005
 2006
 2007
 2008
 2009
 2010 &
thereafter
 Total
Note Payable $649 $— $— $— $— $— $649
Put Option $2,858  —  —  —  —  —  2,858
Long-term debt (1)  —  —  —  —  —  150,000  150,000
Operating leases (2)  19,457  16,195  13,354  10,299  7,479  22,435  89,219
Capital lease obligations  243  17  —  —  —  —  260
  
 
 
 
 
 
 
Total contractual cash obligations (3) $23,207 $16,212 $13,354 $10,299 $7,479 $172,435 $242,986
  
 
 
 
 
 
 
(1)
Excludes contractual and contingent interest as described in Note 9 "CONVERTIBLE SUBORDINATED DEBENTURES."

(2)
Our operating lease commitment balances include lease obligations for properties that have been restructured in prior years and are accrued, net of contractual sublease income of approximately $2.3 million, on our accompanying consolidated balance sheets.

(3)
Total contractual cash obligations exclude the potential future cash payments required (i) in connection with potential earn-out contingent consideration associated with the Third Quarter of 2002 acquisition (ii) to settle the first earn-out associated with the Nims acquisition totaling approximately $3.3 million and expected to be paid in April of 2005 (iii) to settle the other put and call options associated with our Keane Worldzen acquisition (see Note 6 "BUSINESS ACQUISITIONS" in the notes to the accompanying consolidated financial statements for further discussion) and (iv) to settle the accrued deferred compensation liability of approximately $8.1 million and the UK accrued pension liability of approximately $13.5 million (see Note 13 "BENEFIT PLANS" in the notes to the accompanying consolidated financial statements for further discussion).

        Our material commitments are primarily related to our Debentures and our office rentals and
capital expenditures.rentals. Contractual obligations related to operating leases reflectsreflect existing rental leases and the proposed new corporate facility as noteddiscussed in Footnote INote 15 "RELATED PARTIES, COMMITMENTS, AND CONTINGENCIES" in the notes to the accompanying consolidated financial statements. Further discussion regarding our Debentures can be found in Note 9 "CONVERTIBLE SUBORDINATED DEBENTURES."
Seasonality
        We experience a moderate amount of seasonality. Our consulting revenue and profitability are affected by the number of workdays in a quarter. Typically our billable hours are reduced in the second half of the year, especially during the fourth quarter, due to the large number of holidays and vacation time.
OFF-BALANCE SHEET ARRANGEMENTS
        In January 2003, the FASB issued FIN 46, which requires the consolidation of a variable interest entity, as defined, by its primary beneficiary. Primary beneficiaries are those companies that are subject to a majority of the risk of loss or entitled to receive a majority of the 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. FIN 46 is effective prospectively for all variable interests obtained subsequent to December 31, 2002. For variable interests existing prior to December 31, 2002, consolidation will be required beginning July 1, 2003. In December 2003, the FASB agreed to a broad-based deferral of the effective date of FIN 46 for public companies until the end of periods ending after March 15, 2004, with the exception of interests in special purpose entities, which are required in financial statements "Related Parties,
Commitmentsof public companies for periods ending after December 15, 2003.
        We have evaluated the applicability of FIN 46 to our relationship with each of City Square and Contingencies.Gateway LLC and determined that these entities are not required to be consolidated within our consolidated financial statements. We have determined that Gateway LLC is not a variable interest entity as the equity investment is sufficient to absorb the expected losses and the holders of the equity investment do not lack any of the characteristics of a controlling interest. We have concluded that as we no longer occupy the space at Ten City Square and no longer derive any benefit from leasing the space, we would not be determined to be the related party most closely associated with City Square. As a result, we will continue to account for our leases with City Square and Gateway LLC consistent with our historical practices in accordance with generally accepted accounting principles. We believe that we do not have an interest in any variable interest entities that would require consolidation.
        In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." The Companystatement 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 committedremote. 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.
        We are a guarantor with respect to a line of credit for Innovate EC, an Enterprise
Application Architecture (EAA) projectentity in which will encompass all areaswe acquired a minor equity position as a result of a previous acquisition. The total line of credit is for $600,000. We guarantee $300,000 of this obligation. The line is subject to review by the company and further enhance its abilitylending institution. We would be required to sustain growth for the organization.
The EAA contract obligations are includedmeet our guarantor obligation in the above chart underevent the caption
"Other Obligations."

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 clients through increased billing rates. Rates charged by the Companyus 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 costs in 2001.


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.

Keane'stime-to-time.
        Our quarterly operating results have varied, and are likely to continue to vary significantly. This may result in volatility in the market price of Keane's
shares. Keane hasour common stock.    We have experienced and expectsexpect to continue to experience fluctuations in itsour quarterly results. Keane'sOur 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'sour revenue in a particular quarter, including:

 .     
        A significant portion of Keane'sour expenses dodoes not vary relative to revenue. As a result, if revenue in a particular quarter does not meet expectations, Keane'sour operating results could be materially adversely affected, which in turn may have a material adverse impact on the market price of Keaneour common stock. In addition, many of Keane'sour 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.

Keane has
        We continue to position ourselves to achieve increasing percentages of revenues and growth through outsourcing. If we are successful in obtaining new outsourcing contracts, we may experience increased pressure on our overall margins during the early stages of these contracts.    This could result in higher concentrations of revenues and contributions to income from a smaller number of larger clients on customized outsourcing solutions. If we were to receive a higher concentration of our revenues from a smaller number of clients, our revenues could decrease significantly if one or more of these clients decreased their spending. Outsourcing contracts are generally long-term contracts that require additional staffing in the initial phases of the contract period, which often results in lower gross margins at the beginning of these contracts.
        If our clients are not satisfied with our services, we may have exposure to liabilities, which could adversely affect our profitability and financial condition as well as our ability to compete for future work.    If we fail to meet our contractual obligations, we could be subject to legal liability, which could adversely affect our business, operating results and financial condition. The provisions we typically include in our contracts that are designed to limit our exposure to legal claims relating to our services and the applications we develop may not protect us or may not be enforceable under some circumstances or under the laws of some jurisdictions. It is possible, because of the nature of our business, that we will be sued in the future. In addition, although we maintain professional liability insurance, the policy limits may not be adequate to provide protection against all potential liabilities.


Moreover, as a consulting firm, we depend to a large extent on our relationships with our clients and our reputation for high-quality services to retain and attract clients and employees. As a result, claims made against our work may damage our reputation, which in turn, could impact our ability to compete for new work and negatively impact our revenue and profitability.
        The termination of a contract by a significant client could reduce our revenue and profitability or adversely affect our financial condition.    Our five largest clients, excluding the federal government accounted for approximately 18.5% of our revenue in 2004, while no individual client accounted for more than 6.0% of our total revenue. The various agencies of the federal government represent our largest client, accounting for 9.4% of total revenue in 2004. We strive to develop long-term relationships with our clients. Most individual client assignments are from three to twelve months, however, many of our client relationships have continued for many years. Our clients typically retain us on a non-exclusive, engagement-by-engagement basis. Although they may be subject to penalty provisions, clients may generally cancel a contract at any time. Under many contracts, clients may reduce their use of our services under such contract without penalty. In addition, contracts with the federal government contain provisions and are subject to laws and regulations that provide the federal government with rights and remedies not typically found in commercial contracts. Among other things, governments may terminate contracts with short notice, for convenience and may cancel multi-year contracts if funds become unavailable. When contracts are terminated, our revenue may decline and if we are unable to eliminate associated costs in a timely manner, our profitability may decline. In 2004, approximately 18.7% of our revenue was from public sector clients, including U.S. Federal, state, and local governments and agencies. Often government spending programs are dependent upon the budgetary capability to support such programs. Many government budgets have been adversely impacted by the economic slowdown. Most states must operate under a balanced budget. As a result of such budget and deficit considerations, our existing and future revenues and profitability could be adversely affected by reduced government IT spending.
        Unfavorable government audits could require us to refund payments we have received, to forego anticipated revenue and could subject us to penalties and sanctions.    The government agencies we contract with generally have the authority to audit and review our contracts with them. As part of that process, the government agency reviews our performance on the contract, our pricing practices, our cost structure and our compliance with applicable laws, regulations and standards. If the audit agency determines that we have improperly received reimbursement, we would be required to refund any such amount. If a government audit uncovers improper or illegal activities by us or we otherwise determine that these activities have occurred, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeitures of profits, suspension of payments, fines and suspension or disqualification from doing business with the government. Any such unfavorable determination could adversely impact our ability to bid for new work.
        We have pursued, and intendsintend to continue to pursue, strategic acquisitions. Failure to successfully integrate acquired businesses or assets may adversely affect Keane'sour financial performance.    In the past fiverecent years, Keane haswe have grown significantly through acquisitions. From January 1, 1999 through December 31, 2001, Keane has2004, we have completed nine14 acquisitions. The aggregate costmerger and consideration costs of these acquisitions totaled approximately $266.8$414.4 million. Keane'sOur future growth may be based in part on selected acquisitions. At any given time, Keanewe may be in various stages of considering acquisition opportunities. Keane can provide no assurances that it willWe may not 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. In addition, even if Keane reacheswe reach a definitive agreement there is no assurance that Keane willwith a target, we may not be able to complete any future acquisition.

Keane
        We typically anticipatesanticipate that each acquisition will bring benefits, such as an increase in revenue. Prior to completing an acquisition, however, it is difficult to determine if Keane can actually realize these benefits.benefits will be realized. Accordingly, there is a risk that an acquired company may not achieve an increase in revenue or other


benefits for Keane.us. In addition, an acquisition may result in unexpected costs, expenses, and liabilities. Any of these events could have a material adverse effect on Keane'sour business, financial condition, and results of operations.
        The process of integrating acquired companies into Keane'sour existing business maymight also result in unforeseen difficulties. Unforeseen operating difficulties may absorb significant management attention, which Keane mightwe may otherwise devote to itsour existing business. In addition, the process may require significant financial resources that Keanewe might otherwise allocate to other activities, including the ongoing development or expansion of Keane'sour existing operations.
        Finally, future acquisitions could result in Keaneour having to incur additional debt and/or contingent liabilities. We may also issue equity securities in connection with acquisitions, which could have a dilutive effect on our earnings per share. Any of these possibilities could have a material adverse effect on Keane'sour business, financial condition, and result of operations.

The complex process of integrating Metro and SignalTree Solutions with Keane may
disrupt the business activities of the Company and affect employee morale, thus
affecting the Company's ability to pursue its business plan and retain key
employees.

Integrating the operations and personnel of Metro Information Services, Inc.,
which Keane acquired in November 2001, and SignalTree Solutions, which the
Company acquired in March 2002 with Keane is a complex process. The integration
of each of Metro and SignalTree Solutions may not be completed in the expected
time period or may not achieve the anticipated benefits of the merger. The
successful integration of Metro and SignalTree Solutions with Keane requires,
among other things, integration of finance, human resources and sales
organizations. The diversion of the attention of Keane's management and any
difficulties encountered in the process of combining the companies could cause
the disruption of, or a loss of momentum in, the activities of the combined
company's business. Further, the process of combining Metro and SignalTree
Solutions with Keane could negatively affect employee morale and the ability of
the combined company to retain some of its key employees after the merger. The
inability to successfully integrate the operations and personnel of Metro and
SignalTree Solutions with Keane could have a material adverse effect on Keane's
business, financial condition and results of operations.

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.

Keane faces
        We face significant competition for itsour services, and itsour failure to remain competitive could limit itsour ability to maintain existing clients or attract new clients.    The market for Keane'sour 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'sour competition for client assignments and experienced personnel varies significantly from city to city and by the type of service provided. Some of Keane'sour competitors are larger and have greater technical, financial, and marketing resources and greater name recognition in the markets they serve than does


                                       22



Keane.we do. 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 competeswe compete with some companies that are larger in the healthcare market and have greater financial resources than Keane. Keane believeswe do. We believe that significant competitive factors in the healthcare software systems market include size and demonstrated ability to provide service to targeted healthcare markets.

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

Keane conducts
        We conduct business in the United KingdomUK, Canada, and India, which exposes itus to a number of difficulties inherent in international activities.    As a result of itsour acquisition of a controlling interest in Keane Worldzen in October 2003 and the acquisition of SignalTree Solutions in March 2002, Keane has twowe now have four software development facilities in India and has addedIndia. As of December 31, 2004, we had approximately 4001,466 technical professionals to its professional services organization.in the region, including Keane Worldzen. 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'sour ability to meet development objectives important to its newour strategy to add offshore delivery capabilities to the services we provide would be hindered, and itsour business could be harmed.
        If Keane failswe fail to manage itsour geographically dispersed organization, itwe may fail to meet or exceed itsour financial objectives and itsour revenues may decline. Keane
performsWe perform development activities in the U.S. and, Canada, and soon will be in
India, and hashave offices throughout the United States, the United Kingdom,U.S., UK, Canada, and India. This geographic dispersion requires us to devote substantial management resources that locally-basedlocally based competitors do not need to devote to their operations.

Keane's


        Our operations in the U.K.UK, Canada, and India are subject to currency exchange rate fluctuations, foreign exchange restrictions, changes in taxation, and other difficulties in managing operations overseas. KeaneWe may not be successful in itsmanaging our international operations.

Keane
        In addition, there has been political discussion and debate related to worldwide competitive sourcing, particularly from the United States to offshore locations. There is proposed federal and state legislation currently pending related to this issue. It is too early to determine whether or in what form this legislation will be adopted; however, future legislation, if enacted, could have an adverse effect on our business, results of operations and financial condition.
        We may be unable to redeploy itsre-deploy our professionals effectively if engagements are terminated unexpectedly, which would adversely affect itsour results of operations.

Keane's    Our clients can cancel or reduce the scope of their engagements with Keaneus on short notice. If they do so, Keanewe may be unable to reassign itsour professionals to new engagements without delay. The cancellation or reduction in scope of an engagement could, therefore, reduce the utilization rate of Keane'sour professionals, which would have a negative impact on Keane'sour business, financial condition, and results of operations.
        As a result of these and other factors, the Company'sour past financial performance should not be relied on as an indication of future performance. Keane believesWe believe that period to periodperiod-to-period comparisons of itsour financial results are not necessarily meaningful and it expectswe expect that our results of operations may fluctuate from period
to periodperiod-to-period in the future.
        Our growth could be limited if we are unable to attract and retain personnel in the information technology and business consulting industries.    We believe that our future success will depend in large part on our ability to continue to attract and retain highly skilled technical and management personnel. The competition for such personnel is intense. We may not succeed in attracting and retaining the personnel necessary to develop our business. If we do not, our business, financial condition, and results of operations could be materially adversely affected.
        We may be prohibited from repurchasing, and may not have the financial resources to repurchase, our Debentures on the date for repurchase at the option of the holder or upon a designated event, as required by the indenture governing our Debentures, which could cause defaults under our senior revolving credit facility and any other indebtedness we may incur in the future.    The Debenture holders have the right to require us to repurchase all or a portion of their Debentures on June 15, 2008. The Debenture holders may also require us to repurchase all or a portion of their Debentures upon a designated event, as defined in the indenture governing the Debentures. If the Debenture holders elect to require us to repurchase their Debentures on any of the above dates or if a designated event were to occur, we may not have enough funds to pay the repurchase price for all tendered Debentures. We are currently prohibited under our senior revolving credit facility from repurchasing any Debentures if a designated event were to occur. We may also be prohibited under any indebtedness we may incur in the future from purchasing any Debentures prior to their stated maturity. In these circumstances, we will be required to repay all of the outstanding principal of, and pay any accrued and unpaid interest on, such indebtedness or to obtain the requisite consents from the holders of any such indebtedness to permit the repurchase of the Debentures. If we are unable to repay all of such indebtedness or are unable to obtain the necessary consents, we will be unable to offer to repurchase the Debentures, which would constitute an event of default under the indenture for the Debentures, which itself could constitute a default under our senior revolving credit facility or under the terms of any future indebtedness that we may incur. In addition, the events that constitute a designated event under the indenture for the Debentures are events of default under our senior revolving credit facility and may also be events of default under other indebtedness that we may incur in the future.


        We incurred indebtedness when we sold our Debentures. We may incur additional indebtedness in the future. The indebtedness created by the sale of our Debentures, and any future indebtedness, could adversely affect our business and our ability to make full payment on the Debentures.    Our aggregate level of indebtedness increased in connection with the sale of our Debentures. As of December 31, 2004, we had approximately $191.0 million of outstanding indebtedness and had the ability to incur additional debt under our revolving credit facility. We may also obtain additional long-term debt and working capital lines of credit to meet future financing needs, which would have the effect of increasing our total leverage. Any increase in our leverage could have significant negative consequences, including:
        Our ability to satisfy our future obligations, including debt service on our Debentures, depends on our future operating performance and on economic, financial, competitive, and other factors beyond our control. Our business may not generate sufficient cash flow to meet these obligations or to successfully execute our business strategy. If we are unable to service our debt and fund our business, we may be forced to reduce or delay capital expenditures, seek additional financing or equity capital, restructure or refinance our debt or sell assets. We may not be able to obtain additional financing or refinance existing debt or sell assets on terms acceptable to us or at all.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company does
        We do not engage in trading market risk, sensitive instruments or purchasing hedging instruments or "other than trading" instruments that are likely to expose the Companyus to market risk, whether interest rate, foreign currency exchange, and commodity price or equity price risk. The Company hasWe have not purchased options or entered into swaps or forward or futures contracts. The
Company's
Interest Rate Risk
        We invest primarily in U.S. government obligations as well as tax-exempt municipal bonds and corporate bonds. As a result, our primary market risk exposure is that of interest rate risk on itsto our investments, which would affect the carrying value of those investments. Additionally,During 2004, the Company transactsUnited States Federal Reserve Board began increasing benchmark interest rates and at the February 2005 meeting of the Federal Open Market Committee increased rates for the sixth time, a total of 150 basis points, since June 30, 2004. A significant increase in interest rates would increase the rate of return on our cash and cash equivalents, but would have a negative impact on the carrying value of our marketable securities. Our annual interest income would change by approximately $0.8 million for the year ended December 31, 2004 and approximately $0.7 million for the year ended December 31, 2003 for each 100 basis point increase or decrease in interest rates. The fair value of our investment portfolio at December 31, 2004 would change by approximately $1.8 million for each 100 basis point increase or decrease in rates. The fair value of our investment portfolio at December 31, 2003 would


decrease by approximately $3.2 million for each 100 basis point increase in rates and would increase by approximately $2.6 million for each 100 basis point decrease in rates.
        Changes in market rates and the related impact on the fair value of our investments would not generally affect net income as our investments are fixed rate securities and are classified as available-for-sale. Investments classified as available-for-sale are carried at fair value with unrealized gains and losses recorded as a component of accumulated other comprehensive loss in the accompanying consolidated balance sheets. However, when the investments are sold, the unrealized losses are recorded as realized losses and included in net income in the accompanying consolidated statements of income. During 2004, we had a net unrealized loss of approximately $0.9 million. During 2003, we had a net unrealized gain of approximately $0.2 million.
Foreign Currency Risk
        We transact business in the United Kingdom,UK, Canada, and India and as such hashave exposure associated with movement in foreign currency exchange rates. 23

For the year ended December 31, 2004 compared to the same period in 2003, the fluctuation in foreign currency exchange rates negatively impacted net income by approximately $1.7 million. Relative to the foreign currency exposures existing at December 31, 2004, a 10% unfavorable movement would have resulted in an additional $4.4 million reduction of net income for the year ended December 31, 2004. Net revenues derived from our foreign operations totaled approximately 6% of our total revenues for the year ended December 31, 2004 and totaled approximately 3% of our total revenues for both of the years ended December 31, 2003 and 2002.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page(s)

Reports
Report of independent registered public accounting firm45

Consolidated statements of income for the years ended December 31, 2004, 2003, and 2002

46

Consolidated balance sheets as of December 31, 2004 and 2003

47

Consolidated statements of stockholders' equity for the years ended December 31, 2004, 2003, and 2002

48

Consolidated statements of cash flows for the years ended December 31, 2004, 2003, and 2002

49

Notes to consolidated financial statements

50-89


Report of Independent Auditors............................................ 25

Consolidated Balance Sheets asRegistered Public Accounting Firm
The Board of December 31, 2001Directors and 2000................26

Consolidated StatementsStockholders of Income
For the Years Ended December 31, 2001, 2000 and 1999........................27

Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2001, 2000 and 1999........................28

Consolidated Statements of Cash Flows
For the Years ended December 31, 2001, 2000 and 1999........................29

Notes to Consolidated Financial Statements...............................30-43


                                       24



REPORT OF INDEPENDENT AUDITORS

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF KEANE, INC.Keane, Inc.:
        We have audited the accompanying consolidated balance sheets of Keane, Inc. as of December 31, 20012004 and 2000,2003, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001.2004. 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 in accordance with auditingthe standards generally accepted
inof the United States.Public Company Accounting Oversight Board (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 audits 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, 20012004 and 2000,2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001,2004, in conformity with accounting principlesU.S. generally accepted accounting principles.
        As discussed in Note 1 to the United
States.


                                                         /s/ Ernstconsolidated financial statements, in 2004 the Company retroactively changed the manner in which it calculates diluted earnings per share upon the adoption of Emerging Issues Task Force Issue No. 04-08,The Effect of Contingently Convertible Debt on Diluted Earnings per Share.
        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Keane, Inc.'s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and Young LLP

Boston, Massachusetts
Februaryour report dated March 11, 2002, except for Note O,
 as to which the date is March 15, 2002


                                       25

2005 expressed an unqualified opinion thereon.
/s/ Ernst and Young LLP

Boston, Massachusetts
March 11, 2005



KEANE, INC.

CONSOLIDATED BALANCE SHEETS



December 31,                                                                       2001              2000
- ------------------------------------------------------------------------------------------------------------

(IN THOUSANDS EXCEPT SHARE AMOUNTS)
Assets
Current:
        Cash and cash equivalents                                                $  65,556         $  53,783
        Marketable securities                                                       63,687            59,179
        Accounts receivable, net:
          Trade                                                                    160,172           164,706
          Other                                                                      3,109             1,428
        Prepaid expenses and deferred taxes                                         20,026            15,533
                                                                                 ---------         ---------
          Total current assets                                                     312,550           294,629

Property and equipment, net                                                         33,701            24,132
Goodwill, net                                                                      224,891            75,497
Customer lists                                                                      53,659            10,196
Other intangible assets, net                                                        26,292            32,968
Deferred taxes and other assets, net                                                28,810            26,172
                                                                                 ---------         ---------

                                                                                 $ 679,903         $ 463,594
                                                                                 =========         =========
Liabilities
Current:
        Accounts payable                                                            13,723            16,820
        Accrued expenses and other liabilities                                      51,980            26,953
        Accrued compensation                                                        34,161            17,709
        Notes payable                                                                   --             5,006
        Accrued income taxes                                                         4,675             9,003
        Unearned income                                                              5,178             4,611
        Current capital lease obligations                                            1,154             1,230
                                                                                 ---------         ---------
          Total current liabilities                                                110,871            81,332

Deferred income taxes                                                               25,656             9,205
Long-term portion of capital lease and other obligations                            14,203             2,380

Commitments and contingencies (Note I)

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
        75,223,971 in 2001 and 72,446,101 in 2000                                    7,522             7,245
Class B common stock, par value $.10, authorized
        503,797 shares, issued and outstanding
        284,891 in 2001 and 2000                                                        28                28
Additional paid-in capital                                                         162,269           121,444
Accumulated other comprehensive income                                              (2,007)           (4,637)
Retained earnings                                                                  361,361           343,974
Less treasury stock at cost, 5,055,602 shares of Common Stock in 2000                   --           (97,377)
                                                                                 ---------         ---------
            Total stockholders' equity                                             529,173           370,677
                                                                                 ---------         ---------

                                                                                 $ 679,903         $ 463,594
                                                                                 =========         =========

STATEMENTS OF INCOME
 
 For the years ended December 31,
 
 
 2004
 2003
 2002
 
 
 (In thousands, except per share amounts)

 
Revenues $911,543 $804,976 $873,203 
Operating expenses          
 Salaries, wages, and other direct costs  637,240  554,375  630,047 
 Selling, general, and administrative expenses  206,747  192,900  198,813 
 Amortization of intangible assets  16,234  15,847  16,382 
 Restructuring charges, net  (111) (326) 17,604 
  
 
 
 
Operating income  51,433  42,180  10,357 
Other income (expense)          
 Interest and dividend income  3,906  2,981  2,246 
 Interest expense  (5,682) (4,156) (255)
 Other income, net  (665) 7,119  1,288 
 Minority interest  2,516  572  — 
  
 
 
 
Income before income taxes  51,508  48,696  13,636 
  
 
 
 
Provision for income taxes  19,226  19,474  5,455 
  
 
 
 
Net income $32,282 $29,222 $8,181 
  
 
 
 
Basic earnings per share $0.52 $0.44 $0.11 
  
 
 
 
Diluted earnings per share $0.48 $0.43 $0.11 
  
 
 
 
Basic weighted average common shares outstanding  62,601  65,771  74,018 
  
 
 
 
Diluted weighted average common shares and common share equivalents outstanding  71,807  70,817  74,406 
  
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.


                                       26




KEANE, INC.

CONSOLIDATED STATEMENTS OF INCOME



For the Years Ended December 31,                                              2001           2000          1999
- ------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

Total revenues                                                             $  779,159     $  871,956    $1,041,092

Salaries, wages and other direct costs                                        547,883        621,208       702,795
Selling, general and administrative expenses                                  186,708        201,852       199,009
Amortization of goodwill and other intangible assets                           14,457         12,351         9,169
Restructuring charge                                                           10,358          8,624        13,653
                                                                           ----------     ----------    ----------

Operating income                                                               19,753         27,921       116,466

Interest and dividend income                                                    7,043          7,725         7,827
Interest expense                                                                  295            588            --
Other expenses (income), net                                                   (2,720)           872         1,480
                                                                           ----------     ----------    ----------

Income before income taxes                                                     29,221         34,186       122,813

Provision for income taxes                                                     11,834         13,832        49,739
                                                                           ----------     ----------    ----------

Net income                                                                 $   17,387     $   20,354    $   73,074
                                                                           ==========     ==========    ==========

Net income per share (basic)                                               $      .25     $      .29    $     1.02
                                                                           ==========     ==========    ==========
Net income per share (diluted)                                             $      .25     $      .29    $     1.01
                                                                           ==========     ==========    ==========

Weighted average common shares
outstanding (basic)                                                            68,474         69,646        71,571
                                                                           ==========     ==========    ==========

Weighted average common shares and common share equivalents outstanding
(diluted)                                                                      69,396         69,993        72,395
                                                                           ==========     ==========    ==========

BALANCE SHEETS
 
 As of December 31,
 
 
 2004
 2003
 
 
 (Dollars in thousands,
except per share amounts)

 
Assets       
Current:       
 Cash and cash equivalents $67,488 $56,736 
 Restricted cash  986  1,586 
 Marketable securities  130,678  147,814 
 Accounts receivable, net:       
  Trade  125,319  112,404 
  Other  1,148  908 
 Prepaid expenses and deferred taxes  16,515  17,630 
  
 
 
  Total current assets  342,134  337,078 
Property and equipment, net  76,761  75,431 
Goodwill  305,965  292,924 
Customer lists, net  53,040  57,908 
Other intangible assets, net  9,904  13,124 
Other assets, net  16,390  16,636 
  
 
 
  Total assets $804,194 $793,101 
  
 
 
Liabilities       
Current:       
 Accounts payable $9,511 $10,136 
 Accrued expenses and other liabilities  50,967  37,011 
 Accrued building costs  498  458 
 Accrued restructuring  3,513  6,947 
 Accrued compensation  39,763  37,308 
 Note payable  649  1,969 
 Accrued income taxes  1,295  1,937 
 Unearned income  9,376  8,869 
 Current capital lease obligations  243  709 
  
 
 
  Total current liabilities  115,815  105,344 
Convertible debentures  150,000  150,000 
Accrued long-term building costs  39,545  40,042 
Accrued long-term restructuring  5,164  7,073 
Deferred income taxes  25,924  23,775 
Long-term portion of capital lease obligations  17  193 
  
 
 
  Total liabilities  336,465  326,427 
Minority interest  6,026  8,542 

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 62,183,559 at December 31, 2004 and 75,545,391 at December 31, 2003  6,218  7,555 
Class B common stock, par value $.10, authorized 503,797 shares, issued and outstanding, none at December 31, 2004 and 284,599 at December 31, 2003  —  28 
Additional paid-in capital  33,752  167,548 
Accumulated other comprehensive loss  (6,657) (1,392)
Retained earnings  431,046  398,764 
Unearned compensation  (2,656) (704)
Less treasury stock at cost, none at December 31, 2004 and 12,201,381 shares at December 31, 2003  —  (113,667)
  
 
 
  Total stockholders' equity  461,703  458,132 
  
 
 
  Total liabilities and stockholders' equity $804,194 $793,101 
  
 
 
The accompanying notes are an integral part of the consolidated financial statements.


                                       27




KEANE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

For the Years Ended

December 31, 1999, 2000 and 2001
- --------------------------------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)




                                                                                                        Other
                                                                            Class B                     Compre-
                                                    Common Stock          Common Stock      Additional  hensive
                                                    ------------          ------------       Paid-in     Income   Retained
                                                 Shares      Amount     Shares     Amount    Capital     (Loss)    Earnings
- ---------------------------------------------------------------------------------------------------------------------------

Balance January 1, 1999                        71,363,272   $  7,136    285,303   $     29   $109,606      ($764)  $250,546

Common Stock issued under                         721,893         72                           10,689
   stock option and employee
   purchase plans
Conversions of Class B Common                         191                  (191)
  Stock into Common Stock
Income tax benefit from stock                                                                     515
  option plans
Repurchase of Common Stock
Investments valuation adjustment                                                                          (1,263)
Net income                                                                                                           73,074

Comprehensive income
Balance December 31, 1999                      72,085,356      7,208    285,112         29    120,810     (2,027)   323,620

Common Stock issued under                         360,524         36                              320
   stock option and employee
   purchase plans
Conversions of Class B Common                         221          1       (221)        (1)
  Stock into Common Stock
Income tax benefit from stock                                                                     314
  option plans
Repurchase of Common Stock
Investments valuation adjustment                                                                             538
Foreign currency translation
  Adjustment                                                                                              (3,148)

Net income                                                                                                           20,354

Comprehensive income

Balance December 31, 2000                      72,446,101      7,245    284,891         28    121,444     (4,637)   343,974

Common Stock issued under                          18,000          1                           (8,894)
   stock option and employee
   purchase plans
Common Stock issued in connection               2,759,870        276                           49,460
with acquisition of Metro
Information Services, Inc.
Income tax benefit from stock                                                                     259
  option plans
Repurchase of Common Stock
Investments valuation adjustment                                                                           1,181
Foreign  currency translation
  Adjustment                                                                                               1,449
Net income                                                                                                           17,387

Comprehensive income

                                             ==============================================================================
Balance December 31, 2001                      75,223,971   $  7,522    284,891   $     28   $162,269   $ (2,007)  $361,361
                                             ==============================================================================



                                        Treasury Stock        Total
                                            at Cost           Stock-
                                            -------           holders'
                                       Shares      Amount      Equity
- ------------------------------------------------------------------------

Balance January 1, 1999               (313,064)    ($2,769)   $ 363,784

Common Stock issued under               (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
  option plans
Repurchase of Common Stock          (1,000,000)    (23,910)     (23,910)
Investments valuation adjustment                                 (1,263)
Net income                                                       73,074
                                                              ---------
Comprehensive income                                             71,811
Balance December 31, 1999           (1,319,396)    (26,841)     422,799

Common Stock issued under              394,794      10,389       10,745
   stock option and employee
   purchase plans
Conversions of Class B Common                                        --
  Stock into Common Stock
Income tax benefit from stock                                       314
  option plans
Repurchase of Common Stock          (4,131,000)    (80,925)     (80,925)
Investments valuation adjustment                                    538
Foreign currency translation
  Adjustment                                                     (3,148)

Net income                                                       20,354
                                                              ---------
Comprehensive income                                             17,744
                                                              ---------
Balance December 31, 2000           (5,055,602)    (97,377)     370,677

Common Stock issued under              737,348      15,186        6,293
   stock option and employee
   purchase plans
Common Stock issued in connection    4,644,454      86,236      135,972
with acquisition of Metro
Information Services, Inc.
Income tax benefit from stock                                       259
  option plans
Repurchase of Common Stock            (326,200)     (4,045)      (4,045)
Investments valuation adjustment                                  1,181
Foreign  currency translation
  Adjustment                                                      1,449
Net income                                                       17,387
                                                              ---------
Comprehensive income                                             20,017
                                                              ---------

                                     ==================================
Balance December 31, 2001                   --          --    $ 529,173
                                     ==================================



(In thousands, except for share data)
 
  
  
  
  
  
 Accumu-
lated
other
compre-
hensive
loss
  
  
  
  
  
 
 
  
  
 Class B
Common stock
  
  
  
 Treasury stock
at cost
  
 
For the years ended
December 31,
2002, 2003, and 2004
 Common stock
  
  
  
  
 
 Additional
paid-in
capital
 Retained
earnings
 Unearned
compen-
sation
 Total
stockholders'
equity
 
 Shares
 Amount
 Shares
 Amount
 Shares
 Amount
 
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 Class B 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, net of taxes of $773               (1,159)            (1,159)
Investments valuation adjustment, net of taxes of $182               (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 
  
 
 
 
 
 
 
 
 
 
 
 
Issuance of restricted stock award            80        (277)25,000  200  3 
Employee stock option grant and accelerated vesting of certain stock options            541        (541)      — 
Amortization of unearned compensation                     114       114 
Common stock issued under stock option and employee purchase plans            (116)         578,235  4,557  4,441 
Conversions of Class B common stock into common stock 5  — (5) —                   — 
Income tax benefit from stock option plans            445                445 
Repurchase of common stock                       (6,495,200) (66,696) (66,696)
Minimum pension liability, net of taxes of ($773)               (2,342)            (2,342)
Investments valuation adjustment, net of taxes of $108               162             162 
Foreign currency translation               2,199             2,199 
Net income                  29,222          29,222 
                             
 
Comprehensive income                             29,241 
  
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2003 75,545,391 $7,555 284,599 $28 $167,548 $(1,392)$398,764 $(704)(12,201,381)$(113,667)$458,132 
  
 
 
 
 
 
 
 
 
 
 
 
Issuance of restricted stock award 145,000  14       2,194        (2,194)      14 
Employee stock option grant and accelerated vesting of certain stock options            287                287 
Amortization of unearned compensation                     242       242 
Common stock issued under stock option and employee purchase plans 251,481  25       3,432          285,769  2,273  5,730 
Conversions of Class B common stock into common stock 284,599  28 (284,599) (28)                  — 
Income tax benefit from stock option plans            377                377 
Repurchase of common stock                       (2,127,300) (30,096) (30,096)
Reclassification of repurchased stock as unissued according to Massachusetts Business Corporation Act (14,042,912) (1,404)      (140,086)         14,042,912  141,490  — 
Minimum pension liability, net of taxes of $0               (6,646)            (6,646)
Investments valuation adjustment, net of taxes of $570               (859)            (859)
Foreign currency translation               2,240             2,240 
Net income                  32,282          32,282 
                             
 
Comprehensive income                             27,017 
  
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2004 62,183,559 $6,218 — $— $33,752 $(6,657)$431,046 $(2,656)— $— $461,703 
  
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.


                                       28




KEANE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31,                                         2001         2000         1999
- ----------------------------------------------------------------------------------------------------------
(IN THOUSANDS)

Cash Flows From Operating Activities:
Net income                                                             $  17,387    $  20,354    $  73,074
Adjustments to reconcile net income to net cash provided
by operating activities:
   Depreciation and amortization                                          26,113       28,991       31,519
   Deferred income taxes                                                   1,808       (5,444)       4,996
   Provision for doubtful accounts                                         2,024        3,086         (625)
   Loss on sale of property and equipment                                   (167)          --           14
   Gain on sale of investments                                            (1,233)          --           --
   Non-cash restructuring charge                                             825        3,403        5,572
   Impairment of long term investments                                     2,000           --           --
   Gain on sale of business unit                                          (4,302)          --           --
   Income tax benefit from stock options                                     259          314          515
   Changes in operating assets and liabilities, net of acquisitions:
   Decrease in accounts receivable                                        41,691       48,432       37,580
   Increase (decrease) in prepaid expenses and other assets               (1,065)       6,748       (6,910)
   Increase (decrease) in accounts payable, accrued expenses,
        unearned income and other liabilities                                758      (18,415)     (24,064)
   Increase (decrease) in income taxes payable                            (2,916)       8,609      (13,548)
                                                                       ---------    ---------    ---------

Net cash provided by operating activities                                 83,182       96,078      108,123
                                                                       ---------    ---------    ---------

Cash Flows From Investing Activities:
Purchase of investments                                                 (104,591)     (30,875)    (110,915)
Sale and maturities of investments                                       102,340       60,191       96,542
Purchase of property and equipment                                        (7,609)     (11,386)     (16,418)
Proceeds from the sale of property and equipment                             419          182           77
Proceeds from sale of business unit                                       16,087           --           --
Payments for current year acquisitions                                    (7,148)     (32,516)     (60,996)
Payments for prior years acquisitions                                     (1,266)      (3,756)          --
                                                                       ---------    ---------    ---------

Net cash used for investing activities                                    (1,768)     (18,160)     (91,710)
                                                                       ---------    ---------    ---------

Cash Flows From Financing Activities:
Payments on acquired debt                                                (65,938)          --           --
Payments under long-term debt, net                                        (5,006)      (3,523)        (563)
Principal payments under capital lease obligations                        (1,303)      (1,376)      (1,217)
Proceeds from issuance of common stock                                     6,293       10,745       10,761
Repurchase of common stock                                                (4,045)     (80,925)     (24,072)
                                                                       ---------    ---------    ---------

Net cash used for financing activities                                   (69,999)     (75,079)     (15,091)
                                                                       ---------    ---------    ---------
Effect of exchange rate changes on cash                                      358       (2,074)          --
Net increase in cash and cash equivalents                                 11,773          765        1,322
Cash and cash equivalents at beginning of year                            53,783       53,018       51,696
                                                                       ---------    ---------    ---------
Cash and cash equivalents at end of year                               $  65,556    $  53,783    $  53,018
                                                                       =========    =========    =========

Supplemental information:
Income taxes paid                                                      $  14,922    $  10,469    $  62,140


 
 For the years ended December 31,
 
 
 2004
 2003
 2002
 
 
 (In thousands)

 
Cash flows from operating activities:          
 Net income $32,282 $29,222 $8,181 
 Adjustments to reconcile net income to net cash provided by operating activities:          
  Depreciation and amortization  28,741  27,081  27,452 
  Deferred income taxes  5,340  18,710  (3,796)
  Provision for doubtful accounts  (1,530) (2,802) (5,514)
  Minority interest  (2,516) (572) — 
  Gain on sale of property and equipment  (56) (179) (46)
  Gain on sale of investments  (6) (51) (387)
  Other charges, net  (3,267) (1,387) — 
  Non-cash restructuring charges  —  —  1,847 
  Income tax benefit from stock options  377  445  284 
  Changes in operating assets and liabilities, net of acquisitions:          
   (Increase) decrease in accounts receivable  (4,088) 19,979  49,888 
   Increase in prepaid expenses and other assets  (2,311) (866) (4,900)
   Increase (decrease) in accounts payable, accrued expenses, unearned income, and other liabilities  32  (14,621) (5,789)
   (Decrease) increase in income taxes payable  (1,079) 2,613  (4,695)
  
 
 
 
 Net cash provided by operating activities  51,919  77,572  62,525 
  
 
 
 
Cash flows from investing activities:          
 Purchase of investments  (62,566) (144,218) (27,859)
 Sale and maturities of investments  77,622  18,082  69,788 
 Purchase of property and equipment  (10,259) (15,336) (13,656)
 Restricted cash  (192) (1,436) — 
 Proceeds from the sale of property and equipment  378  1,113  410 
 Payments for current year acquisitions, net of cash acquired  (21,354) (7,504) (63,236)
 Payments for prior years acquisitions  (65) (903) (184)
  
 
 
 
 Net cash used for investing activities  (16,436) (150,202) (34,737)
  
 
 
 
Cash flows from financing activities:          
 Proceeds from issuance of convertible debentures  —  150,000  — 
 Debt issuance costs  (42) (4,364) — 
 Payments under long-term debt, net  —  (100) — 
 Principal payments under capital lease obligations  (709) (847) (1,227)
 Proceeds from issuance of common stock  5,607  4,444  6,330 
 Repurchase of common stock  (30,096) (66,696) (54,092)
  
 
 
 
 Net cash provided by (used for) financing activities  (25,240) 82,437  (48,989)
  
 
 
 
 Effect of exchange rate changes on cash  509  546  2,028 
 Net increase (decrease) in cash and cash equivalents  10,752  10,353  (19,173)
Cash and cash equivalents at beginning of year  56,736  46,383  65,556 
  
 
 
 
Cash and cash equivalents at end of year $67,488 $56,736 $46,383 
  
 
 
 
Supplemental information:          
 Income taxes paid $14,604 $4,219 $16,511 
  
 
 
 
 Interest paid $3,070 $1,598 $209 
  
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.


                                       29




KEANE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2001, 2000, and 1999.
(All amounts in thousands unless stated otherwise and except for share and per
share amounts)

A.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        BASIS OF PRESENTATION:    The accompanying consolidated financial statements include the accounts of Keane, Inc. (the "Company") and all of its wholly and majority owned subsidiaries. AllUpon consolidation, all significant intercompany accounts and transactions are eliminated. Our fiscal year ends on December 31. Certain reclassifications have been eliminated.

Certain prior year amounts have been reclassifiedmade to the 2003 and 2002 financial statements to conform to the current2004 presentation. These reclassifications have no effect on previously reported net income or stockholders' equity.
        NATURE OF OPERATIONS:    We are a leading provider of Information Technology ("IT") and Business Consulting services. In business since 1965, our mission is to help clients improve business and IT effectiveness through outsourcing services. In order to align our reporting with our strategic priorities, beginning January 1, 2004, we are classifying our service offerings into the following three categories: Outsourcing, Development & Integration, and Other IT Services. These services were previously classified within our Plan, Build, and Manage service offerings in our Annual Report on Form 10-K for the year presentation.

FISCAL YEAR:ended December 31, 2003. Outsourcing includes Application Outsourcing and Business Process Outsourcing ("BPO"). We optimize clients' internal processes through BPO services through Keane Worldzen, Inc. ("Keane Worldzen"), our majority owned subsidiary.
        We deliver our IT services through an integrated network of regional offices in North America and the UK, and through Advanced Development Centers ("ADCs") in the U.S., Canada, and India. This global delivery model enables us to provide our services to customers onsite at a client's facility, at our nearshore facilities in Halifax, Nova Scotia, and Toronto, Ontario, and through our offshore development centers in India. In 2004, we extended our Global network of Advanced Development Centers with the opening of new facilities in Toronto, Ontario and Hyderabad, India. Our regional offices are supported by centralized Strategic Practices and Quality Assurance Groups. This integrated, highly flexible mix of cost-effective onsite, nearshore, and offshore delivery is now a component of most of our new Application Outsourcing engagements. The Company records activity in quarterly accounting periodsdistribution of equal lengthwork across multiple locations is typically based on a monthly scheduleclient's cost, technology, and risk management requirements. Our successful track record in absorbing the local staff of one five-week month followed by two
four-week months. Differences in amounts presented and those which would have
been presented using actual year end dates are not material. All referencesour clients is particularly attractive to "fiscal 2001", "fiscal 2000" and "fiscal 1999" in the financial statements and
accompanying notes relate to the years ended December 30, 2001, December 31,
2000 and December 31, 1999, respectively. For ease of presentation, December 31
has been utilized for all financial statement captions.

NATURE OF OPERATIONS: Keane provides Information Technology (IT) and business
consulting services. The Company divides its business into three main lines:
Business Consulting, Application Development and Integration (ADI) and
Application Development and Management Outsourcing.

Keane'smany prospective clients.
        Our clients consist primarily of Global 2000 organizations, government
agenciescompanies across several industries. We have specific expertise and healthcare organizations. The Companydepth of capability in financial services, clients through
branch office operations in major markets of North Americainsurance, healthcare, and the United
Kingdom. These offices are supportedpublic sector. We strive to build long-term relationships with our customers by Keane Consulting Group,improving their business and IT performance, reducing their costs, and increasing their organizational flexibility. We achieve recurring revenue as a centralized
Strategic Practices Group representing Keane's core servicesresult of our multi-year outsourcing contracts and key
competencies,our long-term client relationships.
        INDUSTRY SEGMENT INFORMATION:    Based on qualitative and seven Advancedquantitative criteria established by Statement of Financial Accounting Standards ("SFAS") No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information," we operate within one reportable segment: Professional Services. In this segment, we offer an integrated mix of end-to-end business solutions, such as Outsourcing, 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 experienceIntegration, and best practices of the entire Company on a responsive and cost-effective
local level.Other IT services.
        REVENUE RECOGNITION: The Company provides business innovation consulting and
system design, implementation, and support services under fixed price and    We recognize revenue on time and materials contracts.contracts at contractually agreed upon rates. For fixed pricethese types of contracts, we recognize revenue as the services are performed. In some cases, we invoice customers prior to performing the service, resulting in deferred revenues, which are reported as unearned income in the accompanying consolidated balance sheets.
        For the majority of outsourcing engagements, we provide a specific level of service each month for which we bill a standard monthly amount. We recognize revenue for these engagements 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 may be capitalized over defined periods of time and amortized over the period in which the associated revenue is recordedrecognized.
        For fixed-price contracts, we recognize revenue using the proportional performance method. We use estimated labor-to-complete to measure the proportional performance. Proportional performance recognition relies on accurate estimates of cost, scope, and duration of each engagement. If we do not accurately estimate the basiscost or scope or do not manage our projects properly within the expected period of the estimated percentageproject, future revenues may be negatively impacted. Adjustments to revenue are recorded in the period of completion of services rendered.which the over/under estimate is detected. Our management regularly reviews profitability and underlying estimates for fixed-price contracts. Losses, if any, on fixed pricefixed-price contracts are recognized whenrecorded in the period in which the loss is determined. For
time and materials contracts,identified.
        We recognize revenue is recorded at contractually agreed upon
ratesassociated with application software products as the costssoftware products are incurred. Revenues forinstalled and as implementation services are delivered. We recognize software application sales are
recognizedmaintenance fees on theinstalled products on a pro-rated basis of customer acceptance over the periodterm of the agreement. In multiple element arrangements, Keane uses the residual value method in accordance with ("SOP 97-2"), "Software Revenue Recognition," and ("SOP 98-9"), "Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions." Revenue earned on software implementation.arrangements involving multiple elements which qualify for separate element accounting treatment is allocated to each undelivered element using the relative fair values of those elements based on vendor-specific objective evidence with the remaining value assigned to the delivered element, the software license.
        ALLOWANCE FOR BAD DEBTS: The Company evaluates its    Each accounting period, we evaluate accounts receivable for risk associated with a client's inability to make contractual payments or unresolved issues with the adequacy of Keane's services delivered under maintenance
agreements.our services. Billed and unbilled receivables that are specifically identified as being at risk are provided for with a charge to reduce 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. When we determine that an account is deemed uncollectible, we write-off the receivable against the allowance for bad debts.
FOREIGN CURRENCY TRANSLATION:    For the Company'sour subsidiaries in Canada, the UK, and England,India, the Canadian dollar, and British pound, and Indian rupee, respectively, are the functional currencies. All assets and liabilities of the Company'sour Canadian, English, and EnglishIndian subsidiaries are translated at exchange rates in effect at the end of the period. Income and expenses are translated at average exchange rates that approximate those in effect on transaction dates. The translation differencesadjustments are charged or credited
directly to the translation adjustment account included as partrecorded in accumulated other comprehensive loss, a separate component of stockholders' equity.equity in the accompanying consolidated balance sheets. Realized foreign exchange gains and losses are included in other income, (expense).net, in the accompanying consolidated statements of income.
        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, 20012004 included investments in money market funds totaling $3.0 million and investments in commercial paper ($15.0
million) and money market funds ($33.8 million).totaling


$33.5 million. Cash equivalents at December 31, 20002003 included investments in money market funds totaling $14.8 million and investments in commercial paper ($33.3 million)totaling $21.0 million.
        RESTRICTED CASH:    Restricted cash is primarily related to amounts deposited to secure letters of credit for certain foreign capital purchases and money
market funds ($10.6 million).


                                       30

amounts deposited until the purchase price for the acquisition of Fast Track Holdings Limited ("Fast Track") is finalized.
        FINANCIAL INSTRUMENTS:    The amounts reflected in the accompanying consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate their fair value due to their short maturities. BasedOur marketable securities are designated as available-for-sale and are stated at fair market value. As of December 31, 2004, based on the
borrowing rates currentlyan available to the Company for bank loans with similar
terms and maturities,market quote, the fair value of our convertible subordinated debentures was approximately $154.9 million compared to the company's debt obligations
approximates their carrying value.value of $150.0 million. As of December 31, 2003, based on an available market quote, the fair value of our convertible subordinated debentures was approximately $158.1 million compared to the carrying value of $150.0 million. Financial instruments that potentially subject the Companyus to concentration of credit risk consist primarily of investments and trade receivables. The Company's cash, cash equivalents and
investments are held with financial institutions with high credit standings. The
Company'sSee below for discussion of marketable securities. Our customer base consists of geographically dispersed customers in many different industries. Therefore, we do not consider concentration of credit risk with respect to trade receivables is not considered significant.

INVESTMENTS: Investments
        MARKETABLE SECURITIES:    Marketable securities are stated at fair value as reported by the investment custodian. The Company determinesWe determine the appropriate classification of debt and equity securities at the time of purchase and re-evaluatesre-evaluate such designations as of each balance sheet date. InvestmentsMarketable securities are currently designated as available-for-sale, and as such, unrealized gains and losses, net of tax effect are reported in accumulated other comprehensive loss in the accompanying consolidated balance sheets. We invest primarily in U.S. government obligations. We also invest in tax-exempt municipal bonds with at least a separate componentsingle A rating by Moody's grading service and corporate bonds. The majority of stockholders' equity. The Company views itsour investments have a maturity date of not more than five years. We view our marketable securities portfolio as available for use in itsour current operations, and accordingly, these investmentsmarketable securities are classified as current assets in the accompanying consolidated balance sheet. As of December 31, 2001,2004 and 2003, our marketable securities reflect a net unrealized loss of $0.9 million and a net unrealized gain of $0.6 million, respectively. Realized gains and losses are determined by deducting the Company's investments
reflect an increase in market valueamortized cost of $.8 million, which has been reflected in
the statement of stockholder's equity. At December 31, 2000,security from the Company's
investments reflected a decline in market value of $1.2 million. Realizedproceeds received. The realized gains and losses, as well as interest, dividends, and capital gain/loss distributions on all securities, are included in earnings.interest income in the accompanying consolidated statements of income.
        PROPERTY AND EQUIPMENT:    Property and equipment is statedcarried at cost. Repaircost less accumulated depreciation and maintenance costsamortization. Property and equipment are chargedreviewed periodically for indicators of impairment and assets are written down to expense.their fair value as appropriate. Depreciation expense is computed on a straight-line basis over the 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,consolidated balance sheet, and any gain or loss is included in other income, net in the accompanying consolidated statements of income.


        COMPUTER SOFTWARE COSTS:    We capitalize the cost of internal-use software, which has a useful life in excess of one year in accordance with SOP No. 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Subsequent additions, modifications, or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Software maintenance and training costs are expensed in the period in which they are incurred. Capitalized computer software costs are amortized using the straight-line method over a period of three to seven years. The net computer software costs are included in property and equipment in the accompanying consolidated balance sheets.
        SOFTWARE DEVELOPMENT COSTS:    In accordance with SFAS No. 86 ("SFAS 86"), "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," we capitalize costs incurred to develop commercial software products after technological feasibility has been established. Costs incurred to establish technical feasibility are charged to expense as incurred. Enhancements to software products are capitalized where such enhancements extend the life or significantly expand the marketability of the products. Amortization expense is computed on a straight-line basis over three years and totaled approximately $0.8 million, $0.4 million, and $0.4 million, for the years ended December 31, 2004, 2003, and 2002, respectively. As of December 31, 2004 and 2003, the unamortized software development costs were approximately $1.7 million and $1.8 million, respectively, and are included in other assets in the accompanying consolidated balance sheets.
        GOODWILL AND INTANGIBLE ASSETS:    SFAS No. 142 ("SFAS 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 atto begin an annual review for impairment. On January 1, 2002, we adopted SFAS 142 and were, therefore, required to perform an impairment test on our goodwill and other intangibles with indefinite lives during the first six months of 2002, and then on a periodic basis thereafter. Our initial goodwill impairment analysis was completed during the Second Quarter of 2002, and was based on January 1, 2002 balances. Through this analysis, we determined that there was no impairment as of that date. Subsequently, during the Fourth Quarters of 2002, 2003, and 2004, we completed our annual impairment review based on October 1, 2002, 2003, and 2004 balances, respectively, and determined that there was no impairment as of those dates. We estimate the fair value.value of the business operations using a discounted cash flow model based on the future annual operating plan of each reporting unit. This model determines the present value of the estimated cash flows of the reporting unit. 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. As of December 31, 2004 and 2003, our goodwill totaled $306.0 million and $292.9 million, respectively.
        We periodically review our identifiable intangible assets for impairment in accordance with SFAS No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets." In determining whether an intangible asset is impaired, we 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, we may be required to record impairment charges for these assets. As of December 31, 2004 and 2003, we reported total intangibles of customer lists and other intangibles of $62.9 million and $71.0 million, respectively. Intangibles are amortized on a straight-line basis over 15 years for goodwill and 3two to 15 yearsyears.


        INCOME TAXES:    We account for other
intangibles. At each reporting date, management assesses whether there has been
a permanent impairmentincome taxes in the value of its long-termaccordance with SFAS No. 109 ("SFAS 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. SFAS 109 also requires that deferred tax assets be reduced by comparing anticipated undiscounted future cash flows 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,
2001 and 2000 was $46.9 million and $35.4 million, respectively.

INCOME TAXES: The Company accountsdeferred tax asset will not be realized. We account for income taxes under the asset and 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    SFAS No. 130 ("SFAS 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 currency translation adjustments, and
available-for-sale securities valuation adjustments. At December 31, 2001,adjustments, and adjustments related to a foreign defined benefit plan.
        The following table summarize the components of accumulated other comprehensive income was comprised of foreign currency
translation adjustment of $2.5 million and securities valuation adjustment of
($.5) million,loss, net of tax. At December 31, 2000, accumulatedtaxes (dollars in thousands):
As of December 31,

 2004
 2003
 
Foreign currency translation adjustments $4,004 $1,764 
Securities valuation adjustment  (514) 345 
Minimum pension liability adjustment (Note 13)  (10,147) (3,501)
  
 
 
Accumulated other comprehensive loss $(6,657)$(1,392)
  
 
 
        See Note 13 "BENEFIT PLANS" for further discussion on the minimum pension liability adjustment.
        STOCK-BASED COMPENSATION:    We have stock-based compensation plans that are described in detail in Note 13 "BENEFIT PLANS." We have adopted the disclosure-only provisions of SFAS No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation—Transition and Disclosure," an amendment of SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." Accordingly, no compensation expense has been recognized for our stock-based compensation plans other comprehensive
income was comprised of foreign currency translation adjustment of $3.9 millionthan for restricted stock and securities valuation adjustment of $.7 million, net of tax.

STOCK-BASED COMPENSATION: The Companycertain stock options. As permitted by SFAS 148 and SFAS 123, we account for our stock-based compensation in accordance with Accounting Principles Board ("APB") Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."
        In accordance with APB 25 we use the intrinsic value-based method to account for stock option grants and restricted stock awards. We grant stock options for a fixed number of shares to employees with an exercise price equal to the fair valueclosing price of the shares at the date of grant. The Company accounts for stock options grants in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees",grant and 31



accordingly, recognizes notherefore, do not recognize compensation expense for the stock option grants. The
Companyexpense. We also grantsgrant restricted stock for a fixed number of shares to employees for nominal consideration. In 2003, in connection with our acquisition of a majority interest in Worldzen, certain employees were granted Keane Worldzen stock options. In accordance with Financial Accounting Standards Board ("FASB") Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation" and SFAS No. 141 ("SFAS 141"), "Business


Combinations," these stock options were recorded as unearned compensation at the date of acquisition and vest over the life of the stock option. Compensation expense related to restricted stock awards and the Keane Worldzen stock options is recorded ratably over the restriction period.and vesting period, respectively, and is included in the selling, general, and administrative expenses in the accompanying consolidated statements of income. Our Employee Stock Purchase Plan ("ESPP") is non-compensatory as defined in APB 25 and accordingly, we do not recognize compensation expense in our consolidated financial statements.
        Had compensation cost for our stock-based compensation plans been determined based on the fair value at the grant dates as calculated in accordance with SFAS 123 and using the Black-Scholes option-pricing model, we would have recorded additional compensation expense and our net income and earnings per share for the years ended December 31, 2004, 2003, and 2002 would have been reduced to the pro forma amounts indicated below (in thousands, except per share data):
Years ended December 31,

 2004
 2003
 2002
 
Net income—as reported (1) $32,282 $29,222 $8,181 
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects  388  164  28 
Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects  (4,215) (4,739) (11,289)
  
 
 
 
Net income (loss)—pro forma $28,455 $24,647 $(3,080)
  
 
 
 
Earnings (loss) per share:          
Basic—as reported  0.52  0.44  0.11 
Basic—pro forma  0.45  0.37  (0.04)
Diluted—as reported (1)  0.48  0.43  0.11 
Diluted—pro forma (1)  0.43  0.37  (0.04)
(1)
See Note 12 "EARNINGS PER SHARE" for reconciliation of net income as reported to net income used in calculation of diluted earnings per share.
        LEGAL COSTS: The Company accrues    We accrue 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.
        GRANT ACCOUNTING:    Our ADC in Halifax, Nova Scotia, has received grants from Nova Scotia Business Inc. and the Nova Scotia Office of Economic Development. These grants include employment and research and development grants. Employment grants, which relate to employee hiring and training, and research and development grants are recognized as a reduction to salaries expense in earnings in the accompanying consolidated statements of income in the period in which the related expenditures are incurred. In 2004, we received a payment of approximately $1.0 million as a result of achieving and maintaining certain conditions under the grant, of which approximately $0.6 million has been recognized as a reduction to salaries expense. This payment represented 2 of 3 payments under the grant. We are eligible to receive an additional payment if we are able to achieve and maintain additional milestones.
        In addition, in January 2004, we were granted $1.0 million, which is part of a two-year $3.0 million H-1B Technical Skills Training Grant ("H-1B Grant") that is shared by us and two other unrelated third parties. As part of the grant, we are the financial administrator of the authorized funds. For the

year ended December 31, 2004, we received a payment of approximately $0.2 million, which was recognized as a reduction of salaries expense and represents the reimbursement to us under the H-1B Grant.
        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 operates in one reportable
segment-information technology and business consulting services. The Company
offers an integrated mix
        In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of end-to-end business solutions, suchVariable Interest Entities," as Business
Consulting (Plan)amended by FASB Interpretation No. 46(R) ("FIN 46(R)"), Application Development and Integration (Build), and
Application Development and Management Outsourcing (Manage). Approximately 93%,
94% and 96%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 Company's revenuerisk 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. FIN 46(R) is effective prospectively for all variable interests obtained subsequent to December 31, 2002. For variable interests existing prior to December 31, 2002, consolidation is required for periods ending after March 15, 2004, with the exception of interests in special purpose entities, which were required in financial statements of public companies for periods ending after December 15, 2003. We have evaluated the applicability of FIN 46(R) to our relationship with each of City Square Limited Partnership ("City Square") and Gateway LLC and determined that these entities are not required to be consolidated within our unaudited condensed consolidated financial statements. We have determined that Gateway LLC is not a variable interest entity as the equity investment is sufficient to absorb the expected losses and the holders of the equity investment do not lack any of the characteristics of a controlling interest. We have concluded that as we no longer occupy the space at Ten City Square and no longer derive any benefit from leasing the space, we would not be determined to be the related party most closely associated with City Square. As a result, we will continue to account for our leases with City Square and Gateway LLC consistent with our historical practices in accordance with generally accepted accounting principles. We believe that we do not have an interest in any variable interest entities that would require consolidation.
        In May 2003, the EITF reached a consensus on Issue No. 01-08 ("EITF 01-8"), "Determining Whether an Arrangement Contains a Lease." EITF 01-08 provides guidance on how to determine whether an arrangement contains a lease that is within the scope of SFAS No. 13 ("SFAS 13"), "Accounting for Leases." The guidance in EITF 01-08 is based on whether the arrangement conveys to the purchaser (lessee) the right to use a specific asset. EITF 01-08 is effective for arrangements entered into or modified in the Second Quarter of 2004. The adoption of this Issue did not have a significant effect on our consolidated financial position or results of operations.
        In December 2003, the FASB issued SFAS No. 132 (revised 2003) ("SFAS 132 as revised"), "Employers' Disclosures about Pensions and Other Post Retirement Benefits." This Statement revises employers' disclosures about pension plans and other postretirement benefit plans but does not change the measurement or recognition provisions of SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension


Plans and for Termination Benefits," and SFAS No. 106, "Employer's Accounting for Postretirement Benefits Other than Pensions." SFAS 132 as revised requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement plans. This Statement is effective for financial statements with fiscal years ending after December 15, 2003, except the additional disclosure information about foreign plans is effective for fiscal years ending after June 15, 2004. We have a foreign defined benefit plan and, as a result, have included the required additional disclosures as of December 31, 2004. See Note 13 "BENEFIT PLANS" for further discussion.
        In March 2004, the Emerging Issues Task Force ("EITF") reached consensus on Issue No. 03-6 ("EITF 03-6"), "Participating Securities and the Two-Class Method under FASB Statement No. 128, "Earnings per Share," which requires that convertible participating securities should be included in the computation of basic earnings per share using the two-class method. Our 2% Convertible Subordinated Debentures due 2013 ("Debentures") are not participating securities under the provisions of EITF 03-6 as they do not participate in undistributed earnings with our common stock. No separate disclosure of basic or diluted earnings per share has been made for the Class B common stock as the impact was derived from these offeringsimmaterial and, effective February 1, 2004, all of the Class B common stock was converted into shares of our common stock. In addition, there was no impact on the basic and diluted earnings per share for our common stock for all periods presented in the accompanying consolidated statements of income. See Note 11 "Capital Stock" for additional disclosure.
        In September 2004, the EITF reached consensus on Issue No. 04-8 ("EITF 04-8"), "The Effect of Contingently Convertible Debt on Diluted Earnings per Share," which requires that contingently convertible debt be included in the calculation of diluted earnings per share using the if-converted method regardless of whether the market price trigger has been met. Under the if-converted method, the debt is considered converted to shares, with the resulting number of shares included in the denominator of the earnings per share calculation and the related interest expense (net of tax) added back to the numerator of the earnings per share calculation. See Note 2 "Earnings Per Share Data" for additional disclosure. In accordance with this Issue, we have adopted the consensus as of December 31, 2004 and have restated all prior periods presented. The adoption of EITF 04-8 resulted in a reduction of diluted earnings per share for the years ended December 31, 2001, 20002004 and 1999, respectively.

RECENT ACCOUNTING PRONOUNCEMENTS2003, but did not have any impact on diluted earnings per share for the year ended December 31, 2002 as our Debentures were issued in 2003.
        In June 1998,December 2004, the Financial Accounting
StandardsFASB issued Statement of Financial Accounting StandardsSFAS No. 133, (FAS 133),
"Accounting for Derivative Instruments and Hedging Activities.123 (revised 2004) ("SFAS 123(R)") "Share-Based Payment," which required
adoptionis a revision of SFAS 123 and supersedes APB 25 and its related implementation guidance. Generally, the approach in periodsSFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values at the date of grant. Pro forma disclosure is no longer an alternative accounting treatment. SFAS 123(R) is effective for public companies (excluding small business issuers as defined in SEC Regulation S-B) at the beginning of the first interim or annual period beginning after June 15, 1999. FAS 133 was subsequently
amended by Statement2005.
        SFAS 123(R) permits public companies to adopt its requirements using one of Financial Accounting Standards No. 137, " Accountingtwo methods. A "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for Derivative Instrumentsall share-based payments granted after the effective date and Hedging Activities- Deferral(b) based on the requirements of SFAS 123 for all awards granted to employees


prior to the effective date of SFAS 123(R) that remain unvested on the effective date. A "modified retrospective" method which includes the requirements of the Effective Datemodified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of FASB Statement No. 133" and will now be effectivepro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. We have yet to determine which method to use in adopting SFAS 123(R). As permitted by SFAS 123, we currently account for fiscal years beginning
after June 15, 2000, with earliershare-based payments to employees using APB 25's intrinsic value method. Accordingly, the adoption permitted. In June 2000, the FASB
issued Statement No. 138. " Accounting for Certain Derivative Instruments and
Certain Hedging Activities," an amendmentof SFAS 123(R)'s fair value method is expected to FAS 133 and effective
simultaneously with FAS 133. The Company adopted FAS 133 as amended by FAS 138
in the first quarter of 2001, and FAS133 has not hadhave a significant impact on its
financial position orour results of operations.operations, however we are currently evaluating SFAS 123(R) and have not yet determined the impact in future periods.
2. MARKETABLE SECURITIES
        The following is a summary of our available-for-sale marketable securities (dollars in thousands):
 
  
 Gross unrealized
  
 
 Cost
 Gain
 Losses
 Fair value
As of December 31, 2004            
United States Government obligations $71,744 $64 $(595)$71,213
Corporate bonds  32,282  —  (333) 31,949
Municipal bonds  27,506  51  (41) 27,516
  
 
 
 
Total $131,532 $115 $(969)$130,678
  
 
 
 
As of December 31, 2003            
United States Government obligations $53,574 $224 $(3)$53,795
Corporate bonds  63,065  257  (188) 63,134
Municipal bonds  30,600  286  (1) 30,885
  
 
 
 
Total $147,239 $767 $(192)$147,814
  
 
 
 
        The following is a summary of the cost and fair value of current available-for-sale marketable securities at December 31, 2004, by contractual maturity (dollars in thousands):
 
 Cost
 Fair value
Due in one year or less $40,424 $40,228
Due after one year through three years  88,077  87,429
Due after three years  3,031  3,021
  
 
  $131,532 $130,678
  
 
        Proceeds from the sale and maturity of available-for-sale securities were approximately $77.6 million with $0.4 million realized gains and $0.4 million realized losses, $18.1 million with $69,000 realized gains and $18,000 realized losses, and $69.8 million with $0.8 million realized gains and $0.4 million realized losses, for the years ended December 31, 2004, 2003, and 2002, respectively.
        At December 31, 2004, we held available-for-sale securities with an aggregate fair value of approximately $100.6 million that had aggregate gross unrealized losses of approximately $1.0 million. All such securities have been in a continuous unrealized loss position for less than 12 months. We believe that the impairments to these investments are not other-than-temporary at this time as these securities are all highly rated investments which have been subject to routine market changes that have not been significant to date.

3. TRADE ACCOUNTS RECEIVABLE
        Trade accounts receivable consists of the following (dollars in thousands):
As of December 31,

 2004
 2003
 
Billed $81,616 $94,699 
Unbilled  47,250  22,782 
Allowance for doubtful accounts  (3,547) (5,077)
  
 
 
Total $125,319 $112,404 
  
 
 
        Trade accounts receivable is presented net of doubtful accounts. The activity in the allowance for doubtful accounts is as follows (dollars in thousands):
Years ended December 31,

 2004
 2003
 2002
 
Beginning of year balance $5,077 $7,879 $13,014 
Provision/ (recoveries), net  2,341  (1,147) 1,893 
Write-offs  (3,871) (1,655) (7,028)
  
 
 
 
End of year balance $3,547 $5,077 $7,879 
  
 
 
 
4. PROPERTY AND EQUIPMENT
        Property and equipment consists of the following (dollars in thousands):
As of December 31,

 2004
 2003
 
Buildings and improvements $47,964 $47,022 
Office equipment  16,140  15,510 
Computer equipment and software  77,293  68,917 
Leasehold improvements  10,294  12,167 
  
 
 
   151,691  143,616 
Less accumulated depreciation and amortization  (74,930) (68,185)
  
 
 
Total $76,761 $75,431 
  
 
 
        Depreciation expense, including amortization of assets under capital leases, was $12.5 million, $11.2 million, and $11.1 million, for the years ended 2004, 2003, and 2002, respectively. Computer equipment and software includes assets arising from capital lease obligations at a cost of $1.6 million and $2.7 million, with accumulated amortization totaling $1.6 million and $2.3 million as of December 31, 2004 and 2003, respectively.
        In July 2001,2002, we began capitalizing the FASB issued FAScosts of internally developed software with a useful life in excess of one year in accordance with SOP 98-1. We have classified these costs within computer equipment and software. During 2004, 2003, and 2002, we capitalized approximately $2.5 million, $4.3 million, and $4.1 million, respectively, which consists primarily of internal and external labor costs. As of December 31, 2004, 2003, and 2002, these unamortized capitalized costs, which were related to the implementation of our PeopleSoft Enterprise Resource Planning applications were approximately $10.3 million, $8.4 million, and $4.1 million, respectively.


        Our principal executive office is located at 100 City Square in Boston, Massachusetts (the "New Facility"). We lease the New Facility from Gateway LLC as described further in Note 15 "RELATED PARTIES, COMMITMENTS, AND CONTINGENCIES." In view of the related party transactions discussed in Note 15, we concluded that during the construction phase of the New Facility, the estimated construction in progress costs for the New Facility would be capitalized in accordance with EITF Issue No. 141, "Business Combinations"97-10, "The Effect of Lessee Involvement in Asset Construction." We began occupying the New Facility and making lease payments in March 2003. As a result of the completion of the construction phase and our current occupancy, the related capitalized costs are now classified as "Building" within property and equipment, net, in the accompanying consolidated balance sheets. A liability for the same amount appears as accrued building costs in both our short- and long-term liabilities. The costs of the building are being amortized on a straight-line basis over a 39-year useful life.
        Effective January 1, 2002, we adopted SFAS 144, which supersedes SFAS No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-lived Assets and FAS No.
142, "Goodwillfor Long-lived Assets to Be Disposed Of," and Other Intangible Assets." FAS 141 eliminatesprovides a single accounting model for long-lived assets to be disposed of. Adoption of this statement did not have a material effect on our results of operations for the pooling-of-interests method of accounting for business combinations except for
qualifying business combinations that were initiated prior to July 2001. FAS 141
further clarifies the criteria to recognize intangible assets separately from
goodwill. The requirements of Statement 141 are effective for any business
combination that is initiated after June 30, 2001. Under FASyears ended December 31, 2004, 2003, or 2002.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
        In accordance with SFAS 142, goodwill and indefinite lived intangible assets are no longer amortized, but are reviewed annually (or more frequently if impairment indictorsindicators arise) for impairment. Any impairment would be measured based upon the fair value of the related asset based upon the provisions of SFAS No. 142. There were no impairment losses related to goodwill during the years ended December 31, 2004, 2003 and 2002. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives.
        The amortization provisionsfollowing table presents the change in the carrying amount of Statement 142 applygoodwill (dollars in thousands):
 
 2004
 2003
 
Balance as of January 1, $292,924 $277,435 
Goodwill acquired during the year  13,890  13,840 
Currency translation adjustment effect  1,383  1,884 
Adjustments to goodwill balances  (2,232) (235)
  
 
 
Balance as of December 31, $305,965 $292,924 
  
 
 
        The adjustment to goodwill balances represents an adjustment to the acquired balance and additional transaction costs for prior year acquisitions. In addition, goodwill was adjusted by $2.1 million related to deferred tax liabilities established in purchase accounting, which has been reclassified from deferred tax liabilities to goodwill as of December 31, 2004. See Note 14 "INCOME TAXES" for further discussion.


        Amortized 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 Statement 142 in their fiscal year
beginning after December 15, 2001. Becauseconsist of the different transition datesfollowing:
Intangible assets (dollars in thousands):
 Cost
 Accumulated
Amortization
 Net Book
Value
As of December 31, 2004         
Customer lists $88,532 $(35,492)$53,040
Contracts  30,213  (23,091) 7,122
Non-compete agreements  7,524  (7,299) 225
Technology  7,775  (5,399) 2,376
Tradename  193  (12) 181
  
 
 
Total $134,237 $(71,293)$62,944
  
 
 
As of December 31, 2003         
Customer lists $81,532 $(23,624)$57,908
Contracts  29,250  (21,015) 8,235
Non-compete agreements  7,524  (6,122) 1,402
Technology  7,775  (4,288) 3,487
  
 
 
Total $126,081 $(55,049)$71,032
  
 
 
        Amortization expense 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
Company is currently in the process of evaluating the aggregate impact all
provisions of FAS 142 will have on its financial position and results of
operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 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. The Company is required to adopt SFAS No. 144 for the fiscal
year beginning after December 15, 2001 and is currently in the process of
evaluating the impact on its consolidated financial statements.


                                       32



B. INVESTMENTS

The following is a summary of available-for-sale securities:



                                                     Gross Unrealized    Estimated
                                           Cost      Gains     Losses    Fair Value

December 31, 2001
US Government Obligations                $ 30,017   $    338   $     11   $ 30,344
Corporate bonds                            27,906        651        285     28,272
Corporate passthroughs                      4,997         75          1      5,071
                                         --------   --------   --------   --------

                                           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
                                         ========                         ========

December 31, 2000
US Government Obligations                  27,441         30        178     27,293
Corporate bonds                            20,886         67      1,203     19,750
Corporate passthroughs                     12,092         62         18     12,136
                                         --------   --------   --------   --------

                                           60,419        159      1,399     59,179
                                         ========   ========   ========   ========

Due in one year or less                     5,237                            5,237
Due after one year through three years     34,838                           33,438
Due after three years                      20,344                           20,504
                                         --------                         --------
                                         $ 60,419                         $ 59,179
                                         ========                         ========



Proceeds from the sale of available for sale securities were approximately
$102.3 million during 2001. Net realized gains on those sales were $1.2 million.
There was no gain or loss, based on a specific identification basis, realized on
the sale of available for sale securities during the years ended December 31, 20002004, 2003, and 1999.

C. ACCOUNTS RECEIVABLE

Accounts receivable consists2002 was approximately $16.2 million, $15.8 million, and $16.4 million, respectively. Future estimated amortization expense is $15.7 million, $15.2 million, $12.9 million, $11.9 million, and $3.7 million for the years ended December 31, 2005, 2006, 2007, 2008, and 2009, respectively.
6. BUSINESS ACQUISITIONS
        On July 13, 2004, we acquired Fast Track Holdings Limited ("Fast Track"), a privately held consulting firm based in the UK that manages the design, integration, and rapid deployment of large-scale SAP implementations. In exchange for all of Fast Track's outstanding capital stock, we paid approximately $3.4 million in cash, including transaction costs, with the potential to pay up to an additional approximate $5.0 million in earn-out consideration over the next two years, contingent upon the achievement of certain future financial targets. The additional payments for earn-out consideration, if any, will be accounted for as additional purchase price. The acquisition has been accounted for under the purchase method in accordance with SFAS 141 and SFAS No. 142. The purchase price for this acquisition may be subject to further refinements based on future adjustments relating to the value of the following:acquired net assets. The portion of the purchase price related to the intangible assets has been finalized and was identified by independent appraisers utilizing standard valuation procedures and techniques. The total cost of the acquisition through December 31, 2001             2000
                                                          ----             ----
Billed                                               $ 144,896        $ 141,533
Unbilled                                                28,290           34,163
Allowance2004 was $4.1 million, which included net assets acquired of approximately ($0.2) million, goodwill of approximately $3.1 million and intangible assets of $1.1 million, the majority of which is being amortized on a straight-line basis over two years, and approximates the expected period of benefit. Total assets acquired of $2.1 million consisted primarily of accounts receivable of $1.9 million. The operating results of Fast Track have been included in our consolidated statement of operations

beginning July 14, 2004. Pro forma results for doubtfulthis acquisition have not been provided since this acquisition was not material.
        At the date of acquisition, we entered into a plan to exit certain activities, to consolidate facilities and to implement a workforce reduction. As a result, we recorded a restructuring liability of $0.4 million related to the lease obligations and certain other costs for those facilities and $0.1 million related to severance and retention. In accordance with EITF Issue No. 95-3 ("EITF 95-3"), "Recognition of Liabilities in Connection with a Purchase Business Combination," these costs, which are not associated with the generation of future revenues and have no future economic benefit, are reflected as assumed liabilities in the allocation of the purchase price to the net assets acquired.
Nims Associates, Inc.
        On February 27, 2004, we acquired Nims Associates, Inc. ("Nims"), an information technology and consulting services company with offices in the Midwest and ADCs in Indianapolis and Dallas, to expand our customer base, primarily in the financial and insurance industries. In exchange for all of Nims' outstanding capital stock, we paid $18.2 million in cash to the shareholders of Nims, with the potential to pay up to an additional $15.0 million in earn-out consideration over the next three years, contingent upon the achievement of certain future financial targets. The additional payments for earn-out consideration, if any, will be accounted for as additional purchase price. The acquisition was accounted for under the purchase method in accordance with SFAS 141 and SFAS 142. The total cost of the acquisition was $22.8 million, which includes net assets acquired of approximately $5.0 million, goodwill of approximately $10.8 million and intangible assets of $7.0 million. The intangible assets are primarily amortized on a straight-line basis over 10 years, which approximates the expected period of benefit. Total assets acquired of $8.8 million consisted primarily of accounts (13,014)         (10,990)
                                                     ---------        ---------
                                                     $ 160,172        $ 164,706
                                                     =========        =========

Accounts receivable of $5.6 million. The portion of the purchase price related to the intangible assets has been finalized and was identified by independent appraisers utilizing standard valuation procedures and techniques. The operating results of Nims have been included in our consolidated statements of income beginning March 1, 2004.
        At the date of acquisition, we entered into a plan to exit certain activities, to consolidate facilities and to implement a workforce reduction of 22 non-billable employees. As a result, we recorded a restructuring liability of $1.4 million related to the lease obligations and certain other costs for those facilities and $0.3 million related to severance and retention. In accordance with EITF 95-3, these costs, which are not associated with the generation of future revenues and have no future economic benefit, are reflected as assumed liabilities in the allocation of the purchase price to the net assets acquired.
        The unaudited pro forma combined condensed statements of income below present our historical statements and our acquisition of Nims on February 27, 2004 as if the purchase had occurred at January 1, 2003. The following unaudited pro forma combined condensed financial information is presented for comparative purposes only and is not 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 (dollars in thousands, except per share data):
 
 2004
 2003
 
 (Unaudited)

Revenues $920,048 $853,304
Net income (1)  32,481  30,082
Basic earnings per share  0.52  0.46
Diluted earnings per share  0.49  0.44
(1)
See Note 12 "EARNINGS PER SHARE" for reconciliation of net income as reported to net income used in calculation of doubtful accounts.diluted earnings per share.
Keane Worldzen
        On October 17, 2003, we acquired a controlling interest in Keane Worldzen, a privately held BPO firm. In connection with the acquisition, we paid $9.0 million to acquire the Series A preferred shares of Worldzen Holdings Limited held by an unrelated third party. We contributed to Keane Worldzen our Worldzen Holdings Limited shares, $4.3 million in cash and certain assets of our Keane Consulting Group ("KCG"), our business consulting arm. This transaction was accounted for under the purchase method in accordance with SFAS 141 and SFAS 142. As a result of the transaction, we own approximately 62% of Keane Worldzen's outstanding capital stock. The activityformer majority shareholders of Worldzen Holdings Limited contributed their Worldzen Holdings Limited shares to Keane Worldzen in exchange for approximately 38% of Keane Worldzen's outstanding capital stock and are currently members of Keane Worldzen's management. The asset and liabilities contributed to Keane Worldzen were recorded in relation to each shareholder's ownership percentage in Keane Worldzen as follows: (i) carryover basis related to assets and liabilities contributed to Keane Worldzen for which the individual shareholder had a prior interest; and (ii) fair value for assets and liabilities for which an individual shareholder had no prior interest. As a result, we recorded goodwill of approximately $13.8 million in the allowance accountaccompanying consolidated balance sheet.
        In connection with the acquisition, we obtained the right to purchase certain of the remaining shares held by the minority shareholders of Keane Worldzen at different times ("call options"). Our first call option is exercisable beginning on January 1, 2006 and ending on December 31, 2006 and is based on a stated value for the underlying shares of $6.5 million. The fair value of this first call option, using a Black-Scholes valuation model, is approximately $3.8 million and is included in other assets in the accompanying consolidated balance sheets. The other call options are exercisable at the fair market value of the underlying shares during the call periods, which are exercisable at certain times during the period January 1, 2007 through December 31, 2009. Since these other call options can only be exercised at the fair value of the underlying shares, no amounts have been recorded for these call options in our consolidated financial statements.
        Also in connection with the acquisition, the minority shareholders were given the right to require us to purchase certain of their remaining shares at various times ("put options") subject to the achievement of certain operating and financial milestones related to Keane Worldzen's business performance. The first put option, the term of which is October 17, 2003 through December 31, 2005,


is exercisable based on a stated value for the underlying shares of $2.8 million. The fair value of this put option, using a Black-Scholes valuation model, was approximately $279,000 at the acquisition date and is currently being recognized as compensation expense in the accompanying consolidated financial statements through the expiration date of the option. The other put options are exercisable at fair market value for the underlying shares during the put periods, which are exercisable at certain times during the period January 1, 2008 through March 1, 2010. Since these other put options can only be exercised at the fair value of the underlying shares, no amounts have been recorded for these put options in our consolidated financial statements.
        Also in connection with the acquisition, the minority shareholders granted two Keane Worldzen employees options to purchase an aggregate of approximately 720,000 of the shares of Keane Worldzen held by the minority shareholders. These stock options were granted at an exercise price below the fair market value of the shares at the grant date and vest over six years. In accordance with FIN 44 and APB 25, the intrinsic value of the stock options granted was approximately $0.4 million and was recorded as unearned compensation in Worldzen's consolidated balance sheet. As a result, Keane Worldzen is currently recognizing the compensation expense in the accompanying consolidated financial statements over the vesting period through December 31, 2009. Pro forma results for this acquisition have not been provided since this acquisition was not material.
SignalTree Solutions Holding, Inc.
        On March 15, 2002, we acquired SignalTree Solutions Holding, Inc. ("SignalTree Solutions"), a privately held, U.S.-based corporation with two software development facilities in India and additional operations in the U.S. Under the terms of the merger agreement, we paid $68.2 million in cash for SignalTree Solutions.
        We 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 our financial statements effective as of the purchase date.
        The total cost of the acquisition 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 $41.0 million and other identified intangible assets were valued at $21.5 million. At the date of acquisition, we entered a plan to exit certain activities and consolidate facilities. As a result, we recorded a restructuring liability of $1.6 million related to the lease obligation and certain other costs for those facilities. In accordance with EITF 95-3, these costs have been reflected in the purchase price of the acquisition.


        The components of the purchase price allocation is as follows:follows (dollars in thousands):
Consideration and merger costs:
 December 31, 2002
 2003 Adjustments
 December 31,
2004
Consideration paid $66,927 $— $66,927
Transaction costs  1,303  —  1,303
Restructuring  1,553  —  1,553
Deferred tax liability  9,120  —  9,120
  
 
 
Total $78,903 $— $78,903
  
 
 
Allocation of purchase price:
 December 31, 2002
 2003 Adjustments
 December 31,
2004
Net asset value acquired $16,133 $240 $16,373
Customer lists (seven-year life)  18,800  —  18,800
Non-compete agreements (three-year life)  2,700  —  2,700
Goodwill  41,270  (240) 41,030
  
 
 
Total $78,903 $— $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 (dollars in thousands):
Condensed balance sheet:
 December 31, 2002
 2003 Adjustments
 December 31,
2004
Cash $2,650 $— $2,650
Accounts receivable  7,304  —  7,304
Other current assets  3,562  (2) 3,560
Property and equipment, net  8,011  (75) 7,936
  
 
 
Total assets  21,527  (77) 21,450
Accounts payable  569  (11) 558
Accrued compensation  1,569  —  1,569
Other liabilities  3,256  (306) 2,950
  
 
 
Net assets $16,133 $240 $16,373
  
 
 
        The unaudited pro forma combined condensed statements of income below present our historical statements and our acquisition of SignalTree Solutions on March 15, 2002 as if the purchase had occurred at January 1, 2002. The following unaudited pro forma combined condensed financial information is presented for comparative purposes only and is not 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 (dollars in thousands, except per share data):
 
 2004
 2003
 2002
 
 (Unaudited)

Revenues $911,543 $804,976 $883,412
Net income  32,282  29,222  8,910
Basic earnings per share  0.52  0.44  0.12
Diluted earnings per share  0.48  0.43  0.12
        In addition to the Fast Track, Nims, Keane Worldzen, and SignalTree Solutions acquisitions, we completed an acquisition of a business complementary to our business strategy during the Third Quarter of 2002. The merger and consideration costs of this acquisition, which was accounted for using the purchase method of accounting, totaled $13.2 million, which includes a $0.2 million liability adjustment in the First Quarter of 2004. The purchase price included contingent consideration based upon operating performance of the acquired business. As of December 31, 2001           2000          1999
                                              ----           ----          ----
Beginning2002, in connection with this acquisition, we had recorded a contingent liability of year balance                 $ 10,990       $  7,904       $ 8,133
Provision charged                           13,706          6,778         7,749
Recoveries                                  (3,448)
Write-offs                                  (8,234)        (3,692)       (7,978)
                                          --------       --------       -------
Endapproximately $0.9 million related to certain earn-out considerations. The $0.9 million was paid out during the First Quarter of year balance                       $ 13,014       $ 10,990       $ 7,904
                                          ========       ========       =======


                                       33



D. PROPERTY AND EQUIPMENT

Property2003. As of September 25, 2004, the earn-out periods had expired and equipment consistno additional consideration was paid as a result of not reaching the required operating performance measures.
        The results of operations of these acquired companies have been included in our consolidated statements of income from the date of acquisition. The excess of the following:

                                                               December 31,
                                                           2001             2000
                                                           ----             ----
Buildingspurchase price over the fair value of the net assets has been allocated to identifiable intangible assets and improvements                              $ 2,599          $   772
Office equipment                                         52,537           71,316
Computer equipmentgoodwill. Identifiable intangible assets associated with these acquisitions are being amortized on a straight-line basis over periods ranging from two to 10 years and software                          12,019           15,316
Leasehold improvements                                   10,753            9,885
Constructionapproximate the expected period of benefit. Pro forma results of operations for these acquisitions, except for SignalTree Solutions and Nims, have not been provided since these acquisitions were not material either individually or in progress                                 13,000               --
                                                        -------          -------
                                                         90,907           97,289
Less accumulated depreciation and amortization           57,206           73,157
                                                        -------          -------
                                                        $33,701          $24,132
                                                        =======          =======

Depreciation expense totaled $11.7 million, $16.2 million and $22.4 millionthe aggregate in 2001, 2000 and 1999, respectively. Computer equipment and software includes
assets arising from capital lease obligations at a costthe year of $.6 million with
accumulated amortization totaling $.3 million at December 31, 2001.

E.acquisition.
7. ACCRUED EXPENSES AND OTHER LIABILITIES
        Accrued expenses and other liabilities consist of the following:

                                                               December 31,
                                                           2001             2000
                                                           ----             ----
Accrued employee benefits                               $ 8,322          $ 8,226
Accrued rent obligations                                     --            1,609
Accrued restructuring                                    21,723            6,332
Other                                                    21,935           10,786
                                                        -------          -------
                                                        $51,980          $26,953
                                                        =======          =======

F.following (dollars in thousands):
As of December 31,

 2004
 2003
Accrued employee benefits $6,032 $5,427
Accrued pension liability  13,491  5,384
Accrued deferred compensation  8,083  5,559
Purchased services  5,904  5,051
Other  17,457  15,590
  
 
  $50,967 $37,011
  
 
        Refer to Note 13 "BENEFIT PLANS" for additional information.

8. NOTES PAYABLE
        In connection with the Company's acquisitionpurchase of Parallax Solutions Ltd. in
Februarya business complementary to our operations during the Third Quarter of 1999, the Company2002, we issued a $6.6$3.0 million non-interest bearing note payable toas partial consideration. The note had a one-year term with a one-year extension expiring on September 25, 2004. Effective September 25, 2004, the former
owners.term of the contingent service credits was extended one year through September 25, 2005. Additionally, during the Third Quarter of 2002, we acquired an existing $100,000 non-interest bearing note payable in connection with employment credits. During 2004 and 2003, we reduced the year 2001, the Companynote payable balance by $1.3 million and $1.0 million, respectively, as a result of delivering related service credits. Also during 2003, we had paid the $100,000 note. The additional reduction in the non-interest bearing note payable during 2004 results in a remaining balance of $4.0$0.7 million as of December 31, 2004.
9. CONVERTIBLE SUBORDINATED DEBENTURES
   ��    In June 2003, we issued in a private placement $150.0 million principal amount of Debentures. The Debentures are unsecured and subordinated in right of payment to all of our senior indebtedness. The Debentures accrue regular interest at a rate of 2.0% per year. Interest is payable semi-annually in arrears on June 15 and December 15 of each year, beginning December 15, 2003. Beginning with the six-month interest period commencing June 15, 2008, we will pay additional contingent interest during any six-month interest period if the trading price of the Debentures for each of the five trading days immediately preceding the first day of the interest period equals or exceeds 120% of the principal amount of the Debentures. During any interest period when contingent interest is payable, the contingent interest payable per $1,000 principal amount of Debentures will equal 0.35% calculated on the average trading price of $1,000 principal amount of Debentures during the five trading days immediately preceding the first day of the applicable six-month interest period and will be payable in arrears.
        On or after June 15, 2008, we may, by providing at least 30-day notice to the holders, redeem any of the Debentures at a redemption price equal to 100% of the principal amount of the Debentures, plus accrued interest and unpaid interest, if any, and liquidated damages, if any, to, but excluding, the redemption date.
        The Debentures are convertible at the option of the holder into shares of our common stock at an initial conversion rate of 54.4989 shares per $1,000 principal amount of Debentures, which is equivalent to an initial conversion price of approximately $18.349 per share, subject to adjustments, prior to the close of business on the final maturity date only under the following circumstances: (a) during any fiscal quarter commencing after September 30, 2003, and only during such fiscal quarter, if the closing sale price of our common stock exceeds 120% of the conversion price (approximately $22.019) for at least 20 trading days in the 30 consecutive trading day period ending on the last trading day of the preceding fiscal quarter; (b) during the five business days after any five consecutive trading day period in which the trading price per $1,000 principal amount of Debentures for each day of that period was less than 98% of the product of the closing sale price of our common stock and the number of shares issuable upon conversion of $1,000 principal amount of the Debentures; (c) if the Debentures have been called for redemption; or (d) upon the occurrence of specified corporate transactions. See Note 12 "EARNINGS PER SHARE" for further discussion of the Debentures.
        Debt issuance costs were approximately $4.4 million and are included in other assets, net, in the accompanying consolidated balance sheets. These costs are being amortized to interest expense over


five years on a straight-line basis. As of December 31, 2004 and 2003, the unamortized debt issuance costs were approximately $3.1 million and $3.9 million, respectively.
10. RESTRUCTURING CHARGES
Workforce reductions
        In connection with the Fast Track acquisition noted in Note 6 "BUSINESS ACQUISITIONS," we entered into a plan to reduce the workforce by seven employees, most of who had a termination date of October 31, 2004. The employees affected in the reduction were non-billable personnel whose responsibilities were integrated into our existing operations to realize the synergies of the two operations. We recorded a liability of approximately $0.1 million associated with severance, retention and other termination benefits and substantially completed the plan. In accordance with EITF 95-3, these costs have been reflected as assumed liabilities in the allocation of the purchase price to the net assets acquired. As of December 31, 2004, we had paid approximately $58,000 in severance and retention costs and had a remaining accrual balance of $76,000.
        In connection with the Nims acquisition discussed in Note 6 "BUSINESS ACQUISITIONS," we entered into a plan to reduce the workforce by 22 employees, most of whom had a termination date of April 30, 2004. The employees affected in the reduction were non-billable personnel whose responsibilities were integrated into our existing operations to realize the synergies of the two operations. We recorded a liability of approximately $0.3 million associated with severance, retention, and other termination benefits and have substantially completed the plan by December 31, 2004. In accordance with EITF 95-3, these costs have been reflected as assumed liabilities in the allocation of the purchase price to the net assets acquired. As of December 31, 2004, we had paid approximately $0.3 million in severance and retention costs and had a remaining reserve balance of $15,000.
        During 2003, we had two additional workforce reductions related to our business consulting arm and one of our North America branches, which included a headcount reduction of 25 and 50 employees, respectively. As a result of these reductions, we recorded a total restructuring charge of $1.3 million, consisting of retention and severance costs. In accordance with SFAS No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities," we accrued for these costs beginning at the time of an employee's notification through the termination date. No further costs are anticipated to be incurred related to either of the two workforce reductions in 2003. During the Fourth Quarter of 2003, we evaluated the accrual balances of the current and prior year's workforce restructuring balance and determined that $0.1 million and $1.4 million of charges taken in 2003 and 2002, respectively, were no longer deemed to be necessary due to employee resignation prior to termination or revised workforce needs. The net impact of the workforce reductions to the 2003 consolidated statement of income was an expense reduction of $0.2 million.
        As of December 31, 2004, we had completed all of the terminations related to the reductions in force for our business consulting arm and one of our North America branches, respectively. Cash expenditures in 2004 and 2003 related to the 2003 severance and retention restructuring accruals were $0.2 million and $1.1 million, respectively. No further costs are anticipated related to these restructurings.
        In the Fourth Quarters of 2002 and 2001, we recorded restructuring charges of $17.6 million and $10.4 million, respectively. Of these charges, $3.2 million and $4.4 million related to a workforce


reduction of approximately 229 and 900 employees for the years 2002 and 2001, respectively. In 2002, we also had a change in estimate of $0.3 million in connection with workforce reductions, which resulted in a net workforce restructuring charge of $2.9 million. As of January 1, 2004, we had a remaining balance of approximately $24,000 related to the 2002 workforce reduction, all of which we paid in the First Quarter of 2004. No further payments related to the 2002 workforce reduction will be paid.
Branch office closures
        During December 2004, in accordance with SFAS 146, we accrued $2.3 million for a restructuring of one of our real estate locations that we vacated. Additionally, during the Fourth Quarter of 2004, we performed an evaluation of our restructuring balances for properties restructured in prior periods and determined that we were over accrued by $2.4 million, as a result of negotiating early lease terminations or obtaining a subtenant. The net impact of these actions resulted in a net expense reduction to the restructuring charge of $0.1 million in our consolidated statement of income.
        In connection with the Fast Track acquisition noted above, we entered into a plan to exit certain activities and to consolidate certain facilities. As a result, we have recorded a restructuring liability of $0.4 million related to the lease obligation and certain other costs for one facility. In accordance with EITF 95-3, these costs, which are not associated with the generation of future revenues and have no future economic benefit, are reflected as assumed liabilities in the allocation of the purchase price to the net assets acquired. No cash expenditures have been made as of December 31, 2004.
        In connection with the Nims acquisition noted in Note 6 "BUSINESS ACQUISITIONS", we entered into a plan to exit certain activities and to consolidate certain facilities. As a result, we have recorded an initial restructuring liability of $1.4 million related to the lease obligation and certain other costs for eight facilities. During the Fourth Quarter of 2004, we determined that our original estimate for Nims-related lease obligations was too high and reduced the accrual by $0.1 million. In accordance with EITF 95-3, these costs, which are not associated with the generation of future revenues and have no future economic benefit, are reflected as assumed liabilities in the allocation of the purchase price to the net assets acquired. Cash expenditures in 2004 related to all Nims-related branch office closings totaled $0.4 million, which is net of approximately $0.2 million of sublease payments received.
        During December 2003, in accordance with SFAS 146, we accrued $0.9 million for a restructuring of two of our real estate locations from which we no longer were receiving economic benefit. Additionally, during the Fourth Quarter of 2003, we performed an evaluation of our restructuring balances for properties restructured in prior periods and determined that we were over accrued by $1.0 million, as a result of negotiating early lease terminations or obtaining a subtenant. In prior years, in accordance with EITF Issue No. 94-3, ("EITF 94-3"), "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)," we performed reviews of our business strategy and concluded that consolidating some of our branch offices was key to our success. As a result of this note.

G.review, we charged to restructuring $12.1 million in 2002 and $4.0 million in 2001 for branch office closings and certain other expenditures. In the Fourth Quarter of 2002, we also performed a review of accrual balances for properties restructured in prior years. As a result, we 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 our restructuring liability of $0.8 million 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. During 2002, we 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. Cash expenditures in 2004 related to branch office closings were $6.7 million, which is net of approximately $1.7 million of sublease payments received.
Impairments
        We also recorded an impairment charge of $1.8 million and $0.8 million in 2002 and 2001, respectively, for assets associated with the facilities identified in the branch office closures that became impaired as a result of these restructuring actions.
        A summary of restructuring activity during the years 2004, 2003, and 2002, which is reported in the accompanying consolidated balance sheets, is as follows (dollars in thousands):
 
 Workforce
reduction
 Branch office
closures & other
expenditures
 Impaired assets
 Total
 
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  2,136  187  2,416 
 Acquisition related charges to increase prior year estimate  —  3,021  —  3,021 
 Fixed asset impairment charges in fiscal 2002  —  —  (2,034) (2,034)
  
 
 
 
 
Beginning balance in fiscal 2003  3,285  22,950  —  26,235 
 Charges in fiscal 2003  1,345  870  —  2,215 
 Change in current and prior year's estimate  (1,537) (1,004) —  (2,541)
 Cash expenditures in fiscal 2003  (2,856) (9,033) —  (11,889)
  
 
 
 
 
Beginning balance in fiscal 2004  237  13,783  —  14,020 
 Charges in fiscal 2004  —  2,266  —  2,266 
 Change in current and prior year's estimate  —  (2,376) —  (2,376)
 Acquisition related charge in fiscal 2004  454  1,638  —  2,092 
 Cash expenditures in fiscal 2004  (600) (6,725) —  (7,325)
  
 
 
 
 
Balance as of December 31, 2004 $91 $8,586 $— $8,677 
  
 
 
 
 
        As of December 31, 2004, the balance in the branch office closures reserve consisted of amounts for properties identified in 2004, 2003, 2002, 2001, 2000, and 1999 in the amounts of $3.5 million, $0.2 million, $4.3 million, $0.6 million, $5,000, and $18,000, respectively.


11. CAPITAL STOCK

The Company has three
        On January 13, 2004, we announced that our Board of Directors had voted to convert all of our outstanding shares of Class B common stock into shares of our common stock on a one-for-one basis, effective February 1, 2004. Class B shares are entitled to 10 votes per share whereas shares of our common stock are entitled to only one vote per share on matters submitted to shareholders for vote. As of January 31, 2004, the Class B common stock represented less than 1% of the total of our outstanding shares of our Class B common stock and our common stock, net of treasury stock, but had approximately 4.3% of the combined voting power of our outstanding shares of our Class B common stock and our common stock, net of treasury stock.
        On June 14, 2004, we announced that our Board of Directors had authorized us to repurchase an additional 3 million shares of our common stock over the next 12 months effective June 13, 2004. This authorization replaced the June 12, 2003 authorization to purchase 3 million shares of our common stock, of which only 1,817,700 shares were repurchased prior to the expiration of the June 2003 authorization.
        Effective July 1, 2004, companies incorporated in Massachusetts became subject to the Massachusetts Business Corporation Act, Chapter 156D. Chapter 156D provides that shares that are reacquired by a company become authorized but unissued shares. As a result, Chapter 156D eliminates the concept of "treasury shares" and provides that shares reacquired by a company become "authorized but unissued" shares. Accordingly, at July 2, 2004, we have redesignated our existing treasury shares, at an aggregate cost of $141.5 million, as authorized but unissued and allocated this amount to the common stock's par value and additional paid in capital.
        Subsequent to February 1, 2004, we have two classes of stock: Preferred Stock, Common Stockpreferred stock and Class
B Common Stock.common stock. Holders of Common Stockcommon stock are entitled to one vote for each share
held. Holders of Class B Common Stock generally vote together with holders of
Common Stock as a single class 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,preferred stock, and to fix the number of shares of any such series. The Common StockFor the period January 1, 2002 through December 31, 2004, our Board of Directors authorized us to repurchase up to 17.6 million shares of our common stock. A summary of repurchase activity for 2004, 2003, and Class B Common Stock2002 is as follows (dollars in thousands):
 
 2004
 2003
 2002
 
 Shares
 Amount
 Shares
 Amount
 Shares
 Amount
Prior year authorizations at beginning of year 3,181,200    3,676,400    1,542,800   
Authorizations 3,000,000    6,000,000    8,632,200   
Repurchases (2,127,300)$30,096 (6,495,200)$66,696 (6,498,600)$54,092
Expirations (1,182,300)   —    —   
  
    
    
   
Shares remaining as of December 31, 2,871,600    3,181,200    3,676,400   
  
    
    
   
        Between May 1999 and December 31, 2004, we have equal liquidation and dividend rights except that any regular quarterly
dividend declared shall be $.05invested approximately $259.8 million to repurchase approximately 20.6 million shares of our common stock under ten separate authorizations.

12. EARNINGS PER SHARE
        A summary of our calculation of earnings per share lessis as follows (in thousands, except per share data):
Years Ended December 31,

 2004
 2003
 2002
Net income used for basic earnings per share $32,282 $29,222 $8,181
Interest expense associated with convertible debentures, including amortization of debt issuance costs  3,880  2,062  —
Related tax effect  (1,448) (825) —
  
 
 
Net income used for diluted earnings per share $34,714 $30,459 $8,181
  
 
 
Weighted average number of common shares outstanding used in calculation of basic earnings per share  62,601  65,771  74,018
Incremental shares from restricted stock, employee stock purchase plan, and the assumed exercise of dilutive stock options  1,031  652  388
Incremental shares from assumed conversion of convertible debentures  8,175  4,394  —
  
 
 
Weighted average number of common shares and common share equivalents outstanding used in calculation of diluted earnings per share  71,807  70,817  74,406
  
 
 
Earnings per share         
Basic $0.52 $0.44 $0.11
  
 
 
Diluted $0.48 $0.43 $0.11
  
 
 
        Potential common shares consist of employee stock options and restricted common stock. Employee stock options to purchase 1,217,000, 1,453,000, and 2,374,000 shares for holdersthe years ended December 31, 2004, 2003, and 2002, respectively, were outstanding, but were not included in the computation of Class B Common
Stock. Class B Common Stock is nontransferable, except under certain conditions,
but may be converteddiluted earnings per share because the exercise price of the stock options was greater than the average share price of the common shares during the period and therefore, their effect would have been anti-dilutive.
        Our Debentures are convertible at the option of the holder into Common Stock on a share-for-share basis at any time.
Conversions toshares of our common stock totaled 221 and 191at an initial conversion rate of 54.4989 shares in 2000 and 1999,
respectively. There were no conversions during 2001. Shares of common stock reservedper $1,000 principal amount of Debentures, which is equivalent to an initial conversion price of approximately $18.349 per share. The Debentures become convertible under the following circumstances: (a) during any fiscal quarter commencing after September 30, 2003 when, among other circumstances, the closing price per share of our common stock is more than 120% of the conversion price (approximately $22.019 per share) for conversions totaled 284,891 at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; (b) during the five business days after any five consecutive trading day period in which the trading price per $1,000 principal amount of Debentures for each day of that period was less that 98% of the product of the closing sale price per share of our common stock and the number of shares issuable upon conversion of $1,000 principal amount of the Debentures; (c) if the Debentures have been called


for redemption; or (d) upon the occurrence of specified corporate transactions. The total amount of shares issuable upon the conversion of the Debentures is approximately 8.2 million.
        We adopted the provisions of EITF 04-8 which requires that contingently convertible debt should be included in the calculation of diluted earnings per share using the if-converted method regardless of whether the market price trigger has been met. Under the if-converted method, the debt is considered converted to shares, with the resulting number of shares included in the denominator of the earnings per share calculation and the related interest expense (net of tax) added back to the numerator of the earnings per share calculation. EITF 04-8 also requires the restatement of previously reported diluted earnings per share upon adoption. Therefore, the weighted average impact of the 8.2 million shares has been included in the calculation of diluted earnings per share for the year ended December 31, 2001.

H. BENEFIT PLANS

STOCK OPTION PLANS: The Company has four stock-based compensation plans, which
are described below. The Company adopted the disclosure provisions of SFAS 123,
"Accounting for Stock-Based Compensation,"2004 and has continued to apply APB
Opinion 25 and related Interpretations in accounting for its plans. Had
compensation cost for the Company's stock-based compensation plans been
determined2003 based on the fair value atperiod the grant datesDebentures were outstanding. There was no impact on diluted earnings per share for the year ended December 31, 2002 since the Debentures were issued in 2003.
        During the quarter ended June 30, 2004, we adopted the provisions of EITF 03-6, which requires that convertible participating securities should be included in the computation of basic earnings per share using the two-class method. Our Debentures are not participating securities under the provisions of EITF 03-6 as calculatedthey do not participate in accordanceundistributed earnings with SFAS 123,our common stock. No separate disclosure of basic or diluted earnings per share has been made for the Company'sClass B common stock as the impact was immaterial and, effective February 1, 2004, all of the Class B common stock was converted into shares of our common stock. In addition, there was no impact on the basic and diluted earnings per share for our common stock for all periods presented in the accompanying consolidated statements of income. See Note 11 "CAPITAL STOCK" for further discussion.
13. BENEFIT PLANS
        STOCK OPTION PLANS:    Pro forma financial measures regarding net income and earnings per share for
the years ended December 31, 2001, 2000 and 1999 would have been reduced to the
pro forma amounts indicated below:


                                       34



                                                    Years Ended December 31,
                                                   2001       2000       1999
                                                 ------------------------------

Net income - as reported                         $ 17,387   $ 20,354   $ 73,074
Net income - pro forma                              8,045      2,596     61,811
Net income per share - as reported (diluted)          .25        .29       1.01
Net income per share - pro forma (diluted)            .12        .04        .85

The effects of applyingis required by SFAS 123 for stock-based awards as if we had accounted for our stock-based compensation to employees under the fair value method prescribed in this pro formaSFAS 123. As permitted by SFAS 148 and SFAS 123, we account for our stock-based compensation in accordance with APB 25, FIN 44, and related implementation guidance and apply the disclosure areprovisions of SFAS 148 and SFAS 123. Accordingly, our adoption of disclosure provisions of SFAS 148 does not likely to
be representativeimpact our financial condition or results of effects on reported net income for future years.operations.
        The fair market value of each stock option is estimated using the Black ScholesBlack-Scholes option pricing method,model, assuming no expected dividends with the following weighted-average assumptions:

                                                     Years Ended
Years ended December 31,

 2004
 2003
 2002
 
Expected life (in years) 5.2 5.2 4.9 
Expected stock price volatility 56%61%65%
Risk-free interest rate 4.14%3.87%4.24%
        The weighted-average fair value of options granted under the option plans during the years ended December 31, 2001        2000        1999
                                                 ------------------------------

Expected life (years)                               4.8         4.4         4.0
                                                    5.5
Expected2004, 2003, and 2002, was $7.99, $4.90, and $8.52, respectively. The weighted-average fair value of restricted stock price volatility                     65%         93%         96%
Risk-free interest rate                           5.00%       5.00%       5.27%granted under the option plans during the years ended December 31, 2004, 2003, and 2002 was $15.14, $11.09, and $18.34, respectively.

        The 1992 Stock Option Plan provides for grants of stock options for up to 3,600,000 shares of the Company's Common Stockour common stock to our employees, officers, and
directors, of, and consultants, and advisors to, the Company.advisors. 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 grantAs of December 31, 2004 and 2003, there were no options that are intended to qualify as
incentive stock optionsoutstanding under Section 422 ofthis plan and the Internal Revenue Code
("incentive stock options") or nonstatutory options not intended to qualify as
incentive stock options.plan has expired.
        The 1998 Stock Incentive Plan, amended in December 1999, provides for grants of stock options and restricted stock for up to 7,000,000 shares of the Company's Common Stockour common stock to our employees, officers, and directors, of, and consultants, and advisors to, the
Company.advisors. 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.
        In December 2000, the Companywe initiated a new "Time Accelerated Restricted Stock Award Plan" (TARSAP)("TARSAP") under itsour 1998 Stock Incentive Plan, whereby the vesting of certain stock options is directly impacted by the performance of the Company.our performance. 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 ten10 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 future 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 were an important factor in securing employee
confidence, commitment, and trust at a critical junction in the implementation
of its new strategic plan. 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 $108.9
million to repurchase 5, 457,200 million shares of its common stock under three
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 Stockour common stock to our employees, officers, and
directors, of, and consultants, and advisors to, the Company.advisors. 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
        For all of our stock plans, we may grant options that are intended to qualify as incentive stock options under Section 422 35

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.
        In November 2001, the Companywe completed itsa merger with Metro Information Services, Inc. ("Metro.") In connection with the merger, the Companywe assumed all options, whether vested orand unvested, to purchase Metro's common stock, issued under Metro's stock option plans.plan. 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 Keaneour common stock equal to the number of shares of Metro's Common
Stockcommon stock subject to such option, multiplied by a conversion ratio of .48.0.48. The option price was proportionally adjusted. The number of adjusted shares under the Metro plan was 571,058, of which 6,864 shares, 480 shares, and 13,394 shares were exercised during 2004, 2003, and 2002, respectively.
        In September of 2002, we completed the purchase of a business complementary to our business strategy. In connection with this acquisition, we assumed all vested and unvested options to purchase the stock of the acquired company, under the respective stock option plan. Each option to purchase shares of the acquired company, as of September 25, 2002, became an option to acquire a number of shares of our 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 Metroacquired company's plan is 571,058. There87,502, of which 9,706 shares, 27,652 shares, and 14,184 shares were no shares exercised underfrom this plan during December 2001.2004, 2003, and 2002, respectively.


        On August 20, 2002, our Board of Directors approved a stock option exchange offer. The weighted-average fair valueoffer was to exchange outstanding options to purchase shares of optionsour common stock, which were granted under both Plans during the
years ended December 31, 2001,on or after January 1, 2000 and 1999 was $11.96, $11.53had 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:

        The Offer expired on October 7, 2002 ("expiration date"). Options for 1,888,394 shares of our common stock with a weighted average exercise price of $20.45 were eligible for the Offer. Of this amount, 1,348,949 options were surrendered for exchange, with 324,902 options being retained, and the balance of the 214,543 being cancelled because of terminations.
        For the 1,348,949 options surrendered for exchange at a rate of four new options for every five surrendered, we granted new stock options for an aggregate of 1,079,159 shares at an exercise price of $8.28 per share on April 8, 2003. The balance of the surrendered options were canceled because of terminations.
        Information with respect to activity under the Company'sour stock option plans, including restricted stock awards, is set forth below:

                                                                      Weighted
                                                        Common         Average
                                                         Stock   Exercise Price

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
  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
                                                    ==========
 
 Common stock
 Weighted average
exercise price
Outstanding at December 31, 2001 6,270,330 $19.20
Granted 689,342  13.43
Exercised (145,734) 13.08
Canceled/expired (2,467,185) 21.16

Outstanding at December 31, 2002
 
4,346,753
 
 
17.25
Granted 1,820,909  8.57
Exercised (93,160) 7.15
Canceled/expired (1,428,642) 21.65

Outstanding at December 31, 2003
 
4,645,860
 
 
12.42
Granted 1,357,700  15.08
Exercised (157,188) 8.73
Canceled/expired (1,200,880) 16.19
  
   
Outstanding at December 31, 2004 4,645,492 $12.35
  
   
        Shares available for future issuance under the Company'sour stock option plans at December 31, 20012004 are 9,219,291.9,558,317. During the years ended December 31, 2004, 2003, and 2002, we granted 145,000 shares, 25,000 shares, and 6,500 shares of restricted stock, respectively.


        The following table summarizes information about stock options and restricted stock that were outstanding at December 31, 2001:



                                             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    --     $4.99            10,000            1.8                    $ 0.04                10,000               $  0.04
 5.00    --      9.99         2,041,310            8.6                      9.75                14,560                  9.72
10.00    --     14.99           192,700            7.9                     13.12                55,110                 13.02
15.00    --     19.99         1,830,792            6.1                     17.40               484,352                 17.30
20.00    --     24.99           475,073            3.1                     22.22               156,514                 22.32
25.00    --     29.99           840,340            2.9                     27.31               271,038                 27.49
30.00    --     39.99           743,183            3.1                     33.91               568,780                 33.89
40.00    --     49.99            66,600            2.7                     44.73                47,674                 44.61
50.00    --     59.99            70,692            5.8                     57.21                48,689                 57.23
60.00    --     74.99             6,480            7.0                     73.03                 4,080                 73.10
                                  -----                                                          -----

$0.04    --    $74.99         6,277,170            5.9                    $19.20             1,660,797               $ 26.90




                                       36

2004:
Range of exercise prices
 Number
outstanding
 Weighted
average
remaining
contractual
life (in years)
 Weighted
average
exercise
price
of options
outstanding
 Number
exercisable
 Weighted
average
exercise
price of
exercisable
options
$  0.04-$  4.99 3,766 3.90 $3.69 3,766 $3.69
  5.00-7.50 41,242 5.10  6.54 16,867  6.10
  $7.51-11.27 2,572,188 5.70  8.97 306,997  8.69
11.28-16.90 1,390,734 7.90  14.99 26,484  13.14
16.91-25.35 551,000 5.50  18.31 118,000  22.28
25.36-38.02 72,162 2.30  31.07 72,162  31.07
38.03-57.03 720 1.40  47.14 720  47.14
57.04-85.54 13,680 3.40  57.61 13,680  57.61
  
      
   
Total 4,645,492      558,676   
  
      
   
        STOCK PURCHASE PLANS: The Company's    Our 1992 Employee Stock Purchase PlanESPP provides for the purchase of 4,550,0006,550,000 shares of Common Stockcommon stock by qualifying employees at a purchase price of 85% of the market value of the stock on the offering commencement date or the last day of the purchase date.period, whichever is lower. During 2001, 20002004, 2003, and 19992002, participants in this plan purchased 575,841, 384,209,369,056 shares, 484,020 shares, and 310,051378,333 shares, respectively. Shares available for future purchases totaled 1,963,9312,232,522 at December 31, 2001.2004.
        On February 13, 2003, our Board of Directors approved a new UK ESPP. We allocated 500,000 shares of the total number of shares reserved under our 1992 ESPP for issuance under the UK ESPP. During 2004, participants in this plan purchased 2,325 shares. Shares available for future purchases as of December 31, 2004 totaled 493,365.
        INCENTIVE COMPENSATION PLANS: During 1988, the Company    We have 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 2001, 20002004, 2003, and 19992002, approximated $18.3$15.7 million, $11.2$21.3 million, and $8.3$16.8 million, respectively. In addition, management may award discretionary bonuses based upon an individual's performance and/or contribution to us.
DEFERRED COMPENSATION, SAVINGS, AND PROFIT SHARING PLAN:PLANS:    During 1984, the Companywe 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%25% of their salary to the plan. After one year of employment, we contribute $0.50 for each pre-tax dollar deferred, up to 6.0% of eligible employee's annual salary contributed. We may elect to make an additional discretionary contribution to the plan based on our profitability each year. Our match and discretionary contributions, if any, vest 25% each year and are fully vested after five years of employment. Our contributions for 2004, 2003, and 2002 amounted to approximately $7.6 million, $7.5 million, and $8.4 million, respectively.
        In addition, we have a deferred compensation plan for officers and eligible employees. The Company makesdeferred compensation plan allows the participants to reduce their taxable income by contributing


5-50% of their annual salary and 10-90% of their bonus or incentive compensation to the plan. We may make discretionary contributions to the plan based on individual or corporate performance. The amounts deferred earn a percentage of contributions
madeyield as determined by the eligible employeesbenchmark investments selected by the participant. As of December 31, 2004 and profits of the Company. The Company's
contributions vest after the employee has completed 42 months of service and for
2001, 2000 and 1999 amounted to2003, approximately $4.5 million, $5.0$8.1 million and $5.1$5.6 million, respectively.

respectively, was accrued under this plan and is included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.
DEFINED BENEFIT PLAN: PLANS:
The Company hasGratuity Plan
        We provide our employees in India with benefits under a defined benefit plan (the "Gratuity Plan") as required by India law. The Gratuity Plan provides a lump sum payment to vested employees on retirement or on termination of employment in an amount based on the respective employee's salary and years of employment with us. We determine our liability under the Gratuity Plan by actuarial valuation using the projected unit credit method. Under this method, we determine our liability based upon the discounted value of salary increases until the date of separation arising from retirement, death, resignation or other termination of services. Critical assumptions used in measuring the plan expense and projected liability under the projected unit credit method include the discount rate, expected return on assets and the expected increase in the compensation rates. We evaluate these critical assumptions at least annually. We periodically evaluate and update other assumptions used in the projected unit credit method involving demographic factors, such as retirement age and turnover rate, to reflect our experience.
        The discount rate enables us to state expected future cash flows at a present value on the measurement date, which is November 30. The discount rate we use is equal to the yield on high-quality fixed income investments in India at the measurement date. A lower discount rate increases the present value of benefit obligations and therefore increases gratuity expense. Since our Gratuity Plan is unfunded, we have not assumed any returns on assets. As of December 31, 2004, the amount accrued under the Gratuity Plan was approximately $1.2 million and is included in accrued compensation in the accompanying consolidated balance sheet.
UK Defined Benefit Plan
        We also have a defined benefit pension plan that provides pension benefits to employees of our subsidiary located in the Company's U.K. subsidiary. SuchUK, ("UK DBP"). These benefits are available to employees who were active on August 4, 19981999 and not to employees who joined the Companyus after that date, and are based on the employee'semployees' compensation and service. The plan is closed to new employees. The Company'sOur policy is to fund amounts required by applicable government regulations. The measurement date for the UK DBP is December 31. Total pension expense for 2001, 2000,2004, 2003, and 19992002, was approximately $1.2 million, $1.4$2.0 million, and $1.4$1.3 million, respectively.

The Company's projected benefit obligation at December 31, 2000 was
        During the First Quarter of 2004, we closed our UK DBP to future salary accruals effective April 1, 2004. Accordingly, we accounted for the closing of the UK DBP as a curtailment under SFAS No. 88 ("SFAS 88"), "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits." In the First Quarter of 2004, we recorded a curtailment loss of approximately $15.2 million. During 2001,$0.2 million to expense the unrecognized prior service cost, and interest cost were
$1.6we recorded an additional required minimum pension liability of approximately $5.2 million through accumulated other


comprehensive loss in the accompanying consolidated balance sheets. In addition, during the Fourth Quarter of 2004, we recorded an additional required minimum pension liability of approximately $1.4 million. Therefore, during 2004, the total non-cash adjustment to equity to record the required minimum pension liability was $6.6 million and $1.0 million, respectively. Also during 2001,was recognized in accumulated other comprehensive loss. As a result of the curtailment, participants of the UK DBP are eligible to participate in a defined contribution plan, which is available to all employees of the UK subsidiary.
Assumptions
        The following tables summarize the benefit costs and the weighted average assumptions associated with our UK DBP (dollars in thousands):
Years ended December 31,

 2004
 2003
 2002
 
Components of net periodic benefit cost:          
Service cost—benefits earned during the period $277 $1,304 $1,445 
Interest cost on projected benefit obligations  1,807  1,376  1,103 
Expected return on plan assets  (1,563) (1,125) (1,351)
Net amortization and deferral—amortization of unrecognized net loss/(gain)  491  441  88 
  
 
 
 
Net periodic pension cost  1,012  1,996  1,285 
  
 
 
 
Curtailment loss (gain)  183  —  — 
  
 
 
 
Net periodic pension cost after allowance for curtailment $1,195 $1,996 $1,285 
  
 
 
 
        The actuarial assumptions used are based on market interest rates, past experience, and management's best estimate of future economic conditions. Changes in these assumptions may impact future benefit costs and obligations. We change key employee contributions, actuarial gain,benefit plan assumptions in response to current conditions in the securities market. The discount rate has been lowered from 5.75% in 2002 to 5.50% in 2003 and benefits paid were $.3 million, $1.0 million5.40% in 2004 and $.3 million, respectively.is based on AA rated corporate bond yields of similar duration as the liabilities of the UK DBP. The projected benefit obligation at December 31,
2001expected rate of return on pension plan assets has been reduced from 8.00% in 2002 to 7.75% in both 2003 and 2004.
Years ended December 31,

 2004
 2003
 2002
 
Weighted average assumptions:       
Discount rate at end of the year 5.40%5.50%5.75%
Expected return on plan assets for the year 7.75 7.75 8.00 
Rate of compensation increase at end of the year*** — 4.25 3.75 
Discretionary pension increased LPI* pension increases 0.00 0.00 0.00 
LPI pension increases 2.80 2.75 2.25 
Statutory revaluation of benefits (GMP)** 3.50 3.50 3.50 
*
Limited Price Indexation

**
(Guaranteed Minimum Pension)

***
In 2004, the UK DBP was $16.8 million.curtailed.

Plan Assets
        The percentages of the fair value of the UK DBP assets by major category are as follows:
 
 Percentage of Plan Assets
 
As of December 31,

 2004
 2003
 
Equity securities 91%91%
Debt securities 6 6 
Real estate 3 3 
  
 
 
Total 100%100%
  
 
 
Investment Strategy
        The UK DBP assets are invested with the objective of achieving a total rate of return over the long-term, sufficient to fund future pension obligations, to minimize future pension contributions and to ensure a minimum level of funding. We are willing to tolerate a commensurate level of risk to achieve this objective based on the funded status of the plan and the long-term nature of the UK DBP pension liability. Risk is controlled by maintaining a portfolio of assets that is diversified across a variety of asset classes. All of the assets are managed by external investment managers. Asset allocation target ranges were established consistent with the investment objectives, and the assets are rebalanced periodically. The expected long-term rate of return on plan assets was determined based on a variety of considerations, including the established asset allocation targets and expectations for those asset classes, historical returns of the plans' assets and the advice of outside advisors. For 2005, the target allocation range is 80%-90% for equity securities, 5% to 10% for debt securities and 0% to 10% each for real estate and other assets. The UK DBP assets are not invested in Keane common stock.


        The following tables summarize the benefit obligations and funded status associated with our UK DBP (dollars in thousands):
As of December 31,

 2004
 2003
 2002
 
Change in projected benefit obligation:          
 Benefit obligation at beginning of year $32,080 $22,940 $16,780 
 Service cost  277  1,304  1,445 
 Interest cost  1,807  1,376  1,103 
 Employee contributions  52  209  286 
 Actuarial (gain) loss  3,525  3,516  1,722 
 Benefits paid  (504) (72) (403)
 Prior service cost  —  178  — 
 Curtailment (gain) loss  (2,288) (409) — 
 Foreign currency translation  2,623  3,038  2,007 
  
 
 
 
Benefit obligation at end of year  37,572  32,080  22,940 
  
 
 
 
Change in plan assets:          
Fair value of plan assets at beginning of year  19,725  13,844  15,546 
 Actual return on plan assets  2,959  3,134  (4,017)
 Employer contributions  297  737  931 
 Employee contributions  52  209  286 
 Benefits paid  (504) (72) (403)
 Foreign currency translation  1,552  1,873  1,501 
  
 
 
 
Fair value of plan assets at end of year  24,081  19,725  13,844 
  
 
 
 
Funded status  (13,491) (12,355) (9,096)
  
 
 
 
 Unrecognized net actuarial loss  10,147  10,472  8,726 
 Unrecognized prior service cost  —  178  — 
  
 
 
 
Accrued pension cost $(3,344)$(1,705)$(370)
  
 
 
 
Amounts recognized in consolidated balance sheet:          
 Intangible asset (in other assets) $— $178 $— 
 Deferred tax asset, long-term  —  —  773 
 Accrued benefit liability (in accrued expenses and other liabilities)  (13,491) (5,384) (2,302)
 Accumulated other comprehensive loss  10,147  3,501  1,159 
  
 
 
 
Net amount recognized $(3,344)$(1,705)$(370)
  
 
 
 
        As of December 31, 2004, the accumulated benefit obligation and the projected benefit obligation were both $37.6 million. Expected employer contributions for 2005 are approximately $0.2 million.
        Based on the same assumptions used to measure the UK DBP as of December 31, 2000 was $17.02004, future benefit payments expected to be paid are $0.3 million, $0.3 million, $0.5 million, $0.4 million, and $0.9 million in 2005, 2006, 2007, 2008, and 2009, respectively. In addition, we expect to pay $4.5 million in the aggregate for the years ended 2010 through 2014.

14. INCOME TAXES
        Income before income taxes includes the following components (dollars in thousands):
Years ended December 31,

 2004
 2003
 2002
Domestic $47,151 $48,799 $13,085
Foreign  4,357  (103) 551
  
 
 
Total income before provision for income taxes $51,508 $48,696 $13,636
  
 
 
        The provision for income taxes consists of the following (dollars in thousands):
Years ended December 31,

 2004
 2003
 2002
 
Current:          
 Federal $11,729 $359 $5,996 
 State  1,379  (240) 2,573 
 Foreign  778  645  682 
  
 
 
 
Total  13,886  764  9,251 

Deferred:
 
 
 
 
 
 
 
 
 
 
 Federal  3,430  15,515  (2,960)
 State  1,910  3,195  (836)
  
 
 
 
Total  5,340  18,710  (3,796)
  
 
 
 
Total provision for income taxes $19,226 $19,474 $5,455 
  
 
 
 
        The following table shows the principal reasons for the difference between the effective income tax rate and the statutory federal income tax rate (dollars in thousands):
Years ended December 31,

 2004
 2003
 2002
 
Federal income taxes at 35% $18,028 $17,044 $4,772 
State income taxes, net  2,923  1,921  1,129 
Disallowed meals expense  421  293  508 
Foreign rate differential  (1,228) (642) 489 
Non-benefitable book losses  2,125  1,809  653 
Adjustment of prior-year's estimated tax liabilities:          
 Expiration of statutes and changes in estimates  (1,134) (1,669) (1,532)
 Deferred tax asset adjustment  (2,180)      
Retroactive state tax  608       
Other, net  (337) 718  (564)
  
 
 
 
Total $19,226 $19,474 $5,455 
  
 
 
 
        Our policy is to establish reserves for taxes that may become payable in future years as a result of an examination by tax authorities. In accordance with SFAS No. 5 ("SFAS 5"), "Accounting for Contingencies," we establish the reserves based upon our assessment of exposure associated with permanent tax differences and interest expense applicable to both permanent and temporary difference adjustments. The tax reserves are analyzed periodically and adjusted, as events occur to warrant


adjustment to the reserves, such as when the statutory period for assessing tax on a given tax return or period expires, the reserve associated with that period is reduced. In addition, the adjustment to the reserve may reflect additional exposure based on current calculations. Similarly, if tax authorities provide administrative guidance or a decision is rendered in the courts, appropriate adjustments will be made to the tax reserve.
        During the Third Quarter ended September 30, 2004, certain events occurred, which impacted our tax provision. These events include the expiration of certain state statutes and changes in estimates, which resulted in a reduction to our tax provision of approximately $1.1 million, and the enactment of certain tax laws, which resulted in an imposition of tax retroactive to January 1, 2004 and an increase to our tax provision of approximately $0.6 million. The actual returnadjustment of prior years' estimated tax liability of $1.7 million and $1.5 million for the years ended December 31, 2003 and December 31, 2002, respectively, are primarily attributable to the expiration of the statutory period for assessing state tax on periods ended in 1996, 1997 and 1998, and federal tax for the period ended in 1998, respectively. In accordance with SFAS 5 and SFAS No. 109 ("SFAS 109"), "Accounting for Income Taxes," we have adjusted our tax reserves in the period where the conditions under SFAS 5 are no longer met and as of the enactment date of the new tax laws.
        For the year ended December 31, 2004, the Company identified errors relating to deferred tax balances arising from transactions in prior years. As a result, an adjustment to reduce goodwill by $2.1 million has been recorded in the accompanying consolidated balance sheet as of December 31, 2004 with a corresponding reduction to deferred tax liabilities. Furthermore, as of December 31, 2004 the Company recorded an adjustment to record an additional deferred tax asset totaling approximately $2.2 million and a corresponding decrease to the provision for income taxes. This income tax adjustment results from book to tax timing differences related to depreciation expense that management believe relate to a period, or periods prior to 2004. Since the specific period to which this adjustment relates cannot be identified with certainty, the adjustment has been recorded in the year ended December 31, 2004.
        Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax

purposes. Significant components of net deferred tax asset and liabilities are as follows (dollars in thousands):
As of December 31,

 2004
 2003
 
Deferred tax assets:       
 Current:       
  Allowance for doubtful accounts and other reserves $1,428 $2,059 
  Restructuring reserve  1,435  2,838 
  Accrued expenses  2,313  2,435 
  
 
 
   5,176  7,332 
  Valuation allowance  (120) — 
  
 
 
 Net current deferred taxes $5,056 $7,332 
 Noncurrent deferred tax assets:       
  Restructuring reserve $2,056 $2,889 
  Deferred compensation  3,303  2,271 
  Depreciation  6,040  4,527 
  Minimum pension liability adjustment  4,047  1,615 
  Acquired domestic net operating loss carryforwards  2,027  1,814 
  Other net operating loss carryforwards  8,945  2,686 
  Other, net  182  (313)
  
 
 
Total noncurrent deferred tax assets  26,600  15,489 
  
 
 
  Valuation allowance  (13,016) (4,301)
  
 
 
 Net noncurrent deferred tax assets  13,584  11,188 
  
 
 
Deferred tax liabilities:       
 Noncurrent:       
  Intangibles  (34,633) (30,879)
  Capitalized software  (4,875) (4,084)
  
 
 
Total noncurrent deferred tax liabilities  (39,508) (34,963)
  
 
 
Total net noncurrent deferred tax liability $(25,924)$(23,775)
  
 
 
        The valuation allowance for deferred tax assets increased by $8.8 million as a result of the minimum pension liability adjustment and certain subsidiary net operating losses. The tax effect of the minimum pension liability adjustment in 2004 totaling $2.1 million was charged to other comprehensive income. Approximately $3.0 million of the benefit of any future reduction of the valuation allowance attributable to the minimum pension liability would be directly allocated to other comprehensive income.
        At December 31, 2004, we had domestic net operating loss ("NOL") carryforwards for tax purposes of $15.0 million expiring in years ending in 2014 through 2024. Of these NOL carryforwards, $4.9 million relates to a prior acquisition and is subject to limitation pursuant to IRC Section 382.
        On October 22, 2004, the American Jobs Creation Act of 2004 ("AJCA") was signed into law. The AJCA creates a temporary incentive for U.S. multinational corporations to repatriate accumulated

income abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. In December 2004, the FASB issued Financial Staff Position ("FSP") No. FSP 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" ("FSP 109-2"). FSP 109-2 is effective immediately and provides accounting and disclosure guidance for the repatriation provision. FSP 109-2 allows companies additional time to evaluate the effects of the law on its unremitted earnings for the purpose of applying the "indefinite reversal criteria" under APB 23, "Accounting for Income Taxes-Special Areas," and requires explanatory disclosures from companies that have not yet completed the evaluation. We are currently evaluating the effects of the repatriation provision and their impact on the consolidated financial statements. The minimum amount of dividend distribution of foreign earnings that could potentially be subject to the provisions of the AJCA would be $0 and the maximum would be $14.7 million, which is the cumulative undistributed earnings of our foreign subsidiaries at December 31, 2004. The related income tax expense on the amounts eligible for the temporary deduction under the provisions of the AJCA would be $0 to approximately $800,000.
        In addition, our India subsidiary, part of the SignalTree Solutions acquisition, has tax holidays in India, which reduce or eliminate the income tax in that country. The holidays expire between 2006 and 2009. Based on the currently enacted regular corporate income tax rate in India, the benefit to us of the tax holidays for the year ended December 31, 20012004 was a reduction in plan
assets of $2.6approximately $1.5 million. During 2001, employer and employee contributions totaled
$1.5 million and benefits paid totaled $.3 million. The fair value of the plan
assets at December 31, 2001 was $15.6 million.

The components of the 2001 net periodic pension cost were as follows: service
cost was $1.6 million, interest cost was $1.0 million, the expected return on
plan assets was $1.4 million, and net amortization and deferrals was $.4
million.

I.
15. RELATED PARTIES, COMMITMENTS, AND CONTINGENCIES

The Company's corporate offices are located in Boston, Massachusetts. The
building is leased from
Related Party Transactions
        In October 2001, we entered into a partnership in which an officer and certain directors
and shareholders oflease for the Company are limited partners. The lease isNew Facility with Gateway LLC for a term of twenty years at annual rentals considered to be at prevailing market rates and
lasting through 2006. The Company is also required to pay specified percentages
of annual increases in real estate taxes and operating expenses. The Company
leases additional office space and apartments under operating leases and capital
leases, some of which may be renewed for periods up to five years, subject to
increased rentals. Rental expense for all of the Company's facilities, except as
noted below, amounted to approximately $19.4 million in 2001, $22.4 million in
2000 and $21.8 million in 1999. The Company is committed to minimum annual
rental payments under all leases, except for the new facility noted below, of
approximately $27 million in 2002, $22.9 million in 2003, $17.3 million in 2004,
$11.3 million in 2005, $ 5.1 million in 2006 and an aggregate of $5.6 million
for 2007 and thereafter.

In October, 2001, the Company entered into a lease with Gateway Developers LLC
("Gateway LLC") for a term of twelve12 years, pursuant to which the Companywe agreed to lease approximately 95,000 square feet of office and development space in a
building under construction at One Chelsea Street in Boston, Massachusetts (the
"New Facility"). The Company willspace. We lease 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 theour Board of the Company,Directors, and his immediate family members.


                                       37


        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. The Company currently expects to occupy the new facility in January 2003. The
Company will consolidate several existing facilities it hasStephen D. Steinour, one of our directors, 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 Boston area
as part of this move.approval process for the Gateway Loan.
        We began occupying the New Facility and making lease payments in March 2003. Based upon itsour knowledge of rentallease payments for comparable facilities in the Boston area, the Company believeswe believe that the rentallease 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
Companywe entered into the lease, as favorable to the Company us


as those which could have been obtained from an independent third party. Lease payments to Gateway LLC in 2004 were approximately $3.4 million.
In view of these related party transactions, the Company haswe concluded that, during the construction phase of the facility,New Facility, the estimated construction in progress costs for the project willNew Facility would be capitalized in accordance with EITF Issue No. 97-10, "The Effect of Lessee Involvement in Asset Construction." A creditliability in the same amount iswas included in the long-term portion of capital lease and other
obligations in the accompanying balance sheet.caption "Accrued construction-in-progress costs." For purposes of the consolidated statementstatements of cash flows, the Company characterizeswe characterized this treatment as a non-cash financing activity.

The Company is committed to an Enterprise Application Architecture (EAA) project
        As a result of the completion of the construction phase and our current occupancy, the related capitalized costs are now classified as "Building" and are included in property and equipment, net, in the accompanying consolidated balance sheets. A liability for the approximate costsame amount appears as accrued building costs into both our short- and long-term liabilities. The costs of $8.5the building are being amortized on a straight-line basis over a 39-year useful life. Additionally, the obligation is being reduced over the life of the lease at an interest rate of 8.67%. The net effect of the amortization that is included in the operating results approximates the rent expense resulting from the contractual payments we are required to make under the lease.
        In February 1985, we entered into a lease, which subsequently was extended to a term of 20 years, with City Square, pursuant to which we leased approximately 34,000 square feet of office and development space in a building located at Ten City Square, in Boston, Massachusetts. We now lease approximately 88% of this building and the remaining 12% is leased by other tenants. John F. Keane, Chairman of our Board of Directors, and Philip J. Harkins, one of our directors, are limited partners of City Square. Based upon our knowledge of lease payments for comparable facilities in the Boston area, we believe that the lease payments under this lease, which will be approximately $1.0 million per year ($30.00 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, which will be approximately $0.2 million per year were, at the time we entered into the lease, as favorable to us as those which could have been obtained from an independent third party. As a result of our occupancy of the New Facility (as described above), we vacated and we have obtained a subtenant for approximately 17% of Ten City Square and are in the process of seeking a third party to sublease the remaining space.
        As a result of the vacancy at Ten City Square in December 2002, we reserved the remaining lease payments due to City Square for the remainder of the lease term, resulting in a charge of approximately $3.9 million in the Fourth Quarter of 2002. In 2004, we paid approximately $1.1 million in lease payments and as of December 31, 2004, we had a remaining reserve balance of $1.8 million. A
        In January 2003, the FASB issued FIN 46, which requires the consolidation of a variable interest entity, as defined, by its primary beneficiary. Primary beneficiaries are those companies that are subject to a majority of the projectrisk 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.
        We have evaluated the applicability of FIN 46 to our relationship with each of City Square and Gateway LLC and determined that we are not required to consolidate these entities within our


consolidated financial statements. We have determined that Gateway LLC is not a variable interest entity as the equity investment is sufficient to absorb the expected losses and the holders of the equity investment do not lack any of the characteristics of a controlling interest. We have concluded that as we no longer occupy the space at Ten City Square and no longer derive any benefit from leasing the space, we would not be determined to be the related party most closely associated with City Square. As a result, we will continue to account for our leases with City Square and Gateway LLC consistent with our historical practices in accordance with generally accepted accounting principles. We believe that we do not have an interest in any variable interest entities that would require consolidation.
        In March 2003, our Audit Committee approved a related party transaction involving a director of Keane. We had subcontracted with Guardent, Inc. ("Guardent") for a customer project. Maria Cirino, a member of our Board of Directors, was at the time an executive officer, director, and shareholder of Guardent. In addition, the Audit Committee approved our engagement of Guardent as a sub-contractor for the purpose of providing future services to our customers. Under the terms of this approval, no payment to Guardent for a single engagement could exceed $75,000 and no payment to Guardent for all engagements in any calendar year could exceed $250,000. We did not make any payments to Guardent during the year ended December 31, 2004. On February 27, 2004, Guardent was acquired by VeriSign, Inc. ("VeriSign"). Since then, Ms. Cirino has held the position of Senior Vice President of VeriSign Managed Security Services.
        In July 2003, our Audit Committee approved a related party transaction involving a member of our Board of Directors. We sub-contracted with ArcStream Solutions, Inc. ("ArcStream") to develop and assist in the implementation of a wireless electronic application at two customer sites. In accordance with this transaction, we agreed to pay ArcStream a royalty fee for potential future installations during the seven-year license period. John F. Keane, Jr., a member of our Board of Directors, is Chief Executive Officer, a director, and founder of ArcStream. John F. Keane, Jr. is the son of John F. Keane, Sr., Chairman of our Board of Directors, and the brother of Brian T. Keane, our President, Chief Executive Officer, and a director. Effective June 21, 2004, our Audit Committee approved the termination of our agreement with ArcStream and a payment of $150,000 by us to ArcStream in exchange for a release of all parties from any further performance or payment obligations under the original agreement. The termination was for convenience and was not related to ArcStream's performance under the agreement. During the year ended December 31, 2004, we made payments of approximately $225,000 to ArcStream, including the termination payment referred to above. During the year ended December 31, 2003, we made payments of approximately $112,000 to ArcStream.
        During the Third Quarter of 2004, Keane Worldzen sold a portfolio of receivables to World Credit LLC for approximately $0.6 million. A principal of World Credit LLC is a family member of the President of Keane Worldzen and, as a result, we have determined that World Credit LLC is a related party to Keane Worldzen. The sale of the portfolio was deemed to be completedan arms length transaction. In addition, World Credit LLC is an affiliate of World Credit Fund I, LLC and World Credit Fund II, LLC and Prairie Financial LLC. Two non-executive employees of Keane Worldzen hold non-controlling equity interests in World Credit Fund I, LLC and World Credit Fund II, LLC. Keane Worldzen entered into a collection services agreement with World Credit LLC in December 2002. Under this agreement Keane Worldzen provides collection services, and related activities, to World Credit LLC. Keane Worldzen earned a total of $107,800 from World Credit in 2004 for these services.


Commitments and Contingencies
        We lease the New Facility from Gateway LLC as described above. We lease additional office space and apartments in more than 70 locations in North America, the UK, and India under operating leases and capital leases, some of which may be renewed for periods up to five years, subject to increased rental fees. Rental expense for all of our facilities amounted to approximately $16.4 million in 2004, $15.0 million in 2003, and $17.6 million in 2002. On September 25, 2000,We have subleases for certain restructured properties. The related cash receipts for these properties is reflected against the U.S. Equal Employment Opportunity Commission ("EEOC")
commenced a civil action against Keanerestructuring liability and are not recorded in the United States District Courtaccompanying consolidated statements of income.
        As of December 31, 2004, the future minimum lease payments for the Districtnext five years and thereafter under operating and capital leases, were as follows (dollars in thousands):
Years Ended December 31,

 Operating
Leases
 Capital
Leases
2005 $19,457 $243
2006  16,195  17
2007  13,354  —
2008  10,299  —
2009  7,479  —
Thereafter  22,435  —
  
 
Total minimum lease payments $89,219 $260
  
 
Less imputed interest     —
     
Present value of minimum capital lease payments    $260
     
        We are a guarantor with respect to a line of Massachusetts alleging thatcredit for Innovate EC, an entity in which we acquired a minority equity position as a result of a previous acquisition. The total line of credit is for $600,000. We guarantee $300,000 of this obligation. The line is subject to review by the Company discriminated against
former employee Michael Randolphlending institution. We would be required to meet our guarantor obligation in the event the lending institution refuses to extend the credit facility and other unspecified "similarly-situated
individuals" by acts of racial harassment, retaliation and constructive
discharge. The EEOC has not specified the amount of damages it is seeking. The
parties are presently engaged in discovery. Because the lawsuit is in pre-trial
stages, managementInnovate EC is unable to estimatesatisfy its obligation.
        In February 2003, we entered into a new $50.0 million unsecured revolving credit facility (the "credit facility") with two banks. The credit facility replaces a previous $10.0 million demand line of credit, which expired in July 2002. The terms of the effect, ifcredit facility require us to maintain a maximum total funded debt and other financial ratios. The credit facility also includes covenants that, subject to certain specific exceptions and limitations, among other things, restrict our ability to incur additional debt, make certain acquisitions or dispositions of assets, create liens, and pay dividends. On June 11, 2003, we and two of our banks amended certain provisions of the credit facility relating to financial covenants. These covenants, which include total indebtedness and leverage ratios, are no more restrictive than those initially contained in the credit facility. On October 17, 2003 and February 5, 2004, we and two of our banks further amended certain provisions of the credit facility to expand our ability to make certain acquisitions. The annual commitment fee for maintaining the credit facility is 30 basis points on the unused portion of the credit facility, up to a maximum of $150,000. As of December 31, 2004, we had no debt outstanding under the credit facility. We may draw upon the credit facility up to $50.0 million less any it mayoutstanding letters of credit that have been issued against the


credit facility. Any amounts drawn upon the credit facility constitute senior indebtedness for purposes of the Debentures. Borrowings bear interest at one of the bank's base rate or the Euro currency reserve rate.
        During the First Quarter of 2003, we paid $0.9 million related to certain earn-out considerations in connection with an acquisition made during the Third Quarter of 2002. We also recorded, in the Third Quarter of 2002, $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. During 2004, we recognized revenue of approximately $2.6 million in relation to the contingent service credits and reduced each of the related deferred revenue and note by approximately $1.3 million. The note had a one-year term with a one-year extension expiring on its
consolidatedSeptember 25, 2004. Effective September 25, 2004, the term of the contingent service credits was extended one year through September 25, 2005. In connection with the Nims acquisition and based on the forecasted financial position or consolidated resultsperformance related to the first earn-out, we expect to pay approximately $3.3 million contingent consideration in April of operations.

The Company is2005.
        During the First Quarter of 2003, we received a $7.3 million award in connection with an arbitration proceeding initiated by us in 2000 against Signal Corporation for a breach of an agreement between Signal Corporation and our Federal Systems subsidiary.
        We are involved in other litigation and various legal matters, which have arisen in the ordinary course of business. The Company doesWe do not believe that the ultimate resolution of these matters will have a material adverse effect on itsour financial condition, results of operations, or cash flows.
16. SEGMENT INFORMATION
        Based on qualitative and quantitative criteria established by SFAS 131, we operate within one reportable segment: Professional Services.
        In accordance with the enterprise-wide disclosure requirements of SFAS 131, our geographic information is as follows (dollars in thousands):
 
 2004
 2003
 2002
 
 Revenues
 Property &
equipment
 Revenues
 Property &
equipment
 Revenues
 Property &
equipment
Domestic $860,354 $64,173 $781,255 $64,799 $843,918 $22,583
International  51,189  12,588  23,721  10,632  29,285  8,578
  
 
 
 
 
 
 Total $911,543 $76,761 $804,976 $75,431 $873,203 $31,161
  
 
 
 
 
 
        We have no single customer that provides revenues that equal or exceed 10 percent of our consolidated revenues.
17. SUBSEQUENT EVENTS
        On February 28, 2005, we acquired netNumina Solutions, Inc. ("netNumina"), a software development company based in Cambridge, Massachusetts that specializes in technology strategy, architecture, and custom development. The Company believes these litigation matters are without meritcompany offers integrated strategy, creative design, technology architecture, solutions construction, and intendsapplication management services to defend these matters vigorously.

J. INCOME TAXESlarge enterprise


clients. In exchange for all of netNumina's outstanding stock, we will pay $5.8 million in cash to shareholders of netNumina. The acquisition will be accounted for under the purchase method in accordance with SFAS 141 and SFAS 142. The operating results of netNumina will be included in our consolidated statement of operations beginning March 1, 2005.
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
 
 First Quarter
 Second Quarter
 Third Quarter
 Fourth Quarter
 
 (Dollars in thousands, except per share data)

For the year ended December 31, 2004            
Revenues $215,824 $231,712 $234,827 $229,180
Gross margin (1)  65,834  70,002  68,611  69,856
Income before income taxes  9,207  13,452  13,325  15,524
Net income (4)  5,524  8,071  8,051  10,636
Basic earnings per share  0.09  0.13  0.13  0.17
Diluted earnings per share (2)  0.08  0.12  0.12  0.16

For the year ended December 31, 2003
 
 
 
 
 
 
 
 
 
 
 
 
Revenues $204,662 $203,511 $200,421 $196,382
Gross margin (1)  62,231  65,251  63,008  60,111
Income before income taxes (3)  17,601  11,031  9,232  10,832
Net income (3)  10,561  6,620  5,540  6,501
Basic earnings per share  0.15  0.10  0.09  0.10
Diluted earnings per share (2)  0.15  0.10  0.08  0.10
(1)
Gross margin(revenues less salaries, wages, and other direct costs)

(2)
Reflects the adoption of EITF 04-8, which requires contingently convertible debt be included in the calculation of diluted earnings per share using the if-converted method regardless of whether the market price trigger has been met. See Note 12 "EARNINGS PER SHARE" for further discussion.

(3)
First Quarter of 2003 includes a $7.3 million, $4.4 million after tax, favorable judgment in an arbitration award proceeding related to damages for breach of an agreement between Signal Corporation and our Federal Systems subsidiary.

(4)
Fourth Quarter of 2004 includes an adjustment to record an additional deferred tax asset totaling approximately $2.2 million and a corresponding decrease to the provision for 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.

For financial reporting purposes, income before income taxes includes the
following components:

      Earnings before income taxes:

          Domestic                                 $27,721
          Foreign                                    1,501
                                                   -------
Total income before provisiontaxes. See Note 14 "INCOME TAXES" for income taxes     $29,222


                                       38



The provision for income taxes consists of the following:

                                                 Years Ended December 31,
                                           2001             2000            1999
                                           ----             ----            ----
Current:
  Federal                              $  8,993         $ 16,748         $34,230
  State                                     147            1,958           9,283
  Foreign                                   886              570           1,230
                                       --------         --------         -------
     Total Current                       10,026           19,276          44,743

Deferred:
  Federal                                 1,605           (4,283)          3,570
  State                                     412             (898)            626
  Foreign                                  (209)            (263)            800
                                       --------         --------         -------
    Total Deferred                        1,808           (5,444)          4,996
                                       --------         --------         -------
                                       $ 11,834         $ 13,832         $49,739
                                       ========         ========         =======

A reconciliation of the statutory income tax provision with the effective income
tax provision is as follows:

                                                    Years Ended December 31,
                                                  2001        2000        1999
                                                  ----        ----        ----

Federal income taxes at 35%                      $10,228     $11,965     $42,985
State income taxes, net of federal tax benefit       363       1,060       6,530
Merger related costs                               1,048          --          --
Other, net                                           195         807         224
                                                 -------     -------     -------
          Total income tax provision             $11,834     $13,832     $49,739
                                                 =======     =======     =======

The components of the net deferred tax assets and liabilities are as follows:

                                                       Years Ended December 31,
                                                          2001          2000
                                                          ----          ----

Current Asset:
   Allowance for doubtful accounts and other reserves   $  2,208      $  5,204
   Accrued expenses                                        9,167         3,300
                                                        --------      --------
      Total current assets                                11,375         8,504

Non-current Asset:
   Amortization of intangible assets                      12,453         9,998
   Depreciation and other                                 11,496         7,135
   Domestic net operating loss carry-forwards              2,298         2,541
                                                        --------      --------
      Total non-current assets                            26,247        19,674

Non-current Liability:
   Intangibles                                           (28,150)       (9,205)
                                                        --------      --------
Net deferred tax assets                                 $  9,472      $ 18,973
                                                        ========      ========

At December 31, 2001, the Company had domestic net operating loss (NOL)
carry-forwards of $5.6 million expiring in 2017 and 2018, which is subject to a
Section 382 limitation due to ownership changes.

Based upon the level of historical taxable income and projections for future
taxable income over the periods which the deferred tax assets are deductible,
management believes it is more likely than not the Company will realize the
benefits of these deductible differences and no valuation allowance is
necessary.

The current component of deferred tax assets is included in prepaid expenses and
deferred taxes on the balance sheet. The non-current asset component is included
in the deferred taxes and other assets, net on the balance sheet.


                                       39



K. BUSINESS ACQUISITIONS

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 .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.

In accordance with recently issued Statement of Financial Accounting Standards
No.141, " Business combinations," and certain provisions of Statement of
Financial Accounting Standard No. 142, "Goodwill and other Intangible Assets,"
The Company used the purchase method of accounting for a business combination to
account for the merger, as well as the new accounting and reporting regulations
for goodwill and other intangibles. Under these methods of accounting, the
assets and liabilities of Metro, including intangible assets, were recorded at
their respective fair values. All 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 $162.4 million. Portions of the purchase price,
including intangible assets, were identified by independent appraisers utilizing
proven valuation procedures and techniques. In addition, the restructuring
component of the purchase price was in place at the date of acquisition.


                                       40



The components of the purchase price allocation is as follows:

(in thousands)
- -------------------------------------------------------------------------------
Consideration and merger costs:
Value of stock issued                                                 $ 130,796
Fair value of options exchanged                                           4,754
Transaction costs                                                         7,786
Restructuring                                                            10,972
Deferred Tax Liability                                                    8,141
- -------------------------------------------------------------------------------
                        Total                                         $ 162,449

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

Allocation of purchase price:

Net liabilities assumed                                               $ (37,984)
Customer lists                                                           45,200
Non-compete agreements                                                      900
Goodwill                                                                154,333
- -------------------------------------------------------------------------------
                          Total                                       $ 162,449

The following table presents the condensed balance sheet disclosing the amounts
assigned to each of the major assets acquired and liabilities assumed of Metro
at acquisition date:

(in thousands)
- -------------------------------------------------------------------------------
Cash                                                                    $   622
Accounts receivable                                                      40,820
Other current assets                                                      1,004
Property, plant & equipment, net                                          2,790
                                                                        -------
Total assets                                                             45,226

Accounts payable                                                          3,583
Accrued compensation                                                      9,800
Other liabilities                                                         3,889
Note payable                                                             65,938
                                                                        -------
Net assets                                                              $37,984
- -------------------------------------------------------------------------------

The unaudited pro forma combined condensed statements of income combine the
historical statements of the Company and Metro as if the merger had occurred at
January 1, 2000. Unaudited pro forma combined condensed financial information is
presented for comparative purposes only and is not necessarily indicative of the
results of operations that would have actually been reported had the merger
occurred at the beginning of the periods presented, nor is it necessarily
indicative of future financial position or results of operations.

                                    Twelve Months Ended     Twelve Months Ended
                                     December 31, 2001       December 31, 2000

Total revenues                           $ 1,029,871             $ 1,185,547
Net income                                    14,870                  22,778
Net income per share (basic)                   $ .22                   $ .30
Net income per share (diluted)                 $ .21                   $ .30

During 2000 and 1999, the Company completed several acquisitions of businesses
complementary to the Company's business strategy. The cost of these
acquisitions, which were accounted for using the purchase method of accounting,
totaled $35.3 million in 2000 and $67.9 million in 1999. In certain cases, the
purchase price included contingent


                                       41



consideration based upon operating performance of the acquired business. During
2001, the Company paid an additional $1.2 million related to these
contingencies and has been recorded as additional purchase price.

The results of operations of these acquired companies have been included in the
Company's consolidated statement of income from the date of acquisition. The
excess of the purchase price over the fair value of the net assets has been
allocated to identifiable intangible assets and goodwill and is being amortized
on a straight-line basis over periods ranging from three to fifteen years. Pro
forma results of operations for these acquisitions have not been provided as
they were not material to the Company on either an individual or an aggregate
basis.

L. BANK DEBT

In July 1995, the Company secured a $10 million demand line of credit from a
major Boston bank, which expires in July of 2002. Borrowings will bear interest
at the bank's base rate (the prime rate). There were no borrowings under this
line during 2001 or 2000.

M. EARNINGS PER SHARE

A summary of the Company's calculation of earnings per share is as follows:



                                                                          Years Ended December 31,
                                                                 2001                2000                1999
                                                                 ----                ----                ----

Net income                                                      $17,387             $20,354             $73,074
Weighted average number of common shares
outstanding used in calculation of basic earnings
per share                                                        68,474              69,646              71,571
Incremental shares from the assumed exercise of
dilutive stock options                                              922                 347                 824
                                                                -------             -------             -------
Weighted average number of common shares
outstanding used in calculation of diluted earnings
per share                                                        69,396              69,993              72,395
                                                                =======             =======             =======
Earnings per share
Basic                                                           $   .25             $   .29             $  1.02
                                                                =======             =======             =======
Diluted                                                         $   .25             $   .29             $  1.01
                                                                =======             =======             =======



For the period ending December 31, 2001, there were 2,348,368 options for common
stock, which were excluded because they were anti-dilutive.

N. RESTRUCTURING CHARGES

In the fourth quarter of 2001, 2000 and 1999, the Company recorded restructuring
charges of $10.4 million, $8.6 million and $13.7 million, respectively. Of these
charges, $4.4 million, $1.7 million and $3.8 million related to a workforce
reduction, primarily technical consultants, of approximately 900, 200 and 600
employees for the years 2001, 2000 and 1999, respectively. In addition, the
Company 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 wrote off $.8 million in 2001, $3.4 million in 2000 and
$4.8 million in 1999 of assets, which became impaired as a result of these
restructuring actions. The charges included $4.0 million in 2001, $ 3.5 million
in 2000 and $ 5.1 million in 1999 for branch office closings and certain other
expenditures.

During the fourth quarter of 2001, 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 an addition to the
Company's restructuring liability of $1.2 million.


                                       42



A summary of fiscal year 2001 restructuring activity, which is recorded in
accrued expenses in the accompanying balance sheet, is as follows:



- -----------------------------------------------------------------------------------------------------------------
                                            Workforce                       Branch Office Closures
                                            Reduction  Impaired Assets      and Other Expenditures        Total
- -----------------------------------------------------------------------------------------------------------------

Charges for 1999                            $  3,800          $  4,753                    $  5,100       $ 13,653
Charges for 2000                               1,743             3,403                       3,478          8,624
Charges for 2001                               4,417               825                       3,957          9,199
Change in estimates                               --                --                       1,159          1,159
                                            --------          --------                    --------       --------
                                               9,960             8,981                      13,694         32,635

Cash expenditures for 1999                    (1,000)                                                      (1,000)
Cash expenditures for 2000                    (3,138)                                       (2,832)        (5,970)
Cash expenditures for 2001                    (2,620)                                       (2,494)        (5,114)
                                            --------                                      --------       --------
                                              (6,758)                                       (5,326)       (12,084)

Non cash charges for 1999                                       (4,753)                       (819)        (5,572)
Non cash charges for 2000                                       (3,403)                         --         (3,403)
Non cash charges for 2001                                         (825)                         --           (825)
                                                              --------                    --------       --------
                                                                (8,981)                       (819)        (9,800)

Non cash acquisition charges                   7,226                                         3,746         10,972
                                            --------                                      --------       --------

Balance as of December 31, 2001             $ 10,428          $    ---                    $ 11,295       $ 21,723
- -----------------------------------------------------------------------------------------------------------------



As of December 31, 2001, the branch office closures consisted of amounts for
properties identified in 2001, 2000 and 1999 in the amounts of $8.3 million,
$2.0 and $1.0 million, respectively.

O. SUBSEQUENT EVENTS

The Company announced on February 13, 2002, that it has signed a definitive
merger agreement to acquire SignalTree Solutions Holding, Inc., a
privately-held, US based corporation with two software development facilities in
India and additional operations in the United States. The acquisition closed on
March 15, 2002. The Company paid approximately $64.5 million in cash for the
acquisition.


                                       43

further discussion.


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
        Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
        Keane maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed and summarized and reported within the specified time periods. Our management, with the participation of our President and Chief Executive Officer and our Senior Vice President of Finance and Administration and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2004. Based on this evaluation, our President and Chief Executive Officer and our Senior Vice President of Finance and Administration and Chief Financial Officer concluded that, as of December 31, 2004, our disclosure controls and procedures were (1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our President and Chief Executive Officer and our Senior Vice President of Finance and Administration and Chief Financial Officer by others within these entities, particularly during the period in which this report was being prepared, and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.
        Since 2003, we have been in the process of implementing a PeopleSoft Enterprise Resource Planning ("ERP") system for the majority of our processes and operations. We currently plan to implement the following PeopleSoft modules: Resource Management, General Ledger, Accounts Payable, Expense and Time Reporting, Accounts Receivable, Contracts Management, Project Accounting, Billing and Enterprise Planning Management. The implementation of the ERP system is being phased in over time throughout Keane and we currently plan to complete the implementation for the majority of our processes and operations in 2005. During the year ended December 31, 2004, we implemented the General Ledger, Accounts Receivable, Resource Management, Accounts Payable, Expense Reporting, and Enterprise Planning Management modules for the majority of our operations. The second phase of the implementation, which is planned for 2005, will include Contracts Management, Time Reporting, Project Accounting and Billing. Implementing an ERP system involves significant changes in business processes and extensive organizational training. We believe the phased-in approach we are taking reduces the risks associated with making these changes. In addition, we are taking the necessary steps to monitor and maintain appropriate internal controls during this period.
Management's Annual Report on Internal Control Over Financial Reporting
        Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Senior Vice President of Finance and Administration and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2004 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2004.


        Management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included elsewhere herein.
Attestation Report of the Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Keane, Inc.
        We have audited management's assessment, included in the accompanying Management's Report of Internal Control Over Financial Reporting that Keane, Inc. maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Keane, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit.
        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
        In our opinion, management's assessment that Keane, Inc. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO control criteria. Also, in our opinion, Keane, Inc. maintained effective internal control over financial reporting as of December 31, 2004, based on the COSO control criteria.
        We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Keane, Inc. as of December 31, 2004 and 2003 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2004 of Keane, Inc. and our report dated March 11, 2005 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP

Boston, Massachusetts
March 11, 2005


Changes in Internal Control Over Financial Reporting
        During the year ended December 31, 2004, there have not been any significant changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, except as relating to the implementation of an ERP system, as described above.

ITEM 9B. OTHER INFORMATION
        On March 9, 2005, the Compensation Committee of the Board of Directors of Keane, Inc. approved the 2005 Incentive Compensation Plan for the Company's executive officers. See exhibit 10.17 for further detail.
        During the period March 11, 2005 through March 12, 2005, the Company entered into change in control agreements with each member of the executive team. Generally, in the event of involuntary termination in connection with a change in control of Keane, the executive will receive the following benefits: (i) payment by Keane of a multiple of the executive's salary, as well as a multiple of the executive's bonus; (ii) a certain number of months of continued health, dental and financial planning benefit coverage: (iii) outstanding stock options and restricted shares, if any, would become fully vested; and (iv) if the payments provided to the executive exceed the amount that triggers excise tax under section 4999 of the Tax Code, the payments will be grossed-up. The multiples and total number of months for health, dental insurance and financial planning coverage for each executive are as follows, Brian T. Keane and John J. Leahy—three times and 18 months; Robert B. Atwell, Russell Campanello, Raymond Paris, Laurence Shaw, and Georgina Fisk—two times and 12 months.
        Also, on March 11, 2005, the Company entered into an employment agreement with Robert B. Atwell. This agreement provides certain benefits for Mr. Atwell should he be involuntarily terminated from Keane before 1/1/2007. In the event that Mr. Atwell is involuntarily terminated he will receive the following benefits; (i) payment by Keane for up to 12 months of salary; (ii) up to 12 months of health, dental and financial planning benefit coverage; and (iii) outstanding stock options and restricted shares, if any, would become fully vested.
        Copies of each of these agreements are attached hereto as exhibits 10.21 through 10.28.

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'sour Proxy Statement for theour Annual Meeting of Stockholders to be held May 29, 200212, 2005 (the "2002"2005 Proxy Statement") under the caption "Election of Directors".

 and "Code of Business Conduct."

ITEM 11. EXECUTIVE COMPENSATION
        The response to this Item is incorporated herein by reference to the Company's
2002our 2005 Proxy Statement under the caption "Executive Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
        The response to this Item is incorporated herein by reference to the Company's
2002our 2005 Proxy Statement under the captioncaptions "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
2002our 2005 Proxy Statement under the caption "Certain Related Party Transactions."


                                       44



PART IV



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
        The response to this Item is incorporated herein by reference to our 2005 Proxy Statement under the caption "Principal Accountant Fees and Services."

PART IV
ITEM 15. EXHIBITS AND 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.............................................25

Consolidated Balance Sheets as of December 31, 2001 and 2000................26

Consolidated Statements of Income
For the Years Ended December 31, 2001, 2000 and 1999........................27

Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2001, 2000 and 1999........................28

Consolidated Statements of Cash Flows
For the Years Ended December 31, 2001, 2000 and 1999........................29

Notes to Consolidated Financial Statements...............................30-43

(b) Exhibits
    --------

The Exhibits set forth in the Exhibit Indexdocuments are filed as part of this Annual
Report.

(c) Reports on Form 8-K
    -------------------

report:

Report of independent registered public accountants45
Consolidated statements of income for the years ended December 31, 2004, 2003, and 200246
Consolidated balance sheets as of December 31, 2004 and 200347
Consolidated statements of stockholders' equity for the years ended December 31, 2004, 2003, and 200248
Consolidated statements of cash flows for the years ended December 31, 2004, 2003, and 200249
Notes to consolidated financial statements50-89
(b) Exhibits
        See Exhibit Index attached hereto.


SIGNATURES
        Pursuant to the requirements of Section 13 or 15 (d)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 / Brian T. Keane
                                        -------------------------------------
                                        By:  Brian T. Keane
                                        President and Chief Executive Officer

Date: March 28, 2002
KEANE, INC.
(Registrant)



/s/  BRIAN T. KEANE      
Brian T. Keane
President and Chief Executive Officer
Date: March 15, 2005
        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/  John F. Keane                          /s/ John J. Leahy
- --------------------------------------      -------------------------------
John F. Keane                               John J. Leahy
Chairman                                    Senior Vice President and
                                            Chief Financial Officer
                                            (Principal Financial Officer)
                                            (Principal Accounting Officer)

/s/ Brian T. Keane                          /s/ John F. Keane, Jr.
- -------------------------------------       -------------------------------
Brian T. Keane                              John F. Keane, Jr.
President, Chief Executive Officer and      Director
Director

/s/ John F. Rockart                         /s/ Maria A. Cirino
- -------------------------------------       -------------------------------
John F. Rockart                             Maria Cirino
Director                                    Director

/s/ Philip J. Harkins                       /s/ Winston R. Hindle, Jr.
- -------------------------------------       -------------------------------
Philip J. Harkins                           Winston R. Hindle, Jr.
Director                                    Director

/s/ Stephen D. Steinour                     /s/John H. Fain
- -------------------------------------       -------------------------------
Stephen Steinour                            Senior Vice President and Director
Director


                                       46



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).

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.

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 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.

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  Amended and Restated Guidance Promissory Note dated August 1, 2001, in
       the amount of $10,000,000 between the Registrant and Fleet National Bank
       is incorporated herein by reference to Exhibit 10.1 to the Registrant's
       Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.

*10.11 Keane, Inc. 2001 Stock Incentive Plan

21.0   Schedule of Subsidiaries of the Registrant

23.1   Consent of Ernst & Young LLP


/s/  JOHN F. KEANE      
John F. Keane
Chairman

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

/s/  JOHN J. LEAHY      
John J. Leahy
Senior Vice President of Finance and
Administration and Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer)

/s/  MARIA A. CIRINO      
Maria A. Cirino
Director

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





/s/  PHILIP J. HARKINS      
Philip J. Harkins
Director

/s/  WINSTON R. HINDLE, JR.      
Winston R. Hindle, Jr.
Director

/s/  JOHN F. KEANE, JR.      
John F. Keane, Jr.
Director

/s/  JOHN F. ROCKART      
John F. Rockart
Director

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

/s/  JAMES D. WHITE      
James D. White
Director

Exhibit Index

2.1Agreement 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.
3.1Articles 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").
3.2Articles 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 Form 8-K, filed on June 3, 1998 (File No. 1-7516).
3.3Second 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.
3.4Amendment 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.
3.5Amendment No. 2 to Second Amended and Restated Bylaws of the Registrant is incorporated by reference to the Registrant's Quarterly Report on Form 10-K for the quarterly period ended June 30, 2004.
4.1Registration Rights Agreement, dated as of June 18, 2003, by and among Keane, Inc., Morgan Stanley & Co. Incorporated, Wachovia Securities, LLC and Fleet Securities, Inc. is incorporated herein by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K, filed on June 20, 2003.
4.2Indenture, dated as of June 18, 2003, between Keane, Inc. and Wachovia Bank, National Association, as trustee, for 2% Convertible Subordinated Debentures due 2013 is incorporated herein by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K, filed on June 23, 2003.
*10.1Keane, Inc. 401(k) Deferred Savings and Profit Sharing Plan is incorporated herein by reference to Exhibit 10.2 to the Registration Statement.
*10.21992 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 (File No. 1-7516).
*10.31998 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.
*10.4Amendment 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.
*10.5Amended 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.
10.6Metro 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.
10.7Lease 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.
10.8First 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.
10.9Second 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.
*10.10Keane, 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.
*10.11Keane, Inc. United Kingdom Employee Stock Purchase Plan is incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002.
10.12Revolving Credit Agreement dated February 28, 2003, by and between the Registrant, Fleet National Bank, as Agent, and several lenders party, (the "Lenders") thereto is incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002.
10.13Lease, dated October 25, 2001 between the Registrant and Gateway Developers LLC is incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002.
10.14First Amendment dated June 11, 2003 to the Revolving Credit Agreement dated February 28, 2003, by and between the Registrant and the Lenders thereto is incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2003.
10.15Second Amendment dated October 17, 2003 to the Revolving Credit Agreement dated February 28, 2003, by and between the Registrant and the Lenders thereto is incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2003.
10.16Third Amendment dated February 5, 2004 to the Revolving Credit Agreement dated February 28, 2003, by and between the Registrant and the Lenders thereto is incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2003.
*+10.17Summary of Executive Compensation
*+10.18Summary of Director Compensation
*+10.19Keane Ltd. Pension Scheme with all amendments to date
*+10.20First Amendment and Restatement of the Keane, Inc. Deferred Compensation Plan with all amendments to date
*+10.21Employment Agreement between Keane, Inc. and Robert B. Atwell
*+10.22Change in Control Agreement between Keane, Inc. and Robert B. Atwell
*+10.23Change in Control Agreement between Keane, Inc. and Brian T. Keane
*+10.24Change in Control Agreement between Keane, Inc. and John J. Leahy
*+10.25Change in Control Agreement between Keane, Inc. and Laurence D. Shaw
*+10.26Change in Control Agreement between Keane, Inc. and Raymond Paris
*+10.27Change in Control Agreement between Keane, Inc. and Russell J. Campanello
*+10.28Change in Control Agreement between Keane, Inc. and Georgina L. Fisk
10.29Amended and Restated 1992 Employee Stock Purchase Plan, as amended is incorporated herein by reference to Exhibit 10.17 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2004.
+21.1Schedule of Subsidiaries of the Registrant.
+23.1Consent of Independent Registered Public Accounting Firm.
+31.1Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer.
+31.2Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer.
+32.1Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer.
+32.2Certification pursuant to 18 U.S.C. Section 1350 of the Chief Financial Officer.
*
Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(A) and (C)15 of this
       report.


                                       47
the Exchange Act.

+
Filed herewith.



QuickLinks

TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
KEANE, INC. CONSOLIDATED STATEMENTS OF INCOME
KEANE, INC. CONSOLIDATED BALANCE SHEETS
KEANE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except for share data)
KEANE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
KEANE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
SIGNATURES