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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

                                    Form
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d)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, 2003

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 Rule 12b-2 of the Securities Exchange Act of 1934, as amended. Yes ý    No o
        The aggregate market value of the Common Stockcommon stock held by nonaffiliatesnon-affiliates of the registrant, based on the last sale price of the Common Stockcommon stock on the AMEXNew York Stock Exchange on March 8, 2002,June 30, 2003, was $1,019,651,000.approximately $669,882,000. As of March 8, 2002, 75,475,0715, 2004, there were 63,522,027 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. 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, 2002.27, 2004. 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.


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TABLE OF CONTENTS


Page
PART I
Item 1.
BUSINESS
3
Item 2.
PROPERTIES
9
Item 3.
LEGAL PROCEEDINGS
10
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
10
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
10



PART II


Item 5.
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
15
Item 6.
SELECTED FINANCIAL DATA
16
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
17
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
35
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
36
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
77
Item 9A.
CONTROLS AND PROCEDURES
77



PART III


Item 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
77
Item 11.
EXECUTIVE COMPENSATION
77
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
77
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
77
Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
77



PART IV


Item 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
78
SIGNATURES
79
2
PART I
- ------

        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 "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 consultingBusiness Consulting services. In business since 1965, the
Company helpsour mission is to help clients improve business and IT effectiveness through outsourcing services. We help clients plan, build, and manage applications software through our Business Consulting, Application Development and Integration ("AD&I"), and Application Development and Management Outsourcing ("Application Outsourcing") services. We also optimize business performanceclients' internal processes through the innovative use
and management of information technology. Keane's clients consist primarily of
Global 2000 companies across every major industry, healthcare organizations, and
government agencies. Keane provides itsBusiness Process Outsourcing ("BPO") services through Worldzen, Inc. ("Worldzen"), our majority owned subsidiary.
        We deliver our IT services through an extensiveintegrated network of local branch 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 branch 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. 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. 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 include EZ-Access®. Our trademarks include: Keane, can be accessed on the Company's web site at www.keane.com or through its
Investor Relations line at 1-800-75-KEANE.

SERVICES

Keane offers a full range of services that span the full Plan, Buildlogo, Enterprise Application Integration, Keane InSight, and Manage
life cycle. Specifically, Keane focuses on three highly synergisticVistaKeane. Our service offerings: Business Consulting,marks include: Application Development &and Integration (ADI),Services, and Application Development and Management (ADM) 
3

Outsourcing Services. All other trademarks, service marks, or tradenames referenced in this Form 10-K are the property of their respective owners.
SERVICES
        We improve our clients' business performance by maximizing the effectiveness of IT organizations. We apply our rigorous processes and management discipline to applications and business processes, enabling clients to reduce costs and increase organizational flexibility and efficiency. We focus on three synergistic service offerings: Plan services, which is Keane's
flagship service offering.include Business Consulting revenue is reportedand Program Management; Build services, including AD&I, and Manage services, including Application Outsourcing and BPO. Services are delivered using our global delivery model, from operations in the U.S., UK, Canada, and India.
        In 2003, we entered the growing BPO market through the acquisition of a majority interest in Worldzen. Worldzen specializes in complex processes within the Company's Plan sector. ADI revenue is reported in the Build sector.financial services, insurance, and healthcare industries, and provides back-office processes for multiple industries. As part of its Buildour investment, we contributed certain assets of our Keane Consulting Group ("KCG") to Worldzen. Worldzen's services the Company also provides a full-line of healthcare
information systemsaugment our Plan and related IT consulting and IT integrationManage service offerings.
Plan services for
healthcare organizations. ADM Outsourcing revenue is reported in the Company's
Manage sector. Keane believes its broad range of services position it as a
strategic partner to clients, enabling it to identify and implement
comprehensive solutions that meet clients' specific business requirements.
        Business Consulting.    Our Business Consulting (Plan services)

Keane's management consulting services represent a critical componentplay an important role in the
Company'sour ability to help clients optimizemanage their businesses for today's economy.
The Company provides its business consultingbusinesses. During 2003, we provided the majority of our 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 expectedKCG. As part of our investment in Worldzen, we contributed certain assets of KCG to grow at a compounded annual growth rate of 11% through 2005.Worldzen on October 17, 2003.
        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.implementing our operations improvement recommendations. KCG delivers
its services by takingtakes a holisticbroad view of business processes, organizational design, and technology architecture. ItsKCG provides operations improvement services can be
divided intoin three core competency areas: insurance and financial services, manufacturing and distribution, and technology services.technology. Typical KCG client engagements include: assisting with the integration of mergers and acquisitions,include streamlining customer processes and operations and optimizing supply chains, enhancing
customer-facing processes,chains. Typically, KCG's Business Consulting engagements deliver specific, tactical recommendations for process improvement, often resulting in a follow-on BPO engagement. On a going forward basis, KCG will be fully integrated into Worldzen, our majority owned subsidiary.
        IT Consulting.    Our IT Consulting services include several offerings that help companies develop and aligningimplement their IT and business process improvement strategies. KCG helps
Keane develop strong relationships with senior executivesMany clients engage us to provide Project Management services to ensure consistency of quality and other
decision-makers. In addition, consulting engagements often lead to follow-on ITdelivery over multiple projects as clients rely on Keane to support an idea from its genesis through
implementationwithin a client organization. Other Plan services include Network Integration Planning, Strategic Information Planning, and eventual management.


                                       2



Application Development & Integration (Build services)

In an increasingly global, networked and information-based economy,Package Selection.
Build services
        AD&I.    As application software is becomingbecomes more complex, requiring tighter and moreit requires sophisticated integration between front-end and back-end systems to enhance access to critical corporate data, enable high-value process improvements, and enhanceimprove customer service. As a result, Keane focuses its project-based Application Development
and Integration (ADI) businessMany of our AD&I projects focus on the rapidly growingsolutions for Enterprise Application Integration (EAI)("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.problems.
        As a firm with broad-basedresult of our significant expertise across the full spectrum of technical
requirements, Keane hasand experience, we have become a top-tier provider of large, complex software development and integration projects for Global 2000 companies. The CompanyWe also provides ADIprovide AD&I services forto the public sector, which includes agencies within the U.S. Federal government,Government, various states, and other local government entities.
Revenue from public sector business represented approximately 16.5% of Keane's
total revenue
4

        Given the existing economic environment, many clients have deferred investments in the year 2001. Typical client engagements include the
development of softwarenew information systems. As a result, we have concentrated our short-term marketing efforts on helping clients to create an integrated supply or value chain, the
implementation of an enterprise Customer Relationship Management (CRM) solutionbetter integrate and its integration with an Enterprise Resource Planning (ERP) system,enhance existing IT applications, and the
designon projects that rapidly improve efficiency and implementation of an integrated online state vehicle registration and
motor carrier services system.

Keane believeslower costs immediately.
        We believe that it iswe are well positioned to capturebid on and win large-scale ADIAD&I projects from both the commercial and public sector markets due to itsour core competencies in project management, integration, and program management, IT architecture, advanced application
development, and legacy system integration. The Company anticipatesglobal delivery. We anticipate that these competencies, together with itsour long-term relationships with Global 2000 companies, particularly those clients for which we provide Application Outsourcing services, will enable itus to benefit from an economic recovery and an increase in spending on information technology.

Application Development and Management (ADM) 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 helps clients manage existing business systems
more efficiently and more reliably, improving the performance of these
applications while better controlling costs. Under this service offering, Keane
assumes responsibility for the management of a client's business applications
with goals 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
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 seeks to obtain competitive advantages in the ADM Outsourcing market by
generating measurable client benefit, using world class methodologies,
referencing its Global 2000 client base, and emphasizing its continuous process
improvement and seamless client service delivery model. On March 15, 2002, Keane
acquired SignalTree Solutions, a U.S.-based corporation with two development
facilities in India. The addition 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 customers is
based on management and process improvements, the Company's ADM 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) Capability Maturity
Model (CMM). In addition, SignalTree's technology centers in Hyderabad and Delhi
are independently evaluated at Level 5 on the SEI CMM and comply with ISO 9001
standards. 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 has used the SEI CMM as a standard for objectively measuring its
success in improving its client's application management environment. 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 large client engagements that usually span
three-to-five years in duration. In addition, outsourcing projects typically
supply Keane with contractually-obligated recurring revenue, and with an
incumbent position from which to cross-sell other solutions. The Company has
observed historically that consistently providing measurable business value
within an existing client account strongly positions it to win additional
outsourcing engagements and development and integration projects.
        Healthcare Solutions

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 relatedorganizations. In addition, HSD provides healthcare-related IT consulting, outsourcing, and IT integration services. Keane helpsBecause the healthcare market is less cyclical in nature than most of the commercial IT market, our HSD business complements our commercial AD&I revenue and typically acts as a stabilizing influence on Build revenue during periods of slower economic growth.
        HSD's products help healthcare organizations overcome the challenge of providing higher quality patient care while administering more efficient operations through the use of information technology. HSD's core healthcare solutions include EZ-Access, Keane InSight, and VistaKeane. EZ-Access is a browser-based family of healthcare information systems designed to improve access to patient data, reduce the occurrence of medical errors, and protect client investment in information technology. EZ-Access includes 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 U.S.
In addition, Keane'sour broad range of services help healthcare clients address ongoing Health Insurance Portability and Accountability Act (HIPAA)("HIPAA") requirements. HIPAA is Federal legislation designed to improve efficiency in the national healthcare system and protect the privacy of health information. It is expected to have far-reaching implications on the healthcare industry's IT infrastructure and business operations. HSD revenues are currently reported
under Keane's ADI (Build)Our HIPAA-related services include Enterprise Assessment and Planning, Compliance Implementation, and Ongoing Compliance Management.
Manage services
        Application Outsourcing.    Our Application Outsourcing services help clients manage existing business line.

STRATEGY/DISTINCTIVE CAPABILITIES

Keane's mission issystems 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, freeing up client personnel resources, and achieving higher user satisfaction. We seek to help companies optimize business performanceobtain competitive advantages in the application outsourcing market by targeting our Global 2000 client base and generating measurable operational and financial benefits to our clients. We achieve these client benefits through the innovative use of our world-class methodologies, continuous process improvement, and our global delivery model.
        Forty-seven of our Application Outsourcing engagements have been independently assessed at Level 3 or 4 on the Software Engineering Institute's ("SEI") Capability Maturity Model ("CMM"). In
5

addition, two of our ADCs in India, located in Hyderabad and Delhi, are independently evaluated at Level 5 on the SEI CMM and comply with ISO 9001: 2000 standards. Our ADC in Halifax, Nova Scotia, has also been independently evaluated at Level 5 on the SEI CMM. 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, we have used the SEI CMM as a standard for objectively measuring our success in improving our clients' application management 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.
        Our global delivery model offers customers the flexibility and economic advantage of allocating work among a variety of delivery options, including onsite at a client's facility, nearshore in Halifax, Nova Scotia, and offshore at one of our three locations in India. This integrated, highly flexible mix of cost-effective onsite, nearshore, and offshore delivery is now a component of most new outsourcing engagements. The distribution of work across multiple locations is typically based on a client's cost, technology, and risk management requirements. Our project management approach ensures common methodologies and disciplines across locations, and provides a single point of accountability to the client.
        Application Outsourcing provides us with large, long-term contracts. These client engagements usually span three to five years. Application Outsourcing projects typically supply us with contractually obligated recurring revenue and with an ability to cross-sell other solutions. We believe that our ability to consistently provide measurable business value within an existing client account fosters profitable, long-term client relationships by strongly positioning us to win additional outsourcing engagements, as well as development and integration projects.
        Business Process Outsourcing.    We acquired a majority interest in Worldzen, a provider of BPO services, on October 17, 2003. 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. 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 overhead and management distraction of information technology (IT). In addition, Keane
aligns its internal focus, measurement processes,non-core back-office processes. Worldzen provides these low-cost, high-value outsourcing services from operations in both the U.S. and compensation systems to
promote the consistent generation of long-term shareholder value. The Company's
visionIndia.
STRATEGY
        Our goal is to be recognized as one of the world's great IT services firms by its
customers,our clients, employees, and shareholders. Keane seeks to accomplishWe believe that we can achieve this objectivegoal by providing high qualityhelping clients improve their business and effective IT solutions for its customers. The
Company endeavors to create a positive and supportive work environment for its
employees to foster creativity, teamwork, and individual excellence.

Distinctive capabilitieseffectiveness through the consistent delivery of high-value outsourcing services. Specifically, we believe that enable Keane to deliver value to its customers,
and to reach its financial milestones, include a relentless focus on processes
improvement, mature competencies in project and program management, consistent
use of methodologies, a strong quality assurance function, 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 at one of the Company's two Software Development Centersmost significant business trends over the next five years will be corporations leveraging Application Outsourcing, BPO, and offshore delivery to achieve meaningful cost reductions and business improvement. We believe that our depth of capability in India. The Company believes
that the benefitseach of its seamless delivery model include: the use of common
processes,these areas, along with our strong customer relationships and unique process management and metricsmethodologies, will enable us to improve predictability; a single point of
contact to enhance accountability; the flexibility to move and balance workload
basedcapitalize on business need; and the ability to optimize economic benefit. The
Company continues to invest in its delivery model and competencies in order to
add value to itsthis market opportunity.
        We have five major 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 stronglypriorities for 2004. We believe these strategic priorities will position itselfus to take advantage of future increasesexpected market growth driven by a recovery in IT spending.spending, and the convergence of Application Outsourcing, BPO, and offshore delivery.
Achieve sustainable revenue and earnings growth.
        We believe that we can achieve long-term revenue expansion by growing our Application Outsourcing and BPO businesses, as well as by leveraging our strong position in less cyclical vertical industries such as healthcare and the public sector. We expect to increase our operating margins over
6

the short-term by improving billing rates and utilization as the IT services sector recovers, and by aggressively controlling selling, general, and administrative ("SG&A") expenses. Longer term, we will increasingly leverage lower-cost offshore resources in providing outsourcing services, while continuously adjusting our expenses to ensure cost-effective delivery. We expect our ability to effectively manage our working capital, most notably Days Sales Outstanding ("DSO"), and capital spending will enable us to generate strong operating cash flow. We plan to use excess cash to complete attractive acquisitions and to continue to repurchase shares of our common stock from time-to-time.
Strengthen our position as an industry leader in innovative, full lifecycle Application Outsourcing initiatives.
        We believe industry analysts and clients recognize us as one of the leading application outsourcing vendors in North America. Our ability to provide high-quality service to our clients has been significantly enhanced by our global delivery model, with capability onsite, at nearshore facilities in Halifax, Nova Scotia, and at three facilities in India. We expect to intensify our efforts during 2004 to position Keane as a full lifecycle, global provider of outsourcing, and a means for clients to gain the economic advantage of offshore delivery while reducing their associated risks. We also seek opportunities to proactively target our existing customer base of Global 2000 customers, and our deep expertise in specific industry verticals, to cross-sell our Application Outsourcing services.
Continue to rapidly build offshore/nearshore scale and capabilities.
        Global sourcing has become an important component of our clients' overall sourcing strategies. Use of offshore delivery enables clients to gain access to a large pool of cost-effective technical personnel, while enhancing productivity via a 24 hours a day, seven days a week development approach. As a result, we believe offshore delivery is critical for success in today's IT services market. During 2003, we significantly enhanced our offshore sourcing capabilities, doubling the Company has
intensified its internal focussize of our operations in India. During 2004, we plan to strengthen the differentiation and market
position of its ADM Outsourcing services.continue to build scale in our India operations. In addition, we plan to continue to invest in nearshore facilities in Halifax, Nova Scotia, to support new opportunities.
Acquire market share and enhance our BPO solutions.
        Integration between technology and business processes is an increasing trend, and is changing the Company has
concentrated its Business Consultingway clients buy IT and Application Developmentbusiness services. We believe that this convergence of applications and Integration
(ADI) services withinBPO represents a near-term opportunity to build market segments where it believes demand for suchshare, as companies are engaging long-term outsourcing partners now. Accordingly, one of our priorities is building scale and capability in our BPO operations, both through Worldzen and potential additional investments.
Align our operating model with our strategic focus.
        Over the long term, we anticipate that our mix of services will increaseshift to reflect the emerging market opportunity in the event of an economic recovery. To enhance its efforts, the
Company is seekingoffshore outsourcing. We plan to acquire other IT services firms, at what it considers
favorable purchase prices,prioritize investment in offshore delivery, Application Outsourcing, vertical expertise, and BPO operations in order to increase its critical massdevelop the capabilities to support and obtain
additional customersgrow these segments. These investments may include future capital spending and acquisitions. We expect to which it can cross-sell its services.

Business Model

Keane remains focused on its core strengthscontinue to adapt our operating model 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 unitsinfrastructure in accordance with market trends and repeatable solutions.conditions.
7
COMPETITION
        The
combination of these elements helps Keane to mitigate short-term fluctuations in
the IT services market is highly competitive and generate significant long-term per share value.

1.    Recurring Revenue - Keane believesdriven by continual changes in client business requirements and advances in technology. Our competition varies by the most important ingredient for
      long-term successtype of service provided and by geographic markets.
        We compete with traditional players in the IT services industry, is recurring revenue. The
      Company seeksincluding large integrators (such as Accenture ("ACN"), Electronic Data Systems ("EDS"), Computer Sciences Corporation ("CSC"), IBM Global Services ("IBM"), and Perot Systems ("PER")); offshore solution providers, including Wipro ("WIT") and Infosys ("INFY"); IT solutions providers (such as Sapient Corporation ("SAPE"), American Management Systems ("AMSY"), BearingPoint ("BP"), and Ciber ("CBR")); and management consulting firms (such as McKinsey and Booz Allen). Some of these competitors are larger and have greater financial resources than we do.
        We believe that the basis for competition in the IT services industry includes the ability to buildcreate an integrated solution that best meets the needs of an individual customer, provide competitive cost pricing models, 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 client-service delivery options. We believe that we compete favorably with respect to increase contractually obligated recurring revenuethese factors. However, we may not be able to continue to compete successfully with its ADM Outsourcing service, through which Keane


                                       4



      typically manages and enhances applications under three-to-five year
      contracts. These contracts provide Keaneour existing competitors or to compete successfully 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 forany 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.

competitors.
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 Company2003, we derived itsour revenue from the following industry groups:

Industry                                  Percentage of Revenue
- --------                                  ---------------------
Manufacturing                                      21.7%
Financial Services                                 21.6%
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
Industry
Percentage of Revenue
Healthcare
21.9
%
Financial services
20.4
Government
18.6
Manufacturing
17.6
High Technology/Software
7.2
Other
4.5
Energy/Utilities
4.2
Retail/Consumer goods
4.0
Telecommunications
1.6
        Our 10 largest clients accounted for approximately 36%, 29%, and 32% and 30% of the
Company'sour total revenuerevenues during each of the years ended December 31, 2003, 2002, and 2001, and
2000, respectively. The Company'sOur two largest clients during 2001 and 20002003 were various agencies within the Federal Government and IBM.PacifiCare, with approximately 9.2% and 6.5% of our total revenues, respectively. In 2002 and 2001, the Federal Government and IBM were our two largest clients. Federal Government contracts accounted for approximately 7.6% and 6.9% of our total revenues in 2002 and 7.5% of the Company's total
revenue in 2001, and 2000, respectively. IBM accounted for approximately 4.4% and 6.5% of our total revenues in 2002 and 6% of the Company's total revenue for 2001, and 2000, respectively. 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, 2001.2003.
        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 does
not believe that backlog is materialMoreover, any and all orders relating to its business. The Companythe Federal Government may be subject to renegotiation of profits or termination of contract or subcontractors at the election of the Federal
8

Government. We had orders at December 31, 20012003 of approximately $843 million,$1.4 billion, in comparison to orders of approximately $740 million$1.5 billion at December 31, 2000.

2002. Because our clients can cancel or reduce the scope of their engagements on short notice, we do not believe that backlog is a reliable indication of future business.
SALES, MARKETING, AND ACCOUNT MANAGEMENT

Keane markets its
        We market our services and software products through itsour direct sales force, which is based in itsour branch offices and regional areas, as well as through its
centralized Strategic Practices Group. Keane'sour Application Outsourcing Corporate Practice. Our account executives 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 our Senior Vice President of Business Development and Regional Sales Vice Presidents, these account executives identify IT services needs within clients and are responsible for ensuringdeveloping a solution that meets 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 Strategicour Application Outsourcing Corporate Practice, Group, other branch offices, and Advanced Development Centersour Global Services Group as needed to address specialized customer requirements.

Keane focuses its
        Our Application Outsourcing Corporate Practice 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.
        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 December 31, 2001, Keane2003, we had 7,8717,381 employees, including 6,5666,182 business and technical professionals whose services are billable to clients. The CompanyWe sometimes supplements itssupplement our technical staff by utilizing subcontractors, which as of December 31, 2003, consisted of 466 full-time subcontractors.

Management believes Keane's
        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, 2003, 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
9

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"(See Item 13 "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS") 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.
        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.
        At December 31, 2003, 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 $14.1 million in 2003. The aggregate annual rental expense for all of our facilities was approximately $15.0 million in 2003. 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"
        In April 1998, First Command (formerly United Services Planning Association, Inc. & Independent Research Agency for Life Insurance, Inc.) commencedfiled a civil action against Keanecomplaint in the United States District Court for the DistrictTarrant County, Texas (Civil Action No. 96-173235-98), against us and two of Massachusettsour employees alleging that we misrepresented our ability to complete a project contracted for by the Company discriminated against
former employee Michael Randolphplaintiffs and other unspecified "similarly-situated
individuals" by actsconcealed from the plaintiffs material facts related to the status of racial harassment, retaliation and constructive
discharge. The EEOC has not specifiedthe project. During the Third Quarter of 2003, in order to avoid further costs, we settled the claim in full with payment to the plaintiffs in the amount of damages it is seeking. The
parties$3.5 million, of which $1.6 million was previously accrued.
        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 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 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. The
Company believesWe believe that these litigation matters are without merit and intendsintend to defend these matters vigorously.


                                       8

vigorously against them.
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 5, 2004 are as follows:

          NAME                                 AGE                              POSITION
          ----                                 ---                              --------
Name
Committee
Age
Position
John F. Keane (3)                               70                 
72
Chairman of the Board and Director
Brian T. Keane                                  41           
43
President, Chief Executive Officer and Director
John J. Leahy                                   44          
45
Senior Vice President of Finance and Administration and Chief Financial Officer
Russell J. Campanello
48
Senior Vice President
Robert B. Atwell                                53      
55
Senior Vice President - North American Branch Operations
Irene Brown                                     47                        
Russell A. Cappellino
62
Senior Vice President
Raymond W. Paris                                64            Senior 
Georgina L. Fisk
35
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
10
Raymond W. Paris
 
 
 
66
 
Senior Vice President
Gary D. Rader
 
 
 
45
 
Senior Vice President
Laurence D. Shaw
 
 
 
42
 
Vice President
Maria A. Cirino
 
(2)(3)
 
40
 
Director
John H. Fain
 
 
 
55
 
Director
Philip J. Harkins
 
(2)(3)
 
56
 
Director
Winston R. Hindle, Jr.
 
(1)(3)
 
73
 
Director
John F. Keane, Jr.
 
 
 
44
 
Director
James T. McBride
 
(1)(3)
 
58
 
Director
John F. Rockart
 
(1)(2)
 
72
 
Director
Stephen D. Steinour
 
(1)(2)
 
45
 
Director
James D. White
 
(2)(3)
 
43
 
Director
(1) Member of 
Audit Committee.
Committee

(2) Member of 
Compensation Committee.
Committee

(3) Member of
Nominating and Corporate Governance Committee (From February 2003 to February 2004, we had separate Nominating and Corporate Governance Committees. These two committees were reconstituted in February 2004 into a single Nominating Committeeand Corporate Governance 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 the 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.a public company that provides Internet-based customer relationship management solutions, and Perkin Elmer, Inc.American Power Conversion Corporation, a designer, developer, and 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.
11

        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.
        Mr. Cappellino joined Keane as Senior Vice President, Offshore Solutions in March of 2002. From 1995 to March 2002, Mr. Cappellino served as Chairman and CEO of SignalTree Solutions Holding, Inc. ("SignalTree Solutions"). SignalTree Solutions was acquired by Keane in March 2002. From 1993 to 1995, Mr. Cappellino was President of Network Solutions and Vice President/General Manager of Worldwide Telecommunications Marketing at Tandem Computers.
        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. Rader joined Keane in 1987 as a consultant. From 1987 through December 2003, Mr. Rader served as Sales Representative, Sales Manager, Branch Manager, and most recently as a Group Vice President. In January of 2004, Mr. Rader was named Senior Vice President of Business Development.
        Mr. Shaw joined Keane in September 2002 as Senior Vice President and Managing Director of Keane Ltd. From 1996 to September 2002, Mr. Shaw was employed by Headstrong, a global restructuring corporation, during which time he held a number of positions, serving most recently as Chief Operating Officer of European Operations.
        Ms. Cirino has served as a director of Keane since July 2001. Since February 2000, Ms. Cirino has held the position of CEO and Chairman of Guardent, Inc., a managed security services corporation. On February 27, 2004, Guardent was acquired by VeriSign, Inc., 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. 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 communications 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
12

Vice President of Digital Equipment Corporation, a computer systems and services firm. Mr. Hindle is also a director of Mestek, Inc., a public company which 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 cable 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 a brother of Brian Keane.
        Mr. Leahy joined the CompanyMcBride has served as director of Keane since October 2003. Prior to his retirement in August 1999 as Senior Vice President - Finance
and Administration and Chief Financial Officer. From 1982 to August 1999,2002, Mr. Leahy was employed by PepsiCo, during which time he held a number of positions,
servingMcBride spent 32 years with Deloitte & Touche, LLP, most recently as Vice PresidentNational Managing Partner of Business PlanningMarketing 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 andSales.
        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.
13

        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 Board
No additional fee (part of annual retainer)
Initial stock option grant for a new Director
10,000 shares of common stock to be granted on the date of election. 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 grant
5,000 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 2003, 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's
        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, 2002,5, 2004, there were 75,475,07163,522,027 shares of Common Stockcommon stock outstanding and held of record by approximately 2,4822,500 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.
15

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
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

2002

 

 

 

 

 

 
First Quarter
 
$
19.18
 
$
14.30
Second Quarter
 
 
16.82
 
 
12.30
Third Quarter
 
 
12.70
 
 
5.99
Fourth Quarter
 
 
10.10
 
 
5.29
        The closing price of the Common Stockour common stock on the American Stock ExchangeNYSE on March 8,
20025, 2004 was $16.85.

The Company has$15.25.
        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. The Company's Articles of Organization restrictOur $50.0 million credit facility with two banks contains restrictions that may limit our ability to pay cash dividends in the ability of the Board
of Directors to declare regular quarterly dividends on the Class B Common Stock.


                                       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

future.
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(IN THOUSANDS EXCEPT 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%


All amounts prior
Years ended December 31,
 
2003
 
2002
 
2001
 
2000
 
1999
 
(IN THOUSANDS EXCEPT PER SHARE DATA)

 
 
 
 
 
 
 
Income Statement Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
804,976
 
$
873,203
 
$
779,159
 
$
871,956
 
$
1,041,092
 
Operating income
 
 
42,180
 
 
10,357
 
 
19,753
 
 
27,921
 
 
116,466
 
Net income
 
 
29,222
 
 
8,181
 
 
17,387
 
 
20,354
 
 
73,074
 
Basic earnings per share
 
 
0.44
 
 
0.11
 
 
0.25
 
 
0.29
 
 
1.02
 
Diluted earnings per share
 
$
0.44
 
$
0.11
 
$
0.25
 
$
0.29
 
$
1.01
 
Basic weighted average common shares outstanding
 
 
65,771
 
 
74,018
 
 
68,474
 
 
69,646
 
 
71,571
 
Diluted weighted average common shares and common share equivalents outstanding
 
 
66,423
 
 
74,406
 
 
69,396
 
 
69,993
 
 
72,395
 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Total cash and marketable securities
 
$
206,136
 
$
68,255
 
$
129,243
 
$
115,212
 
$
142,763
 
Total assets
 
 
797,987
 
 
685,674
 
 
679,903
 
 
463,594
 
 
519,307
 
Total debt (1)
 
 
193,371
 
 
45,647
 
 
15,357
 
 
8,616
 
 
11,403
 
Stockholders' equity
 
 
458,132
 
 
490,584
 
 
529,173
 
 
370,677
 
 
422,799
 
Book value per share
 
$
7.20
 
$
7.06
 
$
7.00
 
$
5.48
 
$
5.95
 
Number of shares outstanding
 
 
63,629
 
 
69,521
 
 
75,509
 
 
67,675
 
 
71,051
 

Financial Performance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Revenue (decline) growth
 
 
(7.8
)%
 
12.1
%
 
(10.6
)%
 
(16.2
)%
 
(3.3
)%
Net margin
 
 
3.6
%
 
0.9
%
 
2.2
%
 
2.3
%
 
7.0
%
(1)
Includes $40,500, $40,888, and $13,000 in accrued building costs for the years ended December 31, 2003, 2002, and 2001, respectively.
16
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 1999 have been restatedplace undue reliance on any forward-looking statements in this Annual Report on Form 10-K. We undertake no obligation to reflectpublicly 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 acquisitionsfactors 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 Bricker & Associates, Inc.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
        We help clients improve business and IT effectiveness through outsourcing services. We plan, build, and manage application software through our Business Consulting, AD&I, and Application Outsourcing services. We develop long-term relationships with customers by providing a broad range of service offerings delivered on a local basis. We also optimize clients' internal processes through BPO services through Worldzen, our majority owned subsidiary. Our IT services are delivered through an integrated network of local branch offices in North America, the UK, and through ADCs in the U.S., Icom Systems LimitedCanada, and Fourth Tier, Inc., which
were accountedIndia. This global delivery model enables us to provide our services to customers onsite, at our nearshore facilities in Canada, and through our offshore development centers in India. Our centralized Strategic Practices and our Quality Assurance Groups support branch offices. The Practices focus on developing repeatable approaches to common customer needs and challenges, and help to gather and institutionalize our best practices. We believe that our blend of onsite, nearshore, and offshore capabilities enables us to further improve the efficiency and economic advantage of the services that we provide our customers.
        In order for as poolings-of-interests.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 benefit. We believe that maximizing the generation of cash from our operations is fundamental to building long-term per share value. We believe that selling and delivering Application Outsourcing and cross-selling our other services is critical to our long-term success. Attracting, retaining, motivating, and developing talented sales, management, and technical professionals is another essential component to our success. In addition, our ability to leverage SG&A expenses over a broader base of revenue is crucial to increasing net income and cash provided from operations.
17

APPLICATION OF CRITICAL ACCOUNTING POLICIES TheAND ESTIMATES
        Our discussion and analysis of Keane'sour financial condition and results of operations are based on consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.U.S. The preparation of these financial statements requires Keaneus to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of itsour financial statements. ActualThe actual results may differ from these estimates under different assumptions or conditions.
        Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. Application of these policies is particularly important to the portrayal of Keane'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, 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. 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. Costs of transitioning the employees and ensuring we meet required service level agreements may be capitalized over defined periods of time.
For fixed pricefixed-price engagements, revenue is recognized 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 associated with application software products is recognized as the software products are delivered or installed on a milestone basis.and as implementation services are delivered. Software maintenance fees on installed products are recognized on a pro-rated basis over the term of the service agreement.
        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
        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. Considerable judgment is used in assessing the ultimate realization of these receivables, including reviewing the financial stability of the client, evaluating the successful mitigation of service delivery disputes, and gauging current market conditions. If the Company's our
18

evaluation of service delivery issues or a client's ability to pay is incorrect, the Companywe may incur future chargesreductions to revenue.
Goodwill and Intangible Impairment:

Keane evaluatesAssets
        In assessing the recoverability of our goodwill and other intangible assets, associated with acquisition
activity on a periodic basis. This evaluation relies onwe must make assumptions regarding estimated future cash flows and other factors to determine the fair value of these assets. This process is subjective and requires judgment at many points throughout the respective assets.analysis. If these estimates or their related assumptions change in the Companyfuture, we may be required to recognizerecord impairment charges.

Deferred Taxes:

Keane accountscharges for these assets not previously recorded. As of December 31, 2003, our goodwill totaled $292.9 million.
        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 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, 2003, our intangible assets totaled $71.0 million.
Income Taxes
        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 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. Based on prior taxable income and estimates of future taxable
income, the Company has determined that it is more likely than not that its net
deferred tax assets will be fully realized in the future. If actual taxable
income varies from these estimates, the Company may be required to recordWe 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 future 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.
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 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.
        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." Had we adopted the accounting provisions of SFAS 148, we would have recorded additional compensation expense and reduced net income tax expense which will be recordedby approximately $4.6 million, $11.3 million, and $10.3 million in the Company's consolidated
statement of operations.

Restructuring:

Keane has2003, 2002, and 2001, respectively.
19

Restructuring
        We have recorded restructuring charges and reserves associated with restructuring plans approved by management overin the last threefive 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, 2003, 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 $2.7 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 2003, we recorded an expense reduction of $1.0 million associated with early lease terminations and unanticipated subleases.
CONSOLIDATED RESULTS OF OPERATIONS

This Annual Report on Form 10-K contains forward-looking statements. For
        In this purpose, any statements contained hereinsection, we discuss our results of operations. We measure our revenue performance by comparing the growth in Plan, Build, and Manage service revenues. We evaluate our improvement in profitability by comparing gross margins, and SG&A as a percentage of revenues. Other key metrics that we use to manage and evaluate the performance of our business include: bookings or new sales to customers, 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 from the consultant.
2003 Compared to 2002
 
 
REVENUES (Dollars in thousands)
 
 
 
Years Ended December 31,
 
Increase (Decrease)
 
 
 
2003
 
%
 
2002
 
%
 
$
 
%
 
Plan
 
$
48,701
 
6
 
$
66,890
 
8
 
$
(18,189
)
(27.2
)
Build
 
 
196,175
 
24
 
 
216,257
 
25
 
 
(20,082
)
(9.3
)
Manage
 
 
560,100
 
70
 
 
590,056
 
67
 
 
(29,956
)
(5.1
)
 
 
 
 
 
 
 
 
 
Total
 
$
804,976
 
100
%
$
873,203
 
100
%
$
(68,227
)
(7.8
)
 
 
 
 
 
 
 
 
 
Revenues
        Revenues in 2003 compared to 2002 decreased as a result of clients' decisions to continue to defer discretionary technology-related expenditures during a period of economic uncertainty. However, throughout the course of the year, we experienced a more stable demand for our services and believe that we are not statementsbeginning to see some indications of historical
factincreases in discretionary IT spending.
        Plan.    Our Plan service revenues are comprised primarily of business consulting services, which include Business Consulting and Program Management. During 2003, we provided the majority of our Business Consulting services through KCG. During the Fourth Quarter of 2003, we entered the growing BPO market through our acquisition of a majority interest in Worldzen. Worldzen specializes in complex processes within the financial services, insurance, and healthcare industries, and provides back office processes for multiple industries. As part of our investment in Worldzen, we contributed to
20

Worldzen a majority of the assets and certain customer contracts associated with KCG. Our Plan services are delivered via our global delivery model, from operations in the U.S., UK, Canada, and India. The decreases in Plan service revenues were primarily the result of the deferral of consulting projects and a decrease in billing rates in response to weak general economic conditions.
        Build.    Build service revenues, which consist primarily of the AD&I business, were adversely affected during 2003 by customers' decisions to defer software development projects due to the reduction in capital spending related to technology. The products and services we sold within the less cyclical healthcare industry helped to stabilize Build service revenues. Revenues for 2003 from HSD increased $2.6 million, or 4.6% compared to 2002.
        Manage.    Manage services consist primarily of Application Outsourcing services, together with Staff Augmentation, other Maintenance and Migration services, and BPO services, delivered through Worldzen. The decrease in Manage service revenues was due to lower revenues associated with staff augmentation and other services, offset in part by an increase in Application Outsourcing revenues.
        Generally, under Application Outsourcing agreements, we 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 deemed forward-looking statements. Without limitingreduced from the foregoing,stated contract amounts. For example, in accordance with the words "believes," "anticipates," "plans," "expects"contract terms, PacifiCare has the ability to reduce the baseline resources as defined in the contract, which could potentially reduce the contract value, originally valued at approximately $500.0 million through 2012, by approximately $100.0 million. Application Outsourcing agreements generally do not require any capital outlay from us. Application Outsourcing revenue and similar expressionsexpenses are intendedrecognized on a monthly basis consistent with the service provided by us to identify forward-looking statements. There areour customers. Within our Application Outsourcing business, we carefully monitor and manage designated large, long-term strategic Application Outsourcing engagements. These deals represent Application Outsourcing contracts that have been signed since January of 2000, with a numberminimum contract value 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$5.0 million in 2000, excluding revenue
associated with Keane's divested help deskrevenue. We believe that these engagements are representative of the type of Application Outsourcing business or $779.2that forms the core element of our growth strategy. During 2003, these long-term strategic Application Outsourcing engagements generated $230.4 million in 2001
compared to $876.9revenue, a 21.8% increase from $189.2 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 these engagements in 2002.
        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 2002, was primarily attributable to ongoing efforts to bring our costs in alignment with anticipated revenues through workforce reductions and increased offshore staffing, primarily at our India facilities. Salaries, wages, and other direct costs were $554.4 million, or 68.9%, of 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 Company's public sector businessend of 2003, compared to 6,175 total billable employees at the end of 2002. In addition to these employees, we
21

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 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 $31.0 millionpercentage of revenue for 2003 was 31.1%, compared to 27.8% in 2002. The increase in gross margin as a percentage of revenue from
its Application Developmentwas largely the result of a more stable environment for IT services and Management (ADM) Outsourcing service. ADM
Outsourcing revenue represented 51%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
        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, duringcompared 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 $393.9
million, an increase3.3%, compared to 2002. The decrease in amortization of 8.5% from $363.0 million during 2000.

For 2001, revenueintangible assets in 2003 was primarily due to fully amortizing intangibles associated with prior year acquisitions offset in part by the full year amortization of additional intangible assets resulting from the Company's Plan services was $75.3acquisitions of SignalTree Solutions in March 2002 and one other acquisition complementary to our 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 2002 and as a result recorded an expense reduction of $1.5 million down from
$107.1for workforce reductions, and $1.0 million in 2000. Plan revenue is primarily comprised of business
innovation consulting delivered via Keane Consulting Group (KCG), the Company's
business consulting arm, and IT consulting services, which are sold and
implemented out of Keane's network of branch offices. Plan 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 million 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,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 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 certain other expenditures, $1.8 million of assets which became impaired as a result of these restructuring actions, and $0.5 million for a net change in the prior year's estimate for workforce reductions, branch office closures, and asset write-downs associatedother expenditures.
Interest and dividend income
        Interest and dividend income for 2003 was $3.0 million compared to $2.2 million in 2002. The increase 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 our 2% Convertible Subordinated Debentures ("Debentures") issue 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.
22
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 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 Worldzen with gaining synergies fromthe right to increase our ownership position over time. As a result of this transaction, we began to consolidate 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 period is included in Note 14 "INCOME TAXES" in the notes to the accompanying consolidated financial statements.
Net income
        Net income increased to $29.2 million in 2003 compared to $8.2 million in 2002. The improvement in net income is the result of the absence of a restructuring charge in 2003, improved operating income margins, and the favorable judgment in an arbitration award in 2003.
2002 Compared to 2001
 
 
REVENUES (Dollars in thousands)
 
 
 
Years Ended December 31,
 
Increase (Decrease)
 
 
 
2002
 
%
 
2001
 
%
 
$
 
%
 
Plan
 
$
66,890
 
8
 
$
75,314
 
10
 
$
(8,424
)
(11.2
)
Build
 
 
216,257
 
25
 
 
265,993
 
34
 
 
(49,736
)
(18.7
)
Manage
 
 
590,056
 
67
 
 
437,852
 
56
 
 
152,204
 
34.8
 
 
 
 
 
 
 
 
 
 
Total
 
$
873,203
 
100
%
$
779,159
 
100
%
 
94,044
 
12.1
 
 
 
 
 
 
 
 
 
 
23
Revenues
        Revenues increased in 2002 compared to 2001 as the result of new clients and new client billings due to the acquisition of Metro, Information Services.

As anticipated, Keane'swhich was completed on November 30, 2001, and the acquisition of SignalTree Solutions, which was completed on March 15, 2002.
        Plan.    The decrease in Plan service revenues in 2002 compared to 2001 was primarily the result of the deferral of consulting projects and a decrease in billing rates caused by general economic conditions.
        Build.    Build revenue, which consists primarily of application
development and integration business, was alsoservice revenues were adversely affected in 2001during 2002 by the challenging economic environment and the related deferral of new software development projects in both North America and the United Kingdom. ThisUK, as well as by reduced billing rates due to the current reduction in capital spending related to technology. However, the decline in our Build services revenue was offset in part by ongoingrevenue generated from the less cyclical public sector and healthcare-related vertical markets, which contributed growing and more stable revenue streams within the Build projectservices sector.
        Manage.    The improvement in Manage services revenue was the result of increasing revenue from existing Global 2000
customers and revenue of $128.4 million attributable to Public Sector business
from federal and state governments. Engagements within the Public Sector
represented approximately 16.5% of Keane's total revenue in 2001.

Revenue from the Company's Manage Services, which consist primarily of Keane's
ADMour Application Outsourcing service, as well as Application Maintenance and Migration
services, grew to $432.7 million during 2001, an increase of 8% from $399.2
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,
including 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 acquisitionacquisitions of Metro Information Services, on November 30, 2001. Revenue
fromand SignalTree Solutions. Although not immune to economic fluctuations, Application Outsourcing revenues are more stable than those associated with Plan or Build service revenues due to the Company's divested Help Desk business was approximately $43.3 million
during 2000long-term and $5.2 million during 2001. On February 12, 2001recurring nature of outsourcing contracts and the Company sold
its Help Desk operationcost-saving benefits related to Convergys Corporationoutsourcing. Generally, under an Application Outsourcing agreement, we receive a fixed monthly fee in return for $15.7 millionmeeting or exceeding a contractually agreed upon service level. Application Outsourcing agreements generally do not require any capital outlay from us, and we recognize outsourcing revenue and expense on a monthly basis consistent with the service provided to our customers.
        The following table summarizes certain line items from our consolidated statements of income (dollars in cash.thousands):
 
 
Years Ended December 31,
 
Increase (Decrease)
 
 
2002
 
2001
 
$
 
%
Revenues
 
$
873,203
 
$
779,159
 
$
94,044
 
12.1

Salaries, wages, and other direct costs

 

 

630,047

 

 

547,883

 

 

82,164

 

15.0
 
 
 
 
 
 
Gross margin
 
$
243,156
 
$
231,276
 
$
11,880
 
5.1
 
 
 
 
 
 
Gross margin %
 
 
27.8
%
 
29.7
%
 
 
 
 
 
 
 
 
 
 
 
 
Salaries, wages, and other direct costs
        The increase in Keane's Manage revenue during 2001salaries, wages, and other direct costs was driven by continuing
sales growth inprimarily attributable to the Company's ADM Outsourcing business, as Global 2000 customers
seek to improve productivityMetro 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
processes as well as the economic advantage of a large pool of cost-effective
technical professionals.acquisitions. Salaries, wages, and other direct costs were $630.0 million, or 72.2%, of total revenues, for 2001 were2002 and $547.9 million, or 70.3%, of total revenues in 2001. Total billable employees for all operations were 6,175 in 2002, compared to 6,566 in 2001. The lower billable employees resulted from a need to bring personnel resources, which account for the vast majority of our direct costs, in alignment with anticipated revenue. Our billable employees within our India operation were 413 billable employees as of December 31, 2002. We did not have billable employees in India during 2001.
Gross margin
        Gross margin as a percentage of revenue for 2002 was 27.8%, compared to 29.7% in 2001. The decrease in gross margins reflects continuing softness in the demand for IT services resulting in lower billing rates and utilization of billable personnel.
24

Selling, general and administrative expenses
        SG&A expenses for 2002 increased $12.1 million, or 6.5%, compared to 2001. SG&A expenses for 2002 were $198.8 million, or 22.8%, of total revenue, compared to $621.2$186.7 million, or 71.2%24.0%, of total revenue for 2000.2001. The declinedecrease in costs isSG&A as a percentage of revenue was the result of cost synergies obtained from the saleacquisition of Metro as well as our continuing focus on tightly controlling discretionary expenses. The increase in SG&A expenses was attributable to personnel costs incurred in connection with the Company's lower margin Help
DeskMetro and SignalTree Solutions acquisitions.
        During the First Quarter of 2002, we completed the integration of Metro's corporate functions with our own, and during the Second Quarter of 2002, we completed the consolidation and relocation of overlapping branch offices. During the Second Quarter of 2002, we also integrated U.S.-based operations and its ongoing efforts to bring costsacquired from SignalTree Solutions with our own. During the Third Quarter of 2002, we integrated all corporate functions of SignalTree Solutions into our corporate headquarters in alignment with
revenue. As a result, Keane's gross marginsBoston, Massachusetts.
Amortization of intangible assets
        Amortization of intangible assets 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 $186.72002 was $16.4 million, or 24.0%1.9%, of total revenue compared to $201.9 million, or 23.1% of
total revenue, for 2000. The decline in SG&A expenditures during 2001 is a
result of the sale of the Company's Help Desk operations 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.

Amortization of goodwill and other intangible assets for 2001 was $14.5 million, or 1.9% of total revenue, compared to $12.4 million, or 1.4% of total revenue,
in 2000.for 2001. The increase in amortization for 2001of intangible assets was primarily attributable to additional intangible assets resulting from our acquisitions of Metro and SignalTree Solutions offset by the impact of the adoption of SFAS No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," under which goodwill is no longer amortized.
Restructuring charges, net
        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 certain other expenditures, $1.8 million of assets which became impaired as a result of these restructuring actions, and $0.5 million for a net change in prior year's estimate for workforce reductions and branch office closures and other expenditures. During the Company's acquisition of Metro Information
Services in NovemberFourth Quarter of 2001, we recorded a restructuring charge of $10.4 million relating to the costs of workforce reductions, consolidation of branch offices, impaired assets, and the acquisitions of Denver Management Groupcertain other expenditures.
Interest and Care Computer Systems in July and September of 2000.dividend income
        Interest and dividend income totaled $7.0$2.2 million for 2001,2002, compared to $7.7$6.9 million for 2000.2001. The slight decrease in interest and dividend income was attributable to having lesslower cash and cash equivalents and marketable securities earning interest and dividend incomedividends, as a
resultwell as overall lower interest rates. The lower cash and cash equivalent and marketable security balances were due to the use of using cash for acquisitionsto retire debt associated with the acquisition of Metro, the acquisition of SignalTree Solutions, and the repurchase of Keane stock, and as
a resultshares of interest rate declines.our common stock.
Interest expense
        Interest expense for 2002 was $255,000 compared to $295,000 in 2001.
Other income, net
        Other income was $2.7$1.3 million for 2001 as2002, compared to other expense of $0.9$2.9 million in 2000. This increase in other2001. Other income was related toduring 2001 included gains from sales of investments and a gain of $4.0 million resulting from the sale of Keane'sour Help Desk operation,business. This gain was partially offset by the Company's decision to write-off of certain equity investments totaling $2.0 million.
25

Income taxes
        We generated income before taxes of $13.6 million duringfor 2002 compared to $29.2 million in 2001. The provision for income taxes represents the first quarteramounts owed for federal, state, and foreign taxes. The effective income tax rate is the provision for income taxes as a percentage of 2001, and
gains fromincome before the sale of investments.

The Company'sprovision for income taxes. Our effective tax rate was 40.0% for 2002, down from 40.5% in 2001 and 2000.


                                       18



Net cash provided from operations2001. This decrease was $83.2 million during 2001, and $96.1
million during 2000, before proceeds from the saleresult of the Help Desk businessadoption of $15.7SFAS 142, offset by an adjustment of prior year's estimated tax liability. A reconciliation of the statutory federal income tax rate to the effective rate for each period is included in Note 14 "INCOME TAXES" in the notes to the accompanying consolidated financial statements.
Net income
        Net income decreased to $8.2 million and the investment of $4.0in 2002 compared to $17.4 million 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 1999.2001. The decrease in revenue was
primarily anet income is the result of the rapid declinehigher restructuring charge 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 $871.5 million, an increase of 4.4% as compared to similar core non-Y2K
revenue 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 Development2002, 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.

Salaries, wages, and other direct costs for 2000 were $621.2 million, or 71.2%
of revenue, compared to $702.8 million, or 67.5% of revenue for 1999. This
increase as a percentage of revenue was due primarily to lower utilization of
the Company's billable headcount, caused by the decline of Y2K revenue. In order
to bring costs in closer alignment with revenue, in the fourth quarter of 2000,
the Company incurred a charge of $13.5 million, of which $8.6 million, or 1.0%
of revenue, is related to the consolidation and/or closing of certain
non-profitable branch offices, employee severance costs, facility leases, and
for other miscellaneous purposes.

During the second quarter of 2000, the Company identified ten under-performing
branch offices, which had lost critical mass as a result of the Y2K transition
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 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 decrease in the Company's
revenue and investments the Company continued to make in the development and
marketing of its core business lines.

Amortization of goodwill 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.

Interest and other expense for each of 2000 and 1999 were $1.5 million. Interestinterest and dividend income for 2000 totaled $7.7 million, compared to $7.8 million in
1999.

The Company's effective tax rate for each of 2000 and 1999 was 40.5%.

Net income and earnings per share for 2000 were $20.4 million and $.29 per
diluted share including all charges, and $28.4 million and $.41 per diluted
share excluding all charges. This compares to net income of $73.1 million 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 business 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 million 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.

income.
RECENT ACCOUNTING PRONOUNCEMENTS:PRONOUNCEMENTS
        In June 1998,January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," which requires the consolidation of a variable interest entity, as defined, by its primary beneficiary. Primary beneficiaries are those companies that are subject to a majority of the risk of loss or entitled to receive a majority of the entity's residual returns, or both. In determining whether it is the primary beneficiary of a variable interest entity, an entity with a variable interest shall treat variable interests in that same entity held by its related parties as its own interests. 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 of 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 Limited Partnership ("City Square") and 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 April 2003, the FASB issued SFAS No. 149 ("SFAS 149"), "Amendment of Statement of Financial
Accounting Standards133 on Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, (FAS 133)("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." which required adoption in periods beginningThis statement is effective for contracts entered into or modified after June 15, 1999. FAS 133 was subsequently amended by Statement30, 2003. Adoption of Financial Accounting
Standards No. 137, " Accounting for Derivative Instruments and Hedging
Activities- Deferral of the Effective Date of FASB Statement No. 133" and will
now be 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 138 in the first quarter of 2001, and FAS133
hasthis statement did not hadhave a significant impacteffect on itsour consolidated financial position or results of operations.operations because we do not engage in hedging activities.
        In July 2001,November 2002 and May 2003, the FASB issued FASEmerging Issues Task Force ("EITF") reached a consensus on Issue No. 141, "Business Combinations",00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance and FAS No.
142, "Goodwillcriteria for determining when a multiple deliverable arrangement contains more
26

than one unit of accounting. The guidance also addresses methods of measuring and Other Intangible Assets." FAS 141 eliminates the
pooling-of-interests methodallocating arrangement consideration to separate units 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.accounting. The requirements of Statement 141 areguidance is effective for any business
combination that is initiatedrevenue arrangements entered into 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 are15, 2003. Adoption of this statement did 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 acquireda significant effect 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 itsour consolidated financial position andor results of operations.
        In October 2001,May 2003, the FASB issued SFAS No. 144,150 ("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003. Adoption of this statement had no effect on our consolidated financial position or results of operations.
        In May 2003, the ImpairmentEITF reached a consensus on Issue No. 01-08, "Determining Whether an Arrangement Contains a Lease." EITF Issue No. 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 Issue No. 01-08 is based on whether the arrangement conveys to the purchaser (lessee) the right to use a specific asset. Issue No. 01-08 will be effective for arrangements entered into or Disposalmodified in the Second Quarter of Long-Lived Assets.fiscal 2004. We will adopt this statement prospectively and do not anticipate adoption of this statement to 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 Postretirement 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. 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 such, will include the required additional disclosures as of December 31, 2004.
        In December 2003, the SEC published Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." This SAB updates the SEC staff's prior guidance provided in SAB No. 101, "Revenue Recognition," removes material no longer necessary, and conforms the processinterpretive material retained with current authoritative accounting and auditing guidance and SEC rules and regulations, including EITF 00-21, "Revenue Arrangements with Multiple Deliverables." Adoption of evaluating thethis accounting guidance did not impact on itsour consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES: The Company's cash and investments at December
31, 2001 increased to $ 129.2 million 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 decreaseRESOURCES
Consolidated Financial Condition (Dollars 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. 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 additionalthousands)
Years Ended December 31,

 
2003
 
2002
 
2001
 
 
Cash Flows Provided By (Used in)
 
 
 
 
 
 
 
 
 
 
 
Operating activities
 
$
77,572
 
$
62,525
 
$
83,182
 
 
Investing activities
 
 
(150,202
)
 
(34,737
)
 
(1,768
)
 
Financing activities
 
 
82,437
 
 
(48,989
)
 
(69,999
)
 
Effect of exchange rate on cash
 
 
546
 
 
2,028
 
 
358
 
 
 
 
 
 
Increase (Decrease) in Cash and Cash Equivalents
 
$
10,353
 
$
(19,173
)
$
11,773
 
 
 
 
 
 
27
         We have historically financed our operations in the United States. The Company paid
approximately $64.5 million in 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 Company to repurchase up to 1,542,800 shares of its common 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 itsour ability to generate cash from operations. We use the net cash generated from our operations to fund capital expenditures, mergers and acquisitions, and stock 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. Through the net cash provided by operations during 2003, combined with the proceeds of our convertible debt offering completed in June 2003, we have increased our cash and cash equivalents, and our marketable securities position to $206.1 million at December 31, 2003. We intend to use our cash 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 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 Companyimprovement in collections is evident by a reduction in DSO, which was 53 days, 59 days, and 70 days at December 31, 2003, 2002, and 2001, respectively. We calculate DSO using the trailing three months total revenue divided by the number of days in the quarter to equal daily revenue. The average accounts receivable balance for the three-month period is then divided by daily revenue. 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 on 2003.
        Net cash provided by operating activities in 2002 decreased $20.7 million compared to 2001 due primarily to the lower operating results. During 2002, we paid $16.5 million associated with prior and current restructuring charges. Partially offsetting the operating results and restructuring payments were the improvements in working capital, particularly in the collections of our accounts receivables.
        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 2004 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, cash generated from operations and cash generated from the exercise of employee stock options and our employee stock purchase plan 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 2003, 2002, and 2001 was primarily for investments, acquisitions, and capital expenditures.
        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 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
28

$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 may have to pay additional earn-out consideration that is based on achieving specific net revenue targets. Payments in the next 12 months for achieving these goals may range from $1.0 million to $2.0 million. During 2002 we also recorded $3.0 million as deferred revenue related to contingent service credits and issued a $3.0 million non-interest bearing note payable as partial consideration. As of December 31, 2003, the deferred revenue and non-interest bearing note each had a balance of $2.0 million, a reduction of $1.0 million resulting from the delivery of related service credits. The note has a one-year term with a one-year extension expiring on September 25, 2004. 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.
        During 2001, we purchased $104.6 million and sold $102.3 million in marketable securities. In addition, we invested $7.6 million on property and equipment. We also completed the merger of Metro by exchanging our common stock for all of the common stock of Metro. In connection with this merger, we paid $7.1 million in transaction costs. Partially offsetting these cash requirements was $16.1 million in proceeds that we received in connection with the sale of our Help Desk business.
        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. In exchange for all of Nims' outstanding stock, we paid $18.1 million in cash to 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.
Cash flows provided by (used in) financing activities
        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 the Debentures.
        Additionally during 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, 2001 through December 31, 2003, our Board of Directors authorized us to repurchase up to 15.6 million shares of our common stock. The following is a summary of our repurchase activity for 2003, 2002, and 2001 (dollars in thousands):
 
 
2003
 
2002
 
2001
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
Prior year authorizations at beginning of year
 
3,676,400
 
 
 
 
1,542,800
 
 
 
 
869,000
 
 
 
Authorizations
 
6,000,000
 
 
 
 
8,632,200
 
 
 
 
1,000,000
 
 
 
Repurchases
 
(6,495,200
)
$
66,696
 
(6,498,600
)
$
54,092
 
(326,200
)
$
4,045
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares remaining as of December 31,
 
3,181,200
 
 
 
 
3,676,400
 
 
 
 
1,542,800
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
        Between May 1999 and December 31, 2003, we have invested approximately $229.7 million to repurchase approximately 18.5 million shares of our common stock under nine separate authorizations. These share repurchases more than offset the shares issued under our various stock ownership
29

programs. Under these stock ownership programs, we issued 603,235 shares, 510,312 shares, and 755,348 shares and received proceeds of $4.4 million, $6.4 million, and $6.3 million for the years ended December 31, 2003, 2002, and 2001, respectively.
        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 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 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 significantmore 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, 2003, 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 the 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 new 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.
        Net cash used in financing activities in 2001 was primarily due to the payment of debt acquired in connection with the merger of Metro and the repayment of long-term debt.
Increase (Decrease) in Cash and Cash Equivalents
        Our cash and cash equivalents totaled $56.7 million, $46.4 million, and $65.6 million at December 31, 2003, 2002, and 2001, 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, 2003:
 
 
Payments due by Period (Dollars in thousands)
Contractual obligations
 
2004
 
2005
 
2006
 
2007
 
2008
 
2009 &
thereafter
 
Total
Note Payable
 
$
1,969
 
$
—
 
$
—
 
$
—
 
$
—
 
$
—
 
$
1,969
Put Option
 
 
2,858
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
2,858
Long-term debt (1)
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
150,000
 
 
150,000
Operating leases (2)
 
 
22,815
 
 
18,642
 
 
12,597
 
 
8,507
 
 
6,215
 
 
24,425
 
 
93,201
Capital lease obligations
 
 
828
 
 
304
 
 
102
 
 
—
 
 
—
 
 
—
 
 
1,234
 
 
 
 
 
 
 
 
Total contractual cash obligations (3)
 
$
28,470
 
$
18,946
 
$
12,699
 
$
8,507
 
$
6,215
 
$
174,425
 
$
249,262
 
 
 
 
 
 
 
 
(1)
Excludes contractual and contingent interest as described in Note 9 "CONVERTIBLE SUBORDINATED DEBENTURES."
30
(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 $2.7 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 and (ii) to settle the other put and call options associated with our Worldzen acquisition. See Note 6 "BUSINESS ACQUISITIONS" 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 convertible subordinated debentures can be found in Note 9 "CONVERTIBLE SUBORDINATED DEBENTURES."
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.
31
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 tomay 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:

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

 .     

•
the number and requirements of client engagements;

 .     

•
employee utilization rates;

 .     

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

 .     

•
acquisitions; and

 .     

•
other factors, many of which are beyond Keane'sour control.


                                       21

        A significant portion of Keane'sour expenses do 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 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 hasMarch 5, 2004, we have completed nine13 acquisitions. The aggregate costmerger and consideration costs of these acquisitions totaled approximately $266.8$408.2 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 be unable to complete any future acquisition.

Keane typically anticipates
        We anticipate 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
32

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 SignalTree Solutions in March 2002, Keane has twowe now have three software development facilities in India and has addedIndia. As of December 31, 2003, we had approximately 400876 technical professionals to its professional services organization.in the region. 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-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
        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
33

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 due on June 15, 2013, 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, 2003, we had approximately $193.4 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:
•
increasing our vulnerability to adverse economic and industry conditions;

•
limiting our ability to obtain additional financing;

•
limiting our ability to make acquisitions;
34
•
requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, thereby reducing the amount of our cash flow available for other purposes, including capital expenditures;

•
limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we compete; and

•
placing us at a possible competitive disadvantage with less leveraged competitors and competitors that may have better access to capital resources.
        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 sensitivemarket-risk 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'sOur primary market risk exposure is that of interest rate risk on itsour investments, which would affect the carrying value of those investments. However, 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. Since January 1, 2001, the United States Federal Reserve Board has significantly decreased certain benchmark interest rates, which has led to a general decline in market interest rates. The decline in market interest rates has had an impact on the rate of return on our cash and investments. Additionally, the Company transactswe transact business in the United Kingdom,UK, Canada, and India and as such hashave exposure associated with movement in foreign currency exchange rates. 23

In 2003, net revenues derived from our foreign operations totaled approximately 3% of our total revenues.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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


                                       24


Report of independent auditors
37

Consolidated statements of income for the years ended December 31, 2003, 2002, and 2001


38

Consolidated balance sheets as of December 31, 2003 and 2002


39

Consolidated statements of stockholders' equity for the years ended December 31, 2003, 2002, and 2001


40

Consolidated statements of cash flows for the years ended December 31, 2003, 2002, and 2001


41

Notes to consolidated financial statements


42-76
36
REPORT OF INDEPENDENT AUDITORS

TO 
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF KEANE, INC.:
        We have audited the accompanying consolidated balance sheets of Keane, Inc. as of December 31, 20012003 and 2000,2002, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001.2003. These financial statements are the responsibility of the Company'sKeane, Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audits.
        We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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, 20012003 and 2000,2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001,2003, in conformity with accounting principles generally accepted in the United States.


                                                         /s/
        As discussed in Note 5 "GOODWILL AND OTHER INTANGIBLE ASSETS" to the consolidated financial statements, in 2002 Keane, Inc. changed its method of accounting for goodwill and other intangible assets in accordance with the adoption of Statement of Financial Accounting Standards No. 142.
/s/ Ernst and Young LLP
Boston, Massachusetts
February 11, 2002,6, 2004, except for Note O,
 17,
as to which the date is March 15, 2002


                                       25

February 27, 2004
37

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,
 
 
 
2003
 
2002
 
2001
 
 
 
(Dollars in thousands except per share amounts)

 
Revenues
 
$
804,976
 
$
873,203
 
$
779,159
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
Salaries, wages, and other direct costs
 
 
554,375
 
 
630,047
 
 
547,883
 
 
Selling, general, and administrative expenses
 
 
192,900
 
 
198,813
 
 
186,708
 
 
Amortization of goodwill and other intangible assets
 
 
15,847
 
 
16,382
 
 
14,457
 
 
Restructuring charges, net
 
 
(326
)
 
17,604
 
 
10,358
 
 
 
 
 
 
Operating income
 
 
42,180
 
 
10,357
 
 
19,753
 

Other income (expense)

 

 

 

 

 

 

 

 

 

 
 
Interest and dividend income
 
 
2,981
 
 
2,246
 
 
6,884
 
 
Interest expense
 
 
(4,156
)
 
(255
)
 
(295
)
 
Other income, net
 
 
7,119
 
 
1,288
 
 
2,879
 
 
Minority interest
 
 
572
 
 
—
 
 
—
 
 
 
 
 
 
Income before income taxes
 
 
48,696
 
 
13,636
 
 
29,221
 
 
 
 
 
 
Provision for income taxes
 
 
19,474
 
 
5,455
 
 
11,834
 
 
 
 
 
 
Net income
 
$
29,222
 
$
8,181
 
$
17,387
 
 
 
 
 
 
Basic earnings per share
 
$
0.44
 
$
0.11
 
$
0.25
 
 
 
 
 
 
Diluted earnings per share
 
$
0.44
 
$
0.11
 
$
0.25
 
 
 
 
 
 
Basic weighted average common shares outstanding (in thousands)
 
 
65,771
 
 
74,018
 
 
68,474
 
 
 
 
 
 
Diluted weighted average common shares and common share equivalents outstanding (in thousands)
 
 
66,423
 
 
74,406
 
 
69,396
 
 
 
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.


                                       26

38

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,
 
 
 
2003
 
2002
 
 
 
(Dollars in thousands except share amounts)

 
Assets
 
 
 
 
 
 
 
Current:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
56,736
 
$
46,383
 
 
Restricted cash
 
 
1,586
 
 
—
 
 
Marketable securities
 
 
147,814
 
 
21,872
 
 
Accounts receivable, net:
 
 
 
 
 
 
 
 
 
 
Trade
 
 
110,186
 
 
129,432
 
 
 
 
Other
 
 
908
 
 
1,004
 
 
Prepaid expenses and deferred taxes
 
 
15,082
 
 
31,120
 
 
 
 
 
 
 
 
Total current assets
 
 
332,312
 
 
229,811
 
Property and equipment, net
 
 
75,431
 
 
31,161
 
Construction in process
 
 
—
 
 
40,888
 
Goodwill
 
 
292,924
 
 
277,435
 
Customer lists, net
 
 
57,908
 
 
69,193
 
Other intangible assets, net
 
 
13,124
 
 
17,613
 
Deferred taxes and other assets, net
 
 
26,288
 
 
19,573
 
 
 
 
 
 
 
 
Total assets
 
$
797,987
 
$
685,674
 
 
 
 
 

Liabilities

 

 

 

 

 

 

 
Current:
 
 
 
 
 
 
 
 
Accounts payable
 
 
12,331
 
 
11,986
 
 
Accrued expenses and other liabilities
 
 
33,686
 
 
34,917
 
 
Accrued building costs
 
 
458
 
 
234
 
 
Accrued restructuring
 
 
6,947
 
 
13,694
 
 
Accrued compensation
 
 
36,220
 
 
36,346
 
 
Note payable
 
 
1,969
 
 
3,100
 
 
Accrued income taxes
 
 
1,937
 
 
81
 
 
Unearned income
 
 
8,869
 
 
11,535
 
 
Current capital lease obligations
 
 
709
 
 
887
 
 
 
 
 
 
 
 
Total current liabilities
 
 
103,126
 
 
112,780
 
Convertible debentures
 
 
150,000
 
 
—
 
Accrued long-term building costs
 
 
40,042
 
 
40,654
 
Accrued long-term restructuring
 
 
7,073
 
 
12,541
 
Deferred income taxes
 
 
30,879
 
 
28,343
 
Long-term portion of capital lease obligations
 
 
193
 
 
772
 
 
 
 
 
 
 
 
Total liabilities
 
 
331,313
 
 
195,090
 

Minority interest

 

 

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 75,545,391 at December 31, 2003 and 75,545,386 at December 31, 2002
 
 
7,555
 
 
7,555
 
Class B common stock, par value $.10, authorized 503,797 shares, issued and outstanding 284,599 at December 31, 2003 and 284,604 at December 31, 2002
 
 
28
 
 
28
 
Additional paid-in capital
 
 
167,548
 
 
166,598
 
Accumulated other comprehensive loss
 
 
(1,392
)
 
(1,411
)
Retained earnings
 
 
398,764
 
 
369,542
 
Unearned compensation
 
 
(704
)
 
—
 
Less treasury stock at cost, 12,201,381 shares at December 31, 2003 and 6,309,416 shares at December 31, 2002
 
 
(113,667
)
 
(51,728
)
 
 
 
 
 
 
 
Total stockholders' equity
 
 
458,132
 
 
490,584
 
 
 
 
 
 
 
 
Total liabilities and stockholders' equity
 
$
797,987
 
$
685,674
 
 
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.


                                       27

39
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
                                     ==================================
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Accumu-
lated
other
compre-
hensive
loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Class B
Common stock
 
 
 
 
 
 
 
Treasury stock
at cost
 
 
 
For the years ended
December 31,
2001, 2002, and 2003
 
Common stock
 
 
 
 
 
 
 
 
 
 
Additional
paid-in
capital
 
Retained
earnings
 
Unearned
compen-
sation
 
Total
stockholders'
equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance December 31, 2000
 
72,446,101
 
$
7,245
 
284,891
 
$
28
 
$
121,444
 
$
(4,637
)
$
343,974
 
$
—
 
(5,055,602
)
$
(97,377
)
$
370,677
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock issued under stock option and employee purchase plans
 
18,000
 
 
1
 
 
 
 
 
 
 
(8,894
)
 
 
 
 
 
 
 
 
 
737,348
 
 
15,186
 
 
6,293
 
Common stock issued in connection with acquisition of Metro Information Services, Inc.
 
2,759,870
 
 
276
 
 
 
 
 
 
 
49,460
 
 
 
 
 
 
 
 
 
 
4,644,454
 
 
86,236
 
 
135,972
 
Income tax benefit from stock option plans
 
 
 
 
 
 
 
 
 
 
 
 
259
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
259
 
Repurchase of common stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(326,200
)
 
(4,045
)
 
(4,045
)
Investments valuation adjustment, net of taxes of $787
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,181
 
 
 
 
 
 
 
 
 
 
 
 
 
1,181
 
Foreign currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,449
 
 
 
 
 
 
 
 
 
 
 
 
 
1,449
 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
17,387
 
 
 
 
 
 
 
 
 
 
17,387
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
20,017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2001
 
75,223,971
 
$
7,522
 
284,891
 
$
28
 
$
162,269
 
$
(2,007
)
$
361,361
 
$
—
 
—
 
$
—
 
$
529,173
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock issued under stock option and employee purchase plans
 
321,128
 
 
33
 
 
 
 
 
 
 
4,045
 
 
 
 
 
 
 
 
 
 
189,184
 
 
2,364
 
 
6,442
 
Conversions of 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.


                                       28

40

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,
 
 
 
2003
 
2002
 
2001
 
 
 
(Dollars in thousands)

 
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
29,222
 
$
8,181
 
$
17,387
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
27,081
 
 
27,452
 
 
26,113
 
 
 
Deferred income taxes
 
 
18,710
 
 
(3,796
)
 
1,808
 
 
 
Provision for doubtful accounts
 
 
(2,802
)
 
(5,514
)
 
2,024
 
 
 
Minority interest
 
 
(572
)
 
—
 
 
—
 
 
 
Gain on sale of property and equipment
 
 
(179
)
 
(46
)
 
(167
)
 
 
Gain on sale of investments
 
 
(51
)
 
(387
)
 
(1,233
)
 
 
Other charges, net
 
 
(1,387
)
 
—
 
 
—
 
 
 
Non-cash restructuring charges
 
 
—
 
 
1,847
 
 
825
 
 
 
Impairment of long-term investments
 
 
—
 
 
—
 
 
2,000
 
 
 
Gain on sale of business unit
 
 
—
 
 
—
 
 
(4,302
)
 
 
Income tax benefit from stock options
 
 
445
 
 
284
 
 
259
 
 
 
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
 
 
 
 
 
 
 
 
 
 
Decrease in accounts receivable
 
 
22,197
 
 
49,888
 
 
41,691
 
 
 
 
Increase in prepaid expenses and other assets
 
 
(866
)
 
(4,900
)
 
(1,065
)
 
 
 
(Decrease) increase in accounts payable, accrued expenses, unearned income, and other liabilities
 
 
(16,839
)
 
(5,789
)
 
758
 
 
 
 
Increase (decrease) in income taxes payable
 
 
2,613
 
 
(4,695
)
 
(2,916
)
 
 
 
 
 
 
Net cash provided by operating activities
 
 
77,572
 
 
62,525
 
 
83,182
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Purchase of investments
 
 
(144,218
)
 
(27,859
)
 
(104,591
)
 
Sale and maturities of investments
 
 
18,082
 
 
69,788
 
 
102,340
 
 
Purchase of property and equipment
 
 
(15,336
)
 
(13,656
)
 
(7,609
)
 
Restricted cash
 
 
(1,436
)
 
—
 
 
—
 
 
Proceeds from the sale of property and equipment
 
 
1,113
 
 
410
 
 
419
 
 
Proceeds from sale of business unit
 
 
—
 
 
—
 
 
16,087
 
 
Payments for current year acquisitions, net of cash acquired
 
 
(7,504
)
 
(63,236
)
 
(7,148
)
 
Payments for prior years acquisitions
 
 
(903
)
 
(184
)
 
(1,266
)
 
 
 
 
 
 
Net cash used for investing activities
 
 
(150,202
)
 
(34,737
)
 
(1,768
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Proceeds from issuance of convertible debentures
 
 
150,000
 
 
—
 
 
—
 
 
Payments on acquired debt
 
 
—
 
 
—
 
 
(65,938
)
 
Debt issuance costs
 
 
(4,364
)
 
—
 
 
—
 
 
Payments under long-term debt, net
 
 
(100
)
 
—
 
 
(5,006
)
 
Principal payments under capital lease obligations
 
 
(847
)
 
(1,227
)
 
(1,303
)
 
Proceeds from issuance of common stock
 
 
4,444
 
 
6,330
 
 
6,293
 
 
Repurchase of common stock
 
 
(66,696
)
 
(54,092
)
 
(4,045
)
 
 
 
 
 
 
Net cash provided by (used for) financing activities
 
 
82,437
 
 
(48,989
)
 
(69,999
)
 
 
 
 
 
 
Effect of exchange rate changes on cash
 
 
546
 
 
2,028
 
 
358
 
 
Net increase (decrease) in cash and cash equivalents
 
 
10,353
 
 
(19,173
)
 
11,773
 
Cash and cash equivalents at beginning of year
 
 
46,383
 
 
65,556
 
 
53,783
 
 
 
 
 
 
Cash and cash equivalents at end of year
 
$
56,736
 
$
46,383
 
$
65,556
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
Income taxes paid
 
$
4,219
 
$
16,511
 
$
14,922
 
 
 
 
 
 
 
Interest paid
 
$
1,598
 
$
209
 
$
221
 
 
 
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.


                                       29

41

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 2002 and 2001 financial statements to conform to the current year2003 presentation. FISCAL YEAR: The Company records activity in quarterly accounting periods of
equal length basedSuch reclassifications have no effect on a monthly schedule 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 references 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.previously reported net income or stockholders' equity.
        NATURE OF OPERATIONS: Keane provides    We are a leading provider of Information Technology (IT)("IT") and business
consulting services. The Company divides its business into three main lines:
Business Consulting services. In business since 1965, our mission is to help clients improve business and IT effectiveness through outsourcing services. We provide three synergistic service offerings: Plan services, which include Business Consulting, Build services, which include Application Development and Integration (ADI)("AD&I"), and Manage services, which include Application Outsourcing and Business Process Outsourcing ("BPO"). We optimize clients' internal processes through BPO services through Worldzen, Inc. ("Worldzen"), our majority owned subsidiary.
        We deliver our IT services through an integrated network of local branch offices in North America and the UK, and through Advanced Development Centers ("ADCs") in the U.S., Canada, and Management Outsourcing.

Keane'sIndia. This global delivery model enables us to provide our services to customers onsite, at our nearshore facilities in Canada, and through our offshore development centers in India. Our branch offices are supported by centralized Strategic Practices and Quality Assurance Groups.
        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 Advanced Development Centersquantitative criteria established by Statement of Financial Accounting Standards ("ADC"SFAS") in the United
States, CanadaNo. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and India. This delivery structure allows the Company to provide
clients with world-class capabilities representing the organizational experienceRelated 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 Plan, Build and best practices of the entire Company on a responsive and cost-effective
local level.Manage services.
        REVENUE RECOGNITION: The Company provides business innovation consulting and
system design, implementation, and support services under fixed price and    Revenue on time and materials contracts. For fixed price contracts revenue is recorded on the
basis of the estimated percentage of completion of services rendered. Losses, if
any, on fixed price contracts are recognized when the loss is determined. For
time and materials contracts, revenue is recorded at contractually agreed upon ratesrates. For these types of contracts, revenue is recognized as the costsservices are incurred. Revenuesperformed. 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 fixed-price contracts, revenue is recognized 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 cost or scope or do not manage our projects properly within the expected period of the project, future revenues may be negatively impacted. Adjustments to revenue are recorded in the period of which the over/under estimate is detected. Our management regularly reviews profitability and underlying estimates for fixed-price contracts. Losses, if any, on fixed-price contracts are recorded in the period in which the loss is identified.
42

        Revenue associated with application software application salesproducts is recognized as the software products are installed and as implementation services are delivered. Software maintenance fees on installed products are recognized on thea pro-rated basis of customer acceptance over the periodterm of software
implementation.the agreement.
        For the majority of outsourcing engagements, we provide a specific level of service each month for which we bill a standard monthly amount. Revenue for these engagements can be recognized in monthly installments over the billable portion of the contract or on a time and materials basis. Installment amounts may be adjusted to reflect changes in staffing requirements or service level agreements. Costs of transitioning the employees and ensuring we meet required service level agreements may be capitalized over defined periods of time.
        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 charge-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 torecorded in accumulated other comprehensive loss, a separate component of Stockholders' equity in the translation adjustment account included as part of stockholders'
equity.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, 20012003 included investments in money market funds of $14.9 million. Cash equivalents at December 31, 2002 included investments in commercial paper ($15.0
million)totaling $24.5 million and money market funds ($33.8 million). Cash equivalents at December
31, 2000 included investments in commercial paper ($33.3 million) and money
market funds ($10.6 million).


                                       30

totaling $12.8 million.
        RESTRICTED CASH:    Restricted cash represents amounts deposited to secure letters of credit for certain foreign capital purchases.
        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, 2003, 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 $158.1 million compared to the company's debt obligations
approximates their carrying value.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
43

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 tax-exempt municipal bonds with at least a separate componentsingle A rating by Moody's grading service. In addition, we invest in U.S. government obligations 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, 2001,2003 and 2002, our marketable securities reflect net unrealized gains of $0.6 million and $0.3 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 Statement of Position ("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
44

straight-line basis over three years and totaled approximately $0.4 million, $0.4 million, and $0 for the years ended December 31, 2003, 2002, and 2001, respectively. As of December 31, 2003 and 2002, the unamortized software development costs were approximately $1.8 million and $1.5 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 at fair value.to 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, it was determined that there was no impairment as of that date. Subsequently, during the Fourth Quarter of 2002 and 2003, we completed our annual impairment review based on September 30, 2002 and 2003 balances and determined that there was no impairment as of those dates. 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, 2003, we reported total intangibles of customer lists and other intangibles of $71.0 million and $86.8 million, respectively. Intangibles are amortized on a straight-line basis over 15 years for goodwill and 3three to 15 yearsyears.
        We periodically review our identifiable intangible assets for other
intangibles. At each reporting date, management assesses whether there has been
a permanent impairment in accordance with SFAS No. 144 ("SFAS 144"), "Accounting for the valueImpairment or Disposal of its long-term assets and the amount of
such impairment by comparing anticipated undiscountedLong-Lived Assets." In determining whether an intangible asset is impaired, we must make assumptions regarding estimated future cash flows from acquired business units with the carryingasset, intended use of the asset, and other related factors. If the estimates or the related assumptions used to determine the value of the related goodwill. The
factors consideredintangible assets change, we may be required to record impairment charges for these assets.
        INCOME TAXES:    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 also requires that deferred tax assets be reduced by management in performing this assessment include current
operating results, trends and prospects, as well asa valuation allowance if it is more likely than not that some portion or all of 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.adjustments, and adjustments related to a foreign defined benefit plan. At December 31, 2001,2003, accumulated other comprehensive incomeloss was comprised of foreign currency translation adjustment of $2.5$1.8 million, and securities valuation adjustment of $0.3 million, net of tax, and defined benefit plan adjustment of ($.5)3.5) million, net of tax. At December 31, 2000,2002, accumulated other comprehensive incomeloss was comprised of foreign
45

currency translation adjustment of $3.9($0.4) million,
and securities valuation adjustment of $.7$0.2 million, net of tax, and defined benefit plan adjustment of ($1.2) million, net of tax.
        STOCK-BASED COMPENSATION: The Company    We have stock-based compensation plans which are described in detail in Note 13 "BENEFIT PLANS." We apply the provisions of Accounting Principles Board ("APB") Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," to our stock-based compensation and accordingly, 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 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 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.
        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 than for restricted stock and certain stock options.
        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, our net income and earnings per share for the years ended December 31, 2003, 2002, and 2001 would have been reduced to the pro forma amounts indicated below (in thousands, except per share data):
Years ended December 31,

 
2003
 
2002
 
2001
 
Net income—as reported
 
$
29,222
 
$
8,181
 
$
17,387
 
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects
 
 
164
 
 
28
 
 
—
 
Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of tax effects
 
 
(4,739
)
 
(11,289
)
 
(10,314
)
 
 
 
 
 
Net income (loss)—pro forma
 
$
24,647
 
$
(3,080
)
$
7,073
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
 
 
 
Basic—as reported
 
$
0.44
 
$
0.11
 
$
0.25
 
Basic—pro forma
 
 
0.37
 
 
(0.04
)
 
0.10
 
Diluted—as reported
 
 
0.44
 
 
0.11
 
 
0.25
 
Diluted—pro forma
 
 
0.37
 
 
(0.04
)
 
0.10
 
46
        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.
        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
RECENT ACCOUNTING PRONOUNCEMENTS
        In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of end-to-end business solutions, suchVariable Interest Entities," which requires the consolidation of a variable interest entity, as Business
Consulting (Plan), Application Development and Integration (Build), and
Application Development and Management Outsourcing (Manage). Approximately 93%,
94% and 96%defined, by its primary beneficiary. Primary beneficiaries are those companies that are subject to a majority of the Company's revenue was derived from these offeringsrisk 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 the
years endedall variable interests obtained subsequent to December 31, 2001, 20002002. For variable interests existing prior to December 31, 2002, consolidation is 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 of 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 Limited Partnership ("City Square") and 1999, respectively.

RECENT ACCOUNTING PRONOUNCEMENTSGateway Developers LLC ("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 June 1998,April 2003, the Financial Accounting
StandardsFASB issued SFAS No. 149 ("SFAS 149"), "Amendment of Statement of Financial Accounting Standards133 on Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133 (FAS 133)("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." which required
adoption in periods beginningThis statement is effective for contracts entered into or modified after June 15, 1999. FAS 133 was subsequently
amended by Statement30, 2003. Adoption of Financial Accounting Standards No. 137, " Accounting for
Derivative Instruments and Hedging Activities- Deferral of the Effective Date of
FASB Statement No. 133" and will now be 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 138
in the first quarter of 2001, and FAS133 hasthis statement did not hadhave a significant impacteffect on itsour consolidated financial position or results of operations.
        In July 2001,November 2002 and May 2003, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance and criteria for determining when a multiple deliverable arrangement contains more than one unit of accounting. The guidance also addresses methods of measuring and allocating arrangement consideration to separate units of accounting. The guidance is effective for revenue
47

arrangements entered into after June 15, 2003. Adoption of this statement did not have a significant effect on our consolidated financial position or results of operations because we do not engage in hedging transactions.
        In May 2003, the FASB issued FASSFAS No. 141, "Business Combinations"150 ("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003. Adoption of this statement did not have a significant effect on our consolidated financial position or results of operations.
        In May 2003, the EITF reached a consensus on Issue No. 01-08, "Determining Whether an Arrangement Contains a Lease." EITF Issue No. 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 Issue No. 01-08 is based on whether the arrangement conveys to the purchaser (lessee) the right to use a specific asset. The EITF Issue No. 01-08 will be effective for arrangements entered into or modified in the Second Quarter of fiscal 2004. Presently, we intend to adopt this statement prospectively and do not anticipate adoption of this statement to 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 Postretirement 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 FASSFAS No. 142, "Goodwill106, "Employer's Accounting for Postretirement Benefits Other than Pensions." SFAS 132 as revised requires additional disclosures about the assets, obligations, cash flows, and Other Intangible Assets." FAS 141 eliminates the
pooling-of-interests methodnet periodic benefit cost 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 ofdefined benefit pension plans and other postretirement plans. This Statement 141 areis effective for any business
combination thatfinancial statements with fiscal years ending after December 15, 2003, except the additional disclosure information about foreign plans is initiatedeffective for fiscal years ending after June 30, 2001.15, 2004. We have a foreign defined benefit plan and as a result, will include the required additional disclosures as of December 31, 2004.
        In December 2003, the Securities and Exchange Commission ("SEC") published Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." This SAB updates the SEC staff's prior guidance provided in SAB No. 101, "Revenue Recognition," removes material no longer necessary, and conforms the interpretive material retained with current authoritative accounting and auditing guidance and SEC rules and regulations, including EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." Adoption of this accounting guidance did not impact our consolidated financial statements.
48
2. MARKETABLE SECURITIES
        The following is a summary of our available-for-sale securities (dollars in thousands):
 
 
 
 
Gross unrealized
 
 
 
 
Cost
 
Gains
 
Losses
 
Fair value
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
 
 
 
 
 
As of December 31, 2002
 
 
 
 
 
 
 
 
 
 
 
 
United States Government obligations
 
$
2,827
 
$
103
 
$
(1
)
$
2,929
Corporate bonds
 
 
2,251
 
 
39
 
 
(17
)
 
2,273
Municipal bonds
 
 
16,489
 
 
181
 
 
—
 
 
16,670
 
 
 
 
 
Total
 
$
21,567
 
$
323
 
$
(18
)
$
21,872
 
 
 
 
 
        The following is a summary of the cost and fair value of current available-for-sale marketable securities at December 31, 2003, by contractual maturity (dollars in thousands):
 
 
Cost
 
Fair value
Due in one year or less
 
$
11,022
 
$
11,055
Due after one year through three years
 
 
86,304
 
 
86,671
Due after three years
 
 
49,913
 
 
50,088
 
 
 
 
 
$
147,239
 
$
147,814
 
 
 
        Proceeds from the sale and maturity of available-for-sale securities were approximately $18.1 million with $69,000 realized gains and $18,000 realized losses, $69.8 million, with $0.8 million realized gains and $0.4 million realized losses, and $102.3 million with $1.2 million realized as net gains, for the years ended December 31, 2003, 2002, and 2001, respectively.
        At December 31, 2003, we held available-for-sale securities with an aggregate fair value of approximately $30.9 million that had aggregate gross unrealized losses of approximately $0.2 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.
49

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

 
2003
 
2002
 
Billed
 
$
92,484
 
$
103,820
 
Unbilled
 
 
22,779
 
 
33,491
 
Allowance for doubtful accounts
 
 
(5,077
)
 
(7,879
)
 
 
 
 
Total
 
$
110,186
 
$
129,432
 
 
 
 
 
        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,

 
2003
 
2002
 
2001
 
Beginning of year balance
 
$
7,879
 
$
13,014
 
$
10,990
 
(Recoveries)/Provision, net
 
 
(1,147
)
 
1,893
 
 
10,258
 
Write-offs
 
 
(1,655
)
 
(7,028
)
 
(8,234
)
 
 
 
 
 
End of year balance
 
$
5,077
 
$
7,879
 
$
13,014
 
 
 
 
 
 
4. PROPERTY AND EQUIPMENT
        Property and equipment consists of the following (dollars in thousands):
As of December 31,

 
2003
 
2002
 
Buildings and improvements
 
$
47,022
 
$
6,768
 
Office equipment
 
 
15,510
 
 
15,309
 
Computer equipment and software
 
 
68,917
 
 
70,297
 
Leasehold improvements
 
 
12,167
 
 
12,198
 
 
 
 
 
 
 
 
143,616
 
 
104,572
 
Less accumulated depreciation and amortization
 
 
(68,185
)
 
(73,411
)
 
 
 
 
Total
 
$
75,431
 
$
31,161
 
 
 
 
 
        Depreciation expense, including amortization of assets under capital leases, was $11.2 million, $11.1 million, and $11.7 million, for the years ended 2003, 2002, and 2001, respectively. Computer equipment and software includes assets arising from capital lease obligations at a cost of $2.7 million and $3.1 million, with accumulated amortization totaling $2.3 million and $1.8 million as of December 31, 2003 and 2002, respectively.
        In 2002, we began capitalizing the costs 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 2003 and 2002, we capitalized approximately $4.3 million and $4.1 million, respectively, which consists primarily of internal and external labor costs. As of December 31, 2003 and 2002, these unamortized capitalized costs related to the implementation of our PeopleSoft Enterprise Resource Planning applications were approximately $8.4 million and $4.1 million, respectively.
50

        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. 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 for Long-lived Assets to Be Disposed Of," and provides a single accounting model for long-lived assets to be disposed of. Adoption of this statement did not have a material effect on our results of operations for the year ended December 31, 2002 or December 31, 2003.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
        Effective January 1, 2002, we adopted SFAS 142. Under FASSFAS 142, goodwill and indefinite lived intangible assets are no longer amortized, but are reviewed annually (or more frequently if impairment indictorsindicators 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 StatementSFAS 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 arewere required to adopt StatementSFAS 142 in their first fiscal year beginning after December 15, 2001. Because of the different transition dates for goodwill and intangible assets acquired on or before June 30, 2001 and those acquired after that date, pre-existing goodwill and intangibles will bewere amortized during thisthe transition period until adoption, whereas new goodwill and indefinite lived intangible assets acquired after June 30, 2001 willwere not. The
Company is currently in the process of evaluating the aggregate impact all
provisions of FAS
51

GOODWILL AND OTHER INTANGIBLE ASSETS—ADOPTION OF SFAS 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 summarytable presents the reconciliation 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 fromreported net income to the sale of availableadjusted net income (dollars in thousands, except per share amounts):
Years ended December 31,

 
2003
 
2002
 
2001
Reported net income
 
$
29,222
 
$
8,181
 
$
17,387
Goodwill amortization
 
 
—
 
 
—
 
 
3,177
Closing costs amortization
 
 
—
 
 
—
 
 
43
Employee value amortization
 
 
—
 
 
—
 
 
1,165
 
 
 
 
 
Adjusted net income
 
$
29,222
 
$
8,181
 
$
21,772
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
Reported net income
 
$
0.44
 
$
0.11
 
$
0.25
 
Goodwill amortization
 
 
—
 
 
—
 
 
0.05
 
Closing costs amortization
 
 
—
 
 
—
 
 
—
 
Employee value amortization
 
 
—
 
 
—
 
 
0.02
 
 
 
 
 
Adjusted net income per share
 
$
0.44
 
$
0.11
 
$
0.32
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
Reported net income
 
$
0.44
 
$
0.11
 
$
0.25
 
Goodwill amortization
 
 
—
 
 
—
 
 
0.05
 
Closing costs amortization
 
 
—
 
 
—
 
 
—
 
Employee value amortization
 
 
—
 
 
—
 
 
0.02
 
 
 
 
 
Adjusted net income per share
 
$
0.44
 
$
0.11
 
$
0.32
 
 
 
 
Intangible assets (dollars in thousands):
 
Cost
 
Accumulated
Amortization
 
Net Book Value
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
 
 
 
 
As of December 31, 2002
 
 
 
 
 
 
 
 
 
Customer lists
 
$
81,532
 
$
(12,339
)
$
69,193
Contracts
 
 
29,250
 
 
(19,158
)
 
10,092
Non-compete agreements
 
 
7,524
 
 
(4,601
)
 
2,923
Technology
 
 
7,775
 
 
(3,177
)
 
4,598
 
 
 
 
Total
 
$
126,081
 
$
(39,275
)
$
86,806
 
 
 
 
        Amortization expense 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, 20002003, 2002, and 1999.

C. ACCOUNTS RECEIVABLE

Accounts receivable consists2001 was approximately $15.8 million, $16.4 million, and $14.5 million, respectively. Future estimated amortization expense is
52

$15.4 million, $14.5 million, $14.2 million, $12.2 million, and $11.2 million for the years ended December 31, 2004, 2005, 2006, 2007, and 2008, respectively.
        The following table presents the change in the carrying amount of goodwill (dollars in thousands):
Balance as of January 1, 2003
 
$
277,435
 
Goodwill acquired during the year
 
 
13,840
 
Currency translation adjustment effect
 
 
1,884
 
Adjustments to prior year goodwill balances
 
 
(235
)
 
 
 
Balance as of December 31, 2003
 
$
292,924
 
 
 
 
6. BUSINESS ACQUISITIONS
Worldzen, Inc.
        On October 17, 2003, we acquired a controlling interest in 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 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 following:transaction, we own approximately 62% of Worldzen's outstanding capital stock. The former majority shareholders of Worldzen Holdings Limited contributed their Worldzen Holdings Limited shares to Worldzen in exchange for approximately 38% of Worldzen's outstanding capital stock and are currently members of Worldzen's management. The asset and liabilities contributed to Worldzen were recorded in relation to each shareholder's ownership percentage in Worldzen as follows: (i) carryover basis related to assets and liabilities contributed to 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 accompanying 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 Worldzen at different times ("call options"). Our first call option is exercisable beginning on January 1, 2006 and ending on December 31, 2001             2000
                                                          ----             ----
Billed                                               $ 144,896        $ 141,533
Unbilled                                                28,290           34,163
Allowance2006 and is based on a stated value for doubtful accounts                        (13,014)         (10,990)
                                                     ---------        ---------
                                                     $ 160,172        $ 164,706
                                                     =========        =========

Accounts receivablethe underlying shares of $6.5 million. The fair value of this first call option, using a Black-Scholes valuation model, is presented net of doubtful accounts. The activityapproximately $3.8 million and is included in other assets in the allowance accountaccompanying consolidated balance sheet. 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 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,
53

using a Black-Scholes valuation model, was approximately $279,000 at the acquisition date and will be reflected 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 Worldzen employees approximately 720,000 stock options to purchase the shares 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, Worldzen will recognize compensation expense over the vesting period through December 31, 2009.
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 Issue No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination," these costs have been reflected in the purchase price of the acquisition.
54

        The components of the purchase price allocation is as follows:

                                                 December 31,
                                              2001           2000          1999
                                              ----           ----          ----
Beginning of yearfollows (dollars in thousands):
Consideration and merger costs:
 
December 31,
2002
 
2003
Adjustments
 
December 31,
2003
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,
2003
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 $ 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)
                                          --------       --------       -------
End of year balance                       $ 13,014       $ 10,990       $ 7,904
                                          ========       ========       =======


                                       33



D. PROPERTY AND EQUIPMENT

Property and equipment consistsheet disclosing the amounts assigned to each of the following:

                                                               December 31,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,
2003
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
 
 
 
 
Metro Information Services, Inc.
        On November 30, 2001, 2000
                                                           ----             ----
Buildingswe completed the acquisition of Metro Information Services, Inc. ("Metro"), a provider of IT consulting and improvements                              $ 2,599          $   772
Office equipment                                         52,537           71,316
Computer equipmentcustom software development services and software                          12,019           15,316
Leasehold improvements                                   10,753            9,885
Constructionsolutions. The merger was completed by exchanging all of the common stock of Metro for 7.4 million shares of our common stock. Each share of Metro was exchanged for 0.48 of one share of our common stock. In addition, outstanding Metro stock options were converted at the same ratio into options to purchase 571,058 shares of our common stock.
55

        We accounted for the acquisition as a purchase, pursuant to which the assets and liabilities of Metro, including identifiable intangible assets, were recorded at their respective fair values. All identifiable intangible assets will be amortized over their estimated useful life with the exception of goodwill. The financial position, results of operations, and cash flows of Metro were included in progress                                 13,000               --
                                                        -------          -------
                                                         90,907           97,289
Less accumulated depreciationour financial statements effective as of the merger date.
        The total cost of the merger was $164.5 million. Portions of the purchase price, including intangible assets, were identified by independent appraisers utilizing proven valuation procedures and amortization           57,206           73,157
                                                        -------          -------
                                                        $33,701          $24,132
                                                        =======          =======

Depreciation expense totaled $11.7 million, $16.2techniques. Initial goodwill was recorded at $154.3 million and $22.4other identified intangible assets were valued at $46.1 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 $11.0 million in 2001 related to the lease obligation and certain other costs for those facilities. In accordance with EITF Issue No. 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. 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.
        The components of the purchase price allocation as of date of merger with 2002 adjustments is as follows (dollars in thousands):
Consideration and merger costs:
 
November 30,
2001
 
2002
Adjustments
 
December 31,
2003
 
Value of stock issued
 
$
130,796
 
$
—
 
$
130,796
 
Fair value of options exchanged
 
 
4,754
 
 
—
 
 
4,754
 
Transaction costs
 
 
7,786
 
 
258
 
 
8,044
 
Restructuring
 
 
10,972
 
 
3,052
 
 
14,024
 
Deferred tax liability
 
 
8,141
 
 
—
 
 
8,141
 
Deferred tax asset
 
 
—
 
 
(1,249
)
 
(1,249
)
 
 
 
 
 
Total
 
$
162,449
 
$
2,061
 
$
164,510
 
 
 
 
 
 
Allocation of purchase price:
 
November 30,
2001
 
2002
Adjustments
 
December 31,
2003
 
Net liabilities assumed
 
$
(37,984
)
$
(1,034
)
$
(39,018
)
Customer lists (seven-year life)
 
 
45,200
 
 
—
 
 
45,200
 
Non-compete agreements (three-year life)
 
 
900
 
 
—
 
 
900
 
Goodwill
 
 
154,333
 
 
3,095
 
 
157,428
 
 
 
 
 
 
Total
 
$
162,449
 
$
2,061
 
$
164,510
 
 
 
 
 
 
56
        The following table presents the condensed balance sheet disclosing the amounts assigned to each of the major assets acquired and liabilities assumed of Metro as of the date of the acquisition and adjustments (dollars in thousands):
Condensed balance sheet:
 
November 30,
2001
 
2002 Adjustments
 
December 31,
2003
 
Cash
 
$
622
 
$
—
 
$
622
 
Accounts receivable
 
 
40,820
 
 
141
 
 
40,961
 
Other current assets
 
 
1,004
 
 
—
 
 
1,004
 
Property and equipment, net
 
 
2,780
 
 
(401
)
 
2,379
 
 
 
 
 
 
Total assets
 
 
45,226
 
 
(260
)
 
44,966
 
Accounts payable
 
 
3,583
 
 
13
 
 
3,596
 
Accrued compensation
 
 
9,800
 
 
65
 
 
9,865
 
Other liabilities
 
 
3,889
 
 
696
 
 
4,585
 
Note payable
 
 
65,938
 
 
—
 
 
65,938
 
 
 
 
 
 
Net liabilities
 
$
(37,984
)
$
(1,034
)
$
(39,018
)
 
 
 
 
 
        The unaudited pro forma combined condensed statements of income below present our historical statements and our acquisitions of Metro on November 30, 2001 and SignalTree Solutions on March 15, 2002 as if the purchases had occurred at January 1, 2001. 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):
 
 
2003
 
2002
 
2001
Revenues
 
$
804,976
 
$
883,412
 
$
1,070,451
Net income
 
 
29,222
 
 
8,910
 
 
16,013
Basic earnings per share
 
 
0.44
 
 
0.12
 
 
0.23
Diluted earnings per share
 
 
0.44
 
 
0.12
 
 
0.23
        In addition to the Worldzen, SignalTree Solutions, and Metro acquisitions, we completed an acquisition of a business complementary to our business strategy during the Third Quarter of 2002. We did not complete any acquisitions other than Metro during 2001. The merger and consideration costs of this acquisition, which was accounted for using the purchase method of accounting, totaled $13.4 million in 2002. The purchase price included contingent consideration based upon operating performance of the acquired business. As of December 31, 2002, in connection with this acquisition, we had recorded a contingent liability of approximately $0.9 million related to certain earn-out considerations. The $0.9 million was paid out during the First Quarter of 2003. During 2001, we paid an additional $1.2 million related to earn-outs of an acquisition in 2000 and 1999, respectively. Computer equipmenthave recorded this amount as additional purchase price.
        The results of operations of this acquired company have been included in our 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 software includes
assets arisinggoodwill and the intangibles
57

are being amortized on a straight-line basis over periods ranging from capital lease obligations at a costthree to 15 years. Pro forma results of $.6 million with
accumulated amortization totaling $.3 million at December 31, 2001.

E.operations for this acquisition have not been provided.
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,

 
2003
 
2002
Accrued employee benefits
 
$
6,516
 
$
6,728
Accrued pension liability
 
 
5,384
 
 
2,302
Accrued deferred compensation
 
 
5,559
 
 
3,460
Other
 
 
16,227
 
 
22,427
 
 
 
 
 
$
33,686
 
$
34,917
 
 
 
        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 has a one-year term with a one-year extension expiring on September 25, 2004. Additionally, during the former
owners.Third Quarter of 2002, we acquired an existing $100,000 non-interest bearing note payable in connection with employment credits. During 2003, we reduced the yearnote payable balance by $1.0 million as a result of delivering related service credits and we had paid the $100,000 note for a remaining balance of $2.0 million as of December 31, 2003. During 2001, the Companywe paid the remaining balance of a $4.0 million note related to a previous acquisition.
9. CONVERTIBLE SUBORDINATED DEBENTURES
        In June 2003, we issued in a private placement $150.0 million principal amount of 2.0% Convertible Subordinated Debentures due 2013 ("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.
        Debt issuance costs were approximately $4.4 million and are included in other assets in the accompanying consolidated balance sheets. These costs are being amortized to interest expense over five years on a straight-line basis. The unamortized debt issuance costs were $3.9 million as of December 31, 2003.
10. RESTRUCTURING CHARGES
Workforce reductions
        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, 2003, we had completed 25 and 27 terminations related to the reductions in force for our business consulting arm and one of our North America branches, respectively. Cash expenditures in 2003 related to the current year severance and retention restructuring accruals were $1.1 million. The remaining balance of $0.2 million severance and retention costs are expected to be paid during the First and Second Quarters of 2004.
        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
59

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. Cash expenditures in 2003 related to prior year workforce reductions were $1.8 million. As of December 31, 2003 we had a remaining balance of approximately $23,000 related to the 2002 workforce reduction, which we anticipate will be fully paid in the First Quarter of 2004.
Branch office closures
        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, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)," we have 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. Cash expenditures in 2003 related to branch office closings were $9.0 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.
60

        A summary of restructuring activity during the years 2003, 2002, and 2001, 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 2001
 
$
1,405
 
$
4,927
 
$
—
 
$
6,332
 
 
 
 
 
 
 
 
Charges in fiscal 2001
 
 
4,417
 
 
3,957
 
 
825
 
 
9,199
 
 
Change in prior year's estimate
 
 
—
 
 
1,159
 
 
—
 
 
1,159
 
 
Cash expenditures in fiscal 2001
 
 
(2,620
)
 
(2,494
)
 
—
 
 
(5,114
)
 
Acquisition related charge in fiscal 2001
 
 
7,226
 
 
3,746
 
 
—
 
 
10,972
 
 
Fixed asset impairment charges in fiscal 2001
 
 
—
 
 
—
 
 
(825
)
 
(825
)
 
 
 
 
 
 
Beginning balance in fiscal 2002
 
 
10,428
 
 
11,295
 
 
—
 
 
21,723
 
 
Charges in fiscal 2002
 
 
3,192
 
 
12,060
 
 
1,847
 
 
17,099
 
 
Change in prior year's estimate
 
 
(251
)
 
756
 
 
—
 
 
505
 
 
Cash expenditures in fiscal 2002
 
 
(10,177
)
 
(6,318
)
 
—
 
 
(16,495
)
 
Acquisition related charge in fiscal 2002
 
 
93
 
 
2,136
 
 
187
 
 
2,040
 
 
Acquisition related charges to increase prior year estimate
 
 
—
 
 
3,021
 
 
—
 
 
3,397
 
 
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
)
 
 
 
 
 
 
Balance as of December 31, 2003
 
$
237
 
$
13,783
 
$
—
 
$
14,020
 
 
 
 
 
 
 
        As of December 31, 2003, the balance in the branch office closures reserve consisted of amounts for properties identified in 2003, 2002, 2001, 2000, and 1999 in the amounts of $0.9 million, $9.9 million, $2.3 million, $0.5 million, and $0.2 million, respectively.
11. CAPITAL STOCK The Company has(See Note 17 "SUBSEQUENT EVENTS" for further discussion)
        We have three classes of stock: Preferred Stock, Common Stockpreferred stock, common 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 Stockcommon stock generally vote together with holders of Common Stockcommon 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 Stockcommon stock and Class B Common Stockcommon stock have equal liquidation and dividend rights except that any regular quarterly dividend declared shall be $.05 per share less for holders of Class B Common
Stock.common stock. Class B Common Stockcommon stock is nontransferable, except under certain conditions, but may be converted into Common Stockcommon stock on a share-for-share basis at any time. Conversions to common stock totaled 221five shares and 191287 shares in 20002003 and 1999,2002, respectively. There were no conversions during 2001. Shares
61

        For the period January 1, 2001 through December 31, 2003, our Board of Directors authorized us to repurchase up to 15.6 million shares of our common stock. A summary of repurchase activity for 2003, 2002, and 2001 is as follows (dollars in thousands):
 
 
2003
 
2002
 
2001
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
Prior year authorizations at beginning of year
 
3,676,400
 
 
 
 
1,542,800
 
 
 
 
869,000
 
 
 
Authorizations
 
6,000,000
 
 
 
 
8,632,200
 
 
 
 
1,000,000
 
 
 
Repurchases
 
(6,495,200
)
$
66,696
 
(6,498,600
)
$
54,092
 
(326,200
)
$
4,045
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares remaining as of December 31,
 
3,181,200
 
 
 
 
3,676,400
 
 
 
 
1,542,800
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
        Between May 1999 and December 31, 2003, we have invested approximately $229.7 million to repurchase 18.5 million shares of our common stock under nine separate authorizations.
12. EARNINGS PER SHARE
        A summary of our calculation of earnings per share is as follows (in thousands, except per share data):
Years Ended December 31,

 
2003
 
2002
 
2001
Net income used for basic and diluted earnings per share
 
$
29,222
 
$
8,181
 
$
17,387
 
 
 
 
Weighted average number of common shares outstanding used in calculation of basic earnings per share
 
 
65,771
 
 
74,018
 
 
68,474
Incremental shares from restricted stock, employee stock purchase plan, and the assumed exercise of dilutive stock options
 
 
652
 
 
388
 
 
922
 
 
 
 
Weighted average number of common shares and common share equivalents outstanding used in calculation of diluted earnings per share
 
 
66,423
 
 
74,406
 
 
69,396
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
 
 
Basic
 
$
0.44
 
$
0.11
 
$
0.25
 
 
 
 
Diluted
 
$
0.44
 
$
0.11
 
$
0.25
 
 
 
 
        Potential common shares excluded from the computation of diluted earnings per share were approximately 1,453,000, 2,374,000, and 2,348,000 for the years ended December 31, 2003, 2002, and 2001, respectively, as their effect would have been anti-dilutive.
        Our Debentures are convertible at the option of the holder into shares of our common stock at an initial conversion rate of 54.4989 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 during any fiscal quarter commencing after September 30, 2003 when, among other circumstances, the closing price 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. The total amount of shares issuable upon the conversion of the Debentures is approximately 8.2 million.
62
        For the year ended December 31, 2001.

H.2003, the 8.2 million shares issuable upon the conversion of the Debentures were not included in the computation of diluted earnings per share because, in accordance with their terms, the Debentures had not yet become convertible.
13. BENEFIT PLANS
        STOCK OPTION PLANS: The Company has four    On December 31, 2002, the FASB issued SFAS 148. SFAS 148 provides three transition methods for entities electing to adopt the fair value recognition provisions of SFAS 123 for stock-based compensation plans, which
are described below. The Company adoptedemployee compensation. SFAS 148 also amends the disclosure provisions of SFAS 123 "Accounting for Stock-Based Compensation," and has continued to apply APB
Opinion 25 and related Interpretations inrequire prominent disclosure about the effects of an entity's accounting for its plans. Had
compensation cost for the Company'spolicy decisions with respect to stock-based compensation plans been
determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, the Company'sreported net income and earnings per share in annual and interim financial statements. The statement is effective for fiscal years ending after December 15, 2002. Currently, we have not elected to transition from the years ended December 31, 2001, 2000intrinsic value method prescribed by APB No. 25 and 1999 would have been reducedFIN 44 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 effectsfair value method prescribed by SFAS 148. In addition, we will continue to apply the disclosure provisions of applying SFAS 123 in this pro forma123. Accordingly, our adoption of disclosure areprovisions 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,

 
2003
 
2002
 
2001
 
Expected life (in years)
 
5.2
 
4.9
 
4.8
 
Expected stock price volatility
 
61
%
65
%
65
%
Risk-free interest rate
 
3.87
%
4.24
%
5.00
%
        The weighted-average fair value of options granted under the option plans during the years ended December 31, 2003, 2002, and 2001, 2000        1999
                                                 ------------------------------

Expected life (years)                               4.8         4.4         4.0
                                                    5.5
Expected stock price volatility                     65%         93%         96%
Risk-free interest rate                           5.00%       5.00%       5.27%was $4.90, $8.52, and $9.91, 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, 2003, there are 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 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.
63

        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 480 and 13,394 shares were exercised during 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 27,652 and 14,184 shares were no shares exercised underfrom this plan during December 2001.2003 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:
i.
all eligible and $14.39,
respectively.outstanding options issued under all of our stock option plans could be exchanged for new options at an exchange rate of four for every five surrendered;

ii.
the grant date of the new options would be the first business day that is at least six months and one day after the date of the expiration of the Offer; and

iii.
the exercise price of each new option would be the closing price of our common stock on the new grant date.
        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
64

$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 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, 2000
 
5,221,569
 
$
18.55
Granted
 
1,723,024
 
 
20.14
Exercised
 
(192,095
)
 
8.98
Canceled/expired
 
(475,328
)
 
20.13

Outstanding at December 31, 2001

 

6,277,170

 

 

19.20
Granted
 
689,342
 
 
13.43
Exercised
 
(145,734
)
 
13.08
Canceled/expired
 
(2,466,150
)
 
21.16

Outstanding at December 31, 2002

 

4,354,628

 

 

17.25
Granted
 
1,820,909
 
 
8.57
Exercised
 
(93,160
)
 
7.15
Canceled/expired
 
(1,429,389
)
 
21.65
 
 
 

Outstanding at December 31, 2003

 

4,652,988

 

$

12.42
 
 
 
        Shares available for future issuance under the Company'sour stock option plans at December 31, 20012003 are 9,219,291.9,742,363.
        The following table summarizes information about stock options 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

2003:
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  
 
7,671
 
4.90
 
$
3.69
 
7,671
 
$
3.69
  5.00–    7.50
 
64,561
 
6.50
 
 
6.58
 
17,254
 
 
5.85
  7.51–  11.27
 
3,061,129
 
6.70
 
 
8.97
 
257,135
 
 
8.71
11.28–  16.90
 
195,832
 
8.30
 
 
14.01
 
38,082
 
 
13.03
16.91–  25.35
 
1,165,584
 
3.20
 
 
18.54
 
702,207
 
 
19.19
25.36–  38.02
 
130,131
 
2.90
 
 
30.89
 
121,273
 
 
31.11
38.03–  57.03
 
9,360
 
4.40
 
 
45.90
 
9,360
 
 
45.90
57.04–58.34
 
18,720
 
4.30
 
 
57.58
 
18,720
 
 
57.58
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
4,652,988
 
 
 
 
 
 
1,171,702
 
 
 
 
 
 
 
 
 
 
 
 
 
 
        STOCK PURCHASE PLANS: The Company's    Our 1992 Employee Stock Purchase PlanESPP provides for the purchase of 4,550,000 shares of Common Stockcommon stock by qualifying employees at a purchase price of 85% of the market value of the stock on
65

the offering commencement date or the purchase date.date, whichever is lower. During 2001, 20002003, 2002, and 19992001, participants in this plan purchased 575,841, 384,209,484,020 shares, 378,333 shares, and 310,051575,841 shares, respectively. Shares available for future purchases totaled 1,963,931601,578 at December 31, 2001.2003.
        On February 13, 2003, our Board of Directors approved a new UK ESPP. We have allocated 500,000 shares of the total number of shares reserved under our 1992 ESPP for issuance under the UK ESPP. During 2003, participants in this plan purchased 4,310 shares. Shares available for future purchases as of December 31, 2003 totaled 495,690.
        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 2003, 2002, and 2001, 2000approximated $19.0 million, $16.8 million, and 1999 approximated $18.3 million, $11.2 million and $8.3 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 2003, 2002, and 2001, amounted to approximately $7.5 million, $8.4 million, and $4.5 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, 2003 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 to2002, approximately $4.5 million, $5.0$5.6 million and $5.1$3.5 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: The Company has    We have a defined benefit pension plan that provides pension benefits to employees of our subsidiary located in the Company's U.K. subsidiary.UK. Such benefits are available to employees who were active on August 4, 1998 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. Total pension expense for 2001, 2000,2003, 2002, and 19992001, was approximately $2.1 million, $1.3 million, and $1.2 million, $1.4respectively.
66

        The following tables summarize the benefit costs, the weighted average assumptions, as well as the benefit obligations, plan assets and funded status associated with our pension benefit plan (dollars in thousands):
Years ended December 31,

 
2003
 
2002
 
2001
 
Components of net periodic benefit cost:
 
 
 
 
 
 
 
 
 
 
Service cost—benefits earned during the period
 
$
1,424
 
$
1,518
 
$
1,604
 
Interest cost on projected benefit obligations
 
 
1,503
 
 
1,159
 
 
957
 
Expected return on plan assets
 
 
(1,269
)
 
(1,420
)
 
(1,397
)
Net amortization and deferral—amortization of unrecognized net loss/(gain)
 
 
482
 
 
92
 
 
(6
)
 
 
 
 
 
Total net periodic benefit cost
 
$
2,140
 
$
1,349
 
$
1,158
 
 
 
 
 
 
        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. As of December 31, 2003, we changed key employee 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 the expected rate of return on pension plan assets has been changed from 8.00% to 7.75% in 2003.
Years ended December 31,

 
2003
 
2002
 
Weighted average assumptions:
 
 
 
 
 
 
Discount rate at end of the year
 
5.50
%
5.75
%
 
Expected return on plan assets for the year
 
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
 
 
LPI pension increases
 
2.75
 
2.25
 
 
Statutory revaluation of benefits (GMP)**
 
3.50
 
3.50
 
*
Limited Price Indexation

**
(Guaranteed Minimum Pension)
67
As of December 31,

 
2003
 
2002
 
Change in projected benefit obligation:
 
 
 
 
 
 
 
Benefit obligation at beginning of year
 
$
21,277
 
$
16,780
 
 
Service cost
 
 
1,424
 
 
1,518
 
 
Interest cost
 
 
1,503
 
 
1,159
 
 
Employee contributions
 
 
228
 
 
301
 
 
Actuarial (gain) loss
 
 
3,839
 
 
1,942
 
 
Benefits paid
 
 
(79
)
 
(423
)
 
Prior service cost
 
 
178
 
 
—
 
 
Curtailment (gain) loss
 
 
(446
)
 
—
 
 
 
 
 
Benefit obligation at end of year
 
 
27,924
 
 
21,277
 
 
 
 
 
Change in plan assets:
 
 
 
 
 
 
 
Fair value of plan assets at beginning of year
 
 
12,182
 
 
15,546
 
 
Actual return on plan assets
 
 
3,421
 
 
(4,221
)
 
Employer contributions
 
 
805
 
 
979
 
 
Employee contributions
 
 
228
 
 
301
 
 
Benefits paid
 
 
(79
)
 
(423
)
 
 
 
 
Fair value of plan assets at end of year
 
 
16,557
 
 
12,182
 
 
 
 
 
Funded status
 
 
(11,367
)
 
(9,095
)
 
 
 
 
 
Unrecognized net actuarial (gain) loss
 
 
9,484
 
 
8,725
 
 
Unrecognized prior service cost
 
 
178
 
 
—
 
 
 
 
 
Accrued pension cost
 
$
(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)
 
 
(5,384
)
 
(2,302
)
 
Accumulated other comprehensive loss
 
 
3,501
 
 
1,159
 
 
 
 
 
Net amount recognized
 
$
(1,705
)
$
(370
)
 
 
 
 
68
14. INCOME TAXES
        Income before income taxes includes the following components (dollars in thousands):
Years ended December 31,

 
2003
 
2002
 
2001
Domestic
 
$
47,834
 
$
13,085
 
$
27,721
Foreign
 
 
862
 
 
551
 
 
1,501
 
 
 
 
Total income before provision for income taxes
 
$
48,696
 
$
13,636
 
$
29,222
 
 
 
 
        The provision for income taxes consists of the following (dollars in thousands):
Years ended December 31,

 
2003
 
2002
 
2001
 
Current:
 
 
 
 
 
 
 
 
 
 
 
Federal
 
$
359
 
$
5,996
 
$
8,993
 
 
State
 
 
(240
)
 
2,573
 
 
147
 
 
Foreign
 
 
645
 
 
682
 
 
886
 
 
 
 
 
 
Total
 
 
764
 
 
9,251
 
 
10,026
 

Deferred:

 

 

 

 

 

 

 

 

 

 
 
Federal
 
 
15,515
 
 
(2,960
)
 
1,605
 
 
State
 
 
3,195
 
 
(836
)
 
412
 
 
Foreign
 
 
—
 
 
—
 
 
(209
)
 
 
 
 
 
Total
 
 
18,710
 
 
(3,796
)
 
1,808
 
 
 
 
 
 
Total provision for income taxes
 
$
19,474
 
$
5,455
 
$
11,834
 
 
 
 
 
 
        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,

 
2003
 
2002
 
2001
 
Federal income taxes at 35%
 
$
17,044
 
$
4,772
 
$
10,228
 
State income taxes, net
 
 
1,921
 
 
1,129
 
 
363
 
Disallowed meals expense
 
 
293
 
 
508
 
 
506
 
Foreign rate differential
 
 
(642
)
 
489
 
 
(81
)
Non-benefitable book losses
 
 
1,809
 
 
653
 
 
—
 
Adjustment of prior-year's estimated tax liabilities
 
 
(1,669
)
 
(1,532
)
 
—
 
Merger related costs
 
 
—
 
 
—
 
 
1,048
 
Other, net
 
 
718
 
 
(564
)
 
(230
)
 
 
 
 
 
Total
 
$
19,474
 
$
5,455
 
$
11,834
 
 
 
 
 
 
        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
69

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.
        The adjustment of prior years' estimated tax liability of $1.7 million and $1.4$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.
        Deferred taxes arise because of differences in the book and tax bases of assets and liabilities. Significant components of net deferred tax asset and liabilities are as follows (dollars in thousands):
As of December 31,

 
2003
 
2002
 
Deferred tax assets:
 
 
 
 
 
 
 
 
Allowance for doubtful accounts and other reserves
 
$
2,059
 
$
2,022
 
 
Restructuring reserve
 
 
5,727
 
 
10,713
 
 
Accrued expenses
 
 
2,435
 
 
6,004
 
 
Deferred compensation
 
 
2,271
 
 
1,373
 
 
Depreciation
 
 
1,343
 
 
6,638
 
 
Minimum pension liability adjustment
 
 
1,615
 
 
773
 
 
Acquired domestic net operating loss carryforwards
 
 
1,814
 
 
3,214
 
 
Other net operating loss carryforwards
 
 
2,686
 
 
1,059
 
 
Other, net
 
 
(1,213
)
 
2,072
 
 
Valuation allowance
 
 
(4,301
)
 
(1,059
)
 
 
 
 
Total deferred tax assets
 
 
14,436
 
 
32,809
 

Deferred tax liabilities:

 

 

 

 

 

 

 
 
Intangibles
 
 
(30,879
)
 
(28,343
)
 
 
 
 
Total deferred tax liabilities
 
 
(30,879
)
 
(28,343
)
 
 
 
 
Total net deferred tax (liability) asset
 
$
(16,443
)
$
4,466
 
 
 
 
 
        At December 31, 2003, we had domestic net operating loss ("NOL") carryforwards for tax purposes of $6.0 million expiring in years ending in 2017 through 2023. Of these NOL carryforwards, $4.4 million relates to a prior acquisition and is subject to limitation pursuant to IRC Section 382.
        During 2003, the valuation allowance increased $3.2 million as a result of the minimum pension liability adjustment and certain subsidiary net operating losses. The Company's projectedtax effect of the minimum pension liability adjustment in 2003 totaling $0.8 million was charged to other comprehensive income. Approximately $1.0 million of the benefit obligationof any future reduction of the valuation allowance attributable to the minimum pension liability would be directly allocated to other comprehensive income.
        Cumulative undistributed earnings of our foreign subsidiaries amounted to approximately $12.4 million at December 31, 2000 was2003. No provision for U.S. income tax has been made for the repatriation of these earnings because we consider the earnings to be indefinitely reinvested. If such earnings were distributed, tax expense would increase by approximately $15.2$1.3 million. During 2001, service cost and interest cost were
$1.6 million and $1.0 million, respectively. Also during 2001, employee
contributions, actuarial gain, and benefits paid were $.3 million, $1.0 million
and $.3 million, respectively. The projected benefit obligation at December 31,
2001 was $16.8 million.

The fair value
70

        In addition, our India subsidiary, part of the plan assets asSignalTree 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 December 31, 2000 was $17.0 million. The
actual returnthe tax holidays for the year ended December 31, 2003 was approximately $0.9 million or $.01 per diluted share. The benefit to us of the tax holidays for the years ended December 31, 2002 and 2001, was a reduction in plan
assets of $2.6 million. During 2001, employer and employee contributions totaled
$1.5approximately $0.3 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$0, respectively, and immaterial on plan assets was $1.4 million, and net amortization and deferrals was $.4
million.

I.a diluted per share basis.
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 Companyus as those which could have been obtained from an independent third party. Lease payments to Gateway LLC in 2003 were approximately $2.8 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
71

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 are in the process of seeking a third party to sublease the space we formerly occupied at Ten City Square.
        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 2003, we paid approximately $1.0 million in lease payments and as of December 31, 2003, we had a remaining reserve balance of $2.9 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 have subcontracted with Guardent, Inc. ("Guardent") for a customer project. Maria Cirino, a director of Keane, is an executive officer, director, and shareholder of Guardent. In addition, the Audit Committee permitted us to engage Guardent as a subcontractor for the purposes of providing future services to Keane's customers. No payment to Guardent for a single engagement may exceed
72

$75,000 and no payment to Guardent for all engagements in any calendar year may exceed $250,000. As of December 31, 2003, we made payments of approximately $143,000 to Guardent. On February 27, 2004, Guardent was acquired by VeriSign, Inc. Since then, Ms. Cirino has held the position of Senior Vice President of VeriSign Managed Security Services.
        In July 2003, our Audit Committee approved an additional related party transaction involving a director of Keane. We subcontracted 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 may pay ArcStream a royalty fee for potential future installations during the licensing period for the next seven years. John F. Keane, Jr., a director of Keane, is Chief Executive Officer, director, and founder of ArcStream, John F. Keane, Jr. is the son of John F. Keane, Sr., our Chairman of the Board of Directors, and the brother of Brian T. Keane, our President, Chief Executive Officer, and a director. As of December 31, 2003, we made payments of approximately $112,000 to ArcStream.
Commitments and Contingencies
        In addition to our principal executive office, the New Facility, we lease 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 completedrenewed for periods up to five years, subject to increased rental fees. Rental expense for all of our facilities amounted to approximately $15.0 million in 2003, $17.6 million in 2002, and $19.4 million in 2001. We have subleases for certain restructured properties. The related cash receipts for these properties is reflected against the restructuring liability and are not recorded in the accompanying consolidated statements of income.
        As of December 31, 2003, the future minimum lease payments for the next five years and thereafter under operating and capital leases, were as follows (dollars in thousands):
Years Ended December 31,

 
Operating
Leases
 
Capital
Leases
 
2004
 
$
22,815
 
$
828
 
2005
 
 
18,642
 
 
304
 
2006
 
 
12,597
 
 
102
 
2007
 
 
8,507
 
 
—
 
2008
 
 
6,215
 
 
—
 
Thereafter
 
 
24,425
 
 
—
 
 
 
 
 
 
Total minimum lease payments
 
$
93,201
 
$
1,234
 
 
 
 
 
Less imputed interest
 
 
 
 
 
(332
)
 
 
 
 
 
 
Present value of minimum capital lease payments
 
 
 
 
$
902
 
 
 
 
 
 
 
        We are a guarantor with respect to a line of credit 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 lending institution. We would be required to meet our guarantor obligation in the event the lending institution refuses to extend the credit facility and Innovate EC is unable to satisfy its obligation.
73

        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 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 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, 2003, we had no debt outstanding under the credit facility. We may draw upon the credit facility up to $50.0 million less any outstanding 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. Future earn-outs are based on specific net revenue targets. Payments in the next 12 months for achieving these goals may range from $1.0 million to $2.0 million. 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 2003, we recognized revenue of approximately $2.1 million in relation to the contingent service credits and reduced each of the related deferred revenue and note by approximately $1.0 million. The note has a one-year term with a one-year extension expiring on September 25, 2000, the U.S. Equal Employment Opportunity Commission ("EEOC"2004.
        In April 1998, First Command (formerly United Services Planning Association, Inc. & Independent Research Agency for Life Insurance, Inc.) commencedfiled a civil action against Keanecomplaint in the United States District Court for the DistrictTarrant County, Texas (Civil Action No. 96-173235-98), against us and two of Massachusettsour employees alleging that we misrepresented our ability to complete a project contracted for by the Company discriminatedplaintiffs and concealed from the plaintiffs material facts related to the status of the project. During the Third Quarter of 2003, in order to avoid further costs, we settled the claim in full with payment to the plaintiffs of $3.5 million, of which $1.6 million was previously accrued.
        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 former employee Michael RandolphSignal Corporation for a breach of an agreement between Signal Corporation 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
partiesour Federal Systems subsidiary.
        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 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. The
Company believesWe believe that these litigation matters are without merit and intendsintend to defend these matters vigorously.

J. INCOME TAXES

The provision for income taxes includes federal, statevigorously against them.
74
16. SEGMENT INFORMATION
        Based on qualitative 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 provision 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 provisionquantitative criteria established by SFAS 131, we operate within one reportable segment: Professional Services.
        In accordance with the effective income
tax provisionenterprise-wide disclosure requirements of SFAS 131, our geographic information is as follows:

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

Federal income taxes at 35%                      $10,228     $11,965     $42,985
State income taxes, netfollows (dollars in thousands):
 
 
2003
 
2002
 
2001
 
 
Revenues
 
Property &
equipment
 
Revenues
 
Property &
equipment
 
Revenues
 
Property &
equipment
Domestic
 
$
781,255
 
$
64,799
 
$
843,918
 
$
22,583
 
$
730,714
 
$
15,210
International
 
 
23,721
 
 
10,632
 
 
29,285
 
 
8,578
 
 
48,445
 
 
5,491
 
 
 
 
 
 
 
 
Total
 
$
804,976
 
$
75,431
 
$
873,203
 
$
31,161
 
$
779,159
 
$
20,701
 
 
 
 
 
 
 
        We have no single customer that provides revenues that equal or exceed 10 percent 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 componentsour consolidated revenues.
17. SUBSEQUENT EVENTS
        On January 13, 2004, we announced that our Board 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 CompanyDirectors had domestic net operating loss (NOL)
carry-forwards of $5.6 million expiring in 2017 and 2018, which is subjectvoted 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 exchangingconvert all of the Common Stock of Metro for 7.4 millionoutstanding shares of the
Company's Common Stock. Each share of Metro was exchanged for .48 of one share
of KeaneClass B 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 ofour common 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-lineone-for-one basis, over periods ranging from threeeffective February 1, 2004. Class B shares are entitled to fifteen years. Pro
forma results10 votes whereas shares 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 forour 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 relatedare entitled to a workforce
reduction, primarily technical consultants, of approximately 900, 200 and 600
employeesonly one vote on matters submitted to shareholders 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
- -----------------------------------------------------------------------------------------------------------------
vote. As of December 31, 2001,2003, the branch office closures consistedClass B common stock represented less than 1% of amounts for
properties identifiedour outstanding equity, but had approximately 4.3% of the combined voting power of our combined stock.
        On February 5, 2004, we and two of our banks amended our credit facility, allowing us to agree to pay an additional $15.0 million in 2001, 2000earn-out consideration, assuming the acquisition of Nims Associates, Inc. ("Nims").
        On February 27, 2004, we acquired Nims, an IT and 1999consulting services company with offices in the amountsMidwest and ADCs in Indianapolis and Dallas. In exchange for all 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 CompanyNims' outstanding stock, we paid approximately $64.5$18.1 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 acquisition will be accounted for under the acquisition.


                                       43

purchase method in accordance with SFAS 141 and SFAS 142. The operating results of Nims will be included in our consolidated statement of operations beginning March 1, 2004.
75

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, 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
 
 
17,601
 
 
11,031
 
 
9,232
 
 
10,832
 
Net income
 
 
10,561
 
 
6,620
 
 
5,540
 
 
6,501
 
Basic earnings per share
 
 
0.15
 
 
0.10
 
 
0.09
 
 
0.10
 
Diluted earnings per share
 
 
0.15
 
 
0.10
 
 
0.09
 
 
0.10
 

For the year ended December 31, 2002

 

 

 

 

 

 

 

 

 

 

 

 

 
Revenues
 
$
221,259
 
$
226,062
 
$
213,383
 
$
212,499
 
Gross margin (1)
 
 
63,426
 
 
64,157
 
 
58,669
 
 
56,904
 
Income (loss) before income taxes
 
 
9,254
 
 
9,200
 
 
6,517
 
 
(11,335
)
Net income (loss)
 
 
5,553
 
 
5,521
 
 
3,910
 
 
(6,803
)
Basic earnings (loss) per share
 
 
0.07
 
 
0.07
 
 
0.05
 
 
(0.10
)
Diluted earnings (loss) per share
 
 
0.07
 
 
0.07
 
 
0.05
 
 
(0.10
)
(1)
Gross margin(revenues less salaries, wages, and other direct costs)—The Second and Third Quarter 2003 amounts exclude restructuring charges, net of ($0.4) million and $0.6 million, respectively. These reclassifications have been made to previously reported 2003 quarterly results to conform to the annual presentation in the accompanying consolidated statements of income. Such reclassifications have no effect on previously reported net income or stockholders' equity.
76
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
        Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
        Keane's 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, 2003. 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, 2003, 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 SEC's rules and forms.
        No change to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the year ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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, 200227, 2004 (the "2002"2004 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 2004 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 2004 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 2004 Proxy Statement under the caption "Certain Related Party Transactions."


                                       44

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
        The response to this Item is incorporated herein by reference to our 2004 Proxy Statement under the caption "Principal Accountant Fees and Services."
77
PART IV
ITEM 14.15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
    -------------------- The following consolidated financial statements are included in Part II, Item 8:

                                                                        Page(s)

Reports of Independent Auditors.............................................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.report:
(1)
Financial Statements

Report of independent auditors
37
Consolidated statements of income for the years ended December 31, 2003, 2002, and 2001
38
Consolidated balance sheets as of December 31, 2003 and 2002
39
Consolidated statements of stockholders' equity for the years ended December 31, 2003, 2002, and 2001
40
Consolidated statements of cash flows for the years ended December 31, 2003, 2002, and 2001
41
Notes to consolidated financial statements
42-76
(2)
Financial Statement Schedules
Financial statement schedules are omitted because they are either not required or the required information is provided in the consolidated financial statements or notes hereto.
(3)
Exhibits
The Exhibits filed herewith or incorporated herein by reference are set forth in Item 15 (c) below.
(b) Reports on Form 8-K
    -------------------

The Company
We filed or furnished the following Current Reports on Form 8-K during the three-month period ended December 31, 2001.

            i.2003.
1.
On October 14, 2003, we filed a Current Report on Form 8-K filed withunder Item 5, reporting that we issued a press release announcing our application to list our common stock on the SEC onNew York Stock Exchange ("NYSE.")

2.
On October 24,
                  2001, reporting its third quarter financial results and
                  announced the schedule of the meeting and closing date for its
                  acquisition of Metro Information Services, Inc.

            ii.22, 2003, we furnished a Current Report on Form 8-K filed withpursuant to Item 12, containing a copy of our earnings release for the SEC on Novemberperiod ended September 30, 2001, reporting the merger of Metro Information Services, Inc.
                  into a subsidiary of the Company under Item 2 - Acquisition or
                  Disposition of Assets.


                                       45

2003.
(c) 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, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities 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/  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/  BRIAN T. KEANE      
Brian T. Keane
President, Chief Executive Officer, and
Director


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

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


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

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


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

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


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

/s/  JAMES T. MCBRIDE      
James T. McBride
Director


/s/  JAMES D. WHITE      
James D. White
Director
79
Exhibit Index

2.1
Agreement and Plan of Merger, dated as of August 20, 2001, by and among the Registrant, Veritas Acquisition Corp., and Metro Information Services, Inc. is incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated August 20, 2001, filed on August 21, 2001.
3.1
Articles of Organization of the Registrant, as amended, are incorporated herein by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-3 (File No. 33-85206) (the "Registration Statement").
3.2
Articles of Amendment to Registrant's Articles of Organization, filed on May 29, 1998, are incorporated herein by reference to Exhibit 99.1 to the Registrant's Current Report on 8-K, filed on June 3, 1998.
3.3
Second Amended and Restated By-Laws of the Registrant are incorporated herein by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2000.
3.4
Amendment to Second Amended and Restated Bylaws of the Registrant is incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001.
*10.1
Keane, Inc. 401(k) Deferred Savings and Profit Sharing Plan is incorporated herein by reference to Exhibit 10.2 to the Registration Statement.
*10.2
1992 Stock Option Plan is incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992.
*10.3
1998 Stock Incentive Plan is incorporated herein by reference to Exhibit 10 to the Company's Registration Statement on Form S-8 (File No. 333-56119), as filed with and declared effective by the Commission on June 5, 1998.
*10.4
Amendment to 1998 Stock Incentive Plan is incorporated herein by reference to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000.
*10.5
Amended and Restated 1992 Employee Stock Purchase Plan, as amended, is incorporated herein by reference to Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2001.
10.6
Metro Information Services, Inc. Amended and Restated 1997 Stock Option Plan is incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001.
10.7
Lease dated February 20, 1985, between the Registrant and Jonathan G. Davis, as Trustee of City Square Development Trust (the "Trust"), is incorporated herein by reference to Exhibit 10.6 to the Registration Statement.
10.8
First Amendment of Lease dated March 19, 1985, between the Registrant and the Trust, is incorporated herein by reference to Exhibit 10.7 to the Registration Statement.
10.9
Second Amendment of Lease dated November 1985, between the Registrant and the Trust, is incorporated herein by reference to Exhibit 10.8 to the Registration Statement.
*10.10
Keane, Inc. 2001 Stock Incentive Plan is incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001.
*10.11
Keane, Inc. United Kingdom Employee Stock Purchase Plan is incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002.
10.12
Revolving 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.
10.13
Lease, 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.
+10.14
First Amendment dated June 11, 2003 to the Revolving Credit Agreement dated February 28, 2003, by and between the Registrant and the Lenders thereto.
+10.15
Second Amendment dated October 17, 2003 to the Revolving Credit Agreement dated February 28, 2003, by and between the Registrant and the Lenders.
+10.16
Third Amendment dated February 5, 2004 to the Revolving Credit Agreement dated February 28, 2003, by and between the Registrant and the Lenders.
+21.1
Schedule of Subsidiaries of the Registrant.
+23.1
Consent of Ernst & Young LLP.
+31.1
Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer.
+31.2
Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer.
+32.1
Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer.
+32.2
Certification 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 (c) of this
       report.


                                       47