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TABLE OF CONTENTS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-7516

KEANE, INC.
(Exact Name of Registrant as Specified in Its Charter)

Registrant's telephone number, including area code:(617) 241-9200

Securities registered pursuant to Section 12(b) of the Act:

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

        Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

        Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

        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 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filer o    Accelerated filer ý    Non-accelerated filer o

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act Rule 12b-2)Act.) Yes ýo    No oý

        The aggregate market value of the common stock held by non-affiliates of the registrant, based on the last sale price of the common stock on the New York Stock Exchange on June 30, 2004,2005, was approximately $653,965,000.$645,632,000. As of March 3, 2005,2006, there were 62,367,26958,192,415 shares of common stock, $.10 par value per share and no shares of Class B common stock, $.10 par value per share, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE.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 12, 2005.18, 2006. The information required in response to Items 10-14 of Part III of this Form 10-K is hereby incorporated by reference to such proxy statement.

TABLE OF CONTENTS

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 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS."RISK FACTORS."

ITEM 1.    BUSINESS

OVERVIEW

        Keane, Inc. is a leading provider of Information Technology ("IT") and Business Process Services.Services ("BPS"). In business since 1965, our mission is to helpenable clients improveto achieve world-class performance through the transformation of their IT and business and IT effectiveness through outsourcing, development and integration, and other IT services.operations.

        We deliver our IT services through an integrated network of regional offices in North America, and the United Kingdom ("UK"), and Australia, and through Advanced Development Centers ("ADCs") in the United States ("U.S."), Canada, and India. This global delivery model enables us to provide our services to customersclients onsite, at our nearshore facilities in Canada, and through our offshore development centers in India. Our regional offices are supported by centralized Strategic Practices and Quality Assurance Groups.

        Our clients consist primarily of Global 2000 companies across several industries. We have specific expertise and depth of capability in a variety of verticals, including financial services, insurance, healthcare, and the public sector and other verticals.sector. We strive to build long-term relationships with our customersclients by improving their business and IT performance, reducing their costs, and increasing their organizational flexibility. We achieve recurring revenue as a result of our multi-year outsourcing contracts and our long-term client relationships.

        We are a Massachusetts corporation headquartered in Boston. Our common stock is traded on the New York Stock Exchange ("NYSE") under the symbol "KEA." We maintain a Web site with the address www.keane.com. Our Web site includes links to our Corporate Governance Guidelines, our Code of Business Conduct, and our Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee charters, which are available in print to any shareholder upon request. We are not including the information contained in our Web site as part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available, free of charge, through our Web site our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practical after we electronically file these materials with, or otherwise furnish them to, the Securities and Exchange Commission ("SEC").

        We are registered as a reporting company under the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. Accordingly, we file or furnish with the SEC annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K as required by the Exchange Act and the rules and regulations of the SEC. We refer to these reports as Periodic Reports. The public may read and copy any Periodic Reports or other materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room is available by calling 1-800-SEC-0330. In addition, the SEC maintains an Internet Web site that contains reports, proxy and information statements and other

information regarding issuers, such as Keane, that file electronically with the SEC. The address of this Web site is http://www.sec.gov.

Our registered trademarks or service marks include: Application Lifecycle Optimization, EZ-Access, Keane, the Keane logo, Patcom and We Get IT Done. Other trademarks and service marks include: Application Development and Integration Services, Application Development and Management Outsourcing Services, Enterprise Application Integration, Keane InSight, and VistaKeane.

All other trademarks, service marks, or tradenames referenced in this Form 10-K are the property of their respective owners.

SERVICES

        We seek to improve our clients' business performance by maximizing the effectiveness of their business and IT operations. We apply our rigorous processes and management disciplines to our client engagements, enabling clients to reduce costs and increase organizational flexibility and efficiency. We focus on three service offerings:

•

Outsourcing services, which include Application Outsourcing, Application Maintenance, Healthcare Solutions Maintenance, and Business Process Outsourcing;



•

Development and Integration services, which include Application Development & Integration ("AD&I"), and Healthcare Solutions Products; and



•

Other IT services,Services, which include IT Consulting, Business Consulting, and Staff Augmentation.

        Services are deliveredWe deliver our services using oura global delivery model, from operations in the U.S., UK, Canada, Australia, and India. See Note 1617 "SEGMENT INFORMATION" in the notes to the accompanying consolidated financial statements for a discussion of our domestic and international revenues.

        We experience a moderate amount of seasonality. Our consulting revenue and profitability are affected by the number of workdays in a quarter. Typically our billable hours per employee are reduced in the second half of the fiscal year, especially during the fourth quarter, due to the largean increased number of holidays and vacation time.time taken by employees.

Outsourcing Services

        Application Outsourcing.    Our Application Outsourcing services help clients manage existing business systems more efficiently and more reliably, improving the performance of these applications while frequently reducing costs. In a typical Application Outsourcing engagement, we assume responsibility for managing a client's business applications with the goal of instituting operational efficiencies that enhance flexibility, freeing upincreasing availability of client personnel resources, and achieving higher user satisfaction. We seek to obtain 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 use of our world-class methodologies, continuous process improvement, and our global delivery model.

        Our global delivery model offers customersclients 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 Toronto, Ontario, and offshore at one of our four locations in India. This integrated, highly flexible mix of cost-effective onsite, nearshore, and offshore delivery is now a component of most of our new outsourcing engagements. The 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.

        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 addition, ourOur four ADCs in India, located in Hyderabad, Delhi, and Gurgaon, were independently evaluated at Level 5 on the SEI CMMISoftware Engineering Institute's ("SEI") Capability Maturity Model, ("CMMI") and

comply with ISO 9001: 2000 standards. Our ADC in Halifax, Nova Scotia, has also been independently evaluated at Level 5 on the SEI CMMI. The SEI CMM has five levels of process maturity, and many IT organizations typically operate at Level 1, the lowest level of maturity. Since 1997, 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.

        We enter into large, long-term contracts for the provision of Application Outsourcing services. 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 to those clients. We believe that our ability to consistently provide measurable business value for an existing client fosters profitable and long-term client relationships and strongly positions us to win additional outsourcing engagements, as well as development and integration projects.

        Business Process Outsourcing.Services.    We provide Business Process Outsourcing ("BPO") servicesBPS through Keane Worldzen, our majority owned subsidiary. Keane Worldzen specializes in providing BPO servicesBPS to clients with complex operational processes in the financial services, insurance, and healthcare industries, and to clients with back office processes in several industries. Keane Worldzen's deep expertise in process redesign and optimization is an important competitive differentiator. We believe that Keane Worldzen's BPOWorldzen leverages this expertise in delivering both front-end business consulting and follow-on Business Process Outsourcing ("BPO") services. These services are designed to reduce the cost of processing and increase the efficiency of our clients' business transactions, enabling companies to focus on their more strategic activities, and avoid the overhead and management distraction of non-core back-office processes. Keane Worldzen provides these low-cost, high-value outsourcing services from operations in both the U.S. and India.

Development and Integration Services

        AD&I.    As application software becomes more complex, it requires sophisticated integration between front-end and back-end systems to enhance access to critical corporate data, enable process improvements, and improve customerclient service. Many of our AD&I projects leverage "best of breed" technology platforms to support integrated development, Application Outsourcing and BPOBPS solutions for our clients. These "best of breed" solutions are often industry-specific, and therefore leverage Keane's vertical expertise. Frequently, these solutions can be bundled into integrated "solution sets" that are repeatable and cost-effective delivery vehicles. AD&I services include custom development, Enterprise Resource Planning ("ERP") implementations, and other vertically aligned solutions.

        As a result of our significant expertise and experience, including our deep technical experience in leading edge and commercially accepted tools, we have become a top-tier provider of large, complex software development and integration projects for Global 2000 companies. We also provide AD&I services to the public sector, which includes agencies within the U.S. Federal Government, various states, and other local government entities. We believe that we are well positioned to bid on and win large-scale AD&I projects from both the commercial and public sector markets due to our core competencies in project management, integration, and global delivery. We believe that these competencies, together with our long-term relationships with Global 2000 companies, particularly with those clients for which we provide Application Outsourcing services, will provide a foundation for future growth through cross sellingcross-selling of Keane'sour complementary service offerings.

        Healthcare Solutions.    Our Healthcare Solutions Division ("HSD") develops and markets a complete line of open-architecture financial management, patient care, clinical operations, enterprise information, long-term care, and practice management systems for healthcare organizations. The consulting, development, and integration of these systems is included in Development and Integration services. In addition, HSD provides long-term managementmaintenance of these software applications, which is included in Outsourcing Services.

        HSD's products help healthcare organizations overcome the challenge of providing higher quality patient care while administering more efficient operations through the use of information technology. 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 customersclients 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.

Other IT Services

        IT Consulting.    Our IT Consulting services include several offerings that help companies develop and implement their IT and business process improvement strategies. Many clients engage us to provide Project Management services to ensure consistency of quality and delivery over multiple projects within a client organization. Other IT Services also includes our Network Integration Planning, Strategic Information Planning, and Package Selection.Selection offerings.

        Business Consulting.    Our Business Consulting services play an important role in our ability to help clients transform their IT and business operations for maximum business performance. Our Business Consulting services are designed to consider a broad view of business processes, organizational design, and technology architecture. Typically, Business Consulting engagements deliver specific, tactical recommendations for process improvement, often resulting in a follow-on engagement to deliver IT or business outsourcing services. We provide our Business Consulting services through both Keane and Keane Worldzen, our majority-owned BPS subsidiary.

        Staff Augmentation.    Our Staff Augmentation service provides clients with a team of professionals with specialized technical skills to augment their in-house staffs. These professionals help clients develop or manage their applications or assist with short-term IT services requirements without adding to their fixed personnel costs. In many instances, we provide staff augmentation resources to clients who are also utilizing our outsourcing or AD&I services. In addition, we believe that staff augmentation services provide us with a foundation from which to establish new client relationships and ultimately expand our base of services by cross-selling our other offerings.

Transportation Ticketing Solutions

        In 2005, we entered into the market of being a provider of automated fare collection systems for public transport authorities worldwide. The public transport market includes a range of services and systems solutions for bus, bus rapid transit, commuter rail, and heavy rail. The solutions and services within this market include, but are not limited to system design, equipment design, integration, testing, installation, maintenance, card management and distribution services, cash collection, application support and outsourcing and software design.

        The automated fare collection business is a niche market able to sustain only a relatively few number of suppliers. There is significant competition to win contracts due to the long-term expectancy of these systems and few suppliers; therefore, the bidding process is often long, with price competitiveness being a key differentiating factor.

        There is a growing trend for regional ticketing systems, usually built around a large metropolitan area transit agency and often including neighboring agencies that share a common regional smart card-based system. There is an emerging trend for other applications to be added to these regional systems to expand the utility of the smart card. This offers higher value and incentives to the end users

and improves the return on investment for the regional system operators. As a result, these regional systems have incorporated additional capabilities, including call center support, smart card production and distribution, financial clearing and settlement, and multi-application support to their smart card payment programs. The growing new market provides the opportunity to establish lasting relationships and grow revenues and profits over the long-term.

        We formed Keane Australia Micropayment Consortium Pty Ltd ("Kamco"), a wholly-owned subsidiary of Keane, in order to deliver these services in Australia. On July 26, 2005, Kamco and the Public Transport Ticketing Body trading as Transport Ticketing Authority (the "TTA") of the State of Victoria, Australia, entered into a $494.0 million AUD, or approximately $367.0 million (based on the exchange rate of $.74285 AUD per $1.00), contract (the "Victoria TTA contract") to deliver a public transit ticketing system for the State of Victoria. The Victoria TTA contract has a term of approximately twelve years, including two years of development work, referred to as the Build phase, and ten years of operation and maintenance, referred to as the Operate phase. The Build phase represents the development and implementation of the comprehensive solution including hardware, card distribution and software. The Operate phase represents the maintenance of the software, hardware and comprehensive solution, refurbishments and replacements, hosting and management of the subcontractors. Keane has established and is leading a consortium of four transit and technology experts to design, build, implement, and maintain a micropayment smartcard technology system and related equipment for the TTA. Keane's consortium includes automatic fare collection specialists Ascom, ERG, and Giesecke & Devrient Australasia ("G&D"). See Note 2 "SIGNIFICANT CONTRACTS" in the notes to the accompanying consolidated financial statements for further detail on the terms of the Victoria TTA contract.

        With the entrance into the Transportation Ticketing Solution market in 2005 as a result of our winning the Victoria TTA contract, we have determined that the economic characteristics of the services and the distinct client base would require a separate reportable segment. See Note 17 "SEGMENT INFORMATION" in the notes to the accompanying financial statements for further discussion.

STRATEGY

        Our goal is to be recognized as one of the world's premier ITbusiness process and businessIT service providers by our clients, employees, and shareholders. We believe that we can achieve this goal by helping clients improvetransform their IT and business and IT effectivenessoperations through the consistent delivery of high-value consulting, development, and outsourcing services. Specifically, we believe that applications services and business process services are large and synergistic growth markets, and that a significant emerging business trend is corporations leveraging Application Outsourcing, BPO,BPS, and global delivery to achieve meaningful cost reductions and business improvement. We believe that our depth of capability in each of these areas, along with our vertical expertise, strong customerclient relationships and process management capabilities, will enableposition us well to capitalize on this market opportunity.

        In support of this evolution in market demand, we are migrating Keane's organizational structure from a geographic network of local branches to an integrated global matrix, which we have termed "One Keane." In the future we plan to align client relationships and business development activities by geographic region, but business solutions will be designed and delivered by integrated global Business Lines and Vertical Practices. We have fivebelieve that this new organization better positions Keane to deliver high-value, transformational solutions that bundle vertical expertise, business process and applications services, intellectual property through a technology platform or a proprietary reference architecture, and cost effective global delivery. Moreover we expect it will increase Keane's flexibility and scalability, eliminate redundancy and excess costs, and improve the career growth opportunities that we offer our employees.

        Each of Keane's six major strategic priorities for 2005:2006 is aligned with the "One Keane" initiative:

Achieve sustainable revenue and earnings growth.growth in order to build per share value.

        Our objective is to achieve long-term revenue expansion by growing our Application Outsourcing, AD&I and BPOBPS businesses, as well as by leveraging our strong position in less cyclical industries such as healthcare and in the public sector. We expectseek to increase our operating margins over the short-term by improving billing rates and utilization, as the IT services sector continues its economic recovery, and by aggressively controlling selling, general, and administrative ("SG&A") expenses. Longer term, we intend to increasingly leverageleveraging lower-cost offshore resources in providing outsourcing and AD&I services while continuously adjustingto our expenses to ensure cost-effective delivery.clients. We expect our abilitystrive to effectively manage our working capital, most notably Days Sales Outstanding ("DSO"), and capital spending will enable usin order 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.

Enhance and leverageRapidly grow our vertical go-to-market approach

        We are recognized by industry analysts and clients as one of the leading application outsourcing vendors in North America, for our ability to consistently generate measurable business value. With our entrance into the BPO market through our majority owned subsidiary, Keane Worldzen, we believe that

BPO represents a significant additional future growth opportunity for us. We have observed the convergence of applications outsourcing and BPO to be an increasing trend in client buying behavior, and feel that deep industry knowledge is increasingly an important strategic differentiator as clients decide to outsource a broader portfolio of IT and business initiatives. Accordingly, we plan to capitalize on our expertise in the financial services, insurance, healthcare and public sector verticals to go to market with integrated business solutions allowing Keane to go beyond simply delivering cost and performance improvements to our clients and allow us to deliver transformational business benefits.

Build scale and market share in growing business process outsourcing market

        We entered the BPO market in October 2003 through our majority investment in Keane Worldzen, which provides clients with high-value business process services, including process optimization and transaction outsourcing. We believe that client demand for these transformational business process services, often bundled with applications outsourcing, represents a significant future growth opportunity. As a result, in 2005, we plan to invest in additional capability and scale in our BPO operations, both through Keane Worldzen and potential additional investments.

Strengthen our position as an industry leader in advanced global delivery capabilities.

        Global sourcingdelivery has become an important component of our clients' overall sourcing strategies. Use of nearshore and offshore delivery enables clients to access a large pool of cost-effective technical personnel, while enhancing productivity via a 24 hours a day, seven days a week development approach.by taking advantage of time differences among Keane delivery centers around the world. As a result, global delivery capability is critical for success in today's IT services market. During 2004,Over the past several years, we have significantly enhanced our global sourcingdelivery capabilities, opening a fourthand now operate four offshore development centercenters in India and a secondtwo nearshore development centercenters in Canada. During 2005,2006, we expect to expand our efforts to position Keane as a leading provider of global AD&I and outsourcing solutions by continuing tofurther invest in our India and Canada operations.operations in order to support anticipated acceleration in client demand for lower cost delivery resources.

Build scale and market share in growing Business Process Services market.

        We entered the BPS market in October 2003 through our majority investment in Keane Worldzen, which provides clients with high-value business consulting and business process outsourcing, including process optimization and transaction outsourcing. We believe that client demand for transformational business process outsourcing, often bundled with applications outsourcing, represents a significant future growth opportunity. As a result, in 2006, we plan to invest in additional capability and scale in our BPS operations, both through Keane Worldzen and potential additional investments.

Build a flexible, adaptable, and cost-effective organization to anticipate client and marketplace demands.

        The dynamic nature of the IT and business process marketplace requires real-time market insight and the ability to rapidly respond to changing client demands. In 2006, as part of our One Keane initiative, a key Keane priority is to improve the flexibility of our internal organization and operating model, so that Keane's sales, delivery and support teams are able to respond and adapt more quickly to market demands. We also believe that the improved alignment and effectiveness of Keane's internal organization will provide our employees with increased opportunities for challenging work, career growth, and improved overall employee satisfaction, and improve Keane's standing as a choice employer. We expect that, over the long term, this organizational model will drive cost efficiencies, and will result in a more competitive go-to-market cost structure.

Continue to build compelling value propositions for our clients, leveraging vertical expertise and superior technical solutions.

        We seek to deliver integrated solutions, incorporating innovative application of technology and solutions development expertise. In addition, we feel that deep industry knowledge is increasingly an important strategic differentiator as clients decide to outsource a broader portfolio of IT and business initiatives. Accordingly, in 2006 we plan to invest in building further expertise in the financial services, insurance, healthcare, and public sector verticals, and in developing integrated business solutions. We

believe this will enable Keane to go beyond simply delivering cost and performance improvements to our clients and allow us to deliver transformational business benefits.

Enhance growth and market positioning through Mergersmergers and Acquisitionsacquisitions.

        Our long-term growth strategy includes both a strong focus on organic expansion and enhanced growth through mergers and acquisitions ("M&A"). In 2003, 2004, and 2004,2005, we acquired several companies that met specific strategic criteria, including enhancing Keane's capabilities and client relationships. In 2005,2006, we will continue to proactively focus resources on identifying, evaluating, and, when appropriate, consummating M&A transactions that have the potential to create long term per share value. We proactively target applications services and business process servicesoutsourcing firms that provide scale and/or are additive to Keane's strategic positioning.

COMPETITION

        The IT services market is highly competitive and driven by continual changes in client business requirements and advances in technology. Our competition varies by the type of service provided and by geographic markets.

        We compete with traditional players in the IT services industry, including large integrators (such as Accenture, ("ACN"), Electronic Data Systems, ("EDS"), Computer Sciences Corporation, ("CSC"), IBM Global Services, ("IBM"), and Perot Systems ("PER"))Systems); offshore solution providers, including Wipro ("WIT") and Infosys ("INFY");Infosys; IT solutions providers (such as Sapient Corporation, ("SAPE"), BearingPoint, ("BE"), and Ciber ("CBR"))Ciber); and management consulting firms (such as McKinsey and Booz Allen). Some of these competitors are larger and have greater financial resources than we do.

        We believe that competition in the IT services industry is based on firms'a firm's ability to deliver integrated solutions that best meet the needs of customers,clients, provide competitive pricing, develop strong

client relationships, generate recurring revenue, and offer flexible delivery options. We believe that we compete favorably with respect to these factors.

CLIENTS

        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 for outsourcing services.

        In 2004,2005, we derived our revenue from the following industry groups:

        Our 10 largest clients, including various agencies of the Federal Government, accounted for approximately 35.9%30.9%, 35.6%35.9%, and 29.0%35.6% of our total revenues during the years ended December 31, 2005, 2004, and 2003, respectively. Our two largest clients during 2005 were the various agencies of the Federal Government and 2002,a leading insurance provider, with approximately 9.8% and 5.4% of our total revenues in 2005, respectively. Our two largest clients during 2004 and 2003 were the various agencies of the Federal Government and PacifiCare Health Systems, Inc. ("PacifiCare"), with approximately

9.4% and 5.3% of our total revenues in 2004, respectively, and approximately 9.2% and 6.5% of our total revenues in 2003, respectively. In 2002, the Federal Government and IBM were our two largest clients. Federal Government contracts accounted for approximately 7.6% of our total revenues in 2002 and IBM accounted for approximately 4.4% of our total revenues in 2002. A significant decline in revenue from the various agencies of the Federal Government or PacifiCareand a leading insurance provider would have a material adverse effect on our total revenue. With the exception of the various agencies of the Federal Government, PacifiCare,a leading insurance provider, and IBM,PacifiCare, no single client accounted for more than 5%4.0% of our total revenues during any of the three years ended on or before December 31, 2004.2005.

        In accordance with industry practice, many of our orders are terminable by either the client or us on short notice. Moreover, any and all orders relating to the Federal Government may be subject to renegotiation of profits or termination of contract or subcontractors at the election of the Federal Government. We had orders at December 31, 2005 and 2004 of approximately $776.6 million and $600.4 million, respectively, representing backlog for the fiscal yearyears ended December 31, 2005.2006 and 2005, respectively. 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

        We market our services and software products through our direct sales force, which is based close to our clients in ourregional field offices and regional areas, as well as through our Application Outsourcing, BPO and vertical practices.offices. Our account executives are vertically aligned, and are assigned to a limited number of accounts so they can develop an in-depth understanding of each client's individual needs and form strong client relationships. Under the directionWe believe that Keane's existing clients collectively represent a significant future growth opportunity. Accordingly, we have assigned certain of Regional Sales Vice Presidents,our account representatives solely to these clients; these account executives identify IT and business services needs within clients and are responsible for developinglead the development of solutions that meet these requirements. In addition, account executivesThey also ensure that clients receive responsive service that achieves their objectives. AccountIn addition, we have identified a specialized team of account executives focused solely on identifying opportunities and leading solution development for companies that are not currently Keane clients. All account executives receive training in our sales processes and service

offerings and are supported by enterprise knowledge management systems in order to efficiently share organizational learning. Account executives collaborate with our Application Outsourcing and BPO practices, vertical practices, other regional offices, and our Global Services Groupoffshore team as needed to address specialized customerclient requirements.

        Our Outsourcing Business Development Group employs specialized senior sales professionals to respond to client requirements and to pursue and close large, strategic outsourcing engagements. Application Outsourcing engagements provide a strong base of recurring revenue and afford the opportunity to cross-sell our other strategic services, including Business Process Services delivered through Keane Worldzen.

        We focus our marketing efforts on organizations with significant IT budgets and recurring software development and outsourcing needs. We maintain a corporate branding campaign focused on communicating our value proposition of reliably delivering application solutions with quantifiable business results. These branding efforts are actively executed through multiple channels.

EMPLOYEES

        As of December 31, 2004,2005, we had 8,5489,586 total employees, including 7,2358,208 business and technical professionals whose services are billable to clients. This includes a base of 1,7332,626 employees in India, including our Keane Worldzen operations. We sometimes supplement our technical staff by utilizing subcontractors, which as of December 31, 2004,2005, consisted of 585646 full-time professionals.

        We believe our growth and success are dependent on the caliber of our people and will continue to dedicate significant resources to hiring, training and development, and career advancement programs. Our efforts in these areas are grounded in our core values, namely: respect for the individual, commitment to client success, achievement through teamwork, integrity, continuous improvement, and commitment to shareholder value. We strive to hire, promote, and recognize individuals and teams who embody these values.

        We generally do not have change in control and/or employment contractsagreements with our key employees.each executive officer. None of our employees are subject to a collective bargaining agreement and we believe that our relations with our employees are good.

ITEM 1A.    RISK FACTORS

        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.

        Our "One Keane" transformation initiative may not be successfully implemented, which could materially affect our results of operations.    We have recently undertaken the early stages of a multi-faceted internal reorganization, which we call the "One Keane Transformation." Our goals in implementing the One Keane Transformation include: the replacement of our current regional operations structure with an overlapping structure including regional client relationship organizations, delivery organizations based on business lines (such as applications services and business transformation services) and vertical industry expertise (including financial and health care) and global shared services for sales and human resources, aimed at lowering cost. We expect that the One Keane Transformation will be an ongoing process over the next 12-24 months and will touch all areas of Keane, requiring significant internal resources, including significant attention from our management. If we are unable to successfully implement the One Keane Transformation, or a successful implementation that does not achieve our stated objectives, it could result in loss of employee morale, an inability to lower our delivery costs and compete in the global market, and could materially affect our results of operations.

        Our quarterly operating results have varied, and are likely to continue to vary significantly. This may result in volatility in the market price of our common stock.    We have experienced and expect to continue to experience fluctuations in our quarterly results. Our gross margins vary based on a variety of factors including employee utilization rates and the number and type of services performed during a particular period. A variety of factors influence our 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 we can charge clients for services;



•

acquisitions; and



•

other factors, many of which are beyond our control.

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

        We continue to position ourselves to achieve increasing percentages of revenues and growth through outsourcing. If we are successful in obtaining new outsourcing contracts, we may experience increased pressure on our overall margins during the early stages of these contracts.    This could result in higher concentrations of revenues and contributions to income from a smaller number of larger clients on customized outsourcing solutions. If we were to receive a higher concentration of our revenues from a smaller number of clients, our revenues could decrease significantly if one or more of these clients decreased their spending with us. Outsourcing contracts are generally long-term contracts that require additional staffing in the initial phases of the contract period, which often results in lower gross margins at the beginning of these contracts.

        If our clients are not satisfied with our services, we may have exposure to liabilities, which could adversely affect our profitability and financial condition as well as our ability to compete for future work.    If we fail to meet our contractual obligations, we could be subject to legal liability, which could

adversely affect our business, operating results and financial condition. The provisions we typically include in our contracts that are designed to limit our exposure to legal claims relating to our services and the applications we develop may not protect us or may not be enforceable under some circumstances or under the laws of some jurisdictions. It is possible, because of the nature of our business, that we will be sued in the future. In addition, although we maintain professional liability insurance, the policy limits may not be adequate to provide protection against all potential liabilities. Moreover, as a consulting firm, we depend to a large extent on our relationships with our clients and our reputation for high-quality services to retain and attract clients and employees. As a result, claims made against our work may damage our reputation, which in turn, could impact our ability to compete for new work and negatively impact our revenue and profitability.

        The termination of a contract by a significant client could reduce our revenue and profitability or adversely affect our financial condition.    Our five largest clients, excluding the Federal Government, accounted for approximately 19.6% of our revenue for the year ended December 31, 2005, although no individual client accounted for more than 5.4% of our total. The various agencies of the Federal Government represent our largest client, accounting for approximately 9.8% of the total revenue for the year ended December 31, 2005. We strive to develop long-term relationships with our clients. Most individual client assignments are from three to twelve months; however, many of our client relationships have continued for many years. Our clients typically retain us on a non-exclusive, engagement-by-engagement basis. Although they may be subject to penalty provisions, clients may generally cancel a contract at any time. Under many contracts, clients may reduce their use of our services under such contract without penalty. In addition, contracts with the Federal Government contain provisions and are subject to laws and regulations that provide the Federal Government with rights and remedies not typically found in commercial contracts. Among other things, the Federal Government, as well as other public sector clients, may terminate contracts with short notice, for convenience and may cancel multi-year contracts if funds become unavailable. When contracts are terminated, our revenue may decline and if we are unable to eliminate associated costs in a timely manner, our profitability may decline. For the year ended December 31, 2005, approximately 18.7% of our revenue was from public sector clients, including U.S. Federal, state, and local governments and agencies. Often government spending programs are dependent upon the budgetary capability to support such programs. Most states must operate under a balanced budget. As a result of such budget and deficit considerations, our existing and future revenues and profitability could be adversely affected by reduced government IT spending.

        Our engagement with Melbourne, Victoria Transport Ticketing Authority, or Victoria TTA contract, exposes us to a number of different risks inherent in such long-term, large-scale, fixed-fee projects.    We have been awarded a contract to perform services in relation to the development, operation and maintenance of a public transport ticketing system for the state of Victoria, Australia. This engagement will require significant management attention and financial resources, and could adversely affect our results of operations in a number of ways. These include:

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initial costs could potentially result in lower operating margins for the project in the beginning stages;



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difficulties and costs of staffing and managing complex projects and operations in a new geographic market place;



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dependence on subcontractors and potential subcontractor non-performance;



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at certain times, the TTA may terminate the Victoria TTA contract for convenience, subject to certain termination fees and for events of default, subject to Kamco's right to cure;



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complexities in interpreting and delivering the broad range of functional and technical requirements required under the project contract;

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difficulties in working with multiple parties in defining these functional and technical requirements and achieving acceptance of deliverables;



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project delays caused by reasons beyond our control;



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fluctuations in foreign currency exchange rates;



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the additional liability we have undertaken both to guarantee performance of our subsidiary under the contract and the entrance into performance and security bonds under our credit facility.

        Unfavorable government audits could require us to refund payments we have received, to forego anticipated revenue, and could subject us to penalties and sanctions.    The government agencies we contract with generally have the authority to audit and review our contracts with them. As part of that process, the government agency reviews our performance on the contract, our pricing practices, our cost structure and our compliance with applicable laws, regulations, and standards. If the audit agency determines that we have improperly received reimbursement, we would be required to refund any such amount. If a government audit uncovers improper or illegal activities by us or we otherwise determine that these activities have occurred, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeitures of profits, suspension of payments, fines, and suspension or disqualification from doing business with the government. Any such unfavorable determination could adversely impact our ability to bid for new work.

        We have pursued, and intend to continue to pursue, strategic acquisitions. Failure to successfully integrate acquired businesses or assets may adversely affect our financial performance.    In recent years, we have grown significantly through acquisitions. From January 1, 1999 through December 31, 2005, we completed 17 acquisitions. The aggregate merger and consideration costs of these acquisitions totaled approximately $429.2 million. Our future growth may be based in part on selected acquisitions. At any given time, we may be in various stages of considering acquisition opportunities. We may not be able to find and identify desirable acquisition targets or be successful in entering into a definitive agreement with any one target. In addition, even if we reach a definitive agreement with a target, we may not be able to complete any future acquisition.

        We typically 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 these benefits will be realized. Accordingly, there is a risk that an acquired company may not achieve an increase in revenue or other benefits for us. In addition, an acquisition may result in unexpected costs, expenses, and liabilities. Any of these events could have a material adverse effect on our business, financial condition, and results of operations.

        We have recorded a significant amount of goodwill and other intangible assets resulting from our acquisitions. We review our goodwill and identifiable assets for impairment in accordance with SFAS No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," and SFAS No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets. If the estimated future cash flows of the reporting units related to the underlying assets are not sufficient to support the carrying value of the associated underlying assets, we may be required to record impairment charges related to goodwill and other intangible assets. Any material loss resulting from an impairment charge could have a material adverse effect on our results of operations. As of December 31, 2005, our goodwill totaled $314.5 million, customer lists totaled $41.1 million, and other intangibles assets totaled $6.2 million.

        The process of integrating acquired companies into our existing business might also result in unforeseen difficulties. Unforeseen operating difficulties may absorb significant management attention, which we may otherwise devote to our existing business. In addition, the process may require significant financial resources that we might otherwise allocate to other activities, including the ongoing development or expansion of our existing operations.

        Finally, future acquisitions could result in our 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 our business, financial condition, and result of operations.

        We face significant competition for our services, and our failure to remain competitive could limit our ability to maintain existing clients or attract new clients.    The market for our 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, our competition for client assignments and experienced personnel varies significantly from city to city and by the type of service provided. Some of our competitors are larger and have greater technical, financial, and marketing resources and greater name recognition in the markets they serve than 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, we compete with some companies that are larger in the healthcare market and have greater financial resources than we 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.

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

        We conduct business in the UK, Canada, India, and Australia, which exposes us to a number of difficulties inherent in international activities.    As a result of our acquisition of a controlling interest in Keane Worldzen in October 2003 and the acquisition of SignalTree Solutions in March 2002, we now have four software development facilities in India. As of December 31, 2005, we had approximately 2,298 technical professionals in the region, including Keane Worldzen. India is currently experiencing conflicts with Pakistan over the disputed territory of Kashmir as well as clashes between different religious groups within the country. These conflicts, in addition to other unpredictable developments in the political, economic, and social conditions in India, could eliminate or reduce the availability of these development and professional services. If access to these services were to be unexpectedly eliminated or significantly reduced, our ability to meet development objectives important to our strategy to add offshore delivery capabilities to the services we provide would be hindered, and our business could be harmed.

        If we fail to manage our geographically-dispersed organization, we may fail to meet or exceed our financial objectives and our revenues may decline. We perform development activities in the U.S., Canada, India, and Australia, and have offices throughout the U.S., UK, Canada, India, and Australia. This geographic dispersion requires us to devote substantial management resources that locally based competitors do not need to devote to their operations.

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

        In addition, there has been political discussion and debate related to worldwide competitive sourcing, particularly from the United States to offshore locations. There is proposed federal and state legislation currently pending related to this issue. It is too early to determine whether or in what form this legislation will be adopted; however, future legislation, if enacted, could have an adverse effect on our business, results of operations and financial condition.

        We may be unable to re-deploy our professionals effectively if engagements are terminated unexpectedly, which would adversely affect our results of operations.    Our clients can cancel or reduce the scope of their engagements with us on short notice. If they do so, we may be unable to reassign our

professionals to new engagements without delay. The cancellation or reduction in scope of an engagement could, therefore, reduce the utilization rate of our professionals, which would have a negative impact on our business, financial condition, and results of operations. As a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. We believe that period-to-period comparisons of our financial results are not necessarily meaningful and we expect that our results of operations may fluctuate from period-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, including attracting and retaining qualified personnel in India. 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 2.0% Convertible Subordinated Debentures due 2013 (our "Debentures") on the date for repurchase at the option of the holder or upon a designated event, as required by the indenture governing our Debentures, which could cause defaults under our senior revolving credit facility and any other indebtedness we may incur in the future.    The Debenture holders have the right to require us to repurchase all or a portion of their Debentures on June 15, 2008. The Debenture holders may also require us to repurchase all or a portion of their Debentures upon a designated event, as defined in the indenture governing the Debentures. If the Debenture holders elect to require us to repurchase their Debentures on any of the above dates or if a designated event were to occur, we may not have enough funds to pay the repurchase price for all tendered Debentures. We are currently prohibited under our senior revolving credit facility from repurchasing any Debentures if a designated event were to occur. We may also be prohibited under any indebtedness we may incur in the future from purchasing any Debentures prior to their stated maturity. In these circumstances, we will be required to repay all of the outstanding principal of, and pay any accrued and unpaid interest on, such indebtedness or to obtain the requisite consents from the holders of any such indebtedness to permit the repurchase of the Debentures. If we are unable to repay all of such indebtedness or are unable to obtain the necessary consents, we will be unable to offer to repurchase the Debentures, which would constitute an event of default under the indenture for the Debentures, which itself could constitute a default under our senior revolving credit facility or under the terms of any future indebtedness that we may incur. In addition, the events that constitute a designated event under the indenture for the Debentures are events of default under our senior revolving credit facility and may also be events of default under other indebtedness that we may incur in the future.

        We incurred indebtedness when we sold our Debentures. We may incur additional indebtedness in the future. The indebtedness created by the sale of our Debentures, and any future indebtedness, could adversely affect our business and our ability to make full payment on the Debentures.    Our aggregate level of indebtedness increased in connection with the sale of our Debentures. As of December 31, 2005, we had approximately $189.6 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:

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increasing our vulnerability to adverse economic and industry conditions;



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limiting our ability to obtain additional financing;



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limiting our ability to make acquisitions;

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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;



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



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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 1B.    UNRESOLVED STAFF COMMENTS

        None.

ITEM 2.    PROPERTIES

        Our principal executive office as of December 31, 2004,2005, was located at 100 City Square, Boston, Massachusetts 02129, in an approximately 95,000 square foot office building which is leased from Gateway Developers LLC ("Gateway LLC"). John Keane Family LLC is a member of Gateway LLC. The members of John Keane Family LLC are trusts for the benefit of John F. Keane, Chairman of the Board of Directors of Keane, and his immediate family members. See Item 13 "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."

        Based upon our knowledge of rental payments for comparable facilities in the Boston area, we believe that the rental payments under the lease for 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 we entered into the lease, as favorable to us as those which could have been obtained from an independent third party.

        OnAs of December 31, 2004,2005, we leased and maintained sales and support offices in more thanapproximately 70 locations in North America, the UK, Australia, and India. The aggregate annual rental expense for our sales and support offices was approximately $15.7 million in 2004. The aggregate annual rental expense for all of our facilities, including our sales and support offices, was approximately $16.4$17.9 million in 2004.2005. For additional information regarding our lease obligations, see Note 1516 "RELATED PARTIES, COMMITMENTS, AND CONTINGENCIES" in the notes to the accompanying consolidated financial statements.

ITEM 3.    LEGAL PROCEEDINGS

        We are involved in various litigation and legal matters, which have arisen in the ordinary course of business. We do not believe that the ultimate resolution of these matters will have a material adverse effect on our financial condition, results of operations, or cash flows.

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

        None.

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY:        The executive officers and directors of Keane as of March 3, 20052006 are as follows:

(1)

Audit Committee

(2)

Compensation Committee

(3)

Nominating and Corporate Governance Committee

        All Directors hold office until the next Annual Meeting of Stockholders and until their successors have been elected and qualified. Officers of Keane serve at the discretion of our Board of Directors.

        Our directors are elected to serve in classes as follows:

Class I—term expires at our 2008 annual meeting of stockholders:

Maria A. Cirino
John F. Keane, Jr.
James D. White

Class II—term expires at our 2006 annual meeting of stockholders:

Lawrence P. Begley
Philip J. Harkins
Winston R. Hindle, Jr.
Brian T. Keane

Class III—term expires at our 2007 annual meeting of stockholders:

John H. Fain
John F. Keane
John F. Rockart

        Mr. John Keane, the founder of Keane, has served as Chairman of the Board of Directors since Keane's incorporation in March 1967. Mr. Keane served as Chief Executive Officer and President of Keane from 1967 to November 1999. Mr. John Keane is a director of 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 Keane in 1986 and has served as Keane's President and Chief Executive Officer since November 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 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 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 served asis a trustee of Mount Holyoke College since May 2000.the Boston Museum of Science, as well as an overseer of the Boys and Girls Club of Boston and the Boston Symphony Orchestra. Brian Keane is a son of John Keane, the founder, and Chairman of Keane, and the 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. During 2005, Mr. Leahy was promoted to Executive Vice President of Finance and Administration and Chief Financial Officer. From 1982 to August 1999, Mr. Leahy was employed by PepsiCo, Inc., a multinational consumer products corporation, during which time he held a number of positions, serving most recently as Vice President of Business Planning and Development for Pepsi-Cola International.

        Mr. Campanello joined Keane in September 2003 as Senior Vice President of Human Resources. From July 2000 to February 2003, he served as Chief People Officer at NerveWire, a technology and business consulting company. From January 1998 to July 2000, he led the human resource function at Genzyme Corporation, a biotechnology company.

        Mr. Atwell initially joined Keane in 1974 and held a number of positions through 1986. Mr. Atwell left Keane from 1986 to 1991. In 1991, Mr. Atwell rejoined Keane when we acquired a branch of Broadway and Seymour, a regional applications services company where Mr. Atwell was serving as Vice President. Since that time, Mr. Atwell has held several positions with Keane and has held the position of Senior Vice President of North American Branch Operations since 1999.

        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.

        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. Garnick joined Keane in September 2005 as President of North American Services. From September 1999 to September 2001, Mr. Garnick was Chairman and Chief Executive Officer of Global Digital Media, a technology company. From September 2001 to August 2005, Mr. Garnick served as Chief Executive-Americas & Enterprise Application Service at Wipro Technologies, an IT solutions and services provider.

        Mr. Paris joined Keane in November 1976. Mr. Paris has served as Senior Vice President of Healthcare Solutions since January 2000 and served as Vice President and General Manager of the Healthcare Solutions Practice from August 1986 to January 2000. Mr. Paris also served as Area Manager of the Healthcare Solutions Practice from 1981 to 1986.

        Mr. Shaw joined Keane in September 2002 as Managing Director of Keane Ltd. From 1996 to September 2002, Mr. Shaw was employed by Headstrong, a global restructuring corporation, during which time he held a number of positions, serving most recently as Chief Operating Officer of European Operations. During 2004, Mr. Shaw was promoted to Senior Vice President, International Operations for Keane, Inc.

        Mr. Begley has served as a director of the Company and the audit committee financial expert since March 2005. Mr. Begley has served as an independent financial consultant since May of 2001. From March 2000 to May 2001, Mr. Begley served as Executive Vice President, Chief Financial Officer and

Treasurer of CCBN.com. From November 1999 to February 2000, he was Executive Vice President, Chief Financial Officer, and director of Razorfish, Inc. From 1996 to November 1999, Mr. Begley served as Executive Vice President, Chief Financial Officer, and director of iCube, Inc., a systems integration company, which was acquired by Razorfish, Inc. in November 1999. Mr. Begley is a director of MTI Technology Corporation, a global provider of storage, storage management, and data protection.

        Ms. Cirino has served as a director of Keane since July 2001. From February 2000 to February 2004, Ms. Cirino was CEO and Chairman of Guardent, Inc., ("Guardent") a managed security services corporation. On February 27, 2004, Guardent was acquired by VeriSign, Inc., ("VeriSign"), a provider of critical infrastructure services for Internet and telecommunications networks. Since then, Ms. Cirino has held the position of Senior Vice President of VeriSign Managed Security Services, a division of VeriSign. From November 1999 to February 2000, Ms. Cirino served as Vice President of Sales and Marketing for Razorfish Inc., a strategic digital communications company. From July 1997 to November 1999, Ms. Cirino served as Vice President of Sales and Marketing for iCube, Inc., a systems integration company, which was acquired by Razorfish in November 1999.

        Mr. Fain has served as a director of Keane since November 2001 and served as Senior Vice President of Keane from November 2001 to March 2002. Prior to joining Keane, Mr. Fain was the founder, Chief Executive Officer, and Chairman of the Board of Directors of Metro Information Services Inc. ("Metro"), a provider of IT consulting, and custom software development services and solutions, which was acquired by Keane in November 2001. Mr. Fain's role at Metro also included serving as President from July 1979 until January 2001.

        Mr. Harkins has served as a director of Keane since February 1997. Mr. Harkins is currently the President and Chief Executive Officer of Linkage, Inc., an organizational development company

founded by Mr. Harkins in 1988. Prior to 1988, Mr. Harkins was Vice President of Human Resources of Keane.

        Mr. Hindle has served as a director of Keane since February 1995. Mr. Hindle is currently retired. From September 1962 to July 1994, Mr. Hindle served as a Vice President and, subsequently, Senior Vice President of Digital Equipment Corporation, a computer systems and services firm. Mr. Hindle is also a director of Mestek, Inc., a public company that manufactures and markets building and industrial products.

        Mr. John Keane, Jr. has served as a director of Keane since May 1998. From its founding in July 2000 until April 2005, Mr. Keane is the founderwas President and Chief Executive Officer of ArcStream Solutions, Inc., ("ArcStream") a consulting and systems integration firm focusing on mobile and wireless solutions, and has been its President and Chief Executive Officer since July 2000.solutions. We acquired certain assets of ArcStream in April 2005. See Note 7 "BUSINESS ACQUISITIONS" for further discussion on the terms of the acquisition. From September 1997 to July 2000, he was Executive Vice President and a member of the Office of the President of 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 served as Director of Corporate Development. John Keane, Jr. is a son of John Keane, the founder and Chairman of Keane, and the brother of Brian Keane.

        Dr. Rockart has served as a director of Keane since Keane'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 1998 to 2000. Dr. Rockart is also a director of Selective Insurance Group, a public holding company for property and casualty insurance companies.

        Mr. Steinour has served as a director of Keane since July 2001. Since July 2001, Mr. Steinour has served as the Chief Executive Officer of Citizens Bank of Pennsylvania. From January 1997 to July 2001, Mr. Steinour served as Vice Chairman of Citizens Financial Group, a commercial bank holding company. From October 1992 to December 1996, Mr. Steinour served as the Executive Vice President and Chief Credit Officer, as well as Managing Director, of the Citizens Wholesale Banking Division within Citizens Financial Group.

        Mr. White has served as director of Keane since February 2004. SinceFrom July 2002 to October 2005, Mr. White has served aswas the Senior Vice President of Business Development for The Commercial Operations North America of The Gillette Company. Since October 2005, Mr. White has held the position of Senior Vice President, Corporate Brands, at Safeway, Inc., a large food and drug retailer in North America. From June 1986 to May 2002, Mr. White was employed by Nestlé, during which time he held a number of positions, serving most recently as the Vice President of Customer Interface for Nestlé Purina Pet Care Company.

        The compensation of the non-employee members of the Board of Directors is as follows:

        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 stock options under our stock incentive plans. During 2004,2005, we did not grant stock options to non-employee directors, other than the initial stock option grant or the annual stock option grant discussed above. Directors who are officers or employees of Keane do not receive any additional compensation for their services as directors.

PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

        Our authorized capital stock consists of 200,000,000 shares of common stock, $.10 par value per share;share, 503,797 shares of Class B common stock, $.10 par value per share, and 2,000,000 shares of preferred stock, $.01 par value per share. As of March 3, 2005,2006, there were 62,367,26958,192,415 shares of common stock outstanding and held of record by approximately 2,1352,128 registered stockholders and no shares of Class B common stock or preferred stock outstanding. Effective February 1, 2004, each share of our Class B common stock, $.10 par value per share, was automatically converted into one share of common stock.

COMMON STOCK

        Voting.    Each share of our common stock is entitled to one vote on all matters submitted to stockholders. 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 December 31, 2003, the Class B common stock represented less than 1% of our outstanding equity, but had approximately 4.3% of the combined voting power of our combined stock.

        Dividends and Other Distributions.    The holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by our Board of Directors, out of funds legally available therefore. In the event of a liquidation, dissolution, or winding up of Keane, holders of common stock have the right to ratable portions of our net assets after the payment of all debts and other liabilities.

        Other Matters.    The holders of common stock have no preemptive rights or rights to convert their stock into any other securities and are not subject to future calls or assessments by Keane. The common 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 outstanding shares of common stock are fully paid and non-assessable. The rights, preferences, and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock, which we may designate and issue in the future.

PREFERRED STOCK

        Our articles of organization authorize the issuance of up to 2,000,000 shares of preferred stock. Shares of preferred stock may be issued from time-to-time in one or more series, and our 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, and to fix the number of shares of any such series of preferred stock without any further vote or action by the stockholders. The voting and other rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be issued in the future. The issuance of shares of preferred stock, while providing desirable flexibility in connection with acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding voting stock of Keane. We have no present plans to issue any shares of preferred stock.

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

        Our common stock was traded on the AMEX 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 sales price per share as reported by AMEX and NYSE, as the case may be.NYSE.

        The closing price of our common stock on the NYSE on March 3, 20052006 was $13.32.$13.30.

        We have not paid any cash dividend since June 1986. We currently intend to retain all of our earnings to finance future growth and therefore do not anticipate paying any cash dividend in the foreseeable future. Our $50.0$200.0 million credit facility with twoa syndicate of banks contains restrictions that may limit our ability to pay cash dividends in the future.

        The following table provides information about purchases by Keane during the three months ended December 31, 20042005 of equity securities that are registered by Keane pursuant to Section 12 of the Exchange Act:

ISSUER PURCHASES OF EQUITY SECURITIES

(1)

ForOn June 14, 2005, we announced the three months ended December 31, 2004, we did not repurchase any ofapproval by our common stock

(2)

Our Board of Directors approvedof the repurchase by us of 3.0 million shares of our common stock pursuant to a stock repurchase program ("the June 2003 Program and 3.0 million shares of our common stock pursuant to the June 2004 Program.2005 Program"). The repurchases may be made on the open market or in negotiated transactions, and the timing and amount of shares to be purchased will be determined by our management based on its evaluation of market and economic conditions and other factors. The expiration dateWe repurchased all of the shares under the June 20032005 Program was June 12, 2004; as of October 19, 2005.

(2)

On October 25, 2005, we announced the expiration dateapproval by our Board of Directors of the June 2003repurchase of 3.0 million shares of our common stock pursuant to a stock repurchase program we had("the October 2005 Program"). The repurchases may be made on the open market or in negotiated transactions, and the timing and amount of shares to be purchased 1,817,700 shares.will be determined by our management based on its evaluation of market and economic conditions and other factors. Unless terminated earlier by resolution of our Board of Directors, the June 2004October 2005 Program will expire

upon the earlier of the date we repurchase all shares authorized for repurchase thereunder or June 13, 2005.



October 25, 2006.

ITEM 6.    SELECTED FINANCIAL DATA

FINANCIAL HIGHLIGHTS

(1)

Reflects the adoption of Emerging Issues Task Force ("EITF") Issue No. 04-8, "The Effect of Contingently Convertible Debt on Diluted Earnings per Share." See Note 12 "EARNINGS PER SHARE" in the notesNet income for 2005 includes a $3.5 million reduction to our tax reserves due to the accompanying consolidated financial statements for further discussion.

(2)

Includes $40,042, $40,500, $40,888,expiration of certain statutes of limitation and $13,000changes in accrued building costs for the years ended December 31, 2004, 2003, 2002, and 2001, respectively.

(3)

estimates. Net income for 2004 includes an adjustment recorded in the Fourth Quarter of 2004 for an additional deferred tax asset totaling approximately $2.2 million and a corresponding decrease to the provision for income taxes. See Note 1415 "INCOME TAXES" in the notes to the accompanying consolidated financial statements for further discussion. Net income for 2003 includes a $7.3 million, $4.4 million after tax, favorable judgment in an arbitration award proceeding related to damages for breach of an agreement between Signal Corporation and our Federal Systems subsidiary.

(2)

Reflects the adoption of Emerging Issues Task Force ("EITF") Issue No. 04-8, "The Effect of Contingently Convertible Debt on Diluted Earnings per Share" for the years ended December 31, 2005, 2004, and 2003, in which the Debentures were outstanding. See Note 13 "EARNINGS PER SHARE" in the notes to the accompanying consolidated financial statements for further discussion.

(3)

Includes $39,545, $40,042, $40,500, $40,888, and $13,000 in accrued building costs for the years ended December 31, 2005, 2004, 2003, 2002, and 2001, respectively.

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. For purposes of these Acts, any statement that is not a statement of historical fact may be deemed a forward-looking statement. For example, statements containing the words "believes," "anticipates," "plans," "expects," "estimates," "intends," "may," "projects," "will," "would," and similar expressions may be forward-looking statements. We caution investors not to place undue reliance on any forward-looking statements in this Annual Report on Form 10-K. There are a number of factors that could cause our actual results to differ materially from those indicated by these forward-looking statements, including without limitation the factors set forth below under the caption "CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS." These factors and the other cautionary statements made in this annual report should be read as being applicable to all related forward-looking statements wherever they appear in this annual report. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance, or achievements may vary materially from any future results, performance, or achievements expressed or implied by these forward-looking statements. We undertake no obligation to publicly update any forward-looking statements in this annual report, whether as a result of new information, future events, or otherwise.

The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and related notes included in this annual report.

OVERVIEW

        Our goal is to be recognized as one of the world's premier business process and IT service providers by our clients, employees, and shareholders. We believe that we can achieve this goal by helping clients transform their IT and business operations through the consistent delivery of high-value consulting, development, and outsourcing services. Specifically, we believe that applications services and business process services are large and synergistic growth markets, and that a significant business trend is corporations leveraging Application Outsourcing, BPS, and global delivery to achieve meaningful cost reductions and business improvement. We believe that our depth of capability in each of these areas, along with our vertical expertise, strong client relationships, and process management capabilities, position us well to capitalize on this market opportunity.

        In support of this evolution in market demand, we are migrating Keane's organizational structure from a geographic network of local branches to an integrated global matrix, which we have termed, "One Keane." In the future, we plan to align client relationships and business development activities by geographic region, but business solutions will be designed and delivered by integrated global Business Lines and Vertical Practices. We believe that this new organization better positions Keane to deliver high-value, transformational solutions that bundle vertical expertise, business process and applications services, intellectual property through a technology platform or a proprietary reference architecture, and cost effective global delivery. Moreover, we expect it will increase Keane's flexibility and scalability, eliminate redundancy and excess costs, and improve the career growth opportunities that we offer our employees.

Components of Revenues

        We seek to help clients improve their business and information technology ("IT")IT effectiveness. In order to align our reporting with our strategic priorities, beginning January 1, 2004, we classifiedWe classify our service offerings into the following three categories: Outsourcing, Development & Integration, and Other IT Services. These services were previously classified within our Plan, Build, and Manage service offerings in our Annual Report on Form 10-K for the year ended December 31, 2003. Prior period amounts have been reclassified to conform to the current presentation. Below is a description of each of our service offerings:

        Outsourcing:    Our outsourcing services include Application and Business Process Outsourcing, as well as ongoing maintenance related to Development & Integration work for our Healthcare Solutions Division.Outsourcing. Our Application Outsourcing services help clients manage existing business systems more efficiently and more reliably, improving the performance of these applications while frequently reducing costs. Under our Application Outsourcing service offering, we assume responsibility for managing a client's business applications with the goal of instituting operational efficiencies that enhance flexibility, free up client personnel resources, and achieve higher user satisfaction. We enter into large, long-term contracts for the provision of Application Outsourcing services, which generally do not require any capital outlay by us. These contracts usually span three to five years with the ability to renew. We typically receive a fixed monthly fee in return for meeting or exceeding a contractually agreed upon service level. However, because our customersclients typically have the ability to reduce services under their contracts, our monthly fees may be reduced from the stated contract amounts. Outsourcing services also includes ongoing maintenance related to the product sales for our Healthcare Solutions Division.

        Through our global delivery model we can offer customersclients the flexibility and economic advantage of allocating work among a variety of delivery options. These include onsite at a client's facility, nearshore in Halifax, Nova Scotia, and Toronto, Ontario, and offshore at one of our four development centers in India. In 2004, we extended our Global network of Advanced Development Centers with the opening of new facilities in Toronto, Ontario and Hyderabad, India. This integrated, highly flexible mix

of cost-effective onsite, nearshore, and offshore delivery is now a component of most of our new Application Outsourcing engagements. The distribution of work across multiple locations is typically based on a client's cost, technology, and risk management requirements. Our successful track record in absorbing the local staff of our clients is particularly attractive to many prospective clients.

        Our Business Process Outsourcing ("BPO") servicesBPS are provided by our majority owned subsidiary, Worldzen, Inc., now Keane Worldzen, Inc. ("Keane Worldzen"), which we acquired on October 17, 2003. Keane Worldzen specializes in providing BPOBPS services to clients with complex processes in the financial services, insurance, and healthcare industries, and to clients with back-office processes in several industries. Keane Worldzen's BPO services are designed to reduce the cost and increase the efficiency of our clients' business transactions, enabling companies to focus on their more profitable activities and avoid the distraction of non-core back-office processes. Keane Worldzen provides these low-cost, high-value outsourcing services from operations in both the United States ("U.S.") and India.

        Development & Integration:    As application software becomes more complex, it requires sophisticated integration between front-end and back-end systems to enhance access to critical corporate data, enable process improvements, and improve customerclient service. Many of our Development & Integration projects focus on solutions for the integration of enterprise applications, supply chain, and customerclient service problems. We also provide Development & Integration services to the public sector, which includes agencies within the U.S. Federal Government, various states, and other local government entities. Additionally, our Healthcare Solutions Division provides software solutions and integration support to both acute and long-term care providers.

        Other IT Services:    Other IT Services are primarily comprised of IT consulting, project management, and supplemental staff engagements that are principally billed on a time and materials basis.

        Global economic and political conditions may cause companies to be cautious about increasing their use of consulting and IT services, but we continue to see a demand for our services. We continue to experience pricing pressure from competitors as well as from clients facing pressure to control costs. In addition, the growing use of offshore resources to provide lower-cost service delivery capabilities within our industry continues to be a source of pressure on revenues. We also experience wage inflation, primarily in India, as the demand for those resources increases. In order for us to remain successful in the near term, we must continue to maintain and grow our client base, provide high-quality service and satisfaction to our existing clients, and take advantage of cross-selling opportunities. In the current economic environment, we must provide our clients with service offerings that are appropriately priced, satisfy their needs, and provide them with measurable business benefits. While we have recently experienced a more steady demand for our services, and gross margin as a percentage of revenue has stabilized over the past two years, we believe that it is too early to determine if developments will translate into sustainable improvements in our pricing or margins for 20052006 and over the longer term.

        There is a great deal of competition in the provision of Outsourcing services. We believe our evolving go-to-market strategy, where we seek to provide high value, repeatable business solutions to our clients, differentiates us from our competitors. We offer solutions that combine various Keane services and capabilities in response to a specific industry or client need. These vertically-focused solution sets may include application services, business process outsourcing, an underlying technology platform or intellectual property, and global delivery. The solutionssolution sets that we offer to our clients havemay be comprised of five major elements. They are:

•

First, they are vertically driven in that they are value propositions designed to address specific needs, challenges, or opportunities within a verticalan industry.



•

Second, they may include Application services, either in the form of applications development & integration, or application outsourcing.

•

Third, these solutions may also involve a business process component, including process reengineering and business process outsourcing.



•

Fourth, we seek to leverage a technology platform, either provided by a third party or proprietary to Keane, as well as Keane intellectual capital, as a foundation for our solutions.



•

And finally, these solution sets nearly alwaysfrequently incorporate our global delivery capabilities.

        While, we are still in the early stages of implementing this new market approach, weWe believe that our deep industry knowledge will differentiatedifferentiates us from our competitors, allowallowing us to go beyond simply delivering cost and performance improvements to our clients, and allowallowing us to deliver transformational business benefits and, ultimately, help grow our business and integrate our comprehensive capabilities.

Components of Operating Expenses

        The primary categories of our operating expenses include: salaries, wages, and other direct costs; selling, general, and administrative expenses; and amortization of intangible assets. Salaries, wages, and other direct costs are primarily driven by the cost of client-service personnel, which consists mainly of compensation, sub-contractor, and other personnel costs, and other non-payroll costs. Selling expenses are driven primarily by business development activities and client targeting, image-development and branding activities. General and administrative expenses primarily include costs for non-client facing personnel, information systems, and office space, which we seek to manage at levels consistent with changes in the activity levels in our business. We continue to anticipate changes in demand for our services and to identify cost management initiatives to balance our mix of resources to meet current and projected future demand in our markets. We will also continue to use our global sourcing as part of our cost effectivecost-effective delivery model.

        We evaluate our improvement in profitability by comparing gross margins, and selling, general, and administrative ("SG&A") expenses as a percentage of revenues. Other key metrics that we use to manage and evaluate the performance of our business include new contract bookings, the number of billable personnel, and utilization rates. We calculate utilization rates by dividing the total billable hours per consultant by the total hours available, including sick, holiday, and vacation, from the consultant.

NEW CONTRACT BOOKINGS

        New contract bookings for the year ended December 31, 20042005 were $1.1approximately $1.4 billion, an increase of $230.4$268.4 million, or 26.5%24.4%, over new contract bookings of $868.5 million$1.1 billion for the year ended December 31, 2003.2004. New contract bookings for the year ended December 31, 2005 include the $367.0 million Victoria TTA contract with the State Government of Victoria, Australia; $256.9 million of the Victoria TTA contract is included in Outsourcing bookings and $110.1 million of the Victoria TTA contract is included in Development & Integration bookings. For the year ended December 31, 2004,2005, Outsourcing bookings increased 37.7%25.7% to $574.7$722.7 million, Development & Integration bookings increased 20.1%113.1% to $124.8$266.0 million, and Other IT bookings increased 15.0%decreased 5.2% to $399.4$378.7 million compared to the same period in 2003.2004.

        We provide information regarding our bookings because we believe it represents useful information regarding changes in the volume of our new business over time. However, information regarding our new bookings is not comparable to, nor should it be substituted for, an analysis of our revenues. Cancellations and/or reductions in existing contracted amounts are not reflected in new contract bookings.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenue and expenses. On an on-going basis, we

evaluate our estimates including those related to revenue earned but not yet billed, costs to complete fixed-price projects, the collectibility of accounts receivable, acquisition accounting, the valuation of goodwill, certain accrued liabilities and other reserves, income taxes, and others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of

assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from those estimates. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. Application of these policies is particularly important to the portrayal of our financial condition and results of operations. We believe that the accounting policies described below meet these characteristics. Our significant accounting policies are more fully described in the notes to the accompanying consolidated financial statements.

Revenue Recognition

        We derive our revenues from the sale of professional services, software licenses, software maintenance, and equipment. We derive the majority of our revenues from the sale of professional services, which are recognized on a time and materials basis and proportional performance and represented approximately 94%, 93% and 92% of total revenues for the years ended December 31, 2005, 2004, and 2003, respectively. In addition, we recognize revenue as services are performed or products are delivered infrom the sale of software licenses, maintenance and equipment through our Healthcare Solutions Division, which represented approximately 6%, 7% and 8% of total revenues for the years ended December 31, 2005, 2004, and 2003, respectively. In accordance with contractual agreementsStaff Accounting Bulletin ("SAB") No. 104 ("SAB 104"), "Revenue Recognition," we recognize revenue when persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed or determinable and generally accepted accounting principles.collectibility is probable. We consider a non-cancelable fully executed agreement or client purchase order to be persuasive evidence of an arrangement. We consider delivery to have occurred upon completion of services rendered or transfer of product title to the client. We consider the fee to be fixed or determinable if the fee is not subject to adjustment, or if we have not granted extended payment terms to the client. We consider collection to be probable if our internal credit analysis indicates that the client will be able to pay amounts as they become due under the arrangement.

        For general consulting engagements, we recognize revenue on a time and materials basis as services are delivered. For the majority of our outsourcing engagements, we provide a specific level of service each month for which we bill a standard monthly fee. We recognize revenue for these engagements 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 may be capitalized over defined periods of time and amortized over the period in which the associated revenue is recognized.

        For fixed-price engagements, we recognize revenue on a proportional performance basis over the life of the contract. We 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 we do not accurately estimate the resources required or the scope of the work to be performed, then future revenues may be negatively affected or losses on existing contracts may need to be recognized. All future anticipated losses are recognized in the period they are identified.

        We recognizeFor our sales arrangements that contain multiple revenue associated with applicationelements, such as software products as the software products are installedlicenses, professional services and as implementation services are delivered. We recognize software maintenance, fees on installed products on a pro-rated basis overwe first determine whether the termarrangement is within the scope of the agreement. In multiple element arrangements, Keane uses the residual value method in accordanceEmerging Issues Task Force ("EITF") EITF No. 00-21 ("EITF 00-21"), "Revenue Arrangements with Multiple Deliverables", Statement of Position ("SOP") SOP 97-2 ("SOP 97-2"), "Software Revenue Recognition," and SOP 98-997-2 or SOP 81-1 ("SOP 98-9"81-1"), "Modification"Accounting for Performance of SOP 97-2, Software Revenue Recognition, With RespectConstruction-Type and Certain Production-Type Contracts." We recognize revenue on arrangements with multiple deliverables as separate units of accounting only if certain criteria are met. In general, a deliverable (or a group of deliverables) meets the separation criteria if the deliverable has standalone value to Certain Transactions."the client and if there is objective and reliable evidence of the fair value of all remaining undelivered elements in the arrangement. We allocate the total arrangement consideration to each separate unit of accounting based on the relative fair value of each separate unit of accounting or using the residual method. The amount of arrangement consideration that is allocated to a delivered unit of accounting is limited to the amount that is not contingent upon the delivery of another separate unit of accounting. If such criteria are not met, then all deliverables are accounted for as a single unit of

accounting whereby all revenue is recognized based on the accounting applicable to the last element to be delivered.

        Revenue earned on software arrangements involving multiple elements which qualify for separate element accounting treatment is allocated to each undelivered element usingbased on the relative fair values of those elements based on vendor-specific objective evidence with the remaining value assigned to the delivered element, the software license. Revenue allocated to the software license is based on the residual method in accordance with SOP 97-2 and SOP 98-9 ("SOP 98-9"), "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions", under which revenue equal to the fair value of professional services and software support is allocated to those items and recognized as revenue as those items are delivered. Any residual or remaining portion of the total arrangement fee is then allocated to the delivered software license. We generally recognize software maintenance fees on installed products on a pro-rated basis over the term of the agreement. Revenue is recognized for each element when each of the aforementioned revenue recognition criteria has been met.

        Key factors in determining revenue recognition for multiple element arrangements, including software and software-related services are management assessments that installation services are essential to the functionality of the software. We evaluate revenue recognition for these types of arrangements on a contract-by-contract basis as the terms of each arrangement vary. If the services are essential to the functionality of the software, payment of the license fees and are dependent upon the performance of the services, the arrangement includes milestones or client specific acceptance criteria or the services include significant modification or customization of the software, then both the software license and services are recognized under SOP 81-1. Generally, these agreements contain milestone provisions that vary by contract but relate to code load, installation, commencement of training, and demonstration that the software performs the functions requested by the client. The milestones approximate progress to complete based upon input measures. We utilize client acceptance of contract milestones in order to track progress to completion.

        Under EITF 00-21, in order to account for the deliverables within a contract separately, all delivered items must have standalone value, the vendor must have objective and reliable evidence of fair value of the undelivered item(s), and if the client has a general right of return relative to the delivered item, delivery or performance of the undelivered items must be probably and substantially within the vendor's control. We have concluded that objective evidence of fair value does not exist for all of the elements within the Victoria TTA contract. Accordingly, each of the elements cannot be separated into multiple units of accounting and therefore, must be accounted for as a single unit of accounting. As a result, we are deferring all revenues and costs directly associated with the delivery of services during the two years of development work, referred to as the Build phase, and we will recognize all revenues and direct costs for the contract over the period of the ten years of operation and maintenance, referred to as the Operate phase, currently estimated to begin in mid-2007.

        In all consulting engagements, outsourcing engagements, and software application sales, the risk of issues associated with satisfactory service delivery exists. Although we believe these risks are adequately addressed by our adherence to proven project management methodologies, proprietary frameworks, and internal project audits, the potential exists for future revenue charges relating to service delivery issues. Historically, we have not experienced major service delivery issues.

Contract Costs

        Costs to deliver services are expensed as incurred, with the exception of set-up costs and the cost of certain construction and non-construction services for which the related revenues must be deferred under EITF 00-21 or other accounting literature. By analogy to SFAS No. 91 ("SFAS 91"), "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases", deferred contract set-up costs may include costs incurred during the set-up phase of a client arrangement relating to employee transition, and relocation of key personnel. By analogy to FASB Technical Bulletin (As Amended) 90-1 ("FTB 90-1"), "Accounting for Separately Priced

Extended Warranty and Product Maintenance Contracts," we defer and subsequently amortize certain direct and incremental costs directly associated with the delivery of products and services related to activities that enable the provision of contracted services to clients. For contracts in which multiple elements are accounted for as a single unit of accounting, the direct and incremental costs directly associated with the delivery of products and services are deferred and recognized over the period revenues are recognized. We amortize deferred contract costs on a straight-line basis over the lesser of their estimated useful lives or the period in which it was determined we would recognize the associated revenue. Useful lives range from 3 years up to a maximum of the period when the associated revenue is recognized.

        We review deferred contract costs for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Our review is based on our projection of the undiscounted future operating cash flows of the related client contract. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, we record a charge is to reduce the carrying amount to equal projected future discounted cash flows.

Allowance for Bad Debts

        We maintain an allowance for doubtful accounts at an amount we estimate to be sufficient to cover the risk of collecting less than full payment on our receivables. Our allowance for bad debts is

based upon specific identification of likely and probable losses. Each accounting period, we evaluate accounts receivable for risk associated with a client's inability to make contractual payments or unresolved issues with the adequacy of 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. We use considerable judgment 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 our evaluation of service delivery issues or a client's ability to pay is incorrect, we may incur future reductions to revenue.

Business Combinations

        In connection with acquisitions, we estimate the fair value of assets acquired and liabilities assumed. Some of the items, including accounts receivable, property and equipment, other intangible assets, certain accrued liabilities, and legal and other reserves require a high degree of management judgment. Certain estimates may change as additional information becomes available. In particular, restructuring liabilities are subject to change as we complete our assessment of the acquired operations and finalize our integration plan.

Valuation of Goodwill

        We have recorded a significant amount of goodwill resulting from acquisitions. EffectiveWe account for goodwill and other intangible assets at their estimated fair values in accordance with SFAS No. 142, ("SFAS 142"), "Goodwill and Other Intangible Assets," which we adopted effective January 1, 2002,2002. Under SFAS 142, goodwill is no longer amortized but is subject to annual impairment testing. The impairment test involves the use of estimates related to the fair value of the business operations with which the goodwill is associated. Our reporting units consist of aggregated branches that have similar economic characteristics, share the benefit of goodwill, and for which results are regularly reviewed by business operations management. Our goodwill is allocated to these reporting units for impairment assessment. In performing our review of the recoverability of goodwill, we consider several factors, including the fair value of the reporting unit to which the goodwill is assigned. If, as a result of examining any of these factors, we conclude that the carrying value of the reporting unit's goodwill exceeds its estimated fair value, we will record an impairment charge and reduce the carrying value of the reporting unit to its estimated fair value.

        The estimate of fair value requires significant judgment. We estimate the fair value of the business operations using a discounted cash flow model based on the future annual operating plan of each reporting unit. This model determines the present value of the estimated cash flows of the reporting unit. Any loss resulting from an impairment test would be reflected in operating income in our consolidated statement of income. The annual impairment testing process is subjective and requires judgment at many points throughout the analysis. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets not previously recorded. As of December 31, 2004,2005, our goodwill totaled $306.0$314.5 million.

Valuation of Intangible Assets

        In connection with our acquisitions, we are required to recognize other intangible assets separate and apart from goodwill if such assets arise from contractual or other legal rights or if such assets are separable from the acquired business. Other intangible assets include, among other things, customer-relatedclient-related assets such as order backlog, customerclient contracts, and customerclient relationships. We account for other intangible assets at their estimated fair values in accordance with SFAS 142. Determining a fair value for such items requires a high degree of judgment, assumptions, and estimates. In most situations, we use third parties to assist us with such valuations. In addition, these intangible assets are amortized over the best estimate of their estimated useful life.lives.

        We review our identifiable intangible assets for impairment in accordance with StatementSFAS 144. In performing our review of Financial Accounting Standards ("SFAS") No. 144 ("SFAS 144"), "Accounting for the Impairmentrecoverability of other intangible assets, we consider several factors. These factors include the expected cash flows that an asset is expected to generate over its estimated economic life, whether there have been significant changes in legal factors or Disposalthe overall business climate that could affect the underlying value of Long-Lived Assets."an asset or whether there is an expectation that the asset will be sold or disposed of before the end of its originally estimated useful life.

        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, as a result of examining the factors, we conclude that the carrying value of the other intangible assets exceeds its estimated fair value, we will record an impairment charge and reduce the carrying value of the asset to its estimated fair value. If the estimates or the related assumptions used to determine the value of the intangible assets change, we may be required to record impairment charges for these assets. As of December 31, 2004,2005, our intangible assets totaled $62.9$47.2 million.

Income Taxes

        To record income tax expense, we are required to estimate our income taxes in each of the jurisdictions in which we operate. We account for income taxes in accordance with SFAS No. 109 ("SFAS 109"), "Accounting for Income Taxes," which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. In addition, income tax expense at interim reporting dates requires us to estimate our expected effective tax rate for the entire year. This involves estimating our actual current tax liability together with assessing temporary differences that result in deferred tax assets and liabilities and expected future tax rates.

        We record a valuation allowance to reduce our deferred tax assets to an amount we believe is more likely than not to be realized. We consider future taxable income and prudent and feasible tax planning strategies in assessing the need for a valuation allowance. We have recorded a valuation allowance for the tax benefits 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. If we determine that we will require more or less of our reserves in the future, such adjustment would be recorded as an increase or reduction of income tax expense in the period such determination is made. Circumstances that could cause our estimates of income tax expense to change include: the impact of information that subsequently becomes available as we prepare our tax returns; revision to tax positions taken as a result of further analysis and consultation; the actual level of pre-tax income; changes in tax rules, regulations, and rates; and changes mandated as a result of audits by taxing authorities.

Stock-based Compensation

        We grant stock options for a fixed number of shares of our common stock to employees with an exercise price equal to the closing price of the sharesour common stock at the date of grant. We also grant restricted stock for a fixed number of shares to employees for a nominal consideration.purchase price.

        We adopted the disclosure provisions of SFAS No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation—Transition and Disclosure," an amendment to SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." As permitted by SFAS 148 and SFAS 123, we account for our stock-based compensation in accordance with Accounting Principles Board ("APB") Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." In accordance with APB 25, we recognize compensation expense based on the difference between the market value at grant date and the grant price and record the compensation expense ratably over the restriction period. We do not recognize compensation expense on our stock option grants as the stock options are granted at the market price at the date of grant.

        Had expense been recognized using the fair value method described in SFAS 123, using the Black-Scholes option-pricing model, we would have recorded additional compensation expense and reduced net income by approximately $3.8$13.5 million, $4.6$4.9 million, and $11.3$5.5 million in 2005, 2004, and 2003, and 2002, respectively. The stock-based compensation expense for 2005 includes the impact of the acceleration of certain Keane stock options granted prior to August 1, 2005 with an exercise price of $11.44 or greater. As a result of the acceleration, we would have had to record approximately $10.5 million in pretax non-cash compensation expense or approximately $8.7 million net of taxes in the Fourth Quarter of 2005.

        See "RECENT ACCOUNTING PRONOUNCEMENTS" for discussion on SFAS No. 123 (revised 2004) ("SFAS 123(R)") "Share-Based Payment," which was issued in December 2004 and is a revision of SFAS 123 and supersedes APB 25 and its related implementation guidance.

Restructuring

        We have recorded restructuring charges and reserves associated with restructuring plans approved by management in the last six 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 we believe that our current estimates regarding lease obligations are adequate, future events could require adjustments to these estimates. Based on the assumptions included in our analysis as of December 31, 2004,2005, to the extent that we are unable to maintain all of our current, contractual subleases, we could incur an additional restructuring charge up to approximately $2.3$2.6 million. In addition, if we are able to negotiate early terminations of our operating leases or to obtain a sublessee,subleasee, we would record a reduction to the restructuring liability and a corresponding expense reduction. In 20042005 and 2003,2004, we recorded ana reduction to restructuring expense reduction of $2.4$0.6 million and $1.0$2.4 million, respectively, associated with early lease terminations and unanticipated subleases.

Accrued Compensation and Other Liabilities

        Employee compensation costs are our largest expense category. We have a number of different variable compensation programs, which are highly dependent on estimates and judgments, particularly at interim reporting dates. Some programs are discretionary while others have quantifiable performance metrics. Certain programs are annual, while others are quarterly or monthly. Often, actual compensation amounts cannot be determined until after we report our results. We believe we make reasonable estimates and judgments using all significant information available. We also estimate the amounts required for incurred but not reported health claims under our self-insured employee benefit programs. Our accrual for health costs is based on historical experience and actual amounts may vary from these estimates. In addition, with respect to our potential exposure to losses from litigation, claims and other assessments, we record a liability when such amounts are believed to be probable and can be reasonably estimated.

Pension Costs

        We have a foreign defined benefit plan that provides pension benefits to employees of our subsidiary located in the UK ("UK DBP"). The measurement of our pension obligation and costs is dependent on a variety of assumptions used by our actuary. These assumptions include estimates of the present value and timing of projected future pension payments to plan participants taking into consideration retirement rates and mortality rates. Assumptions used in determining projected benefit obligations and the fair values of plan assets for our UK DBP are evaluated periodically by management in consultation with outside actuaries and investment advisors. Changes in assumptions are based on relevant Company data. Critical assumptions, such as the discount rate used to measure the benefit obligations, the expected long-term rate of return on plan assets and healthcare cost projections, are evaluated and updated annually. Changes in these assumptions could have a material impact on the projected benefit obligations and the fair values of the plan assets, pension expense, and the required minimum liability. We have assumed that the expected long-term rate of return on plan assets will be 7.75%.

At the end of each year, we determine the discount rate that reflects the current rate at which the pension liabilities could be effectively settled. This rate should be in line with rates for high quality, fixed incomefixed-income investments available for the period to maturity of the pension benefits, and changes as long-term interest rates change. At December 31, 2004,2005, we determined this rate to be 5.40%4.9%.

        During 2004, we closed the UK DBP to future salary accruals effective April 1, 2004. Accordingly, we accounted for the closing of the UK DBP as a curtailment under SFAS No. 88 ("SFAS 88"), "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits." As a result, in 2004, we recorded a curtailment loss of approximately $0.2 million to expense the unrecognized prior service cost, and we recorded an additional required minimum pension liability of approximately $6.6 million as a non-cash adjustment through accumulatedAccumulated other

comprehensive loss in the accompanying consolidated balance sheets. In 2005, we recorded a net increase in the required minimum pension liability of approximately $2.8 million through Accumulated other comprehensive loss primarily due to lower investment yields on high quality corporate bonds. As of December 31, 2005 and 2004, the minimum pension liability was $15.3 million and $13.5 million, respectively, and is included in accrued expenses and other long-term liabilities in the accompanying consolidated balance sheet.sheets. Expected employer contributions for 2006 are approximately $0.2 million. However, recent legislation in the UK could have a significant impact on the funding levels required under the UK DBP in the future. See Note 1314 "BENEFIT PLANS" in the notes to the accompanying consolidated financial statements for further discussion. We are reviewing various alternatives regarding the structure of the UK Pension. Based upon information available to date, we believe the increase in future funding levels could range from approximately $1.0 million to approximately $2.0 million on an annual basis in 2006 and beyond.

CONSOLIDATED RESULTS OF OPERATIONS

2005 Compared to 2004

Revenues

        Revenues for the year ended December 31, 2005 were $955.9 million, an increase of $44.3 million, or 4.9%, compared to revenues of $911.5 million for the year ended December 31, 2004. The increase in revenues compared to the year ended December 31, 2004 was partly due to revenues from netNumina Solutions, Inc. ("netNumina"), which we acquired on February 28, 2005, and higher revenues from new and existing clients, offset by decreases in revenues from PacifiCare and IBM, as discussed below, and the termination of a contract with a large client in the Third Quarter ended September 30, 2004. The increase was also due to the revenues associated with our acquisitions of Nims Associates, Inc. ("Nims"), which we acquired on February 27, 2004, and Fast Track Holdings Limited ("Fast Track"), which we acquired on July 13, 2004. See Note 7 "BUSINESS ACQUISITIONS" for a description of our acquired businesses.

        During the Fourth Quarter of 2004, both a large UK client and IBM notified us that they would be reducing their purchasing requirements. The reduction of purchasing requirements from the UK client reduced our total annual revenues by approximately $11.3 million in 2005. During the First Quarter ended March 31, 2005, IBM also notified us that Keane and other current vendor resources would be included in a proposal process for both current and future business. In July 2005, we decided to withdraw from our staff augmentation relationship with IBM. In the Third Quarter ended September 30, 2005, we sold our IBM business to another provider. These lower volumes from IBM and the sale of the business resulted in a revenue reduction for the year ended December 31, 2005 of approximately $21.7 million compared to the year ended December 31, 2004.

        We have concluded that objective evidence of fair value does not exist for all of the elements within the Victoria TTA contract. Accordingly, each of the elements cannot be separated into multiple units of accounting and therefore, must be accounted for as a single unit of accounting. As a result, we are deferring all revenues and costs directly associated with the delivery of products and services during two years of development work, referred to as the Build phase, and we will recognize all revenues and direct costs for the contract over the period of the ten years of operation and maintenance, referred to as the Operate phase, currently estimated to begin in mid-2007. In 2005, all revenues and direct and incremental costs associated with the delivery of products and services have therefore been deferred.

        Outsourcing.    Outsourcing service revenues for the year ended December 31, 2005 were $506.5 million, an increase of $41.5 million, or 8.9%, compared to the year ended December 31, 2004. The increase in Outsourcing service revenues compared to the year ended December 31, 2004 was partly due to revenues generated from new and existing clients from our application maintenance and BPO offerings, as well as revenues associated with netNumina. The increase reflects approximately $14.5 million of higher revenues generated by Nims in 2005 compared to 2004 and approximately $8.5 million of revenues associated with Nims due to a full twelve months of results in 2005. These increases in Outsourcing service revenues more than offsets lower revenues associated with PacifiCare, as discussed below, reductions from a large UK client and the termination of a contract with a large client in the Third Quarter ended September 30, 2004.

        PacifiCare, one of our largest clients, reduced the level of service from the stated baseline contract amounts in accordance with its right under the contract terms, thereby reducing the contract value. We have provided services at or above the baseline levels set forth in the contract at agreed upon rates. Revenues from PacifiCare for the year ended December 31, 2005, were approximately $10.4 million lower than revenues from PacifiCare for the year ended December 31, 2004.

        On December 20, 2005, UnitedHealth Group Incorporated, an affiliate of United HealthCare Services, Inc. ("United HealthCare"), completed its acquisition of PacifiCare. On January 20, 2006, we entered into a 5-year master services agreement with United HealthCare Services, Inc. effective January 1, 2006. Simultaneously, we and PacifiCare terminated our Information Technology Services Agreement, dated January 11, 2002, effective January 1, 2006. Our original Information Technology Services Agreement with PacifiCare provided for an outsourcing arrangement with a ten-year term and $500 million in contract value. The remaining contract value under that agreement as of January 1, 2006 would have been approximately $226 million. As a result of the ending of the original agreement with PacifiCare we will receive a $10.1 million payment in two equal installments on July 30, 2006 and July 30, 2007. Under the new master services agreement with United HealthCare we will receive approximately $21 million for a specified level of services provided from January 1, 2006 through June 30, 2007.

        Development & Integration.    Development & Integration service revenues for the year ended December 31, 2005 were $171.0 million, a decrease of $5.8 million, or 3.3%, compared to the year ended December 31, 2004. The decrease was primarily due to lower revenues from our healthcare product and services and lower revenues from the large UK client.

        Other IT Services.    Other IT Services revenues for the year ended December 31, 2005 were $278.3 million, an increase of $8.6 million, or 3.2%, compared to the year ended December 31, 2004. The increase was primarily due to additional supplemental staffing placements offset by lower revenues from IBM.

        The following table summarizes certain line items from our consolidated statements of income (dollars in thousands):

Salaries, wages, and other direct costs

        Salaries, wages, and other direct costs for the year ended December 31, 2005 were $669.9 million, an increase of $32.7 million, or 5.1%, compared to $637.2 million for the year ended December 31, 2004. The increase was primarily attributable to higher costs of client service personnel to support our increased service revenues. Salaries, wages, and other direct costs were 70.1% of total revenues for the year ended December 31, 2005, compared to 69.9% of total revenues for the same period in 2004.

        Total billable employees for all operations were 8,208 as of December 31, 2005, compared to 7,235 as of December 31, 2004. This includes 2,283 billable employees in India, which includes Keane Worldzen, and represents and increase of 829 employees, or 57.0%, over the year ended December 31, 2004. We added our India operation in March 2002 with our acquisition of SignalTree Solutions and we acquired our controlling interest in Keane Worldzen in October 2003. In addition to these employees, we occasionally use subcontract personnel to augment our billable staff, which represented 646 full-time professionals as of December 31, 2005. Overall utilization rates for all three periods remained stable as we increased the number of billable employees.

Gross margin

        Our management believes gross margin(revenues less salaries, wages, and other direct costs) provides an important measure of our profitability. Gross margin for the year ended December 31, 2005 increased $11.6 million, or 4.2%, compared to the year ended December 31, 2004. Gross margin as a percentage of revenues for the year ended December 31, 2005 was 29.9% compared to 30.1% for the year ended December 31, 2004. The lower labor cost associated with the increased use of offshore resources at our India facilities contributed to maintaining our gross margins. We continue to closely monitor utilization rates and other direct costs in an effort to avoid adverse impacts on our gross margin.

Selling, general, and administrative expenses

        SG&A expenses include salaries for our corporate and branch administrative employees, sales and marketing expenses, as well as the cost of our administrative facilities, including related depreciation expense. SG&A expenses for the year ended December 31, 2005 increased $12.5 million, or 6.1% over the same period in 2004. These increases in SG&A expenses were primarily due to labor and labor-related costs, expenses associated with the Victoria TTA contract and costs associated with our growth in India. The year ended December 31, 2005 includes approximately $3.4 million of indirect expenses associated with the Victoria TTA contract. SG&A expenses for the twelve months ended December 31, 2005 were 22.9% of total revenues, as compared to 22.7% of total revenues for the same period in 2004. The increases in SG&A expenses as a percentage of revenue were mainly due to the costs of the Victoria TTA contract and the labor and labor related costs.

Amortization of intangible assets

        Amortization of intangible assets for the year ended December 31, 2005 was $15.6 million, a decrease of $0.6 million, or 3.6%, over the same period in 2004. The decrease in amortization of intangible assets was primarily due to certain intangibles becoming fully amortized offset by the amortization of intangible assets resulting from the Fast Track and Nims acquisitions.

Restructuring charges, net

        During the Fourth Quarter of 2004, we reevaluated our estimates recorded for the restructuring charge taken in 2002 and 2003 and as a result recorded an expense reduction of $2.4 million and a charge of $2.3 million, resulting in a net expense reduction of $0.1 million.

Interest and dividend income

        Interest and dividend income for the year ended December 31, 2005 was $4.7 million compared to $3.9 million for the same period in 2004. The increase in interest and dividend income was primarily attributable to higher interest rates and lower amortization of discount for the year ended December 31, 2005 compared to the same period in 2004. To the extent we use our cash and marketable securities to fund acquisitions, our operations, and capital investments, our interest income will decline in future periods.

Interest expense

        Interest expense for the year ended December 31, 2005 was $5.6 million, unchanged compared to $5.7 million for the same period in 2004. Interest expense was unchanged because our Debentures were outstanding for the entire twelve months ended December 31, 2005 and 2004. We also record interest expense on the accrued building costs associated with our corporate facility as explained in Note 16 "RELATED PARTIES, COMMITMENTS, AND CONTINGENCIES" in the notes to the accompanying consolidated financial statements.

Other (expense) income, net

        Other expense, net was $0.7 million for the year ended December 31, 2005, unchanged compared to expense of $0.7 million for the same period in 2004 and consists primarily of foreign exchange gains and losses.

Minority Interest

        Minority interest income for the year ended December 31, 2005 was $1.0 million, a decrease of $1.5 million compared to the same period in 2004. The decrease in minority interest income was due to Keane's higher ownership percentage of Keane Worldzen and due to a decrease in Keane Worldzen's net loss during 2005 compared to 2004. The amount in minority interest income represents the loss attributable to minority shareholders of Keane Worldzen for the period presented. We completed our acquisition of a controlling interest in Keane Worldzen in the Fourth Quarter for 2003, which resulted in an initial equity position of approximately 62% of the issued and outstanding capital stock of Keane Worldzen and our consolidation of the results of Keane Worldzen. Consistent with the right to increase our ownership position over time, we increased our equity position to approximately 81% in April 2005 with an additional capital contribution of approximately $5.0 million in cash and $3.0 million from the conversion of existing cash advances to equity. Consistent with the minority shareholders' rights, the minority shareholders exercised their first put option in December 2005, which required us to purchase approximately 5% of their outstanding shares for $2.8 million. As a result of our additional capital contribution and the minority shareholders' exercise of the first put option, we own approximately 86% of the outstanding capital stock of Keane Worldzen and the minority interest shareholders own approximately 14% of the issued and outstanding capital stock of Keane Worldzen. We continue to consolidate the results of Keane Worldzen but recognize 86% of the results of operations. The put options are explained in further detail in Note 7 "BUSINESS ACQUISTIONS" in the notes to the accompanying consolidated financial statements.

Income taxes

        The provision for income taxes represents the amounts owed for federal, state, and foreign taxes. Our effective tax rate was 33.6% for the year ended December 31, 2005. Our effective tax rate was 37.3% for the year ended December 31, 2004. The determination of the provision for income tax expense, deferred tax assets and liabilities and related valuation allowance involves judgment. As a global company, we are required to calculate and provide for income taxes in each of the tax jurisdictions where we operate. This involves making judgments regarding the recoverability of deferred tax assets, which can affect the overall effective tax rate. In addition, changes in the geographic mix or

estimated level of pre-tax income can also affect the overall effective tax rate. During the year ended December 31, 2005, we recorded a $3.5 million reduction to our tax reserves due to the expiration of certain statutes of limitation and changes in estimates. In accordance with SFAS 5 and SFAS No. 109 ("SFAS 109"), "Accounting for Income Taxes," we adjusted our tax reserves in the period where the conditions under SFAS 5 were no longer met, which resulted in a reduction to our tax provision. In addition, as a result of owning greater than 80% of the outstanding voting stock of Keane Worldzen, beginning April 1, 2005, we are able to record a tax benefit on the losses associated with Keane Worldzen, thereby reducing our annual effective tax rate.

        During the year ended December 31, 2004, certain events occurred which impacted our tax provision. These events included the expiration of certain state statutes and changes in estimates, which resulted in a reduction to our tax provision of approximately $1.1 million, and the enactment of certain tax laws, which resulted in an imposition of tax retroactive to January 1, 2004 and that resulted in an increase to our tax provision of approximately $0.6 million. The net impact of these events was a reduction of our tax provision by approximately $0.5 million. For the year ended December 31, 2004 we identified errors relating to deferred tax balances arising from transactions in prior years. As a result, we recorded an adjustment to record an additional deferred tax asset totaling approximately $2.2 million and a corresponding decrease to the provision for income taxes. This income tax adjustment resulted from book to tax timing differences related to depreciation expense that management believes related to a period, or periods prior to 2004. Since the specific period to which this adjustment related could not be identified with certainty, the adjustment was recorded in the year ended December 31, 2004.

Net income

        Net income for the year ended December 31, 2005 was $1.1 million higher compared to the year ended December 31, 2004. The increase is due to the lower effective tax rate resulting from the reduction of tax reserves discussed above for the year ended December 31, 2005.

2004 Compared to 2003

Revenues

        Revenues for the year ended December 31, 2004 were $911.5 million, an increase of $106.6 million, or 13.2%, compared to revenues of $805.0 million for the year ended December 31,

2003. Revenues in 2004 increased compared to 2003 due primarily to the growth in Outsourcing services and revenues from our acquired businesses. We completed our acquisition of Nims Associates, Inc. ("Nims"), an IT and consulting services company with offices in the Midwest, on February 27, 2004, and as a result, the operating results of Nims have been included in our consolidated financial statements beginning March 1, 2004. In addition, we completed the acquisition of Fast Track Holdings Limited ("Fast Track") on July 13, 2004, and have included its operating results in our consolidated financial statements beginning July 14, 2004. Fast Track was a privately held consulting firm based in the United KingdomUK that manages the design, integration, and rapid deployment of large-scale SAP implementations.

        Outsourcing.    Outsourcing service revenues for the year ended December 31, 2004 were $465.1 million, an increase of $93.8 million, or 25.3%, compared to the year ended December 31, 2003. The increase in Outsourcing service revenues was primarily due to increased revenues from large outsourcing contracts, as well as the revenues generated by Nims. PacifiCare, one of our largest clients, has reduced the level of service from the stated baseline contract amounts in accordance with its right under the contract terms, thereby reducing the contract value. During the Second Quarter ended June 30, 2004, PacifiCare requested that we further reduce service levels to levels below the minimums provided in our contract. The requested change was not consistent with the terms of our contract with PacifiCare and would have resulted in a reduction in our monthly billings to PacifiCare. Accordingly, we did not agree to this change. Since then, through the year ended on December 31, 2004, we have continued providing services at or above the minimum levels set forth in the contract. In accordance with the contract terms, we and PacifiCare jointly engaged an independent third party to conduct a study to compare our billing rates with benchmark rates. The results assert that our rates are higher than the benchmark rates. To the extent that the lower rates identified in the study would go in effect in the Second Quarter of 2005, our annual revenues and operating income would decline. We have thirty days to evaluate the results of the study and expect that we will enter into discussions with PacifiCare thereafter.

        Development & Integration.    Development & Integration service revenues for the year ended December 31, 2004 were $176.8 million, an increase of $14.7 million, or 9.0%, compared to the year ended December 31, 2003 partly due to the revenues associated with the acquisition of Fast Track in the Third Quarter ended September 30, 2004.

        Other IT Services.    Other IT Services revenues for the year ended December 31, 2004 were $269.7 million, a decrease of $1.9 million, or 0.7%, compared to the year ended December 31, 2003. During the Second Quarter ended June 30, 2004 we agreed to a 5% price reduction for one of our large customersclients and mitigated the impact of that price reduction on gross margin by negotiating lower pricing of our subcontractor personnel. Additionally, this customerclient also notified us in the Fourth Quarter of 2004 that they would be reducing their purchasing requirements, which will have an impact of reducing annual revenues by approximately $7.0 million to $8.0 million in 2005 from that customer.client. In addition, a large client in the UK has notified us that they would be reducing their purchasing requirements, which will have an impact of reducing annual revenue by approximately $10.0 million to $14.0 million in 2005.

        The following table summarizes certain line items from our consolidated statements of income (dollars in thousands):

Salaries, wages, and other direct costs

        Salaries, wages, and other direct costs for the year ended December 31, 2004 were $637.2 million, an increase of $82.9 million compared to $554.4 million for the year ended December 31, 2003. The increase was primarily attributable to costs of client service personnel to support the increased service revenues as well as an increase in direct costs to support the revenues generated by our acquired Nims business. Salaries, wages, and other direct costs were 69.9% of total revenues for the year ended December 31, 2004 compared to 68.9% of total revenues for the year ended December 31, 2003.

        Total billable employees for all operations were 7,235 as of December 31, 2004, compared to 6,369 total billable employees as of December 31, 2003. This includes a base of billable employees within our India operations of 1,454, which represents an increase of 421 employees, or 40.8%, over the year ended December 31, 2003. We added our India operation in March 2002 with our acquisition of SignalTree Solutions. In addition, total billable employees include a base of 370 billable employees within our Keane Worldzen operations. We acquired our controlling interest in Keane Worldzen in October 2003. In addition to these employees, we occasionally use subcontract personnel to augment our billable staff, which represented 585 subcontractors as of December 31, 2004. Overall utilization rates for all three periods remained stable as we increased the number of billable employees.

Gross margin

        Our management believes gross margin(revenues less salaries, wages, and other direct costs) provides an important measure of our profitability. Gross margin for the year ended December 31, 2004 increased $23.7 million, or 9.5%, compared to the year ended December 31, 2003. Gross margin as a percentage of revenues for the year ended December 31, 2004 was 30.1% compared to 31.1% for

the year ended December 31, 2003. Although gross margin for the year ended December 31, 2004 decreased by approximately 100 basis points compared to the year ended December 31, 2003, we believe that the relatively constant gross margin percentage over the past two years is indicative of a more stable environment for IT services, and firmer utilization rates, as well as the benefit of our global delivery capabilities. The lower labor cost associated with the increased use of offshore resources at our India facilities helped reduce the impact of lower pricing of our services on gross margin. We continue to closely monitor utilization rates and other direct costs in an effort to avoid adverse impacts on our gross margin.

Selling, general, and administrative expenses

        SG&A expenses include salaries for our corporate and branch administrative employees, sales and marketing expenses, as well as the cost of our administrative facilities, including related depreciation expense. SG&A expenses for the year ended December 31, 2004 increased $13.8 million, or 7.2%, compared to the year ended December 31, 2003. The increase in SG&A expenses was due to higher compensation costs in 2004 compared to 2003, resulting from higher headcount associated with our acquired business, Keane Worldzen in the Fourth Quarter ended December 31, 2003, Nims in the First Quarter ended March 31, 2004 and Fast Track in the Third Quarter ended September 30, 2004. Also contributing to the increase in SG&A expenses were higher costs associated with the growth of our India operations. SG&A expenses for the year ended December 31, 2004 were 22.7% of total revenues, as compared to 24.0% of total revenues for the year ended December 31, 2003. The decrease in SG&A expenses as a percentage of revenue in 2004 was due in part to the acquisition of Nims, the integration of the operations of Nims, and increasing revenues.

Amortization of intangible assets

        Amortization of intangible assets for the year ended December 31, 2004 was $16.2 million, compared to $15.8 million for the year ended December 31, 2003. The amortization of intangible assets for 2004 increased $0.4 million due to the additional intangible assets resulting from our Nims acquisition in the First Quarter ended March 31, 2004 and, to a lesser extent, our Fast Track acquisition in the Third Quarter ended September 30, 2004. These amounts were offset in part by certain intangibles that have become fully amortized.

Restructuring charges, net

        During the Fourth Quarter of 2004, we reevaluated our estimates recorded for the restructuring charge taken in 2002 and 2003 and as a result recorded an expense reduction of $2.4 million and a charge of $2.3 million, resulting in a net expense reduction of $0.1 million. During 2003, we reevaluated our estimates recorded for the restructuring charge taken in 2002 and as a result recorded an expense reduction of $1.5 million for workforce reductions, and $1.0 million related to the costs of consolidating and/or closing certain non-profitable offices. In addition, during 2003 we recorded a restructuring charge of $2.2 million. Of this charge, $1.3 million was for an additional workforce reduction of 75 employees and $0.9 million was for the costs associated with a branch office closing. The net impact of these actions resulted in a net expense reduction to the restructuring charge of $326,000 in our consolidated statement of income.

Interest and dividend income

        Interest and dividend income for the year ended December 31, 2004 was $3.9 million compared to $3.0 million for the year ended December 31, 2003. The increase in interest and dividend income was the result of higher average cash balances and marketable securities. The higher average cash balances and marketable securities was due to the investment of the net proceeds from the issuance of our 2.0% Convertible Subordinate Debentures due 2013 ("Debentures") issued in June 2003 and strong cash flow, offset in part by the impact of our share repurchases during 2003 and the year ended December 31, 2004. To the extent we use our cash and marketable securities to fund acquisitions, our operations, and capital investments, our interest income will decline in future periods.

Interest expense

        Interest expense for the year ended December 31, 2004 was $5.7 million compared to $4.2 million for the year ended December 31, 2003. The increase in interest expense was primarily related to a full year of interest recognized on our Debentures and the imputed interest expense on the accrued building costs as a result of our occupation of our corporate facility. As explained in Note 1516 "RELATED PARTIES, COMMITMENTS, AND CONTINGENCIES" in the notes to the accompanying consolidated financial statements, the accounting for the facility requires us to impute interest expense on the accrued building costs.

Other (expense) income, net

        Other expense, net was $0.7 million for the year ended December 31, 2004 and other income, net was $7.1 million for the year ended December 31, 2003. Other income, net during the First Quarter of 2003 included a $7.3 million, $4.4 million after tax, favorable judgment in an arbitration award proceeding related to damages for breach of an agreement between Signal Corporation and our Federal Systems subsidiary.

Minority Interest

        During the Fourth Quarter of 2003, we completed our acquisition of a controlling interest in Keane Worldzen, a privately held BPOBPS firm. Our initial investment resulted in an equity position of approximately 62% of the issued and outstanding capital stock of Keane Worldzen with the right to increase our ownership position over time. As a result of this transaction, we began to consolidate Keane Worldzen's financial results with ours in the Fourth Quarter of 2003. The amount in minority interest represents the loss attributable to minority shareholders for the period that we consolidated Keane Worldzen.

Income taxes

        The provision for income taxes represents the amounts owed for federal, state, and foreign taxes. Our effective tax rate was 37.3% for the year ended December 31, 2004. Our effective tax rate was 40% for the year ended December 31, 2003. The determination of the provision for income tax expense, deferred tax assets and liabilities and related valuation allowance involves judgment. As a global company, we are required to calculate and provide for income taxes in each of the tax jurisdictions where we operate. This involves making judgments regarding the recoverability of deferred tax assets, which can affect the overall effective tax rate. In addition, changes in the geographic mix or estimated level of pre-tax income can affect the overall effective tax rate. During the Third Quarter ended September 30, 2004, certain events occurred, which impacted our tax provision. These events include the expiration of certain state statutes and changes in estimates, which resulted in a reduction to our tax provision of approximately $1.1 million, and the enactment of certain tax laws, which resulted in an imposition of tax retroactive to January 1, 2004 and that resulted in an

increase to our tax provision of approximately $0.6 million. The net impact of these events was a reduction of our tax provision by approximately $0.5 million. In accordance with SFAS 5 and SFAS No. 109 ("SFAS 109"), "Accounting

"Accounting for Income Taxes," we adjusted our tax reserves in the period where the conditions under SFAS 5 were no longer met and as of the enactment date of the new tax laws.

        For the year ended December 31, 2004, the Company identified errors relating to deferred tax balances arising from transactions in prior years. As a result, an adjustment to reduce goodwill by approximately $2.1 million has been recorded in the accompanying consolidated balance sheet as of December 31, 2004 with a corresponding reduction to deferred tax liabilities. Furthermore, as of December 31, 2004, the Company recorded an adjustment to record an additional deferred tax asset totaling approximately $2.2 million and a corresponding decrease to the provision for income taxes. This income tax adjustment results from book to tax timing differences related to depreciation expense that management believes relate to a period, or periods prior to 2004. Since the specific period to which this adjustment relates cannot be identified with certainty, the adjustment has been recorded in the year ended December 31, 2004.

Net income

        Net income for the year ended December 31, 2004 was $3.1 million higher compared to the year ended December 31, 2003. The increase is due to higher income before taxes and the lower effective tax rate as a result of the reduction of tax reserves discussed above for the year ended December 31, 2004.

2003 Compared to 2002

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 beginning to see some indications of increases in discretionary IT spending.

        Outsourcing.    Outsourcing service revenues for the year ended December 31, 2003 were $371.3 million, an increase of $26.8 million, or 7.8%, compared to the year ended December 31, 2002. The increase in Outsourcing service revenues was primarily due to increased revenues from large outsourcing contracts.

        Development & Integration.    Development & Integration service revenues for the year ended December 31, 2003 were $162.1 million, a decrease of $23.7 million, or 12.8%, compared to the year ended December 31, 2002. Development and Integration service revenues were adversely affected during 2003 by customers' decisions to defer software development projects due to the reduction in capital spending related to technology.

        Other IT Services.    Other IT Services revenues for the year ended December 31, 2003 were $271.6 million, a decrease of $71.3 million, or 20.8%, compared to the year ended December 31, 2002, largely due to lower revenues associated with staff augmentation and other services.

        The following table summarizes certain line items from our consolidated statements of income (dollars in thousands):

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 end of 2003, compared to 6,175 total billable employees at the end of 2002. In addition to these employees, we occasionally use subcontractors to augment our billable staff. The base of billable employees within our India operation was 876 at the end of 2003, an increase of 463 employees, or 112.1%, compared to 2002. We added our India operation in March 2002 with our acquisition of SignalTree Solutions. We closely monitor utilization rates, billable employees, and other direct costs in an effort to avoid adverse impacts to our gross margin.

Gross margin

        We believe gross margin(revenues less salaries, wages, and other direct costs) provides an important measure of our profitability. Gross margin as a percentage of revenue for 2003 was 31.1%, compared to 27.8% in 2002. The increase in gross margin as a percentage of revenue was largely the result of a more stable environment for IT services and improved utilization related to our base of billable personnel in North America. Also contributing to the improvement in the gross margin percentage was our lower labor cost due to increased use of offshore resources at our India facilities.

Selling, general and administrative expenses

        SG&A expenses include salaries for our corporate and branch administrative employees, sales and marketing expenses, as well as the cost of our administrative facilities, including related depreciation expense. SG&A expenses for 2003 decreased $5.9 million, or 3.0%, compared to 2002. SG&A expenses for 2003 were $192.9 million, or 24.0%, of total revenue, compared to $198.8 million, or 22.8%, of total revenue for 2002. The decrease in SG&A expenses in 2003 was the result of our

Fourth Quarter of 2002 workforce reduction, our continued focus on tightly controlling discretionary expenses, and the cost synergies of fully integrating the acquisitions that we made in 2001 and 2002.

Amortization of intangible assets

        Amortization of intangible assets for 2003 was $15.8 million, a decrease of $0.5 million, or 3.3%, compared to 2002. The decrease in amortization of intangible assets in 2003 was primarily due to fully amortizing intangibles associated with prior year acquisitions offset in part by the full year amortization of additional intangible assets resulting from the acquisitions 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 for workforce reductions, and $1.0 million related to the costs of consolidating and/or closing certain non-profitable offices. In addition, during 2003 we recorded a restructuring charge of $2.2 million. Of this charge, $1.3 million was for an additional workforce reduction of 75 employees and $0.9 million was for the costs associated with a branch office closing. The net impact of these actions resulted in 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 other 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 Debentures in June 2003 and our strong cash flow. Our cash balances were reduced by cash used to repurchase shares of our common stock in 2003.

Interest expense

        Interest expense for 2003 was $4.2 million compared to $255,000 in 2002. The interest expense increase is primarily related to the issuance of our Debentures and our new corporate facility. The accounting for the facility as explained in Note 15 "RELATED PARTIES, COMMITMENTS, AND CONTINGENCIES" in the notes to the accompanying consolidated financial statements, requires us to impute interest expense on the accrued building costs.

Other income, net

        Other income was $7.1 million for 2003 compared to $1.3 million in 2002. Other income in 2003 included a $7.3 million payment received for a favorable judgment in an arbitration award proceeding related to damages for breach of an agreement between Signal Corporation and our Federal Systems subsidiary.

Minority interest

        During the Fourth Quarter of 2003, we completed our acquisition of a controlling interest in Keane Worldzen, a privately held BPO firm. Our initial investment resulted in an equity position of approximately 62% of the issued and outstanding capital stock of Keane Worldzen with the right to increase our ownership position over time. As a result of this transaction, we began to consolidate Keane Worldzen's financial results with ours in the Fourth Quarter of 2003. The amount in minority interest represents the loss attributable to minority shareholders for the period that we consolidated Worldzen.

Income taxes

        We generated income before taxes of $48.7 million for 2003 compared to $13.6 million in 2002. The provision for income taxes represents the amounts owed for federal, state, and foreign taxes. The effective income tax rate is the provision for income taxes as a percentage of income before the provision for income taxes. Our effective tax rate was 40.0% for 2003 and 2002, and reflects an adjustment of prior year's estimated tax liability in 2003 and 2002. A reconciliation of the statutory federal income tax rate to the effective rate for each 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.

RECENT ACCOUNTING PRONOUNCEMENTS

        In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," as amended by FASB Interpretation No. 46(R) ("FIN 46(R)"), which requires the consolidation of a variable interest entity, as defined, by its primary beneficiary. Primary beneficiaries are those companies that are subject to a majority of the risk of loss or entitled to receive a majority of the entity's residual returns, or both. In determining whether it is the primary beneficiary of a variable interest entity, an entity with a variable interest shall treat variable interests in that same entity held by its related parties as its own interests. FIN 46(R) is effective prospectively for all variable interests obtained subsequent to December 31, 2002. For variable interests existing prior to December 31, 2002, consolidation is required for periods ending after March 15, 2004, with the exception of interests in special purpose entities, which were required in financial statements of public companies for periods ending after December 15, 2003.

        We have evaluated the applicability of FIN 46(R) to our relationship with each of City Square Limited Partnership ("City Square") and Gateway LLC and determined that these entities are not required to be consolidated within our unaudited condensed consolidated financial statements. We have determined that Gateway LLC is not a variable interest entity as the equity investment is sufficient to absorb the expected losses and the holders of the equity investment do not lack any of the characteristics of a controlling interest. We have concluded that as we no longer occupy the space at Ten City Square and no longer derive any benefit from leasing the space, we would not be determined to be the related party most closely associated with City Square. As a result, we will continue to account for our leases with City Square and Gateway LLC consistent with our historical practices in accordance with generally accepted accounting principles. We believe that we do not have an interest in any variable interest entities that would require consolidation.

        In May 2003, the EITF reached a consensus on Issue No. 01-08 ("EITF 01-8"), "Determining Whether an Arrangement Contains a Lease." EITF 01-08 provides guidance on how to determine

whether an arrangement contains a lease that is within the scope of SFAS No. 13 ("SFAS 13"), "Accounting for Leases." The guidance in EITF 01-08 is based on whether the arrangement conveys to the purchaser (lessee) the right to use a specific asset. EITF 01-08 is effective for arrangements entered into or modified in the Second Quarter of 2004. The adoption of this statement did not have a significant effect on our unaudited condensed consolidated financial position or results of operations.

        In December 2003, the FASB issued SFAS No. 132 (revised 2003) ("SFAS 132 as revised"), "Employers' Disclosures about Pensions and Other Post Retirement Benefits." This Statement revises employers' disclosures about pension plans and other postretirement benefit plans but does not change the measurement or recognition provisions of SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" and SFAS No. 106, "Employer's Accounting for Postretirement Benefits Other than Pensions." SFAS 132 as revised requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement plans. This Statement is effective for financial statements with fiscal years ending after December 15, 2003, except the additional disclosure information about foreign plans is effective for fiscal years ending after June 15, 2004. We have a foreign defined benefit plan and, as a result, have included the required additional disclosures in the notes to the accompanying consolidated financial statements.

        In March 2004, the EITF reached consensuses on Issue No. 03-6 ("EITF 03-6"), "Participating Securities and the Two-Class Method" under FASB Statement No. 128, "Earnings per Share," which requires that convertible participating securities should be included in the computation of basic earnings per share using the two-class method. Our Debentures are not participating securities under the provisions of EITF 03-6 as they do not participate in undistributed earnings with our common stock. No separate disclosure of basic or diluted earnings per share has been made for the Class B common stock as the impact was immaterial and, effective February 1, 2004, all of the Class B common stock was converted into shares of our common stock. In addition, there was no impact on the basic and diluted earnings per share for our common stock for all periods presented in the accompanying unaudited condensed consolidated statements of income. See Note 8 "Capital Stock" in the notes to the accompanying unaudited condensed consolidated financial statements for additional disclosure.

        In September 2004, the EITF reached consensus on Issue No. 04-8 ("EITF 04-8"), "The Effect of Contingently Convertible Debt on Diluted Earnings per Share," which requires that contingently convertible debt should be included in the calculation of diluted earnings per share using the if-converted method regardless of whether the market price trigger has been met. Under the if-converted method, the debt is considered converted to shares, with the resulting number of shares included in the denominator of the earnings per share calculation and the related interest expense (net of tax) added back to the numerator of the earnings per share calculation. See Note 2 "Earnings Per Share Data" in the notes to the accompanying consolidated financial statements for additional disclosure. In accordance with this Issue, we have adopted the consensus as of December 31, 2004 and have restated all prior periods presented. The adoption of EITF 04-8 resulted in a reduction of diluted earnings per share for the years ended December 31, 2004 and 2003, but did not have any impact on diluted earnings per share for the year ended December 31, 2002 as our Debentures were issued in 2003.

        In December 2004, the FASB issued SFAS No. 123 (revised 2004)153 ("SFAS 153"), "Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29." This standard eliminates the exception for nonmonetary exchanges of similar productive assets to be measured based on the fair value of the assets exchanged and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. This standard is effective January 1, 2006 and we do not believe the adoption of SFAS 153 will have a material impact on our consolidated financial position, results of operations, and financial condition.

        In December 2004, the FASB issued SFAS 123(R)") "Share-Based Payment,", which is a revision of SFAS 123 and supersedes APB 25 and its related implementation guidance. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values at the date of grant. Pro forma disclosure is no longer an alternative. In April 2005, the Securities and Exchange Commission ("SEC") announced that it would provide for a phased-in implementation process for SFAS 123(R) is effective for. Specifically, the SEC will require public companies (excludingthat are not small business issuerissuers as defined in SEC Regulation S-B) atS-B to adopt SFAS 123(R) no later than the beginning of the first interim or annual periodfiscal year beginning after June 15, 2005. Therefore, we were required to adopt SFAS 123(R) on January 1, 2006.

        SFAS 123(R) permits public companies to adopt its requirements using one of two methods. Amethods: a "modified prospective" method, in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date. Adate, and a "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. WeEffective January 1, 2006, we have yet to determine which method we will use in adoptingadopted SFAS 123(R). using the modified prospective method. As permitted by SFAS 123, we currently account for share-based payments to employees using APB 25's intrinsic value method. Accordingly,On October 20, 2005 and December 30, 2005, our Board of Directors and Brian T. Keane, by our Board of Directors' delegation of authority to him, approved the acceleration of the vesting of certain Keane stock options granted prior to August 1, 2005 with an exercise price of $11.44 or greater. See Note 1 "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES," in the footnotes to the accompanying consolidated financial statements for further discussion on the impact of the option acceleration. We are continuing to evaluate the impact of the adoption of SFASFAS 123(R)'s fair value method for the First Quarter of 2006. Our evaluation is based on awards

        In November 2005, the FASB issued Staff Position No. FAS 115-1 ("FSP 115-1"), "The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments." FSP 115-1 provides accounting guidance for determining and measuring other-than-temporary impairments of debt and equity securities, and confirms the disclosure requirements for investments in unrealized loss positions as outlined in EITF issue 03-01, "The Meaning of Other-Than-Temporary Impairments and its Application to Certain Investments." The accounting requirements of FSP 115-1 are effective for us on January 1, 2006. We do not yet determinedbelieve the adoption of FSP 115-1 will have a material impact in future periods.on our consolidated financial position, results of operations or cash flows.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated Financial Condition (Dollars in thousands)

        We have historically financed our operations with cash generated from operations. In addition, we raised $150.0 million in proceeds from the issuance of our Debentures. We use the net cash generated from these sources to fund capital expenditures, mergers and acquisitions, and stock repurchases. If we were to experience a decrease in revenue as a result of a decrease in demand for our services or a decrease in our ability to collect receivables, we would be required to reduce discretionary spending related to SG&A expenses and adjust our workforce in an effort to maintain profitability. At December 31, 2004,2005, we had $198.2$167.4 million in cash and cash equivalents and marketable securities. In addition, on September 15, 2005, we entered into a $200 million five-year credit facility, of which approximately $166.8 million was available for borrowing, subject to certain financial covenants, as of December 31, 2005, after considering $33.2 million of outstanding letters of credit. We intend to continue to use our cash and cash equivalents and marketable securities for general corporate

purposes, which may include additional repurchases of our common stock under existing or future share repurchase programs and the funding of future acquisitions and other corporate transactions.

Cash flows from operating activities

        Net cash provided by operating activities totaled $51.9$45.5 million in 20042005 as compared to net cash provided by operationsoperating activities of $77.6$51.9 million in 2003.2004. The decrease in net cash provided by operating activities was driven in part by the absence of a $7.3 million payment that we received in connection with an arbitration proceeding in the First Quarter of 2003, $10.4 million of higher tax payments during 2004lower accounts receivable collection and higher working capital requirements due to the timing of payroll and subcontractor costs. Accounts receivable increased $13.2 million to $126.5 million in 2004 compared to 2003. The accounts receivable increase was largely driven by the revenue growth experienced in 2004. However, Daycertain cash payments. Days Sales Outstanding ("DSO"), an indicator of the effectiveness of our accounts receivable collections, was 58 days as of December 31, 2005 compared to 52 days as of December 31, 2004 compared toand 53 days as of December 31, 2003 and 59 days as of December 31, 2002.2003. We calculate DSO using the trailing three months total revenues divided by the number of days in the quarter to determine daily revenues. The average accounts receivable balance for the three-month period is then divided by daily revenues. Changes in accounts receivable have a

significant effect on our cash flow. Items that can affect our accounts receivable DSO include, contractual payment terms, client payment patterns (including approval or processing delays and cash management), fluctuations in the level of IT product sales and our level of collection efforts. Many individual reasons are outside of our control. As a result, our DSO will normally fluctuate from period to period affecting our liquidity.

        Net cash provided by operating activities decreased $25.7 million in 2003 increased $15.0 million2004 compared to 2002 due to higher net income and improvements in working capital. We drove the improvements in working capital through our continuing efforts to increase collections of accounts receivable. The improvement in collections is evident by a reduction in DSO. Cashcash provided by operating activities also improved due toof $77.6 million in 2003. The decrease in net cash provided by operating activities was driven in part by our receipt of a $7.3 million award that we receivedpayment in connection with an arbitration proceeding in the First Quarter of 2003, a $10.4 million increase in tax payments during 2004 as compared to 2003 and higher working capital requirements due to the timing of payroll and subcontractor costs. Accounts receivable increased $13.2 million to $125.3 million as of December 31, 2004, compared to $126.5 million as of December 31, 2003. This awardThe accounts receivable increase was the result of an arbitration proceeding that we initiatedlargely driven by revenue growth in 2000 for a breach of an agreement between Signal Corporation and our Federal Systems subsidiary. Partially offsetting this increase is approximately $11.9 million that we paid associated with prior and current restructuring charges and $3.5 million that we paid in connection with settling a legal claim in the Third Quarter of 2003. During 2002, we paid $16.5 million associated with prior and current restructuring charges.2004.

        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 20052006 and beyond, we have taken and will continue to take, as we deem necessary, steps to reduce our expenses and align our cost structure to our revenue. We anticipate that current cash on hand and cash generated from operations will be adequate to fund our planned capital and financing expenditures for the next 12 months and beyond.

Cash flows used in investing activities

        Net cash provided by and used in investing activities in each of 2005, 2004, 2003, and 20022003 was primarily forrelated to investments, acquisitions, and capital expenditures.

        Marketable Securities:    During 2005, we purchased $36.3 million and sold $70.2 million in marketable securities, generating a net source of cash of $33.9 million. During 2004, we purchased $62.6 million and sold $77.6 million in marketable securities, generating a net source of cash of $15.0 million. In addition,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.

        Property and Equipment:    During 2005, we invested $16.3 million in property and equipment primarily associated with the expansion of our ADCs nearshore and offshore as well as capitalized software costs in connection with the implementation of our PeopleSoft Enterprise Resource Planning applications in 2005. During 2004, we invested $10.3 million in property and equipment, and capitalized software costs in connection with the implementation of our PeopleSoft Enterprise Resource Planning applications in 2004. During 2003, 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.

        Business Acquisitions:    On June 1, 2005, we acquired Cresta Testing, Inc. ("Cresta"). In exchange for all of the outstanding capital stock of Cresta, we paid $0.6 million in cash, of which $60,000 was held back to secure indemnification obligations of the Cresta stockholders, with the potential to pay up to an additional $0.5 million in earn-out consideration over two years from the acquisition, contingent upon the achievement of certain future financial targets. The $60,000 held back was deposited as restricted cash and also accrued and included in Accrued expenses and other liabilities in the accompanying consolidated balance sheet.

        On February 28, 2005, we acquired netNumina. In exchange for all of the outstanding capital stock of netNumina, we paid $5.7 million in cash, of which $0.6 million was held back to secure indemnification obligations of the netNumina stockholders and acquired $4.6 million in cash. The $0.6 million held back was deposited as restricted cash, and included in Accrued expenses and other liabilities in the accompanying consolidated balance sheet.

        In connection with our acquisition of Keane Worldzen on October 17, 2003, the minority shareholders of Keane Worldzen were given the right to require us to purchase certain of their remaining shares at various times ("put options") subject to the achievement of certain operating and financial milestones related to Keane Worldzen's business performance. The first put option, the term of which was October 17, 2003 through December 31, 2005, was exercisable based on a stated value for the underlying shares of $2.8 million. The minority shareholders exercised their first put option in December 2005, which required us to purchase approximately 5% of their outstanding shares for $2.8 million. The fair value of this put option, using a Black-Scholes valuation model, was approximately $279,000 at the acquisition date and was recognized as compensation expense in the accompanying consolidated financial statements through the expiration date of the option. The other put options are exercisable at fair market value for attaining up to stated ownership percentages during the applicable put periods, which are exercisable at certain times during the period January 1, 2008 through March 1, 2010.

On February 27, 2004, we acquired Nims, an information technology and consulting services company.Nims. We paid $18.1$18.2 million in cash, including transaction costs and net of cash acquired, for all of the outstanding capital stock of Nims. The purchase price may increase with the potential to pay up to an additional $15.0 million in earn-out consideration over the next three years from the acquisition, contingent upon the achievement of certain future financial targets. The first earn-out was achieved as of March 1, 2005 and as a result, we paid $3.3 million in earn-out consideration in April 2005. Based on the forecastedNims' financial performance related toas of December 31, 2005, the firstsecond earn-out was achieved. As a result, we accrued an additional $3.3 million in earn-out consideration, which we expect to pay approximately $3.3 million contingent consideration in April 2006. As of 2005.December 31, 2005, there is remaining approximately $8.3 million in earn-out consideration that could be achieved over the next two years. During 2005, we also received a tax refund related to an acquisition of approximately $0.2 million.

        On July 13, 2004, we acquired Fast Track, a privately held consulting firm based in the United Kingdom that manages the design, integration, and rapid deployment of large-scale SAP implementations.Track. In exchange for all of Fast Track's outstanding capital stock, we paid approximately $3.4 million in cash, including transactions costs, with the potential to pay up to approximately $5.0 million, additionally, in earn-out consideration over the next two years from the acquisition, contingent upon the achievement of certain future financial targets. We did not pay any earn-out consideration related to Fast Track in 2005.

        During 2003, we purchased $144.2 million and sold $18.1 million in marketable securities, generating a net use of cash of $126.1 million. In addition, we invested $15.3 million on property and equipment, and capitalized software costs in connection with the implementation of our PeopleSoft Enterprise Resource Planning applications. We also invested $7.5 million, net of cash acquired, for the controlling interest in Keane Worldzen and paid $0.9 million related to prior year's acquisitions.

        During 2002, we purchased $27.9 million and sold $69.8 million in marketable securities, generating net cash of $41.9 million, which we used to partially fund acquisitions. In 2002, we paid $63.2 million, net of cash acquired, to acquire SignalTree Solutions, and another smaller business that is

complementary to our business strategy. In connection with the smaller complementary business acquisition, we recorded $3.0 million as deferred revenue related to contingent service credits and issued a $3.0 million non-interest bearing note payable as partial consideration. As of December 31, 2004, the deferred revenue and non-interest bearing note each had a balance of $0.6 million, which reflects an aggregate reduction of $4.8 million resulting from the delivery of related service credits. The note had a one-year term with a one-year extension expiring on September 25, 2004. Effective September 25, 2004, the term of the contingent service credits was extended one year through September 25, 2005. During 2002, we also invested $13.7 million on property and equipment, and capitalized software costs in connection with the implementation of our PeopleSoft Enterprise Resource Planning applications.

Cash flows provided by (used in) financing activities

        Net cash flows used for financing activities waswere $51.5 million and $25.2 million in 2005 and 2004, compared to net cash flows provided by financing activities of $82.4 million in 2003. Net cash flows used for financing activitiesrespectively, and were primarily for the repurchase of our common stock.

        In June 2003, we received $150.0 million in proceeds from our issuance of convertible subordinated debentures. From these proceeds, we simultaneously invested approximately $37.3 million to repurchase approximately 3.0 million shares of our common stock from authorizations approved by our Board of Directors in October of 2002 and May of 2003. Net proceeds after the repurchase of

shares and approximately $4.4 million debt issuance costs were approximately $108.3 million. See Note 910 "CONVERTIBLE SUBORDINATED DEBENTURES" in the notes to the accompanying consolidated financial statements for additional information on our Debentures.

        Additionally during 20042005 and 2003,2004, 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, 20022003 through December 31, 2004,2005, our Board of Directors authorized us to repurchase up to 17.615.0 million shares of our common stock. The following is a summary of our repurchase activity for 2005, 2004, 2003, and 20022003 (dollars in thousands):

        Between May 1999 and December 31, 2004,2005, we have invested approximately $259.8$314.7 million to repurchase approximately 20.625.2 million shares of our common stock under tentwelve separate authorizations. These share repurchases more than offset the shares issued under our various stock ownership programs. Under these stock ownership programs, we issued 505,530 shares, 682,250 shares, 603,235 shares, and 510,312603,235 shares and received proceeds of $5.4 million, $5.6 million, $4.4 million, and $6.4$4.4 million for the years ended December 31, 2005, 2004, 2003, and 2002,2003, respectively.

        In February 2003, we entered into a $50.0 million unsecured revolving credit facility ("credit facility") with two banks. The credit facility replaced a previous $10.0 million demand line of credit, which expired in July 2002. The terms of the credit facility requirerequired us to maintain a maximum total funded debt and other financial ratios. The credit facility also includesincluded covenants that, subject to certain specific exceptions and limitations, among other things, restrictrestricted our ability to incur additional debt, make certain acquisitions or disposition of assets, create liens, and pay dividends. OnBetween June 11,

2003 we and the two banksJuly 2005, we amended certain provisions of the credit facility relatingwith the two banks, including the allowable limit for letters of credit within the total facility and for the purposes of issuing a letter of credit to satisfy bank guarantees with respect to the Victoria TTA contract. One of the banks issued a $32.4 million ($45 million AUD) letter of credit dated July 14, 2005 against our credit facility in connection with our Victoria TTA contract. This credit facility was terminated in connection with the execution of a new credit facility, described below, on September 15, 2005.

        On September 15, 2005, we entered into a five-year revolving credit facility ("the new credit facility") with a syndicate of banks (the "lenders") in the amount of $200.0 million, plus an additional amount of up to $50.0 million subject to certain terms and conditions (the "loan amount"). The new credit facility has various nonfinancial and financial covenants. These covenants, which include a total indebtednessleverage ratio, a senior leverage ratio and leverage ratios, are no more restrictive than those initially contained in thea quick ratio. The new credit facility replaced our $50.0 million unsecured revolving credit facility. On October 17, 2003 and February 5, 2004, we andPursuant to the two banks further amended certain provisions of thenew credit facility, we may borrow funds from the lenders up to expand our ability to make certain acquisitions.the loan amount with a $50.0 million sub limit for letters of credit. The annual commitment fee for maintaining the credit facilitypayable quarterly is 30 basis pointsat an initial rate of 0.20% per annum on the unused portionamount of revolving credit commitments, subject to adjustment based on a senior leverage ratio as defined in the new credit facility and up to a maximum per annum rate of $150,000.0.25%. To the extent there are letters of credit outstanding under the new credit facility, we are required to pay the administrative agent a letter of credit fee, initially 1.0% annually, subject to adjustment based on the senior leverage ratio as defined and up to a maximum per annum rate of 1.5%. In connection with the new credit facility, we paid $1.3 million in related debt issuance costs. As of December 31, 2004, we had no debt outstanding under the credit facility. We may draw upon the credit facility up2005, there was approximately $166.8 million available for borrowing, subject to $50.0certain financial covenants, after considering

$33.2 million less anyof outstanding letters of credit. These letters of credit, that have beenwhich include the $32.4 million ($45 million AUD) letter of credit issued in July 2005 against our previous credit facility in connection with our Victoria TTA contract, remain outstanding against the new credit facility. Any amounts drawn upon the credit facility constitute senior indebtedness for purposes of our Debentures. Borrowings bear interest at one of the bank's base rate or the Euro currency reserve rate. Based on our current operating plan, we believe that our cash and cash equivalents on hand, marketable securities, cash flows from operations, and our line of credit will be sufficient to meet our current capital requirements for at least the next 12 months.

        Net cash used in financing activities in 2002 was primarily the result of our share repurchase program. During 2002, we repurchased 6,498,600 shares of our common stock for a total investment of approximately $54.1 million at an average per share price of $8.32, which was partially offset by $6.3 million in cash proceeds from our various stock ownership programs.

Increase (Decrease) in Cash and Cash Equivalents

        Our cash and cash equivalents totaled $71.6 million, $67.5 million, $56.7 million, and $46.4$56.7 million at December 31, 2005, 2004, 2003, and 2002,2003, respectively.

        The following table summarizes our contractual obligations by year as of December 31, 2004:2005:

(1)

Excludes contractual and contingent interest as described in Note 910 "CONVERTIBLE SUBORDINATED DEBENTURES."DEBENTURES" in the notes to the accompanying consolidated financial statements.

(2)

Our operating lease commitment balances include lease obligations for properties that have been restructured in prior years and are accrued, net of contractual sublease income of approximately $2.3$2.6 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 acquisitionCresta, Nims, and Fast Track (ii) to settle the first earn-out associated with the Nims acquisition totaling approximately $3.3 million and expected to be paid in April of 2005 (iii) to settle the other put and call options associated with our Keane Worldzen acquisition (see Note 67 "BUSINESS ACQUISITIONS" in the notes to the accompanying consolidated financial statements for further discussion) and (iv)(iii) to settle the accrued deferred compensation liability of approximately $8.1$8.0 million and the UK accrued minimum pension liability of approximately $13.5$15.3 million (see Note 1314 "BENEFIT PLANS" in the notes to the accompanying consolidated financial statements for further discussion). Recent legislation in the UK could have a significant impact on the future funding levels required under the UK DBP. We are reviewing various alternatives regarding the structure of the UK Pension. Based upon information available to date, we believe the increase in future funding levels could range from approximately $1.0 million to approximately $2.0 million on an annual basis in 2006 and beyond.

        Our material commitments are primarily related to our Debentures, our Credit Facility, and our office rentals. Further discussion regarding our Debentures can be found in Note 10 "CONVERTIBLE SUBORDINATED DEBENTURES" in the notes to the accompanying consolidated financial statements. Further discussion regarding our Credit Facility can be found in Note 16 "RELATED PARTIES, COMMITMENTS, AND CONTINGENCIES." Contractual obligations related to operating leases reflect existing rental leases and the corporate facility as discussed in Note 1516 "RELATED PARTIES, COMMITMENTS, AND CONTINGENCIES" in the notes to the accompanying consolidated financial statements. Further discussion regarding our Debentures can be found in Note 9 "CONVERTIBLE SUBORDINATED DEBENTURES.CONTINGENCIES."

Seasonality

        We experience a moderate amount of seasonality. Our consulting revenue and profitability are affected by the number of workdays in a quarter. Typically our billable hours are reduced in the second half of the year, especially during the fourth quarter, due to the large number of holidays and vacation time.

OFF-BALANCE SHEET ARRANGEMENTS

        In January 2003, the FASB issued FIN 46, which requires the consolidation of a variable interest entity, as defined, by its primary beneficiary. Primary beneficiaries are those companies that are subject to a majority of the risk of loss or entitled to receive a majority of the entity's residual returns, or both. In determining whether it is the primary beneficiary of a variable interest entity, an entity with a variable interest shall treat variable interests in that same entity held by its related parties as its own interests. FIN 46 is effective prospectively for all variable interests obtained subsequent to December 31, 2002. For variable interests existing prior to December 31, 2002, consolidation will be required beginning July 1, 2003. In December 2003, the FASB agreed to a broad-based deferral of the effective date of FIN 46 for public companies until the end of periods ending after March 15, 2004, with the exception of interests in special purpose entities, which are required in financial statements 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 November 2002,February 2006, our lease for Ten City Square expired and the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." The statement requiresbuilding was sold to a guarantor to record certain guarantees at fair value and to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote. The interpretation and its disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The interpretation's initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Under FIN 45, the guarantor's previous accounting for guarantees issued prior to December 31, 2002 will not be revised or restated.third party.

        We are a guarantor with respect to a line of credit for Innovate EC, an entity in which we 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 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.

        In connection with certain contracts, we have been required to deliver security or performance bonds for the benefit of our clients. These bonds give the beneficiary the right to obtain payment from the issuer of the bond if certain specified events occur or fail to occur. In addition, we have various agreements in which we may be obligated to indemnify our clients or third parties with respect to certain matters. Generally, these indemnification provisions are included in contracts arising in the normal course of business under which we customarily agree to hold the indemnified party harmless against losses arising from a breach of representations related to such matters as title to assets sold and licensed or certain intellectual property rights, improper disclosures of confidential information, personal injuries or property damages. Typically, there are no specific dollar limits associated with indemnifications. In general, the term of the indemnifications will correspond to the contract term such that the harm or damage must occur during the contract period. Therefore, claims may be raised after completion of the contract associated with the indemnification provision, but the damage must have been caused during the contract term. As a prime contractor under certain contracts, we are responsible for the performance of our subcontractors and would be required to arrange for performance in the event the subcontractors failed to perform. However, we would retain our right to enforce the subcontracts and to seek damages for nonperformance from our subcontractors. A limited number of our contracts include liquidated damages provisions, which would require us to make per diem payments for late deliveries. Further, our obligations under these agreements may be limited in terms of time and/or amount and, in some instances, we may have recourse against third parties, including our subcontractors, for certain payments made by us. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of our obligations and the unique facts of each particular agreement.

        We have agreed to numerous indemnification provisions in connection with the Victoria TTA contract. As the prime contractor for the Victoria TTA contract, Kamco is the beneficiary of corresponding indemnifications obligations by its subcontractors. Subject to a number of exclusions, Kamco's maximum liability is capped at $72 million ($100 million AUD). Under the Victoria TTA contract, liquidated damages, for which Kamco may be liable, are assessed at $36,000 ($50,000 AUD) per day for each day the specified phase completion is behind schedule, but are limited to $7.2 million ($10 million AUD). The first $3.6 million ($5 million AUD) in liquidated damages is split evenly amongst Kamco and certain subcontractors. The next $3.6 million ($5 million AUD) is apportioned based on responsibility for the delay. In addition, we have a total of $32.4 million ($45 million AUD) letters of credit issued against the new facility as surety bonds to ensure due and proper performance of our obligations under the Victoria TTA contract.

        On September 15, 2005, we entered into a five-year revolving credit facility with a syndicate of banks in the amount of $200 million, plus an additional amount of up to $50 million subject to certain terms and conditions. See Note 16 "RELATED PARTIES, COMMITMENTS AND CONTINGENCIES" in the notes to the accompanying consolidated financial statements for further discussion on the new credit facility.

IMPACT OF INFLATION AND CHANGING 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 us are based on the cost of labor and market conditions within the industry.

CERTAIN FACTORS THAT MAY AFFECT FUTURE 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.

        Our quarterly operating results have varied, and are likely to continue to vary significantly. This may result in volatility in the market price of our common stock.    We have experienced and expect to continue to experience fluctuations in our quarterly results. Our gross margins vary based on a variety of factors including employee utilization rates and the number and type of services performed during a particular period. A variety of factors influence our 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 we can charge clients for services;



•

acquisitions; and



•

other factors, many of which are beyond our control.

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

        We continue to position ourselves to achieve increasing percentages of revenues and growth through outsourcing. If we are successful in obtaining new outsourcing contracts, we may experience increased pressure on our overall margins during the early stages of these contracts.    This could result in higher concentrations of revenues and contributions to income from a smaller number of larger clients on customized outsourcing solutions. If we were to receive a higher concentration of our revenues from a smaller number of clients, our revenues could decrease significantly if one or more of these clients decreased their spending. Outsourcing contracts are generally long-term contracts that require additional staffing in the initial phases of the contract period, which often results in lower gross margins at the beginning of these contracts.

        If our clients are not satisfied with our services, we may have exposure to liabilities, which could adversely affect our profitability and financial condition as well as our ability to compete for future work.    If we fail to meet our contractual obligations, we could be subject to legal liability, which could adversely affect our business, operating results and financial condition. The provisions we typically include in our contracts that are designed to limit our exposure to legal claims relating to our services and the applications we develop may not protect us or may not be enforceable under some circumstances or under the laws of some jurisdictions. It is possible, because of the nature of our business, that we will be sued in the future. In addition, although we maintain professional liability insurance, the policy limits may not be adequate to provide protection against all potential liabilities.

Moreover, as a consulting firm, we depend to a large extent on our relationships with our clients and our reputation for high-quality services to retain and attract clients and employees. As a result, claims made against our work may damage our reputation, which in turn, could impact our ability to compete for new work and negatively impact our revenue and profitability.

        The termination of a contract by a significant client could reduce our revenue and profitability or adversely affect our financial condition.    Our five largest clients, excluding the federal government accounted for approximately 18.5% of our revenue in 2004, while no individual client accounted for more than 6.0% of our total revenue. The various agencies of the federal government represent our largest client, accounting for 9.4% of total revenue in 2004. We strive to develop long-term relationships with our clients. Most individual client assignments are from three to twelve months, however, many of our client relationships have continued for many years. Our clients typically retain us on a non-exclusive, engagement-by-engagement basis. Although they may be subject to penalty provisions, clients may generally cancel a contract at any time. Under many contracts, clients may reduce their use of our services under such contract without penalty. In addition, contracts with the federal government contain provisions and are subject to laws and regulations that provide the federal government with rights and remedies not typically found in commercial contracts. Among other things, governments may terminate contracts with short notice, for convenience and may cancel multi-year contracts if funds become unavailable. When contracts are terminated, our revenue may decline and if we are unable to eliminate associated costs in a timely manner, our profitability may decline. In 2004, approximately 18.7% of our revenue was from public sector clients, including U.S. Federal, state, and local governments and agencies. Often government spending programs are dependent upon the budgetary capability to support such programs. Many government budgets have been adversely impacted by the economic slowdown. Most states must operate under a balanced budget. As a result of such budget and deficit considerations, our existing and future revenues and profitability could be adversely affected by reduced government IT spending.

        Unfavorable government audits could require us to refund payments we have received, to forego anticipated revenue and could subject us to penalties and sanctions.    The government agencies we contract with generally have the authority to audit and review our contracts with them. As part of that process, the government agency reviews our performance on the contract, our pricing practices, our cost structure and our compliance with applicable laws, regulations and standards. If the audit agency determines that we have improperly received reimbursement, we would be required to refund any such amount. If a government audit uncovers improper or illegal activities by us or we otherwise determine that these activities have occurred, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeitures of profits, suspension of payments, fines and suspension or disqualification from doing business with the government. Any such unfavorable determination could adversely impact our ability to bid for new work.

        We have pursued, and intend to continue to pursue, strategic acquisitions. Failure to successfully integrate acquired businesses or assets may adversely affect our financial performance.    In recent years, we have grown significantly through acquisitions. From January 1, 1999 through December 31, 2004, we have completed 14 acquisitions. The aggregate merger and consideration costs of these acquisitions totaled approximately $414.4 million. Our future growth may be based in part on selected acquisitions. At any given time, we may be in various stages of considering acquisition opportunities. We may not be able to find and identify desirable acquisition targets or be successful in entering into a definitive agreement with any one target. In addition, even if we reach a definitive agreement with a target, we may not be able to complete any future acquisition.

        We typically 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 these benefits will be realized. Accordingly, there is a risk that an acquired company may not achieve an increase in revenue or other

benefits for us. In addition, an acquisition may result in unexpected costs, expenses, and liabilities. Any of these events could have a material adverse effect on our business, financial condition, and results of operations.

        The process of integrating acquired companies into our existing business might also result in unforeseen difficulties. Unforeseen operating difficulties may absorb significant management attention, which we may otherwise devote to our existing business. In addition, the process may require significant financial resources that we might otherwise allocate to other activities, including the ongoing development or expansion of our existing operations.

        Finally, future acquisitions could result in our 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 our business, financial condition, and result of operations.

        We face significant competition for our services, and our failure to remain competitive could limit our ability to maintain existing clients or attract new clients.    The market for our 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, our competition for client assignments and experienced personnel varies significantly from city to city and by the type of service provided. Some of our competitors are larger and have greater technical, financial, and marketing resources and greater name recognition in the markets they serve than 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, we compete with some companies that are larger in the healthcare market and have greater financial resources than we 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.

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

        We conduct business in the UK, Canada, and India, which exposes us to a number of difficulties inherent in international activities.    As a result of our acquisition of a controlling interest in Keane Worldzen in October 2003 and the acquisition of SignalTree Solutions in March 2002, we now have four software development facilities in India. As of December 31, 2004, we had approximately 1,466 technical professionals in the region, including Keane Worldzen. India is currently experiencing conflicts with Pakistan over the disputed territory of Kashmir as well as clashes between different religious groups within the country. These conflicts, in addition to other unpredictable developments in the political, economic, and social conditions in India, could eliminate or reduce the availability of these development and professional services. If access to these services were to be unexpectedly eliminated or significantly reduced, our ability to meet development objectives important to our strategy to add offshore delivery capabilities to the services we provide would be hindered, and our business could be harmed.

        If we fail to manage our geographically dispersed organization, we may fail to meet or exceed our financial objectives and our revenues may decline. We perform development activities in the U.S., Canada, and India, and have offices throughout the 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.

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

        In addition, there has been political discussion and debate related to worldwide competitive sourcing, particularly from the United States to offshore locations. There is proposed federal and state legislation currently pending related to this issue. It is too early to determine whether or in what form this legislation will be adopted; however, future legislation, if enacted, could have an adverse effect on our business, results of operations and financial condition.

        We may be unable to re-deploy our professionals effectively if engagements are terminated unexpectedly, which would adversely affect our results of operations.    Our clients can cancel or reduce the scope of their engagements with us on short notice. If they do so, we may be unable to reassign our professionals to new engagements without delay. The cancellation or reduction in scope of an engagement could, therefore, reduce the utilization rate of our professionals, which would have a negative impact on our business, financial condition, and results of operations.

        As a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. We believe that period-to-period comparisons of our financial results are not necessarily meaningful and we expect that our results of operations may fluctuate from period-to-period in the future.

        Our growth could be limited if we are unable to attract and retain personnel in the information technology and business consulting industries.    We believe that our future success will depend in large part on our ability to continue to attract and retain highly skilled technical and management personnel. The competition for such personnel is intense. We may not succeed in attracting and retaining the personnel necessary to develop our business. If we do not, our business, financial condition, and results of operations could be materially adversely affected.

        We may be prohibited from repurchasing, and may not have the financial resources to repurchase, our Debentures on the date for repurchase at the option of the holder or upon a designated event, as required by the indenture governing our Debentures, which could cause defaults under our senior revolving credit facility and any other indebtedness we may incur in the future.    The Debenture holders have the right to require us to repurchase all or a portion of their Debentures on June 15, 2008. The Debenture holders may also require us to repurchase all or a portion of their Debentures upon a designated event, as defined in the indenture governing the Debentures. If the Debenture holders elect to require us to repurchase their Debentures on any of the above dates or if a designated event were to occur, we may not have enough funds to pay the repurchase price for all tendered Debentures. We are currently prohibited under our senior revolving credit facility from repurchasing any Debentures if a designated event were to occur. We may also be prohibited under any indebtedness we may incur in the future from purchasing any Debentures prior to their stated maturity. In these circumstances, we will be required to repay all of the outstanding principal of, and pay any accrued and unpaid interest on, such indebtedness or to obtain the requisite consents from the holders of any such indebtedness to permit the repurchase of the Debentures. If we are unable to repay all of such indebtedness or are unable to obtain the necessary consents, we will be unable to offer to repurchase the Debentures, which would constitute an event of default under the indenture for the Debentures, which itself could constitute a default under our senior revolving credit facility or under the terms of any future indebtedness that we may incur. In addition, the events that constitute a designated event under the indenture for the Debentures are events of default under our senior revolving credit facility and may also be events of default under other indebtedness that we may incur in the future.

        We incurred indebtedness when we sold our Debentures. We may incur additional indebtedness in the future. The indebtedness created by the sale of our Debentures, and any future indebtedness, could adversely affect our business and our ability to make full payment on the Debentures.    Our aggregate level of indebtedness increased in connection with the sale of our Debentures. As of December 31, 2004, we had approximately $191.0 million of outstanding indebtedness and had the ability to incur additional debt under our revolving credit facility. We may also obtain additional long-term debt and working capital lines of credit to meet future financing needs, which would have the effect of increasing our total leverage. Any increase in our leverage could have significant negative consequences, including:

•

increasing our vulnerability to adverse economic and industry conditions;



•

limiting our ability to obtain additional financing;



•

limiting our ability to make acquisitions;



•

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

        We do not engage in trading market risk, sensitive instruments or purchasing hedging instruments or "other than trading" instruments that are likely to expose us to market risk, whether interest rate, foreign currency exchange, and commodity price or equity price risk. We have not purchased options or entered into swaps or forward or futures contracts. However, on October 20, 2005, our Board of Directors approved our foreign exchange risk management policy, which will allow us to invest in hedging instruments for the purpose of hedging foreign currency risk.

Interest Rate Risk

        We invest primarily in U.S. government obligations as well as tax-exempt municipal bonds and corporate bonds. As a result, our primary market risk exposure is that of interest rate risk to our investments, which would affect the carrying value of those investments. During 2004, the United States Federal Reserve Board began increasing benchmark interest rates and at the FebruaryDecember 2005 meeting of the Federal Open Market Committee increased rates for the sixththirteenth time, a total of 150325 basis points, since June 30, 2004.points. A significant increase in interest rates would increase the rate of return on our cash and cash equivalents, but would have a negative impact on the carrying value of our marketable securities. Our annual interest income would change by approximately $0.8$0.7 million for each of the yearyears ended December 31, 20042005 and approximately $0.7 million for the year ended December 31, 20032004, for each 100 basis point increase or decrease in interest rates. The fair value of our investment portfolio at December 31, 20042005 would changedecrease by approximately $1.8$1.0 million for eacha 100 basis point increase orin rates and increase $0.9 million for a 100 basis point decrease in rates. The fair value of our investment portfolio at December 31, 20032004 would

decrease have changed by approximately $3.2$1.8 million for each 100 basis point increase in rates and would increase by approximately $2.6 million for each 100 basis pointor decrease in rates.

        Changes in market rates and the related impact on the fair value of our investments would not generally affect net income as our investments are fixed ratefixed-rate securities and are classified as available-for-sale. Investments classified as available-for-sale are carried at fair value with unrealized gains and losses recorded as a component of accumulated other comprehensive loss in the accompanying consolidated balance sheets. However, when the investments are sold, the unrealized

losses are recorded as realized losses and included in net income in the accompanying consolidated statements of income. During 2004,

        As of December 31, 2005, we had a net unrealized loss of approximately $0.9 million. During 2003, we had$1.2 million, which represents an increase of $0.3 million compared to a net unrealized gainloss of approximately $0.2 million.$0.9 million as of December 31, 2004. At December 31, 2005 and December 31, 2004, we held available-for-sale securities with an aggregate fair value of approximately $92.7 million and $100.6 million, respectively, that had aggregate gross unrealized losses of approximately $1.3 million and $1.0 million, in those years. Factors considered in determining whether a loss is temporary include the length of time and extent to which the securities have been in an unrealized loss position and our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. All such securities have been in a continuously declining 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.

Foreign Currency Risk

        We transact business in the UK, Canada, India, and IndiaAustralia and as such have exposure associated with movement in foreign currency exchange rates. For the year ended December 31, 2005 compared to the same period in 2004, the fluctuation in foreign currency exchange rates negatively impacted our operating income by approximately $2.7 million. Relative to the foreign currency exposures existing at December 31, 2005, a 10% unfavorable movement would have resulted in an additional $7.1 million reduction of operating income for the year ended December 31, 2005. For the year ended December 31, 2004 compared to the same period in 2003, the fluctuation in foreign currency exchange rates negatively impacted netoperating income by approximately $1.7$2.3 million. Relative to the foreign currency exposures existing at December 31, 2004, a 10% unfavorable movement would have resulted in an additional $4.4$5.2 million reduction of netoperating income for the year ended December 31, 2004.

        Net revenues derived from our foreign operations totaled approximately 6%5.9%, 5.6%, and 2.9% of our total revenues for the year ended December 31, 2005, 2004, and totaled approximately 3% of our total revenues for both of the years ended December 31, 2003, and 2002.respectively.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Keane, Inc.:

        We have audited the accompanying consolidated balance sheets of Keane, Inc. as of December 31, 20042005 and 2003,2004, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2004.2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether 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, 20042005 and 2003,2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004,2005, in conformity with U.S. generally accepted accounting principles.

        As discussed in Note 1 to the consolidated financial statements, in 2004 the Company retroactively changed the manner in which it calculates diluted earnings per share upon the adoption of Emerging Issues Task Force Issue No. 04-08,The Effect of Contingently Convertible Debt on Diluted Earnings per Share.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Keane, Inc.'s internal control over financial reporting as of December 31, 2004,2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 20053, 2006 expressed an unqualified opinion thereon.

KEANE, INC.

CONSOLIDATED STATEMENTS OF INCOME