SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-K

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

|(Mark One)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended December 31, 2003                  
|OR                                                           
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                             to

Commission file number 1-7516

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

|Massachusetts(State or Other Jurisdiction
of Incorporation or Organization)    |  | 04-2437166(I.R.S. Employer
Identification Number)
|------------------------------------------------------------------------------ |  | -------------------------------------------------
|100 City Square, Boston, Massachusetts(Address of Principal Executive Offices) |  | 02129(Zip Code)                                  

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

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

|Title of Each ClassCommon Stock, $.10 par value |  | Name of Each Exchange on Which RegisteredNew York Stock Exchange
|----------------------------------------------- |  | ----------------------------------------------------------------

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

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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 an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as
amended. Yes ý    No o

The aggregate market value of the common 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, 2003, was approximately $669,882,000. As of March 5, 2004, there were 63,522,027 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. 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 27, 2004. 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.



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TABLE OF CONTENTS

|           |  |                                                                                                |  | Page
|---------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|           |  | PART I                                                                                         |  |     
|Item 1.    |  | BUSINESS                                                                                       |  | 3   
|Item 2.    |  | PROPERTIES                                                                                     |  | 9   
|Item 3.    |  | LEGAL PROCEEDINGS                                                                              |  | 10  
|Item 4.    |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                            |  | 10  
|           |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY                                                |  | 10  
|           |  | PART II                                                                                        |  |     
|Item 5.    |  | MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                      |  | 15  
|Item 6.    |  | SELECTED FINANCIAL DATA                                                                        |  | 16  
|Item 7.    |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS          |  | 17  
|Item 7A.   |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                     |  | 35  
|Item 8.    |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                    |  | 36  
|Item 9.    |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE           |  | 77  
|Item 9A.   |  | CONTROLS AND PROCEDURES                                                                        |  | 77  
|           |  | PART III                                                                                       |  |     
|Item 10.   |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                             |  | 77  
|Item 11.   |  | EXECUTIVE COMPENSATION                                                                         |  | 77  
|Item 12.   |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |  | 77  
|Item 13.   |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                 |  | 77  
|Item 14.   |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                         |  | 77  
|           |  | PART IV                                                                                        |  |     
|Item 15.   |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                               |  | 78  
|SIGNATURES |  | 79                                                                                            

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PART I

This annual report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended. For purposes of these Acts, any statement that is not a statement of historical fact may be deemed a forward-looking statement. For
example, statements containing the words "believes," "anticipates," "plans," "expects," "estimates," "intends," "may," "projects," "will," "would," and similar expressions may be forward-looking
statements. However, we caution investors not to place undue reliance on any forward-looking statements in this annual report because these statements speak only as of the date when made. We undertake
no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise. There are a number of factors that could cause our actual results
to differ materially from those indicated by these forward-looking statements, including without limitation, the factors set forth in this Annual Report on Form 10-K under the
caption "CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS."

ITEM 1. BUSINESS

OVERVIEW

Keane, Inc. is a leading provider of Information Technology ("IT") and Business Consulting services. In business since 1965, our mission is to help clients
improve business and IT effectiveness through outsourcing services. We help clients plan, build, and manage applications software through our Business Consulting, Application Development and
Integration ("AD&I"), and Application Development and Management Outsourcing ("Application Outsourcing") services. We also optimize clients' internal processes through Business Process Outsourcing
("BPO") services through Worldzen, Inc. ("Worldzen"), our majority owned subsidiary.

We
deliver our IT services through an integrated network of local branch offices in North America and the United Kingdom ("UK"), 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 customers onsite, at our nearshore facilities in Canada, and through our offshore development
centers in India. Our branch offices are supported by centralized Strategic Practices and Quality Assurance Groups.

Our
clients consist primarily of Global 2000 companies across several industries. We have specific expertise and depth of capability in financial services, insurance, healthcare, and the
public sector. We strive to build long-term relationships with our customers by improving their business and IT performance, reducing their costs, and increasing their organizational
flexibility. We achieve recurring revenue as a result of 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. We are not including the information contained in our Web site as part of, or incorporating it by reference into, this Annual Report on Form 10-K. We
make available, free of charge, through our Web site our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on
Form 8-K, and amendments to these reports, as soon as reasonably practical after we electronically file these materials with, or otherwise furnish them to, the Securities and
Exchange Commission ("SEC").

Our
registered trademarks include EZ-Access®. Our trademarks include: Keane, the Keane logo, Enterprise Application Integration, Keane InSight, and VistaKeane.
Our service marks include: Application Development and Integration Services, and Application Development and Management

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

SERVICES

We improve our clients' business performance by maximizing the effectiveness of IT organizations. We apply our rigorous processes and management discipline to
applications and business processes, enabling clients to reduce costs and increase organizational flexibility and efficiency. We focus on three synergistic service offerings: Plan services, which
include Business Consulting and Program Management; Build services, including AD&I, and Manage services, including Application Outsourcing
and BPO. Services are delivered using our global delivery model, from operations in the U.S., UK, Canada, and India.

In
2003, we entered the growing BPO market through the acquisition of a majority interest in Worldzen. Worldzen specializes in complex processes within the financial services, insurance,
and healthcare industries, and provides back-office processes for multiple industries. As part of our investment, we contributed certain assets of our Keane Consulting Group ("KCG") to Worldzen.
Worldzen's services augment our Plan and Manage service offerings.

Plan services

Business Consulting.Our Business Consulting services play an important role in our ability to help clients manage their
businesses. During 2003, we provided the majority of our Business Consulting services through KCG. As part of our investment in Worldzen, we contributed certain assets of KCG to Worldzen on
October 17, 2003.

KCG
helps companies maximize productivity, reduce costs, and create capacity for future growth by identifying high-value business opportunities and implementing our
operations improvement recommendations. KCG takes a broad view of business processes, organizational design, and technology architecture. KCG provides operations improvement services in three core
areas: insurance and financial services, manufacturing and distribution, and technology. Typical KCG client engagements include streamlining customer processes and operations and optimizing supply
chains. Typically, KCG's Business Consulting engagements deliver specific, tactical recommendations for process improvement, often resulting in a follow-on BPO engagement. On a going
forward basis, KCG will be fully integrated into Worldzen, our majority owned subsidiary.

IT Consulting.Our IT Consulting services include several offerings that help companies develop and 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 Plan services include Network Integration Planning, Strategic Information Planning, and Package Selection.

Build services

AD&I.As application software becomes more complex, it requires sophisticated integration between front-end and
back-end systems to enhance access to critical corporate data, enable process improvements, and improve customer service. Many of our AD&I projects focus on solutions for Enterprise
Application Integration ("EAI"), supply chain, and customer service problems.

As
a result of our significant expertise and experience, 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.

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Given
the existing economic environment, many clients have deferred investments in new information systems. As a result, we have concentrated our short-term marketing efforts
on helping clients to better integrate and enhance existing IT applications, and on projects that rapidly improve efficiency and lower costs immediately.

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 anticipate that these competencies, together with our long-term relationships with Global 2000 companies, particularly those clients for which we
provide Application Outsourcing services, will enable us to benefit from an economic recovery and an increase in spending on information technology.

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.
In addition, HSD provides healthcare-related IT consulting, outsourcing, and IT integration services. Because the healthcare market is less cyclical in nature than most of the commercial IT market,
our HSD business complements our commercial AD&I revenue and typically acts as a stabilizing influence on Build revenue during periods of slower economic growth.

HSD's
products help healthcare organizations overcome the challenge of providing higher quality patient care while administering more efficient operations through the use of information
technology. HSD's core healthcare solutions include EZ-Access, Keane InSight, and VistaKeane. EZ-Access is a browser-based family of healthcare information systems designed to
improve access to patient data, reduce the occurrence of medical errors, and protect client investment in information technology. EZ-Access includes our widely installed Patcom Plus, a
patient management system that is considered a market leader by industry analysts. Keane InSight is a
comprehensive healthcare information system that provides immediate access to patient information using secure, browser-based technology. VistaKeane is a fully integrated financial and clinical
solution for long-term and post-acute care providers. HSD's customers include integrated delivery networks, hospitals, long-term care facilities, and physician
group practices. HSD currently provides proprietary software and services to more than 280 hospital-based clients and approximately 4,000 long-term care facilities throughout the U.S.

In
addition, our broad range of services help healthcare clients address ongoing Health Insurance Portability and Accountability Act ("HIPAA") requirements. HIPAA is Federal legislation
designed to improve efficiency in the national healthcare system and protect the privacy of health information. It is expected to have far-reaching implications on the healthcare
industry's IT infrastructure and business operations. Our HIPAA-related services include Enterprise Assessment and Planning, Compliance Implementation, and Ongoing Compliance Management.

Manage services

Application Outsourcing.Our Application Outsourcing services help clients manage existing business 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, freeing up 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.

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

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addition,
two of our ADCs in India, located in Hyderabad and Delhi, are independently evaluated at Level 5 on the SEI CMM and comply with ISO 9001: 2000 standards. Our ADC in Halifax, Nova Scotia, has
also been independently evaluated at Level 5 on the SEI CMM. The SEI CMM has five levels of process maturity, and many IT organizations typically operate at Level 1, the lowest level of maturity.
Since 1997, we have used the SEI CMM as a standard for objectively measuring our success in improving our clients' application management environments. The SEI CMM has become the industry's standard
method for evaluating the effectiveness of an IT environment and the process maturity of outsourcing vendors.

Our
global delivery model offers customers the flexibility and economic advantage of allocating work among a variety of delivery options, including onsite at a client's facility,
nearshore in Halifax, Nova Scotia, and offshore at one of our three locations in India. This integrated, highly flexible mix of cost-effective onsite, nearshore, and offshore delivery is
now a component of most new outsourcing engagements. The distribution of work across multiple locations is typically based on a client's cost, technology, and risk management requirements. Our project
management approach ensures common methodologies and disciplines across locations, and provides a single point of accountability to the client.

Application
Outsourcing provides us with large, long-term contracts. These client engagements usually span three to five years. Application Outsourcing projects typically
supply us with contractually obligated recurring revenue and with an ability to cross-sell other solutions. We believe that our ability to consistently provide measurable business value
within an existing client account fosters profitable, long-term client relationships by strongly positioning us to win additional outsourcing engagements, as well as development and
integration projects.

Business Process Outsourcing.We acquired a majority interest in Worldzen, a provider of BPO services, on October 17,
2003. Worldzen specializes in providing BPO services to clients with complex processes in the financial services, insurance, and healthcare industries, and to clients with back office processes in
several industries. Worldzen's BPO services are designed to reduce the cost and increase the efficiency of our clients' business transactions, enabling companies to focus on their more profitable
activities, and avoid the overhead and management distraction of non-core back-office processes. Worldzen provides these low-cost, high-value outsourcing services
from operations in both the U.S. and India.

STRATEGY

Our goal is to be recognized as one of the world's great IT services firms by our clients, employees, and shareholders. We believe that we can achieve this goal
by helping clients improve their business and IT effectiveness through the consistent delivery of high-value outsourcing services. Specifically, we believe that one of the most significant
business trends over the next five years will be corporations leveraging Application Outsourcing, BPO, and offshore delivery to achieve meaningful cost reductions and business improvement. We believe
that our depth of capability in each of these areas, along with our strong customer relationships and unique process management methodologies, will enable us to capitalize on this market opportunity.

We
have five major strategic priorities for 2004. We believe these strategic priorities will position us to take advantage of expected market growth driven by a recovery in IT spending,
and the convergence of Application Outsourcing, BPO, and offshore delivery.

Achieve sustainable revenue and earnings growth.

We believe that we can achieve long-term revenue expansion by growing our Application Outsourcing and BPO businesses, as well as by leveraging our
strong position in less cyclical vertical industries such as healthcare and the public sector. We expect to increase our operating margins over

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the
short-term by improving billing rates and utilization as the IT services sector recovers, and by aggressively controlling selling, general, and administrative ("SG&A") expenses. Longer
term, we will increasingly leverage lower-cost offshore resources in providing outsourcing services, while continuously adjusting our expenses to ensure cost-effective
delivery. We expect our ability to effectively manage our working capital, most notably Days Sales Outstanding ("DSO"), and capital spending will enable us to generate strong operating cash flow. We
plan to use excess cash to complete attractive acquisitions and to continue to repurchase shares of our common stock from time-to-time.

Strengthen our position as an industry leader in innovative, full lifecycle Application Outsourcing initiatives.

We believe industry analysts and clients recognize us as one of the leading application outsourcing vendors in North America. Our ability to provide
high-quality service to our clients has been significantly enhanced by our global delivery model, with capability onsite, at nearshore facilities in Halifax, Nova Scotia, and at three
facilities in India. We expect to intensify our efforts during 2004 to position Keane as a full lifecycle, global provider of outsourcing, and a means for clients to gain the economic advantage of
offshore delivery while reducing their associated risks. We also seek opportunities to proactively target our existing customer base of Global 2000 customers, and our deep expertise in specific
industry verticals, to cross-sell our Application Outsourcing services.

Continue to rapidly build offshore/nearshore scale and capabilities.

Global sourcing has become an important component of our clients' overall sourcing strategies. Use of offshore delivery enables clients to gain access to a large
pool of cost-effective technical personnel, while enhancing productivity via a 24 hours a day, seven days a week development approach. As a result, we believe offshore
delivery is critical for success in today's IT services market. During 2003, we significantly enhanced our offshore sourcing capabilities, doubling the size of our operations in India. During 2004, we
plan to continue to build scale in our India operations. In addition, we plan to continue to invest in nearshore facilities in Halifax, Nova Scotia, to support new opportunities.

Acquire market share and enhance our BPO solutions.

Integration between technology and business processes is an increasing trend, and is changing the way clients buy IT and business services. We believe that this
convergence of applications and BPO represents a near-term opportunity to build market share, as companies are engaging long-term outsourcing partners now. Accordingly, one of
our priorities is building scale and capability in our BPO operations, both through Worldzen and potential additional investments.

Align our operating model with our strategic focus.

Over the long term, we anticipate that our mix of services will shift to reflect the emerging market opportunity in offshore outsourcing. We plan to prioritize
investment in offshore delivery, Application Outsourcing, vertical expertise, and BPO operations in order to develop the capabilities to support and grow these segments. These investments may include
future capital spending and acquisitions. We expect to continue to adapt our operating model and infrastructure in accordance with market trends and conditions.

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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")); offshore solution providers, including Wipro ("WIT") and Infosys ("INFY"); IT solutions providers (such as Sapient Corporation
("SAPE"), American Management Systems ("AMSY"), BearingPoint ("BP"), and Ciber ("CBR")); and management consulting firms (such as McKinsey and Booz Allen). Some of these competitors are larger and
have greater financial resources than we do.

We
believe that the basis for competition in the IT services industry includes the ability to create an integrated solution that best meets the needs of an individual customer, provide
competitive cost pricing models, develop strong client relationships, generate recurring revenue, and offer flexible client-service delivery options. We believe that we compete favorably with respect
to these factors. However, we may not be able to continue to compete successfully with our existing competitors or to compete successfully with any new competitors.

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
2003, we derived our revenue from the following industry groups:

Industry

Percentage of RevenueHealthcare

21.9
%Financial services

20.4Government

18.6Manufacturing

17.6High Technology/Software

7.2Other

4.5Energy/Utilities

4.2Retail/Consumer goods

4.0Telecommunications

1.6


Our
10 largest clients accounted for approximately 36%, 29%, and 32% of our total revenues during the years ended December 31, 2003, 2002, and 2001, respectively. Our two largest
clients during 2003 were various agencies within the Federal Government and PacifiCare, with approximately 9.2% and 6.5% of our total revenues, respectively. In 2002 and 2001, the Federal Government
and IBM were our two largest clients. Federal Government contracts accounted for approximately 7.6% and 6.9% of our total revenues in 2002 and 2001, respectively. IBM accounted for approximately 4.4%
and 6.5% of our total revenues in 2002 and 2001, respectively. A significant decline in revenue from the Federal Government or PacifiCare would have a material adverse effect on our total revenue.
With the exception of the Federal Government, PacifiCare, and IBM, no single client accounted for more than 5% of our total revenues during any of the three years ended on or before
December 31, 2003.

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

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Government.
We had orders at December 31, 2003 of approximately $1.4 billion, in comparison to orders of approximately $1.5 billion at December 31, 2002. Because our
clients can cancel or reduce the scope of their engagements on short notice, we do not believe that backlog is a reliable indication of future business.

SALES, MARKETING, AND ACCOUNT MANAGEMENT

We market our services and software products through our direct sales force, which is based in our branch offices and regional areas, as well as through our
Application Outsourcing Corporate Practice. Our account executives are assigned to a limited number of accounts so they can develop an in-depth understanding of each client's individual
needs and form strong client relationships. Under the direction of our Senior Vice President of Business Development and Regional Sales Vice Presidents, these account executives identify IT services
needs within clients and are responsible for developing a solution that meets these requirements. In addition, account executives ensure that clients receive responsive service that achieves their
objectives. Account executives receive in-depth 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 Corporate Practice, other branch offices, and our Global Services Group as needed to address specialized
customer requirements.

Our
Application Outsourcing Corporate Practice employs specialized senior sales professionals to respond to client requirements and to pursue and close large, strategic outsourcing
engagements. Application Outsourcing engagements provide a strong base of recurring revenue and afford the opportunity to cross-sell our other strategic services.

We
focus our marketing efforts on organizations with significant IT budgets and recurring software development and outsourcing needs. 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

On December 31, 2003, we had 7,381 employees, including 6,182 business and technical professionals whose services are billable to clients. We sometimes
supplement our technical staff by utilizing subcontractors, which as of December 31, 2003, consisted of 466 full-time subcontractors.

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 employment contracts with our key employees. None of our employees are subject to a collective bargaining agreement and we believe that our relations with our
employees are good.

ITEM 2. PROPERTIES

Our principal executive office as of December 31, 2003, 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

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Board
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.

At
December 31, 2003, we leased and maintained sales and support offices in more than 70 locations in North America, the UK, and India. The aggregate annual rental expense for our
sales and support offices was approximately $14.1 million in 2003. The aggregate annual rental expense for all of our facilities was approximately $15.0 million in 2003. For additional
information regarding our lease obligations, see Note 15 "RELATED PARTIES, COMMITMENTS, AND CONTINGENCIES" in the notes to the accompanying consolidated financial statements.

ITEM 3. LEGAL PROCEEDINGS

In April 1998, First Command (formerly United Services Planning Association, Inc. & Independent Research Agency for Life Insurance, Inc.)
filed a complaint in the District Court for Tarrant County, Texas (Civil Action No. 96-173235-98), against us and two of our employees alleging that we misrepresented
our ability to complete a project contracted for by the plaintiffs and concealed from the plaintiffs material facts related to the status of the project. During the Third Quarter of 2003, in order to
avoid further costs, we settled the claim in full with payment to the plaintiffs in the amount of $3.5 million, of which $1.6 million was previously accrued.

During
the First Quarter of 2003, we received a $7.3 million award in connection with an arbitration proceeding initiated by us in 2000 against Signal Corporation for a breach of
an agreement between Signal Corporation and our Federal Systems subsidiary.

We
are involved in other litigation and various legal matters, which have arisen in the ordinary course of business. 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. We believe that these matters are without merit and intend to defend vigorously against them.

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 5, 2004 are as follows:

|Name                  |  | Committee |  | Age |  | Position                                                                       
|--------------------- |  | --------- |  | --- |  | -------------------------------------------------------------------------------
|John F. Keane         |  |           |  | 72  |  | Chairman of the Board and Director                                             
|Brian T. Keane        |  |           |  | 43  |  | President, Chief Executive Officer and Director                                
|John J. Leahy         |  |           |  | 45  |  | Senior Vice President of Finance and Administration and Chief Financial Officer
|Russell J. Campanello |  |           |  | 48  |  | Senior Vice President                                                          
|Robert B. Atwell      |  |           |  | 55  |  | Senior Vice President                                                          
|Russell A. Cappellino |  |           |  | 62  |  | Senior Vice President                                                          
|Georgina L. Fisk      |  |           |  | 35  |  | Vice President                                                                 
|                      |  |           |  |     |  |                                                                                

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|Raymond W. Paris       |  |        |  | 66 |  | Senior Vice President
|---------------------- |  | ------ |  | -- |  | ---------------------
|Gary D. Rader          |  |        |  | 45 |  | Senior Vice President
|Laurence D. Shaw       |  |        |  | 42 |  | Vice President       
|Maria A. Cirino        |  | (2)(3) |  | 40 |  | Director             
|John H. Fain           |  |        |  | 55 |  | Director             
|Philip J. Harkins      |  | (2)(3) |  | 56 |  | Director             
|Winston R. Hindle, Jr. |  | (1)(3) |  | 73 |  | Director             
|John F. Keane, Jr.     |  |        |  | 44 |  | Director             
|James T. McBride       |  | (1)(3) |  | 58 |  | Director             
|John F. Rockart        |  | (1)(2) |  | 72 |  | Director             
|Stephen D. Steinour    |  | (1)(2) |  | 45 |  | Director             
|James D. White         |  | (2)(3) |  | 43 |  | Director             

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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 the Board
of Directors.

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 Firstwave Technologies, a public company that provides Internet-based customer relationship
management solutions, and 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 as a trustee of Mount Holyoke College
since May 2000. 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. From 1982 to August 1999, Mr. Leahy
was employed by PepsiCo, Inc., a multinational consumer products corporation, during which time he held a number of positions, serving most recently as Vice President of Business Planning and
Development for Pepsi-Cola International.

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

11

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

Mr. Cappellino
joined Keane as Senior Vice President, Offshore Solutions in March of 2002. From 1995 to March 2002, Mr. Cappellino served as Chairman and CEO of
SignalTree Solutions Holding, Inc. ("SignalTree Solutions"). SignalTree Solutions was acquired by Keane in March 2002. From 1993 to 1995, Mr. Cappellino was President of Network
Solutions and Vice President/General Manager of Worldwide Telecommunications Marketing at Tandem Computers.

Ms. Fisk
joined Keane in August 1998 as Marketing Manager of Keane Ltd in the UK. From October 2000 to January 2001, Ms. Fisk served as the
Director of Marketing of Keane Ltd in the UK. Since January 2001, Ms. Fisk has served as Director of Marketing for Keane, Inc. and in January 2004, was promoted to
Vice President, Marketing of Keane, Inc.

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

Mr. Rader
joined Keane in 1987 as a consultant. From 1987 through December 2003, Mr. Rader served as Sales Representative, Sales Manager, Branch Manager, and most
recently as a Group Vice President. In January of 2004, Mr. Rader was named Senior Vice President of Business Development.

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

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

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

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

Mr. Hindle
has served as a director of Keane since February 1995. Mr. Hindle is currently retired. From September 1962 to July 1994, Mr. Hindle
served as a Vice President and, subsequently, Senior

12

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Vice
President of Digital Equipment Corporation, a computer systems and services firm. Mr. Hindle is also a director of Mestek, Inc., a public company which manufactures and markets
industrial products.

Mr. John
Keane, Jr. has served as a director of Keane since May 1998. Mr. Keane is the founder of ArcStream Solutions, Inc., a consulting and systems
integration firm focusing on cable and wireless solutions, and has been its President and Chief Executive Officer since July 2000. From September 1997 to July 2000, he was
Executive Vice President and a member of the Office of the President of 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 a brother of Brian Keane.

Mr. McBride
has served as director of Keane since October 2003. Prior to his retirement in 2002, Mr. McBride spent 32 years with Deloitte & Touche,
LLP, most recently as National Managing Partner of Marketing and Sales.

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. Since July 2002, Mr. White has served as the Senior Vice President of Business Development for
The Commercial Operations North America of The Gillette Company. From June 1986 to May 2002, Mr. White was employed by Nestlé, during which time he held a number of
positions, serving most recently as the Vice President of Customer Interface for Nestlé Purina Pet Care Company.

13

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

|Compensation                                                                |  | Amount                                                                                                                                                                                                                                          
|--------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Annual retainer                                                             |  | $20,000                                                                                                                                                                                                                                         
|Additional compensation:                                                    |  |                                                                                                                                                                                                                                                 
|Fee per Board Meeting                                                       |  | 2,000                                                                                                                                                                                                                                           
|Annual fee for Chairperson of Nominating and Corporate Governance Committee |  | 5,000                                                                                                                                                                                                                                           
|Annual fee for Chairperson of Compensation Committee                        |  | 15,000                                                                                                                                                                                                                                          
|Annual fee for Chairperson of Audit Committee                               |  | 25,000                                                                                                                                                                                                                                          
|Committee meetings and telephonic meetings of the Board                     |  | No additional fee (part of annual retainer)                                                                                                                                                                                                     
|Initial stock option grant for a new Director                               |  | 10,000 shares of common stock to be granted on the date of election. These options vest in three equal annual installments and have an exercise price equal to the closing price of our common stock on the
NYSE on the date of grant.          
|Annual stock option grant                                                   |  | 5,000 shares of common stock to be granted on the date of each Annual Meeting. These options vest in three equal annual installments and have an exercise price equal to the closing price of our common
stock on the NYSE on the date of grant.

The
compensation of our non-employee directors is determined on an approximate 52-week period (the "Annual Directors Term") that runs from annual meeting date to
annual meeting date rather than on a calendar year. A director may elect to receive his or her annual fee or meeting attendance fees for an Annual Directors Term in the form of shares of common stock
in lieu of cash payments. If a director elects to receive shares of common stock in lieu of cash as payment for the annual fee or meeting attendance fees, the number of shares to be received by the
director will be determined by dividing the dollar value of the annual fee or the meeting attendance fees owed by the closing price of our common stock as reported on the NYSE on the last day of the
Annual Directors Term.

Directors
generally make their elections as to the form of compensation for his or her annual fee or meeting attendance fees in July of each year and such election is valid for the
Annual Directors Term beginning in the calendar year in which the election is made.

Non-employee
directors are also eligible to receive stock options under our stock incentive plans. During 2003, 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.

14

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PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our authorized capital stock consists of 200,000,000 shares of common stock, $.10 par value per 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 5, 2004, there were 63,522,027 shares of common stock outstanding and held of record by
approximately 2,500 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.

15

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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.

Stock PricePeriod

High

Low2003First Quarter

$
10.09

$
6.90Second Quarter


14.00


7.80Third Quarter


15.19


12.30Fourth Quarter


15.13


12.722002First Quarter

$
19.18

$
14.30Second Quarter


16.82


12.30Third Quarter


12.70


5.99Fourth Quarter


10.10


5.29


The
closing price of our common stock on the NYSE on March 5, 2004 was $15.25.

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 million credit facility with two banks contains restrictions that may limit our ability to pay cash dividends in the future.

ITEM 6. SELECTED FINANCIAL DATA

FINANCIAL HIGHLIGHTS

|Years ended December 31,                                                        |  | 2003 |         | 2002 |   | 2001    |   | 2000 |         | 1999 |  
|------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | -
|
|Income Statement Data:                                                          |  |      |         |      |   |         |   |      |         |      |  
|Revenues                                                                        |  | $    | 804,976 |      | $ | 873,203 |   | $    | 779,159 |      | $
|Operating income                                                                |  |      | 42,180  |      |   | 10,357  |   |      | 19,753  |      |  
|Net income                                                                      |  |      | 29,222  |      |   | 8,181   |   |      | 17,387  |      |  
|Basic earnings per share                                                        |  |      | 0.44    |      |   | 0.11    |   |      | 0.25    |      |  
|Diluted earnings per share                                                      |  | $    | 0.44    |      | $ | 0.11    |   | $    | 0.25    |      | $
|Basic weighted average common shares outstanding                                |  |      | 65,771  |      |   | 74,018  |   |      | 68,474  |      |  
|Diluted weighted average common shares and common share equivalents outstanding |  |      | 66,423  |      |   | 74,406  |   |      | 69,396  |      |  
|Balance Sheet Data:                                                             |  |      |         |      |   |         |   |      |         |      |  
|Total cash and marketable securities                                            |  | $    | 206,136 |      | $ | 68,255  |   | $    | 129,243 |      | $
|Total assets                                                                    |  |      | 797,987 |      |   | 685,674 |   |      | 679,903 |      |  
|Total debt (1)                                                                  |  |      | 193,371 |      |   | 45,647  |   |      | 15,357  |      |  
|Stockholders' equity                                                            |  |      | 458,132 |      |   | 490,584 |   |      | 529,173 |      |  
|Book value per share                                                            |  | $    | 7.20    |      | $ | 7.06    |   | $    | 7.00    |      | $
|Number of shares outstanding                                                    |  |      | 63,629  |      |   | 69,521  |   |      | 75,509  |      |  
|Financial Performance:                                                          |  |      |         |      |   |         |   |      |         |      |  
|Revenue (decline) growth                                                        |  |      | (7.8    | )%   |   | 12.1    | % |      | (10.6   | )%   |  
|Net margin                                                                      |  |      | 3.6     | %    |   | 0.9     | % |      | 2.2     | %    |  

---

16

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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. 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 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

We help clients improve business and IT effectiveness through outsourcing services. We plan, build, and manage application software through our Business
Consulting, AD&I, and Application Outsourcing services. We develop long-term relationships with customers by providing a broad range of service offerings delivered on a local basis. We
also optimize clients' internal processes through BPO services through Worldzen, our majority owned subsidiary. Our IT services are delivered through an integrated network of local branch offices in
North America, the UK, and through ADCs in the U.S., Canada, and India. This global delivery model enables us to provide our services to customers onsite, at our nearshore facilities in Canada, and
through our offshore development centers in India. Our centralized Strategic Practices and our Quality Assurance Groups support branch offices. The Practices focus on developing repeatable approaches
to common customer needs and challenges, and help to gather and institutionalize our best practices. We believe that our blend of onsite, nearshore, and offshore capabilities enables us to further
improve the efficiency and economic advantage of the services that we provide our customers.

In
order for us to remain successful in the near term, we must continue to maintain and grow our client base, provide high-quality service and satisfaction to our existing clients, and
take advantage of cross-selling opportunities. In the current economic environment, we must provide our clients with service offerings that are appropriately priced, satisfy their needs, and provide
them with measurable business benefit. We believe that maximizing the generation of cash from our operations is fundamental to building long-term per share value. We believe that selling
and delivering Application Outsourcing and cross-selling our other services is critical to our long-term success. Attracting, retaining, motivating, and developing talented sales,
management, and technical professionals is another essential component to our success. In addition, our ability to leverage SG&A expenses over a broader base of revenue is crucial to increasing net
income and cash provided from operations.

17

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APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based on consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets
and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. The actual results may differ from these estimates under
different assumptions or conditions.

Critical
accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different
assumptions and conditions. Application of these policies is particularly important to the portrayal of 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 recognize revenue as services are performed or products are delivered in accordance with contractual agreements and generally accepted accounting principles.
For general consulting engagements, revenue is recognized on a time and materials basis as services are delivered. For the majority of our outsourcing engagements, we provide a specific level of
service each month for which we bill a standard monthly fee. Revenue for these engagements is recognized in monthly installments over the billable portion of the contract. These installments may be
adjusted to reflect changes in
staffing requirements and service levels consistent with terms of the contract. Costs of transitioning the employees and ensuring we meet required service level agreements may be capitalized over
defined periods of time.

For
fixed-price engagements, revenue is recognized 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.

Revenue
associated with application software products is recognized as the software products are installed and as implementation services are delivered. Software maintenance fees on
installed products are recognized on a pro-rated basis over the term of the agreement.

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.

Allowance for Bad Debts

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. Considerable
judgment is used in assessing the ultimate realization of these receivables, including reviewing the financial stability of the client, evaluating the successful mitigation of service delivery
disputes, and gauging current market conditions. If our

18

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evaluation
of service delivery issues or a client's ability to pay is incorrect, we may incur future reductions to revenue.

Goodwill and Intangible Assets

In assessing the recoverability of our goodwill and other intangible assets, we must make assumptions regarding estimated future cash flows and other factors to
determine the fair value of these assets. This process is subjective and requires judgment at many points throughout the 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, 2003, our goodwill totaled $292.9 million.

We
review our identifiable intangible assets for impairment in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144 ("SFAS 144"), "Accounting for
the Impairment or Disposal of Long-Lived Assets." In determining whether an intangible asset is impaired, we must make assumptions regarding estimated future cash flows from the asset,
intended use of the asset, and other related factors. If the estimates or the related assumptions used to determine the value of the intangible assets change, we may be required to record impairment
charges for these assets. As of December 31, 2003, our intangible assets totaled $71.0 million.

Income Taxes

We account for income taxes in accordance with SFAS No. 109 ("SFAS 109"), "Accounting for Income Taxes," which requires that deferred tax assets and
liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. SFAS 109 also requires that deferred
tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. 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.

Stock-based Compensation

We grant stock options for a fixed number of shares to employees with an exercise price equal to the closing price of the shares at the date of grant. We also
grant restricted stock for a fixed number of shares to employees for nominal consideration. We account for our stock-based compensation in accordance with Accounting Principles Board ("APB") Opinion
No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." In accordance with APB 25, we recognize compensation expense based on the difference between the market value at grant date and
the grant price and record the compensation
expense ratably over the restriction period. We do not recognize compensation expense on our stock option grants as the stock options are granted at the market price at the date of grant.

We
adopted the disclosure provisions of SFAS No. 148 ("SFAS 148"), "Accounting for Stock-Based CompensationTransition and Disclosure," an amendment to SFAS
No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." Had we adopted the accounting provisions of SFAS 148, we would have recorded additional compensation expense and
reduced net income by approximately $4.6 million, $11.3 million, and $10.3 million in 2003, 2002, and 2001, respectively.

19

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Restructuring

We have recorded restructuring charges and reserves associated with restructuring plans approved by management in the last five 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, 2003, to the extent that we are unable to maintain all of our current,
contractual subleases, we could incur an additional restructuring charge up to approximately $2.7 million. In addition, if we are able to negotiate early terminations of our operating leases or
to obtain a sublessee, we would record a reduction to the restructuring liability and a corresponding expense reduction. In 2003, we recorded an expense reduction of $1.0 million associated
with early lease terminations and unanticipated subleases.

CONSOLIDATED RESULTS OF OPERATIONS

In this section, we discuss our results of operations. We measure our revenue performance by comparing the growth in Plan, Build, and Manage service revenues. We
evaluate our improvement in profitability by comparing gross margins, and SG&A as a percentage of revenues. Other key metrics that we use to manage and evaluate the performance of our business
include: bookings or new sales to customers, the number of billable personnel, and utilization rates. We calculate utilization rates by dividing the total billable hours per consultant by the total
hours available from the consultant.

2003 Compared to 2002

REVENUES (Dollars in thousands)Years Ended December 31,

Increase (Decrease)2003

%

2002

%

$

%Plan

$
48,701

6

$
66,890

8

$
(18,189
)
(27.2
)Build


196,175

24


216,257

25


(20,082
)
(9.3
)Manage


560,100

70


590,056

67


(29,956
)
(5.1
)Total

$
804,976

100
%
$
873,203

100
%
$
(68,227
)
(7.8
)


Revenues

Revenues in 2003 compared to 2002 decreased as a result of clients' decisions to continue to defer discretionary technology-related expenditures during a period
of economic uncertainty. However, throughout the course of the year, we experienced a more stable demand for our services and believe that we are beginning to see some indications of increases in
discretionary IT spending.

Plan.Our Plan service revenues are comprised primarily of business consulting services, which include Business Consulting
and Program Management. During 2003, we provided the majority of our Business Consulting services through KCG. During the Fourth Quarter of 2003, we entered the growing BPO market through our
acquisition of a majority interest in Worldzen. Worldzen specializes in complex processes within the financial services, insurance, and healthcare industries, and provides back office processes for
multiple industries. As part of our investment in Worldzen, we contributed to

20

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Worldzen
a majority of the assets and certain customer contracts associated with KCG. Our Plan services are delivered via our global delivery model, from operations in the U.S., UK, Canada, and India.
The decreases in Plan service revenues were primarily the result of the deferral of consulting projects and a decrease in billing rates in response to weak general economic conditions.

Build.Build service revenues, which consist primarily of the AD&I business, were adversely affected during 2003 by
customers' decisions to defer software development projects due to the reduction in capital spending related to technology. The products and services we sold within the less cyclical healthcare
industry helped to stabilize Build service revenues. Revenues for 2003 from HSD increased $2.6 million, or 4.6% compared to 2002.

Manage.Manage services consist primarily of Application Outsourcing services, together with Staff Augmentation, other
Maintenance and Migration services, and BPO services, delivered through Worldzen. The decrease in Manage service revenues was due to lower revenues associated with staff augmentation and other
services, offset in part by an increase in Application Outsourcing revenues.

Generally,
under Application Outsourcing agreements, we receive a fixed monthly fee in return for meeting or exceeding a contractually agreed upon service level. However, because our
customers typically have the ability to reduce services under their contracts, our monthly fees may be reduced from the stated contract amounts. For example, in accordance with the contract terms,
PacifiCare has the ability to reduce the baseline resources as defined in the contract, which could potentially reduce the contract value, originally valued at approximately $500.0 million through
2012, by approximately $100.0 million. Application Outsourcing agreements generally do not require any capital outlay from us.
Application Outsourcing revenue and expenses are recognized on a monthly basis consistent with the service provided by us to our customers. Within our Application Outsourcing business, we carefully
monitor and manage designated large, long-term strategic Application Outsourcing engagements. These deals represent Application Outsourcing contracts that have been signed since January of
2000, with a minimum contract value of $5.0 million in revenue. We believe that these engagements are representative of the type of Application Outsourcing business that forms the core element
of our growth strategy. During 2003, these long-term strategic Application Outsourcing engagements generated $230.4 million in revenue, a 21.8% increase from $189.2 million
in revenue from these engagements in 2002.

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

Years Ended December 31,

Increase (Decrease)2003

2002

$

%Revenues

$
804,976

$
873,203

$
(68,227
)
(7.8
)Salaries, wages, and other direct costs


554,375


630,047


(75,672
)
(12.0
)Gross margin

$
250,601

$
243,156

$
7,445

3.1Gross margin %


31.1
%

27.8
%


Salaries, wages, and other direct costs

The decrease in salaries, wages, and other direct costs in 2003, as compared to 2002, was primarily attributable to ongoing efforts to bring our costs in
alignment with anticipated revenues through workforce reductions and increased offshore staffing, primarily at our India facilities. Salaries, wages, and other direct costs were $554.4 million,
or 68.9%, of total revenues, for 2003 and $630.0 million, or 72.2%, of total revenues in 2002. Total billable employees for all operations were 6,182 at the end of 2003, compared to 6,175 total
billable employees at the end of 2002. In addition to these employees, we

21

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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 our 2% Convertible Subordinated Debentures ("Debentures") issue in June 2003 and our strong cash flow. Our cash balances were
reduced by cash used to repurchase shares of our common stock in 2003.

22

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Interest expense

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

Other income, net

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

Minority interest

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

Income taxes

We generated income before taxes of $48.7 million for 2003 compared to $13.6 million in 2002. The provision for income taxes represents the amounts
owed for federal, state, and foreign taxes. The
effective income tax rate is the provision for income taxes as a percentage of income before the provision for income taxes. Our effective tax rate was 40.0% for 2003 and 2002, and reflects an
adjustment of prior year's estimated tax liability in 2003 and 2002. A reconciliation of the statutory federal income tax rate to the effective rate for each period is included in Note 14
"INCOME TAXES" in the notes to the accompanying consolidated financial statements.

Net income

Net income increased to $29.2 million in 2003 compared to $8.2 million in 2002. The improvement in net income is the result of the absence of a
restructuring charge in 2003, improved operating income margins, and the favorable judgment in an arbitration award in 2003.

2002 Compared to 2001

REVENUES (Dollars in thousands)Years Ended December 31,

Increase (Decrease)2002

%

2001

%

$

%Plan

$
66,890

8

$
75,314

10

$
(8,424
)
(11.2
)Build


216,257

25


265,993

34


(49,736
)
(18.7
)Manage


590,056

67


437,852

56


152,204

34.8Total

$
873,203

100
%
$
779,159

100
%

94,044

12.1


23

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Revenues

Revenues increased in 2002 compared to 2001 as the result of new clients and new client billings due to the acquisition of Metro, which was completed on
November 30, 2001, and the acquisition of SignalTree Solutions, which was completed on March 15, 2002.

Plan.The decrease in Plan service revenues in 2002 compared to 2001 was primarily the result of the deferral of consulting
projects and a decrease in billing rates caused by general economic conditions.

Build.Build service revenues were adversely affected during 2002 by the deferral of software development projects in both
North America and the UK, as well as by reduced billing rates due to the current reduction in capital spending related to technology. However, the decline in our Build services revenue was offset in
part by revenue generated from the less cyclical public sector and healthcare-related vertical markets, which contributed growing and more stable revenue streams within the Build services sector.

Manage.The improvement in Manage services revenue was the result of increasing revenue from our Application Outsourcing
service, and the acquisitions of Metro and SignalTree Solutions. Although not immune to economic fluctuations, Application Outsourcing revenues are more stable than those associated with Plan or Build
service revenues due to the long-term and recurring nature of outsourcing contracts and the cost-saving benefits related to outsourcing. Generally,
under an Application Outsourcing agreement, we receive a fixed monthly fee in return for meeting or exceeding a contractually agreed upon service level. Application Outsourcing agreements generally do
not require any capital outlay from us, and we recognize outsourcing revenue and expense on a monthly basis consistent with the service provided to our customers.

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

Years Ended December 31,

Increase (Decrease)2002

2001

$

%Revenues

$
873,203

$
779,159

$
94,044

12.1Salaries, wages, and other direct costs


630,047


547,883


82,164

15.0Gross margin

$
243,156

$
231,276

$
11,880

5.1Gross margin %


27.8
%

29.7
%


Salaries, wages, and other direct costs

The increase in salaries, wages, and other direct costs was primarily attributable to the Metro and SignalTree Solutions acquisitions. Salaries, wages, and other
direct costs were $630.0 million, or 72.2%, of total revenues, for 2002 and $547.9 million, or 70.3%, of total revenues in 2001. Total billable employees for all operations were 6,175 in
2002, compared to 6,566 in 2001. The lower billable
employees resulted from a need to bring personnel resources, which account for the vast majority of our direct costs, in alignment with anticipated revenue. Our billable employees within our India
operation were 413 billable employees as of December 31, 2002. We did not have billable employees in India during 2001.

Gross margin

Gross margin as a percentage of revenue for 2002 was 27.8%, compared to 29.7% in 2001. The decrease in gross margins reflects continuing softness in the demand
for IT services resulting in lower billing rates and utilization of billable personnel.

24

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Selling, general and administrative expenses

SG&A expenses for 2002 increased $12.1 million, or 6.5%, compared to 2001. SG&A expenses for 2002 were $198.8 million, or 22.8%, of total revenue,
compared to $186.7 million, or 24.0%, of total revenue for 2001. The decrease in SG&A as a percentage of revenue was the result of cost synergies obtained from the acquisition of Metro as well
as our continuing focus on tightly controlling discretionary expenses. The increase in SG&A expenses was attributable to personnel costs incurred in connection with the Metro and SignalTree Solutions
acquisitions.

During
the First Quarter of 2002, we completed the integration of Metro's corporate functions with our own, and during the Second Quarter of 2002, we completed the consolidation and
relocation of overlapping branch offices. During the Second Quarter of 2002, we also integrated U.S.-based operations acquired from SignalTree Solutions with our own. During the Third Quarter of 2002,
we integrated all corporate functions of SignalTree Solutions into our corporate headquarters in Boston, Massachusetts.

Amortization of intangible assets

Amortization of intangible assets for 2002 was $16.4 million, or 1.9%, of total revenue compared to $14.5 million, or 1.9% of total revenue, for
2001. The increase in amortization of intangible assets was primarily attributable to additional intangible assets resulting from our acquisitions of Metro and
SignalTree Solutions offset by the impact of the adoption of SFAS No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," under which goodwill is no longer amortized.

Restructuring charges, net

During 2002, we recorded a restructuring charge of $17.6 million. This charge consisted of $3.2 million related to a workforce reduction of
approximately 229 employees, $12.1 million for branch office closings and certain other expenditures, $1.8 million of assets which became impaired as a result of these restructuring
actions, and $0.5 million for a net change in prior year's estimate for workforce reductions and branch office closures and other expenditures. During the Fourth Quarter of 2001, we recorded a
restructuring charge of $10.4 million relating to the costs of workforce reductions, consolidation of branch offices, impaired assets, and certain other expenditures.

Interest and dividend income

Interest and dividend income totaled $2.2 million for 2002, compared to $6.9 million for 2001. The decrease in interest and dividend income was
attributable to lower cash and cash equivalents and marketable securities earning interest and dividends, as well as overall lower interest rates. The lower cash and cash equivalent and marketable
security balances were due to the use of cash to retire debt associated with the acquisition of Metro, the acquisition of SignalTree Solutions, and the repurchase of shares of our common stock.

Interest expense

Interest expense for 2002 was $255,000 compared to $295,000 in 2001.

Other income, net

Other income was $1.3 million for 2002, compared to $2.9 million in 2001. Other income during 2001 included gains from sales of investments and a
gain of $4.0 million resulting from the sale of our Help Desk business. This gain was partially offset by the write-off of certain equity investments totaling $2.0 million.

25

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Income taxes

We generated income before taxes of $13.6 million for 2002 compared to $29.2 million in 2001. 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 2002, down from 40.5% in 2001. This decrease was the result of the adoption of SFAS 142, offset by an adjustment of prior year's estimated tax liability. A reconciliation of the
statutory federal income tax rate to the effective rate for each period is included in Note 14 "INCOME TAXES" in the notes to the accompanying consolidated financial statements.

Net income

Net income decreased to $8.2 million in 2002 compared to $17.4 million in 2001. The decrease in net income is the result of higher restructuring
charge in 2002, and lower interest and dividend income.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities," which requires the consolidation of a variable interest entity, as defined, by its primary beneficiary. Primary beneficiaries are those companies that are subject to a majority of the risk
of loss or entitled to receive a majority of the entity's residual returns, or both. In determining whether it is the primary beneficiary of a variable interest entity, an entity with a variable
interest shall treat variable interests in that same entity held by its related parties as its own
interests. FIN 46 is effective prospectively for all variable interests obtained subsequent to December 31, 2002. For variable interests existing prior to December 31, 2002,
consolidation will be required beginning July 1, 2003. In December 2003, the FASB agreed to a broad-based deferral of the effective date of FIN 46 for public companies until the end of
periods ending after March 15, 2004, with the exception of interests in special purpose entities, which are required in financial statements of public companies for periods ending after
December 15, 2003. We have evaluated the applicability of FIN 46 to our relationship with each of City Square Limited Partnership ("City Square") and Gateway LLC and determined that these
entities are not required to be consolidated within our consolidated financial statements. We have determined that Gateway LLC is not a variable interest entity as the equity investment is sufficient
to absorb the expected losses and the holders of the equity investment do not lack any of the characteristics of a controlling interest. We have concluded that as we no longer occupy the space at Ten
City Square and no longer derive any benefit from leasing the space, we would not be determined to be the related party most closely associated with City Square. As a result, we will continue to
account for our leases with City Square and Gateway LLC consistent with our historical practices in accordance with generally accepted accounting principles. We believe that we do not have an interest
in any variable interest entities that would require consolidation.

In
April 2003, the FASB issued SFAS No. 149 ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging
activities under SFAS No. 133, ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." This statement is effective for contracts entered into or modified after
June 30, 2003. Adoption of this statement did not have a significant effect on our consolidated financial position or results of operations because we do not engage in hedging activities.

In
November 2002 and May 2003, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables." EITF Issue No. 00-21 provides guidance and criteria for determining when a multiple deliverable arrangement contains more

26

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than
one unit of accounting. The guidance also addresses methods of measuring and allocating arrangement consideration to separate units of accounting. The guidance is effective for revenue
arrangements entered into after June 15, 2003. Adoption of this statement did not have a significant effect on our consolidated financial position or results of operations.

In
May 2003, the FASB issued SFAS No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for
financial instruments entered into or modified after May 31, 2003. Adoption of this statement had no effect on our consolidated financial position or results of operations.

In
May 2003, the EITF reached a consensus on Issue No. 01-08, "Determining Whether an Arrangement Contains a Lease." EITF Issue No. 01-08
provides guidance on how to determine whether an arrangement contains a lease that is within the scope of SFAS No. 13 ("SFAS 13"), "Accounting for Leases." The guidance in Issue
No. 01-08 is based on whether the arrangement conveys to the purchaser (lessee) the right to use a specific asset. Issue No. 01-08 will be effective for
arrangements entered into or modified in the Second Quarter of fiscal 2004. We will adopt this statement prospectively and do not anticipate adoption of this statement to have a significant effect on
our consolidated financial position or results of operations.

In
December 2003, the FASB issued SFAS No. 132 (revised 2003) ("SFAS 132 as revised"), "Employers' Disclosures about Pensions and Other Postretirement Benefits."
This Statement revises employers' disclosures about pension plans and other postretirement benefit plans, but does not change the measurement or recognition provisions of SFAS No. 87,
"Employers' Accounting for Pensions," SFAS No. 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 such, will include the
required additional disclosures as of December 31, 2004.

In
December 2003, the SEC published Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." This SAB updates the SEC staff's prior guidance provided in SAB
No. 101, "Revenue Recognition," removes material no longer necessary, and conforms the interpretive material retained with current authoritative accounting and auditing guidance and SEC rules
and regulations, including EITF 00-21, "Revenue Arrangements with Multiple Deliverables." Adoption of this accounting guidance did not impact our consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated Financial Condition (Dollars in thousands)

|Years Ended December 31,                         |                                  | 2003 |        | 2002     |   | 2001    |        
|------------------------------------------------ | -------------------------------- | ---- | ------ | -------- | - | ------- | -------
|                                                 | Cash Flows Provided By (Used in) |      |        |          |   |         |        
|                                                 | Operating activities             |      | $      | 77,572   |   | $       | 62,525 
|                                                 | Investing activities             |      |        | (150,202 | ) |         | (34,737
|                                                 | Financing activities             |      |        | 82,437   |   |         | (48,989
|                                                 | Effect of exchange rate on cash  |      |        | 546      |   |         | 2,028  
|                                                 |                                  |      |        |          |   |         |        
|Increase (Decrease) in Cash and Cash Equivalents |                                  | $    | 10,353 |          | $ | (19,173 | )      
|                                                 |                                  |      |        |          |   |         |        

27

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We have historically financed our operations through our ability to generate cash from operations. We use the net cash generated from our operations to fund capital expenditures, mergers
and acquisitions, and stock repurchases. If 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. Through the net cash provided by operations during 2003,
combined with the proceeds of our convertible debt offering completed in June 2003, we have increased our cash and cash equivalents, and our marketable securities position to
$206.1 million at December 31, 2003. We intend to use our cash and marketable securities for general corporate purposes, which may include additional repurchases of our common stock
under existing or future share repurchase programs and the funding of future acquisitions and other corporate transactions.

Cash flows from operating activities

Net cash provided by operating activities in 2003 increased $15.0 million compared to 2002 due to higher net income and improvements in working capital. We
drove the improvements in working capital through our continuing efforts to increase collections of accounts receivable. The improvement in collections is evident by a reduction in DSO, which was
53 days, 59 days, and 70 days at December 31, 2003, 2002, and 2001, respectively. We calculate DSO using the trailing three months total revenue divided by the number of
days in the quarter to equal daily revenue. The average accounts receivable balance for the three-month period is then divided by daily revenue. Cash provided by operating activities also improved due
to a $7.3 million award that we received in the First Quarter of 2003. This award was the result of an arbitration proceeding that we initiated in 2000 for a breach of an agreement between
Signal Corporation and our Federal Systems subsidiary. Partially offsetting this increase is approximately $11.9 million that we paid associated with prior and current restructuring charges and
$3.5 million that we paid in connection with settling a legal claim in the Third Quarter on 2003.

Net
cash provided by operating activities in 2002 decreased $20.7 million compared to 2001 due primarily to the lower operating results. During 2002, we paid $16.5 million
associated with prior and current restructuring charges. Partially offsetting the operating results and restructuring payments were the improvements in working capital, particularly in the collections
of our accounts receivables.

We
believe that cash generated from our operating activities will be sufficient to fund our working capital requirements through the next 12 months and beyond. However, in order
to protect against the current economic conditions persisting in 2004 and beyond, we have taken and will continue to take, as we deem necessary, steps to reduce our expenses and align our cost
structure to our revenue. We
anticipate that current cash on hand, cash generated from operations and cash generated from the exercise of employee stock options and our employee stock purchase plan will be adequate to fund our
planned capital and financing expenditures for the next 12 months and beyond.

Cash flows used in investing activities

Net cash used in investing activities in each of 2003, 2002, and 2001 was primarily for investments, acquisitions, and capital expenditures.

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

During
2002, we purchased $27.9 million and sold $69.8 million in marketable securities, generating net cash of $41.9 million, which we used to partially fund
acquisitions. In 2002, we paid

28

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$63.2 million,
net of cash acquired, to acquire SignalTree Solutions, and another smaller business that is complementary to our business strategy. In connection with the smaller complementary
business acquisition, we may have to pay additional earn-out consideration that is based on achieving specific net revenue targets. Payments in the next 12 months for achieving
these goals may range from $1.0 million to $2.0 million. During 2002 we also recorded $3.0 million as deferred revenue related to contingent service credits and issued a
$3.0 million non-interest bearing note payable as partial consideration. As of December 31, 2003, the deferred revenue and non-interest bearing note each had a
balance of $2.0 million, a reduction of $1.0 million resulting from the delivery of related service credits. The note has a one-year term with a one-year
extension expiring on September 25, 2004. During 2002, we also invested $13.7 million on property and equipment, and capitalized software costs in connection with the implementation of
our PeopleSoft Enterprise Resource Planning applications.

During
2001, we purchased $104.6 million and sold $102.3 million in marketable securities. In addition, we invested $7.6 million on property and equipment. We also
completed the merger of Metro by exchanging our common stock for all of the common stock of Metro. In connection with this merger, we paid $7.1 million in transaction costs. Partially
offsetting these cash requirements was $16.1 million in proceeds that we received in connection with the sale of our Help Desk business.

On
February 27, 2004, we acquired Nims Associates, Inc. ("Nims"), an information technology and consulting services company with offices in the Midwest and ADCs in
Indianapolis and Dallas. In exchange for all of Nims' outstanding stock, we paid $18.1 million in cash to shareholders of Nims, with the potential to pay up to an additional
$15.0 million in earn-out consideration over the next three years, contingent upon the achievement of certain future financial targets.

Cash flows provided by (used in) financing activities

In June 2003, we received $150.0 million in proceeds from our issuance of convertible subordinated debentures. From these proceeds, we
simultaneously invested approximately $37.3 million to repurchase approximately 3.0 million shares of our common stock from authorizations approved by our Board of Directors in October
of 2002 and May of 2003. Net proceeds after the repurchase of shares and approximately $4.4 million debt issuance costs were approximately $108.3 million. See Note 9 "CONVERTIBLE
SUBORDINATED DEBENTURES" in the notes to the accompanying consolidated financial statements for additional information on the Debentures.

Additionally
during 2003, we were authorized to repurchase shares of our common stock on the open market or in negotiated transactions, with the timing and amount of shares purchased
determined by our management based on its evaluation of market and economic conditions and other factors. From January 1, 2001 through December 31, 2003, our Board of Directors
authorized us to repurchase up to 15.6 million shares of our common stock. The following is a summary of our repurchase activity for 2003, 2002, and 2001 (dollars in thousands):

|                                               |  | 2003       |   | 2002 |        | 2001
|---------------------------------------------- |  | ---------- | - | ---- | ------ | ----
|
|Prior year authorizations at beginning of year |  | 3,676,400  |   |      |        |     
|Authorizations                                 |  | 6,000,000  |   |      |        |     
|Repurchases                                    |  | (6,495,200 | ) | $    | 66,696 |     
|                                               |  |            |   |      |        |     
|Shares remaining as of December 31,            |  | 3,181,200  |   |      |        |     
|                                               |  |            |   |      |        |     

Between
May 1999 and December 31, 2003, we have invested approximately $229.7 million to repurchase approximately 18.5 million shares of our common stock
under nine separate authorizations. These share repurchases more than offset the shares issued under our various stock ownership

29

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programs.
Under these stock ownership programs, we issued 603,235 shares, 510,312 shares, and 755,348 shares and received proceeds of $4.4 million, $6.4 million, and $6.3 million
for the years ended December 31, 2003, 2002, and 2001, respectively.

In
February 2003, we entered into a new $50.0 million unsecured revolving credit facility (the "credit facility") with two banks. The credit facility replaces a previous
$10.0 million demand line of credit, which expired in July 2002. The terms of the credit facility require us to maintain a maximum total funded debt and other financial ratios. The
credit facility also includes covenants that, subject to certain specific exceptions and limitations, among other things, restrict our ability to incur additional debt, make certain acquisitions or
dispositions of assets, create liens, and pay dividends. On June 11, 2003, we and two of our banks amended certain provisions of the credit facility relating to financial covenants. These
covenants, which include total indebtedness and leverage ratios, are no more restrictive than those initially contained in the credit facility. On October 17, 2003 and February 5, 2004,
we and two of our banks further amended certain provisions of the credit facility to expand our ability to make certain acquisitions. The annual commitment fee for maintaining the credit facility is
30 basis points on the unused portion of the credit facility, up to a maximum of $150,000. As of December 31, 2003, we had no debt outstanding under the credit facility. We may draw upon the
credit facility up to $50.0 million less any outstanding letters of credit that have been issued against the credit facility. Any amounts drawn upon the credit facility constitute senior
indebtedness for purposes of the Debentures. Borrowings bear interest at one of the bank's base rate or the Euro currency reserve rate. Based on our current operating plan, we believe that our cash
and cash equivalents on hand, marketable securities, cash flows from operations, and our new line of credit will be sufficient to meet our current capital requirements for at least the next
12 months.

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

Net
cash used in financing activities in 2001 was primarily due to the payment of debt acquired in connection with the merger of Metro and the repayment of long-term debt.

Increase (Decrease) in Cash and Cash Equivalents

Our cash and cash equivalents totaled $56.7 million, $46.4 million, and $65.6 million at December 31, 2003, 2002, and 2001,
respectively.

The
following table summarizes our contractual obligations by year as of December 31, 2003:

|                                       |  | Payments due by Period (Dollars in thousands)
|-------------------------------------- |  | ---------------------------------------------
|
|Note Payable                           |  | $                                            
|Put Option                             |  |                                              
|Long-term debt (1)                     |  |                                              
|Operating leases (2)                   |  |                                              
|Capital lease obligations              |  |                                              
|                                       |  |                                              
|Total contractual cash obligations (3) |  | $                                            
|                                       |  |                                              

---

30

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Our material commitments are primarily related to our Debentures and our office rentals. Contractual obligations related to operating leases
reflect existing rental leases and the proposed new corporate facility as discussed in Note 15 "RELATED PARTIES, COMMITMENTS, AND CONTINGENCIES" in the notes to the accompanying consolidated
financial statements. Further discussion regarding our convertible subordinated debentures can be found in Note 9 "CONVERTIBLE SUBORDINATED DEBENTURES."

OFF-BALANCE SHEET ARRANGEMENTS

In January 2003, the FASB issued FIN 46, which requires the consolidation of a variable interest entity, as defined, by its primary beneficiary. Primary
beneficiaries are those companies that are subject to a majority of the risk of loss or entitled to receive a majority of the entity's residual returns, or both. In determining whether it is the
primary beneficiary of a variable interest entity, an entity with a variable interest shall treat variable interests in that same entity held by its related parties as its own interests. FIN 46 is
effective prospectively for all variable interests obtained subsequent to December 31, 2002. For variable interests existing prior to December 31, 2002, consolidation will be required
beginning July 1, 2003. In December 2003, the FASB agreed to a broad-based deferral of the effective date of FIN 46 for public companies until the end of periods ending after
March 15, 2004, with the exception of interests in special purpose entities, which are required in financial statements 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 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, 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 requires a guarantor to record certain guarantees at fair value and to make significant new disclosures, even when the likelihood of making any payments under
the guarantee is remote. The interpretation and its disclosure requirements are effective for financial statements of interim or annual
periods ending after December 15, 2002. The interpretation's initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. Under FIN 45, the guarantor's previous accounting for guarantees issued prior to December 31, 2002 will not be revised or restated.

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.

31

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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 may 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:



A
significant portion of our expenses do 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 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 March 5, 2004, we have
completed 13 acquisitions. The aggregate merger and consideration costs of these acquisitions totaled approximately $408.2 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 be unable to complete any future acquisition.

We
anticipate that each acquisition will bring benefits, such as an increase in revenue. Prior to completing an acquisition, however, it is difficult to determine if 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

32

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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 SignalTree Solutions in March 2002, we now have three software development facilities in India. As of
December 31, 2003, we had approximately 876 technical professionals in the region. India is currently experiencing conflicts with Pakistan over the disputed territory of Kashmir as well as
clashes between different religious groups within the country. These conflicts, in addition to other unpredictable developments in the political, economic, and social conditions in India, could
eliminate or reduce the availability of these development and professional services. If access to these services were to be unexpectedly eliminated or
significantly reduced, 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 in 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.

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

33

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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 due on June 15, 2013, which could cause defaults
under our senior revolving credit facility and any other indebtedness we may incur in the future.The Debenture holders have the right to require us to repurchase
all or a portion of their Debentures on June 15, 2008. The Debenture holders may also require us to repurchase all or a portion of their Debentures upon a designated event, as defined in the
indenture governing the Debentures. If the Debenture holders elect to require us to repurchase their Debentures on any of the above dates or if a designated event were to occur, we may not have enough
funds to pay the repurchase price for all tendered Debentures. We are currently prohibited under our senior revolving credit facility from repurchasing any Debentures if a designated event were to
occur. We may also be prohibited under any indebtedness we may incur in the future from purchasing any Debentures prior to their stated maturity. In these circumstances, we will be required to repay
all of the outstanding principal of, and pay any accrued and unpaid interest on, such indebtedness or to obtain the requisite consents from the holders of any such indebtedness to permit the
repurchase of the Debentures. If we are unable to repay all of such indebtedness or are unable to obtain the necessary consents, we will be unable to offer to repurchase the Debentures, which would
constitute an event of default under the indenture for the Debentures, which itself could constitute a default under our senior revolving credit facility or under the terms of any future indebtedness
that we may incur. In addition, the events that constitute a designated event under the indenture for the Debentures are events of default under our senior revolving credit facility and may also be
events of default under other indebtedness that we may incur in the future.

We incurred indebtedness when we sold our Debentures. We may incur additional indebtedness in the future. The indebtedness created by the sale of our Debentures,
and any future indebtedness, could adversely affect our business and our ability to make full payment on the Debentures.Our aggregate level of indebtedness increased in
connection with the sale of our Debentures. As of December 31, 2003, we had approximately $193.4 million of outstanding indebtedness and had the ability to incur additional debt under
our revolving credit facility. We may also obtain additional long-term debt and working capital lines of credit to meet future financing needs, which would have the effect of increasing
our total leverage. Any increase in our leverage could have significant negative consequences, including:



34

---



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 instruments or purchasing hedging 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. Our primary market risk
exposure is that of interest rate risk on our investments, which would affect the carrying value of those investments. However, changes in market rates and the related impact on the fair value of our
investments would not generally affect net income as our investments are fixed rate securities and are classified as available-for-sale. Investments classified as
available-for-sale are carried at fair value with unrealized gains and losses recorded as a component of accumulated other comprehensive loss in the accompanying consolidated
balance sheets. Since January 1, 2001, the United States Federal Reserve Board has significantly decreased certain benchmark interest rates, which has led to a general decline in market
interest rates. The decline in market interest rates has had an impact on the rate of return on our cash and investments. Additionally, we transact business in the UK, Canada, and India and as such
have exposure associated with movement in foreign currency exchange rates. In 2003, net revenues derived from our foreign operations totaled approximately 3% of our total revenues.

35

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|Report of independent auditors                                                                        |  | 37   
|----------------------------------------------------------------------------------------------------- |  | -----
|Consolidated statements of income for the years ended December 31, 2003, 2002, and 2001               |  | 38   
|Consolidated balance sheets as of December 31, 2003 and 2002                                          |  | 39   
|Consolidated statements of stockholders' equity for the years ended December 31, 2003, 2002, and 2001 |  | 40   
|Consolidated statements of cash flows for the years ended December 31, 2003, 2002, and 2001           |  | 41   
|Notes to consolidated financial statements                                                            |  | 42-76

36

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REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF KEANE, INC.:

We have audited the accompanying consolidated balance sheets of Keane, Inc. as of December 31, 2003 and 2002, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of Keane, Inc.'s
management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Keane, Inc. at December 31, 2003
and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States.

As
discussed in Note 5 "GOODWILL AND OTHER INTANGIBLE ASSETS" to the consolidated financial statements, in 2002 Keane, Inc. changed its method of accounting for goodwill and other
intangible assets in accordance with the adoption of Statement of Financial Accounting Standards No. 142.



Boston,
Massachusetts
February 6, 2004, except for Note 17,
as to which the date is February 27, 2004

37

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KEANE, INC.        CONSOLIDATED STATEMENTS OF INCOME

|                                                                                               |                                                      | For the years ended December 31, |        
|---------------------------------------------------------------------------------------------- | ---------------------------------------------------- | -------------------------------- | -------
|
|
|Revenues                                                                                       |                                                      | $                                | 804,976
|Operating expenses                                                                             |                                                      |                                  |        
|                                                                                               | Salaries, wages, and other direct costs              |                                  |        
|                                                                                               | Selling, general, and administrative expenses        |                                  |        
|                                                                                               | Amortization of goodwill and other intangible assets |                                  |        
|                                                                                               | Restructuring charges, net                           |                                  |        
|                                                                                               |                                                      |                                  |        
|Operating income                                                                               |                                                      |                                  | 42,180 
|Other income (expense)                                                                         |                                                      |                                  |        
|                                                                                               | Interest and dividend income                         |                                  |        
|                                                                                               | Interest expense                                     |                                  |        
|                                                                                               | Other income, net                                    |                                  |        
|                                                                                               | Minority interest                                    |                                  |        
|                                                                                               |                                                      |                                  |        
|Income before income taxes                                                                     |                                                      |                                  | 48,696 
|                                                                                               |                                                      |                                  |        
|Provision for income taxes                                                                     |                                                      |                                  | 19,474 
|                                                                                               |                                                      |                                  |        
|Net income                                                                                     |                                                      | $                                | 29,222 
|                                                                                               |                                                      |                                  |        
|Basic earnings per share                                                                       |                                                      | $                                | 0.44   
|                                                                                               |                                                      |                                  |        
|Diluted earnings per share                                                                     |                                                      | $                                | 0.44   
|                                                                                               |                                                      |                                  |        
|Basic weighted average common shares outstanding (in thousands)                                |                                                      |                                  | 65,771 
|                                                                                               |                                                      |                                  |        
|Diluted weighted average common shares and common share equivalents outstanding (in thousands) |                                                      |                                  | 66,423 
|                                                                                               |                                                      |                                  |        

The accompanying notes are an integral part of the consolidated financial statements.

38

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KEANE, INC.        CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                        |                                        | As of December 31, |                                           
|------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------- | ------------------ | ------------------------------------------
|
|
|Assets                                                                                                                                                  |                                        |                    |                                           
|Current:                                                                                                                                                |                                        |                    |                                           
|                                                                                                                                                        | Cash and cash equivalents              |                    | $                                         
|                                                                                                                                                        | Restricted cash                        |                    |                                           
|                                                                                                                                                        | Marketable securities                  |                    |                                           
|                                                                                                                                                        | Accounts receivable, net:              |                    |                                           
|                                                                                                                                                        |                                        |                    | Trade                                     
|                                                                                                                                                        |                                        |                    | Other                                     
|                                                                                                                                                        | Prepaid expenses and deferred taxes    |                    |                                           
|                                                                                                                                                        |                                        |                    |                                           
|                                                                                                                                                        |                                        |                    | Total current assets                      
|Property and equipment, net                                                                                                                             |                                        |                    | 75,431                                    
|Construction in process                                                                                                                                 |                                        |                    |                                          
|Goodwill                                                                                                                                                |                                        |                    | 292,924                                   
|Customer lists, net                                                                                                                                     |                                        |                    | 57,908                                    
|Other intangible assets, net                                                                                                                            |                                        |                    | 13,124                                    
|Deferred taxes and other assets, net                                                                                                                    |                                        |                    | 26,288                                    
|                                                                                                                                                        |                                        |                    |                                           
|                                                                                                                                                        |                                        |                    | Total assets                              
|                                                                                                                                                        |                                        |                    |                                           
|Liabilities                                                                                                                                             |                                        |                    |                                           
|Current:                                                                                                                                                |                                        |                    |                                           
|                                                                                                                                                        | Accounts payable                       |                    |                                           
|                                                                                                                                                        | Accrued expenses and other liabilities |                    |                                           
|                                                                                                                                                        | Accrued building costs                 |                    |                                           
|                                                                                                                                                        | Accrued restructuring                  |                    |                                           
|                                                                                                                                                        | Accrued compensation                   |                    |                                           
|                                                                                                                                                        | Note payable                           |                    |                                           
|                                                                                                                                                        | Accrued income taxes                   |                    |                                           
|                                                                                                                                                        | Unearned income                        |                    |                                           
|                                                                                                                                                        | Current capital lease obligations      |                    |                                           
|                                                                                                                                                        |                                        |                    |                                           
|                                                                                                                                                        |                                        |                    | Total current liabilities                 
|Convertible debentures                                                                                                                                  |                                        |                    | 150,000                                   
|Accrued long-term building costs                                                                                                                        |                                        |                    | 40,042                                    
|Accrued long-term restructuring                                                                                                                         |                                        |                    | 7,073                                     
|Deferred income taxes                                                                                                                                   |                                        |                    | 30,879                                    
|Long-term portion of capital lease obligations                                                                                                          |                                        |                    | 193                                       
|                                                                                                                                                        |                                        |                    |                                           
|                                                                                                                                                        |                                        |                    | Total liabilities                         
|Minority interest                                                                                                                                       |                                        |                    | 8,542                                     
|Stockholders' equity                                                                                                                                    |                                        |                    |                                           
|Preferred stock, par value $.01, authorized 2,000,000 shares, issued none                                                                               |                                        |                    |                                          
|Common stock, par value $.10, authorized 200,000,000 shares, issued and outstanding 75,545,391 at December 31, 2003 and 75,545,386 at December 31, 2002 |                                        |                    | 7,555                                     
|Class B common stock, par value $.10, authorized 503,797 shares, issued and outstanding 284,599 at December 31, 2003 and 284,604 at December 31, 2002   |                                        |                    | 28                                        
|Additional paid-in capital                                                                                                                              |                                        |                    | 167,548                                   
|Accumulated other comprehensive loss                                                                                                                    |                                        |                    | (1,392                                    
|Retained earnings                                                                                                                                       |                                        |                    | 398,764                                   
|Unearned compensation                                                                                                                                   |                                        |                    | (704                                      
|Less treasury stock at cost, 12,201,381 shares at December 31, 2003 and 6,309,416 shares at December 31, 2002                                           |                                        |                    | (113,667                                  
|                                                                                                                                                        |                                        |                    |                                           
|                                                                                                                                                        |                                        |                    | Total stockholders' equity                
|                                                                                                                                                        |                                        |                    |                                           
|                                                                                                                                                        |                                        |                    | Total liabilities and stockholders' equity
|                                                                                                                                                        |                                        |                    |                                           

The accompanying notes are an integral part of the consolidated financial statements.

39

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KEANE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Dollars in thousands)

|                                                                                       |  |            |  |   |       |  |         |   |   |    |  | Accumu-
lated
other
compre-
hensive
loss |         |   |   |        |   |   |         |  |   |      |  
|-------------------------------------------------------------------------------------- |  | ---------- |  | - | ----- |  | ------- | - | - | -- |  | ---------------------------------------- | ------- | - | - | ------ | - | - | ------- |  | - | ---- | -
|
|
|
|
|Balance December 31, 2000                                                              |  | 72,446,101 |  | $ | 7,245 |  | 284,891 |   | $ | 28 |  | $                                        | 121,444 |   | $ | (4,637 | ) | $ | 343,974 |  | $ |     |  
|                                                                                       |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   |        |   |   |         |  |   |      |  
|Common stock issued under stock option and employee purchase plans                     |  | 18,000     |  |   | 1     |  |         |   |   |    |  |                                          | (8,894  | ) |   |        |   |   |         |  |   |      |  
|Common stock issued in connection with acquisition of Metro Information Services, Inc. |  | 2,759,870  |  |   | 276   |  |         |   |   |    |  |                                          | 49,460  |   |   |        |   |   |         |  |   |      |  
|Income tax benefit from stock option plans                                             |  |            |  |   |       |  |         |   |   |    |  |                                          | 259     |   |   |        |   |   |         |  |   |      |  
|Repurchase of common stock                                                             |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   |        |   |   |         |  |   |      |  
|Investments valuation adjustment, net of taxes of $787                                 |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   | 1,181  |   |   |         |  |   |      |  
|Foreign currency translation adjustment                                                |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   | 1,449  |   |   |         |  |   |      |  
|Net income                                                                             |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   |        |   |   | 17,387  |  |   |      |  
|                                                                                       |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   |        |   |   |         |  |   |      |  
|Comprehensive income                                                                   |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   |        |   |   |         |  |   |      |  
|                                                                                       |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   |        |   |   |         |  |   |      |  
|Balance December 31, 2001                                                              |  | 75,223,971 |  | $ | 7,522 |  | 284,891 |   | $ | 28 |  | $                                        | 162,269 |   | $ | (2,007 | ) | $ | 361,361 |  | $ |     |  
|                                                                                       |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   |        |   |   |         |  |   |      |  
|Common stock issued under stock option and employee purchase plans                     |  | 321,128    |  |   | 33    |  |         |   |   |    |  |                                          | 4,045   |   |   |        |   |   |         |  |   |      |  
|Conversions of Class B common stock into common stock                                  |  | 287        |  |   |      |  | (287    | ) |   |   |  |                                          |         |   |   |        |   |   |         |  |   |      |  
|Income tax benefit from stock option plans                                             |  |            |  |   |       |  |         |   |   |    |  |                                          | 284     |   |   |        |   |   |         |  |   |      |  
|Repurchase of common stock                                                             |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   |        |   |   |         |  |   |      |  
|Minimum pension liability, net of taxes of $773                                        |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   | (1,159 | ) |   |         |  |   |      |  
|Investments valuation adjustment, net of taxes of $182                                 |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   | (273   | ) |   |         |  |   |      |  
|Foreign currency translation                                                           |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   | 2,028  |   |   |         |  |   |      |  
|Net income                                                                             |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   |        |   |   | 8,181   |  |   |      |  
|                                                                                       |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   |        |   |   |         |  |   |      |  
|Comprehensive income                                                                   |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   |        |   |   |         |  |   |      |  
|                                                                                       |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   |        |   |   |         |  |   |      |  
|Balance December 31, 2002                                                              |  | 75,545,386 |  | $ | 7,555 |  | 284,604 |   | $ | 28 |  | $                                        | 166,598 |   | $ | (1,411 | ) | $ | 369,542 |  | $ |     |  
|                                                                                       |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   |        |   |   |         |  |   |      |  
|Issuance of restricted stock award                                                     |  |            |  |   |       |  |         |   |   |    |  |                                          | 80      |   |   |        |   |   |         |  |   | (277 | )
|Employee stock option grant and accelerated vesting of certain stock options           |  |            |  |   |       |  |         |   |   |    |  |                                          | 541     |   |   |        |   |   |         |  |   | (541 | )
|Amortization of unearned compensation                                                  |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   |        |   |   |         |  |   | 114  |  
|Common stock issued under stock option and employee purchase plans                     |  |            |  |   |       |  |         |   |   |    |  |                                          | (116    | ) |   |        |   |   |         |  |   |      |  
|Conversions of Class B common stock into common stock                                  |  | 5          |  |   |      |  | (5      | ) |   |   |  |                                          |         |   |   |        |   |   |         |  |   |      |  
|Income tax benefit from stock option plans                                             |  |            |  |   |       |  |         |   |   |    |  |                                          | 445     |   |   |        |   |   |         |  |   |      |  
|Repurchase of common stock                                                             |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   |        |   |   |         |  |   |      |  
|Minimum pension liability, net of taxes of $773                                        |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   | (2,342 | ) |   |         |  |   |      |  
|Investments valuation adjustment, net of taxes of $108                                 |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   | 162    |   |   |         |  |   |      |  
|Foreign currency translation                                                           |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   | 2,199  |   |   |         |  |   |      |  
|Net income                                                                             |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   |        |   |   | 29,222  |  |   |      |  
|                                                                                       |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   |        |   |   |         |  |   |      |  
|Comprehensive income                                                                   |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   |        |   |   |         |  |   |      |  
|                                                                                       |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   |        |   |   |         |  |   |      |  
|Balance December 31, 2003                                                              |  | 75,545,391 |  | $ | 7,555 |  | 284,599 |   | $ | 28 |  | $                                        | 167,548 |   | $ | (1,392 | ) | $ | 398,764 |  | $ | (704 | )
|                                                                                       |  |            |  |   |       |  |         |   |   |    |  |                                          |         |   |   |        |   |   |         |  |   |      |  

The accompanying notes are an integral part of the consolidated financial statements.

40

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KEANE, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                               |                                                                                   | For the years ended December 31,                                  |                                                                                                  
|---------------------------------------------- | --------------------------------------------------------------------------------- | ----------------------------------------------------------------- | -------------------------------------------------------------------------------------------------
|
|
|Cash flows from operating activities:          |                                                                                   |                                                                   |                                                                                                  
|                                               | Net income                                                                        |                                                                   | $                                                                                                
|                                               | Adjustments to reconcile net income to net cash provided by operating activities: |                                                                   |                                                                                                  
|                                               |                                                                                   | Depreciation and amortization                                     |                                                                                                  
|                                               |                                                                                   | Deferred income taxes                                             |                                                                                                  
|                                               |                                                                                   | Provision for doubtful accounts                                   |                                                                                                  
|                                               |                                                                                   | Minority interest                                                 |                                                                                                  
|                                               |                                                                                   | Gain on sale of property and equipment                            |                                                                                                  
|                                               |                                                                                   | Gain on sale of investments                                       |                                                                                                  
|                                               |                                                                                   | Other charges, net                                                |                                                                                                  
|                                               |                                                                                   | Non-cash restructuring charges                                    |                                                                                                  
|                                               |                                                                                   | Impairment of long-term investments                               |                                                                                                  
|                                               |                                                                                   | Gain on sale of business unit                                     |                                                                                                  
|                                               |                                                                                   | Income tax benefit from stock options                             |                                                                                                  
|                                               |                                                                                   | Changes in operating assets and liabilities, net of acquisitions: |                                                                                                  
|                                               |                                                                                   |                                                                   | Decrease in accounts receivable                                                                  
|                                               |                                                                                   |                                                                   | Increase in prepaid expenses and other assets                                                    
|                                               |                                                                                   |                                                                   | (Decrease) increase in accounts payable, accrued expenses, unearned income, and other liabilities
|                                               |                                                                                   |                                                                   | Increase (decrease) in income taxes payable                                                      
|                                               |                                                                                   |                                                                   |                                                                                                  
|                                               | Net cash provided by operating activities                                         |                                                                   |                                                                                                  
|                                               |                                                                                   |                                                                   |                                                                                                  
|Cash flows from investing activities:          |                                                                                   |                                                                   |                                                                                                  
|                                               | Purchase of investments                                                           |                                                                   |                                                                                                  
|                                               | Sale and maturities of investments                                                |                                                                   |                                                                                                  
|                                               | Purchase of property and equipment                                                |                                                                   |                                                                                                  
|                                               | Restricted cash                                                                   |                                                                   |                                                                                                  
|                                               | Proceeds from the sale of property and equipment                                  |                                                                   |                                                                                                  
|                                               | Proceeds from sale of business unit                                               |                                                                   |                                                                                                  
|                                               | Payments for current year acquisitions, net of cash acquired                      |                                                                   |                                                                                                  
|                                               | Payments for prior years acquisitions                                             |                                                                   |                                                                                                  
|                                               |                                                                                   |                                                                   |                                                                                                  
|                                               | Net cash used for investing activities                                            |                                                                   |                                                                                                  
|                                               |                                                                                   |                                                                   |                                                                                                  
|Cash flows from financing activities:          |                                                                                   |                                                                   |                                                                                                  
|                                               | Proceeds from issuance of convertible debentures                                  |                                                                   |                                                                                                  
|                                               | Payments on acquired debt                                                         |                                                                   |                                                                                                  
|                                               | Debt issuance costs                                                               |                                                                   |                                                                                                  
|                                               | Payments under long-term debt, net                                                |                                                                   |                                                                                                  
|                                               | Principal payments under capital lease obligations                                |                                                                   |                                                                                                  
|                                               | Proceeds from issuance of common stock                                            |                                                                   |                                                                                                  
|                                               | Repurchase of common stock                                                        |                                                                   |                                                                                                  
|                                               |                                                                                   |                                                                   |                                                                                                  
|                                               | Net cash provided by (used for) financing activities                              |                                                                   |                                                                                                  
|                                               |                                                                                   |                                                                   |                                                                                                  
|                                               | Effect of exchange rate changes on cash                                           |                                                                   |                                                                                                  
|                                               | Net increase (decrease) in cash and cash equivalents                              |                                                                   |                                                                                                  
|Cash and cash equivalents at beginning of year |                                                                                   |                                                                   | 46,383                                                                                           
|                                               |                                                                                   |                                                                   |                                                                                                  
|Cash and cash equivalents at end of year       |                                                                                   | $                                                                 | 56,736                                                                                           
|                                               |                                                                                   |                                                                   |                                                                                                  
|Supplemental information:                      |                                                                                   |                                                                   |                                                                                                  
|                                               | Income taxes paid                                                                 |                                                                   | $                                                                                                
|                                               |                                                                                   |                                                                   |                                                                                                  
|                                               | Interest paid                                                                     |                                                                   | $                                                                                                
|                                               |                                                                                   |                                                                   |                                                                                                  

The accompanying notes are an integral part of the consolidated financial statements.

41

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KEANE, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION:The accompanying consolidated financial statements include the accounts of Keane, Inc. and all
of its wholly and majority owned subsidiaries. Upon consolidation, all significant intercompany accounts and transactions are eliminated. Our fiscal year ends on December 31. Certain
reclassifications have been made to the 2002 and 2001 financial statements to conform to the 2003 presentation. Such reclassifications have no effect on previously reported net income or stockholders'
equity.

NATURE OF OPERATIONS:We are a leading provider of Information Technology ("IT") and Business Consulting services. In
business since 1965, our mission is to help clients improve business and IT effectiveness through outsourcing services. We provide three synergistic service offerings: Plan services, which include
Business Consulting, Build services, which include Application Development and Integration ("AD&I"), and Manage services, which include Application Outsourcing and Business Process Outsourcing
("BPO"). We optimize clients' internal processes through BPO services through Worldzen, Inc. ("Worldzen"), our majority owned subsidiary.

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

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

INDUSTRY SEGMENT INFORMATION:Based on qualitative and quantitative criteria established by Statement of Financial Accounting
Standards ("SFAS") No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information," we operate within one reportable segment: Professional Services. In this
segment, we offer an integrated mix of end-to-end business solutions, such as Plan, Build and Manage services.

REVENUE RECOGNITION:Revenue on time and materials contracts is recorded at contractually agreed upon rates. For these types
of contracts, revenue is recognized as the services are performed. In some cases, we invoice customers prior to performing the service, resulting in deferred revenues, which are reported as unearned
income in the accompanying consolidated balance sheets.

For
fixed-price contracts, revenue is recognized using the proportional performance method. We use estimated labor-to-complete to measure the proportional
performance. Proportional performance recognition relies on accurate estimates of cost, scope, and duration of each engagement. If we do not accurately estimate the cost or scope or do not manage our
projects properly within the expected period of the project, future revenues may be negatively impacted. Adjustments to revenue are recorded in the period of which the over/under estimate is detected.
Our management regularly reviews profitability and underlying estimates for fixed-price contracts. Losses, if any, on fixed-price contracts are recorded in the period in which the loss is identified.

42

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Revenue
associated with application software products is recognized as the software products are installed and as implementation services are delivered. Software maintenance fees on
installed products are recognized on a pro-rated basis over the term of the agreement.

For
the majority of outsourcing engagements, we provide a specific level of service each month for which we bill a standard monthly amount. Revenue for these engagements can be
recognized in monthly installments over the billable portion of the contract or on a time and materials basis. Installment amounts may be adjusted to reflect changes in staffing requirements or
service level agreements. Costs of transitioning the employees and ensuring we meet required service level agreements may be capitalized over defined periods of time.

ALLOWANCE FOR BAD DEBTS: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. Considerable judgment is used in assessing the ultimate realization of these receivables, including reviewing the financial stability of the
client, evaluating the successful mitigation of service delivery disputes, and gauging current market conditions. When we determine that an account is deemed uncollectible, we charge-off
the receivable against the allowance for bad debts.

FOREIGN CURRENCY TRANSLATION:For our subsidiaries in Canada, the UK, and India, the Canadian dollar, British pound, and
Indian rupee, respectively, are the functional currencies. All assets and liabilities of our Canadian, English, and Indian subsidiaries are translated at exchange rates in effect at the end of the
period. Income and expenses are translated at average exchange rates that approximate those in effect on transaction dates. The translation adjustments are recorded in accumulated other comprehensive
loss, a separate component of Stockholders' equity in the accompanying consolidated balance sheets. Realized foreign exchange gains and losses are included in other income, net, in the accompanying
consolidated statements of income.

CASH AND CASH EQUIVALENTS:Cash and cash equivalents consist of highly liquid investments with a maturity of three months or
less at the time of purchase. Cash equivalents are currently designated as available-for-sale. Cash equivalents at December 31, 2003 included investments in money market
funds of $14.9 million. Cash equivalents at December 31, 2002 included investments in commercial paper totaling $24.5 million and money market funds totaling $12.8 million.

RESTRICTED CASH:Restricted cash represents amounts deposited to secure letters of credit for certain foreign capital
purchases.

FINANCIAL INSTRUMENTS:The amounts reflected in the accompanying consolidated balance sheets for cash and cash equivalents,
accounts receivable, and accounts payable approximate their fair value due to their short maturities. Our marketable securities are designated as available-for-sale and are
stated at fair market value. As of December 31, 2003, based on an available market quote, the fair value of our convertible subordinated debentures was approximately $158.1 million
compared to the carrying value of $150.0 million. Financial instruments that potentially subject us to concentration of credit risk consist primarily of investments and trade receivables. See
below for discussion of marketable securities. Our customer base consists of geographically dispersed customers in many

43

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different
industries. Therefore, we do not consider concentration of credit risk with respect to trade receivables significant.

MARKETABLE SECURITIES:Marketable securities are stated at fair value as reported by the investment custodian. We determine
the appropriate classification of debt and equity securities at the time of purchase and re-evaluate such designations as of each balance sheet date. Marketable securities are currently
designated as available-for-sale, and as such, unrealized gains and losses, net of tax effect are reported in accumulated other comprehensive loss in the accompanying
consolidated balance sheets. We invest primarily in tax-exempt municipal bonds with at least a single A rating by Moody's grading service. In addition, we invest in U.S. government
obligations and corporate bonds. The majority of our investments have a maturity date of not more than five years. We view our marketable securities portfolio as available for use in our current
operations, and accordingly, these marketable securities are classified as current assets in the accompanying consolidated balance sheet. As of December 31, 2003 and 2002, our marketable
securities reflect net unrealized gains of $0.6 million and $0.3 million, respectively. Realized gains and losses are determined by deducting the amortized cost of the security from the
proceeds received. The realized gains and losses, as well as interest, dividends, and capital gain/loss distributions on all securities, are included in interest income in the accompanying
consolidated statements of income.

PROPERTY AND EQUIPMENT:Property and equipment is carried at cost less accumulated depreciation and amortization. Property
and equipment are reviewed periodically for indicators of impairment and assets are written down to their fair value as appropriate. Depreciation expense is computed on a straight-line
basis over the estimated useful lives of 25 to 40 years for buildings and improvements, and two to seven years for office equipment, computer equipment, and software. Leasehold improvements are
amortized over the shorter of the estimated useful life of the improvement or the term of the lease not to exceed seven years. Repair and maintenance costs are charged to expense. Upon disposition,
the cost and related accumulated depreciation are removed from the consolidated balance sheet, and any gain or loss is included in other income, net in the accompanying consolidated statements of
income.

COMPUTER SOFTWARE COSTS:We capitalize the cost of internal-use software, which has a useful life in excess of
one year in accordance with Statement of Position ("SOP") No. 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use."
Subsequent additions, modifications, or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform.
Software maintenance and training costs are expensed in the period in which they are incurred. Capitalized computer software costs are amortized using the straight-line method over a
period of three to seven years. The net computer software costs are included in property and equipment in the accompanying consolidated balance sheets.

SOFTWARE DEVELOPMENT COSTS:In accordance with SFAS No. 86 ("SFAS 86"), "Accounting for the Costs of Computer Software
to be Sold, Leased, or Otherwise Marketed," we capitalize costs incurred to develop commercial software products after technological feasibility has been established. Costs incurred to establish
technical feasibility are charged to expense as incurred. Enhancements to software products are capitalized where such enhancements extend the life or significantly expand the marketability of the
products. Amortization expense is computed on a

44

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straight-line
basis over three years and totaled approximately $0.4 million, $0.4 million, and $0 for the years ended December 31, 2003, 2002, and 2001, respectively.
As of December 31, 2003 and 2002, the unamortized software development costs were approximately $1.8 million and $1.5 million, respectively, and are included in other assets in
the accompanying consolidated balance sheets.

GOODWILL AND INTANGIBLE ASSETS:SFAS No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," clarified
criteria to recognize intangible assets from goodwill and established requirements to cease amortizing goodwill and indefinite lived intangibles and to begin an annual review for impairment. On
January 1, 2002, we adopted SFAS 142 and were, therefore, required to perform an impairment test on our goodwill and other intangibles with indefinite lives during the first six months
of 2002, and then on a periodic basis thereafter. Our initial goodwill impairment analysis was completed during the Second Quarter of 2002, and was based on January 1, 2002 balances. Through
this analysis, it was determined that there was no impairment as of that date. Subsequently, during the Fourth Quarter of 2002 and 2003, we completed our annual impairment review based on
September 30, 2002 and 2003 balances and determined that there was no impairment as of those dates. Future changes in estimates may result in a non-cash goodwill impairment that
could have a material adverse impact on our financial condition and results of operations. As of December 31, 2003, we reported total intangibles of customer lists and other intangibles of
$71.0 million and $86.8 million, respectively. Intangibles are amortized on a straight-line basis over three to 15 years.

We
periodically review our identifiable intangible assets for impairment in accordance with SFAS No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets." In determining whether an intangible asset is impaired, we must make assumptions regarding estimated future cash flows from the asset, intended use of the asset, and
other related factors. If the estimates or the related assumptions used to determine the value of the intangible assets change, we may be required to record impairment charges for these assets.

INCOME TAXES:We account for income taxes in accordance with SFAS No. 109 ("SFAS 109"), "Accounting for Income
Taxes," which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded assets and
liabilities. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be
realized. We account for income taxes under the asset and liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

COMPREHENSIVE INCOME:SFAS No. 130 ("SFAS 130"), "Reporting Comprehensive Income," establishes rules for the
reporting and display of comprehensive income and its components. Components of comprehensive income include net income and certain transactions that have generally been reported in the consolidated
statement of stockholders' equity. Other comprehensive income is comprised of currency translation adjustments, available-for-sale securities valuation adjustments, and
adjustments related to a foreign defined benefit plan. At December 31, 2003, accumulated other comprehensive loss was comprised of foreign currency translation adjustment of
$1.8 million, securities valuation adjustment of $0.3 million, net of tax, and defined benefit plan adjustment of ($3.5) million, net of tax. At December 31, 2002, accumulated
other comprehensive loss was comprised of foreign

45

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currency
translation adjustment of ($0.4) million, securities valuation adjustment of $0.2 million, net of tax, and defined benefit plan adjustment of ($1.2) million, net of tax.

STOCK-BASED COMPENSATION:We have stock-based compensation plans which are described in detail in Note 13 "BENEFIT
PLANS." We apply the provisions of Accounting Principles Board ("APB") Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," to our stock-based compensation and accordingly, we
use the intrinsic value-based method to account for stock option grants and restricted stock awards. We grant stock options for a fixed number of shares to employees with an exercise price equal to
the closing price of the shares at the date of grant and therefore, do not recognize compensation expense. We also grant restricted stock for a fixed number of shares to employees for nominal
consideration. In 2003, in connection with our acquisition of a majority interest in Worldzen, certain employees were granted Worldzen stock options. In accordance with Financial Accounting Standards
Board ("FASB") Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation" and SFAS No. 141 ("SFAS 141"), "Business Combinations," these
stock options were recorded as unearned compensation at the date of acquisition and vest over the life of the stock option. Compensation expense related to restricted stock awards and the Worldzen
stock options is recorded ratably over the restriction and vesting period, respectively, and is included in the selling, general, and administrative expenses in the accompanying consolidated
statements of income. Our Employee Stock Purchase Plan ("ESPP") is non-compensatory as defined in APB 25 and accordingly, we do not recognize compensation expense in our consolidated
financial statements.

We
have adopted the disclosure-only provisions of SFAS No. 148 ("SFAS 148"), "Accounting for Stock-Based CompensationTransition and Disclosure," an
amendment of SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." Accordingly, no compensation expense has been recognized for our stock-based compensation plans other
than for restricted stock and certain stock options.

Had
compensation cost for our stock-based compensation plans been determined based on the fair value at the grant dates as calculated in accordance with SFAS 123, our net income
and earnings per
share for the years ended December 31, 2003, 2002, and 2001 would have been reduced to the pro forma amounts indicated below (in thousands, except per share data):

|Years ended December 31,                                                                                                          |  | 2003 |        | 2002 |   | 2001    |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------- | -
|Net incomeas reported                                                                                                            |  | $    | 29,222 |      | $ | 8,181   |  
|Add: Stock-based employee compensation expense included in reported net income, net of related tax effects                        |  |      | 164    |      |   | 28      |  
|Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of tax effects |  |      | (4,739 | )    |   | (11,289 | )
|                                                                                                                                  |  |      |        |      |   |         |  
|Net income (loss)pro forma                                                                                                       |  | $    | 24,647 |      | $ | (3,080  | )
|                                                                                                                                  |  |      |        |      |   |         |  
|Earnings (loss) per share:                                                                                                        |  |      |        |      |   |         |  
|Basicas reported                                                                                                                 |  | $    | 0.44   |      | $ | 0.11    |  
|Basicpro forma                                                                                                                   |  |      | 0.37   |      |   | (0.04   | )
|Dilutedas reported                                                                                                               |  |      | 0.44   |      |   | 0.11    |  
|Dilutedpro forma                                                                                                                 |  |      | 0.37   |      |   | (0.04   | )

46

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LEGAL COSTS:We accrue costs of settlement, damages, and under certain conditions, costs of defense when such costs are
probable and estimable. Otherwise, such costs are expensed as incurred.

USE OF ESTIMATES:The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," which requires the consolidation
of a variable interest entity, as defined, by its primary beneficiary. Primary beneficiaries are those companies that are subject to a majority of the risk of loss or entitled to receive a majority of
the entity's residual returns, or both. In determining whether it is the primary beneficiary of a variable interest entity, an entity with a variable interest shall treat variable interests in that
same entity held by its related parties as its own interests. FIN 46 is effective prospectively for all variable interests obtained subsequent to December 31, 2002. For variable interests
existing prior to December 31, 2002, consolidation is required beginning July 1, 2003. In December 2003, the FASB agreed to a broad-based deferral of the effective date of FIN 46
for public companies until the end of periods ending after March 15, 2004, with the exception of interests in special purpose entities, which are required in financial statements of public
companies for periods ending after December 15, 2003. We have evaluated the applicability of FIN 46 to our relationship with each of City Square Limited Partnership ("City Square") and Gateway
Developers LLC ("Gateway LLC") and determined that these entities are not required to be consolidated within our consolidated financial statements. We have determined that Gateway LLC is not a
variable interest entity as the equity investment is sufficient to absorb the expected losses and the holders of the equity investment do not lack any of the characteristics of a controlling interest.
We have concluded that as we no longer occupy the space at Ten City Square and no longer derive any benefit from leasing the space, we would not be determined to be the related party most closely
associated with City Square. As a result, we will continue to account for our leases with City Square and Gateway LLC consistent with our historical practices in accordance with generally accepted
accounting principles. We believe that we do not have an interest in any variable interest entities that would require consolidation.

In
April 2003, the FASB issued SFAS No. 149 ("SFAS 149"), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging
activities under SFAS No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." This statement is effective for contracts entered into or modified after
June 30, 2003. Adoption of this statement did not have a significant effect on our consolidated financial position or results of operations.

In
November 2002 and May 2003, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables." EITF Issue No. 00-21 provides guidance and criteria for determining when a multiple deliverable arrangement contains more than one unit of accounting. The guidance
also addresses methods of measuring and allocating arrangement consideration to separate units of accounting. The guidance is effective for revenue

47

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arrangements
entered into after June 15, 2003. Adoption of this statement did not have a significant effect on our consolidated financial position or results of operations because we do not
engage in hedging transactions.

In
May 2003, the FASB issued SFAS No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for
financial instruments entered into or modified after May 31, 2003. Adoption of this statement did not have a significant effect on our consolidated financial position or results of operations.

In
May 2003, the EITF reached a consensus on Issue No. 01-08, "Determining Whether an Arrangement Contains a Lease." EITF Issue No. 01-08
provides guidance on how to determine whether an arrangement contains a lease that is within the scope of SFAS No. 13 ("SFAS 13"), "Accounting for Leases." The guidance in EITF Issue
No. 01-08 is based on whether the arrangement conveys to the purchaser (lessee) the right to use a specific asset. The EITF Issue No. 01-08 will be effective for
arrangements entered into or modified in the Second Quarter of fiscal 2004. Presently, we intend to adopt this statement prospectively and do not anticipate adoption of this statement to have a
significant effect on our consolidated financial position or results of operations.

In
December 2003, the FASB issued SFAS No. 132 (revised 2003) ("SFAS 132 as revised"), "Employers' Disclosures about Pensions and Other Postretirement Benefits."
This Statement revises employers' disclosures about pension plans and other postretirement benefit plans, but does not change the measurement or recognition provisions of SFAS No. 87,
"Employers' Accounting for Pensions", SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits", and 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, will include the required additional disclosures as of December 31, 2004.

In
December 2003, the Securities and Exchange Commission ("SEC") published Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." This SAB updates the SEC
staff's prior guidance provided in SAB No. 101, "Revenue Recognition," removes material no longer necessary, and conforms the interpretive material retained with current authoritative
accounting and auditing guidance and SEC rules and regulations, including EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." Adoption of this accounting
guidance did not impact our consolidated financial statements.

48

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2. MARKETABLE SECURITIES

The following is a summary of our available-for-sale securities (dollars in thousands):

Gross unrealizedCost

Gains

Losses

Fair valueAs of December 31, 2003United States Government obligations

$
53,574

$
224

$
(3
)
$
53,795Corporate bonds


63,065


257


(188
)

63,134Municipal bonds


30,600


286


(1
)

30,885Total

$
147,239

$
767

$
(192
)
$
147,814As of December 31, 2002United States Government obligations

$
2,827

$
103

$
(1
)
$
2,929Corporate bonds


2,251


39


(17
)

2,273Municipal bonds


16,489


181





16,670Total

$
21,567

$
323

$
(18
)
$
21,872


The
following is a summary of the cost and fair value of current available-for-sale marketable securities at December 31, 2003, by contractual maturity
(dollars in thousands):

Cost

Fair valueDue in one year or less

$
11,022

$
11,055Due after one year through three years


86,304


86,671Due after three years


49,913


50,088$
147,239

$
147,814


Proceeds
from the sale and maturity of available-for-sale securities were approximately $18.1 million with $69,000 realized gains and $18,000 realized
losses, $69.8 million, with $0.8 million realized gains and $0.4 million realized losses, and $102.3 million with $1.2 million realized as net gains, for the years
ended December 31, 2003, 2002, and 2001, respectively.

At
December 31, 2003, we held available-for-sale securities with an aggregate fair value of approximately $30.9 million that had aggregate gross
unrealized losses of approximately $0.2 million. All such securities have been in a continuous unrealized loss position for less than 12 months. We believe that the impairments to these
investments are not other-than-temporary at this time as these securities are all highly rated investments which have been subject to routine market changes that have not been
significant to date.

49

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3. TRADE ACCOUNTS RECEIVABLE

Trade accounts receivable consists of the following (dollars in thousands):

As of December 31,

2003

2002Billed

$
92,484

$
103,820Unbilled


22,779


33,491Allowance for doubtful accounts


(5,077
)

(7,879
)Total

$
110,186

$
129,432


Trade
accounts receivable is presented net of doubtful accounts. The activity in the allowance for doubtful accounts is as follows (dollars in thousands):

Years ended December 31,

2003

2002

2001Beginning of year balance

$
7,879

$
13,014

$
10,990(Recoveries)/Provision, net


(1,147
)

1,893


10,258Write-offs


(1,655
)

(7,028
)

(8,234
)End of year balance

$
5,077

$
7,879

$
13,014


4. PROPERTY AND EQUIPMENT

Property and equipment consists of the following (dollars in thousands):

As of December 31,

2003

2002Buildings and improvements

$
47,022

$
6,768Office equipment


15,510


15,309Computer equipment and software


68,917


70,297Leasehold improvements


12,167


12,198143,616


104,572Less accumulated depreciation and amortization


(68,185
)

(73,411
)Total

$
75,431

$
31,161


Depreciation
expense, including amortization of assets under capital leases, was $11.2 million, $11.1 million, and $11.7 million, for the years ended 2003, 2002, and
2001, respectively. Computer equipment and software includes assets arising from capital lease obligations at a cost of $2.7 million and $3.1 million, with accumulated amortization
totaling $2.3 million and $1.8 million as of December 31, 2003 and 2002, respectively.

In
2002, we began capitalizing the costs of internally developed software with a useful life in excess of one year in accordance with SOP 98-1. We have classified these costs
within computer equipment and software. During 2003 and 2002, we capitalized approximately $4.3 million and $4.1 million, respectively, which consists primarily of internal and external
labor costs. As of December 31, 2003 and 2002, these unamortized capitalized costs related to the implementation of our PeopleSoft Enterprise Resource Planning applications were approximately
$8.4 million and $4.1 million, respectively.

50

---

Our
principal executive office is located at 100 City Square in Boston, Massachusetts (the "New Facility"). We lease the New Facility from Gateway LLC as described further in
Note 15 "RELATED PARTIES, COMMITMENTS, AND CONTINGENCIES." In view of the related party transactions discussed in Note 15, we concluded that during the construction phase of the New
Facility, the estimated construction in progress costs for the New Facility would be capitalized in accordance with EITF Issue No. 97-10, "The Effect of Lessee Involvement in Asset
Construction." We began occupying the New Facility and making lease payments in March 2003. As a result of the completion of the construction phase and our current occupancy, the related
capitalized costs are now classified as "Building" within property and equipment, net, in the accompanying consolidated balance sheets. A liability for the same amount appears as accrued building
costs in both our short- and long-term liabilities. The costs of the building are being amortized on a straight-line basis over a 39-year useful life.

Effective
January 1, 2002, we adopted SFAS 144, which supersedes SFAS No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to Be Disposed Of," and provides a single accounting model for long-lived assets to be disposed of. Adoption of this statement did not have a material
effect on our results of operations for the year ended December 31, 2002 or December 31, 2003.

5. GOODWILL AND OTHER INTANGIBLE ASSETS

Effective January 1, 2002, we adopted SFAS 142. Under SFAS 142, goodwill and indefinite lived intangible assets are no longer amortized, but
are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over
their useful lives. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired on or after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to June 30, 2001, companies were required to adopt SFAS 142 in their first fiscal year beginning after December 15, 2001. Because of the different transition dates
for goodwill and intangible assets acquired on or before June 30, 2001 and those acquired after that date, pre-existing goodwill and intangibles were amortized during the transition
period until adoption, whereas new goodwill and indefinite lived intangible assets acquired after June 30, 2001 were not.

51

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GOODWILL AND OTHER INTANGIBLE ASSETSADOPTION OF SFAS 142

The following table presents the reconciliation of reported net income to the adjusted net income (dollars in thousands, except per share amounts):

|Years ended December 31,    |                               | 2003 |        | 2002   |   | 2001 
|--------------------------- | ----------------------------- | ---- | ------ | ------ | - | -----
|Reported net income         |                               | $    | 29,222 |        | $ | 8,181
|Goodwill amortization       |                               |      |       |        |   |     
|Closing costs amortization  |                               |      |       |        |   |     
|Employee value amortization |                               |      |       |        |   |     
|                            |                               |      |        |        |   |      
|                            | Adjusted net income           |      | $      | 29,222 |   | $    
|                            |                               |      |        |        |   |      
|Basic earnings per share:   |                               |      |        |        |   |      
|                            | Reported net income           |      | $      | 0.44   |   | $    
|                            | Goodwill amortization         |      |        |       |   |      
|                            | Closing costs amortization    |      |        |       |   |      
|                            | Employee value amortization   |      |        |       |   |      
|                            |                               |      |        |        |   |      
|                            | Adjusted net income per share |      | $      | 0.44   |   | $    
|                            |                               |      |        |        |   |      
|Diluted earnings per share: |                               |      |        |        |   |      
|                            | Reported net income           |      | $      | 0.44   |   | $    
|                            | Goodwill amortization         |      |        |       |   |      
|                            | Closing costs amortization    |      |        |       |   |      
|                            | Employee value amortization   |      |        |       |   |      
|                            |                               |      |        |        |   |      
|                            | Adjusted net income per share |      | $      | 0.44   |   | $    
|                            |                               |      |        |        |   |      

|Intangible assets (dollars in thousands): |  | Cost |         | Accumulated
Amortization |   | Net Book Value
|----------------------------------------- |  | ---- | ------- | ------------------------ | - | --------------
|As of December 31, 2003                   |  |      |         |                          |   |               
|Customer lists                            |  | $    | 81,532  |                          | $ | (23,624       
|Contracts                                 |  |      | 29,250  |                          |   | (21,015       
|Non-compete agreements                    |  |      | 7,524   |                          |   | (6,122        
|Technology                                |  |      | 7,775   |                          |   | (4,288        
|                                          |  |      |         |                          |   |               
|Total                                     |  | $    | 126,081 |                          | $ | (55,049       
|                                          |  |      |         |                          |   |               
|As of December 31, 2002                   |  |      |         |                          |   |               
|Customer lists                            |  | $    | 81,532  |                          | $ | (12,339       
|Contracts                                 |  |      | 29,250  |                          |   | (19,158       
|Non-compete agreements                    |  |      | 7,524   |                          |   | (4,601        
|Technology                                |  |      | 7,775   |                          |   | (3,177        
|                                          |  |      |         |                          |   |               
|Total                                     |  | $    | 126,081 |                          | $ | (39,275       
|                                          |  |      |         |                          |   |               

Amortization
expense for the years ended December 31, 2003, 2002, and 2001 was approximately $15.8 million, $16.4 million, and $14.5 million, respectively.
Future estimated amortization expense is

52

---

$15.4 million,
$14.5 million, $14.2 million, $12.2 million, and $11.2 million for the years ended December 31, 2004, 2005, 2006, 2007, and 2008, respectively.

The
following table presents the change in the carrying amount of goodwill (dollars in thousands):

Balance as of January 1, 2003

$
277,435Goodwill acquired during the year


13,840Currency translation adjustment effect


1,884Adjustments to prior year goodwill balances


(235
)Balance as of December 31, 2003

$
292,924


6. BUSINESS ACQUISITIONS

Worldzen, Inc.

On October 17, 2003, we acquired a controlling interest in Worldzen, a privately held BPO firm. In connection with the acquisition, we paid
$9.0 million to acquire the Series A preferred shares of Worldzen Holdings Limited held by an unrelated third party. We contributed to Worldzen our Worldzen Holdings Limited shares,
$4.3 million in cash and certain assets of our Keane Consulting Group ("KCG"), our business consulting arm. This transaction was accounted for under the purchase method in accordance with
SFAS 141 and SFAS 142. As a result of the transaction, we own approximately 62% of Worldzen's outstanding capital stock. The former majority shareholders of Worldzen Holdings Limited
contributed their Worldzen Holdings Limited shares to Worldzen in exchange for approximately 38% of Worldzen's outstanding capital stock and are currently members of Worldzen's management. The asset
and liabilities contributed to Worldzen were recorded in relation to each shareholder's ownership percentage in Worldzen as follows: (i) carryover basis related to assets and liabilities
contributed to Worldzen for which the individual shareholder had a prior interest; and (ii) fair value for assets and liabilities for which an individual shareholder had no prior interest. As a
result, we recorded goodwill of approximately $13.8 million in the accompanying consolidated balance sheet.

In
connection with the acquisition, we obtained the right to purchase certain of the remaining shares held by the minority shareholders of Worldzen at different times ("call options").
Our first call option is exercisable beginning on January 1, 2006 and ending on December 31, 2006 and is based on a stated value for the underlying shares of $6.5 million. The
fair value of this first call option, using a Black-Scholes valuation model, is approximately $3.8 million and is included in other assets in the accompanying consolidated balance sheet. The
other call options are exercisable at the fair market value of the underlying shares during the call periods, which are exercisable at certain times during the period January 1, 2007 through
December 31, 2009. Since these other call options can only be exercised at the fair value of the underlying shares, no amounts have been recorded for these call options in our consolidated
financial statements.

Also
in connection with the acquisition, the minority shareholders were given the right to require us to purchase certain of their remaining shares at various times ("put options")
subject to the achievement of certain operating and financial milestones related to Worldzen's business performance. The first put option, the term of which is October 17, 2003 through
December 31, 2005, is exercisable based on a stated value for the underlying shares of $2.8 million. The fair value of this put option,

53

---

using
a Black-Scholes valuation model, was approximately $279,000 at the acquisition date and will be reflected as compensation expense in the accompanying consolidated financial statements through
the expiration date of the option. The other put options are exercisable at fair market value for the underlying shares during the put periods, which are exercisable at certain times during the period
January 1, 2008 through March 1, 2010. Since these other put options can only be exercised at the fair value of the underlying shares, no amounts have been recorded for these put options
in our consolidated financial statements.

Also
in connection with the acquisition, the minority shareholders granted two Worldzen employees approximately 720,000 stock options to purchase the shares held by the minority
shareholders. These stock options were granted at an exercise price below the fair market value of the shares at the grant date and vest over six years. In accordance with FIN 44 and APB 25, the
intrinsic value of the stock options granted was approximately $0.4 million and was recorded as unearned compensation in Worldzen's consolidated balance sheet. As a result, Worldzen will
recognize compensation expense over the vesting period through December 31, 2009.

SignalTree Solutions Holding, Inc.

On March 15, 2002, we acquired SignalTree Solutions Holding, Inc. ("SignalTree Solutions"), a privately held, U.S.-based corporation with two
software development facilities in India and additional operations in the U.S. Under the terms of the merger agreement, we paid $68.2 million in cash for SignalTree Solutions.

We
accounted for the acquisition as a purchase, pursuant to which the assets and liabilities of SignalTree Solutions, including intangible assets, were recorded at their respective fair
values. All identifiable intangible assets are being amortized over their estimated useful life with the exception of goodwill. The financial position, results of operations, and cash flows of
SignalTree Solutions were included in our financial statements effective as of the purchase date.

The
total cost of the acquisition was $78.9 million. Portions of the purchase price, including intangible assets, were identified by independent appraisers utilizing proven
valuation procedures and techniques. Goodwill was recorded at $41.0 million and other identified intangible assets were valued at $21.5 million. At the date of acquisition, we entered a
plan to exit certain activities and consolidate facilities. As a result, we recorded a restructuring liability of $1.6 million related to the lease obligation and certain other costs for those
facilities. In accordance with EITF Issue No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination," these costs have been reflected in the purchase
price of the acquisition.

54

---

The
components of the purchase price allocation is as follows (dollars in thousands):

Consideration and merger costs:

December 31,
2002

2003
Adjustments

December 31,
2003Consideration paid

$
66,927

$


$
66,927Transaction costs


1,303





1,303Restructuring


1,553





1,553Deferred tax liability


9,120





9,120Total

$
78,903

$


$
78,903


Allocation of purchase price:

December 31,
2002

2003
Adjustments

December 31,
2003Net asset value acquired

$
16,133

$
240

$
16,373Customer lists (seven-year life)


18,800





18,800Non-compete agreements (three-year life)


2,700





2,700Goodwill


41,270


(240
)

41,030Total

$
78,903

$


$
78,903


The
following table presents the condensed balance sheet disclosing the amounts assigned to each of the major assets acquired and liabilities assumed of SignalTree Solutions at the
acquisition date (dollars in thousands):

Condensed balance sheet:

December 31,
2002

2003
Adjustments

December 31,
2003Cash

$
2,650

$


$
2,650Accounts receivable


7,304





7,304Other current assets


3,562


(2
)

3,560Property and equipment, net


8,011


(75
)

7,936Total assets


21,527


(77
)

21,450Accounts payable


569


(11
)

558Accrued compensation


1,569





1,569Other liabilities


3,256


(306
)

2,950Net assets

$
16,133

$
240

$
16,373


Metro Information Services, Inc.

On November 30, 2001, we completed the acquisition of Metro Information Services, Inc. ("Metro"), a provider of IT consulting and custom software
development services and solutions. The merger was completed by exchanging all of the common stock of Metro for 7.4 million shares of our common stock. Each share of Metro was exchanged for
0.48 of one share of our common stock. In addition, outstanding Metro stock options were converted at the same ratio into options to purchase 571,058 shares of our common stock.

55

---

We
accounted for the acquisition as a purchase, pursuant to which the assets and liabilities of Metro, including identifiable intangible assets, were recorded at their respective fair
values. All identifiable intangible assets will be amortized over their estimated useful life with the exception of goodwill. The financial position, results of operations, and cash flows of Metro
were included in our financial statements effective as of the merger date.

The
total cost of the merger was $164.5 million. Portions of the purchase price, including intangible assets, were identified by independent appraisers utilizing proven valuation
procedures and techniques. Initial goodwill was recorded at $154.3 million and other identified intangible assets were valued at $46.1 million. At the date of acquisition, we entered a
plan to exit certain activities and consolidate facilities. As a result, we recorded a restructuring liability of $11.0 million in 2001 related to the lease obligation and certain other costs
for those facilities. In accordance with EITF Issue No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination," these costs, which are not associated
with the generation of future revenues and have no future economic benefit, are reflected as assumed liabilities in the allocation of the purchase price to the net assets acquired. During 2002, we
adjusted the purchase price allocation principally as a result of an adjustment in the valuation of the liability assumed for the restructured facilities and for other matters unresolved at the time
of acquisition. As a result of these non-cash adjustments, the goodwill balance was increased by $3.1 million.

The
components of the purchase price allocation as of date of merger with 2002 adjustments is as follows (dollars in thousands):

Consideration and merger costs:

November 30,
2001

2002
Adjustments

December 31,
2003Value of stock issued

$
130,796

$


$
130,796Fair value of options exchanged


4,754





4,754Transaction costs


7,786


258


8,044Restructuring


10,972


3,052


14,024Deferred tax liability


8,141





8,141Deferred tax asset





(1,249
)

(1,249
)Total

$
162,449

$
2,061

$
164,510


Allocation of purchase price:

November 30,
2001

2002
Adjustments

December 31,
2003Net liabilities assumed

$
(37,984
)
$
(1,034
)
$
(39,018
)Customer lists (seven-year life)


45,200





45,200Non-compete agreements (three-year life)


900





900Goodwill


154,333


3,095


157,428Total

$
162,449

$
2,061

$
164,510


56

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The
following table presents the condensed balance sheet disclosing the amounts assigned to each of the major assets acquired and liabilities assumed of Metro as of the date of the
acquisition and adjustments (dollars in thousands):

Condensed balance sheet:

November 30,
2001

2002 Adjustments

December 31,
2003Cash

$
622

$


$
622Accounts receivable


40,820


141


40,961Other current assets


1,004





1,004Property and equipment, net


2,780


(401
)

2,379Total assets


45,226


(260
)

44,966Accounts payable


3,583


13


3,596Accrued compensation


9,800


65


9,865Other liabilities


3,889


696


4,585Note payable


65,938





65,938Net liabilities

$
(37,984
)
$
(1,034
)
$
(39,018
)


The
unaudited pro forma combined condensed statements of income below present our historical statements and our acquisitions of Metro on November 30, 2001 and SignalTree Solutions
on March 15, 2002 as if the purchases had occurred at January 1, 2001. The following unaudited pro forma combined condensed financial information is presented for comparative purposes
only and is not necessarily indicative of the results of operations that would have actually been reported had the purchase occurred at the beginning of the periods presented, nor is it necessarily
indicative of future financial position or results of operations (dollars in thousands, except per share data):

2003

2002

2001Revenues

$
804,976

$
883,412

$
1,070,451Net income


29,222


8,910


16,013Basic earnings per share


0.44


0.12


0.23Diluted earnings per share


0.44


0.12


0.23


In
addition to the Worldzen, SignalTree Solutions, and Metro acquisitions, we completed an acquisition of a business complementary to our business strategy during the Third Quarter of
2002. We did not complete any acquisitions other than Metro during 2001. The merger and consideration costs of this acquisition, which was accounted for using the purchase method of accounting,
totaled $13.4 million in 2002. The purchase price included contingent consideration based upon operating performance of the acquired business. As of December 31, 2002, in connection with
this acquisition, we had recorded a contingent liability of approximately $0.9 million related to certain earn-out considerations. The $0.9 million was paid out during the
First Quarter of 2003. During 2001, we paid an
additional $1.2 million related to earn-outs of an acquisition in 2000 and have recorded this amount as additional purchase price.

The
results of operations of this acquired company have been included in our consolidated statement of income from the date of acquisition. The excess of the purchase price over the fair
value of the net assets has been allocated to identifiable intangible assets and goodwill and the intangibles

57

---

are
being amortized on a straight-line basis over periods ranging from three to 15 years. Pro forma results of operations for this acquisition have not been provided.

7. ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities consist of the following (dollars in thousands):

As of December 31,

2003

2002Accrued employee benefits

$
6,516

$
6,728Accrued pension liability


5,384


2,302Accrued deferred compensation


5,559


3,460Other


16,227


22,427$
33,686

$
34,917


Refer
to Note 13 "BENEFIT PLANS" for additional information.

8. NOTES PAYABLE

In connection with the purchase of a business complementary to our operations during the Third Quarter of 2002, we issued a $3.0 million
non-interest bearing note payable as partial consideration. The note has a one-year term with a one-year extension expiring on September 25, 2004.
Additionally, during the Third Quarter of 2002, we acquired an existing $100,000 non-interest bearing note payable in connection with employment credits. During 2003, we reduced the note
payable balance by $1.0 million as a result of delivering related service credits and we had paid the $100,000 note for a remaining balance of $2.0 million as of December 31,
2003. During 2001, we paid the remaining balance of a $4.0 million note related to a previous acquisition.

9. CONVERTIBLE SUBORDINATED DEBENTURES

In June 2003, we issued in a private placement $150.0 million principal amount of 2.0% Convertible Subordinated Debentures due 2013 ("Debentures").
The Debentures are unsecured and subordinated in right of payment to all of our senior indebtedness. The Debentures accrue regular interest at a rate of 2.0% per year. Interest is payable
semi-annually in arrears on June 15 and December 15 of each year, beginning December 15, 2003. Beginning with the six-month interest period commencing
June 15, 2008, we will pay additional contingent interest during any six-month interest period if the trading price of the Debentures for each of the five trading days immediately
preceding the first day of the interest period equals or exceeds 120% of the principal amount of the Debentures. During any interest period when contingent interest is payable, the contingent interest
payable per $1,000 principal amount of Debentures will equal 0.35% calculated on the average trading price of $1,000 principal amount of Debentures during the five trading days immediately preceding
the first day of the applicable six-month interest period and will be payable in arrears.

58

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On
or after June 15, 2008, we may, by providing at least 30-day notice to the holders, redeem any of the Debentures at a redemption price equal to 100% of the
principal amount of the Debentures, plus accrued interest and unpaid interest, if any, and liquidated damages, if any, to, but excluding, the redemption date.

The
Debentures are convertible at the option of the holder into shares of our common stock at an initial conversion rate of 54.4989 shares per $1,000 principal amount of Debentures,
which is equivalent to an initial conversion price of approximately $18.349 per share, subject to adjustments, prior to the close of business on the final maturity date only under the following
circumstances: (a) during any fiscal quarter commencing after September 30, 2003, and only during such fiscal quarter, if the closing sale price of our common stock exceeds 120% of the
conversion price (approximately $22.019) for at least 20 trading days in the 30 consecutive trading day period ending on the last trading day of the preceding fiscal quarter; (b) during the
five business days after any five consecutive trading day period in which the trading price per $1,000 principal amount of Debentures for each day of that period was less than 98% of the product of
the closing sale price of our common stock and the number of shares issuable upon conversion of $1,000 principal amount of the Debentures; (c) if the Debentures have been called for redemption;
or (d) upon the occurrence of specified corporate transactions.

Debt
issuance costs were approximately $4.4 million and are included in other assets in the accompanying consolidated balance sheets. These costs are being amortized to interest
expense over five years on a straight-line basis. The unamortized debt issuance costs were $3.9 million as of December 31, 2003.

10. RESTRUCTURING CHARGES

Workforce reductions

During 2003, we had two additional workforce reductions related to our business consulting arm and one of our North America branches, which included a headcount
reduction of 25 and 50 employees, respectively. As a result of these reductions, we recorded a total restructuring charge of $1.3 million, consisting of retention and severance costs. In
accordance with SFAS No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities," we accrued for these costs beginning at the time of an employee's
notification through the termination date. No further costs are anticipated to be incurred related to either of the two workforce reductions in 2003. During the Fourth Quarter of 2003, we evaluated
the accrual balances of the current and prior year's workforce restructuring balance and determined that $0.1 million and $1.4 million of charges taken in 2003 and 2002, respectively,
were no longer deemed to be necessary due to employee resignation prior to termination or revised workforce needs. The net impact of the workforce reductions to the 2003 consolidated statement of
income was an expense reduction of $0.2 million.

As
of December 31, 2003, we had completed 25 and 27 terminations related to the reductions in force for our business consulting arm and one of our North America branches,
respectively. Cash expenditures in 2003 related to the current year severance and retention restructuring accruals were $1.1 million. The remaining balance of $0.2 million severance and
retention costs are expected to be paid during the First and Second Quarters of 2004.

In
the Fourth Quarters of 2002 and 2001, we recorded restructuring charges of $17.6 million and $10.4 million, respectively. Of these charges, $3.2 million and
$4.4 million, related to a workforce

59

---

reduction
of approximately 229 and 900 employees for the years 2002 and 2001, respectively. In 2002, we also had a change in estimate of $0.3 million in connection with workforce reductions,
which resulted in a net workforce restructuring charge of $2.9 million. Cash expenditures in 2003 related to prior year workforce reductions were $1.8 million. As of December 31,
2003 we had a remaining balance of approximately $23,000 related to the 2002 workforce reduction, which we anticipate will be fully paid in the First Quarter of 2004.

Branch office closures

During December 2003, in accordance with SFAS 146, we accrued $0.9 million for a restructuring of two of our real estate locations from which
we no longer were receiving economic benefit. Additionally, during the Fourth Quarter of 2003, we performed an evaluation of our restructuring balances for properties restructured in prior periods and
determined that we were over accrued by $1.0 million, as a result of negotiating early lease terminations or obtaining a subtenant. In prior years, in accordance
with EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)," we have performed reviews of our business strategy and concluded that consolidating some of our branch offices was key to our success. As a result of this review, we charged to
restructuring $12.1 million in 2002 and $4.0 million in 2001 for branch office closings and certain other expenditures. In the Fourth Quarter of 2002, we also performed a review of
accrual balances for properties restructured in prior years. As a result, we determined that the cost to consolidate and/or close certain non-profitable offices would be higher than the
original estimate. The change in estimates resulted in a net charge to our restructuring liability of $0.8 million and $1.2 million in 2002 and 2001, respectively. The resulting net
charge in 2002 and 2001 was $12.9 million and $5.1 million, respectively. Cash expenditures in 2003 related to branch office closings were $9.0 million, which is net of
approximately $1.7 million of sublease payments received.

Impairments

We also recorded an impairment charge of $1.8 million and $0.8 million in 2002 and 2001, respectively, for assets associated with the facilities
identified in the branch office closures that became impaired as a result of these restructuring actions.

60

---

A
summary of restructuring activity during the years 2003, 2002, and 2001, which is reported in the accompanying consolidated balance sheets, is as follows (dollars in thousands):

|                                 |                                                             | Workforce
reduction |        | Branch office
closures & other expenditures |   | Impaired assets |        | Total |  
|-------------------------------- | ----------------------------------------------------------- | ------------------- | ------ | ------------------------------------------- | - | --------------- | ------ | ----- | -
|Beginning balance in fiscal 2001 |                                                             | $                   | 1,405  |                                             | $ | 4,927           |        | $     | 
|                                 |                                                             |                     |        |                                             |   |                 |        |       |  
|                                 | Charges in fiscal 2001                                      |                     |        | 4,417                                       |   |                 | 3,957  |       |  
|                                 | Change in prior year's estimate                             |                     |        |                                            |   |                 | 1,159  |       |  
|                                 | Cash expenditures in fiscal 2001                            |                     |        | (2,620                                      | ) |                 | (2,494 | )     |  
|                                 | Acquisition related charge in fiscal 2001                   |                     |        | 7,226                                       |   |                 | 3,746  |       |  
|                                 | Fixed asset impairment charges in fiscal 2001               |                     |        |                                            |   |                 |       |       |  
|                                 |                                                             |                     |        |                                             |   |                 |        |       |  
|Beginning balance in fiscal 2002 |                                                             |                     | 10,428 |                                             |   | 11,295          |        |       | 
|                                 | Charges in fiscal 2002                                      |                     |        | 3,192                                       |   |                 | 12,060 |       |  
|                                 | Change in prior year's estimate                             |                     |        | (251                                        | ) |                 | 756    |       |  
|                                 | Cash expenditures in fiscal 2002                            |                     |        | (10,177                                     | ) |                 | (6,318 | )     |  
|                                 | Acquisition related charge in fiscal 2002                   |                     |        | 93                                          |   |                 | 2,136  |       |  
|                                 | Acquisition related charges to increase prior year estimate |                     |        |                                            |   |                 | 3,021  |       |  
|                                 | Fixed asset impairment charges in fiscal 2002               |                     |        |                                            |   |                 |       |       |  
|                                 |                                                             |                     |        |                                             |   |                 |        |       |  
|Beginning balance in fiscal 2003 |                                                             |                     | 3,285  |                                             |   | 22,950          |        |       | 
|                                 | Charges in fiscal 2003                                      |                     |        | 1,345                                       |   |                 | 870    |       |  
|                                 | Change in current and prior year's estimate                 |                     |        | (1,537                                      | ) |                 | (1,004 | )     |  
|                                 | Cash expenditures in fiscal 2003                            |                     |        | (2,856                                      | ) |                 | (9,033 | )     |  
|                                 |                                                             |                     |        |                                             |   |                 |        |       |  
|Balance as of December 31, 2003  |                                                             | $                   | 237    |                                             | $ | 13,783          |        | $     | 
|                                 |                                                             |                     |        |                                             |   |                 |        |       |  

As
of December 31, 2003, the balance in the branch office closures reserve consisted of amounts for properties identified in 2003, 2002, 2001, 2000, and 1999 in the amounts of
$0.9 million, $9.9 million, $2.3 million, $0.5 million, and $0.2 million, respectively.

11. CAPITAL STOCK (See Note 17 "SUBSEQUENT EVENTS" for further discussion)

We have three classes of stock: preferred stock, common stock, and Class B common stock. Holders of common stock are entitled to one vote for each share
held. Holders of Class B common stock generally vote together with holders of common stock as a single class but are entitled to 10 votes for each share held. The Board of Directors is
authorized to determine the rights, preferences, privileges, and restrictions of any series of preferred stock, and to fix the number of shares of any such series. The common stock and Class B
common stock have equal liquidation and dividend rights except that any regular quarterly dividend declared shall be $.05 per share less for holders of Class B common stock. Class B
common stock is nontransferable, except under certain conditions, but may be converted into common stock on a share-for-share basis at any time. Conversions to common stock
totaled five shares and 287 shares in 2003 and 2002, respectively. There were no conversions during 2001.

61

---

For
the period January 1, 2001 through December 31, 2003, our Board of Directors authorized us to repurchase up to 15.6 million shares of our common stock. A summary
of repurchase activity for 2003, 2002, and 2001 is as follows (dollars in thousands):

|                                               |  | 2003       |   | 2002 |        | 2001
|---------------------------------------------- |  | ---------- | - | ---- | ------ | ----
|
|Prior year authorizations at beginning of year |  | 3,676,400  |   |      |        |     
|Authorizations                                 |  | 6,000,000  |   |      |        |     
|Repurchases                                    |  | (6,495,200 | ) | $    | 66,696 |     
|                                               |  |            |   |      |        |     
|Shares remaining as of December 31,            |  | 3,181,200  |   |      |        |     
|                                               |  |            |   |      |        |     

Between
May 1999 and December 31, 2003, we have invested approximately $229.7 million to repurchase 18.5 million shares of our common stock under nine
separate authorizations.

12. EARNINGS PER SHARE

A summary of our calculation of earnings per share is as follows (in thousands, except per share data):

|Years Ended December 31,                                                                                                            |  | 2003 |        | 2002 |   | 2001  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------
|Net income used for basic and diluted earnings per share                                                                            |  | $    | 29,222 |      | $ | 8,181 
|                                                                                                                                    |  |      |        |      |   |       
|Weighted average number of common shares outstanding used in calculation of basic earnings per share                                |  |      | 65,771 |      |   | 74,018
|Incremental shares from restricted stock, employee stock purchase plan, and the assumed exercise of dilutive stock options          |  |      | 652    |      |   | 388   
|                                                                                                                                    |  |      |        |      |   |       
|Weighted average number of common shares and common share equivalents outstanding used in calculation of diluted earnings per share |  |      | 66,423 |      |   | 74,406
|                                                                                                                                    |  |      |        |      |   |       
|Earnings per share                                                                                                                  |  |      |        |      |   |       
|Basic                                                                                                                               |  | $    | 0.44   |      | $ | 0.11  
|                                                                                                                                    |  |      |        |      |   |       
|Diluted                                                                                                                             |  | $    | 0.44   |      | $ | 0.11  
|                                                                                                                                    |  |      |        |      |   |       

Potential
common shares excluded from the computation of diluted earnings per share were approximately 1,453,000, 2,374,000, and 2,348,000 for the years ended December 31, 2003,
2002, and 2001, respectively, as their effect would have been anti-dilutive.

Our
Debentures are convertible at the option of the holder into shares of our common stock at an initial conversion rate of 54.4989 shares of common stock per $1,000 principal amount of
Debentures, which is equivalent to an initial conversion price of approximately $18.349 per share. The Debentures become convertible during any fiscal quarter commencing after September 30,
2003 when, among other circumstances, the closing price of our common stock is more than 120% of the conversion price (approximately $22.019 per share) for at least 20 trading days in the 30
consecutive trading days ending on the last trading day of the preceding fiscal quarter. The total amount of shares issuable upon the conversion of the Debentures is approximately 8.2 million.

62

---



For the year ended December 31, 2003, the 8.2 million shares issuable upon the conversion of the Debentures were not included in the computation of
diluted earnings per share because, in accordance with their terms, the Debentures had not yet become convertible.

13. BENEFIT PLANS

STOCK OPTION PLANS:On December 31, 2002, the FASB issued SFAS 148. SFAS 148 provides three transition
methods for entities electing to adopt the fair value recognition provisions of SFAS 123 for stock-based employee compensation. SFAS 148 also amends the disclosure provisions of
SFAS 123 to require prominent disclosure about the effects of an entity's accounting policy decisions with respect to stock-based compensation on reported net income and earnings per share in
annual and interim financial statements. The statement is effective for fiscal years ending after December 15, 2002. Currently, we have not elected to transition from the intrinsic value method
prescribed by APB No. 25 and FIN 44 to the fair value method prescribed by SFAS 148. In addition, we will continue to apply the disclosure provisions of SFAS 123.
Accordingly, our adoption of disclosure provisions of SFAS 148 does not impact our financial condition or results of operations.

The
fair market value of each stock option is estimated using the Black-Scholes option pricing model, assuming no expected dividends with the following weighted-average assumptions:

Years ended December 31,

2003

2002

2001Expected life (in years)

5.2

4.9

4.8Expected stock price volatility

61
%
65
%
65
%Risk-free interest rate

3.87
%
4.24
%
5.00
%


The
weighted-average fair value of options granted under the option plans during the years ended December 31, 2003, 2002, and 2001, was $4.90, $8.52, and $9.91, respectively.

The
1992 Stock Option Plan provides for grants of stock options for up to 3,600,000 shares of our common stock to our employees, officers, directors, consultants, and advisors.
Generally, options expire five years from the date of grant, require a purchase price of not less than 100% of the fair market value of the stock as of the date of grant, and are exercisable at such
time or times as the Board of Directors in each case determines. As of December 31, 2003, there are no options outstanding under this plan and the plan has expired.

The
1998 Stock Incentive Plan, amended in December 1999, provides for grants of stock options for up to 7,000,000 shares of our common stock to our employees, officers, directors,
consultants, and advisors. Generally, options expire five years from the date of grant, require a purchase price of not less than 100% of the fair market value of the stock as of the date of grant,
and are exercisable at such time or times as the Board of Directors in each case determines.

In
December 2000, we initiated a new "Time Accelerated Restricted Stock Award Plan" ("TARSAP") under our 1998 Stock Incentive Plan, whereby the vesting of certain stock options is
directly impacted by our performance. The vesting of stock options granted under the TARSAP accelerates upon the meeting of certain profitability criteria. If these criteria are not met, such options
will vest five years after the date of grant and expire at the end of 10 years.

63

---

The
2001 Stock Incentive Plan provides for grants of stock options for up to 7,000,000 shares of our common stock to our employees, officers, directors, consultants, and advisors.
Generally, options expire five years from the date of grant, require a purchase price of not less than 100% of the fair market value of the stock as of the date of grant, and are exercisable at such
time or times as the Board of Directors in each case determines.

For
all of our stock plans, we may grant options that are intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code ("incentive stock options")
or nonstatutory options not intended to qualify as incentive stock options.

In
November 2001, we completed a merger with Metro. In connection with the merger, we assumed all options, vested and unvested, to purchase Metro's common stock, issued under
Metro's stock option plan. Each option to purchase shares of Metro's common stock outstanding as of November 30, 2001 became an option to acquire a number of shares of our common stock equal to
the number of shares of Metro's common stock subject to such option, multiplied by a conversion ratio of 0.48. The option price was proportionally adjusted. The number of adjusted shares under the
Metro plan was 571,058, of which 480 and 13,394 shares were exercised during 2003 and 2002, respectively.

In
September of 2002, we completed the purchase of a business complementary to our business strategy. In connection with this acquisition, we assumed all vested and unvested options to
purchase the stock of the acquired company, under the respective stock option plan. Each option to purchase shares of the acquired company, as of September 25, 2002, became an option to acquire
a number of shares of our common stock equal to the number of shares of the acquired company subject to such option, multiplied by conversion ratio of 0.1766. The option price has been proportionally
adjusted. The number of adjusted shares under the acquired company's plan is 87,502, of which 27,652 and 14,184 shares were exercised from this plan during 2003 and 2002, respectively.

On
August 20, 2002, our Board of Directors approved a stock option exchange offer. The offer was to exchange outstanding options to purchase shares of our common stock, which were
granted on or after January 1, 2000 and had an exercise price of $12.00 or greater per share, for new options to purchase shares of common stock on substantially the following terms ("the
Offer"). Pursuant to the terms of the Offer:



The
Offer expired on October 7, 2002 ("expiration date"). Options for 1,888,394 shares of our common stock with a weighted average exercise price of $20.45 were eligible for the
Offer. Of this amount, 1,348,949 options were surrendered for exchange, with 324,902 options being retained, and the balance of the 214,543 being cancelled because of terminations.

For
the 1,348,949 options surrendered for exchange at a rate of four new options for every five surrendered, we granted new stock options for an aggregate of 1,079,159 shares at an
exercise price of

64

---

$8.28
per share on April 8, 2003. The balance of the surrendered options were canceled because of terminations.

Information
with respect to activity under our stock option plans is set forth below:

Common stock

Weighted average
exercise priceOutstanding at December 31, 2000

5,221,569

$
18.55Granted

1,723,024


20.14Exercised

(192,095
)

8.98Canceled/expired

(475,328
)

20.13Outstanding at December 31, 2001

6,277,170


19.20Granted

689,342


13.43Exercised

(145,734
)

13.08Canceled/expired

(2,466,150
)

21.16Outstanding at December 31, 2002

4,354,628


17.25Granted

1,820,909


8.57Exercised

(93,160
)

7.15Canceled/expired

(1,429,389
)

21.65Outstanding at December 31, 2003

4,652,988

$
12.42


Shares
available for future issuance under our stock option plans at December 31, 2003 are 9,742,363.

The
following table summarizes information about stock options that were outstanding at December 31, 2003:

|Range of exercise prices |       | Number
outstanding |           | Weighted
average
remaining
contractual
life (in years) |  | Weighted
average
exercise
price
of options
outstanding |       | Number
exercisable |         | Weighted
average
exercise
price of
exercisable
options
|------------------------ | ----- | ------------------ | --------- | ------------------------------------------------------ |  | ------------------------------------------------------ | ----- | ------------------ | ------- | ------------------------------------------------------
|$  0.04$  4.99          |       | 7,671              |           | 4.90                                                   |  | $                                                      | 3.69  |                    | 7,671   |                                                       
|5.00    7.50            |       | 64,561             |           | 6.50                                                   |  |                                                        | 6.58  |                    | 17,254  |                                                       
|7.51  11.27             |       | 3,061,129          |           | 6.70                                                   |  |                                                        | 8.97  |                    | 257,135 |                                                       
|11.28  16.90            |       | 195,832            |           | 8.30                                                   |  |                                                        | 14.01 |                    | 38,082  |                                                       
|16.91  25.35            |       | 1,165,584          |           | 3.20                                                   |  |                                                        | 18.54 |                    | 702,207 |                                                       
|25.36  38.02            |       | 130,131            |           | 2.90                                                   |  |                                                        | 30.89 |                    | 121,273 |                                                       
|38.03  57.03            |       | 9,360              |           | 4.40                                                   |  |                                                        | 45.90 |                    | 9,360   |                                                       
|57.0458.34              |       | 18,720             |           | 4.30                                                   |  |                                                        | 57.58 |                    | 18,720  |                                                       
|                         |       |                    |           |                                                        |  |                                                        |       |                    |         |                                                       
|                         | Total |                    | 4,652,988 |                                                        |  |                                                        |       |                    |         | 1,171,702                                             
|                         |       |                    |           |                                                        |  |                                                        |       |                    |         |                                                       

STOCK PURCHASE PLANS:Our 1992 ESPP provides for the purchase of 4,550,000 shares of common stock by qualifying employees at
a purchase price of 85% of the market value of the stock on

65

---

the
offering commencement date or the purchase date, whichever is lower. During 2003, 2002, and 2001, participants in this plan purchased 484,020 shares, 378,333 shares, and 575,841 shares,
respectively. Shares available for future purchases totaled 601,578 at December 31, 2003.

On
February 13, 2003, our Board of Directors approved a new UK ESPP. We have allocated 500,000 shares of the total number of shares reserved under our 1992 ESPP for issuance under
the UK ESPP. During 2003, participants in this plan purchased 4,310 shares. Shares available for future purchases as of December 31, 2003 totaled 495,690.

INCENTIVE COMPENSATION PLANS:We have established incentive compensation plans for certain officers and selected employees.
Payments under the plans are based on actual performance compared to stated plan objectives. Compensation expense under the plans in 2003, 2002, and 2001, approximated $19.0 million,
$16.8 million, and $18.3 million, respectively. In addition, management may award discretionary bonuses based upon an individual's performance and/or contribution to us.

DEFERRED COMPENSATION, SAVINGS, AND PROFIT SHARING PLANS:During 1984, we established a deferred savings and profit sharing
plan under Section 401(k) of the Internal Revenue Code. The plan enables eligible employees to reduce their taxable income by contributing up to 25% of their salary to the plan. After one year
of employment, we contribute $0.50 for each pre-tax dollar deferred, up to 6.0% of eligible employee's annual salary contributed. We may elect to make an additional discretionary
contribution to the plan based on our profitability each year. Our match and discretionary contributions, if any, vest 25% each year and are fully vested after five years of employment. Our
contributions for 2003, 2002, and 2001, amounted to approximately $7.5 million, $8.4 million, and $4.5 million, respectively.

In
addition, we have a deferred compensation plan for officers and eligible employees. The deferred compensation plan allows the participants to reduce their taxable income by
contributing 5-50% of their annual salary and 10-90% of their bonus or incentive compensation to the plan. We may make discretionary contributions to the plan based on
individual or corporate performance. The amounts deferred earn a yield as determined by the benchmark investments selected by the participant. As of December 31, 2003 and 2002, approximately
$5.6 million and $3.5 million, respectively, was accrued under this plan and is included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.

DEFINED BENEFIT PLAN:We have a defined benefit pension plan that provides pension benefits to employees of our subsidiary
located in the UK. Such benefits are available to employees who were active on August 4, 1998 and not to employees who joined us after that date, and are based on the employees' compensation
and service. Our policy is to fund amounts required by applicable government regulations. Total pension expense for 2003, 2002, and 2001, was approximately $2.1 million, $1.3 million,
and $1.2 million, respectively.

66

---

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

Years ended December 31,

2003

2002

2001Components of net periodic benefit cost:Service costbenefits earned during the period

$
1,424

$
1,518

$
1,604Interest cost on projected benefit obligations


1,503


1,159


957Expected return on plan assets


(1,269
)

(1,420
)

(1,397
)Net amortization and deferralamortization of unrecognized net loss/(gain)


482


92


(6
)Total net periodic benefit cost

$
2,140

$
1,349

$
1,158


The
actuarial assumptions used are based on market interest rates, past experience, and management's best estimate of future economic conditions. Changes in these assumptions may impact
future benefit costs and obligations. As of December 31, 2003, we changed key employee benefit plan assumptions in response to current conditions in the securities market. The discount rate has
been lowered from 5.75% in 2002 to 5.50% in 2003 and the expected rate of return on pension plan assets has been changed from 8.00% to 7.75% in 2003.

Years ended December 31,

2003

2002Weighted average assumptions:Discount rate at end of the year

5.50
%
5.75
%Expected return on plan assets for the year

7.75

8.00Rate of compensation increase at end of the year

4.25

3.75Discretionary pension increased LPI* pension increases

0.00

0.00LPI pension increases

2.75

2.25Statutory revaluation of benefits (GMP)**

3.50

3.50


---

67

---

|As of December 31,                                |                                                                       | 2003 |         | 2002   |  
|------------------------------------------------- | --------------------------------------------------------------------- | ---- | ------- | ------ | -
|Change in projected benefit obligation:           |                                                                       |      |         |        |  
|Benefit obligation at beginning of year           |                                                                       | $    | 21,277  |        | $
|                                                  | Service cost                                                          |      |         | 1,424  |  
|                                                  | Interest cost                                                         |      |         | 1,503  |  
|                                                  | Employee contributions                                                |      |         | 228    |  
|                                                  | Actuarial (gain) loss                                                 |      |         | 3,839  |  
|                                                  | Benefits paid                                                         |      |         | (79    | )
|                                                  | Prior service cost                                                    |      |         | 178    |  
|                                                  | Curtailment (gain) loss                                               |      |         | (446   | )
|                                                  |                                                                       |      |         |        |  
|Benefit obligation at end of year                 |                                                                       |      | 27,924  |        |  
|                                                  |                                                                       |      |         |        |  
|Change in plan assets:                            |                                                                       |      |         |        |  
|Fair value of plan assets at beginning of year    |                                                                       |      | 12,182  |        |  
|                                                  | Actual return on plan assets                                          |      |         | 3,421  |  
|                                                  | Employer contributions                                                |      |         | 805    |  
|                                                  | Employee contributions                                                |      |         | 228    |  
|                                                  | Benefits paid                                                         |      |         | (79    | )
|                                                  |                                                                       |      |         |        |  
|Fair value of plan assets at end of year          |                                                                       |      | 16,557  |        |  
|                                                  |                                                                       |      |         |        |  
|Funded status                                     |                                                                       |      | (11,367 | )      |  
|                                                  |                                                                       |      |         |        |  
|                                                  | Unrecognized net actuarial (gain) loss                                |      |         | 9,484  |  
|                                                  | Unrecognized prior service cost                                       |      |         | 178    |  
|                                                  |                                                                       |      |         |        |  
|Accrued pension cost                              |                                                                       | $    | (1,705  | )      | $
|                                                  |                                                                       |      |         |        |  
|Amounts recognized in consolidated balance sheet: |                                                                       |      |         |        |  
|                                                  | Intangible asset (in other assets)                                    |      | $       | 178    |  
|                                                  | Deferred tax asset, long-term                                         |      |         |       |  
|                                                  | Accrued benefit liability (in accrued expenses and other liabilities) |      |         | (5,384 | )
|                                                  | Accumulated other comprehensive loss                                  |      |         | 3,501  |  
|                                                  |                                                                       |      |         |        |  
|Net amount recognized                             |                                                                       | $    | (1,705  | )      | $
|                                                  |                                                                       |      |         |        |  

68

---



14. INCOME TAXES

Income before income taxes includes the following components (dollars in thousands):

Years ended December 31,

2003

2002

2001Domestic

$
47,834

$
13,085

$
27,721Foreign


862


551


1,501Total income before provision for income taxes

$
48,696

$
13,636

$
29,222


The
provision for income taxes consists of the following (dollars in thousands):

Years ended December 31,

2003

2002

2001Current:Federal

$
359

$
5,996

$
8,993State


(240
)

2,573


147Foreign


645


682


886Total


764


9,251


10,026Deferred:Federal


15,515


(2,960
)

1,605State


3,195


(836
)

412Foreign








(209
)Total


18,710


(3,796
)

1,808Total provision for income taxes

$
19,474

$
5,455

$
11,834


The
following table shows the principal reasons for the difference between the effective income tax rate and the statutory federal income tax rate (dollars in thousands):

Years ended December 31,

2003

2002

2001Federal income taxes at 35%

$
17,044

$
4,772

$
10,228State income taxes, net


1,921


1,129


363Disallowed meals expense


293


508


506Foreign rate differential


(642
)

489


(81
)Non-benefitable book losses


1,809


653


Adjustment of prior-year's estimated tax liabilities


(1,669
)

(1,532
)

Merger related costs








1,048Other, net


718


(564
)

(230
)Total

$
19,474

$
5,455

$
11,834


Our
policy is to establish reserves for taxes that may become payable in future years as a result of an examination by tax authorities. In accordance with SFAS No. 5 ("SFAS 5"),
"Accounting for Contingencies," we establish the reserves based upon our assessment of exposure associated with permanent tax differences and interest expense applicable to both permanent and
temporary difference adjustments. The tax reserves are analyzed periodically and adjusted, as events occur to warrant adjustment to the reserves, such as when the statutory period for assessing tax on
a given tax return or

69

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period
expires, the reserve associated with that period is reduced. In addition, the adjustment to the reserve may reflect additional exposure based on current calculations. Similarly, if tax
authorities provide administrative guidance or a decision is rendered in the courts, appropriate adjustments will be made to the tax reserve.

The
adjustment of prior years' estimated tax liability of $1.7 million and $1.5 million for the years ended December 31, 2003 and December 31, 2002,
respectively, are primarily attributable to the expiration of the statutory period for assessing state tax on periods ended in 1996, 1997, and 1998, and federal tax for the period ended in 1998,
respectively.

Deferred
taxes arise because of differences in the book and tax bases of assets and liabilities. Significant components of net deferred tax asset and liabilities are as follows (dollars
in thousands):

As of December 31,

2003

2002Deferred tax assets:Allowance for doubtful accounts and other reserves

$
2,059

$
2,022Restructuring reserve


5,727


10,713Accrued expenses


2,435


6,004Deferred compensation


2,271


1,373Depreciation


1,343


6,638Minimum pension liability adjustment


1,615


773Acquired domestic net operating loss carryforwards


1,814


3,214Other net operating loss carryforwards


2,686


1,059Other, net


(1,213
)

2,072Valuation allowance


(4,301
)

(1,059
)Total deferred tax assets


14,436


32,809Deferred tax liabilities:Intangibles


(30,879
)

(28,343
)Total deferred tax liabilities


(30,879
)

(28,343
)Total net deferred tax (liability) asset

$
(16,443
)
$
4,466


At
December 31, 2003, we had domestic net operating loss ("NOL") carryforwards for tax purposes of $6.0 million expiring in years ending in 2017 through
2023. Of these NOL carryforwards, $4.4 million relates to a prior acquisition and is subject to limitation pursuant to IRC Section 382.

During
2003, the valuation allowance increased $3.2 million as a result of the minimum pension liability adjustment and certain subsidiary net operating losses. The tax effect of
the minimum pension liability adjustment in 2003 totaling $0.8 million was charged to other comprehensive income. Approximately $1.0 million of the benefit of any future reduction of the
valuation allowance attributable to the minimum pension liability would be directly allocated to other comprehensive income.

Cumulative
undistributed earnings of our foreign subsidiaries amounted to approximately $12.4 million at December 31, 2003. No provision for U.S. income tax has been made
for the repatriation of these earnings because we consider the earnings to be indefinitely reinvested. If such earnings were distributed, tax expense would increase by approximately
$1.3 million.

70

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In
addition, our India subsidiary, part of the SignalTree Solutions acquisition, has tax holidays in India, which reduce or eliminate the income tax in that country. The holidays expire
between 2006 and 2009. Based on the currently enacted regular corporate income tax rate in India, the benefit to us of the tax holidays for the year ended December 31, 2003 was approximately
$0.9 million or $.01 per diluted share. The benefit to us of the tax holidays for the years ended December 31, 2002 and 2001, was approximately $0.3 million and $0, respectively,
and immaterial on a diluted per share basis.

15. RELATED PARTIES, COMMITMENTS, AND CONTINGENCIES

Related Party Transactions

In October 2001, we entered into a lease for the New Facility with Gateway LLC for a term of 12 years, pursuant to which we agreed to lease approximately
95,000 square feet of office and development space. We lease approximately 57% of the New Facility and the remaining 43% is, or will be, occupied by other tenants. John Keane Family LLC is a member of
Gateway LLC. The members of John Keane Family LLC are trusts for the benefit of John F. Keane, Chairman of our Board of Directors, and his immediate family members.

On
October 31, 2001, Gateway LLC entered into a $39.4 million construction loan with Citizens Bank of Massachusetts (the "Gateway Loan") in connection with the New Facility
and an adjacent building located at 20 City Square, Boston, Massachusetts. John Keane Family LLC and John F. Keane are each liable for certain obligations under the Gateway Loan if and to the extent
Gateway LLC requires funds to comply with its obligations under the Gateway Loan. Stephen D. Steinour, one of our directors, is Chief Executive Officer of Citizens Bank of Pennsylvania. Citizens Bank
of Massachusetts and Citizens Bank of Pennsylvania are subsidiaries of Citizens Financial Group, Inc. Mr. Steinour was not involved in the approval process for the Gateway Loan.

We
began occupying the New Facility and making lease payments in March 2003. Based upon our knowledge of lease payments for comparable facilities in the Boston area, we believe
that the lease payments under the lease for the New Facility, which will be approximately $3.2 million per year ($33.00 per square foot for the first 75,000 square feet and $35.00 per square
foot for the remainder of the premises) for the first six years of the lease term and approximately $3.5 million per year ($36.00 per square foot for the first 75,000 square feet and $40.00 per
square foot for the remainder of the premises) for the remainder of the lease term, plus specified percentages of any annual increases in real estate taxes and operating expenses, were, at the time we
entered into the lease, as favorable to us as those which could have been obtained from an independent third party. Lease payments to Gateway LLC in 2003 were approximately $2.8 million.

In
view of these related party transactions, we concluded that, during the construction phase of the New Facility, the estimated construction in progress costs for the New Facility would
be capitalized in accordance with EITF Issue No. 97-10, "The Effect of Lessee Involvement in Asset Construction." A liability in the same amount was included in the caption "Accrued
construction-in-progress costs." For purposes of the consolidated statements of cash flows, we characterized this treatment as a non-cash financing activity.

As
a result of the completion of the construction phase and our current occupancy, the related capitalized costs are now classified as "Building" and are included in property and
equipment, net, in the accompanying consolidated balance sheets. A liability for the same amount appears as accrued

71

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building
costs into both our short- and long-term liabilities. The costs of the building are being amortized on a straight-line basis over a 39-year useful life.
Additionally, the obligation is being reduced over the life of the lease at an interest rate of 8.67%. The net effect of the amortization that is included in the operating results approximates the
rent expense resulting from the contractual payments we are required to make under the lease.

In
February 1985, we entered into a lease, which subsequently was extended to a term of 20 years, with City Square, pursuant to which we leased approximately 34,000 square
feet of office and development space in a building located at Ten City Square, in Boston, Massachusetts. We now lease approximately 88% of this building and the remaining 12% is leased by other
tenants. John F. Keane, Chairman of our Board of Directors, and Philip J. Harkins, one of our directors, are limited partners of City Square. Based upon our knowledge of lease payments for comparable
facilities in the Boston area, we believe that the lease payments under this lease, which will be approximately $1.0 million per year ($30.00 per square foot) for the remainder of the lease
term (until February 2006), plus specified percentages of any annual increases in real estate taxes and operating expenses, which will be approximately $0.2 million per year were, at the
time we entered into the lease, as favorable to us as those which could have been obtained from an independent third party. As a result of our occupancy of the New Facility (as described above), we
vacated and are in the process of seeking a third party to sublease the space we formerly occupied at Ten City Square.

As
a result of the vacancy at Ten City Square in December 2002, we reserved the remaining lease payments due to City Square for the remainder of the lease term, resulting in a
charge of approximately $3.9 million in the Fourth Quarter of 2002. In 2003, we paid approximately $1.0 million in lease payments and as of December 31, 2003, we had a remaining
reserve balance of $2.9 million.

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.

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

In
March 2003, our Audit Committee approved a related party transaction involving a director of Keane. We have subcontracted with Guardent, Inc. ("Guardent") for a customer
project. Maria Cirino, a director of Keane, is an executive officer, director, and shareholder of Guardent. In addition, the Audit Committee permitted us to engage Guardent as a subcontractor for the
purposes of providing future services to Keane's customers. No payment to Guardent for a single engagement may exceed

72

---

$75,000
and no payment to Guardent for all engagements in any calendar year may exceed $250,000. As of December 31, 2003, we made payments of approximately $143,000 to Guardent. On
February 27, 2004, Guardent was acquired by VeriSign, Inc. Since then, Ms. Cirino has held the position of Senior Vice President of VeriSign Managed Security Services.

In
July 2003, our Audit Committee approved an additional related party transaction involving a director of Keane. We subcontracted with ArcStream Solutions, Inc.
("ArcStream") to develop and assist in the implementation of a wireless electronic application at two customer sites. In accordance with this transaction, we may pay ArcStream a royalty fee for
potential future installations during the licensing period for the next seven years. John F. Keane, Jr., a director of Keane, is Chief Executive Officer, director, and founder of ArcStream, John F.
Keane, Jr. is the son of John F. Keane, Sr., our Chairman of the Board of Directors, and the brother of Brian T. Keane, our President, Chief Executive Officer, and a director. As of
December 31, 2003, we made payments of approximately $112,000 to ArcStream.

Commitments and Contingencies

In addition to our principal executive office, the New Facility, we lease office space and apartments in more than 70 locations in North America, the UK, and
India under operating leases and capital leases, some of which may be renewed for periods up to five years, subject to increased rental fees. Rental expense for all of our facilities amounted to
approximately $15.0 million in 2003, $17.6 million in 2002, and $19.4 million in 2001. We have subleases for certain restructured properties. The related cash receipts for these
properties is reflected against the restructuring liability and are not recorded in the accompanying consolidated statements of income.

As
of December 31, 2003, the future minimum lease payments for the next five years and thereafter under operating and capital leases, were as follows (dollars in thousands):

Years Ended December 31,

Operating
Leases

Capital
Leases2004

$
22,815

$
8282005


18,642


3042006


12,597


1022007


8,507


2008


6,215


Thereafter


24,425


Total minimum lease payments

$
93,201

$
1,234Less imputed interest





(332
)Present value of minimum capital lease payments




$
902


We
are a guarantor with respect to a line of credit for Innovate EC, an entity in which we acquired a minority equity position as a result of a previous acquisition. The total line of
credit is for $600,000. We guarantee $300,000 of this obligation. The line is subject to review by the lending institution. We would be required to meet our guarantor obligation in the event the
lending institution refuses to extend the credit facility and Innovate EC is unable to satisfy its obligation.

73

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In
February 2003, we entered into a new $50.0 million unsecured revolving credit facility (the "credit facility") with two banks. The credit facility replaces a previous
$10.0 million demand line of credit, which expired in July 2002. The terms of the credit facility require us to maintain a maximum total funded debt and other financial ratios. The
credit facility also includes covenants that, subject to certain specific exceptions and limitations, among other things, restrict our ability to incur additional debt, make certain acquisitions or
dispositions of assets, create liens, and pay dividends.On June 11, 2003, we and two of our banks amended certain provisions of the credit
facility relating to financial covenants. These covenants, which include total indebtedness and leverage ratios, are no more restrictive than those initially contained in the credit facility. On
October 17, 2003 and February 5, 2004, we and two of our banks further amended certain provisions of the credit facility to expand our ability to make certain acquisitions. The annual
commitment fee for maintaining the credit facility is 30 basis points on the unused portion of the credit facility, up to a maximum of $150,000. As of December 31, 2003, we had no debt
outstanding under the credit facility. We may draw upon the credit facility up to $50.0 million less any outstanding letters of credit that have been issued against the credit facility. Any
amounts drawn upon the credit facility constitute senior indebtedness for purposes of the Debentures. Borrowings bear interest at one of the bank's base rate or the Euro currency reserve rate.

During
the First Quarter of 2003, we paid $0.9 million related to certain earn-out considerations in connection with an acquisition made during the Third Quarter of
2002. Future earn-outs are based on specific net revenue targets. Payments in the next 12 months for achieving these goals may range from $1.0 million to $2.0 million.
We also recorded, in the Third Quarter of 2002, $3.0 million as deferred revenue related to contingent service credits and issued a $3.0 million non-interest bearing note
payable as partial consideration. During 2003, we recognized revenue of approximately $2.1 million in relation to the contingent service credits and reduced each of the related deferred revenue
and note by approximately $1.0 million. The note has a one-year term with a one-year extension expiring on September 25, 2004.

In
April 1998, First Command (formerly United Services Planning Association, Inc. & Independent Research Agency for Life Insurance, Inc.) filed a complaint in
the District Court for Tarrant County, Texas (Civil Action No. 96-173235-98), against us and two of our employees alleging that we misrepresented our ability to complete
a project contracted for by the plaintiffs and concealed from the plaintiffs material facts related to the status of the project. During the Third Quarter of 2003, in order to avoid further costs, we
settled the claim in full with payment to the plaintiffs of $3.5 million, of which $1.6 million was previously accrued.

During
the First Quarter of 2003, we received a $7.3 million award in connection with an arbitration proceeding initiated by us in 2000 against Signal Corporation for a breach of
an agreement between Signal Corporation and our Federal Systems subsidiary.

We
are involved in other litigation and various legal matters, which have arisen in the ordinary course of business. 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. We believe that these matters are without merit and intend to defend vigorously against them.

74

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16. SEGMENT INFORMATION

Based on qualitative and quantitative criteria established by SFAS 131, we operate within one reportable segment: Professional Services.

In
accordance with the enterprise-wide disclosure requirements of SFAS 131, our geographic information is as follows (dollars in thousands):

2003

2002

2001Revenues

Property &
equipment

Revenues

Property &
equipment

Revenues

Property &
equipmentDomestic

$
781,255

$
64,799

$
843,918

$
22,583

$
730,714

$
15,210International


23,721


10,632


29,285


8,578


48,445


5,491Total

$
804,976

$
75,431

$
873,203

$
31,161

$
779,159

$
20,701


We
have no single customer that provides revenues that equal or exceed 10 percent of our consolidated revenues.

17. SUBSEQUENT EVENTS

On January 13, 2004, we announced that our Board of Directors had 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. Class B shares are entitled to 10 votes whereas shares of our common stock are entitled to
only one vote on matters submitted to shareholders for vote. 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.

On
February 5, 2004, we and two of our banks amended our credit facility, allowing us to agree to pay an additional $15.0 million in earn-out consideration,
assuming the acquisition of Nims Associates, Inc. ("Nims").

On
February 27, 2004, we acquired Nims, an IT and consulting services company with offices in the Midwest and ADCs in Indianapolis and Dallas. In exchange for all of Nims'
outstanding stock, we paid $18.1 million in cash to the shareholders of Nims, with the potential to pay up to an additional $15.0 million in earn-out consideration over the next
three years, contingent upon the achievement of certain future financial targets. The acquisition will be accounted for under the purchase method in accordance with SFAS 141 and
SFAS 142. The operating results of Nims will be included in our consolidated statement of operations beginning March 1, 2004.

75

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18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

|                                     |  | First Quarter |         | Second Quarter |   | Third Quarter |  | Fourth Quarter |        
|------------------------------------ |  | ------------- | ------- | -------------- | - | ------------- |  | -------------- | -------
|
|For the year ended December 31, 2003 |  |               |         |                |   |               |  |                |        
|Revenues                             |  | $             | 204,662 |                | $ | 203,511       |  | $              | 200,421
|Gross margin (1)                     |  |               | 62,231  |                |   | 65,251        |  |                | 63,008 
|Income before income taxes           |  |               | 17,601  |                |   | 11,031        |  |                | 9,232  
|Net income                           |  |               | 10,561  |                |   | 6,620         |  |                | 5,540  
|Basic earnings per share             |  |               | 0.15    |                |   | 0.10          |  |                | 0.09   
|Diluted earnings per share           |  |               | 0.15    |                |   | 0.10          |  |                | 0.09   
|For the year ended December 31, 2002 |  |               |         |                |   |               |  |                |        
|Revenues                             |  | $             | 221,259 |                | $ | 226,062       |  | $              | 213,383
|Gross margin (1)                     |  |               | 63,426  |                |   | 64,157        |  |                | 58,669 
|Income (loss) before income taxes    |  |               | 9,254   |                |   | 9,200         |  |                | 6,517  
|Net income (loss)                    |  |               | 5,553   |                |   | 5,521         |  |                | 3,910  
|Basic earnings (loss) per share      |  |               | 0.07    |                |   | 0.07          |  |                | 0.05   
|Diluted earnings (loss) per share    |  |               | 0.07    |                |   | 0.07          |  |                | 0.05   

---

76

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Keane's management, with the participation of our President and Chief Executive Officer and our Senior Vice President of Finance and Administration and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
December 31, 2003. Based on this evaluation, our President and Chief Executive Officer and our Senior Vice President of Finance and Administration and Chief Financial Officer concluded that, as
of December 31, 2003, our disclosure controls and procedures were (1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known
to our President and Chief Executive Officer and our Senior Vice President of Finance and Administration and Chief Financial Officer by others within these entities, particularly during the period in
which this report was being prepared, and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms.

No
change to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the year
ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The response to this Item is contained in part under the caption "Directors and Executive Officers of the Company" in Item 4 of Part I hereof and the
remainder is incorporated herein by reference to our Proxy Statement for our Annual Meeting of Stockholders to be held May 27, 2004 (the "2004 Proxy Statement") under the caption "Election of
Directors" and "Code of Business Conduct."

ITEM 11. EXECUTIVE COMPENSATION

The response to this Item is incorporated herein by reference to our 2004 Proxy Statement under the caption "Executive Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The response to this Item is incorporated herein by reference to our 2004 Proxy Statement under the captions "Stock Ownership of Certain Beneficial Owners and
Management" and "Equity Compensation Plan Information."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The response to this Item is incorporated herein by reference to our 2004 Proxy Statement under the caption "Certain Related Party Transactions."

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The response to this Item is incorporated herein by reference to our 2004 Proxy Statement under the caption "Principal Accountant Fees and Services."

77

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:



Report of independent auditors

37Consolidated statements of income for the years ended December 31, 2003, 2002, and 2001

38Consolidated balance sheets as of December 31, 2003 and 2002

39Consolidated statements of stockholders' equity for the years ended December 31, 2003, 2002, and 2001

40Consolidated statements of cash flows for the years ended December 31, 2003, 2002, and 2001

41Notes to consolidated financial statements

42-76








(b) Reports on Form 8-K

We
filed or furnished the following Current Reports on Form 8-K during the three-month period ended December 31, 2003.



(c) Exhibits

See
Exhibit Index attached hereto.

78

---



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|                     |  | KEANE, INC.(Registrant)                                              
|-------------------- |  | ---------------------------------------------------------------------
|                     |  | /s/BRIAN T. KEANEBrian T. Keane President and Chief Executive Officer
|Date: March 15, 2004 |  |                                                                      

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

|/s/JOHN F. KEANEJohn F. Keane Chairman                                           |  | /s/JOHN J. LEAHYJohn J. Leahy Senior Vice President of Finance and
Administration and Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
|-------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|/s/BRIAN T. KEANEBrian T. Keane President, Chief Executive Officer, and
Director |  | /s/JOHN F. KEANE, JR.John F. Keane, Jr. Director                                                                                                                            
|/s/JOHN F. ROCKARTJohn F. Rockart Director                                       |  | /s/MARIA A. CIRINOMaria A. Cirino Director                                                                                                                                  
|/s/PHILIP J. HARKINSPhilip J. Harkins Director                                   |  | /s/WINSTON R. HINDLE, JR.Winston R. Hindle, Jr. Director                                                                                                                    
|/s/STEPHEN D. STEINOURStephen D. Steinour Director                               |  | /s/JOHN H. FAINJohn H. Fain Director                                                                                                                                        
|/s/JAMES T. MCBRIDEJames T. McBride Director                                     |  | /s/JAMES D. WHITEJames D. White Director                                                                                                                                    

79

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|Exhibit Index |  |                                                                                                                                                                                                                                                                                                           
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1           |  | Agreement and Plan of Merger, dated as of August 20, 2001, by and among the Registrant, Veritas Acquisition Corp., and Metro Information Services, Inc. is incorporated herein by reference to Exhibit 2.1 to
the Registrant's Current Report on Form 8-K dated August 20, 2001, filed on August 21, 2001.
|3.1           |  | Articles of Organization of the Registrant, as amended, are incorporated herein by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-3 (File No. 33-85206) (the "Registration
Statement").                                                                                    
|3.2           |  | Articles of Amendment to Registrant's Articles of Organization, filed on May 29, 1998, are incorporated herein by reference to Exhibit 99.1 to the Registrant's Current Report on 8-K, filed on June 3,
1998.                                                                                             
|3.3           |  | Second Amended and Restated By-Laws of the Registrant are incorporated herein by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
2000.                                                                                                     
|3.4           |  | Amendment to Second Amended and Restated Bylaws of the Registrant is incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001.                                                                                                                       
|*10.1         |  | Keane, Inc. 401(k) Deferred Savings and Profit Sharing Plan is incorporated herein by reference to Exhibit 10.2 to the Registration Statement.                                                                                                                                                            
|*10.2         |  | 1992 Stock Option Plan is incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992.                                                                                                                                                           
|*10.3         |  | 1998 Stock Incentive Plan is incorporated herein by reference to Exhibit 10 to the Company's Registration Statement on Form S-8 (File No. 333-56119), as filed with and declared effective by the Commission
on June 5, 1998.                                                                             
|*10.4         |  | Amendment to 1998 Stock Incentive Plan is incorporated herein by reference to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000.                                                                                                                          
|*10.5         |  | Amended and Restated 1992 Employee Stock Purchase Plan, as amended, is incorporated herein by reference to Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 2001.                                                                                 
|10.6          |  | Metro Information Services, Inc. Amended and Restated 1997 Stock Option Plan is incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001.                                                                                                            
|10.7          |  | Lease dated February 20, 1985, between the Registrant and Jonathan G. Davis, as Trustee of City Square Development Trust (the "Trust"), is incorporated herein by reference to Exhibit 10.6 to the Registration
Statement.                                                                                
|10.8          |  | First Amendment of Lease dated March 19, 1985, between the Registrant and the Trust, is incorporated herein by reference to Exhibit 10.7 to the Registration Statement.                                                                                                                                   
|10.9          |  | Second Amendment of Lease dated November 1985, between the Registrant and the Trust, is incorporated herein by reference to Exhibit 10.8 to the Registration Statement.                                                                                                                                   
|*10.10        |  | Keane, Inc. 2001 Stock Incentive Plan is incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001.                                                                                                                                                   
|*10.11        |  | Keane, Inc. United Kingdom Employee Stock Purchase Plan is incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002.                                                                                                                                 
|10.12         |  | Revolving Credit Agreement dated February 28, 2003, by and between the Registrant, Fleet National Bank, as Agent, and several lenders party, (the "Lenders") thereto is incorporated by reference to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2002.                    
|10.13         |  | Lease, dated October 25, 2001 between the Registrant and Gateway Developers LLC is incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002.                                                                                                         
|+10.14        |  | First Amendment dated June 11, 2003 to the Revolving Credit Agreement dated February 28, 2003, by and between the Registrant and the Lenders thereto.                                                                                                                                                     
|              |  |                                                                                                                                                                                                                                                                                                           

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|+10.15 |  | Second Amendment dated October 17, 2003 to the Revolving Credit Agreement dated February 28, 2003, by and between the Registrant and the Lenders.
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|+10.16 |  | Third Amendment dated February 5, 2004 to the Revolving Credit Agreement dated February 28, 2003, by and between the Registrant and the Lenders. 
|+21.1  |  | Schedule of Subsidiaries of the Registrant.                                                                                                      
|+23.1  |  | Consent of Ernst & Young LLP.                                                                                                                    
|+31.1  |  | Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer.                                                   
|+31.2  |  | Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer.                                                   
|+32.1  |  | Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer.                                                                 
|+32.2  |  | Certification pursuant to 18 U.S.C. Section 1350 of the Chief Financial Officer.                                                                 

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