<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                ________________
                                        
                                   Form 10-K

                       FOR ANNUAL AND TRANSITION REPORTS
                    PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
 -                                                                            
ACT OF 1934
For the fiscal year ended December 31, 1998
                          -----------------
                                      
                                      OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from _________ to _________

                         Commission file number 1-7516
                                                ------
                                  KEANE, INC
                                  ----------
            (Exact Name of Registrant as Specified in Its Charter)
                                        
Massachusetts                               04-2437166
-------------                               ----------
(State or Other Jurisdiction                (I.R.S. Employer
of Incorporation or Organization)           Identification Number)


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

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

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

Title of Each Class                    Name of Each Exchange on Which Registered
--------------------                   -----------------------------------------
Common Stock, $.10 par value           American Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act:  NONE

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes   [X]      No [_]


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.  [_]

The aggregate market value of the Common Stock held by nonaffiliates of the
registrant, based on the last sale price of the Common Stock on the AMEX on
March 12, 1999, was $1,621,812,462. As of March 12, 1999, 60,200,908 shares of
Common Stock, $.10 par value per share, and 285,213 shares of Class B Common
Stock, $.10 par value per share, were issued and outstanding.

Documents Incorporated by Reference.  The Registrant intends to file a
definitive proxy statement pursuant to Regulation 14A, promulgated under the
Securities Exchange Act of 1934, as amended, to be used in connection with the
Registrant's Annual Meeting of Stockholders to be held on May 26, 1999.  The
information required in response to Items 10-13 of Part III of this Form 10-K is
hereby incorporated by reference to such proxy statement.
<PAGE>
 
PART I
------

ITEM 1.  BUSINESS

Keane, Inc., a Massachusetts corporation (together with its subsidiaries, unless
the context otherwise requires, "Keane" or the "Company"), provides management
and information technology (IT) consulting, application software development and
integration, application management, and call center management services to
corporations, government agencies, and healthcare facilities.  Keane's services
enable clients to operationalize their business strategy, cost-effectively
develop new software applications to enable their strategy, and manage mission-
critical software applications to better support business requirements.  The
Company serves its clients through a series of corporate practices that support
Keane's network of branch offices in the major markets of the U.S., Canada, and
the U.K.  Keane's practices accumulate, develop, and disseminate the Company's
organizational experience along core service and industry lines.  This delivery
structure allows Keane to provide clients with the world-class capabilities of
the entire company on a responsive and cost-effective local level.  Keane
provides services primarily to Fortune 1,000 companies, including AT&T
Corporation, Eastman Kodak Company, General Electric Company, International
Business Machines Corporation, McDonald's Corporation and Procter & Gamble
Company.

KEANE'S SERVICES MODEL: Underlying Keane's strategic focus and efforts is a
three-tiered service model. This model structures the Company's services into
three core disciplines--planning, building and managing IT. Across these
disciplines is a consistent focus on helping clients achieve quantifiable
business benefit.  Keane achieves this objective through the application of
rigorous processes and management disciplines and a culture of accountability
for successful results.

Keane's "plan, build and manage" capabilities encompass a broad range of
services designed to help clients align IT with business strategy and build and
manage the optimal infrastructure of people, process, and technology to enable
that strategy. This full spectrum of capabilities not only responds to clients'
most critical IT and business needs, but enables them to take advantage of the
synergies associated with linking their IT planning, implementation and
outsourcing investments.

Planning Services: Keane's planning services are delivered primarily through
Bricker & Associates, Inc. ("Bricker"), the Company's operations improvement
consulting subsidiary. Keane also provides project management training and
consulting based on the Company's project management, risk management, and
related processes.  Bricker helps companies plan and implement operations
improvements aligned with their business strategy to achieve targeted increases
in revenue, profits, and shareholder value.  Bricker does this by taking an
integrated approach to organizational design, workflow improvements, and
technology strategy.

Bricker's planning services frequently identify opportunities for IT initiatives
to enable clients' business strategies. These recommendations are complemented
by Keane's extensive range of IT solutions. Keane's investment in this
consulting practice positions the Company at the front end of many of its
clients' application development and outsourcing initiatives.

Build Services: Keane's Application Development services, the Company's "build"
services, assist clients in implementing new technology to achieve strategic
objectives.  The services include Customer Relationship Management ("CRM") and
Customer Application Development solutions that may leverage industry-leading
packaged software, data warehousing, and web-based technology. Many of the
industries Keane serves are initiating CRM programs to target key customers,
improve sales effectiveness, and increase customer loyalty.  Keane's Application
Development projects can encompass IT planning and assessment; design,
development, and integration of software applications; and program management
services.

Keane considers its qualifications in the following areas as important strengths
in the Application Development arena: (i) its operations improvement and change
management competencies; (ii) its software package, application, and system
architecture expertise; (iii) its enterprise application integration

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experience; and (iv) its industry-renowned project management processes. By
combining these capabilities, Keane seeks to deliver complete Application
Development solutions that fully leverage advanced technology while extending
the life and payback of existing IT assets.

Manage Services: The growing attention on new technology implementations has not
diminished the tremendous need to more effectively manage the existing IT assets
known as legacy systems. Keane's flagship Application Outsourcing solution,
together with its Migration and Call Center services, help clients address this
need.

Application Outsourcing services, encompassing management and enhancements of
mission-critical software applications, are designed to enable clients to
realize ongoing business value from their IT assets. On these engagements, Keane
focuses on advancing clients' application environments to Level 3 on the
Software Engineering Institute's Capability Maturity Model ("CMM"). The CMM is
recognized within the IT industry as the standard for measuring the
effectiveness, or maturity, of IT development and management processes.  By
advancing to CMM Level 3, clients are able to eliminate defects in software,
reduce lengthy cycle times, lower support costs, and improve service to their
user community.

To date, 17 of Keane's outsourcing engagements were independently certified at
CMM Level 3, including those at BankBoston, Bell Atlantic, Blue Cross Blue
Shield of Maryland, Public Service Electric & Gas, and Toyota Motor Sales.  In
addition, as proven in its engagements, Keane can achieve this certification
within 12 months, as compared to the industry standard of 3 1/2 years according
to the Center for Systems Management. Keane believes its ability to deliver such
a strategic advantage in its outsourcing programs is a critical competitive
differentiator in the Application Outsourcing marketplace.

STRATEGIC DIFFERENTIATORS: Keane considers the following characteristics of the
Company critical to its positioning in the marketplace:

     A delivery structure of world-class corporate practices supporting local
     branches, enabling it to deliver its organizational strengths responsively
     and cost-effectively at the local level.
     Industry expertise developed from serving clients in banking, insurance,
     utilities, telecommunications, manufacturing, healthcare, and government.
     Operations improvement expertise, enabling it to help clients realize the
     benefits of integrating operations improvements with technology
     initiatives.
     Capabilities across the application development and management lifecycle,
     enabling it to help clients leverage advanced technologies while extending
     the return on investment of existing technology.
     Focus on rigorous process and management disciplines, through its
     proprietary methodologies and best practices, enabling it to provide
     clients with consistent, high quality, and measurable results.
     Long-term client relationships, which create greater opportunities for
     recurring revenues through ongoing service delivery based on exposure to
     clients' business, technical and organizational requirements.

MARKETPLACE DRIVERS:  The Company believes that there are significant
opportunities for growth in the IT services industry, particularly in the
application management, application development and consulting markets.
Dataquest Incorporated, a market research firm, estimated the U.S. and European
markets for service offerings such as Keane's at $116 billion and $80 billion,
respectively, for 1999.  Moreover, according to Dataquest Incorporated,
expenditures on externally provided IT services in the areas of consulting,
application development and integration, and IT/application management (Keane's
core "plan, build, manage" service offerings) are among the industry's highest
growth areas.

The Company believes that the following factors will continue to drive market
growth in the IT services business served by Keane:

1.   Increased Dependence on Information Technology: Globalization,
     deregulation, consolidation, and the rapid pace of change have increased
     reliance on information technology. Companies are applying technology to
     bring products to market first or faster, integrate key business processes
     to improve

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     quality and reduce costs, and improve customer service. Enterprises are
     using outsourcing strategies to enable them to achieve business-driven IT
     initiatives.

2.   IT Changing the Basis of Industry Competition: Advances in new technology,
     especially the Internet, are enabling companies to fundamentally change the
     basis of competition within industries. Products and services can be
     delivered to customers in innovative ways, and the costs associated with
     delivering these products and services can be significantly different.
     Companies must have a proactive IT strategy to achieve a competitive
     advantage in this environment.

3.   Organizational Focus on Core Competencies: The intense competition and
     rapid change characteristics of many industries have led senior management
     to concentrate on their core competencies in order to compete more
     effectively. Businesses are consequently outsourcing more frequently,
     especially IT services.

4.   The Growing Challenges of Managing Corporate IT Organizations: The IT
     environment has grown increasingly complex, costly and burdensome as a
     result of the challenges of deploying new technology, maintaining older
     systems (including meeting Year 2000 compliance requirements) and finding
     skilled staff in a limited pool of qualified IT professionals. Advisory
     services and outsourcing solutions enable companies to implement operations
     improvements, achieve faster time to market of new technology, gain control
     over existing software assets and strategic development initiatives.

5.   The Growing Trend toward Reengineering IT Organizations: With the growing
     acceptance of IT as a critical business asset and the internal pressures
     experienced within IT organizations, executive managers are increasingly
     seeking ways to make IT more effective. Similar to the reengineering
     efforts undertaken in other parts of the business in recent years,
     executives are now focusing on improving processes and performance in IT.
     Outsourcing to a firm with proven methodologies and performance metrics
     enables these organizations to implement world-class processes and
     systematically target improvement objectives.

BUSINESS STRATEGY:  Keane believes that the IT pressures companies are
experiencing, together with requirements to reduce costs, decrease cycle times,
and adapt quickly to changing market dynamics, is causing companies to focus on
achieving significant improvements in their IT organizations.  Those service
providers best able to deliver reliable and quantifiable business benefit and
results -- i.e., on-time, within budget and according to technical
specifications, business requirements and targeted performance metrics -- will
appeal to organizations focused on using outsourcing as a strategic business
tool.  Moreover, service providers with the critical mass and infrastructure to
operate and grow efficiently have a competitive advantage in servicing client
needs.  In an effort to achieve profitable growth in this environment, Keane is
increasing market share with both new and existing clients while deriving an
increasing portion of its business from large-scale, multiyear projects with
large organizations. The key elements of the Company's growth strategy are
described below.

1.   Increase Concentration of Core Solutions Business: The Company is focusing
     on large, Keane-managed business within its core "plan, build and manage"
     service offerings. These opportunities include consulting, application
     development, application management, migration services (including Year
     2000 compliance services), call center management and enterprise healthcare
     information solutions. Keane believes its full range of services parallel
     the overall spending patterns in the IT services market, in which clients
     are turning to service providers for assistance in planning, building and
     managing business-driven IT initiatives. In addition, it believes that
     providing one type of service positions it for follow-on business in its
     other core services. Growth of Keane's core services continued to increase
     during the year, representing 76% of total revenue for 1998, up from 66% in
     1997.

2.   Build Long-Term Strategic Partnerships with Clients: The Company also seeks
     to build long-term strategic partnerships with its clients. The Company
     believes that its branch office structure, which consists of local branches
     located near clients, assists Keane in developing an intimate understanding
     of its clients' business, IT and organization requirements. This enables
     Keane to offer knowledgeable,

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     highly responsive solutions to clients, and to do so more cost-effectively
     than many of its competitors. Keane enjoys a strong recurring revenue rate,
     demonstrating its ability to respond to client needs on an ongoing basis
     with client satisfaction. One way Keane is extending its client
     relationships is by growing business with its large base of Year 2000
     clients. Keane has been leveraging its market share by helping these
     clients with other IT services. As of the end of 1998, Keane sold over $700
     million in other services to its Year 2000 project clients, up from over
     $262 million at the end of 1997. Keane's strategy is to leverage its
     increased client base by introducing and delivering its other strategic
     services to new Year 2000 clients where possible.

3.   Achieve Critical Mass and Strengthen Its Services Portfolio: Growing market
     share and achieving critical mass in each market it serves are fundamental
     to the Company's strategy. Keane accomplishes this by growing the
     organization and expanding its service offerings to meet the demands of its
     clients.

     Critical Mass Strategy: Keane defines its critical mass objectives on three
     -----------------------                                                    
     levels: at the account, at the branch, and at the enterprise. By reaching
     critical mass objectives in each of these three areas, Keane seeks to
     strengthen client partnerships through a strong local presence, achieve
     economies of scale by spreading costs across a broad revenue base, and
     implement continuous improvements by investing in its methodologies and
     infrastructure.

     Critical mass at the account level is measured by revenues generated by
     individual clients. Keane targets clients with potential to generate more
     than $1 million in revenues annually primarily through delivery of large
     project and multiyear outsourcing engagements. This strategy enables Keane
     to sell and deliver services more cost-effectively and provides Keane with
     a more predictable revenue stream. In 1998, the number of clients from
     which the Company generated $1 million or more each increased 75% from
     1997.

     Critical mass at the branch level equates with being one of the two largest
     IT services firms in that market and having the depth and breadth of
     managerial, sales and technical capability to deliver complex solutions
     locally. Reaching branch-level critical mass objectives produces the local
     presence Keane relies on to strengthen client partnerships. Keane measures
     critical mass progress at the branch level according to growth in revenues
     per branch. In 1998, the average revenues generated by each of Keane's
     branches increased 25% from 1997. Finally, critical mass at the enterprise
     level can be measured by the Company's annual revenue growth rate, which
     has been 44% compounded over the last five years.

     Overseas Expansion: In addition, in 1998, Keane expanded into the European
     -------------------                                                       
     marketplace, establishing Keane Ltd operations in the United Kingdom
     through the acquisition of Icom Systems Ltd. Overseas operations are a
     significant step in Keane's critical mass objectives, affording Keane a
     foothold in the U.K. market while strengthening its ability to support the
     needs of its global customers.

     Acquisition Strategy: Keane's acquisition strategy, to a large extent, has
     ---------------------                                                     
     been the strategy used to quickly increase the company's critical mass,
     strengthen its presence in existing markets and establish a strong presence
     in new regions. Recently, acquisitions have also been used to strengthen
     Keane's ability to provide clients with a full-service solution across the
     "plan, build, and manage" application life-cycle. For example, Keane's
     acquisition of Bricker & Associates, Inc. in June 1998 provided the company
     with strong management consulting capabilities. Likewise, the acquisition
     of Fourth Tier, Inc. in October 1998 provides Keane with credentials in the
     Customer Relationship Management market. Keane believes marketing services
     throughout the "plan, build, and manage" application life-cycle is
     synergistic.

     The Company has demonstrated a capacity to complete acquisitions and to
     successfully integrate the acquired companies into its operations. Keane
     believes this ability is a competitive advantage in a consolidating market,
     and will continue to evaluate appropriate acquisition opportunities. In
     1998, the Company completed five acquisitions. Since July 1986, Keane has
     completed 22 acquisitions of companies with annual revenues at the time of
     acquisition ranging from approximately $1 million to

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     approximately $170 million. In identifying potential acquisition
     candidates, the Company seeks firms with client profiles, geographic
     markets, technical capabilities and corporate cultures similar or
     complementary to its own. Because the IT services industry is highly
     fragmented, the Company expects that there will continue to be suitable
     acquisition opportunities, although competition for these acquisitions has
     been intense and will likely intensify further.

     The Company's ability to expand successfully by acquisitions depends on
     many factors, including the successful identification and acquisition of
     businesses and management's ability to integrate and operate the new
     businesses effectively. The Company competes for acquisition candidates
     with other entities, some of whom have greater financial resources than the
     Company. Increased competition for acquisition candidates may result in
     fewer acquisition opportunities being made available to the Company as well
     as less advantageous acquisition terms, including increased purchase
     prices. The anticipated benefits from any acquisition may not be achieved
     unless the operations of the acquired business are successfully combined
     with those of the Company in a timely manner. These integration activities
     require substantial attention from management. The diversion of the
     attention of management, and any difficulties encountered in the transition
     process, could have an adverse impact on Keane's revenues and operating
     results. In addition, the process of integrating the various businesses
     could cause the interruption of, or a loss of momentum in, the activities
     of some or all of these businesses, which could have an adverse effect on
     the Company's operations and financial results. To support these needs,
     Keane has a Director of Mergers and Acquisitions overseeing due-diligence
     and other acquisition-related requirements, and it uses its Knowledge
     Management resources to facilitate the smooth integration of newly acquired
     organizations.

4.   Continuously Strengthen Keane's Infrastructure: A strong infrastructure is
     required to successfully sell and execute large and complex projects.
     Keane's infrastructure encompasses a series of corporate practices, the
     Company's delivery methodologies, and such internal processes as sales,
     recruiting and management operations. This infrastructure--the processes,
     expertise and competencies that make up the Company and its value
     proposition--are all supported by investment in organizational training and
     knowledge management processes and technologies. Keane believes that the
     investment made in all of these areas, combined with its emphasis on
     accumulating and disseminating organizational experience, enhances the
     ability of the Company to accommodate aggressive growth, attract and retain
     superior technical and managerial talent, and consistently deliver high-
     quality solutions to its clients. Below is a summary of key activities in
     strengthening Keane's infrastructure.

     Corporate Practices and Industry Focus: To help clients derive greater 
     ---------------------------------------
     value from IT, Keane continues to formalize corporate practices in its core
     services and along its industry lines. Keane's core practices include
     operations improvement consulting, custom application development, customer
     relationship management, data warehousing/business intelligence, e-
     solutions (application solutions that leverage web-based technologies),
     application management outsourcing and call center outsourcing. Through its
     Corporate Practices, Keane is also leveraging the expertise and best
     practices it has developed serving banking, insurance, manufacturing,
     utilities, high technology, healthcare, telecommunications, and government
     clients. These clients are each facing unique business challenges stemming
     from such forces as deregulation, consolidation, changing currencies, and
     new competitors. The strategic use of IT, together with innovation in
     processes and organization, enables clients to gain competitive strength in
     this environment.

     Keane's earliest industry focus is in the healthcare industry, where it
     offers clients an enterprisewide solution that spans both its full range of
     services and its industry-leading suite of healthcare information systems.
     Keane expects its Healthcare Solutions Practice will continue to grow in
     importance as healthcare organizations address ongoing mergers and shifts
     in regulations, and demand grows for an integrated healthcare delivery
     system. While many of Keane's competitors in this arena are just beginning
     to focus on IT services, Keane has a well-established presence in the IT
     services market as well as a comprehensive product offering through its
     Healthcare Solutions Practice. To leverage this competitive strength, Keane
     intends to continue integrating its products and services, drawing on its
     experience serving the industry since 1975, its operational improvement
     capabilities, and its demonstrated ability to move clients to CMM Level 3.

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     Methodologies:  All of Keane's services are based on the application of
     --------------                                                         
     rigorous processes and management disciplines. The Company captures these
     processes, as well as its organizational experience, in its methodologies.
     The underlying management principles within these methodologies are
     embodied in Productivity Management, Keane's approach to managing projects
     which has evolved over the last 33 years from actual delivery experience.
     Methodologies enable the Company to improve productivity and predictability
     in its services. As a result, Keane invests in improving its existing
     methodologies and introducing new methodologies as needed. In 1998, Keane
     introduced its Customer Relationship Management methodology (its CRM
     Framework), which addresses how Keane delivers enterprise-wide solutions
     that help clients plan, build and manage application solutions to support
     and integrate such processes as sales, marketing and customer service.

     Training and Knowledge Management: Keane also invests in training at all
     ----------------------------------                                      
     levels of the organization. To Keane, training offers an effective means of
     sharing the company's organizational knowledge, building critical job
     skills, and fostering the development of company culture. In addition,
     Keane supports a Knowledge Management program. This program is an
     integrated system of people, processes, and technology focused on capturing
     and sharing organizational knowledge and best practices, while filling
     critical knowledge voids. Keane's Knowledge Management program is tied
     closely to its organizational learning teams, training organization, and
     quality assurance practice. This unique integration provides a powerful
     learning continuum, which allows Keane to leverage the value of its
     companywide experience and deliver solutions faster, better, and more
     efficiently.

MARKETING, SALES AND CLIENTS:  Keane markets its services and software products
through its direct sales force, which is based in its branch offices.  Keane's
sales representatives are assigned to a limited number of accounts so they can
develop an in-depth understanding of each client's individual needs and form
strong client relationships.  These representatives are responsible for ensuring
that clients receive responsive service and that Keane's software solutions
achieve client objectives.

Keane focuses its marketing efforts on organizations with significant IT budgets
and recurring software development and outsourcing needs.  While Keane performs
work for companies in most major industries and for state and federal
governments, most of the Company's revenue is derived from organizations within
the following industry groups: manufacturing, financial services (including
banking and insurance services businesses), government, software, energy,
healthcare, telecommunications, public utilities, and retail/consumer
organizations. Organizations in each of these industries are highly information-
dependent and use mission-critical information systems as a competitive
advantage.  Projects and services for these industry groups address both front
office (e.g. sales, marketing and customer service) and back office (e.g., human
resources, billing and logistics) processes, organization, and technology.  For
instance, projects for manufacturing clients may involve factory floor
operations, materials management, order processing, accounting and computer
operating systems development and support.  Typical development projects for
financial services firms include applications for mutual fund analysis, fund
tracking, stock transfer, customer information, commercial and consumer loans,
cash distribution, accounting and human resource systems.  Insurance company
projects include such applications as claims processing, agency management,
coordination of benefits and subrogation, pension, premium and loss reporting,
accounting, compensation and benefits systems.  Projects for healthcare clients
include applications for accounting, patient registration and scheduling, and
other patient care and clinical functions.

The following table sets forth a list of selected clients for which the Company
provided services in 1998:

   
     3M Corporation                      Baylor Health Care System    
     Aldus Corp.                         Bell Atlantic                
     American Express Co., Inc.          British Airways              
     Ameritech                           Cargill                      
     AT&T Corporation                    Carrier                      
     Bose Corporation                    CIGNA Corporation            
     BankBoston Corporation              Cincinnati Bell Telephone    
     Baxter Healthcare Corporation       Department of Justice         

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     Discover Card                       McDonald's Corporation            
     Eastman Kodak Company               McKesson Corporation                 
     Elf Atochem North America           Microsoft Corporation                
     EMC Corporation                     Miller Brewing                       
     Exxon Corporation                   National Assn. of Security Dealers   
     Fidelity                            Northern Mutual Life Insurance       
     Farmers Insurance Group             Northern Telecom, Inc.               
     First Bank                          The Pillsbury Company                
     General Electric Company            Princess Cruise Lines                
     GTE Data Service Incorporated       Procter & Gamble Company             
     Guardian Life Insurance             The Putnam Companies, Inc.           
     Hoffmann-La Roche, Inc              Reader's Digest Association, Inc.    
     International Business              Robert Wood Johnson Hospital      
       Machines Corporation              SD Warren                         
     J.D. Edwards                        Transquest                           
     Jewel Food Stores, Inc.             U.S. Customs                         
     Johns Hopkins Hospital              Whirlpool Corporation                 
     Liberty Mutual Insurance Co.                

The Company has historically derived, and may in the future derive, a
significant percentage of its total revenue from a relatively small number of
clients.  Keane's five largest clients accounted for approximately 25% and 19%
of the Company's total revenues during the years ended December 31, 1997 and
1998, respectively.  The Company's two largest clients during 1997 and 1998 were
IBM and various organizations within the Federal Government. IBM accounted for
approximately 10% and 6% of the Company's total revenues for 1997 and 1998,
respectively, and various organizations within the Federal Government accounted
for approximately 5% of the Company's total revenues in each of 1997 and 1998. A
significant decline in revenues from IBM or the Federal Government could have a
material adverse effect upon the Company's total revenues.  With the exception
of IBM and the Federal Government, no single client accounted for more than 5%
of the Company's revenues during the three years ended December 31, 1998.

In accordance with industry practice, nearly all of the Company's orders are
terminable by either the client or the Company on short notice.  The Company
does not believe that backlog is material to the business.  The Company had
orders at December 31, 1998 of approximately $900 million, in comparison to
orders of approximately $636 million at December 31, 1997.

YEAR 2000: Among the services that the Company provides are assessment,
planning, migration/remediation, testing services and independent verification
and validation for Year 2000 compliance. In 1998, Keane was recognized by
Gartner Group as one of the top three service providers in this market.  The
Company has devoted significant resources to services that address the Year 2000
problem and believes the demand for these services will continue through 1999
and, to a lesser degree, into 2000 and beyond.  Although the Company believes
that the demand for its services relating to the Year 2000 problem will continue
to exist after the Year 2000, this demand will diminish significantly over time
and will eventually disappear. Keane's strategy is to leverage and build on its
leadership position in Year 2000 compliance services. The Company's leadership
in this market has enabled it to significantly increase market share, gain
visibility with client executives, and expand its reputation for delivering
large, mission-critical projects. These are all important advantages in
positioning Keane to meet clients' current needs for application management and
development. As reflected in its sales performance, Keane has been effective in
leveraging this success by introducing Year 2000 clients to its other strategic
services. As of the end of 1998, Keane cross-sold more than $700 million of non-
Year 2000 services to its Year 2000 customers, up from more than $262 million as
of the end of 1997.

The Company's services addressing the Year 2000 problem involve key aspects of
its clients' computer systems.  A failure in a client's system could result in a
claim for substantial damages against the Company, regardless of the

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Company's responsibility for such failure.  Litigation, regardless of its
outcome, could result in substantial cost to the Company.  Accordingly, any
contract liability claim or litigation against the Company could have an adverse
effect on the Company's business, operations and financial results.

BRANCH OFFICES:  Keane provides services through its network of branch offices
located in major metropolitan areas in the United States, Canada and the United
Kingdom.  Branch offices are responsible for providing marketing, software
planning, analysis, design, implementation and maintenance services for clients
within assigned geographic territories.  Each of these offices has the necessary
technical resources and management depth to service its targeted area.  Each
office is led by a resident managing director and has one or more client sales
representatives, service delivery managers, staffing and employee development
managers and personnel recruiters. In 1998, the average revenues generated by
each of Keane's branches was $20 million, which is up 25% from 1997. Keane
believes a strong local presence and capability enable it to provide clients
with highly responsive, cost-effective service and dependable results, and
provide employees with an attractive work environment with minimal travel
demands.

Keane's branch offices are afforded the benefits of being part of a large
organization with many resources.  Keane's knowledge sharing resources and
corporate practices, for instance, enable the Company to learn from its
experience at one branch and refine and leverage that experience at other
locations.  Keane's infrastructure is designed to capture and then continuously
improve software planning, development and management processes. Frequently,
branches transfer personnel from other branches with expertise within a specific
technology, application or industry.

EMPLOYEES:  On December 31, 1998, Keane had 10,537 employees, including 9,493
technical staff whose services are billable to clients.

The Company believes that its future success will depend in part on its
continued ability to attract and retain highly skilled managerial, technical,
sales and support personnel.  Accordingly, Keane devotes significant resources
to its Human Resources Department, including a staff of over 125 recruiters.
The Company's current employees are also a valuable recruiting tool.  During
1998, approximately 28% of the Company's new billable employees were referred to
the Company by existing personnel.  There can be no assurance that the Company
will be able to continue to attract and retain personnel necessary for the
development of its business.

The Company generally does not have employment contracts with its key employees.
None of the Company's employees is subject to a collective bargaining agreement.
The Company believes that its relations with its employees are good.

COMPETITION:  The IT services market is highly competitive and characterized by
continual change and improvement in technology.  The market is fragmented, and
no company holds a dominant position.  Consequently, the Company's competition
for client assignments and experienced personnel varies significantly from city
to city.  The Company believes it is among the 10 largest custom software
services firms serving the commercial market in the United States.

The Company's competition also varies by the type of service provided.  For
large application development and outsourcing projects, the Company competes
with consulting divisions of large public accounting firms, such as Andersen
Consulting, as well as companies such as Electronic Data Systems Corporation and
IBM Global Services.  For systems implementation and maintenance, the Company
often competes with small, local firms, as well as large international firms,
including Analysts International Corp., Cap Gemini America, Computer Horizons
Corporation, Computer Sciences Corporation, and Computer Task Group, Inc.  For
management consulting engagements, the Company competes with large public
accounting firms, McKinsey and Booz-Allen & Hamilton. In the healthcare software
systems market, Keane competes with such companies as Shared Medical Systems,
HBOC/McKesson, and MEDITECH, Inc.  The Company believes its well-established
presence in the IT services market as well as its comprehensive product offering
is a significant competitive differentiator in serving the healthcare market.
Some of these competitors are larger and have greater financial resources than
the Company.  In addition, clients may seek to increase their internal IT
resources to satisfy their custom software development needs.

                                       9
<PAGE>
 
The Company believes that the bases for competition in the IT services industry
include the ability to compete cost-effectively, develop strong client
relationships, generate recurring revenues, use comprehensive delivery
methodologies and achieve organizational learning by implementing standardized
operational processes.  The Company believes that it competes favorably with
respect to these factors.  There can be no assurance that the Company will
continue to compete successfully with its existing competitors or will be able
to compete successfully with any new competitors.


ITEM 2.  PROPERTIES

The principal executive office of the Company is located at Ten City Square,
Boston, Massachusetts 02129, in an approximately 34,000 square foot office
building which is owned by City Square Limited Partnership.  Several of the
Company's officers, directors and shareholders are limited partners of this
partnership.  See Item 13 -- "Certain Relationships and Related Transactions."
At December 31, 1998, the Company leased and maintained sales and support
offices in more than 50 locations in the United States and three locations in
the United Kingdom.  The aggregate annual rental expense for the Company's sales
and service offices was approximately $13,433,000 in 1998.  The aggregate annual
rental expense for all of the Company's facilities was approximately $16,111,000
in 1998.  For additional information regarding the Company's lease obligations,
see Note K of "Notes to Consolidated Financial Statements. "

The Company believes that its facilities are adequate for its current needs and
that suitable additional space will be available as needed.


ITEM 3.    LEGAL PROCEEDINGS

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


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

No matters were submitted to a vote of the Company's security holders during the
fourth quarter of the year ended December 31, 1998.

                                       10
<PAGE>
 
EXECUTIVE OFFICERS OF THE COMPANY:  The executive officers and directors of the
Company are as follows:


NAME                           AGE   POSITION
----                           ---   --------
                                 
John F. Keane(1)               67    Chief Executive Officer, President, 
                                     Director  
John F. Keane, Jr.             39    Office of the President, Executive Vice
                                     President, Director
Brian T. Keane                 38    Office of the President, Executive Vice
                                     President, Director
Edward H. Longo                55    Senior Vice President 
Raymond W. Paris               61    Vice President  Healthcare Solutions 
                                     Practice 
Wallace A. Cataldo             49    Vice President, Finance and Administration
Renee Southard                 44    Vice President  Human Resources       
Philip J. Harkins(1)(2)        51    Director                              
Winston R. Hindle, Jr.(1)(2)   68    Director                              
John F. Rockart(1)(2)          67    Director                              
Robert A. Shafto(1)(2)         63    Director                              
__________________________________

(1) Member of Audit Committee.

(2) Member of Compensation Committee.

All Directors hold office until the next annual meeting of the stockholders and
until their successors have been elected and qualified.  The Company has no
standing nominating committee.  Officers of the Company serve at the discretion
of the Board of Directors.

Mr. John Keane, the founder of the Company, has been Chief Executive Officer,
President and a director of the Company since the Company's incorporation in
March 1967.  Prior to joining the Company, Mr. Keane worked for IBM's Data
Processing Division and was employed as a consultant by Arthur D. Little, Inc.,
a Cambridge, Massachusetts management consulting firm. Mr. Keane is also a
director or Firstwave Technologies, Inc. and EG&G, Inc.

Mr. John Keane, Jr. joined the Company in 1987 and was appointed Executive Vice
President and a member of the Office of the President in September 1997.  Prior
to this role, Mr. Keane had been Senior Vice President since December 1996.
From December 1994 to December 1996, he was an Area Vice President. From January
1994 to December 1994, Mr. Keane served as a Business Area Manager.  From July
1992 to January 1994, he acted as manager of Software Reengineering, and from
January 1991 to July 1992, he served as Director of Corporate Development. Mr.
Keane has been a director of the Company since May 1998.  John Keane, Jr. is a
son of John Keane, the founder, President, Chief Executive Officer and a
director of the Company, and a brother of Brian Keane.

Mr. Brian Keane joined the Company in 1986 and was appointed Executive Vice
President and a member of the Office of the President in September 1997.  Prior
to this role, Mr. Keane had been Senior Vice President since December 1996.
From December 1994 to December 1996, he was an Area Vice President.  From July
1992 to December 1994, Mr. Keane served as a Business Area Manager and from
January 1990 to July 1992, he served as a Branch Manager. Mr. Keane has been a
director of the Company since May 1998.  Brian Keane is a son of John Keane, the
founder, President, Chief Executive Officer and a director of the Company, and a
brother of John Keane, Jr.

Mr. Longo joined the Company in March 1980 and has been Senior Vice President
since December 1994.  From January 1993 to December 1994, he was Vice President,
Eastern Region.  From May 1987 to January 1993, he was Vice President of the New
England area.  From June 1986 to May 1987, he was an Area Manager.

                                       11
<PAGE>
 
Mr. Paris joined the Company in November 1976.  Mr. Paris became Area Manager of
the Healthcare Solutions Practice in 1981 and has served as Vice President and
General Manager of the Healthcare Solutions Practice since August 1986.

Mr. Cataldo joined the Company in June 1975 and has been Vice President -
Finance and Administration since October 1985.  Mr. Cataldo served as Chief
Financial Officer from November 1983 to October 1985 and as Controller from
November 1978 to November 1983.

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

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

Mr. Hindle has been a director since February 1995.  Mr. Hindle is currently
retired.  From September 1962 to July 1994, Mr. Hindle served as a Vice
President and, subsequently, Senior Vice President of Digital Equipment
Corporation.  Mr. Hindle is also a director of CP Clare Corporation and 
Mestek, Inc.

Dr. Rockart has been a director since the Company's incorporation in March 1967.
Dr. Rockart has been a Senior Lecturer at the Alfred J. Sloan School of
Management of the Massachusetts Institute of Technology since 1974, and has been
the Director of The Center for Information Systems Research since 1976.  Dr.
Rockart is also a director of ComShare Inc.

Mr. Shafto has been a director since July 1994. Mr. Shafto is currently retired.
From January, 1998 to April, 1998, Mr. Shafto was Chairman of New England
Financial.   Through December 31, 1997, he was Chairman, Chief Executive Officer
and President of New England Life Insurance Company, an insurance and investment
firm which he joined in 1972 as Second Vice President for Computer Systems
Development and Information Systems.  Mr. Shafto was named President and Chief
Operating Officer of New England Life Insurance Company in 1989 and assumed the
position of Chief Executive Officer in January 1992.  He was elected to the
office of Chairman of New England Life Insurance Company effective July 1, 1993.

Compensation of the nonemployee directors currently consists of an annual
director's fee of  $4,000 plus $1,000 and expenses for each meeting of the Board
of Directors attended.  Directors who are officers or employees of the Company
do not receive any additional compensation for their services as directors.

                                       12
<PAGE>
 
PART II
-------

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

The Company's authorized capital stock consists of 200,000,000 shares of Common
Stock, $.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 12, 1999, there were 71,363,755 shares of Common Stock
outstanding and held of record by approximately 3,197 stockholders; 285,213
shares of Class B Common Stock outstanding and held of record by approximately
127 stockholders; and no shares of Preferred Stock outstanding.

On October 9, 1998, the Company privately issued 915,571 shares of Keane, Inc.
Common Stock in exchange for all of the outstanding capital stock of Fourth
Tier, Inc., a privately-held provider of enterprise relationship management
services. Such issuance was made pursuant to the exemption provided for private
offerings in Section 4(2) of the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.


COMMON STOCK AND CLASS B COMMON STOCK:

Voting.  Each share of Common Stock is entitled to one vote on all matters
submitted to stockholders and each share of Class B Common Stock is entitled to
ten votes on all such matters.  The holders of Common Stock and Class B Common
Stock vote as a single class on all actions submitted to a vote of the Company's
stockholders, except that separate class votes of the holders of Common Stock
and Class B Common Stock are required to authorize further issuances of Class B
Common Stock and certain charter amendments.  Voting for directors is
noncumulative.

As of March 12, 1999, the Class B Common Stock represented less than 1% of the
Company's outstanding equity, but had approximately 4% of the combined voting
power of the Company's outstanding Common Stock and Class B Common Stock.  The
substantial voting rights of the Class B Common Stock may make the Company less
attractive as the potential target of a hostile tender offer or other proposal
to acquire the stock or business of the Company and render merger proposals more
difficult, even if such actions would be in the best interests of the holders of
the Common Stock.

Dividends and Other Distributions.  The holders of Common Stock and Class B
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors, out of funds legally available, except that
the Board of Directors may not declare and pay a regular quarterly cash dividend
on the shares of Class B Common Stock unless a noncumulative per share dividend
which is $.05 per share greater is paid at the same time on the shares of Common
Stock.  In the event of a liquidation, dissolution or winding up of the Company,
holders of Common Stock and Class B Common Stock have the right to ratable
portions of the net assets of the Company available after the payment of all
debts and other liabilities.

Trading Markets.  The Company's Common Stock is traded on the American Stock
Exchange.  The Common Stock is also registered pursuant to the Securities
Exchange Act of 1934, as amended.  The Company furnishes to the holders of its
Common Stock and Class B Common Stock the same information and reports
concerning the Company.  Shares of Class B Common Stock are not transferable by
a stockholder except for transfers (i) by gift, (ii) in the event of the death
of a stockholder, or (iii) by a trust to a person who is the grantor or a
principal beneficiary of such trust (individuals or entities receiving Class B
Common Stock pursuant to such transfers being referred to as "Permitted
Transferees").  The Class B Common Stock is not listed or traded on any exchange
or in any market and no trading market exists for shares of the Class B Common
Stock.  The Class B Common Stock is, however, convertible at all times, and
without cost to the stockholder, into shares of Common Stock on a share-for-
share basis.  Shares of Class B Common Stock are automatically converted into an
equal number of such shares of Common Stock in connection with any transfer of
such shares other than to a Permitted Transferee.  In addition, all of the
outstanding shares of Class B Common Stock are convertible into shares of Common
Stock upon a majority vote of the Board of Directors.

Future Issuances of Class B Common Stock; Retirement of Class B Common Stock
Upon Conversion into Common Stock.  The Company may not issue any additional
shares of Class B Common Stock without the approval of a majority of the votes
of the outstanding shares of Common Stock and Class B Common Stock voting as
separate

                                       13
<PAGE>
 
classes.  The Board of Directors may issue shares of authorized but unissued
Common Stock and Preferred Stock without further stockholder action.  All shares
of Class B Common Stock converted into Common Stock are retired and may not be
reissued.

Other Matters.  The holders of Common Stock and Class B Common Stock have no
preemptive rights or (except as described above) rights to convert their stock
into any other securities and are not subject to future calls or assessments by
the Company.  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 the Company may designate and
issue in the future.  See "Preferred Stock" below.

PREFERRED STOCK:  The Company's Articles of Organization authorize the issuance
of up to 2,000,000 shares of Preferred Stock, $.01 par value per share.
Preferred Stock may be issued from time to time in one or more series, and the
Board of Directors is authorized to determine the rights, preferences,
privileges and restrictions, including the dividend rights, conversion rights,
voting rights, terms of redemption, redemption price or prices and liquidation
preferences, of any such series of Preferred Stock, and to fix the number of
shares of any such series without any further vote or action by the
stockholders.  The voting and other rights of the holders of Common Stock and
Class B 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.
Issuance of Preferred Stock, while providing desirable flexibility in connection
with acquisitions and other corporate purposes, could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a majority of the outstanding voting stock of the Company.  The
Company has no present plans to issue any shares of Preferred Stock.

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY:  The Company's Common Stock is
traded on the American Stock Exchange under the symbol "KEA."  The following
table sets forth, for the periods indicated, the high and low closing prices per
share as reported by the American Stock Exchange.
           
                          Stock Price             
                                                  
                                     High     Low 
                                     ----     --- 
                                                  
             1998                                 
             First Quarter          $56.50  $35.25
             Second Quarter          59.00   42.75
             Third Quarter           60.94   36.00
             Fourth Quarter          39.94   28.12
                                                  
             1997                                 
             First Quarter          $18.56  $14.88
             Second Quarter          29.35   15.06
             Third Quarter           34.47   27.06
             Fourth Quarter          40.69   26.88 


The closing price of the Common Stock on the American Stock Exchange on March
12, 1999 was $26.94.

The Company has not paid any cash dividend since June 1986.  The Company
currently intends to retain all of its earnings to finance future growth and
therefore does not anticipate paying any cash dividend in the foreseeable
future.  The Company's Articles of Organization restrict the ability of the
Board of Directors to declare regular quarterly dividends on the Class B Common
Stock.

                                       14
<PAGE>
 
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                   First Quarter   Second Quarter    Third Quarter    Fourth Quarter
                                   -------------   --------------    -------------    --------------
<S>                             <C>              <C>               <C>              <C>  
Year Ended December 31, 1998                                                       
                                                                                   
Total revenues                       $230,056          $266,904         $285,465          $293,773
Income before income taxes             38,300            42,402           48,314            45,140
Net income                             22,784            22,700           27,249            23,616
*Net income per share (basic)             .32               .32              .38               .33
*Net income per share (diluted)           .32               .31              .38               .33
                                                                                
Year Ended December 31, 1997                                                    
                                                                                
Total revenues                       $151,776          $163,301         $182,140          $209,584
Income before income taxes             18,580            21,092           23,106            25,305
Net income                             10,884            12,371           13,561            14,555
*Net income per share (basic)             .16               .18              .19               .21
*Net income per share (diluted)           .15               .17              .19               .20
</TABLE>

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

All amounts have been restated to reflect the acquisitions in 1998 of Bricker &
Associates, Inc., Icom Systems Ltd and Fourth Tier, Inc., which were accounted
for as poolings-of-interests.

                                       15
<PAGE>
 
ITEM 6.    SELECTED FINANCIAL DATA

FINANCIAL HIGHLIGHTS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>

Year Ended December 31,                1994           1995          1996         1997         1998
-----------------------------------------------------------------------------------------------------
<S>                                  <C>          <C>            <C>          <C>          <C> 
Income Statement Data:                                                                   
                                                                                         
  Total revenues                      $351,346       $394,619      $505,982     $706,801   $1,076,198
  Operating income                      32,643         33,659        47,403       85,163      170,187
  Net income                            17,308         20,148        28,173       51,371       96,349
  Net income per share (basic)             .30            .30           .40          .73         1.36
  Net income per share   (diluted)         .29            .30           .40          .72         1.33
 *Weighted average common               57,964         67,036        69,780       70,096       71,053
   shares outstanding (basic)                                                            
 *Weighted average common               58,984         67,728        70,540       71,603       72,284
  shares and common share                                                                
  equivalents outstanding                                                                
  (diluted)                                                                              
-----------------------------------------------------------------------------------------------------
                                                                                         
Balance Sheet Data:                                                                      
  Total assets                        $181,259       $198,191      $251,771     $329,176   $  457,560
  Total debt                            12,317          9,146        16,502        9,493        3,930
  Stockholders' equity                 145,915        169,526       201,768      257,037      363,784
  Book value per share                    2.20           2.53          2.89         3.65         5.10
  *Number of shares                     66,244         67,114        69,792       70,342       71,336
   outstanding                                                                           
-----------------------------------------------------------------------------------------------------
                                                                                         
Financial Performance:                                                                   
  Total revenue growth                    95.2%          12.3%         28.2%        39.7%        52.3%
  Net margin                               4.9%           5.1%          5.6%         7.3%         9.0%
  Return on average equity                15.1%          12.8%         15.2%        22.4%        31.0%
</TABLE>

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

All amounts have been restated to reflect the acquisitions in 1998 of Bricker &
Associates, Inc., Icom Systems Ltd and Fourth Tier, Inc., which were accounted
for as poolings-of-interests.

                                       16
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

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

RESULTS OF OPERATIONS, 1998 VS. 1997: The Company's revenue for 1998 was $1.08
billion, a 52.3% increase from $706.8 million in 1997.  The increase in revenue
was a result of strong growth generated by the Company's service offerings, and
by five strategic acquisitions made during the year.  The Company experienced
the largest revenue growth in Year 2000 Compliance Services and Application
Outsourcing.  Year 2000 Compliance revenue increased 146.4% to $369.4 million,
Application Outsourcing revenue increased 48.8% to $155.3 million and
Application Development increased 32.8% to $130.1 million. IT Consulting
increased 48.4% to $54.0 million, primarily as a result of the acquisition of
Bricker & Associates, Inc.  Help Desk revenue increased 25.5% to $49.2 million,
Health Care Services and Sales increased 22.4% to $37.1 million, Supplemental
Staffing revenue increased 13.5% to $263.9 million, and all other services
increased 6.8% to $17.2 million.

The Company's largest revenue increase was from Year 2000 Compliance.  Keane
expects its Year 2000 revenues will gradually decrease over the next two years,
but anticipates that revenues from Strategic Service offerings may increase as
companies that have completed their Year 2000 Compliance projects are now able
to concentrate on other strategic IT development projects.

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

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

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

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

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

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

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

                                       17
<PAGE>
 
Net income and earnings per share for 1998 were $96.3 million and $1.33 per
share diluted, respectively, up 87.6% and 84.7%, respectively from $51.4 million
and $.72 per share diluted, respectively, in 1997.

RESULTS OF OPERATIONS, 1997 VS. 1996:  In 1997, revenue increased 39.7% to
$706.8 million, from $506.0 million in 1996.  This increase in revenue resulted
from strong growth in each of the Company's service offerings, including Year
2000 application outsourcing, application development, helpdesk and IT
consulting services.  Year 2000 revenue increased 724% to $149.9 million, and
application outsourcing revenue increased 114% to $104.4 million.  Revenue from
application development services increased 36% to $98.0 million.  Helpdesk
revenue increased 39% to $39.2 million.  IT consulting services revenue
increased 14% to $36.4 million.  Other revenue increased 40% to $16.1 million.
The Company believes that these revenue increases are attributable to a strong
economy in which companies made substantial investments in their information
systems.  In addition, the Company generated new revenues in 1997 as a result of
the Year 2000 compliance issue, which is requiring many large corporations to
contract with outside service providers in order to achieve systems compliance
by the Year 2000.  Revenue from supplemental staffing services decreased 14% to
$232.5 million.  This decrease resulted from the Company's decision to de-
emphasize supplemental staffing in 1997 in favor of strategic services, which,
historically, produce higher margins than supplemental staffing.  Revenue from
the Company's Healthcare Solutions Practice increased to $30.3 million.

Salaries, wages, and other direct costs for 1997 were $469.4 million, or 66.4%
of revenue, compared to $341.4 million, or 67.5% of revenue, for 1996, a
decrease of 1.1%.  This decrease as a percentage of revenue is due to the
Company's ability to increase its average billing rates by more than the
increase in related technical salary costs, which, in turn, is attributable to
an increase in strategic services work being performed by the Company.

Selling, General, & Administrative ("SG&A") expenses for 1997 were $138.2
million, or 19.5% of revenue, compared to $104.5 million, or 20.6% of revenue,
in 1996, a decrease of 1.1% as a percentage of revenue.  The Company's objective
is to continue to attempt to reduce SG&A, as a percentage of revenue, by
realizing the economies of scale associated with increasing revenue without
proportionately increasing SG&A, and to continue to implement cost saving
programs in such areas as travel and employee benefits.

Amortization of goodwill and other intangible assets for 1997 was $14.0 million,
or 2.0% of revenue, compared to $12.7 million, or 2.5% of revenue, in 1996.

Interest and other expenses for 1997 and 1996 totaled $1.3 million,
respectively.  Interest and other related income for 1997 totaled $4.2 million,
compared to $2.7 million in 1996.  The increase in interest and other related
income can be attributed to the increase in investments.

Pretax income for 1997 was $88.1 million, or 12.5% of revenue, up 80.9% from
pretax income of $48.7 million, or 9.6% of revenue, in 1996.

The Company's effective tax rate for 1997 was 41.7% compared to 42.2% in 1996.
The effective tax rate reflects a combination of federal and state income taxes.

Net income and earnings per share for 1997 were $51.4 million and $.72 per share
diluted, respectively, up 82.3% from $28.2 million and $.40 per share diluted,
respectively, in 1996.

LIQUIDITY AND CAPITAL RESOURCES: The Company's cash and investments at December
31, 1998 increased to $129.2 million from $91.0 million at December 31, 1997.
This increase was primarily attributable to net income, increased accounts
payable and accrued expenses of approximtely $15.2 million, offset by increased
accounts receivable of approximtely $73.9 million and expenditures associated
with the adding and expanding of facilities to support the Company's growth of
approximtely $16.7 million. In addition, the Company maintains and has available
a $20 million unsecured demand line of credit split equally between two major
Boston banks for operations and acquisition opportunities.

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

                                       18
<PAGE>
 
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 the clients through increased billing rates.  Rates
charged by the Company are based on the cost of labor and market conditions
within the industry.  The Company was able to increase its billing rates over
its increases in direct labor in 1998.  This is due primarily to our increase in
client strategic services in which competition is less and the quality of
services commands higher rates.


YEAR 2000 ISSUES

OVERVIEW

The "Year 2000" issue is the result of computer programs being written using two
digits rather than four to define the applicable year.  Keane's computer
equipment and software and devices with embedded technology that are time
sensitive may recognize "00" as the year 1900 rather than the Year 2000.  This
could result in a system failure or miscalculations causing disruptions of
Keane's operations, including, among other things, a temporary inability to
perform mission critical functions like billing and time reporting.  As a
result, software and computer systems may need to be upgraded or replaced in
order to ensure that they accept four digit date codes.


STATE OF READINESS

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

Keane's Healthcare Solutions Practice develops, markets and sells software
products.  Certain of these products are not fully Year 2000 operable.  Keane
has advised its customer base for these products that it does not intend to
offer Year 2000 compliant versions of these products and has encouraged them to
migrate to new products offered by Keane that are Year 2000 ready.  The Company
anticipates that some customers will choose not to migrate to these products and
will therefore terminate their relationship with Keane's Healthcare Solutions
Practice.  The exact amount of anticipated lost customers has not been
determined.  The Company believes that the revenue lost as a result of these
events will be immaterial to its overall operations.

In addition to its own products, Keane markets certain third party software
products through its Healthcare Solutions Practice.  The Company is seeking
assurances from the vendors of these products that all licensed software is Year
2000 compliant. The Company has received substantially all of these assurances
in the first quarter of 1999.

Company Systems.  Keane has established a Year 2000 task force that has
---------------                                                        
completed its assessment of the Company's Information Technology-related ("IT-
related") systems for the Year 2000 issue.  For IT-related systems, the Company
believes that most of the critical systems, including its accounting software,
AS400 applications and payroll systems, are now Year 2000 compliant.  However,
Keane's Federal Systems subsidiary uses a software product for its accounting
system that is not Year 2000 compliant.  The vendor for this product has advised
the Company that it plans to release a Year 2000 compliant upgrade for its
product in the first quarter of 1999.  The Company is in the process of
replacing its billing software because the current software product is not Year
2000 compliant.  The cost to replace this software is currently estimated to be
approximately $500,000.  Keane believes that the new software will be
operational by the end of the first quarter of 1999.

Keane's Year 2000 task force is also evaluating the Company's non-IT systems,
including alarm systems, sprinkler systems, elevators, fax machines and other
miscellaneous systems that may contain embedded technology, for the Year 2000
Issue. Keane expects to complete its identification and assessment of Year 2000
Issues in non-IT systems in 1999 and to establish a remediation plan to address
any outstanding Year 2000 Issues concerning the Company's non-IT systems.


Costs to Address Year 2000 Issues
---------------------------------

Keane anticipates that it will incur direct costs to modify or replace existing
systems used by Keane in the operation of its business to ensure that all
systems will be operable in the Year 2000, including the costs to replace its
billing

                                       19
<PAGE>
 
software described above.  The Company believes that the total amounts spent by
it to date and that it expects to spend in 1999 addressing the Year 2000 issue
are not material.


Risks to the Company
--------------------

In the event of a failure of some or all of the Company's IT-related and non-IT
systems on January 1, 2000, the Company's operations may be substantially
curtailed until the Company or its third-party suppliers develop a solution to
address such system's failure.  In such event, the Company may be unable to:
(a) perform billing functions, (b) keep track of time performed on projects for
its clients, (c) access client records, (d) communicate between field offices
and headquarters, (e) operate its Internet site, (f) receive and send email or
(g) prepare its financial statements for the fourth quarter of 1999 or periods
thereafter.

Among the services that Keane provides are assessment, planning,
migration/remediation and testing services for Year 2000 compliance.  Keane has
devoted significant resources to services that address the Year 2000 problem and
believes the market for these services will decline as the Year 2000 approaches.
Although Keane believes that the demand for its services relating to the Year
2000 problem will continue to exist after the Year 2000, this demand will
diminish significantly over time and will eventually disappear.

Keane's services addressing the Year 2000 problem involve key aspects of its
clients' computer systems.  A failure in a client's system could result in a
claim for substantial damages against Keane, regardless of Keane's
responsibility for the failure. Keane could incur substantial costs in
connection with any resulting litigation, regardless of the outcome.


Contingency Plans
-----------------

As described above, the Company has identified potential vulnerabilities
associated with the change of the century.  The Company is devoting resources to
working with providers of systems to the Company to ensure that its business is
not substantially interrupted as a result of the date change.  The Company
currently does not have a contingency plan in the event of a particular system
not being Year 2000 compliant. Such a plan will be developed if it becomes clear
that the company is not going to achieve its scheduled compliance objectives.

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.

Fluctuations in Operating Results.  Keane has experienced and expects to
---------------------------------                                       
continue to experience fluctuations in its quarterly results.  Keane's gross
margins vary based on a variety of factors including employee utilization rates
and the number and type of services performed by Keane during a particular
period.  A variety of factors influence Keane's revenue in a particular quarter,
including:

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

     the number and requirements of client engagements;

     employee utilization rates;

     changes in the rates Keane can charge clients for services;

     acquisitions; and

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

                                       20
<PAGE>
 
A significant portion of Keane's expenses do not vary relative to revenue.  As a
result, if revenue in a particular quarter does not meet expectations, Keane's
operating results could be materially adversely affected, which in turn may have
a material adverse impact on the market price of Keane common stock.  In
addition, many of Keane's engagements are terminable without client penalty.  An
unanticipated termination of a major project could result in an increase in
underutilized employees and a decrease in revenue and profits.


Risks Relating to Acquisitions.  In the past five years, Keane has grown
------------------------------                                          
significantly through acquisitions.  Since January 1, 1998, Keane has completed
the acquisitions of Quantum Associates, Inc. d/b/a Omega Systems in Pittsburgh,
Pennsylvania, GSE Erudite Systems in Salt Lake City, Utah, Bricker & Associates,
Inc. in Chicago, Illinois, Icom Systems Ltd in Birmingham, England, Fourth Tier,
Inc. in El Segundo, California, Emergent Corporation in San Mateo, California
and Advanced Solutions Inc. in New York, New York.  Keane's future growth may be
based in part on selected acquisitions.  At any given time, Keane may be in
various stages of considering such opportunities.  Keane can provide no
assurances that it will be able to find and identify desirable acquisition
targets or that it will be successful in entering into a definitive agreement
with any one target.  Also, even if a definitive agreement is reached, there is
no assurance that any future acquisition will be completed.

Keane typically anticipates that each acquisition will bring certain benefits,
such as an increase in revenue.  Prior to completing an acquisition, however, it
is difficult to determine if such benefits can actually be realized.
Accordingly, there is a risk that an acquired company may not achieve an
increase in revenue or other benefits for Keane.  In addition, an acquisition
may result in unexpected costs and expenses.  Any of these events could have a
material adverse effect on Keane's business, financial condition and results of
operations.

The process of integrating acquired companies into Keane's existing business may
also result in unforeseen difficulties.  Unforeseen operating difficulties may
absorb significant management attention which Keane might otherwise devote to
its existing business.  Also, the process may require significant financial
resources that Keane might otherwise allocate to other activities, including the
ongoing development or expansion of Keane's existing operations.  Finally,
future acquisition could result in Keane having to incur additional debt and/or
contingent liabilities.  All of these possibilities might have a material
adverse effect on Keane's business, financial condition and result of
operations.

Dependence on Personnel.  Keane believes that its future success will depend in
-----------------------                                                        
large part on its ability to continue to attract and retain highly-skilled
technical and management personnel.  The competition for such personnel is
intense.  Keane may not succeed in attracting and retaining the personnel
necessary to develop its business.  If Keane does not, its business, financial
condition and result of operations could be materially adversely affected.

Highly Competitive Market.  The market for Keane's services is highly
-------------------------                                            
competitive.  The technology for custom software services can change rapidly.
The market is fragmented, and no company holds a dominant position.
Consequently, Keane's competition for client assignments and experienced
personnel varies significantly from city to city and by the type of service
provided.  Some of Keane's competitors are larger and have greater technical,
financial and marketing resources and greater name recognition in the markets
they serve than does Keane.  In addition, clients may elect to increase their
internal information systems resources to satisfy their custom software
development needs.

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

     compete cost-effectively;

     develop strong client relationships;

     generate recurring revenues;

     utilize comprehensive delivery methodologies; and

     achieve organizational learning by implementing standard operational
     processes.

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

                                       21
<PAGE>
 
Keane may not be able to compete successfully against current or future
competitors.  In addition, competitive pressures faced by Keane may materially
adversely affect its business, financial condition and results of operations.


Year 2000 Compliance; Risks Associated with Provision of Year 2000 Services.
---------------------------------------------------------------------------  
Keane has reviewed its internal computer systems and has identified certain
internal systems that are not Year 2000 compatible (i.e., such systems use only
two digits to represent the year in date data fields and, consequently, may not
accurately distinguish between the 20th and 21st centuries or may not function
properly at the turn of the century).  Keane is in the process of correcting
these systems or replacing them with Year 2000 compliant systems.  Keane expects
to implement successfully the systems and programming changes necessary to
address Year 2000 issues and does not believe that the cost of such actions will
have a material effect on Keane's financial condition or results of operations.
There may, however, be a delay in, or increased costs associated with, the
implementation of these changes.  Keane's inability to implement changes could
have a material adverse effect on Keane's business, financial condition or
results of operations.

Among the services that Keane provides are assessment, planning,
migration/remediation and testing services for Year 2000 compliance.  Keane has
devoted significant resources to services that address the Year 2000 problem and
believes the market for these services will decline as the Year 2000 approaches.
Although Keane believes that the demand for its services relating to the Year
2000 problem will continue to exist after the Year 2000, this demand will
diminish significantly over time and will eventually disappear.

Keane's services addressing the Year 2000 problem involve key aspects of its
clients' computer systems.  A failure in a client's system could result in a
claim for substantial damages against Keane, regardless of Keane's
responsibility for the failure.  Keane could incur substantial costs in
connection with any resulting litigation, regardless of the outcome.

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

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


ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company does not engage in trading market risk sensitive instruments or
purchasing hedging instruments or "other than trading" instruments that are
likely to expose the Company to market risk, whether interest rate, foreign
currency exchange, commodity price or equity price risk. The Company has not
purchased options or entered into swaps or forward or futures contracts. The
Company's primary market risk exposure is that of interest rate risk on its
investments, which would affect the carrying value of those investments.

                                       22
<PAGE>
 
ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                Page(s)
 

Report of Independent Accountants................................  24


Consolidated Balance Sheets as of December 31, 1997 and 1998.....  25

Consolidated Statements of Income
for the Years Ended December 31, 1996, 1997 and 1998.............  26

Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1997 and 1998.....................  27

Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1997 and 1998...........................  28

Notes to Consolidated Financial Statements....................... 29-38

                                       23
<PAGE>
 
REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF KEANE, INC.:


In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Keane, Inc.
and its subsidiaries at December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.



                                              /s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 26, 1999

                                       24
<PAGE>
 
KEANE, INC. CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,                                                 1997             1998
------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)                                  
Assets                                                               
Current:                                                             
<S>                                                      <C>                <C>
         Cash and cash equivalents                         $ 40,276         $ 51,696
         Short term investments                               6,607            6,165
         Accounts receivable, net:                                   
         Trade                                              157,921          229,457
         Other                                                2,041            1,573
         Prepaid expenses and other current assets           10,729           23,376
                                                           --------         --------
         Total current assets                               217,574          312,267
                                                                     
Long term investments                                        44,139           71,368
Property and equipment, net                                  23,613           29,973
Intangible assets, net                                       35,825           35,714
Other assets, net                                             8,025            8,238
                                                           --------         --------
                                                           $329,176         $457,560
                                                           ========         ========
Liabilities                                                          
Current:                                                             
         Accounts payable                                  $ 22,709         $ 20,222
         Accrued expenses and other liabilities              13,191           30,647
         Accrued compensation                                23,691           25,429
         Notes payable                                        6,927            1,000
         Accrued income taxes                                 3,055           13,548
         Current capital lease obligations                      822              954
                                                           --------         --------
         Total current liabilities                           70,395           91,800
                                                                     
Long-term portion of capital lease obligations                1,379            1,976
Notes payable                                                   365              ---
                                                                     
Commitments and contingencies (Note K)                               
                                                                     
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                  
         70,361,354 in 1997 and 71,363,272 in 1998            7,036            7,136
Class B common stock, par value $.10, authorized                     
         503,797 shares, issued and outstanding                      
         286,615 in 1997 and 285,303 in 1998                     29               29
Additional paid-in capital                                   97,680          109,606
Foreign currency translation                                   (372)            (764)
Retained earnings                                           155,077          250,546
Less treasury stock at cost, 305,615 shares of Common                
 Stock in 1997 and 313,064 shares of Common Stock in 1998    (2,413)          (2,769)
                                                           --------         -------- 
Total stockholders' equity                                  257,037          363,784
                                                           --------         -------- 
                                                                     
                                                           $329,176         $457,560
                                                           ========         ========
                                                                                 
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

                                       25
<PAGE>
 
<TABLE>
<CAPTION>
KEANE, INC. CONSOLIDATED STATEMENTS OF INCOME
 
For the Years Ended December 31,                        1996             1997               1998
---------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)              
<S>                                                 <C>             <C>               <C>
Total revenues                                       $  505,982       $  706,801       $  1,076,198
                                                     
Salaries, wages and other direct costs                  341,434          469,433            696,752
Selling, general and administrative expenses            104,481          138,168            193,438
Amortization of goodwill and other intangible assets     12,664           14,037              7,701
Merger costs                                                                 ---              8,120
                                                     ----------       ----------         ----------  
Operating income                                         47,403           85,163            170,187
                                                              
Interest and dividend income                              2,676            4,212              5,189
Interest expense                                            602              244                163
Other expenses, net                                         741            1,048              1,057
                                                     ----------       ----------         ----------  
                                                     
Income before income taxes                               48,736           88,083            174,156
                                                              
Provision for income taxes                                    
                                                         20,563           36,712             77,807
                                                     ----------       ----------         ----------  
                                                     
Net income                                           $   28,173       $   51,371         $   96,349
                                                     ==========       ==========         ==========  
Net income per share (basic)                         $     0.40       $     0.73         $     1.36
                                                     ==========       ==========         ========== 
Net income per share (diluted)                       $     0.40       $     0.72         $     1.33 
                                                     ==========       ==========         ========== 
                                                     
Weighted average common shares outstanding (basic)       69,780           70,096             71,053
                                                     ==========       ==========         ========== 
Weighted average common shares and common share      
equivalents outstanding (diluted)                        70,540           71,603             72,284
                                                     ==========       ==========         ==========              

</TABLE>
                                                                                
The accompanying notes are an integral part of the consolidated financial
statements.

                                       26
<PAGE>

KEANE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE> 
<CAPTION> 


For the Years Ended
December 31, 1996, 1997 and 1998
----------------------------------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
                                   
                                                                   Class B
                                       Common Stock              Common Stock      Additional
                                    -----------------         -----------------      Paid-in
                                    Shares     Amount         Shares     Amount      Capital
-------------------------------------------------------------------------------------------------
<S>                             <C>            <C>         <C>          <C>        <C> 
Balance December 31, 1995          67,129,584   $6,713      288,258      $29          $88,683
                                                                             
Common Stock issued under             929,307       93                                  3,380
  stock option and employee                                                 
  purchase plans                                                            
Stock issued by pooled              1,751,116      175                       
  companies                                                                  
Conversions of Class B Common             645                  (645)         
  Stock into Common Stock                                                    
Income tax benefit from stock                                                
  option plans                                                                            583
Other comprehensive income                                                   
Treasury Stock purchase                                                      
Dividends paid to shareholders                                               
Net income                                                                   
                                  ---------------------------------------------------------------
Balance December 31, 1996          69,810,652    6,981      287,613       29           92,646
                                                                             
Common Stock issued under             549,704       55                                  4,006
  stock option and employee                                                 
  purchase plans                                                            
Conversions of Class B Common             998                  (998)         
  Stock into Common Stock                                                    
Income tax benefit from stock                                                           1,028
  option plans                                                               
Other comprehensive income
Dividends paid to shareholders                                               
Net income                                                                   
                                  ---------------------------------------------------------------
Balance December 31, 1997          70,361,354    7,036      286,615       29           97,680
                                                                             
Pooling of interests with Omega                                              
  (Note N)                                                                   
Common Stock issued under             769,795       77                                  6,191
  stock option and employee                                                 
  purchase plans                                                            
Issuance  of common stock for         230,811       23                                    (23)
  business acquisitions                                                      
Merger expenses paid by                                                      
  shareholders                                                                          1,571
Conversions of Class B Common           1,312                (1,312)         
  Stock into Common Stock                                                    
Income tax benefit from stock                                                
  option plans                                                                          4,187
Other comprehensive income
Dividends paid to shareholders                                               
Net income                                                                   
                                  ---------------------------------------------------------------
Balance December 31, 1998          71,363,272   $7,136      285,303      $29         $109,606
                                  ===============================================================


                                                    --------
                                                    Treasury         
                                                     Stock           
                                Foreign             --------           Total
                                Currency            at Cost            Stock-
                                Trans-    Retained  --------           holders'
                                lation    Earnings   Shares   Amount   Equity
-------------------------------------------------------------------------------
<S>                             <C>       <C>       <C>       <C>      <C>     
Balance December 31, 1995        ($42)    $ 76,555  (304,314) ($2,412) $169,526
                                                                                
Common Stock issued under                                                       
   stock option and employee                                                    
   purchase plans                                                         3,473
Stock issued by pooled                                                          
  companies                                                                 175  
Conversions of Class B Common                                                   
  Stock into Common Stock                                                     -  
Income tax benefit from stock                                                   
  option plans                                                              583 
Other comprehensive income         (3)                                       (3)    
Treasury Stock purchase                               (1,301)      (1)       (1)   
Dividends paid to shareholders                (158)                        (158)       
Net income                                  28,173                       28,173        
                               -------------------------------------------------
                                                                        
Balance December 31, 1996         (45)     104,570  (305,615)  (2,413)  201,768
                                                                          
Common Stock issued under                                                 4,061
   stock option and employee                                                  
   purchase plans                                                             
Conversions of Class B Common                                                 -
  Stock into Common Stock                                                 
Income tax benefit from stock                                             1,028
  option plans                                                             
Other comprehensive income       (327)                                     (327)
Dividends paid to shareholders                (864)                        (864)
Net income                                  51,371                       51,371    
                               ------------------------------------------------
                                                                        
Balance December 31, 1997        (372)     155,077  (305,615)  (2,413)  257,037
                                                                            
Pooling of interests with Omega                589                          589
  (Note N)                                                                    
Common Stock issued under                             (7,449)    (356)    5,912
   stock option and employee                                                  
   purchase plans                                                             
Issuance  of common stock for                                                 -
  business acquisitions                                                   
Merger expenses paid by                                                   1,571
  shareholders                                                                
Conversions of Class B Common                                                 -
  Stock into Common Stock                                                 
Income tax benefit from stock                                             4,187
  option plans                                                             
Other comprehensive income       (392)                                     (392)
Dividends paid to shareholders              (1,469)                      (1,469)
Net income                                  96,349                       96,349
                               ------------------------------------------------
Balance December 31, 1998       ($764)    $250,546  (313,064) ($2,769) $363,784
                               ================================================

</TABLE>
                                                                               
The accompanying notes are an integral part of the consolidated financial
statements.

                                       27
<PAGE>
 
KEANE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>                                                            
<CAPTION>                                                          
For the Years Ended December 31,                           1996           1997           1998
------------------------------------------------------------------------------------------------
(IN THOUSANDS)                                                                    
Cash Flows From Operating Activities:                                             
<S>                                                      <C>          <C>             C>
Net income                                                $ 28,173       $ 51,371       $ 96,349
Adjustments to reconcile net income                                               
  to net cash provided by operating activities:                                   
 Depreciation and amortization                              20,551         22,659         21,018
 Deferred income taxes                                      (4,267)        (6,896)       (10,553)
 Provision for doubtful accounts                             3,621          3,391          5,332
 Loss (gain) on sale of property and equipment                 (18)            14             25
 Non-cash interest on long-term debt                           380            197            ---
 Tax benefit from stock options                                583          1,028          4,187
 Changes in assets and liabilities, net of acquisitions:                          
 (Increase) in accounts receivable                         (22,377)       (59,993)       (73,854)
 (Increase) in prepaid expenses and other assets              (220)          (451)        (1,995)
 Increase in accounts payable and accrued                                         
    expenses and other liabilities                          12,843         29,098         15,228
 Increase (decrease) in income taxes payable                 5,410         (3,990)        10,493
                                                          --------       --------       --------
                                                                                  
Net cash provided by operating activities                   44,679         36,428         66,230
                                                          --------       --------       --------
                                                                                  
Cash Flows From Investing Activities:                                             
Purchase of investments                                    (34,586)       (60,080)       (97,592)
Sale of investments                                         15,675         39,577         70,805
Purchase of property and equipment                          (5,842)       (17,502)       (16,740)
Proceeds from the sale of property and equipment               308            519            385
Payments for acquisitions                                     (747)           ---         (9,150)
                                                          --------       --------       --------
                                                                                  
Net cash (used for) investing activities                   (25,192)       (37,486)       (52,292)
                                                          --------       --------       --------
                                                                                  
Cash Flows From Financing Activities:                                             
Payments under long-term debt, net                          (3,302)        (4,161)        (7,292)
Principal payments under capital lease obligations          (1,158)          (921)        (1,240)
Proceeds from issuance of common stock                       3,474          4,061          7,483
Dividends paid                                                (158)          (864)        (1,469)
                                                          --------       --------       --------
                                                                                  
Net cash (used for) financing activities                    (1,144)        (1,885)        (2,518)
                                                                                  
Net increase (decrease) in cash and cash equivalents        18,343         (2,943)        11,420
Cash and cash equivalents at beginning of year              24,876         43,219         40,276
                                                          --------       --------       --------
Cash and cash equivalents at end of year                  $ 43,219       $ 40,276       $ 51,696
                                                          ========       ========       ========
                                                                                  
Supplemental information:                                                         
Income taxes paid                                         $ 18,241       $ 45,922       $ 68,540
</TABLE>

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

                                       28
<PAGE>
 
KEANE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


A.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION:  The consolidated financial statements include the
accounts of Keane, Inc. (the "Company") and its wholly owned subsidiaries.  All
significant intercompany transactions have been eliminated.

As described in Note N, during 1998 the Company completed five acquisitions.
Four of the acquisitions were accounted for as poolings-of-interests and one was
accounted for as a purchase. The accompanying financial statements and notes
have been restated for all periods presented for the three material pooling-of-
interests acquisitions.

Certain prior year amounts have been reclassified to conform with the current
year presentation.

NATURE OF OPERATIONS: The Company provides management and information technology
(IT) consulting, application software development and integration, application
management, and call center management services to corporations, government
agencies, and healthcare facilities. The Company serves its clients through a
series of corporate practices that support the Company's network of branch
offices in the major markets of the U.S., Canada, and the United Kingdom. This
delivery structure allows the Company to provide clients with world-class
capabilities of the entire Company on a responsive and cost-effective local
level. The Company primarily provides services to Fortune 1000 companies.

REVENUE RECOGNITION: The Company provides system design, implementation and
support services under fixed price and time and materials contracts.  For fixed
price contracts, revenue is recorded on the basis of the estimated percentage of
completion of services rendered.  Losses, if any, on fixed price contracts are
recognized when the loss is determined.  For time and materials contracts,
revenue is recorded at contractually agreed upon rates as the costs are
incurred.  Revenues for software application sales are recognized on the basis
of customer acceptance over the period of software implementation.

The Company provides services to multiple General Electric (GE) and
International Business Machines (IBM) locations.  The Company believes that each
GE and IBM location served by the Company is essentially autonomous.  Each
location contracts separately for its services and each contract involves
different projects.  Aggregate revenues for GE totaled approximately $28
million, $29 million and $31 million in 1996, 1997 and 1998, respectively.
Aggregate revenues for IBM totaled approximately $55 million, $70 million and
$66 million in 1996, 1997 and 1998, respectively.

FOREIGN CURRENCY TRANSLATION: For the Company's subsidiaries in Canada and
England, the Canadian dollar and British pound, respectively, are the functional
currencies.  All assets and liabilities of the Company's Canadian and English
subsidiaries are translated at exchange rates in effect at the end of the
period.  Income and expenses are translated at rates that approximate those in
effect on transaction dates.  The translation differences are charged or
credited directly to the translation adjustment account included as part of
stockholders' equity.  Realized foreign exchange gains and losses are included
in other income (expense).

CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of highly liquid
investments with a maturity of three months or less at the time of purchase.
Cash equivalents at December 31, 1998 included investments in commercial paper
($41.2 million), municipal bonds ($1.0 million) and money market funds ($1.1
million).  Cash equivalents at December 31, 1997 included investments in
commercial paper ($22.0 million), corporate bonds ($4.3 million) and money
market funds ($2.3 million).

FINANCIAL INSTRUMENTS: The amounts reflected in the consolidated balance sheets
for cash and cash equivalents, accounts receivable and accounts payable
approximate their fair value due to their short maturities. Based on the
borrowing rates currently available to the Company for bank loans with similar
terms and maturities, the fair value of the company's debt obligations
approximates their carrying value. Financial instruments that potentially
subject the Company to concentration of credit risk consist primarily of

                                       29
<PAGE>
 
investments and trade receivables. The Company's cash, cash equivalents and
investments are held with financial institutions with high credit standings. The
Company's customer base consists of geographically disperse customers in several
different industries, therefore concentration of credit risk with respect to
trade receivables is not considered significant.

INVESTMENTS:  Investments are stated at fair value as reported by the investment
custodian.   The Company determines the appropriate classification of debt and
equity securities at the time of purchase and re-evaluates such designations as
of each balance sheet date.  Investments are currently designated as available-
for-sale, and as such, unrealized gains and losses are reported in a separate
component of stockholders' equity.  At December 31, 1997 and 1998, the market
value of these investments approximated cost.

PROPERTY AND EQUIPMENT: Property and equipment is stated at cost.  Repair and
maintenance costs are charged to expense.  Depreciation is computed on a
straight-line basis over estimated useful lives of 25 to 40 years for buildings
and improvements, and 3 to 5 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.  Upon
disposition, the cost and related accumulated depreciation are removed from the
accounts, and any gain or loss is included in income.

INTANGIBLE ASSETS: Intangible assets consist principally of goodwill, the excess
of the purchase price over the appraised fair value of assets acquired in
acquisitions, and acquired customer-based intangibles, noncompetition
agreements, and software initially recorded at fair value.  Intangibles are
amortized on a straight-line basis over 14 or 15 years for goodwill and 3 to 15
years for other intangibles.  At each reporting date, management assesses
whether there has been a permanent impairment in the value of its long-term
assets and the amount of such impairment by comparing anticipated undiscounted
future operating income from acquired business units with the carrying value of
the related goodwill.  The factors considered by management in performing this
assessment include current operating results, trends and prospects, as well as
the effects of demand, competition and other economic factors.

The Company capitalized approximately $0.5 million of computer software
development costs during 1996. There were no costs capitalized in 1997 or 1998.
Costs are amortized over the expected life of the product, approximately 5
years, upon release.

INCOME TAXES: The Company accounts for income taxes under the 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.

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.


B.  INVESTMENTS

At December 31, 1998, the Company's investments included obligations of the U.S.
Government ($33.6 million), municipal bonds ($10.9 million), corporate pass
throughs ($12.8 million) and corporate bonds ($20.2 million).  At December 31,
1997, the Company's investments included obligations of the U.S. Government
($11.8 million), municipal bonds ($7.6 million), mortgage pass throughs ($9.6
million), corporate bonds ($19.7 million) and commercial paper ($2.0 million).
Contractual maturities at December 31, 1998 were $6.1 million due within one
year and $71.4 million due after one through five years.  Actual maturities may
differ from contractual maturities because the issuers of these securities may
have the right to prepay obligations without penalty.  There was no gain or
loss, based on a specific identification basis, realized on the sale of
available for sale securities during the years ended December 31, 1996, 1997 and
1998.

                                       30
<PAGE>
 
C.  ACCOUNTS RECEIVABLE

Accounts receivable are presented net of an allowance for doubtful accounts of
$4.9 million and $8.1 million at December 31, 1997 and 1998, respectively.  The
provisions charged to the statement of operations were $3.6 million, $3.3
million and $5.3 million in 1996, 1997, and 1998, respectively, and write-offs
against the allowances were $1.7 million, $2.1 million and $2.1 million in 1996,
1997, and 1998, respectively.


D.  PROPERTY AND EQUIPMENT
(IN THOUSANDS)

Property and equipment consist of the following:
                                              
<TABLE>
<CAPTION>

                                      December 31, 
                                      1997      1998
                                    -------    -------
<S>                                <C>        <C>     
Buildings and improvements          $   772    $   772
Office equipment                     38,467     50,191
Computer equipment and software       5,517      8,946
Leasehold improvements                5,301      7,387
                                    -------    -------
                                     50,057     67,296
                                             
Less accumulated depreciation                
 and amortization                    26,444     37,323
                                    -------    -------
                                             
                                    $23,613    $29,973
                                    =======    =======
</TABLE>

Depreciation expense totaled $7,887, $8,622 and $13,317 in 1996, 1997 and 1998,
respectively.  Computer equipment and software includes assets arising from
capital lease obligations at a cost of  $1,628 and $1,510, with accumulated
amortization totaling  $1,263 and $1,030, at December 31, 1997 and 1998,
respectively.


E.  INTANGIBLE ASSETS
(IN THOUSANDS)

Intangible assets consist of the following:
 
<TABLE>
<CAPTION>
                                   December 31,
                                  1997       1998
                                  ----       ----
<S>                           <C>         <C>    
Goodwill                        $23,695    $23,695
Noncompetition agreements        22,203      2,268
Customer-based intangibles       37,915     44,501
Software                          8,089      5,618
Other                             1,208        273
                                -------    -------
                                 93,110     76,355
Less accumulated amortization    57,285     40,641
                                -------    -------
                                $35,825    $35,714
                                =======    =======
</TABLE>

                                       31
<PAGE>
 
F.  ACCRUED EXPENSES AND OTHER LIABILITIES
    (IN THOUSANDS)

Accrued expenses and other liabilities consist of the following:

<TABLE>
<CAPTION>
                                    December 31,
                                 1997        1998
                                 ----        ----
<S>                           <C>          <C>
Deferred savings and profit   
 sharing plan                  $ 3,156     $ 5,250
Accrued employee benefits        2,100       3,412
Employee stock withholdings        936       4,265
Accrued payroll taxes              609       6,164
Accrued rent obligations         1,299       2,130
Other                            5,091       9,426
                               -------     -------
                               $13,191     $30,647
                               =======     =======
</TABLE>
                                                                                
G.  CAPITAL LEASE OBLIGATIONS
(IN THOUSANDS)

The Company finances certain equipment through capital leases.  At December 31,
1998, future minimum lease payments under noncancelable capital leases, together
with the present value of minimum lease payments, are summarized below:

<TABLE>
<S>                                          <C> 
Year ending December 31, 1999                   $1,044
Year ending December 31, 2000                    1,017
Year ending December 31, 2001                      782
Year ending December 31, 2002                      564
                                                ------
                                           
Total minimum payments                           3,407
Less amount representing future interest           477
                                                ------
                                           
Present value of net minimum payments            2,930
Less current portion                               954
                                                ------
                                           
Long-term portion of capital lease payments     $1,976
                                                ======
</TABLE>
                                                                                
H.  NOTES PAYABLE

In conjunction with the Company's acquisition of GSE Erudite Software, Inc. on
April 20, 1998, the Company issued a $1.0 million dollar note payable due one
year from the purchase date.

At December 31, 1997, Icom Systems Ltd., had $3.9 million of outstanding debt, 
which was paid during 1998.

I.  CAPITAL STOCK

In May 1998, the stockholders approved an amendment to the Company's Articles of
Organization increasing the number of shares of Common Stock authorized for
issuance to 200,000,000 shares.

                                       32
<PAGE>
 
The Company has three classes of share capital: 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 as a single
class with holders of Common Stock but are entitled to 10 votes for each share
held.  The Board of Directors is authorized to determine the rights,
preferences, privileges and restrictions, including the dividend rights,
conversion rights, voting rights, terms of redemption price or prices and
liquidation preferences, 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 645, 998 and 1,312 shares in 1996, 1997 and
1998, respectively.  Shares of common stock reserved for conversions totaled
285,303 at December 31, 1998.


J.  STOCK OPTION, STOCK PURCHASE, COMPENSATION AND RETIREMENT PLANS

STOCK OPTION PLANS: The Company has three stock-based compensation plans, which
are described below.  The Company adopted the disclosure provisions of SFAS 123,
"Accounting for Stock-Based Compensation," in 1996 and has continued to apply
APB Opinion 25 and related Interpretations in accounting for its plans.  Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, the Company's net income and earnings per share for
the years ended December 31, 1996, 1997 and 1998 would have been reduced to the
pro forma amounts indicated below:


<TABLE>
<CAPTION>
                                   Years Ended December 31,
                                 1996       1997         1998
                           ----------------------------------------
                            (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
                            
<S>                          <C>          <C>          <C>    
Net income - as reported       $ 28,173   $ 51,371    $ 96,349
Net income - pro forma           27,379     49,386      91,020
Net income per share -                                        
 as reported (diluted)              .40        .72        1.33
Net income per share -                                        
 pro forma (diluted)                .39        .69        1.26 
</TABLE>


The effects of applying SFAS 123 in this pro forma disclosure are not likely to
be representative of effects on reported net income for future years.  SFAS 123
does not apply to awards prior to 1995 and additional awards in future years are
anticipated.

The fair market value of each stock option is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:  an expected life of 4.5 years in 1996 and 4.0 years in 1997 and
1998, expected volatility of 37% in 1996 , 41% in 1997 and 47% in 1998, a
dividend yield of 0% and risk-free interest rates between 4.22-6.70%.

The 1992 Stock Option Plan provides for grants of stock options for up to
3,600,000 shares of the Company's Common Stock to employees, officers and
directors of, and consultants and advisors to, the Company.  Generally, options
expire five years from the date of grant, require a purchase price of not less
than 100% of the fair market value of the stock as of the date of grant, and are
exercisable at such time or times as the Board of Directors in each case
determines. The Company may grant options that are intended to qualify as
incentive stock options under Section 422 of the Internal Revenue Code
("incentive stock options") or nonstatutory options not intended to qualify as
incentive stock options.

The 1998 Stock Incentive Plan provides for grants of stock options for up to
2,000,000 shares of the Company's Common Stock to employees, officers and
directors of, and consultants and advisors to, the Company. Generally, options
expire five years from the date of grant, require a purchase price of not less
than 100% of the fair market value of the stock as of the date of grant, and are
exercisable at such time or times as the Board of Directors in each case
determines. The Company may grant options that are intended to qualify as
incentive stock options under Section 422 of the Internal Revenue Code
("incentive stock options") or nonstatutory options, restricted stock awards and
other stock-based awards, including the grant of shares based upon certain
conditions not intended to qualify as incentive stock options.

                                       33
<PAGE>
 
The weighted-average fair value of options granted under both Plans during the
years ended December 31, 1996, 1997 and 1998 was $2.45, $8.40 and $14.73,
respectively.

Transactions under the Companys' stock option plans are as follows:

<TABLE>
<CAPTION>
                                                    Weighted
                                     Common          Average
                                      Stock       Exercise Price
                                    ---------     -------------- 
<S>                                <C>            <C>
Outstanding at December 31, 1995    1,793,469          $ 4.00
  Granted                             799,630            5.92
  Exercised                          (346,434)           3.15
  Canceled/Expired                   (128,000)           4.29
                                    --------- 
Outstanding at December 31, 1996    2,118,665            4.84
  Granted                             575,432           19.91
  Exercised                          (413,004)           3.73
  Canceled/Expired                    (93,998)           6.83
                                    --------- 
Outstanding at December 31, 1997    2,187,095            8.93
  Granted                             953,789           34.15
  Exercised                          (782,577)           4.21
  Canceled/Expired                   (120,247)          18.80
                                    --------- 
Outstanding at December 31, 1998    2,238,060          $20.80
</TABLE>

The following table summarizes information about stock options that were
outstanding at December 31, 1998:

<TABLE> 
<CAPTION> 
                                         Options Outstanding                     Options Exercisable 
                           ------------------------------------------------    --------------------------
                                         Weighted Average
                                            Remaining                           
         Range of            Number        Contractual      Weighted Average    Number      Weighted Average
      Exercise Prices      Outstanding        Life           Exercise Price   Exercisable    Exercise Price
      ---------------      -----------  ------------------  ----------------  -----------   ----------------
<S>                      <C>            <C>                 <C>               <C>           <C>
     $ 0.04  -  $ 5.19      322,740        1.3 years             $ 4.70         154,283          $   4.17
     $ 5.42  -  $ 7.25      472,987        2.1 years             $ 6.02          60,337          $   6.06
     $ 7.35  -  $15.06      361,333        3.0 years             $14.46               -                 -
     $15.32  -  $28.19      145,250        4.6 years             $27.70               -                 -
     $30.69  -  $38.38      822,250        4.3 years             $33.97          36,844           $ 32.58
     $43.50  -  $55.63      113,500        3.9 years             $44.41               -                 -
                           ---------
     $ 0.04  -  $55.63    2,238,060        3.2 years             $20.80         251,464            $ 9.16
</TABLE>

STOCK PURCHASE PLANS: The Company's 1983 Restricted Stock Purchase Plan provides
for grants of 2,025,000 shares of Common Stock to be made to key employees at
the discretion of the compensation committee of the Board of Directors.  No
grants were issued during 1996 through 1998.  At December 31, 1998, 1,377,760
shares remained available for future grants.  Restrictions on the sale or
transfer of shares lapse three years after the date of grant.  As grants are
issued, deferred compensation equivalent to the market value at the date of
grant, less $.10 per share of the purchase price, is amortized to compensation
expense over the three-year vesting period.  The amount of amortization for 1996
and 1997 was $54 and $47, respectively. There was no amortization in 1998.

The Company's 1992 Employee Stock Purchase Plan provides for the purchase of
2,550,000 shares of Common Stock by qualifying employees at a purchase price of
85% of the market value of the stock on the purchase date.  During 1996, 1997
and 1998, participants in this plan purchased 257,776, 136,700 and 72,832
shares, respectively.  Shares available for future purchases totaled 1,234,032
at December 31, 1998.

                                       34
<PAGE>
 
COMPENSATION PLANS: During 1988, the Company 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 1996, 1997 and 1998 approximated $4,224, $6,661 and
$9,505, respectively.

DEFERRED SAVINGS AND PROFIT SHARING PLAN: During 1984, the Company established a
deferred savings and profit sharing plan under Section 401(k) of the Internal
Revenue Code.  The plan enables eligible employees to reduce their taxable
income by contributing up to 15% of their salary to the plan.  The Company makes
discretionary contributions to the plan based on a percentage of contributions
made by the eligible employees and profits of the Company.  The Company's
contributions vest after the employee has completed 42 months of service and for
1996, 1997 and 1998 amounted to approximately $705, $3,156 and $4,818,
respectively.


K.  COMMITMENTS AND CONTINGENCIES

The Company's corporate offices are located in Boston, Massachusetts.  The
building is leased from a partnership in which certain officers, directors and
shareholders of the Company are limited partners.  The lease is for a term of
twenty years at annual rentals of $682,000 through February 1996 and at
prevailing market rates in subsequent years through 2006.  The Company is also
required to pay specified percentages of annual increases in real estate taxes
and operating expenses.

The Company leases additional office space and apartments under operating
leases, some of which may be renewed for periods up to five years, subject to
increased rentals.  Rental expense for all of the Company's facilities amounted
to approximately $11.6 million in 1996, $13.0 million in 1997 and $16.1 million
in 1998.  The Company is committed to minimum annual rental payments under all
leases of approximately $17.7 million in 1999, $14.9 million in 2000, $13.0
million in 2001, $10.7 million in 2002, $7.2 million in 2003 and an aggregate of
$8.8 million from 2004 to 2006.

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


L.  INCOME TAXES

The provision for income taxes includes federal, state and foreign income taxes
currently payable and those deferred because of temporary differences between
the financial statement and tax bases of assets and liabilities.

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>

                   Years Ended December 31 ,
                1996         1997           1998
             ----------------------------------------
                         (IN THOUSANDS) 
<S>            <C>          <C>           <C>
                                          
Current:    
  Federal     $19,936        $35,236        $ 67,740
  State         4,830          8,161          15,499
  Foreign          64            211           5,121
              -------        -------        --------
   Total       24,830         43,608          88,360
                                         
Deferred:                                
  Federal      (3,948)        (7,073)         (7,626)
  State          (255)           251          (2,717)
  Foreign         (64)           (74)           (210)
              -------        -------        --------
   Total       (4,267)        (6,896)        (10,553)
              -------        -------        --------
              $20,563        $36,712        $ 77,807
              =======        =======        ========
</TABLE>
                                                                                

                                       35
<PAGE>
 
A reconciliation of the statutory income tax provision with the effective income
tax provision is as follows:

<TABLE>
<CAPTION>
                                    Years Ended December 31,
                                 1996         1997        1998
                                -----------------------------
                                       (IN THOUSANDS) 
<S>                            <C>         <C>        <C>
Federal income taxes at 35%      $17,058    $30,829     $60,955
State income taxes,                2,996      5,164       8,307
  net of federal tax benefit                           
Merger related costs                   -                  2,916
Tax credits                         (130)       (35)          -
Other, net                           639        754       5,629
                                 -------    -------     -------
                                 $20,563    $36,712     $77,807
                                 =======    =======     =======
</TABLE>
                                                                                
The components of the net deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                     Years Ended December 31,
                                         1997        1998
                      
                                          (IN THOUSANDS)    
Current:                                                    
<S>                                  <C>           <C>      
 Allowance for doubtful accounts                            
  and other reserves                   $   5,476    $14,206 
 Employee medical benefits                  (374)      (367)
 Accrued expenses                            397        946 
                                       ---------  ---------
Total current assets                   $   5,499    $14,785 
                                       =========  ========= 
                                                            
Long-term:                                                  
 Customer based intangibles            $  (5,478)   $(4,980)
 Amortization of intangible assets        11,118     11,913 
 Accrued rents                                70          - 
 Depreciation and other                       73        117 
                                       ---------  ---------
Long-term assets (liabilities)         $   5,783    $ 7,050 
                                       =========  =========  
</TABLE>
                                                                                
The current component is included in prepaid expenses and other current assets
on the balance sheet.  The long-term component is included in the other assets
on the balance sheet.


M.  RESEARCH AND DEVELOPMENT

Research and development expenses included in SG&A were approximately $4.1
million, $2.9 million and $3.5 million in 1996, 1997 and 1998, respectively.


N.  BUSINESS ACQUISITIONS

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

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

On June 1, 1998, the Company completed its acquisition of Bricker &
Associates, Inc. ("Bricker"), an operations improvement consulting firm, under
an Agreement and Plan of Merger by and among the Company, Beta Acquisition Corp.
and Bricker, whereby the Company agreed to acquire all of the outstanding
capital stock and options of Bricker

                                       36
<PAGE>
 
in exchange for approximately 2,336,196 million shares of Keane, Inc. common
stock (the "merger"). The merger has been accounted for as a pooling-of-
interests.

During the quarter ended June 30, 1998, the Company incurred a $4.1 million
charge to operations to reflect investment banking, legal, accounting and other
professional fees associated with the Bricker transaction.

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

<TABLE>
<CAPTION>
                                           Three months ended
                                   March 31, 1998         March 31, 1997
                                   --------------       ------------------
                                            (IN THOUSANDS)
<S>                                <C>                      <C>
Revenue                                               
     Keane, Inc.                       $209,162              $141,110
     Bricker & Associates, Inc.           5,800                 3,191
                                       --------              --------
Combined revenue                       $214,962              $144,301
                                       ========              ========
                                                      
Net income                                            
     Keane, Inc.                       $ 19,080              $  9,848
     Bricker & Associates, Inc.           1,846                   168
                                       --------              --------
Combined net income                    $ 20,926              $ 10,016
                                       ========              ========
</TABLE>
                                                                               

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

During the quarter ended September 30, 1998, the Company incurred a $1.9 million
charge to operations to reflect investment banking, legal, accounting and other
professional fees associated with the Icom transaction.

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

<TABLE>
<CAPTION>
                                         Six months ended
                                  June 30, 1998   June 30, 1997
                                  -------------   -------------
                                         (IN THOUSANDS)
<S>                          <C>                  <C>
Revenue                                           
     Keane, Inc.                    $465,655          $299,795
     Icom Systems Ltd.                25,861            12,746
                                    --------          --------
Combined revenue                    $491,516          $312,541
                                    ========          ========
Net income                                        
     Keane, Inc.                    $ 41,594          $ 21,450
     Icom Systems Ltd.                 1,697               425
                                    --------          --------
Combined net income                 $ 43,291          $ 21,875
                                    ========          ========
</TABLE>
                                                                                
  On October 9, 1998 the Company acquired all of the outstanding capital stock
of Fourth Tier, Inc. ("Fourth Tier"), a privately-held provider of enterprise
relationship management consulting services based in Los Angeles, California, in
exchange for 915,571 shares of Keane, Inc. common stock. The merger has been
accounted for as a pooling-of-interests.

                                       37
<PAGE>
 
During the quarter ended December 30, 1998, the Company incurred a $2.1
million charge to operations to reflect investment banking, legal, accounting
and other professional fees associated with the Fourth Tier transaction. In
addition, an additional charge for $1.7 million as a result of the requirement
to convert Fourth Tier, Inc. from cash to accrual basis for tax reporting.

Revenue and net income of the combined entities for the nine-month period prior
to the merger and the corresponding period in the prior year are presented in
the following table. Prior to the acquisition, there were no intercompany
transactions between the two companies.
 
<TABLE>
<CAPTION>
                                         Nine months ended   
                                September 30, 1998   September 30, 1997   
                                ------------------   ------------------
                                           (IN THOUSANDS)
<S>                              <C>                       <C>                
Revenue                                                                   
     Keane, Inc.                   $772,056               $492,895      
     Fourth Tier, Inc.               10,369                  4,322      
                                   --------               --------      
Combined revenue                   $782,425               $497,217      
                                   ========               ========      
                                                                        
Net income                                                              
     Keane, Inc.                   $ 68,568               $ 34,637      
     Fourth Tier, Inc.                4,205                  2,179      
                                   --------               --------      
Combined net income                $ 72,773               $ 36,816      
                                   ========               ========       
</TABLE>
                                                                                

O.  BANK DEBT

In July 1995, the Company secured a $20 million demand line of credit from two
banks, which expires in May of 1999. Borrowings will bear interest at the bank's
base rate (the prime rate). There were no borrowings under either line during
1997 or 1998.


P.  EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                                       Years Ended December 31,
                                               1996              1997               1998
                                               ----              ----               ----
                                                (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S>                                      <C>                <C>               <C> 
Net income                               $    28,173            $51,371            $96,349
Weighted average number
 of common shares
  outstanding used in calculation
    of basic earnings per share               69,780             70,096             71,053

Incremental shares from the assumed
 exercise of dilutive stock options              760              1,507              1,231
                                         -----------        -----------        ----------- 
Weighted average number of common        
 shares outstanding used in
  calculation of diluted earnings
   per share                                  70,540             71,603             72,284
                                         ===========        ===========        =========== 
Earnings per share
   Basic                                 $       .40        $       .73        $      1.36
                                         ===========        ===========        =========== 
   Diluted                               $       .40        $       .72        $      1.33
                                         ===========        ===========        =========== 
</TABLE>
                                                                                
For the period ending December 31, 1998, there were 120,000 options for common 
stock, which were excluded because they were anti-dilutive.

                                       38
<PAGE>
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

Not applicable.


PART III
--------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The response to this Item is contained in part under the caption "Executive
Officers of the Company" in Part I hereof, and the remainder is incorporated
herein by reference to the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held May 26, 1999 (the "1999 Proxy Statement") under the
caption "Election of Directors."


ITEM 11. EXECUTIVE COMPENSATION

The response to this Item is incorporated herein by reference to the Company's
1999 Proxy Statement under the caption "Executive Compensation."


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The response to this Item is incorporated herein by reference to the Company's
1999 Proxy Statement under the caption "Stock Ownership of Certain Beneficial
Owners and Management."


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The response to this Item is incorporated herein by reference to the Company's
1999 Proxy Statement under the caption "Certain Related Party Transactions."

                                       39
<PAGE>
 
PART IV
-------

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)    Financial Statements
       --------------------

The following consolidated financial statements are included in Part II, Item 8:
 
                                                                Page(s)
 
Report of Independent Accountants...............................   24
 
Consolidated Balance Sheets as of December 31, 1997 and 1998....   25
 
Consolidated Statements of Income
For the Years Ended December 31, 1996, 1997 and 1998............   26
 
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1996, 1997 and 1998............   27
 
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1997 and 1998............   28
 
Notes to Consolidated Financial Statements......................  29-38
 

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

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


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

The Company filed the following current Reports on Form 8-K during the 
three-month period ended December 31, 1998:
 
     i.   Current Report on Form 8-K, dated September 30, 1998, reaffirming that
          there were no known issues with respect to the Company's business
          outlook.
     ii.  Current Report on Form 8-K, dated October 6, 1998, announcing
          agreement to acquire Fourth Tier, Inc.
     iii. Current Report on Form 8-K, dated October 9, 1998, announcing the
          acquisition of Fourth Tier, Inc.

                                       40
<PAGE>
 
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/ John F. Keane
                                   -----------------
                                   By:  John F.  Keane
                                   President and Chief Executive Officer
                                   (Principal Executive Officer)


Date:      March 26, 1999


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.


<TABLE>
<CAPTION>


/s/ John F. Keane             March 26, 1999       /s/ Wallace A. Cataldo            March 26, 1999 
-----------------             --------------       ----------------------            -------------- 
<S>                           <C>                   <C>                              <C>            
                              Date                  Wallace A. Cataldo               Date            
John F. Keane                                       Vice President - Finance and
President,                                          Administration
Chief Executive Officer                             (Principal Financial Officer)
and Director                                        (Principal Accounting Officer)
(Principal Executive Officer)

/s/ Brian T. Keane            March 26, 1999        /s/ John F. Keane, Jr.           March 26, 1999
------------------            --------------        ----------------------           --------------  
Brian T. Keane                                      John F. Keane, Jr.               Date
Director                                            Director     

/s/ John F. Rockart           March 26, 1999        /s/ Robert A. Shafto             March 26, 1999
------------------            --------------        ----------------------           --------------  
                              Date                  Robert A. Shafto                 Date
John F. Rockart                                     Director
Director

/s/ Philip J. Harkins         March 26, 1999        /s/ Winston R. Hindle, Jr.          March 26, 1999
------------------            --------------        ----------------------           --------------  
Philip J. Harkins             Date                  Winston R. Hindle, Jr.           Date
Director                                            Director
                 
</TABLE>

                                       41
<PAGE>
 
Exhibit Index
-------------
<TABLE> 
<S>     <C> 

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

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

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

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

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

*10.3   1982 Incentive Stock Option Plan (the "Option Plan") is incorporated
        herein by reference to Exhibit 10(c) to the Registrant's Annual Report
        on Form 10-K for the year ended December 31, 1988 (the "1988 
        Form 10-K"). On January 9, 1990, the Board of Directors of the
        Registrant adopted an Amendment to Section 4 of the Option Plan
        increasing the number of shares eligible for issuance thereunder to
        900,000.

*10.4   Amendments to the Option Plan effective as of February 15, 1990 and
        March 7, 1990 are incorporated herein by reference to Exhibit 10.4 to
        the Registrant's Annual Report on Form 10-K for the year ended December
        31, 1990 (the "1990 Form 10-K").

*10.5   1978 Employee Stock Purchase Plan (the "Stock Purchase Plan") is
        incorporated herein by reference to Exhibit 10(b) to the 1988 Form 10-K.

*10.6   Amendments to the Stock Purchase Plan effective as of February 15, 1990
        are incorporated herein by reference to Exhibit 10.6 to the Registrant's
        Annual Report on Form 10-K for the year ended December 31, 1992 (the
        "1992 Form 10-K").

*10.7   1983 Restricted Stock Plan (the "Restricted Stock Plan") is incorporated
        herein by reference to Exhibit 10.5 to the Registration Statement.

*10.8   Amendment to the Restricted Stock Plan effective as of February 15, 1990
        is incorporated herein by reference to Exhibit 10-4 of the 1990 
        Form 10-K.

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

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

10.11   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.

10.12   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.
 </TABLE>

*    Management contract or compensatory plan or arrangement required to be
     filed as an exhibit to this form pursuant to Item 14(A) and (C) of this
     report.

                                       42
<PAGE>

<TABLE> 
<C>    <S>  
10.13  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.

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

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

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

21.     Schedule of Subsidiaries of the Registrant.............................................,...  Ex 21-1
 
23.     Consent of PricewaterhouseCoopers LLP......................................................  Ex 23-1
 
27.1    Restated Financial Data Schedule for the year ended December 31, 1996......................  Ex 27-1
 
27.2    Restated Financial Data Schedule for the three months ended March 31, 1997.................  Ex 27-2
 
27.3    Restated Financial Data Schedule for the six months ended June 30, 1997....................  Ex 27-3
 
27.4    Restated Financial Data Schedule for the nine months ended September 30, 1997..............  Ex 27-4
 
27.5    Financial Data Schedule for the year ended December 31, 1997...............................  Ex 27-5
 
27.6    Restated Financial Data Schedule for the three months ended March 31, 1998.................  Ex 27-6
 
27.7    Restated Financial Data Schedule for the six months ended June 30, 1998....................  Ex 27-7
 
27.8    Restated Financial Data Schedule for the nine months ended September 30, 1998..............  Ex 27-8
 
27.9    Financial Data Schedule for the year ended December 31, 1998...............................  Ex 27-9

</TABLE>

                                       43