**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-Q**

 
| **(Mark  One)** |       |                                                                                                                                                                                                                                                                                                                                                               |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                         |
| ý          | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                       |
|            | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                         |
| ** **      | ** ** | **For the quarterly  period ended June 30, 2005**                                                                                                                                                                                                                                                                                                                  |
| ** **      | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                         |
| **Or**          |
| ** **      | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                         |
| o               | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                      |
|            | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                         |
| ** **      | ** ** | **For the transition  period  from                            to                            ** |

 

**Commission File Number 1-7516**

 

**KEANE, INC.**

(Exactname of registrant as specified in its charter)

 
| **MASSACHUSETTS**                                           | ** ** | **04-2437166**                     |
|------------------------------------------------------------------|------------|------------------------------------|
| (State  or other jurisdiction of  incorporation or organization) | ** ** | (IRS  Employer Identification No.) |
| ** **                                                       | ** ** | ** **                         |
| **100 City Square, Boston, Massachusetts**                  | ** ** | **02129**                     |
| (Address  of principal executive offices)                        | ** ** | (Zip  Code)                        |

 

Registrant’stelephone number, including area code **(617)241-9200**

 

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 (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days. Yes ý    No o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the ExchangeAct). Yes ý    No o

 

As of June 30, 2005, there were 60,947,363shares of the registrant’s Common Stock, $.10 par value per share, and noshares of the registrant’s Class B Common Stock, $.10 par value per share,issued and outstanding.

 

 

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**Keane, Inc.**

 

**Table ofContents**

 
| **Part I.**   | **Financial Information**                                                                                            | ** ** |
|---------------|----------------------------------------------------------------------------------------------------------------------|------------|
|          |                                                                                                                 |       |
| Item 1.       | Unaudited Condensed Consolidated  Statements of Income for the three and six months ended June 30, 2005 and  2004    |       |
|          |                                                                                                                 |       |
|          | Unaudited Condensed  Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004                           |       |
|          |                                                                                                                 |       |
|          | Unaudited Condensed  Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004 |       |
|          |                                                                                                                 |       |
|          | Notes to Unaudited Condensed  Consolidated Financial Statements                                                      |       |
|          |                                                                                                                 |       |
| Item 2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          |       |
|          |                                                                                                                 |       |
| Item 3.       | Quantitative  and Qualitative Disclosures About Market Risk                                                          |       |
|          |                                                                                                                 |       |
| Item 4.       | Controls and  Procedures                                                                                             |       |
|          |                                                                                                                 |       |
| **Part II.**  | **Other Information**                                                                                                | ** ** |
| ** **    | ** **                                                                                                           | ** ** |
| Item 2.       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                         |       |
|          |                                                                                                                 |       |
| Item 4.       | Submission  of Matters to a Vote of Security Holders                                                                 |       |
|          |                                                                                                                 |       |
| Item 6.       | Exhibits                                                                                                             |       |
|          |                                                                                                                 |       |
| Signatures    |                                                                                                                 |       |
|          |                                                                                                                 |       |
| Exhibit Index |                                                                                                                 |       |

 

2

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**Part I. Financial Information**

 

**Item 1. Financial Statements**

 

**Keane, Inc.**

**UnauditedCondensed Consolidated Statements of Income**

** **
| ** **                                                                       | ** ** | **Three Months Ended June 30,**             | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                                    | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                       | ** ** | **(In thousands except per share amounts)** | ** ** |
|                                                                             |       |                                        |       |                          |       |   |   |   |   |
| **Revenues**                                                                     |       | $                                           | 237,818    |                          | $          | 231,712 |   | $ | 470,022 |   | $ | 447,536 |   |
| ** **                                                                       |       |                                        |       |                          |       |   |   |   |   |
| **Operating  expenses**                                                          |       |                                        |       |                          |       |   |   |   |   |
| Salaries, wages,  and other direct costs                                         |       | 166,461                                     |       | 161,710                       |       | 328,654 |   | 311,700 |   |
| Selling,  general, and administrative expenses                                   |       | 56,304                                      |       | 52,665                        |       | 110,476 |   | 105,882 |   |
| Amortization of  intangible assets                                               |       | 3,860                                       |       | 4,035                         |       | 7,930 |   | 7,948 |   |
| **Operating  income**                                                            |       | 11,193                                      |       | 13,302                        |       | 22,962 |   | 22,006 |   |
|                                                                             |       |                                        |       |                          |       |   |   |   |   |
| **Other  income (expense)**                                                      |       |                                        |       |                          |       |   |   |   |   |
| Interest and  dividend income                                                    |       | 1,128                                       |       | 875                           |       | 2,233 |   | 1,930 |   |
| Interest expense                                                                 |       | (1,406                                      | )          | (1,400                        | )          | (2,822 | ) | (2,838 | ) |
| Other (expense)  income, net                                                     |       | (174                                        | )          | 166                           |       | (190 | ) | 291 |   |
| Minority  interest                                                               |       | 190                                         |       | 509                           |       | 873 |   | 1,270 |   |
| **Income  before income taxes**                                                  |       | 10,931                                      |       | 13,452                        |       | 23,056 |   | 22,659 |   |
| Provision for  income taxes                                                      |       | 3,888                                       |       | 5,381                         |       | 8,738 |   | 9,064 |   |
| **Net  income**                                                                  |       | $                                           | 7,043      |                          | $          | 8,071 |   | $ | 14,318 |   | $ | 13,595 |   |
| Basic earnings  per share                                                        |       | $                                           | 0.11       |                          | $          | 0.13 |   | $ | 0.23 |   | $ | 0.22 |   |
|                                                                             |       |                                        |       |                          |       |   |   |   |   |
| Diluted earnings  per share                                                      |       | $                                           | 0.11       |                          | $          | 0.12 |   | $ | 0.22 |   | $ | 0.20 |   |
|                                                                             |       |                                        |       |                          |       |   |   |   |   |
| Basic weighted  average common shares outstanding                                |       | 61,675                                      |       | 62,746                        |       | 61,932 |   | 63,221 |   |
| Diluted weighted  average common shares and common share equivalents outstanding |       | 70,492                                      |       | 71,896                        |       | 70,776 |   | 72,473 |   |

 

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

 

3

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**Keane, Inc.**

 

**Unaudited Condensed Consolidated Balance Sheets**

** **
| ** **                                       | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                       | ** ** | **(In thousands)** | ** ** |
|                                             |       |               |       |
| **Assets**                                       |       |               |       |                   |       |
| Current:                                         |       |               |       |                   |       |
| Cash and cash  equivalents                       |       | $                  | 59,673     |                   | $          | 67,488 |   |
| Restricted cash                                  |       | 1,829              |       | 986                    |       |
| Marketable  securities                           |       | 120,292            |       | 130,678                |       |
| Accounts  receivable, net                        |       | 142,128            |       | 126,467                |       |
| Prepaid expenses  and deferred taxes             |       | 22,575             |       | 16,515                 |       |
| Total current assets                             |       | 346,497            |       | 342,134                |       |
|                                             |       |               |       |                   |       |
| Property and  equipment, net                     |       | 75,909             |       | 76,761                 |       |
| Goodwill                                         |       | 311,431            |       | 305,965                |       |
| Customer lists, net                              |       | 47,052             |       | 53,040                 |       |
| Other intangible  assets, net                    |       | 7,915              |       | 9,904                  |       |
| Other assets, net                                |       | 15,193             |       | 16,390                 |       |
| Total assets                                     |       | $                  | 803,997    |                   | $          | 804,194 |   |
|                                             |       |               |       |                   |       |
| **Liabilities**                                  |       |               |       |                   |       |
| Current:                                         |       |               |       |                   |       |
| Short-term debt                                  |       | $                  | 423        |                   | $          | 892 |   |
| Accounts payable                                 |       | 6,258              |       | 9,511                  |       |
| Accrued  restructuring                           |       | 3,499              |       | 3,513                  |       |
| Unearned income                                  |       | 9,462              |       | 9,376                  |       |
| Accrued  compensation                            |       | 36,537             |       | 39,763                 |       |
| Accrued expenses  and other liabilities          |       | 44,737             |       | 39,269                 |       |
| Total current  liabilities                       |       | 100,916            |       | 102,324                |       |
|                                             |       |               |       |                   |       |
| Long-term debt                                   |       | 150,091            |       | 150,017                |       |
| Accrued  long-term building costs                |       | 39,280             |       | 39,545                 |       |
| Accrued  long-term restructuring                 |       | 3,551              |       | 5,164                  |       |
| Other long-term  liabilities                     |       | 14,596             |       | 13,491                 |       |
| Deferred income  taxes                           |       | 30,313             |       | 25,924                 |       |
| Total  liabilities                               |       | 338,747            |       | 336,465                |       |
|                                             |       |               |       |                   |       |
| **Minority  Interest**                           |       | 6,658              |       | 6,026                  |       |
| ** **                                       |       |               |       |                   |       |
| **Stockholders’  Equity**                   |       |               |       |                   |       |
| ** **                                       |       |               |       |                   |       |
| Common stock                                     |       | 6,095              |       | 6,218                  |       |
| Additional  paid-in capital                      |       | 17,250             |       | 33,752                 |       |
| Accumulated  other comprehensive loss            |       | (7,679             | )          | (6,657                 | )          |
| Retained  earnings                               |       | 445,364            |       | 431,046                |       |
| Unearned  compensation                           |       | (2,438             | )          | (2,656                 | )          |
|                                             |       |               |       |                   |       |
| Stockholders’  equity                       |       | 458,592            |       | 461,703                |       |
| Total  liabilities and stockholders’ equity |       | $                  | 803,997    |                   | $          | 804,194 |   |

 

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

 

4

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**Keane, Inc.**

 

**Unaudited Condensed Consolidated Statements of Cash Flows**

** **
| ** **                                                                                          | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| ** **                                                                                          | ** ** | **(Dollars in thousands)**    | ** ** |
| **Cash  flows from operating activities:**                                                          |       |                          |       |   |   |
| Net income                                                                                          |       | $                             | 14,318     |   | $ | 13,595 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:                  |       |                          |       |   |   |
| Depreciation and  amortization                                                                      |       | 14,200                        |       | 13,947 |   |
| Deferred income  taxes                                                                              |       | 5,630                         |       | 3,593 |   |
| Provision for  doubtful accounts                                                                    |       | 3,119                         |       | 3,466 |   |
| Minority  interest                                                                                  |       | (873                          | )          | (1,270 | ) |
| Loss (gain) on  sale of property and equipment                                                      |       | (159                          | )          | 91 |   |
| Loss (gain) on  sale of investments                                                                 |       | 134                           |       | (186 | ) |
| Other charges,  net                                                                                 |       | (355                          | )          | (2,278 | ) |
| Changes in  operating assets and liabilities, net of acquisitions:                                  |       |                          |       |   |   |
| (Increase) in  accounts receivable                                                                  |       | (15,338                       | )          | (25,948 | ) |
| (Increase) in  prepaid expenses and other assets                                                    |       | (4,455                        | )          | (2,048 | ) |
| (Decrease)  increase in accounts payable, accrued expenses, unearned income, and other  liabilities |       | (5,989                        | )          | 3,219 |   |
| (Decrease)  increase in income taxes payable                                                        |       | (933                          | )          | 231 |   |
| **Net  cash provided by operating activities**                                                      |       | 9,299                         |       | 6,412 |   |
| ** **                                                                                          |       |                          |       |   |   |
| **Cash  flows from investing activities:**                                                          |       |                          |       |   |   |
| Purchase of  investments                                                                            |       | (23,407                       | )          | (32,521 | ) |
| Sale and  maturities of investments                                                                 |       | 33,185                        |       | 61,118 |   |
| Purchase of  property and equipment                                                                 |       | (7,931                        | )          | (6,380 | ) |
| Restricted cash                                                                                     |       | 35                            |       | (151 | ) |
| Proceeds from  the sale of property and equipment                                                   |       | 773                           |       | 153 |   |
| Payments for  current year acquisitions, net of cash acquired                                       |       | (1,270                        | )          | (18,039 | ) |
| Payments for  prior years acquisitions, net of cash acquired                                        |       | (3,122                        | )          | (64 | ) |
| **Net  cash (used for) provided by investing activities**                                           |       | (1,737                        | )          | 4,116 |   |
| ** **                                                                                          |       |                          |       |   |   |
| **Cash  flows from financing activities:**                                                          |       |                          |       |   |   |
| Debt issuance  costs                                                                                |       | —                        |       | (42 | ) |
| Principal  payments under capital lease obligations                                                 |       | (161                          | )          | (269 | ) |
| Proceeds from  issuance of common stock                                                             |       | 2,353                         |       | 2,932 |   |
| Repurchase of  common stock                                                                         |       | (17,563                       | )          | (30,096 | ) |
| **Net  cash used for financing activities**                                                         |       | (15,371                       | )          | (27,475 | ) |
| Effect of  exchange rate changes on cash                                                            |       | (6                            | )          | 24 |   |
| **Net  decrease in cash and cash equivalents**                                                      |       | (7,815                        | )          | (16,923 | ) |
| **Cash  and cash equivalents at beginning of period**                                               |       | 67,488                        |       | 56,736 |   |
| **Cash  and cash equivalents at end of period**                                                     |       | $                             | 59,673     |   | $ | 39,813 |   |
| ** **                                                                                          |       |                          |       |   |   |   |   |
| **Supplemental  information:**                                                                      |       |                          |       |   |   |
| Income taxes  paid                                                                                  |       | $                             | 9,725      |   | $ | 5,367 |   |
| Interest paid                                                                                       |       | $                             | 1,505      |   | $ | 1,546 |   |

 

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

 

5

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**Keane, Inc.**

 

**Notes to Unaudited Condensed Consolidated FinancialStatements**

 

**Note 1.****                   ****Basis of Presentation**

 

The accompanying unauditedcondensed consolidated financial statements have been prepared in accordancewith generally accepted accounting principles for interim financial informationand, accordingly, do not include all of the information and footnotes requiredby generally accepted accounting principles for complete financial statements.The accompanying unaudited condensed consolidated financial statements includethe accounts of Keane, Inc. and our wholly and majority ownedsubsidiaries. In the opinion of management, all adjustments, consistingprimarily of normal recurring accruals, considered necessary for a fairpresentation of the results of operations for the interim periods reported andof our financial condition as of the date of the interim balance sheet havebeen included. Operating results for the three and six months ended June 30,2005 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2005 or for any other period.

 

The balance sheet atDecember 31, 2004 has been derived from our audited consolidated financialstatements at that date but does not include all of the information andfootnotes required by generally accepted accounting principles for completefinancial statements.

 

Certain reclassificationshave been made to the 2004 financial statements to conform to the 2005presentation.  These reclassificationshave no effect on previously reported net income or stockholder’s equity.

 

For further information,refer to the consolidated financial statements and footnotes thereto includedin our Annual Report on Form 10-K for the year ended December 31,2004 filed with the Securities and Exchange Commission on March 15, 2005.

 

**Note 2.****                   ****Earnings Per Share Data**

 

The computation of earningsper share for the three and six months ended June 30, 2005 and 2004 is asfollows (in thousands, except per share data):

 
| ** **                                                                                                                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                            | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income used  for basic earnings per share                                                                                         |       | $                                | 7,043      |                           | $          | 8,071 |   | $ | 14,318 |   | $ | 13,595 |   |
| Interest expense  associated with convertible debentures, including amortization of debt  issuance costs                              |       | 970                              |       | 970                            |       | 1,940 |   | 1,940 |   |
|                                                                                                                                  |       |                             |       |                           |       |   |   |   |   |
| Related tax  effect                                                                                                                   |       | (345                             | )          | (388                           | )          | (735 | ) | (776 | ) |
|                                                                                                                                  |       |                             |       |                           |       |   |   |   |   |
| Net income used  for diluted earnings per share                                                                                       |       | $                                | 7,668      |                           | $          | 8,653 |   | $ | 15,523 |   | $ | 14,759 |   |
|                                                                                                                                  |       |                             |       |                           |       |   |   |   |   |
| Weighted average  number of common shares outstanding used in calculation of basic earnings per  share                                |       | 61,675                           |       | 62,746                         |       | 61,932 |   | 63,221 |   |
| Incremental  shares from restricted stock, employee stock purchase plan, and the assumed  exercise of dilutive stock options          |       | 642                              |       | 975                            |       | 669 |   | 1,077 |   |
| Incremental  shares from assumed conversion of convertible Debentures                                                                 |       | 8,175                            |       | 8,175                          |       | 8,175 |   | 8,175 |   |
| Weighted average  number of common shares and common share equivalents outstanding used in calculation  of diluted earnings per share |       | 70,492                           |       | 71,896                         |       | 70,776 |   | 72,473 |   |
|                                                                                                                                  |       |                             |       |                           |       |   |   |   |   |
| Earnings per  share                                                                                                                   |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                                                                                 |       | $                                | 0.11       |                           | $          | 0.13 |   | $ | 0.23 |   | $ | 0.22 |   |
| Diluted                                                                                                                               |       | $                                | 0.11       |                           | $          | 0.12 |   | $ | 0.22 |   | $ | 0.20 |   |

 

Potential common sharesconsist of employee stock options and restricted common stock. Employee stockoptions to purchase 1,704,403 and 1,378,836 shares for the three months endedJune 30, 2005 and 2004, and

 

6

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1,702,702 and 1,352,097shares for the six months ended June 30, 2005 and 2004, respectively, wereoutstanding, but were not included in the computation of diluted earnings pershare because the exercise price of the stock options was greater than theaverage share price of the common shares during the period and, therefore,their effect would have been anti-dilutive.

 

Our 2.0% ConvertibleSubordinated Debentures due 2013 (the “Debentures”) are convertible at theoption of the holder into shares of our common stock at an initial conversion rateof 54.4989 shares of common stock per $1,000 principal amount of Debentures,which is equivalent to an initial conversion price of approximately $18.349 pershare. The Debentures become convertible under the following circumstances:(a) during any fiscal quarter commencing after September 30, 2003when, among other circumstances, the closing price per share of our commonstock is more than 120% of the conversion price (approximately $22.019 pershare) for at least 20 trading days in the 30 consecutive trading days endingon the last trading day of the preceding fiscal quarter; (b) during thefive business days after any five consecutive trading day period in which thetrading price per $1,000 principal amount of Debentures for each day of thatperiod was less that 98% of the product of the closing sale price per share ofour common stock and the number of shares issuable upon conversion of $1,000principal amount of the Debentures; (c) if the Debentures have been calledfor redemption; or (d) upon the occurrence of specified corporatetransactions. Approximately 8.2 million shares of our common stock would beissuable upon the conversion of all of the outstanding Debentures.

 

Weadopted the provisions of Emerging Issues Task Force (“EITF”) IssueNo. 04-8 (“EITF 04-8”), “The Effect of Contingently Convertible Debt onDiluted Earnings per Share,” in the Fourth Quarter of 2004.  EITF 04-8 requires that we includecontingently convertible debt in the calculation of diluted earnings per shareusing the if-converted method regardless of whether the market price triggerhas been met. Under the if-converted method, the debt is considered convertedto shares, with the resulting number of shares included in the denominator ofthe earnings per share calculation and the related interest expense (net oftax) added back to the numerator of the earnings per share calculation. EITF04-8 also requires the restatement of previously reported diluted earnings pershare upon adoption. Therefore, the weighted average impact of the 8.2 millionshares issuable upon conversion of the Debentures has been included in thecalculation of diluted earnings per share for the three and six months endedJune 30, 2005 and 2004.

 

**Note 3.****                   ****Stock-Based Compensation**

 

We have stock-basedcompensation plans for which we have adopted the disclosure-only provisions ofSFAS No. 148 (“SFAS 148”), “Accounting for Stock-BasedCompensation—Transition and Disclosure,” an amendment of SFAS No. 123 (“SFAS 123”),“Accounting for Stock-Based Compensation.” Accordingly, no compensation expensehas been recognized for our stock-based compensation plans other than forrestricted stock and certain stock options. As permitted by SFAS 148 and SFAS123, we account for our stock-based compensation in accordance with AccountingPrinciples Board (“APB”) Opinion No. 25 (“APB 25”), “Accounting for StockIssued to Employees.”

 

In accordance with APB 25 we use the intrinsic value-basedmethod to account for stock option grants and restricted stock awards. We grantstock options for a fixed number of shares to employees with an exercise priceequal to the closing price of the shares at the date of grant and therefore, donot recognize compensation expense. We also grant restricted stock for a fixednumber of shares to employees for nominal consideration. In 2003, in connectionwith our acquisition of a majority interest in Keane Worldzen, certainemployees were granted Keane Worldzen stock options. In accordance withFinancial Accounting Standards Board (“FASB”) Interpretation No. 44 (“FIN44”), “Accounting for Certain Transactions Involving Stock Compensation,” andSFAS No. 141 (“SFAS 141”), “Business Combinations,” these stockoptions were recorded as unearned compensation at the date of acquisition andvest over the life of the stock option. Compensation expense related torestricted stock awards and the Keane Worldzen stock options is recordedratably over the restriction and vesting period, respectively, and is includedin the selling, general, and administrative expenses in the accompanyingconsolidated statements of income. Our Employee Stock Purchase Plan (“ESPP”) isnon-compensatory as defined in APB 25, and accordingly, we do not recognizecompensation expense in our consolidated financial statements.

 

7

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Had compensation expense forour stock-based compensation plans been determined based on the fair value atthe grant dates as calculated in accordance with SFAS 123 and using theBlack-Scholes option-pricing model, we would have recorded additionalcompensation expense and our net income and earnings per share for the sixmonths ended June 30, 2005 and 2004 would have been reduced to the pro formaamounts indicated below (in thousands, except per share data):

 
| ** **                                                                                                                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income—as  reported (1)                                                                                                    |       | $                                | 7,043      |                           | $          | 8,071 |   | $ | 14,318 |   | $ | 13,595 |   |
| Add: Stock-based  employee compensation expense included in reported net income, net of related  tax effects                        |       | 90                               |       | 110                            |       | 175 |   | 226 |   |
| Deduct: Total  stock-based employee compensation expense determined under the fair value  method for all awards, net of tax effects |       | (1,127                           | )          | (1,126                         | )          | (2,184 | ) | (2,183 | ) |
|                                                                                                                                |       |                             |       |                           |       |   |   |   |   |
| Net income—pro  forma                                                                                                          |       | $                                | 6,006      |                           | $          | 7,055 |   | $ | 12,309 |   | $ | 11,638 |   |
|                                                                                                                                |       |                             |       |                           |       |   |   |   |   |
| Earnings per  share                                                                                                                 |       |                             |       |                           |       |   |   |   |   |
| Basic—as  reported                                                                                                             |       | $                                | 0.11       |                           | $          | 0.13 |   | $ | 0.23 |   | $ | 0.22 |   |
| Basic—pro forma                                                                                                                |       | $                                | 0.10       |                           | $          | 0.11 |   | $ | 0.20 |   | $ | 0.18 |   |
| Diluted—as  reported                                                                                                           |       | $                                | 0.11       |                           | $          | 0.12 |   | $ | 0.22 |   | $ | 0.20 |   |
| Diluted—pro  forma                                                                                                             |       | $                                | 0.09       |                           | $          | 0.11 |   | $ | 0.19 |   | $ | 0.18 |   |

 

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 (1) See Note 2 “Earnings PerShare Data” for reconciliation of net income as reported to net income used incalculation of diluted earnings per share.

 

 

**Note 4.****                   ****Comprehensive Income and Accumulated OtherComprehensive Loss**

 

SFAS No. 130 (“SFAS 130”), “ReportingComprehensive Income,” establishes rules for the reporting and display ofcomprehensive income and its components. Components of comprehensive incomeinclude net income and certain transactions that have generally been reportedin the consolidated statement of stockholders’ equity. Other comprehensiveincome is comprised of currency translation adjustments, available-for-salesecurities valuation adjustments, and adjustments related to a foreign definedbenefit plan.

 

Total comprehensive income(i.e., net income plus available-for-sale securities valuation adjustments,currency translation adjustments and adjustments related to a foreign definedbenefit plan, net of tax) was $6.5 million and $13.3 million for the three andsix months ended June 30, 2005, respectively, and was $5.7 million and$7.2 million for the three and six months ended June 30, 2004, respectively. SeeNote 5 “Pension Plan” for a discussion of the minimum pension liabilityadjustments.

 

The following table summarizes the components ofaccumulated other comprehensive loss, net of taxes (dollars

in thousands):

 
| **As of**                                 | ** ** | **June 30, 2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------|------------|-------------------|------------|------------------------|------------|
| Foreign currency  translation adjustments |       | $                 | 4,870      |                   | $          | 4,004 |   |
| Securities  valuation adjustment          |       | (660              | )          | (514                   | )          |
| Minimum pension  liability adjustment     |       | (11,889           | )          | (10,147                | )          |
|                                      |       |              |       |                   |       |
| Accumulated  other comprehensive loss     |       | $                 | (7,679     | )                      | $          | (6,657 | ) |

 

**Note 5.****                    Pension Plan**

 

Our United Kingdom (“UK”) defined benefit plan (“DBP”)provides pension benefits to employees of our UK subsidiary who were active onAugust 4, 1999, and not to employees who joined after that date, and are basedon the employees’ compensation and service. Our policy is to fund amounts required by applicable governmentregulations.  The measurement date for theUK DBP is December 31.

 

8

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During the First Quarter of 2004, we decided to closeour UK DBP to future salary accruals effective April 1, 2004. Accordingly, weaccounted for the closing of the UK DBP as a curtailment under SFAS No. 88 (“SFAS88”),  “Employers’ Accounting forSettlements and Curtailments of Defined Benefit Pension Plans and forTermination Benefits.”  In 2004, werecorded a curtailment loss of approximately $0.2 million to expense the unrecognizedprior service cost, and we recorded an additional required minimum liability ofapproximately $6.6 million through Accumulated other comprehensive loss in theaccompanying condensed consolidated balance sheets.  As a result of the availability of morerecent measurements of both the plan assets and obligations under the UK DBP,during the Second Quarter of 2005, we recorded an additional required minimumliability of approximately $1.7 million through Accumulated other comprehensiveloss.  As of June 30, 2005, the UKpension liability was approximately $14.6 million and is included in Otherlong-term liabilities in the accompanying unaudited condensed consolidatedbalance sheets.

 

Net periodic pension cost of the UK DBP for the threeand six months ended June 30, 2005 and 2004 is presented as follows (dollars inthousands):

 
| ** **                                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                    | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                                                  |       | $                                | 15         |                           | $          | — |   | $ | 30 |   | $ | 233 |   |
| Interest cost                                                 |       | 477                              |       | 452                            |       | 973 |   | 906 |   |
| Expected return  on plan assets                               |       | (439                             | )          | (393                           | )          | (896 | ) | (788 | ) |
| Amortization of  prior service cost                           |       | —                           |       | —                         |       | — |   | — |   |
| Amortization of  transitional obligation                      |       | —                           |       | —                         |       | — |   | — |   |
| Recognized  actuarial loss                                    |       | 111                              |       | 123                            |       | 227 |   | 246 |   |
| Net periodic  pension cost                                    |       | $                                | 164        |                           | $          | 182 |   | $ | 334 |   | $ | 597 |   |
| Curtailment  loss/(gain)                                      |       | —                           |       | —                         |       | — |   | 183 |   |
| Net periodic  pension expense after allowance for curtailment |       | $                                | 164        |                           | $          | 182 |   | $ | 334 |   | $ | 780 |   |

 

**Note 6.****                   ****Business Acquisitions**

 

*Cresta*

 

On June 1, 2005, we acquiredCresta Testing, Inc. (“Cresta”), a software testing company that specializes inmanaged services, test strategy and training, and functional and performancetesting. In exchange for all of the outstanding capital stock of Cresta, wepaid $0.6 million in cash, of which $60,000 was held back to secureindemnification obligations of the Cresta stockholders.  We also agreed to pay up to an additional$0.5 million in earn-out consideration over the next two years, contingent uponthe achievement of certain future financial targets. The earn-out considerationis also dependent on the employment of a certain Cresta employee, therefore, inaccordance with SFAS No. 141 (“SFAS 141”), “Business Combinations,” we willrecord any additional earn-out consideration as compensation expense.  The $60,000 held back was deposited asrestricted cash and accrued and included in Accrued expenses and otherliabilities in the accompanying unaudited condensed consolidated balance sheet.The acquisition has been accounted for under the purchase method inaccordance with SFAS 141 and SFAS No. 142 (“SFAS 142”), “Goodwilland Other Intangible Assets.” The total cost of the acquisition through June30, 2005 was $0.6 million, which included net assets acquired of approximately$0.4 million. Total assets acquired of $0.7 million consisted primarily of cashof $0.1 million and accounts receivable of $0.6 million. The purchase priceallocation is preliminary as of June 30, 2005. The operating results of Crestahave been included in our condensed consolidated statement of operationsbeginning June 2, 2005.

 

*ArcStream*

 

On April 4, 2005, weacquired certain assets and assumed specified liabilities of ArcStreamSolutions, Inc. (“ArcStream”) for a base purchase price of zero ($0.00)dollars, subject to a working capital adjustment, and an additional earn-outconsideration based on the performance of the ArcStream business during theremainder of 2005. ArcStream is a business and technology consulting firm basedin Watertown, Massachusetts, that specializes in helping organizations competethrough the use of advanced technologies and process improvement.  As a stockholder of ArcStream, John Keane,Jr. will be entitled to a portion of any additional consideration. JohnKeane, Jr. is the founder, President and Chief Executive Officer ofArcStream.  He is also the brother of Brian Keane, the CEO of the Company,the son of John Keane, Sr., the Chairman of the Board, and a member of Keane’sBoard of

 

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Directors.  In addition, in connection with thetransaction, John Keane, Jr., agreed to guarantee certain indemnificationobligations of ArcStream and the Company paid John Keane, Jr. $21,875 pursuantto a consulting arrangement to assist in the transition of the acquiredbusiness. The transaction was approved by both the Audit Committee and theBoard of Directors of the Company.  Theoperating results of the acquired ArcStream assets have been included in ourcondensed consolidated statement of operations beginning April 5, 2005.

 

*netNuminaSolutions, Inc.*

 

On February 28, 2005, we acquired netNumina Solutions,Inc. (“netNumina”), a software development company based in Cambridge,Massachusetts that specializes in technology strategy, architecture, and customdevelopment, to enhance our capabilities in Development and Integrationservices.  In exchange for all of theoutstanding capital stock of netNumina, we agreed to pay $5.7 million, of which$0.6 million was held back to secure indemnification obligations of thenetNumina stockholders. As of June 30, 2005, we had paid $4.7 million of the$5.1 million not held back based on the stock certificates surrendered forcancellation. The $0.6 million held back was deposited as restricted cash, andaccrued and included with the remaining $0.4 million for netNumina stockcertificates to be surrendered in Accrued expenses and other liabilities in theaccompanying unaudited condensed consolidated balance sheet.  As of July 19, 2005, we had paid $0.1 millionof the remaining $0.4 million not held back. The acquisition has been accountedfor under the purchase method in accordance with SFAS 141 andSFAS 142.  The total cost of thetransaction through June 30, 2005 was $4.8 million, which included net assetsof approximately $5.2 million.  Totalassets acquired of $7.8 million consisted primarily of cash of $4.6 million andaccounts receivable of $2.3 million.  Inconnection with the purchase price allocation we recorded a $0.4 million fairvalue adjustment to reduce property and equipment that resulted from an excessbook value of the assets acquired over the purchase price and recorded deferredtax assets of $2.0 million.  As a result,we have not recorded any goodwill or intangible assets in connection with thisacquisition. The valuation and purchase price allocation are preliminary as ofJune 30, 2005.  The operating results ofnetNumina have been included in our unaudited condensed consolidated statementsof income beginning March 1, 2005.

 

At the date of acquisition, we entered into a plan toimplement a workforce reduction of eight non-billable employees.  As a result, we recorded a restructuringliability of $1.0 million related to severance. In accordance with EITF Issue No. 95-3 (“EITF 95-3”), “Recognition ofLiabilities in Connection with a Purchase Business Combination,” these costs,which are not associated with the generation of future revenues and have nofuture economic benefit, are reflected as assumed liabilities in the allocationof the purchase price to the net assets acquired.

 

*Fast Track Holdings Limited*

 

On July 13, 2004, we acquired Fast TrackHoldings Limited (“Fast Track”), a privately held consulting firm based in theUnited Kingdom that manages the design, integration, and deployment oflarge-scale SAP implementations. In exchange for all of Fast Track’soutstanding capital stock, we paid approximately $3.4 million in cash,including transaction costs.  We alsoagreed to pay up to an additional approximately $5.0 million in earn-outconsideration over the next two years, contingent upon the achievement ofcertain future financial targets. Based on Fast Track’s financial resultsthrough June 30, 2005, we do not expect the first earn-out, totalingapproximately $2.0 million, will be achieved. The additional payments forearn-out consideration, if any, will be accounted for as additional purchaseprice. The acquisition has been accounted for under the purchase method inaccordance with SFAS 141 and SFAS 142.  The portion of the purchase price related tothe intangible assets has been finalized and was identified utilizing standardvaluation procedures and techniques. The total cost of the acquisition throughJune 30, 2005 was $4.1 million, which included net assets acquired ofapproximately ($0.2) million, goodwill of approximately $3.1 million andintangible assets of approximately $1.1 million, the majority of which isbeing amortized on a straight-line basis over two years, and approximatesthe expected period of benefit. Total assets acquired of  $2.1 million consisted primarily of accountsreceivable of $1.9 million. The operating results of Fast Track have beenincluded in our unaudited condensed consolidated statement of operationsbeginning July 14, 2004.

 

At the date of acquisition,we entered into a plan to exit certain activities, to consolidate facilitiesand to implement a workforce reduction. As a result, we recorded a restructuring liability of $0.4 millionrelated to the lease obligations and certain other costs for those facilitiesand $0.1 million related to severance and retention. In accordance withEITF 95-3, these costs, which are not associated with the generation of futurerevenues and have no future economic benefit, are reflected as assumedliabilities in the allocation of the purchase price to the net assets acquired.

 

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*Nims Associates, Inc.*

 

On February 27,2004, we acquired Nims Associates, Inc. (“Nims”), an informationtechnology and consulting services company with offices in the Midwest andAdvanced Development Centers (“ADCs”) in Indianapolis and Dallas, to expand ourcustomer base, primarily in the financial and insurance industries. In exchangefor all of Nims’ outstanding capital stock, we paid $18.2 million in cashto the shareholders of Nims, with the potential to pay up to an additional$15.0 million in earn-out consideration over the next three years,contingent upon the achievement of certain future financial targets. Theadditional payments for earn-out consideration will be accounted for as additionalpurchase price. The first earn-out was achieved as of March 1, 2005 and, as aresult, we paid $3.3 million in earn-out consideration in April 2005 andrecorded a corresponding increase in Goodwill. As of June 30, 2005, there is a remaining $11.7 million in earn-outconsideration that could be achieved over the next two years.  The acquisition was accounted for under thepurchase method in accordance with SFAS 141 and SFAS 142. The totalcost of the acquisition through June 30, 2005 was $26.1 million, which includesnet assets acquired of approximately $5.4 million, goodwill ofapproximately $13.7 million and intangible assets of $7.0 million.The intangible assets are primarily amortized on a straight-line basis over10 years, which approximates the expected period of benefit. Total assetsacquired of $8.8 million consisted primarily of accounts receivable of$5.6 million. The portion of the purchase price related to the intangibleassets has been finalized and was identified by utilizing standard valuationprocedures and techniques. The operating results of Nims have been included inour unaudited condensed consolidated statements of income beginningMarch 1, 2004.

 

At the date of acquisition,we entered into a plan to exit certain activities, to consolidate facilitiesand to implement a workforce reduction of 22 non-billable employees. As aresult, we recorded a restructuring liability of $1.3 million related tothe lease obligations and certain other costs for those facilities and$0.3 million related to severance and retention. In accordance with EITF95-3, these costs, which are not associated with the generation of futurerevenues and have no future economic benefit, are reflected as assumedliabilities in the allocation of the purchase price to the net assets acquired.

 

The unaudited pro formacombined condensed statements of income below present our historical statementsand our acquisition of Nims on February 27, 2004 as if the purchase hadoccurred at January 1, 2004. The following unaudited pro forma combinedcondensed financial information is presented for comparative purposes only andis not necessarily indicative of the results of operations that would haveactually been reported had the purchase occurred at the beginning of theperiods presented, nor is it necessarily indicative of future financialposition or results of operations (dollars in thousands, except per sharedata):

 
| **For the six months ended June  30,** | ** ** | **2004**      | ** ** |
|----------------------------------------|------------|---------------|------------|
| ** **                             | ** ** | **Unaudited** | ** ** |
| Revenues                               |       | $             | 456,041    |   |
| Net income (1)                         |       | 13,794        |       |
| Basic earnings  per share              |       | 0.22          |       |
| Diluted earnings  per share            |       | 0.21          |       |
|                                        |            |               |            |  |

 

----

 (1) See Note 2 “EarningsPer Share Data” for reconciliation of net income as reported to net income usedin calculation of diluted earnings per share.

 

*Keane Worldzen*

 

On October 17, 2003, weacquired a controlling interest in Keane Worldzen, a privately held BusinessProcess Outsourcing (“BPO”) firm. In connection with the acquisition, we paid$9.0 million to acquire the Series A preferred shares of WorldzenHoldings Limited held by an unrelated third party. We contributed to KeaneWorldzen our Worldzen Holdings Limited shares, $4.3 million in cash andcertain assets of our Keane Consulting Group (“KCG”), our business consultingarm. This transaction was accounted for under the purchase method in accordancewith SFAS 141 and SFAS 142. As a result of the initial transaction,we owned approximately 62% of Keane Worldzen’s outstanding capital stock. Theformer majority shareholders of Worldzen Holdings Limited contributed theirWorldzen Holdings Limited shares to Keane Worldzen in exchange forapproximately 38% of Keane Worldzen’s outstanding capital stock and arecurrently members of Keane Worldzen’s management. The assets and liabilitiescontributed to Keane Worldzen were recorded in relation to each shareholder’sownership 

 

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percentage in Keane Worldzenas follows: (i) carryover basis related to assets and liabilitiescontributed to Keane Worldzen for which the individual shareholder had a priorinterest; and (ii) fair value for assets and liabilities for which anindividual shareholder had no prior interest. As a result, we initiallyrecorded goodwill of approximately $13.8 million in the accompanyingunaudited condensed consolidated balance sheets.

 

On April 1, 2005, weincreased our equity position in Keane Worldzen to approximately 81% with anadditional capital contribution of approximately $5.0 million in cash and $3.0million from the conversion of an outstanding loan to equity. As a result ofthe additional capital contribution, we continue to consolidate the results ofKeane Worldzen, but are also able to consolidate its results for tax purposesbeginning April 1, 2005. Upon our additional capital contribution, the minorityinterest shareholders own approximately 19% of the issued and outstandingcapital stock of Keane Worldzen.

 

In connection with ouracquisition of a controlling interest in Keane Worldzen in October 2003, weobtained the right to purchase certain of the remaining shares held by theminority shareholders of Keane Worldzen at different times (“call options”).Our first call option is exercisable during the period beginning onJanuary 1, 2006 and ending on December 31, 2006 and is based on astated value for the underlying shares of $6.5 million. The fair value ofthe first call option, using a Black Scholes valuation model, is approximately$3.8 million and is included in other assets in the accompanying unauditedcondensed consolidated balance sheets. The other call options are exercisableat the fair market value of the underlying shares during the call periods,which are exercisable at certain times during the period January 1, 2007through December 31, 2009. Since these other call options can only beexercised at the fair value of the underlying shares, no amounts have beenrecorded for these call options in our unaudited condensed consolidatedfinancial statements.

 

Also in connection with theacquisition, the minority shareholders were given the right to require us topurchase certain of their remaining shares at various times (“put options”)subject to the achievement of certain operating and financial milestonesrelated to Keane Worldzen’s business performance. The first put option, theterm of which is October 17, 2003 through December 31, 2005, isexercisable based on a stated value for the underlying shares of$2.8 million. The fair value of this put option, using a Black Scholesvaluation model, was approximately $279,000 at the acquisition date and iscurrently being recognized as compensation expense in the accompanyingunaudited condensed consolidated financial statements through the expirationdate of the option. The other put options are exercisable at fair market valuefor the underlying shares during the put periods, which are exercisable atcertain times during the period January 1, 2008 through March 1,2010. Because these other put options can only be exercised at the fair valueof the underlying shares, no amounts have been recorded for these put optionsin our unaudited condensed consolidated financial statements.

 

The results of operations ofthese acquired companies have been included in our unaudited condensedconsolidated statements of income from the date of acquisition. The excess ofthe purchase price over the fair value of the net assets has been allocated toidentifiable intangible assets and goodwill. Identifiable intangible assetsassociated with these acquisitions are being amortized on a straight-line basisover periods ranging from two to 10 years and approximate the expectedperiods of benefit. Pro forma results of operations for Cresta, ArcStream,netNumina, and Fast Track have not been provided since these acquisitions werenot material either individually or in the aggregate in the year of acquisition.

 

**Note 7.****                   ****Restructurings**

 

*Workforce reductions*

 

In connection with the netNumina acquisitionnoted above, we entered into a plan to reduce the workforce by eight employees,most of whom had an expected termination date in the Second Quarter of2005.  The employees affected in thereduction are non-billable personnel whose responsibilities we plan tointegrate into our existing operations to realize the synergies of the twooperations.  We recorded a liability of$1.0 million associated with severance and other termination benefits andexpect the plan to be substantially completed by September 30, 2005.  In accordance with EITF 95-3, these costshave been reflected as assumed liabilities in the allocation of the purchaseprice to the net assets acquired.  Cashexpenditures for the six months ended June 30, 2005 related to the netNuminaseverance and retention accruals was $0.6 million. As of June 30, 2005, theremaining balance was $0.4 million.

 

In connection withthe Fast Track acquisition noted above, we entered into a plan to reduce theworkforce by seven employees, most of whom had a termination date of October31, 2004. The employees affected in the reduction 

 

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were non-billablepersonnel whose responsibilities were integrated into our existing operationsto realize the synergies of the two operations. We recorded a liability ofapproximately $0.1 million associated with severance, retention and othertermination benefits, completed the plan by the end of the First Quarter of2005, and paid the entire $0.1 million in severance and retention. Inaccordance with EITF 95-3, these costs have been reflected as assumedliabilities in the allocation of the purchase price to the net assets acquired.

 

Inconnection with the Nims acquisition noted above, we entered into a plan toreduce the workforce by 22 employees, most of whom had a termination date ofApril 30, 2004. The employees affected in the reduction were non-billablepersonnel whose responsibilities were integrated into our existing operationsto realize the synergies of the two operations. We recorded a liability of $0.3million associated with severance, retention and other termination benefits,completed the plan by the end of the First Quarter of 2005, and paid the entire$0.3 million in severance and retention. In accordance with EITF 95-3, these costs have been reflected as assumedliabilities in the allocation of the purchase price to the net assets acquired.

 

*Branchoffice closures*

 

During December 2004, in accordance withSFAS 146, we accrued $2.3 million for a restructuring of one of ourreal estate locations that we vacated. Additionally, during the Fourth Quarterof 2004, we performed an evaluation of our restructuring balances for propertiesrestructured in prior periods and determined that we were over-accrued by $2.4million, as a result of negotiating early lease terminations or obtaining asubtenant.  The net impact of theseactions resulted in a net expense reduction to the restructuring charge of $0.1million in the Fourth Quarter of 2004 in our consolidated statement of income.Cash expenditures for the six months ended June 30, 2005 related to the 2004property restructurings totaled $0.3 million. As of June 30, 2005, the remaining reserve balance was $2.0 million.

 

In connection with the FastTrack acquisition noted above, we entered into a plan to exit certainactivities and to consolidate certain facilities. As a result, we recorded arestructuring liability of $0.4 million related to the lease obligationand certain other costs for one facility. In accordance with EITF 95-3, thesecosts, which are not associated with the generation of future revenues and haveno future economic benefit, are reflected as assumed liabilities in the allocationof the purchase price to the net assets acquired.  The total restructuring liability was paid inthe First Quarter ended March 31, 2005.

 

In connection with the Nimsacquisition noted above, we entered into a plan to exit certain activities andto consolidate certain facilities. As a result, we recorded an initialrestructuring liability of $1.4 million related to the lease obligationand certain other costs for eight facilities. During the Fourth Quarter of2004, we determined that our original estimate for Nims-related leaseobligations was too high and reduced the accrual by $0.1 million.  In accordance with EITF 95-3, these costs,which are not associated with the generation of future revenues and have nofuture economic benefit, are reflected as assumed liabilities in the allocationof the purchase price to the net assets acquired.  Cash expenditures for the six months endedJune 30, 2005 related to all Nims-related branch office closings totaled $0.1million, which is net of approximately $74,000 of sublease paymentsreceived.  As of June 30, 2005, theremaining reserve balance was $0.7 million.

 

During December 2003, inaccordance with SFAS 146, we accrued $0.9 million for a restructuring of two ofour real estate locations from which we no longer were receivingeconomic benefit.  Additionally, duringthe Fourth Quarter of 2003, we performed an evaluation of our restructuringbalances for properties restructured in prior periods and determined that wewere over-accrued by $1.0 million, as a result of negotiating early leaseterminations or obtaining a subtenant. In prior years, in accordance with EITF Issue No. 94-3, we performedreviews of our business strategy and concluded that consolidating some of ourbranch offices was key to our success. Cash expenditures for the period ended June 30, 2005 for all branchoffice closings relating to restructuring charges in 2003 and prior years were$1.2 million, which is net of approximately $0.7 million of subleasepayments received.  As of June 30, 2005,the total remaining reserve balance for branch office closings relating torestructuring in 2003 and prior years was $3.9 million.

 

As part of our acquisitions of Metro InformationServices, Inc. (“Metro”) on November 30, 2001 and SignalTree Solutions (“SignalTree”)on March 15, 2002, we entered into a plan to exit certain activities and toconsolidate facilities and recorded restructuring liabilities.  Included in the total of $1.2 million branchoffice cash expenditures for restructuring charges in 2003 and prior years werecash payments of $0.1 million, net of sublease income, for the leaseobligations and other expenses associated with the restructured locationsassumed for both the Metro and SignalTree acquisitions.  As of June 30, 2005, included in the totalremaining reserve balance of $3.9 million was a remaining lease obligationliability of approximately $0.5 million and $0.9 million for Metro andSignalTree, respectively.

 

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The activity for the six months ended June 30, 2005associated with restructuring charges is as follows (in thousands, except pershare data):

 
| ** **                                        | ** ** | **January 1,  2005  Balance** | ** ** | **Cash  Expenditures,  Net** | ** ** | **Acquisition  Related  Charges in  Fiscal 2005** | ** ** | **June 30,  2005 Balance** | ** ** |
|---------------------------------------------------|------------|-------------------------------|------------|------------------------------|------------|---------------------------------------------------|------------|----------------------------|------------|
| **Branch office closures and other expenditures** |       |                          |       |                         |       |                                              |       |                       |       |
| 1999                                              |       | $                             | 18         |                         | $          | —                                            |       | $                          | —     |   | $ | 18 |   |
| 2000                                              |       | 4                             |       | —                       |       | —                                            |       | 4                          |       |
| 2001                                              |       | 560                           |       | (113                         | )          | —                                            |       | 447                        |       |
| 2002                                              |       | 4,280                         |       | (895                         | )          | —                                            |       | 3,385                      |       |
| 2003                                              |       | 232                           |       | (140                         | )          | —                                            |       | 92                         |       |
| 2004                                              |       | 3,492                         |       | (821                         | )          | —                                            |       | 2,671                      |       |
| 2005                                              |       | —                        |       | —                       |       | —                                            |       | —                     |       |
|                                              |       | 8,586                         |       | (1,969                       | )          | —                                            |       | 6,617                      |       |
| **2004  Workforce reduction**                     |       | 91                            |       | (84                          | )          | —                                            |       | 7                          |       |
| **2005  Workforce reduction**                     |       | —                        |       | (559                         | )          | 985                                               |       | 426                        |       |
| **Total  Restructuring Balance**                  |       | $                             | 8,677      |                         | $          | (2,612                                            | )          | $                          | 985        |   | $ | 7,050 |   |

 

The restructuringbalance is included in current accrued restructuring and accrued long-termrestructuring costs in the accompanying condensed unaudited consolidatedbalance sheets.

 

**Note 8.****                   ****Convertible Subordinated Debentures**

 

InJune 2003, we issued in a private placement $150.0 million principalamount of 2.0% Convertible Subordinated Debentures due 2013.  The Debentures are unsecured and subordinatedin right of payment to all of our senior indebtedness. The Debentures accrueregular interest at a rate of 2.0% per year. Interest is payable semi-annuallyin arrears on June 15 and December 15 of each year, beginningDecember 15, 2003. Beginning with the six-month interest period commencingJune 15, 2008, we will pay additional contingent interest during anysix-month interest period if the trading price of the Debentures for each ofthe five trading days immediately preceding the first day of the interestperiod equals or exceeds 120% of the principal amount of the Debentures. Duringany interest period when contingent interest is payable, the contingentinterest payable per $1,000 principal amount of Debentures will equal 0.35%calculated on the average trading price of $1,000 principal amount ofDebentures during the five trading days immediately preceding the first day ofthe applicable six-month interest period and will be payable in arrears.

 

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

 

The Debentures areconvertible at the option of the holder into shares of our common stock at aninitial conversion rate of 54.4989 shares per $1,000 principal amount of Debentures,which is equivalent to an initial conversion price of approximately $18.349 pershare, subject to adjustments, prior to the close of business on the finalmaturity date only under the following circumstances: (a) during anyfiscal quarter commencing after September 30, 2003, and only during suchfiscal quarter, if the closing sale price per share of our common stock exceeds120% of the conversion price (approximately $22.019) for at least 20 tradingdays in the 30 consecutive trading day period ending on the last trading day ofthe preceding fiscal quarter; (b) during the five business days after anyfive consecutive trading day period in which the trading price per $1,000principal amount of Debentures for each day of that period was less that 98% ofthe product of the closing sale price per share of our common stock and thenumber of shares issuable upon conversion of $1,000 principal amount of theDebentures; (c) if the Debentures have been called for redemption; or(d) upon the occurrence of specified corporate transactions. See Note 2 “EarningsPer Share Data” for further discussion of the Debentures.

 

Debt issuance costs wereapproximately $4.4 million and are included in other assets, net, in theaccompanying unaudited condensed consolidated balance sheets. These costs arebeing amortized to interest expense over five years on a straight-line basis.As of June 30, 2005 and December 31, 2004, the unamortized debt issuance costs 

 

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were approximately $2.6million and $3.1 million, respectively.

 

**Note 9.****                   ****Capital Stock**

 

OnJune 14, 2005, we announced that our Board of Directors had authorized usto repurchase an additional 3 million shares of our common stock over thenext 12 months effective June 13, 2005. This authorization replacedour June 14, 2004 authorization to purchase 3 million shares of ourcommon stock, of which only 1,236,000 shares were repurchased prior to itsexpiration.

 

Duringthe six months ended June 30, 2005, a total of 213,508 shares of our commonstock were exercised or purchased by participants under our stock option plans,ESPP and UK ESPP. In addition, 10,296 shares of our common stock were issued tofive of our directors in lieu of cash as payment for the annual directors fee ormeeting attendance fees.

 

**Note 10.****            ****Related Parties, Commitments, and Contingencies**

 

*Related PartyTransactions*

 

Our principal executiveoffice is located at 100 City Square in Boston, Massachusetts (the “NewFacility”). In October 2001, we entered into a lease with GatewayDevelopers LLC (“Gateway LLC”) for a term of 12 years, pursuant to whichwe agreed to lease approximately 95,000 square feet of office and developmentspace in the New Facility. We lease approximately 57% of the New Facility andthe remaining 43% is, or will be, occupied by other tenants. John Keane FamilyLLC is a member of Gateway LLC. The members of John Keane Family LLC are trustsfor the benefit of John F. Keane, Chairman of our Board of Directors, and hisimmediate family members.

 

On October 31, 2001,Gateway LLC entered into a $39.4 million construction loan with CitizensBank of Massachusetts (the “Gateway Loan”) in connection with the New Facilityand an adjacent building located at 20 City Square, Boston, Massachusetts. JohnKeane Family LLC and John F. Keane are each liable for certain obligationsunder the Gateway Loan if and to the extent Gateway LLC requires funds tocomply with its obligations under the Gateway Loan. Stephen D. Steinour, amember of our Board of Directors, is Chief Executive Officer of Citizens Bankof Pennsylvania. Citizens Bank of Massachusetts and Citizens Bank ofPennsylvania are subsidiaries of Citizens Financial Group, Inc.Mr. Steinour was not involved in the approval process for the GatewayLoan.  In June 2005, the Gateway Loan wasrefinanced to a non-recourse permanent loan with CitiGroup.

 

We began occupying the NewFacility and making lease payments in March 2003. Based upon our knowledgeof lease payments for comparable facilities in the Boston area, we believe thatthe lease payments under the lease for the New Facility, which will beapproximately $3.2 million per year ($33.00 per square foot for the first75,000 square feet and $35.00 per square foot for the remainder of thepremises) for the first six years of the lease term and approximately$3.5 million per year ($36.00 per square foot for the first 75,000 squarefeet and $40.00 per square foot for the remainder of the premises) for theremainder of the lease term, plus specified percentages of any annual increasesin real estate taxes and operating expenses, were, at the time we entered intothe lease, as favorable to us as those which could have been obtained from anindependent third party. Lease payments to Gateway LLC in the six months endedJune 30, 2005 were approximately $1.8 million.

 

In view of these relatedparty transactions, we concluded that, during the construction phase of the NewFacility, the estimated construction in progress costs for the New Facilitywould be capitalized in accordance with EITF Issue No. 97-10, “The Effectof Lessee Involvement in Asset Construction.” A liability in the same amountwas included in the caption “Accrued long-term building costs” in theaccompanying unaudited condensed consolidated balance sheets. For purposes ofthe unaudited condensed consolidated statements of cash flows, we characterizedthis treatment as a non-cash financing activity.

 

As a result of the completionof the construction phase and our current occupancy, the related capitalizedcosts are now classified as “Building” and are included in property andequipment, net, in the accompanying unaudited condensed consolidated balancesheets. A liability for the same amount appears as accrued expenses and otherliabilities and accrued long-term building costs, representing our short andlong-term components. The costs of the building are being amortized on astraight-line basis over a 39-year useful life. Additionally, the obligationwill be reduced over the life of the lease at an interest rate of 8.67%. Thenet effect of the amortization that is included in the operating resultsapproximates the rent expense resulting from the contractual payments we arerequired to make under the lease.

 

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In February 1985, weentered into a lease, which subsequently was extended to a term of20 years, with City Square Limited Partnership (“City Square”), pursuantto which we leased approximately 34,000 square feet of office and developmentspace in a building located at Ten City Square, in Boston, Massachusetts. Wenow lease approximately 88% of this building and the remaining 12% is leased byother tenants. John F. Keane, Chairman of our Board of Directors, and Philip J.Harkins, a member of our Board of Directors, are limited partners of CitySquare. Based upon our knowledge of lease payments for comparable facilities inthe Boston area, we believe that the lease payments under this lease, whichwill be approximately $1.0 million per year ($30.00 per square foot) forthe remainder of the lease term (until February 2006), plus specifiedpercentages of any annual increases in real estate taxes and operatingexpenses, which will be approximately $0.2 million per year, were, at thetime we entered into the lease, as favorable to us as those which could havebeen obtained from an independent third party. As a result of ouroccupancy of the New Facility (as described above), we vacated and we haveobtained a subtenant for approximately 17% of Ten City Square.

 

As a result of the vacancy atTen City Square in December 2002, we reserved the remaining lease paymentsdue to City Square for the remainder of the lease term, resulting in a chargeof approximately $3.9 million in the Fourth Quarter of 2002. In the sixmonths ended June 30, 2005, we paid approximately $0.6 million in leasepayments and as of June 30, 2005 we had a remaining reserve balance of$1.3 million.

 

In January 2003, theFASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of VariableInterest Entities,” as amended by FASB Interpretation No. 46(R) (“FIN46(R)”) in December 2003, which requires the consolidation of a variableinterest entity, as defined, by its primary beneficiary. Primary beneficiariesare those companies that are subject to a majority of the risk of loss orentitled to receive a majority of the entity’s residual returns, or both. Indetermining whether it is the primary beneficiary of a variable interestentity, an entity with a variable interest shall treat variable interests inthat same entity held by its related parties as its own interests.

 

We have evaluated theapplicability of FIN 46(R) to our relationship with each of City Square andGateway LLC and determined that we are not required to consolidate theseentities within our unaudited condensed consolidated financial statements. Wehave determined that Gateway LLC is not a variable interest entity as theequity investment is sufficient to absorb the expected losses and the holdersof the equity investment do not lack any of the characteristics of acontrolling interest. We have concluded that as we no longer occupy the spaceat Ten City Square and no longer derive any benefit from leasing the space, wewould not be determined to be the related party most closely associated withCity Square. As a result, we will continue to account for our leases with CitySquare and Gateway LLC consistent with our historical practices in accordancewith generally accepted accounting principles. We believe that we do not havean interest in any variable interest entities that would require consolidation.

 

In July 2003, our AuditCommittee approved a related party transaction involving a member of our Boardof Directors. We sub-contracted with ArcStream to develop and assist in theimplementation of a wireless electronic application at two customer sites. Inaccordance with this transaction, we agreed to pay ArcStream a royalty fee forpotential future installations during the seven-year license period. John F.Keane, Jr., a member of our Board of Directors, is Chief Executive Officer, adirector, and founder of ArcStream. John F. Keane, Jr. is the son of John F.Keane, Sr., Chairman of our Board of Directors, and the brother of Brian T.Keane, our President, Chief Executive Officer and a director. EffectiveJune 21, 2004, our Audit Committee approved the termination of ouragreement with ArcStream and a payment of $150,000 by us to ArcStream inexchange for a release of all parties from any further performance or paymentobligations under the original agreement. The termination was for convenienceand was not related to ArcStream’s performance under the agreement. On April 4,2005, we acquired certain assets and assumed specified liabilities of ArcStreamfor a base purchase price of ($0.00) dollars, subject to a working capitaladjustment and additional consideration based on the performance of theArcStream business during the remainder of 2005. In addition, in connectionwith the transaction, John Keane, Jr. agreed to guarantee certain indemnificationobligations of ArcStream and the Company paid John Keane, Jr. $21,875 pursuantto a consulting arrangement to assist in the transition of the acquiredbusiness. See Note 6 “Business Acquisitions” for a further discussion of theacquisition.

 

*Commitments and Contingencies*

 

We lease the New Facilityfrom Gateway LLC as described above. We lease additional office space andapartments in more than 70 locations in North America, the United Kingdom, andIndia under operating leases and capital leases, some of which may be renewedfor periods up to five years, subject to increased rental fees.

 

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

 

In February 2003, weentered into a $50.0 million unsecured revolving credit facility (“creditfacility”) with two banks. The credit facility replaced a previous$10.0 million demand line of credit, which expired in July 2002. Theterms of the credit facility require us to maintain a maximum total funded debtand other financial ratios. The credit facility also includes covenants that, subjectto certain specific exceptions and limitations, among other things, restrictour ability to incur additional debt, make certain acquisitions or dispositionof assets, create liens, and pay dividends**.**On June 11, 2003, we and the two banks amended certain provisions of thecredit facility relating to financial covenants. These covenants, which includetotal indebtedness and leverage ratios, are no more restrictive than thoseinitially contained in the credit facility. On October 17, 2003 and February 5,2004, we and the two banks further amended certain provisions of the creditfacility to expand our ability to make certain acquisitions.  On March 31, 2005, we and the two banksfurther amended certain provisions of the credit facility as follows: (a) toallow additional unsecured indebtedness, (b) to allow Keane’s April 1, 2005additional investment in Keane Worldzen, (c) to further expand our ability tomake certain acquisitions and (d) to adjust financial covenants, which are nomore restrictive than those initially contained in the credit facility.   The annual commitment fee for maintainingthe credit facility is 30 basis points on the unused portion of the creditfacility, up to a maximum of $150,000. As of June 30, 2005, we had no debtoutstanding under the credit facility. We may draw upon the credit facility upto $50.0 million less any outstanding letters of credit that have beenissued against the credit facility. Any amounts drawn upon the credit facilityconstitute senior indebtedness for purposes of the Debentures. Borrowings bearinterest at one of the bank’s base rate or the Euro currency reserve rate.

 

During the Third Quarter of2002, in connection with an acquisition of a business complementary to our own,we recorded $3.0 million as deferred revenue related to contingent servicecredits and issued a $3.0 million non-interest bearing note payable aspartial consideration. During the six months ended June 30, 2005, we recognizedrevenue of approximately $0.6 million in relation to the contingentservice credits and reduced each of the related deferred revenue and note byapproximately $0.3 million. As of June 30, 2005, the remaining deferredrevenue and note payable balances were each $0.3 million.  The note had a one-year term with a one-yearextension expiring on September 25, 2004. Effective September 25,2004, the term of the contingent service credits was extended one year throughSeptember 25, 2005.

 

We are involved in litigationand various legal matters, which have arisen in the ordinary course ofbusiness. We do not believe that the ultimate resolution of these matters willhave a material adverse effect on our financial condition, results ofoperations, or cash flows.

 

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**Note 11.****            ****Segment Information**

 

Based on qualitative andquantitative criteria established by SFAS No. 131 (“SFAS 131”), “Disclosuresabout Segments of an Enterprise and Related Information,” we operate within onereportable segment: *Professional Services.*In this segment, we offer an integrated mix of end-to-end business solutions,such as Application and Business Process Outsourcing, Development &Integration and Other IT Services.

 

In accordance with theenterprise wide disclosure requirements of SFAS 131, our geographicinformation is as follows (in thousands):

 
| ** **      | ** ** | **Three Months Ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **      | ** ** | **2005**                        | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:       |       |                            |       |                          |       |   |   |   |   |
| Domestic        |       | $                               | 222,889    |                          | $          | 218,332 |   | $ | 441,022 |   | $ | 423,547 |   |
| International   |       | 14,929                          |       | 13,380                        |       | 29,000 |   | 23,989 |   |
| Total Revenues: |       | $                               | 237,818    |                          | $          | 231,712 |   | $ | 470,022 |   | $ | 447,536 |   |

 
| ** **                      | ** ** | **At June 30,  2005** | ** ** | **At December 31,  2004** | ** ** |
|---------------------------------|------------|-----------------------|------------|---------------------------|------------|
| Property &  Equipment:      |       |                  |       |                      |       |
| Domestic                        |       | $                     | 63,424     |                      | $          | 64,173 |   |
| International                   |       | 12,485                |       | 12,588                    |       |
| Total Property  & Equipment |       | $                     | 75,909     |                      | $          | 76,761 |   |

 

Nosingle customer provides revenues that equal or exceed 10 percent of ourconsolidated revenues.

 

**Note 12.****            ****Income Taxes**

 

Our policy is to establish reserves for taxes that maybecome payable in future years as a result of an examination by taxauthorities. In accordance with SFAS No. 5 (“SFAS 5”), “Accounting forContingencies,” we establish the reserves based upon our assessment of exposureassociated with permanent tax differences and interest expense applicable toboth permanent and temporary difference adjustments. The tax reserves areanalyzed periodically and adjusted, as events occur to warrant adjustment tothe reserves, such as when the statutory period for assessing tax on a giventax return or period expires, the reserve associated with that period isreduced. In addition, the adjustment to the reserve may reflect additionalexposure based on current calculations. Similarly, if tax authorities provideadministrative guidance or a decision is rendered in the courts, appropriateadjustments will be made to the tax reserve.

 

The provision for incometaxes represents the amounts owed for federal, state, and foreign taxes. Oureffective tax rate was 35.6% for the Second Quarter ended June 30, 2005 and was37.9% for the first six months of 2005. Our effective tax rate was 40% for theSecond Quarter ended June 30, 2004 and the first six months of 2004. Thedetermination of the provision for income tax expense, deferred tax assets andliabilities and related valuation allowance involves judgment. As a globalcompany, we are required to calculate and provide for income taxes in each ofthe tax jurisdictions where we operate. This involves making judgmentsregarding the recoverability of deferred tax assets, which can affect theoverall effective tax rate. In addition, changes in the geographic mix orestimated level of pre-tax income can affect the overall effective tax rate.The decreases in our estimated effective tax rate for the Second Quarter andsix months ended June 30, 2005 compared to the same periods in 2004 were due toour ability to consolidate Keane Worldzen for tax purposes beginning April 1,2005.  As a result of owning greater than80% of the outstanding voting stock of Keane Worldzen, beginning April 1, 2005,we are able to record a tax benefit on the losses associated with KeaneWorldzen, thereby reducing our annual effective tax rate. See Note 6 “Acquisitions”for further discussion on our ownership in Keane Worldzen.

 

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##### **Note 13.**             SubsequentEvents

 

On July 11, 2005, we and twobanks further amended certain provisions of the credit facility to increase theallowable limit for letters of credit within the total facility, including forthe purposes of issuing a letter of credit to satisfy bank guarantees withrespect to the Transport Ticketing Authority of the State of Victoria.  One of our banks has issued a $45 million AUDletter of credit dated July 14, 2005 against our credit facility in connectionwith our contract with the Transport Ticketing Authority.

 

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##### **Item 2.**                     Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

 

This Quarterly Report on Form 10-Q contains forward-looking statementswithin the meaning of Section 21E of the Securities Exchange Act of 1934, asamended, and Section 27A of the Securities Act of 1933, as amended.  For purposes of these Acts, any statementthat is not a statement of historical fact may be deemed a forward-lookingstatement.  For example, statementscontaining the words “believes,” “anticipates,” “plans,” “expects,” “estimates,”“intends,” “may,” “projects,” “will,” “would” andsimilar expressions may be forward-looking statements.  We caution investors not to place unduereliance on any forward-looking statements in this Quarterly Report on Form10-Q.  We undertake no obligation topublicly update any forward-looking statements, whether as a result of newinformation, future events or otherwise. There are a number of factors that could cause our actual results todiffer materially from those indicated by these forward-looking statements,including without limitation the factors set forth below under the caption “CertainFactors That May Affect Future Results.” These factors and the other cautionary statements made in this quarterlyreport should be read as being applicable to all related forward-lookingstatements wherever they appear in this quarterly report.  If one or more of these factors materialize,or if any underlying assumptions prove incorrect, our actual results,performance, or achievements may vary materially from any future results,performance or achievements expressed or implied by these forward-lookingstatements.

 

The following discussionand analysis should be read in conjunction with the unaudited condensedconsolidated financial statements and related notes included elsewhere in thisQuarterly Report on Form 10-Q and the audited consolidated financial statementsand related notes included in our Annual Report on Form 10-K for the year endedDecember 31, 2004, and with the information under the heading “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inour Annual Report on Form 10-K for the year ended December 31, 2004.

 

**OVERVIEW**

 

**Componentsof Revenues**

 

We seek to help clients improve their business andinformation technology (“IT”) effectiveness. We classify our service offeringsinto the following three categories: Outsourcing, Development &Integration, and Other IT Services.

 

*Outsourcing:*    Ouroutsourcing services include Application and Business Process Outsourcing. OurApplication Outsourcing services help clients manage existing business systemsmore efficiently and more reliably, improving the performance of theseapplications while frequently reducing costs. Under our Application Outsourcingservice offering, we assume responsibility for managing a client’s businessapplications with the goal of instituting operational efficiencies that enhanceflexibility, free up client personnel resources, and achieve higher usersatisfaction. We enter into large, long-term contracts for the provision ofApplication Outsourcing services, which generally do not require any capitaloutlay by us. These contracts usually span three to five years with the abilityto renew. We typically receive a fixed monthly fee in return for meeting orexceeding a contractually agreed upon service level. However, because ourcustomers typically have the ability to reduce services under their contracts,our monthly fees may be reduced from the stated contract amounts.  Outsourcing services also includes ongoingmaintenance related to the product sales for our Healthcare Solutions Division.

 

Through our global delivery model we can offercustomers the flexibility and economic advantage of allocating work among avariety of delivery options. These include onsite at a client’s facility,nearshore in Halifax, Nova Scotia, and Toronto, Ontario, and offshore at one ofour four development centers in India. In 2004, we extended our global networkof Advanced Development Centers with the opening of new facilities in Toronto,Ontario and Hyderabad, India. This integrated, flexible mix of cost-effectiveonsite, nearshore, and offshore delivery is now a component of most of our newApplication Outsourcing engagements. The distribution of work across multiplelocations is typically based on a client’s cost, technology, and riskmanagement requirements.

 

Our Business Process Outsourcing (“BPO”) services areprovided by our majority owned subsidiary, KeaneWorldzen, Inc. (“Keane Worldzen”), which we acquired on October 17,2003. Keane Worldzen specializes in providing BPO services to clientswith complex processes in the financial services, insurance, and healthcareindustries, and to clients with back-office processes in several industries.Keane Worldzen’s BPO services are designed to reduce the cost and increase theefficiency of our clients’ business transactions, enabling companies to focuson their more profitable activities and avoid the distraction of non-coreback-office processes. Keane Worldzen provides these low-cost, high-valueoutsourcing services from operations in both the United States (“U.S.”) andIndia.

 

*Development &Integration:*  As application software becomes morecomplex, it requires sophisticated integration between front-end and back-endsystems to enhance access to critical corporate data, enable processimprovements, and improve customer service. Many of our Development & Integrationprojects focus on solutions for the integration of enterprise

 

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applications,supply chain, and customer service problems. We also provideDevelopment & Integration services to the public sector, whichincludes agencies within the U.S. Federal Government, various states, and otherlocal government entities. Additionally, our Healthcare Solutions Divisionprovides software solutions and integration support to both acute and long-termcare providers.

 

*OtherIT Services:*  Other IT Services are primarilycomprised of IT consulting, project management, and supplemental staffengagements that are principally billed on a time and materials basis.

 

Global economic and political conditions may causecompanies to be cautious about increasing their use of consulting and ITservices, but we continue to see a demand for our services. We continue toexperience pricing pressure from competitors as well as from clients facingpressure to control costs. In addition, the growing use of offshore resourcesto provide lower-cost service delivery capabilities within our industrycontinues to be a source of pressure on revenues. We also experience wageinflation, primarily in India, as the demand for those resources increases. Inorder for us to remain successful in the near term, we must continue tomaintain and grow our client base, provide high-quality service andsatisfaction to our existing clients, and take advantage of cross-sellingopportunities. In the current economic environment, we must provide our clientswith service offerings that are appropriately priced, satisfy their needs, andprovide them with measurable business benefits. While we have recentlyexperienced a more steady demand for our services, and gross margin as apercentage of revenue has stabilized over the past two years, we believe thatit is too early to determine if developments will translate into sustainableimprovements in our pricing or margins for 2005 and over the longer term.

 

There is a great deal of competition in the provisionof Outsourcing services. We believe our evolving go-to-market strategy, wherewe seek to provide high value, repeatable business solutions to our clients,differentiates us from our competitors. We offer solutions that combine variousKeane services and capabilities in response to a specific industry or clientneed.  These vertically-focused solutionsets may include application services, business process outsourcing, an underlyingtechnology platform or intellectual property, and global delivery. The solutionsets that we offer to our clients may be comprised of five major elements.

 

*•**                                         *First,they are vertically driven in that they are value propositions designed toaddress specific needs, challenges, or opportunities within a verticalindustry.

 

*•**                                         *Second,they may include Application services, either in the form of applicationsdevelopment & integration, or application outsourcing.

 

*•**                                         *Third,these solutions may also involve a business process component, including processreengineering and business process outsourcing.

 

*•**                                         *Fourth,we seek to leverage a technology platform, either provided by a third party orproprietary to Keane, as well as Keane intellectual capital, as a foundationfor our solutions.

 

*•**                                         *Andfinally, these solution sets frequently incorporate our global deliverycapabilities.

 

While, we are still in the early stages ofimplementing this new market strategy, we believe that our deep industryknowledge will differentiate us from our competitors, allow us to go beyondsimply delivering cost and performance improvements to our clients, and allowus to deliver transformational business benefits and, ultimately, help grow ourbusiness and integrate our comprehensive capabilities.

 

###### **Componentsof Operating Expenses**

 

The primary categories of our operating expensesinclude: salaries, wages, and other direct costs; selling, general andadministrative expenses; and amortization of intangible assets. Salaries,wages, and other direct costs are primarily driven by the cost ofclient-service personnel, which consists mainly of compensation,sub-contractor, and other personnel costs, and other non-payroll costs. Sellingexpenses are driven primarily by business development activities and clienttargeting, image-development and branding activities. General andadministrative expenses primarily include costs for non-client facingpersonnel, information systems, and office space, which we seek to manage atlevels consistent with changes in the activity levels in our business. Wecontinue to anticipate changes in demand for our services and to identify costmanagement initiatives to balance our mix of resources to meet current andprojected future demand in our markets. We will also continue

 

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touse our global sourcing as part of our cost effective delivery model.

 

We evaluate our improvement in profitability bycomparing gross margins, and selling, general, andadministrative (“SG&A”) expenses as a percentage of revenues. Other keymetrics that we use to manage and evaluate the performance of our businessinclude new contract bookings, the number of billable personnel, andutilization rates. We calculate utilization rates by dividing the totalbillable hours per consultant by the total hours available, including sick,holiday, and vacation, from the consultant.

 

###### **EMPLOYEES**

 

As of June 30, 2005, we had 8,720 total employees,including 7,364 business and technical professionals whose services arebillable to clients. This includes a base of 1,918 employees in India,including our Keane Worldzen operations. We sometimes supplement our technicalstaff by utilizing subcontractors, which as of June 30, 2005, consisted of 561full-time professionals.

 

##### **NEWCONTRACT BOOKINGS**

 

New contract bookings for the three months ended June30, 2005 were $259.2 million, a decrease of $23.1 million, or 8.2%, over newcontract bookings of $282.3 million for the three months ended June 30,2004. For the three months ended June 30, 2005, Outsourcing bookings decreased12.0% to $131.5 million, Development & Integration bookings decreased 7.6%to $39.3 million, and Other IT bookings decreased 2.2% to $88.4 millioncompared to the same period in 2004.

 

New contract bookings for the six months ended June30, 2005 decreased $164.7 million, or 23.8%, over new contract bookings of$692.0 million for the six months ended June 30, 2004. For the six months endedJune 30, 2005, Outsourcing bookings decreased 40.0% to $250.6 million,Development & Integration bookings increased 3.7% to $83.5 million, andOther IT bookings decreased 0.4% to 193.2 million, compared to the same periodin 2004.

 

We provide information regarding our bookings becausewe believe it represents useful information regarding changes in the volume ofour new business over time. However, information regarding our new bookings isnot comparable to, nor should it be substituted for, an analysis of ourrevenues. Cancellations and/or reductions in existing contracted amounts arenot reflected in new contract bookings.

 

**CONSOLIDATEDRESULTS OF OPERATIONS**

 

**2005Compared to 2004**

** **
| ** **                     | ** ** | **Three  Months Ended  June 30,** | ** ** | **Increase  (Decrease)** | ** ** | **Six  months ended  June 30,** | ** ** | **Increase  (Decrease)** | ** ** |
|--------------------------------|------------|-----------------------------------|------------|--------------------------|------------|---------------------------------|------------|--------------------------|------------|
| ** **                     | ** ** | **2005**                          | ** ** | **%**                    | ** ** | **2004**                        | ** ** | **%**                    | ** ** | **$** | ** ** | **%** | ** ** | **2005** | ** ** | **%** | ** ** | **2004** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| Outsourcing                    |       | $                                 | 125,858    |                     | 53         |                            | $          | 116,515                  |       | 50 |   | $ | 9,343 |   | 8.0 |   | $ | 248,442 |   | 53 |   | $ | 221,768 |   | 50 |   | $ | 26,674 |   | 12.0 |   |
| Development &  Integration |       | 42,426                            |       | 18                       |       | 44,780                          |       | 20                       |       | (2,354 | ) | (5.3 | ) | 84,183 |   | 18 |   | 86,679 |   | 19 |   | $ | (2,496 | ) | (2.9 | ) |
| Other IT Services              |       | 69,534                            |       | 29                       |       | 70,417                          |       | 30                       |       | (883 | ) | (1.3 | ) | 137,397 |   | 29 |   | 139,089 |   | 31 |   | $ | (1,692 | ) | (1.2 | ) |
| Total                          |       | $                                 | 237,818    |                     | 100        | %                               | $          | 231,712                  |       | 100 | % | $ | 6,106 |   | 2.6 |   | $ | 470,022 |   | 100 | % | $ | 447,536 |   | 100 |   | $ | 22,486 |   | 5.0 |   |

 

##### **Revenues**

 

Revenues for the Second Quarter ended June 30, 2005 were $237.8 millioncompared to revenues of $232.2 million for the First Quarter ended March 31,2005 and compared to revenues of $231.7 million for the Second Quarter endedJune 30, 2004. These increases in revenues were partly due to a full quarter ofrevenues from netNumina Solutions, Inc. (“netNumina”), and revenues from CrestaTesting, Inc. (“Cresta”) and certain assets of ArcStream, which we acquired onFebruary 28, 2005, June 1, 2005, and April 1, 2005, respectively. Additionally,revenues associated with Nims Associated, Inc. (“Nims”), which we acquired onFebruary 27, 2004, increased in the Second Quarter ended June 30, 2005 comparedto both the First Quarter ended March 31, 2005 and the Second Quarter endedJune 30, 2004. See Note 6 “Business Acquisitions” for a description of theseacquired businesses.

 

Revenues for the six months ended June 30, 2005 were $470.0 million, anincrease of $22.5 million, or 5.0% compared to

 

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revenues for the six months endedJune 30, 2004. The increase was primarily due to the revenues associated withour acquisitions of netNumina, Fast Track Holdings Limited (“Fast Track”), afull quarter of revenues from Nims and increases in revenues from both new andexisting customers.   We completed theacquisition of Fast Track on July 13, 2004, and included its results ofoperations beginning July 14, 2004. See Note 6 “Business Acquisitions” for adescription of this acquired business. The increase in revenues was partiallyoffset by the reductions in revenues discussed below from a large UK client,IBM and PacifiCare and the termination of a large customer in the Third Quarterended September 30, 2004.

 

During the Fourth Quarter of 2004, both a large UK client and IBMnotified us that they would be reducing their purchasing requirements. Weexpect the reduction of purchasing requirements from the UK client will reduceour total annual revenues by approximately $10.0 million to $13.0 million in2005. During the First Quarter ended March 31, 2005, IBM also notified us thatKeane and other current vendor resources would be included in a proposalprocess for both current and future business. In July 2005, we decided towithdraw from this staff augmentation relationship with IBM. We expect thewithdrawal from this relationship will reduce our revenues for the remainder of2005 by approximately $6.0 million to $10.0 million.

 

*Outsourcing*.  Outsourcing service revenues for the SecondQuarter ended June 30, 2005 were $125.9 million, an increase of $3.3 million,or 2.7%, compared to the First Quarter ended March 31, 2005. The sequentialincrease was primarily related to the ramp up of BPO projects, several largeoutsourcing customers, as well as revenues from netNumina. These increases morethan offset the decreases in revenues from the large UK client andPacifiCare.  Outsourcing service revenuesfor the Second Quarter ended June 30, 2005 increased $9.3 million, or 8.0%,over the same period in 2004. The increase in Outsourcing service revenues waspartly due to revenues generated by Nims, which contributed approximately $12.7million in Applications Outsourcing revenues in the Second Quarter ended June30, 2005 compared to $8.5 million in the Second Quarter ended June 30, 2004.  The increase in Outsourcing revenues alsoreflects higher revenues associated with existing and new customers from bothour BPO and Application Outsourcing offerings, which more than offsets thedecreases from the large UK client, PacifiCare, and a customer who terminatedits contract with Keane in the Third Quarter ended September 30, 2004.Outsourcing service revenues for the six months ended June 30, 2005 increased$26.7 million, or 12.0%, over the same period in 2004. The increase reflects$11.6 million of higher revenues generated by Nims due to a full six months ofresults in 2005, revenues generated by netNumina and higher revenues from newand existing customers from both our BPO and Application Outsourcing offerings,which more than offsets lower revenues associated with PacifiCare and acustomer who terminated its contract with Keane in the Third Quarter endedSeptember 30, 2004.

 

PacifiCare, one of our largest clients, has reduced the level ofservice from the stated baseline contract amounts in accordance with its rightunder the contract terms, thereby reducing the contract value. We have providedservices at or above the baseline levels set forth in the contract.  In accordance with the contract terms,PacifiCare engaged an independent third party to conduct a benchmark study tocompare our billing rates with those of comparable companies on comparableengagements. The independent third party issued a report stating that Keane’srates are higher than the rate identified in the benchmark study. While we donot necessarily agree with the results of the benchmark study, we entered intodiscussions with PacifiCare and we have agreed to reduce the rates. As a result,revenues from PacifiCare in the Second Quarter ended June 30, 2005, wereapproximately $2.0 million lower than revenues from PacifiCare in the FirstQuarter ended March 31, 2005. We expect a reduction in revenues ofapproximately $4.0 million to $6.0 million in the last six months of 2005compared to the same period in 2004.

 

*Development & Integration*.  Development & Integration servicerevenues for the Second Quarter ended June 30, 2005 were $42.4 million, anincrease of $0.7 million, or 1.6%, compared to the First Quarter ended March31, 2005. The sequential increase was primarily due to revenues from netNumina,partially offset by decreases in revenues from the large UK client andIBM.  Development & Integrationservice revenues for the Second Quarter ended June 30, 2005 decreased  $2.4 million, or 5.3%, over the sameperiod in 2004. Development & Integration revenues for the six months endedJune 30, 2005 were $84.2 million, a decrease of $2.5 million, or 2.9%, over thesame period in 2004. These decreases were primarily due to the lower revenuesfrom the large UK client, IBM, and existing customers, but were partially offsetby revenues from netNumina and Fast Track.

 

*Other IT Services*.  Other IT Services revenues for the SecondQuarter ended June 30, 2005 were $69.5 million, an increase of $1.7 million, or2.5%, compared to the First Quarter ended March 31, 2005.  The sequential increase was primarily due tohigher billable days in the Second Quarter ended June 30, 2005, which impactstime and material projects. In addition, higher revenues from a large customeroffset decreases from IBM. Other IT Services revenues for the Second Quarterended June 30, 2005 decreased $0.9 million, or 1.3%, and for the six monthsended June 30, 2005, decreased $1.7 million, or 1.2%, over the same periods in2004. These decreases were primarily due to the termination of a contract witha large customer in the Third Quarter ended September 30, 2004 and lowerrevenues from IBM, partially offset by higher revenues resulting from anincrease of placements at an existing large customer.

 

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

 
| ** **                                    | ** ** | **Three  Months Ended June 30,** | ** ** | **Increase  (Decrease)** | ** ** | **Six  months ended  June 30,** | ** ** | **Increase  (Decrease)** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|--------------------------|------------|---------------------------------|------------|--------------------------|------------|
| ** **                                    | ** ** | **2005**                         | ** ** | **2004**                 | ** ** | **$**                           | ** ** | **%**                    | ** ** | **2005** | ** ** | **2004** | ** ** | **$** | ** ** | **%** | ** ** |
| Revenues                                      |       | $                                | 237,818    |                     | $          | 231,712                         |       | $                        | 6,106      |   | 2.6 |   | $ | 470,022 |   | $ | 447,536 |   | $ | 22,486 |   | 5.0 |   |
| Salaries, wages,  and other direct costs |       | 166,461                          |       | 161,710                  |       | 4,751                           |       | 2.9                      |       | 328,654 |   | 311,700 |   | 16,954 |   | 5.4 |   |
| Gross margin                                  |       | $                                | 71,357     |                     | $          | 70,002                          |       | $                        | 1,355      |   | 1.9 |   | $ | 141,368 |   | $ | 135,836 |   | $ | 5,532 |   | 4.1 |   |
| Gross margin%                                 |       | 30.0                             | %          | 30.2                     | %          |                            |       |                     |       | 30.1 | % | 30.4 | % |   |   |   |   |

##### ** **

##### **Salaries, wages, and other direct costs**

 

Salaries, wages, and other direct costs for theSecond Quarter ended June 30, 2005 were $166.5 million, an increase of $4.3million, or 2.6%, compared to $162.2 million in the First Quarter ended March31, 2005.  Salaries, wages, and otherdirect costs for the Second Quarter ended June 30, 2005 increased $4.8 million,or 2.9%, and for the first six months of 2005 increased $17.0 million, or 5.4%,over the same periods in 2004. These increases were primarily attributable tocosts of client service personnel to support the increased servicerevenues.  Salaries, wages, and otherdirect costs were 70.0% of total revenues for the Second Quarter ended June 30,2005, and for the six months ended June 30, 2005 were 69.9% of total revenues,compared to 69.8% and 69.6% of total revenues for the same periods in 2004,respectively.

 

Total billable employees for all operations were 7,364 as of June 30,2005, compared to 7,236 as of March 31, 2005 and 7,062 total billable employeesas of June 30, 2004. This includes 1,630 billable employees in India, whichincludes Keane Worldzen, and represents an increase of 139 employees, or 9.3%,over the First Quarter ended March 31, 2005 and an increase of 203 employees, or 14.2%, over the Second Quarterended June 30, 2004.  We added our Indiaoperation in March 2002 with our acquisition of SignalTree Solutions andwe acquired our controlling interest in Keane Worldzen in October 2003. Inaddition to these employees, we occasionally use subcontract personnel toaugment our billable staff, which represented 561 full-time professionals as ofJune 30, 2005. Overall utilization rates for all three periods remained stableas we increased the number of billable employees.

 

##### **Grossmargin**

 

Our management believes gross margin *(revenuesless salaries, wages, and other direct costs)* provides an importantmeasure of our profitability. Gross margin for the Second Quarter ended June30, 2005 increased $1.4 million, or 1.9%, and for the first six months of 2005increased $5.5 million, or 4.1%, over the same periods in 2004.  Gross margin as a percentage of revenues forthe Second Quarter ended June 30, 2005 was 30.0% compared to 30.2% for both the same period in 2004 and the FirstQuarter ended March 31, 2005. Gross margin as a percentage of revenues for thefirst six months of 2005 was 30.1% compared to 30.4% for the same period in2004. We believe that the relatively constant gross margin percentage isindicative of a more stable environment for IT services, firmerutilization rates, as well as the benefit of our global sourcing capabilities.The lower labor cost associated with the increased use of offshore resources atour India facilities helped reduce the impact of lower pricing of our serviceson gross margin. We continue to closely monitor utilization rates and otherdirect costs in an effort to avoid adverse impacts on our gross margin.

 

##### **Selling,general, and administrative expenses**

 
| ** **                                                | ** ** | **Three  Months Ended June 30,** | *** *** | **Increase  (Decrease)** | ** ** | **Six  months ended  June 30,** | ** ** | **Increase  (Decrease)** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|--------------|--------------------------|------------|---------------------------------|------------|--------------------------|------------|
| ** **                                                | ** ** | **2005**                         | ** **   | **2004**                 | ** ** | **$**                           | ** ** | **%**                    | ** ** | **2005** | ** ** | **2004** | ** ** | **$** | ** ** | **%** | ** ** |
| Selling, general,  and administrative expenses (SG&A) |       | $                                | 56,304       |                     | $          | 52,665                          |       | $                        | 3,639      |   | 6.9 |   | $ | 110,476 |   | $ | 105,882 |   | $ | 4,594 |   | 4.3 |   |
| SG&A as a% of  revenue                                |       | 23.7                             | %            | 22.7                     | %          |                            |       |                     |       | 23.5 | % | 23.7 | % |   |   |   |   |
|                                                           |            |                                  |              |                          |            |                                 |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

SG&A expenses include salaries for our corporate and branchadministrative employees, sales and marketing expenses, as well as the cost ofour administrative facilities, including related depreciation expense. SG&Aexpenses for the Second Quarter ended June 30, 2005 increased $3.6 million, or6.9%, and for the first six months of 2005 increased $4.6 million, or 4.3%,over the same periods in 2004. These increases in SG&A expenses were due inpart to additional expenses associated

 

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with Nims, netNumina and FastTrack, higher recruiting expenses, as well as costs associated with our growthin India. In addition, the Second Quarter of 2005 includes approximately $0.8million of pursuit expenses associated with Keane’s successful bid on theVictoria Transport Ticketing Authority engagement.   SG&A expenses for the Second Quarter andsix months ended June 30, 2005 were 23.7% and 23.5% of total revenues,respectively, as compared to 22.7% and 23.7% of total revenues, respectively,for the same periods in 2004. The increase in SG&A expenses as a percentageof revenue in the quarter was partially due to the $0.8 million of pursuitexpenses and SG&A expenses associated with recent acquisitions.  SG&A expenses as a percentage of revenuedecreased in the six months ended June 30, 2005 as a result of the costsynergies of fully integrating acquisitions we made in 2004 as well as theassociated acquired revenues.

 

##### **Amortizationof intangible assets**

 

Amortization of intangible assets for the Second Quarter ended June 30,2005 was $3.9 million, a decrease of $0.2 million, or 4.3%, over the sameperiod in 2004. The decrease in amortization of intangible assets was primarilydue to certain intangibles becoming fully amortized offset by the amortizationof intangible assets resulting from the Fast Track acquisition completed in theThird Quarter ended September 30, 2004. Amortization of intangible assets forthe six months ended June 30, 2005 was flat compared to the same period in2004.

 

##### **Thefollowing table summarizes the non-operating items from our condensedconsolidated statements of income (dollars in thousands)**

 
| ** **                       | ** ** | **Three Months Ended  June 30,** | ** ** | **Increase  (Decrease)** | ** ** | **Six Months Ended  June 30,** | ** ** | **Increase  (Decrease)** | ** ** |
|----------------------------------|------------|----------------------------------|------------|--------------------------|------------|--------------------------------|------------|--------------------------|------------|
| ** **                       | ** ** | **2005**                         | ** ** | **2004**                 | ** ** | **$**                          | ** ** | **2005**                 | ** ** | **2004** | ** ** | **$** | ** ** |
| **Other  income (expense)**      |       |                             |       |                     |       |                           |       |                     |       |   |   |   |   |
| Interest and  dividend income    |       | $                                | 1,128      |                     | $          | 875                            |       | $                        | 253        |   | $ | 2,233 |   | $ | 1,930 |   | $ | 303 |   |
| Interest expense                 |       | (1,406                           | )          | (1,400                   | )          | (6                             | )          | (2,822                   | )          | (2,838 | ) | 16 |   |
| Other income  (expense), net     |       | (174                             | )          | 166                      |       | (340                           | )          | (190                     | )          | 291 |   | (481 | ) |
| Minority  interest               |       | 190                              |       | 509                      |       | (319                           | )          | 873                      |       | 1,270 |   | (397 | ) |
| **Other  income (expense), net** |       | $                                | (262       | )                        | $          | 150                            |       | $                        | (412       | ) | $ | 94 |   | $ | 653 |   | $ | (559 | ) |

##### ** **

##### **Interestand dividend income**

 

Interest and dividend income for the Second Quarter ended June 30, 2005was $1.1 million and for the first six months of 2005 was $2.2 million comparedto $0.9 million and $1.9 million for the same periods in 2004, respectively.These increases in interest and dividend income were primarily attributable tothe increase in average cash and cash equivalents balances and higher interestrates for the Second Quarter and six months ended June 30, 2005 compared to thesame periods in 2004. To the extent we use our cash and marketable securitiesto fund acquisitions, our operations, and capital investments, our interestincome will decline in future periods.

 

##### **Interestexpense**

 

Interest expense for the Second Quarter ended June 30, 2005 was $1.4million and was $2.8 million for the first six months of 2005 and unchangedcompared to the same periods in 2004. Interest expense was unchanged becauseour Debentures were outstanding for the entire Second Quarter and six monthsended June 30, 2005 and 2004. We also record interest expense on the accruedbuilding costs associated with our corporate facility as explained in Note 10 “RelatedParties, Commitments, and Contingencies” in the notes to the accompanyingunaudited condensed consolidated financial statements.

 

##### **Other(expense) income, net**

 

Other expense, net was $0.2 million for both the Second Quarter endedJune 30, 2005 and for the first six months of 2005, compared to income of $0.2million and $0.3 million, respectively, for the same periods in 2004.  These decreases were primarily due to foreignexchange losses.

 

##### **MinorityInterest**

 

Minority interest income for the Second Quarter ended June 30, 2005 was$0.2 million and for the first six months of 2005 was $0.9 million, a decreaseof $0.3 million and $0.4 million compared to the same periods in 2004,respectively. The decreases in minority interest income are due to Keane’shigher ownership percentage in Keane Worldzen effective April 1, 2005. Theamount in minority interest income represents the loss attributable to minorityshareholders of Keane Worldzen for the period presented.  We completed our acquisition of a controllinginterest in Keane Worldzen in the Fourth Quarter for 2003, which resulted in aninitial equity position of approximately 62% of the issued and outstandingcapital stock of Keane Worldzen and our consolidation of the results of KeaneWorldzen. Consistent with the right to increase our ownership position overtime, we increased our equity position to approximately 81% in April 2005 withan additional capital contribution of approximately $5.0 million in cash and$3.0 million from the conversion of an outstanding loan to equity. EffectiveApril 1, 2005, as a result of the additional capital contribution, we continueto consolidate the results of Keane Worldzen but recognize 81% of the resultsof operations.  As a result of ouradditional capital contribution, the minority interest shareholders own 

 

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approximately 19% of the issuedand outstanding capital stock of Keane Worldzen.

 

##### **Incometaxes**

 

##### **Thefollowing table summarizes the changes in provision for income taxes includedin our condensed consolidated statements of income (dollars in thousands)**

 
| ** **                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                  | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** |
| ** **                  | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Income before  income taxes |       | $                      | 10,931     |                 | $          | 13,452 |   | $ | 23,056 |   | $ | 22,659 |   |
| Provision for  income taxes |       | 3,888                  |       | 5,381                |       | 8,738 |   | 9,064 |   |
| **Net  income**             |       | $                      | 7,043      |                 | $          | 8,071 |   | $ | 14,318 |   | $ | 13,595 |   |
|                        |       |                   |       |                 |       |   |   |   |   |
| **Effective  Tax Rate**     |       | 35.6                   | %          | 40.0                 | %          | 37.9 | % | 40.0 | % |

 

The provision for income taxes represents the amounts owed for federal,state, and foreign taxes.  Our effective tax rate was 35.6% for theSecond Quarter ended June 30, 2005 and was 37.9% for the first six months of2005, compared to 40.0% for the same periods in 2004.  The decreases in our estimated effective taxrate for the Second Quarter and six months ended June 30, 2005 compared to thesame periods in 2004 were primarily due to our ability to consolidate KeaneWorldzen for tax purposes beginning April 1, 2005. As a result of owninggreater than 80% of the outstanding voting stock of Keane Worldzen, beginningApril 1, 2005, we are able to record a tax benefit on the losses associatedwith Keane Worldzen in our consolidated tax provision, thereby reducing ourannual effective tax rate. The determination of the provision for incometax expense, deferred tax assets and liabilities and related valuationallowance involves judgment. As a global company, we are required to calculateand provide for income taxes in each of the tax jurisdictions where we operate.This involves making judgments regarding the recoverability of deferred taxassets, which can affect the overall effective tax rate. In addition, changesin the geographic mix or estimated level of pre-tax income can affect theoverall effective tax rate.

 

##### **Netincome**

 

Net income for the Second Quarter ended June 30, 2005 decreased $1.0million compared to the same period in 2004. Net income decreased to $7.0 million for the Second Quarter ended June30, 2005 compared to $8.1 million for the Second Quarter ended June 30, 2004primarily due to decreased operating income as a result of proportionallyhigher SG&A expenses, offset in part by a lower effective tax rate.  The increase of net income by $0.7 millionfor the first six months of 2005 compared to the same period in 2004 was due toa higher gross margin, an increase in interest and dividend income, and a lowereffective tax rate.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

In December 2004, the FASB issued SFASNo. 123 (revised 2004) (“SFAS 123(R)”), “Share-Based Payment,” whichis a revision of SFAS 123 and supersedes APB 25 and its relatedimplementation guidance. Generally, the approach in SFAS 123(R) is similarto the approach described in SFAS 123. However, SFAS 123(R) requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the income statement based on their fair values atthe date of grant. Pro forma disclosure is no longer an alternative. In April2005, the Securities and Exchange Commission (“SEC”) announced that it wouldprovide for a phased-in implementation process for SFAS 123(R). Specifically,the SEC will require public companies that are not small business issuers asdefined in SEC Regulation S-B to adopt SFAS 123(R) no later than the beginningof the first fiscal year beginning after June 15, 2005.  Therefore, we are required to adopt SFAS123(R) on January 1, 2006.

 

SFAS 123(R) permits public companies to adopt itsrequirements using one of two methods: a “modified prospective” method, inwhich compensation cost is recognized beginning with the effective date(a) based on the requirements of SFAS 123(R) for all share-basedpayments granted after the effective date and (b) based on therequirements of SFAS 123 for all awards granted to employees prior to theeffective date of SFAS 123(R) that remain unvested on the effective date,and a “modified retrospective” method which includes the requirements of themodified prospective method described above, but also permits entities torestate based on the amounts previously recognized under SFAS 123 forpurposes of pro forma disclosures either (a) all prior periods presentedor (b) prior interim periods of the year of adoption. We have yet todetermine which method we will use in adopting SFAS 123(R). As permittedby SFAS 123, we currently account for share-based payments to employeesusing APB 25’s intrinsic value method. Accordingly, the adoption ofSFAS 123(R)’s fair value method will have a significant impact on ourresults of operations. We are evaluating SFAS 123(R) and have not yetdetermined the

 

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impact in future periods.

 

##### **LIQUIDITYAND CAPITAL RESOURCES**

 

**Consolidated Financial Condition (inthousands)**

** **
| **Six  Months Ended June 30,**         | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash Flows  Provided By (Used For)     |       |       |       |       |       |
| Operating  activities                  |       | $          | 9,299      |       | $          | 6,412 |   |
| Investing  activities                  |       | (1,737     | )          | 4,116      |       |
| Financing  activities                  |       | (15,371    | )          | (27,475    | )          |
| Effect of  exchange rate on cash       |       | (6         | )          | 24         |       |
|                                   |       |       |       |       |       |
| Decrease in Cash  and cash equivalents |       | $          | (7,815     | )          | $          | (16,923 | ) |

 

We have historically financed our operations with cash generated fromoperations. In addition, in 2003, we raised $150.0 million in proceeds from theissuance of our debentures. We use the net cash generated from these sources tofund capital expenditures, mergers and acquisitions, and stock repurchases. Ifwe were to experience a decrease in revenue as a result of a decrease in demandfor our services or a decrease in our ability to collect receivables, we wouldbe required to reduce discretionary spending related to SG&A expenses andadjust our workforce in an effort to maintain profitability. At June 30, 2005,we had $180.0 million in cash and cash equivalents and marketable securities.We intend to continue to use our cash and cash equivalents and marketablesecurities for general corporate purposes, which may include additional repurchasesof our common stock under existing or future share repurchase programs and thefunding of future acquisitions and other corporate transactions.

 

**Cash flows provided by operatingactivities**

 

Net cash provided by operating activities totaled $9.3 million for thesix months ended June 30, 2005 compared to net cash provided by operatingactivities of $6.4 million for the six months ended June 30, 2004.  The increase in net cash provided byoperating activities was driven by the higher accounts receivable collectionand the timing of cash payments. Days Sales Outstanding (“DSO”), an indicatorof the effectiveness of our accounts receivable collections, was 54 days as ofJune 30, 2005, compared to 52 days as of December 31, 2004 and 53 days as ofJune 30, 2004. We calculate DSO using the trailing three months total revenuedivided by the number of days in the quarter to determine daily revenue.  The average accounts receivable balance forthe three-month period is then divided by daily revenue. Partially offsettingthe increase in accounts receivable was an increase in accrued liabilities.

 

**Cash flows (used for) provided byinvesting activities**

 

Net cash used for investing activities for the six months ended June30, 2005 was $1.7 million compared to net cash provided by investing activitiesof $4.1 million for the six months ended June 30, 2004.

** **

*MarketableSecurities:* During the six months ended June 30, 2005, wepurchased $23.4 million and sold $33.2 million in marketable securities,generating a net source of cash of $9.8 million, compared to purchases of $32.5million and sales of $61.1 million in the first six months of 2004.  The net proceeds from these transactions wereused to fund our share repurchases and acquisitions.

 

*Propertyand Equipment:*We invested $7.9 million and $6.4 millionin property and equipment, and capitalized software costs in connection withthe implementation of our PeopleSoft Enterprise Resource Planning applicationsas of June 30, 2005 and 2004, respectively.

 

*BusinessAcquisitions:*On June 1, 2005, we acquired Cresta.  Inexchange for all of the outstanding capital stock of Cresta, we paid $0.6million in cash, of which $60,000 was held back to secure indemnificationobligations of the Cresta stockholders, with the potential to pay up to anadditional $0.5 million in earn-out consideration over the next two years,contingent upon the achievement of certain future financial targets. The$60,000 held back was deposited as restricted cash and also accrued andincluded in Accrued expenses and other liabilities in the accompanyingunaudited condensed consolidated balance sheet.

 

On February 28, 2005, we acquired netNumina. Inexchange for all of the outstanding capital stock of netNumina, we agreed topay $5.7 million, of which $0.6 million was held back to secure indemnificationobligations of the netNumina stockholders and acquired $4.6 million incash.  As of June 30, 2005, we had paid$4.7 million of the $5.1 million not held

 

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backfor the netNumina stock certificates surrendered for cancellation. The  $0.6 million heldback was deposited as restricted cash, and accrued with the remaining $0.4million for stock certificates to be surrendered in Accrued expenses and otherliabilities in the accompanying unaudited condensed consolidated balance sheet.

 

On February 27, 2004, we acquired Nims. Inexchange for all of the outstanding capital stock of Nims, we paid$18.2 million in cash, including transaction costs and net of cashacquired. The purchase price for Nims may increase with the potential to pay upto an additional $15.0 million in earn-out consideration over the nextthree years, contingent upon the achievement of certain future financialtargets.  The first earn-out was achievedas of March 1, 2005 and as a result, we paid $3.3 million in earn-outconsideration in April 2005. As of June 30, 2005, there is a remaining $11.7million in earn-out consideration that could be achieved over the next twoyears. During the Second Quarter ended June 30, 2005, we also received a taxrefund related to the Nims acquisition of approximately $0.2 million.

 

**Cashflows used for financing activities**

 

Net cash flows used for financing activities was $15.4 million for thesix months ended June 30, 2005, compared to net cash used for financingactivities of $27.5 million for the six months ended June 30, 2004.   Net cash flows used for financing activitiesfor both 2005 and 2004 were primarily for the repurchase of our common stock,and were partially offset by proceeds received from the issuance of stockassociated with our employee stock purchase and stock option plans.  The following is a summary of our repurchaseactivity for the six months ended June 30, 2005 and 2004 (dollars inthousands):

 
| ** **                               | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|------------------------------------------|------------|------------|------------|------------|------------|
| ** **                               | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|                                     |       |       |       |       |       |   |   |   |   |
| Prior year  authorizations at January 1, |       | 2,871,600  |       |       |       | 3,181,200 |   |   |   |
| Authorizations                           |       | 3,000,000  |       |       |       | 3,000,000 |   |   |   |
| Repurchases paid                         |       | (1,352,500 | )          | $          | 17,563     |   | (2,127,300 | ) | $ | 30,096 |   |
| Repurchases  accrued                     |       | (107,500   | )          | $          | 1,477      |   | — |   |   |   |
| Expirations                              |       | (1,763,900 | )          |       |       | (1,182,300 | ) |   |   |
| Shares remaining  as of June 30,         |       | 2,647,700  |       |       |       | 2,871,600 |   |   |   |
|                                          |            |            |            |            |            |  |  |  |  |  |  |  |

 

These share repurchases more thanoffset the shares issued under our various stock incentive programs. Underthese stock  incentiveprograms, we issued 223,804 shares and 285,769 shares and received proceeds of$2.4 million and $2.9 million for the six months ended June 30, 2005 and 2004,respectively. Between May 1999 and June 30, 2005, we have invested approximately$278.8 million to repurchase approximately 22.0 million shares of our commonstock under eleven separate authorizations.

 

In February 2003, we entered into a $50.0 million unsecuredrevolving credit facility (“credit facility”) with two banks. The creditfacility replaced a previous $10.0 million demand line of credit, whichexpired in July 2002. The terms of the credit facility require us tomaintain a maximum total funded debt and other financial ratios. The creditfacility also includes covenants that, subject to certain specific exceptionsand limitations, among other things, restrict our ability to incur additionaldebt, make certain acquisitions or disposition of assets, create liens, and paydividends. On June 11, 2003, we and the two banks amended certainprovisions of the credit facility relating to financial covenants. Thesecovenants, which include total indebtedness and leverage ratios, are no morerestrictive than those initially contained in the credit facility. OnOctober 17, 2003 and February 5, 2004, we and the two banks furtheramended certain provisions of the credit facility to expand our ability to makecertain acquisitions. OnMarch 31, 2005, we and the two banks further amended certain provisions of thecredit facility as follows: (a) to allow additional unsecured indebtedness, (b)to allow Keane’s April 1, 2005 additional investment in Keane Worldzen, (c) tofurther expand our ability to make certain acquisitions and (d) to adjustfinancial covenants, which are no more restrictive than those initiallycontained in the credit facility. On July 11, 2005, we and the two banksfurther amended certain provisions of the credit facility to increase theallowable limit for letters of credit within the total facility, including forthe purposes of issuing a letter of credit to satisfy bank guarantees withrespect to the Transport Ticketing Authority of the State of Victoria. One ofthe banks has issued a $45 million AUD letter of credit dated July 14, 2005against our credit facility in connection with our contract with the TransportTicketing Authority. The annual commitment fee for maintaining thecredit facility is 30 basis points on the unused portion of the creditfacility, up to a maximum of $150,000. As of June 30, 2005, we had no debtoutstanding under the credit facility. We may draw upon the credit facility upto $50.0 million less any outstanding letters of credit that have beenissued against the credit facility. Any amounts drawn upon the credit facilityconstitute senior indebtedness for purposes of our Debentures. Borrowings bearinterest at one of the bank’s base rate or the Euro currency reserve rate.Based on our current operating plan, we believe that our cash and cashequivalents on hand, marketable securities, cash flows from operations, and ourline of credit will be sufficient to meet our current capital requirements forat least the next 12 months.

 

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##### **Increase(Decrease) in Cash and Cash Equivalents**

 

Our cash and cash equivalents totaled $59.7 million and $39.8 millionat June 30, 2005, and 2004, respectively.

 

**IMPACT OFINFLATION AND CHANGING PRICES**

 

Inflationary increases incosts have not been material in recent years and, to the extent permitted bycompetitive pressures, are passed on to clients through increased billingrates. Rates charged by us are based on the cost of labor and market conditionswithin the industry.

 

**CERTAINFACTORS THAT MAY AFFECT FUTURE RESULTS**

 

The following importantfactors, among others, could cause actual results to differ materially fromthose indicated by forward-looking statements made in this Quarterly Report onForm 10-Q and presented elsewhere by management from time-to-time.

 

**Our quarterly operating results have varied, and are likelyto continue to vary significantly. This may result in volatility in the marketprice of our common stock.**    We have experienced and expect to continue toexperience fluctuations in our quarterly results. Our gross margins vary basedon a variety of factors including employee utilization rates and the number andtype of services performed during a particular period. A variety of factorsinfluence our revenue in a particular quarter, including:

 

*•**                                         *general economic conditions, which may influenceinvestment decisions or cause downsizing;

 

*•**                                         *the number and requirements of clientengagements;

 

*•**                                         *employee utilization rates;

 

*•**                                         *changes in the rates we can charge clients forservices;

 

*•**                                         *acquisitions; and

 

*•**                                         *other factors, many of which are beyond ourcontrol.

 

A significant portion of ourexpenses does not vary relative to revenue. As a result, if revenue in aparticular quarter does not meet expectations, our operating results could bematerially adversely affected, which in turn may have a material adverse impacton the market price of our common stock. In addition, many of our engagementsare terminable without client penalty. An unanticipated termination of a majorproject could result in an increase in underutilized employees and a decreasein revenue and profits.

 

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

 

**If our clients are not satisfied with our services, we mayhave exposure to liabilities, which could adversely affect our profitabilityand financial condition as well as our ability to compete for future work.**    If we fail to meet ourcontractual obligations, we could be subject to legal liability, which couldadversely affect our business, operating results and financial condition. Theprovisions we typically include in our contracts that are designed to limit ourexposure to legal claims relating to our services and the applications wedevelop may not protect us or may not be enforceable under some circumstancesor under the laws of some jurisdictions. It is possible, because of the natureof our business, that we will be sued in the future. In addition, although wemaintain professional liability insurance, the policy limits may not beadequate to

 

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provide protection against all potential liabilities.Moreover, as a consulting firm, we depend to a large extent on ourrelationships with our clients and our reputation for high-quality services toretain and attract clients and employees. As a result, claims made against ourwork may damage our reputation, which in turn, could impact our ability tocompete for new work and negatively impact our revenue and profitability.

 

**The termination of a contract by a significant client couldreduce our revenue and profitability or adversely affect our financialcondition.**    Ourfive largest clients, excluding the federal government, accounted forapproximately 19.1% of our revenue in the Second Quarter ended June 30, 2005,and 19.0% for the six months ended June 30, 2005, although no individual clientaccounted for more than 6.0% of our total revenue for either period. Thevarious agencies of the federal government represent our largest client,accounting for approximately 9.5% of total revenue for both the Second Quarterand six months ended June 30, 2005. We strive to develop long-termrelationships with our clients. Most individual client assignments are fromthree to twelve months; however, many of our client relationships havecontinued for many years. Our clients typically retain us on a non-exclusive,engagement-by-engagement basis. Although they may be subject to penaltyprovisions, clients may generally cancel a contract at any time. Under manycontracts, clients may reduce their use of our services under such contract withoutpenalty. In addition, contracts with the federal government contain provisionsand are subject to laws and regulations that provide the federal governmentwith rights and remedies not typically found in commercial contracts. Amongother things, the federal government, as well as other public sector clients,may terminate contracts with short notice, for convenience and may cancelmulti-year contracts if funds become unavailable. When contracts areterminated, our revenue may decline and if we are unable to eliminateassociated costs in a timely manner, our profitability may decline. In both theSecond Quarter and six months ended June 30, 2005, approximately 18.4% of ourrevenue was from public sector clients, including U.S. Federal, state, andlocal governments and agencies. Often government spending programs aredependent upon the budgetary capability to support such programs. Manygovernment budgets have been adversely impacted by the economic slowdown. Moststates must operate under a balanced budget. As a result of such budget anddeficit considerations, our existing and future revenues and profitabilitycould be adversely affected by reduced government IT spending.

 

**Our recently announced engagement with Melbourne, Victoria TransportTicketing Authority, or TTA, exposes us to a number of different risks inherentin such long-term, large-scale, fixed-fee projects. **We have been awarded a contract to performservices in relation to the development, operation and maintenance of a publictransport ticketing system for the state of Victoria, Australia.  This engagement will require significantmanagement attention and financial resources, and could adversely affect ourresults of operations in a number of ways. These include:

 

•                  start-up costs couldpotentially result in initial lower operating margins for the project;

 

•                  difficulties and costs ofstaffing and managing complex projects and operations in a new geographicmarket place;

 

•                  dependence on subcontractorsand potential subcontractor non-performance;

 

•                  complexities in interpreting anddelivering the broad range of functional and technical requirements requiredunder the project contract;

 

•                  difficulties in working withmultiple parties in defining these functional and technical requirements andachieving acceptance of deliverables;

 

•                  project delays caused byreasons beyond our control;

 

•                  fluctuations in foreign currencyexchange rates;

 

•                  the additionalliability we have undertaken both to guarantee performance of our subsidiaryunder the contract and the entrance into performance and security bonds underour credit facility.

 

**Unfavorable government audits could require us to refundpayments we have received, to forego anticipated revenue, and could subject usto penalties and sanctions.**    The government agencies we contract withgenerally have the authority to audit and review our contracts with them. Aspart of that process, the government agency reviews our performance on thecontract, our pricing practices, our cost structure and our compliance withapplicable laws, regulations and standards. If the audit agency determines thatwe have improperly received reimbursement, we would be required to refund anysuch amount. If a government audit uncovers improper or illegal activities byus or we otherwise determine that these activities have occurred, we may besubject to civil and criminal penalties and administrative sanctions, includingtermination of 

 

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contracts, forfeitures of profits, suspension ofpayments, fines and suspension or disqualification from doing business with thegovernment. Any such unfavorable determination could adversely impact ourability to bid for new work.

 

**We have pursued, and intend to continue to pursue, strategicacquisitions. Failure to successfully integrate acquired businesses or assetsmay adversely affect our financial performance.**    In recent years, wehave grown significantly through acquisitions. From January 1, 1999through June 30, 2005, we completed 17 acquisitions. The aggregate merger andconsideration costs of these acquisitions totaled approximately$423.1 million. Our future growth may be based in part on selectedacquisitions. At any given time, we may be in various stages of consideringacquisition opportunities. We may not be able to find and identify desirableacquisition targets or be successful in entering into a definitive agreementwith any one target. In addition, even if we reach a definitive agreement witha target, we may not be able to complete any future acquisition.

 

We typically anticipate thateach acquisition will bring benefits, such as an increase in revenue. Prior tocompleting an acquisition, however, it is difficult to determine if thesebenefits will be realized. Accordingly, there is a risk that an acquiredcompany may not achieve an increase in revenue or other benefits for us. Inaddition, an acquisition may result in unexpected costs, expenses, andliabilities. Any of these events could have a material adverse effect on ourbusiness, financial condition, and results of operations.

 

Wehave recorded a significant amount of goodwill and other intangible assetsresulting from our acquisitions. We review our goodwill and identifiable assetsfor impairment in accordance with SFAS 142 and SFAS No. 144 (“SFAS 144”), “Accountingfor the Impairment or Disposal of Long-Lived Assets,” respectively.  If the estimated future cash flows of thereporting units related to the underlying assets are not sufficient to supportthe carrying value of the associated underlying assets, we may be required torecord impairment charges related to goodwill and other intangible assets. Anymaterial loss resulting from an impairment charge could have a material adverseeffect on our results of operations. As of June 30, 2005, our goodwill totaled$311.4 million, customer lists totaled $47.1 million and other intangiblesassets totaled $7.9 million.

 

The process of integratingacquired companies into our existing business might also result in unforeseendifficulties. Unforeseen operating difficulties may absorb significantmanagement attention, which we may otherwise devote to our existing business.In addition, the process may require significant financial resources that wemight otherwise allocate to other activities, including the ongoing developmentor expansion of our existing operations.

 

Finally, future acquisitionscould result in our having to incur additional debt and/or contingentliabilities. We may also issue equity securities in connection with acquisitions,which could have a dilutive effect on our earnings per share. Any of thesepossibilities could have a material adverse effect on our business, financialcondition, and result of operations.

 

**We face significant competition for our services, and ourfailure to remain competitive could limit our ability to maintain existingclients or attract new clients.**    The market for our services is highlycompetitive. The technology for custom software services can change rapidly.The market is fragmented, and no company holds a dominant position.Consequently, our competition for client assignments and experienced personnelvaries significantly from city to city and by the type of service provided.Some of our competitors are larger and have greater technical, financial, andmarketing resources and greater name recognition in the markets they serve thanwe do. In addition, clients may elect to increase their internal informationsystems resources to satisfy their custom software development and integrationneeds.

 

In the healthcare softwaresystems market, we compete with some companies that are larger in thehealthcare market and have greater financial resources than we do. We believethat significant competitive factors in the healthcare software systems marketinclude size and demonstrated ability to provide service to targeted healthcaremarkets.

 

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

 

**We conduct business in the UK, Canada, and India, whichexposes us to a number of difficulties inherent in international activities.**    As a result of ouracquisition of a controlling interest in Keane Worldzen in October 2003and the acquisition of SignalTree Solutions in March 2002, we now havefour software development facilities in India. As of June 30, 2005, we hadapproximately 1,643 technical professionals in the region, including KeaneWorldzen. India is currently experiencing conflicts with Pakistan over thedisputed territory of Kashmir as well as clashes between different religiousgroups within the country. These conflicts, in addition to other unpredictabledevelopments in the political, economic, and social conditions in India, couldeliminate or reduce the availability of these development and professionalservices. If access to these services were to be unexpectedly eliminated orsignificantly reduced, our ability to meet development objectives important toour strategy to add offshore delivery capabilities to the services we providewould be hindered, and our business could be harmed.

 

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If we fail to manage ourgeographically dispersed organization, we may fail to meet or exceed ourfinancial objectives and our revenues may decline. We perform developmentactivities in the U.S., Canada, and India, and have offices throughout theU.S., UK, Canada, and India. This geographic dispersion requires us to devotesubstantial management resources that locally based competitors do not need todevote to their operations.

 

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

 

In addition, there has been political discussion and debate related toworldwide competitive sourcing, particularly from the United States to offshorelocations. There is proposed federal and state legislation currently pendingrelated to this issue. It is too early to determine whether or in what formthis legislation will be adopted; however, future legislation, if enacted, couldhave an adverse effect on our business, results of operations and financialcondition.

 

**We may be unable to re-deploy our professionalseffectively if engagements are terminated unexpectedly, which would adverselyaffect our results of operations.**    Our clients can cancel or reduce the scope oftheir engagements with us on short notice. If they do so, we may be unable toreassign our professionals to new engagements without delay. The cancellationor reduction in scope of an engagement could, therefore, reduce the utilizationrate of our professionals, which would have a negative impact on our business,financial condition, and results of operations.

 

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

 

**Our growth could be limited if we are unable to attract andretain personnel in the information technology and business consultingindustries.**    Webelieve that our future success will depend in large part on our ability tocontinue to attract and retain highly skilled technical and managementpersonnel. The competition for such personnel is intense. We may not succeed inattracting and retaining the personnel necessary to develop our business. If wedo not, our business, financial condition, and results of operations could bematerially adversely affected.

 

**We may be prohibited from repurchasing, and may not have thefinancial resources to repurchase, our Debentures on the date for repurchase atthe option of the holder or upon a designated event, as required by theindenture governing our Debentures, which could cause defaults under our seniorrevolving credit facility and any other indebtedness we may incur in thefuture.**    TheDebenture holders have the right to require us to repurchase all or a portionof their Debentures on June 15, 2008. The Debenture holders may alsorequire us to repurchase all or a portion of their Debentures upon a designatedevent, as defined in the indenture governing the Debentures. If the Debentureholders elect to require us to repurchase their Debentures on any of the abovedates or if a designated event were to occur, we may not have enough funds topay the repurchase price for all tendered Debentures. We are currentlyprohibited under our senior revolving credit facility from repurchasing anyDebentures if a designated event were to occur. We may also be prohibited underany indebtedness we may incur in the future from purchasing any Debenturesprior to their stated maturity. In these circumstances, we will be required torepay all of the outstanding principal of, and pay anyaccrued and unpaid interest on, such indebtedness or to obtain the requisiteconsents from the holders of any such indebtedness to permit the repurchase ofthe Debentures. If we are unable to repay all of such indebtedness or are unableto obtain the necessary consents, we will be unable to offer to repurchase theDebentures, which would constitute an event of default under the indenture forthe Debentures, which itself could constitute a default under our seniorrevolving credit facility or under the terms of any future indebtedness that wemay incur. In addition, the events that constitute a designated event under theindenture for the Debentures are events of default under our senior revolvingcredit facility and may also be events of default under other indebtedness thatwe may incur in the future.

 

**We incurred indebtedness when we sold our Debentures. We mayincur additional indebtedness in the future. The indebtedness created by thesale of our Debentures, and any future indebtedness, could adversely affect ourbusiness and our ability to make full payment on the Debentures.**    Our aggregate level ofindebtedness increased in connection with the sale of our Debentures. As ofJune 30, 2005, we had approximately $190.3 million of outstandingindebtedness and had the ability to incur additional debt under our revolvingcredit facility. We may also obtain additional long-term debt and workingcapital lines of credit to meet future financing needs, which would have theeffect of increasing our total leverage. Any increase in our leverage couldhave significant negative consequences, including:

 

*•**                                         *increasing our vulnerability to adverseeconomic and industry conditions;

 

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*•**                                         *limiting our ability to obtain additionalfinancing;

 

*•**                                         *limiting our ability to make acquisitions;

 

*•**                                         *requiring the dedication of a substantialportion of our cash flow from operations to service our indebtedness, therebyreducing the amount of our cash flow available for other purposes, includingcapital expenditures;

 

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

 

*•**                                         *placing us at a possible competitivedisadvantage with less leveraged competitors and competitors that may havebetter access to capital resources.

 

Our ability to satisfy ourfuture obligations, including debt service on our Debentures, depends on ourfuture operating performance and on economic, financial, competitive, and otherfactors beyond our control. Our business may not generate sufficient cash flowto meet these obligations or to successfully execute our business strategy. Ifwe are unable to service our debt and fund our business, we may be forced toreduce or delay capital expenditures, seek additional financing or equitycapital, restructure or refinance our debt or sell assets. We may not be ableto obtain additional financing or refinance existing debt or sell assets onterms acceptable to us or at all.

 

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**Item 3.****          ****Quantitative and QualitativeDisclosures About Market Risk**

 

We do not engage in trading market risk, sensitive instruments orpurchasing hedging instruments or “other than trading” instruments that arelikely to expose us to market risk, whether interest rate, foreign currencyexchange, and commodity price or equity price risk. We have not purchasedoptions or entered into swaps or forward or futures contracts.

 

*Interest Rate Risk*

 

We invest primarily in U.S. government obligations as well astax-exempt municipal bonds and corporate bonds. As a result, our primary marketrisk exposure is that of interest rate risk to our investments, which wouldaffect the carrying value of those investments. During 2004, the United StatesFederal Reserve Board began increasing benchmark interest rates and at the June2005 meeting of the Federal Open Market Committee increased rates for the ninthtime, a total of 225 basis points, since June 30, 2004. A significant increasein interest rates would increase the rate of return on our cash and cashequivalents, but would have a negative impact on the carrying value of ourmarketable securities. Our interest income would change by approximately $0.7million for both the six months ended June 30, 2005 and June 30, 2004 for each100 basis point increase or decrease in interest rates. The fair value ofour investment portfolio at June 30, 2005 would decrease by approximately $1.4million for a 100 basis point increase in rates and increase $1.4 million for a100 basis point decrease in rates. The fair value of our investment portfolioat December 31, 2004 would change by approximately $1.8 million for each100 basis point increase or decrease in rates.

 

Changes in market rates and the related impact on the fair value of ourinvestments would not generally affect net income as our investments are fixedrate securities and are classified as available-for-sale. Investmentsclassified as available-for-sale are carried at fair value with unrealizedgains and losses recorded as a component of accumulated other comprehensiveloss in the accompanying consolidated balance sheets. However, when theinvestments are sold, the unrealized losses are recorded as realized losses andincluded in net income in the accompanying consolidated statements of income.As of June 30, 2005, we had a net unrealized loss of approximately $1.1million, which represents a decrease of $0.5 million and an increase of $0.3million from March 31, 2005 and December 31, 2004, respectively.

 

*Foreign Currency Risk*

 

We transact business in the UK, Canada, andIndia and as such have exposure associated with movement in foreign currencyexchange rates. For the Second Quarter and six months ended June 30, 2005compared to the same periods in 2004, the fluctuation in foreign currencyexchange rates negatively impacted operating income by approximately $0.7million and $1.5 million, respectively. Relative to the foreign currencyexposures existing at June 30, 2005, a 10% unfavorable movement would haveresulted in an additional $1.6 million reduction of operating income for theSecond Quarter ended June 30, 2005 and additional $3.1 million reduction ofoperating income for the six months ended June 30, 2005. Net revenues derivedfrom our foreign operations totaled approximately 6% of our total revenues forboth the Second Quarter and six months ended June 30, 2005, respectively, andtotaled approximately 6% and 5% of our total revenues for the Second Quarterand six months ended June 30, 2004, respectively.

 

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**Item4.****           Controlsand Procedures**

 

**ConclusionRegarding the Effectiveness of Disclosure Controls and Procedures**

 

Keane maintains disclosurecontrols and procedures designed to ensure that information required to bedisclosed in reports filed under the Securities Exchange Act of 1934, asamended, is recorded, processed and summarized and reported within thespecified time periods. Our management, with the participation of our Presidentand Chief Executive Officer and our Senior Vice President of Finance andAdministration and Chief Financial Officer, evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) as of June 30, 2005. Based on thisevaluation, our President and Chief Executive Officer and our Senior VicePresident of Finance and Administration and Chief Financial Officer concludedthat, as of June 30, 2005, our disclosure controls and procedures were (1) designedto ensure that material information relating to us, including our consolidatedsubsidiaries, is made known to our President and Chief Executive Officer andour Senior Vice President of Finance and Administration and Chief FinancialOfficer by others within these entities, particularly during the period inwhich this report was being prepared, and (2) effective, in that theyprovide reasonable assurance that information required to be disclosed by us inthe reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms.

 

**Changes inInternal Control Over Financial Reporting**

 

During the three months ended June 30, 2005, except asindicated below, there have not been any significant changes in our internalcontrols over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)under the Exchange Act) that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.  As has been previously reported, we are inthe process of implementing a PeopleSoft Enterprise Resource Planning (“ERP”)system for the majority of our processes and operations.  During the Second Quarter of 2005, we beganto phase in the modules for Time Reporting, Contracts Management, ProjectAccounting, Billing and Revenue Recognition in our North Americanoperations.  We believe that internalcontrols over financial reporting related to these system and process changeswere effective as of June 30, 2005.  Weplan to continue the roll out of these modules in a deliberate phased approachto ensure internal controls over financial reporting remain effective.

 

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**Keane, Inc.**

**Part II.****          OtherInformation**

 

**Item 2.****  Unregistered Sales of EquitySecurities and Use of Proceeds**

 

(c)                                  The following table provides informationabout purchases by Keane during the three months ended June 30, 2005 of equitysecurities that are registered by Keane pursuant to Section 12 of the ExchangeAct:

 

**ISSUER PURCHASES OF EQUITYSECURITIES**

** **
| **Period**        | ** ** | **(a)  Total Number of  Shares (or Units)  Purchased** | ** ** | **(b)  Average Price  Paid per Share (or  Unit)** | ** ** | **(c)  Total Number of  Shares Purchased  as Part of Publicly  Announced Plans  or Programs  (1) (2)** | ** ** | **(d)  Maximum Number of  Shares that May Yet Be  Purchased Under the  Plans or Programs  (1) (2)** | ** ** |
|-------------------|------------|--------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| 04/01/05-04/30/05 |       | —                                                 |       | $                                                 | —     |                                                                                                   | —     |                                                                                                | 2,871,600  |   |
| 05/01/05-05/31/05 |       | 835,500                                                |       | $                                                 | 12.74      |                                                                                                   | 835,500    |                                                                                                | 2,036,100  |   |
| 06/01/05-06/30/05 |       | 624,500                                                |       | $                                                 | 13.44      |                                                                                                   | 624,500    |                                                                                                | 2,647,700  |   |
| Total:            |       | 1,460,000                                              |       | $                                                 | 13.04      |                                                                                                   | 1,460,000  |                                                                                                | 2,647,700  |   |

 

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(1)          On June 14, 2004, we announced the approval by our Board of Directors ofthe repurchase by us of 3.0 million shares of our common stock pursuant toa stock repurchase program (“the June 2004 Program”). The repurchases weremade on the open market or in negotiated transactions, and the timing andamount of shares to be purchased was determined by our management based on itsevaluation of market and economic conditions and other factors.  The June 2004 Programexpired on June 13, 2005.

 

(2)          On June 14, 2005, we announced the approval by our Board of Directors ofthe repurchase by us of 3.0 million shares of our common stock pursuant toa stock repurchase program (“the June 2005 Program”). The repurchases maybe made on the open market or in negotiated transactions, and the timing andamount of shares to be purchased will be determined by our management based onits evaluation of market and economic conditions and other factors. Unlessterminated earlier by resolution of our Board of Directors, the June 2005Program will expire upon the earlier of the date we repurchase all sharesauthorized for repurchase thereunder or June 13, 2006.

 

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##### **Item 4.**                     Submission of Matters to a Vote ofSecurity Holders

 

The following matters were submitted to a vote of thestockholders at our 2005 Annual Meeting of Stockholders held on May 12, 2005(the “Annual Meeting”):  (1) to electfour Class I directors for the ensuing three years and (2) to ratify andapprove the selection of Ernst & Young LLP as the Company’s independentregistered public accounting firm for the current year. The number of shares ofcommon stock outstanding and eligible to vote as of the record date of March21, 2005 was 62,371,473.  Each of thesematters was approved by the requisite vote of our stockholders. Set forth belowis the number of votes cast for, against, or withheld, as well as the number ofabstentions and broker non-votes as to the respective matter, including aseparate tabulation with respect to each nominee for director.

 

###### **Proposal 1: electing four Class I directors for the ensuing three years**

 
| **Nominees**        | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|---------------------|------------|------------|------------|--------------|------------|
| Maria A. Cirino     |       | 51,516,137 |       | 1,087,349    |       |
| John F. Keane, Jr.  |       | 48,754,238 |       | 3,849,249    |       |
| Stephen D. Steinour |       | 49,827,405 |       | 2,776,081    |       |
| James D. White      |       | 51,486,525 |       | 1,116,961    |       |

 

The other members of the Keane Board of Directorswhose terms of office continued after the Annual Meeting were Lawrence P.Begley, Philip J. Harkins, Winston R. Hindle, Jr., Brian T. Keane, John H.Fain, John F. Keane, and John F. Rockart.

 

**ProposalII: ratifying and approving the selection of Ernst & Young LLP as Keane’sindependent registered public accounting firm for the current year**

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 51,123,809 |       | 1,443,759   |       | 35,918      |       |

 

**Item 6.****                    ****Exhibits**

 

Exhibit 3.1 -                Restated Articles of Organization dated May10, 2005

 

Exhibit 10.1 – Fourth Amendment dated March 31, 2005 to the RevolvingCredit Agreement dated February 28, 2003, by and between the Registrant and theLenders thereto

 

Exhibit 10.2 – Fifth Amendment dated July 11, 2005 to the RevolvingCredit Agreement dated February 28, 2003, by and between the Registrant and theLenders thereto

 

Exhibit 31.1—Certificationpursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief ExecutiveOfficer.

 

Exhibit 31.2—Certificationpursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief FinancialOfficer.

 

Exhibit 32.1—Certificationpursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer.

 

Exhibit 32.2—Certificationpursuant to 18 U.S.C. Section 1350 of the Chief Financial Officer.

 

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** **

**Signatures**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|                                                                      |   | KEANE, INC.                                                                                                                                    |   |
|---------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                      |   | (Registrant)                                                                                                                                        |   |
|                                                                      |   |                                                                                                                                                |   |
|                                                                      |   |                                                                                                                                                |   |
|  Date        August  4, 2005 |   | /s/ Brian T. Keane                                                                                                                                  |   |
|                                                                      |   |                                                                                                                                                |   |
|                                                                      |   |                                                                                                                                                |   |
|                                                                      |   | Brian T. Keane  President and Chief Executive  Officer                                                                                         |   |
|                                                                      |   |                                                                                                                                                |   |
|                                                                      |   |                                                                                                                                                |   |
|  Date        August  4, 2005 |   | /s/ John J. Leahy                                                                                                                                   |   |
|                                                                      |   |                                                                                                                                                |   |
|                                                                      |   |                                                                                                                                                |   |
|                                                                      |   | John J. Leahy  Senior Vice President of  Finance and  Administration and Chief Financial Officer  (Principal Financial and Accounting Officer) |   |

 

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Exhibit Index

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                          |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                     |
| 3.1              |       | Restated Articles of  Organization dated May 10, 2005                                                                                                    |
|             |       |                                                                                                                                                     |
| 10.1             |       | Fourth Amendment dated  March 31, 2005 to the Revolving Credit Agreement dated February 28, 2003, by  and between the Registrant and the Lenders thereto |
|             |       |                                                                                                                                                     |
| 10.2             |       | Fifth Amendment dated July  11, 2005 to the Revolving Credit Agreement dated February 28, 2003, by and  between the Registrant and the Lenders thereto   |
|             |       |                                                                                                                                                     |
| 31.1             |       | Certification pursuant to  Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer.                                                          |
|             |       |                                                                                                                                                     |
| 31.2             |       | Certification pursuant to  Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer.                                                          |
|             |       |                                                                                                                                                     |
| 32.1             |       | Certification pursuant to  18 U.S.C. Section 1350 of the Chief Executive Officer.                                                                        |
|             |       |                                                                                                                                                     |
| 32.2             |       | Certification pursuant to  18 U.S.C. Section 1350 of the Chief Financial Officer.                                                                        |

 

39

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