UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

---

FORM 10-Q

|(Mark One)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the quarter ended September 30, 2004                     
|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.(Exact name of registrant as specified in its charter)

|MASSACHUSETTS(State or other jurisdiction of
incorporation or organization)    |  | 04-2437166(IRS Employer Identification No.)
|------------------------------------------------------------------------------ |  | -------------------------------------------
|100 City Square, Boston, Massachusetts(Address of principal executive offices) |  | 02129(Zip Code)                            
|Registrant's telephone 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

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

As of September 30, 2004, there were issued and outstanding 62,021,769 shares of the registrant's Common Stock and no shares of the registrant's Class B Common
Stock.



---





Keane, Inc.

Table of Contents

|Part I.       |  | Financial Information                                                                                                 |  |   
|------------- |  | --------------------------------------------------------------------------------------------------------------------- |  | --
|Item 1.       |  | Unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2004 and 2003 |  | 3 
|              |  | Unaudited Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003                        |  | 4 
|              |  | Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003       |  | 5 
|              |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                        |  | 6 
|Item 2.       |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                 |  | 22
|Item 3.       |  | Quantitative and Qualitative Disclosures About Market Risk                                                            |  | 37
|Item 4.       |  | Controls and Procedures                                                                                               |  | 38
|Part II.      |  | Other Information                                                                                                     |  |   
|Item 2.       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                           |  | 40
|Item 6.       |  | Exhibits                                                                                                              |  | 40
|Signatures    |  | 41                                                                                                                   
|Exhibit Index |  | 42                                                                                                                   

2

---





Keane, Inc.

Part I. Financial Information

Item 1. Financial Statements

Keane, Inc.

Unaudited Condensed Consolidated Statements of Income

|                                                                                |                                               | Three Months Ended September 30, |         | Nine Months Ended September 30, |  
|------------------------------------------------------------------------------- | --------------------------------------------- | -------------------------------- | ------- | ------------------------------- | -
|
|
|                                                                                |                                               |                                  |         |                                 |  
|Revenues                                                                        |                                               | $                                | 234,827 |                                 | $
|Operating expenses                                                              |                                               |                                  |         |                                 |  
|                                                                                | Salaries, wages, and other direct costs       |                                  |         | 166,216                         |  
|                                                                                | Selling, general, and administrative expenses |                                  |         | 51,029                          |  
|                                                                                | Amortization of intangible assets             |                                  |         | 4,137                           |  
|                                                                                | Restructuring charges, net                    |                                  |         |                                |  
|                                                                                |                                               |                                  |         |                                 |  
|Operating income                                                                |                                               |                                  | 13,445  |                                 |  
|Other income (expense)                                                          |                                               |                                  |         |                                 |  
|                                                                                | Interest and dividend income                  |                                  |         | 920                             |  
|                                                                                | Interest expense                              |                                  |         | (1,414                          | )
|                                                                                | Other (expense) income, net                   |                                  |         | (172                            | )
|                                                                                | Minority interest                             |                                  |         | 546                             |  
|                                                                                |                                               |                                  |         |                                 |  
|Income before income taxes                                                      |                                               |                                  | 13,325  |                                 |  
|Provision for income taxes                                                      |                                               |                                  | 5,274   |                                 |  
|                                                                                |                                               |                                  |         |                                 |  
|Net income                                                                      |                                               | $                                | 8,051   |                                 | $
|                                                                                |                                               |                                  |         |                                 |  
|Basic earnings per share                                                        |                                               | $                                | 0.13    |                                 | $
|Diluted earnings per share                                                      |                                               | $                                | 0.13    |                                 | $
|Basic weighted average common shares outstanding                                |                                               |                                  | 61,868  |                                 |  
|Diluted weighted average common shares and common share equivalents outstanding |                                               |                                  | 62,795  |                                 |  

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

3

---





Keane, Inc.

Unaudited Condensed Consolidated Balance Sheets

|                                     |                                        | September 30,
2004                         |         | December 31,
2003 |        
|------------------------------------ | -------------------------------------- | ------------------------------------------ | ------- | ----------------- | -------
|
|
|Assets                               |                                        |                                            |         |                   |        
|Current:                             |                                        |                                            |         |                   |        
|                                     | Cash and cash equivalents              |                                            | $       | 59,704            |        
|                                     | Restricted cash                        |                                            |         | 955               |        
|                                     | Marketable securities                  |                                            |         | 122,566           |        
|                                     | Accounts receivable, net               |                                            |         | 139,384           |        
|                                     | Prepaid expenses and deferred taxes    |                                            |         | 17,984            |        
|                                     |                                        |                                            |         |                   |        
|                                     |                                        | Total current assets                       |         |                   | 340,593
|Property and equipment, net          |                                        |                                            | 76,554  |                   |        
|Goodwill                             |                                        |                                            | 306,820 |                   |        
|Customer lists, net                  |                                        |                                            | 56,038  |                   |        
|Other intangible assets, net         |                                        |                                            | 11,010  |                   |        
|Other assets, net                    |                                        |                                            | 15,951  |                   |        
|                                     |                                        |                                            |         |                   |        
|                                     |                                        | Total assets                               |         | $                 | 806,966
|Liabilities                          |                                        |                                            |         |                   |        
|Current:                             |                                        |                                            |         |                   |        
|                                     | Short-term debt                        |                                            | $       | 753               |        
|                                     | Accounts payable                       |                                            |         | 11,045            |        
|                                     | Accrued restructuring                  |                                            |         | 5,692             |        
|                                     | Unearned income                        |                                            |         | 7,607             |        
|                                     | Accrued compensation                   |                                            |         | 49,289            |        
|                                     | Accrued expenses and other liabilities |                                            |         | 54,791            |        
|                                     |                                        |                                            |         |                   |        
|                                     |                                        | Total current liabilities                  |         |                   | 129,177
|Long-term debt                       |                                        |                                            | 150,126 |                   |        
|Accrued long-term building costs     |                                        |                                            | 39,674  |                   |        
|Accrued long-term restructuring      |                                        |                                            | 4,600   |                   |        
|Deferred income taxes                |                                        |                                            | 27,137  |                   |        
|                                     |                                        |                                            |         |                   |        
|                                     |                                        | Total liabilities                          |         |                   | 350,714
|Minority Interest                    |                                        |                                            | 6,726   |                   |        
|Stockholders' Equity                 |                                        |                                            |         |                   |        
|Common stock                         |                                        |                                            | 6,202   |                   |        
|Class B common stock                 |                                        |                                            |        |                   |        
|Additional paid-in capital           |                                        |                                            | 31,000  |                   |        
|Accumulated other comprehensive loss |                                        |                                            | (7,573  | )                 |        
|Retained earnings                    |                                        |                                            | 420,410 |                   |        
|Unearned compensation                |                                        |                                            | (513    | )                 |        
|Less treasury stock, at cost         |                                        |                                            |        |                   |        
|                                     |                                        |                                            |         |                   |        
|Stockholders' equity                 |                                        |                                            | 449,526 |                   |        
|                                     |                                        |                                            |         |                   |        
|                                     |                                        | Total liabilities and stockholders' equity |         | $                 | 806,966
|                                     |                                        |                                            |         |                   |        

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

4

---





Keane, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

|                                                 |                                                                                   | Nine Months Ended September 30,                                   |                                                                                                  
|------------------------------------------------ | --------------------------------------------------------------------------------- | ----------------------------------------------------------------- | -------------------------------------------------------------------------------------------------
|
|
|Cash flows from operating activities:            |                                                                                   |                                                                   |                                                                                                  
|                                                 | Net income                                                                        |                                                                   | $                                                                                                
|                                                 | Adjustments to reconcile net income to net cash provided by operating activities: |                                                                   |                                                                                                  
|                                                 |                                                                                   | Depreciation and amortization                                     |                                                                                                  
|                                                 |                                                                                   | Deferred income taxes                                             |                                                                                                  
|                                                 |                                                                                   | Provision for doubtful accounts, net                              |                                                                                                  
|                                                 |                                                                                   | Minority interest                                                 |                                                                                                  
|                                                 |                                                                                   | Loss (gain) on sale of property and equipment                     |                                                                                                  
|                                                 |                                                                                   | Gain on sale of investments                                       |                                                                                                  
|                                                 |                                                                                   | Other charges, net                                                |                                                                                                  
|                                                 |                                                                                   | Changes in operating assets and liabilities, net of acquisitions: |                                                                                                  
|                                                 |                                                                                   |                                                                   | (Increase) decrease in accounts receivable                                                       
|                                                 |                                                                                   |                                                                   | Increase in prepaid expenses and other assets                                                    
|                                                 |                                                                                   |                                                                   | Increase (decrease) in accounts payable, accrued expenses, unearned income, and other liabilities
|                                                 |                                                                                   |                                                                   | (Decrease) increase in income taxes payable                                                      
|                                                 |                                                                                   |                                                                   |                                                                                                  
|                                                 | Net cash provided by operating activities                                         |                                                                   |                                                                                                  
|                                                 |                                                                                   |                                                                   |                                                                                                  
|Cash flows from investing activities:            |                                                                                   |                                                                   |                                                                                                  
|                                                 |                                                                                   | Purchase of investments                                           |                                                                                                  
|                                                 |                                                                                   | Sale and maturities of investments                                |                                                                                                  
|                                                 |                                                                                   | Purchase of property and equipment                                |                                                                                                  
|                                                 |                                                                                   | Restricted cash                                                   |                                                                                                  
|                                                 |                                                                                   | Proceeds from the sale of property and equipment                  |                                                                                                  
|                                                 |                                                                                   | Payments for current year acquisitions, net of cash acquired      |                                                                                                  
|                                                 |                                                                                   | Payments for prior years acquisitions                             |                                                                                                  
|                                                 |                                                                                   |                                                                   |                                                                                                  
|                                                 | Net cash used for investing activities                                            |                                                                   |                                                                                                  
|                                                 |                                                                                   |                                                                   |                                                                                                  
|Cash flows from financing activities:            |                                                                                   |                                                                   |                                                                                                  
|                                                 |                                                                                   | Proceeds from issuance of convertible debt                        |                                                                                                  
|                                                 |                                                                                   | Debt issuance costs                                               |                                                                                                  
|                                                 |                                                                                   | Repayment of debt                                                 |                                                                                                  
|                                                 |                                                                                   | Principal payments under capital lease obligations                |                                                                                                  
|                                                 |                                                                                   | Proceeds from issuance of common stock                            |                                                                                                  
|                                                 |                                                                                   | Repurchase of common stock                                        |                                                                                                  
|                                                 |                                                                                   |                                                                   |                                                                                                  
|                                                 | Net cash (used for) provided by financing activities                              |                                                                   |                                                                                                  
|                                                 |                                                                                   |                                                                   |                                                                                                  
|Effect of exchange rate changes on cash          |                                                                                   |                                                                   | (67                                                                                              
|Net increase in cash and cash equivalents        |                                                                                   |                                                                   | 2,968                                                                                            
|Cash and cash equivalents at beginning of period |                                                                                   |                                                                   | 56,736                                                                                           
|                                                 |                                                                                   |                                                                   |                                                                                                  
|Cash and cash equivalents at end of period       |                                                                                   | $                                                                 | 59,704                                                                                           
|                                                 |                                                                                   |                                                                   |                                                                                                  
|Supplemental information:                        |                                                                                   |                                                                   |                                                                                                  
|Income taxes paid                                |                                                                                   | $                                                                 | 11,489                                                                                           
|Interest paid                                    |                                                                                   | $                                                                 | 1,561                                                                                            

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

5

---





Keane, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1.     Basis of Presentation



Note 2.     Earnings Per Share Data



Three Months Ended
September 30,

Nine Months Ended
September 30,2004

2003

2004

2003Net income

$
8,051

$
5,540

$
21,646

$
22,721Weighted average number of common shares outstanding used in calculation of basic earnings per share


61,868


64,016


62,793


66,436Incremental shares from restricted stock, employee stock purchase plan and the assumed exercise of dilutive stock options


927


1,058


1,027


540Weighted average number of common shares and common share equivalents outstanding used in calculation of diluted earnings per share


62,795


65,074


63,820


66,976Earnings per shareBasic

$
0.13

$
0.09

$
0.34

$
0.34Diluted

$
0.13

$
0.09

$
0.34

$
0.34


6

---





7

---





Note 3.     Stock-Based Compensation



8

---





Three Months Ended
September 30,

Nine Months Ended
September 30,2004

2003

2004

2003Net incomeas reported

$
8,051

$
5,540

$
21,646

$
22,721Add: Stock-based employee compensation expense included in reported net income, net of related tax effects


84


25


310


48Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of tax effects


(1,078
)

(769
)

(3,255
)

(3,799
)Net incomepro forma

$
7,057

$
4,796

$
18,701

$
18,970Earnings per shareBasicas reported

$
0.13

$
0.09

$
0.34

$
0.34Basicpro forma

$
0.11

$
0.07

$
0.30

$
0.29Dilutedas reported

$
0.13

$
0.09

$
0.34

$
0.34Dilutedpro forma

$
0.11

$
0.07

$
0.29

$
0.28


Note 4.     Comprehensive Income and Accumulated Other Comprehensive Loss



Note 5.     Business Acquisitions



9

---





10

---





11

---





Note 6.     Restructurings



12

---





13

---





January 1, 2004 Balance

Cash
Expenditures

Acquisition
Related
Charges in
Fiscal 2004

September 30,
2004 BalanceBranch office closures and other expenditures1999

$
156

$
(115
)
$


$
412000


478


(468
)




102001


2,343


(1,582
)




7612002


9,935


(2,942
)




6,9932003


871


(202
)




6692004





(133
)

1,777


1,64413,783


(5,442
)

1,777


10,1182002 Workforce reduction


24


(24
)




2003 Workforce reduction


213


(213
)




2004 Workforce reduction





(281
)

455


174Total Restructuring Balance

$
14,020

$
(5,960
)
$
2,232

$
10,292




14

---





Note 7.     Convertible Subordinated Debentures



Note 8.     Capital Stock



15

---





Note 9.     Related Parties, Commitments, and Contingencies



16

---





17

---





18

---





19

---





Note 10.   Segment Information



Three Months Ended September 30,

Nine Months Ended September 30,2004

2003

2004

2003Revenues:Domestic

$
222,066

$
195,307

$
645,613

$
593,056International


12,761


5,114


36,750


15,538Total Revenues:

$
234,827

$
200,421

$
682,363

$
608,594


At September 30,
2004

At December 31,
2003Property & Equipment:Domestic





$
64,523

$
64,799International






12,031


10,632Total Property & Equipment





$
76,554

$
75,431




Note 11.   Income Taxes



20

---





21

---







Keane, Inc.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. For purposes of these Acts, any statement that is not a statement of historical fact may be deemed a forward-looking
statement. For example, statements containing the words "believes," "anticipates," "plans," "expects," "estimates," "intends," "may," "projects," "will," "would," and similar expressions may be
forward-looking statements. We caution investors not to place undue reliance on any forward-looking statements in this Quarterly Report on Form 10-Q. We undertake no obligation to
publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. There are a number of factors that could cause our actual results to differ
materially from those indicated by these forward-looking statements, including without limitation the factors set forth below under the caption "Certain Factors That May Affect Future Results." These
factors and the other cautionary statements made in this quarterly report should be read as being applicable to all related forward-looking statements 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-looking statements.

The
following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on
Form 10-Q and the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31,
2003, and with the information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the
year ended December 31, 2003.

OVERVIEW

Components of Revenues

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

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

22

---



Through
our global delivery model we can offer customers the flexibility and economic advantage of allocating work among a variety of delivery options. These include onsite at a client's facility,
nearshore in Halifax, Nova Scotia, and Toronto, Ontario, and offshore at one of our three development centers in India. We are in the process of enlarging the development center in Toronto and expect
to have expanded, leased facilities by the end of the Fourth Quarter of 2004. This integrated, highly flexible mix of cost-effective onsite, nearshore, and offshore delivery is now a
component of most of our new Application Outsourcing engagements. The distribution of work across multiple locations is typically based on a client's cost, technology, and risk management
requirements. Our successful track record in absorbing the local staff of our clients is particularly attractive to many prospective clients.

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

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

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

Global
economic and political conditions continue to cause companies to be cautious about increasing their use of consulting and IT services, but we continue to see a demand for our services. We
continue to experience pricing pressure from competitors as well as from clients facing pressure to control costs. In addition, the growing use of offshore resources to provide lower-cost
service delivery capabilities within our industry continues to be a source of pressure on revenues. We also experience wage inflation, primarily in India, as the demand for those resources increases.
In order for us to remain successful in the near term, we must continue to maintain and grow our client base, provide high-quality service and satisfaction to our existing clients, and
take advantage of cross-selling opportunities. In the current economic environment, we must provide our clients with service offerings that are appropriately priced, satisfy their needs, and provide
them with measurable business benefits. While we have recently experienced a steady demand for our services, and gross margin as a percentage of revenue has stabilized over the past four quarters, we
believe that it is too early to determine if developments will translate into sustainable improvements in our pricing or margins during the remainder of 2004 and over the longer term.

Components of Operating Expenses

The primary categories of operating expenses include: salaries, wages, and other direct costs; selling, general and administrative expenses; and amortization of intangible assets. Salaries, wages, and
other direct costs are primarily driven by the cost of client-service personnel, which consists mainly of

23

---



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

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

EMPLOYEES

As of September 30, 2004, we had 8,423 total employees, including 7,099 business and technical professionals whose services are billable to clients. This includes a base of 1,720 employees (of
which 1,450 employees are billable) in India, including our Keane Worldzen operations.

NEW CONTRACT BOOKINGS

New contract bookings represent the engagement value of contracts signed in the current reporting period. New contract bookings for the three months ended September 30, 2004 were
$205.2 million, an increase of $13.8 million, or 7.2%, over new bookings of $191.4 million for the three months ended September 30, 2003. For the three months ended
September 30, 2004, Outsourcing bookings decreased 34.2% to $59.5 million, Development & Integration bookings decreased 11.8% to $30.1 million and Other IT bookings
increased 73.0% to $115.6 million compared to the same period in 2003.

New
contract bookings for the nine months ended September 30, 2004 were $897.1 million, an increase of $275.9 million, or 44.4%, over new bookings of $621.2 million for the
nine months ended September 30, 2003. For the nine months ended September 30, 2004, Outsourcing bookings increased 62.1% to $476.9 million, Development & Integration
bookings increased 33.5% to $110.6 million and Other IT bookings increased 26.8% to $309.6 million compared to the same period in 2003.

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

24

---



CONSOLIDATED RESULTS OF OPERATIONS
2004 COMPARED TO 2003
REVENUES (dollars in thousands)

|                          |  | Three Months Ended
September 30, |         | Increase
(Decrease) |     | Nine Months Ended
September 30, |   | Increase
(Decrease) | 
|------------------------- |  | -------------------------------- | ------- | ------------------- | --- | ------------------------------- | - | ------------------- | 
|
|Outsourcing               |  | $                                | 123,819 |                     | 53  |                                 | $ | 91,131              | 
|Development & Integration |  |                                  | 45,710  |                     | 19  |                                 |   | 41,852              | 
|Other IT Services         |  |                                  | 65,298  |                     | 28  |                                 |   | 67,438              | 
|                          |  |                                  |         |                     |     |                                 |   |                     | 
|Total                     |  | $                                | 234,827 |                     | 100 | %                               | $ | 200,421             | 
|                          |  |                                  |         |                     |     |                                 |   |                     | 

Revenues

Revenues for the Third Quarter ended September 30, 2004 were $234.8 million, an increase of $3.1 million, or 1.3%, compared to revenues of
$231.7 million for the Second Quarter ended June 30, 2004. Revenues for the Third Quarter ended September 30, 2004 increased $34.4 million, or 17.2%, compared to the Third
Quarter of 2003 due primarily to the growth in Outsourcing services and revenues from our newly acquired businesses. We completed our acquisition of Nims Associates, Inc. ("Nims") on
February 27, 2004, and as a result, the operating results of Nims have been included in our unaudited condensed consolidated financial statements beginning March 1, 2004. In addition, we
completed the acquisition of Fast Track Holdings Limited ("Fast Track") on July 13, 2004, and have included its operating results in our unaudited condensed consolidated financial statements
beginning July 14, 2004. Fast Track is a privately held consulting firm based in the United Kingdom that manages the design, integration, and rapid deployment of large-scale SAP
implementations.

Revenues
for the nine months ended September 30, 2004 were $682.4 million, an increase of $73.8 million, or 12.1%, compared to revenues of $608.6 million for the same
period last year due primarily to the growth in Outsourcing services and revenues from our newly acquired business.

Outsourcing.Outsourcing service revenues for the Third Quarter ended September 30, 2004 were $123.8 million, an increase of
$7.3 million, or 6.3%, compared to the Second Quarter ended June 30, 2004. Outsourcing service revenues for the Third Quarter ended September 30, 2004 increased
$32.7 million, or 35.9%, and for the first nine months of 2004 increased $69.5 million, or 25.2%, over the same periods in 2003. The increase in Outsourcing service revenues was
primarily due to increased revenues from large outsourcing contracts, as well as the revenues generated by Nims. During the Third Quarter ended September 30, 2004, we received a
$3.2 million one-time fee from Affiliated Computer Services ("ACS") resulting from the termination of our contract, of which $3.0 million was recognized as revenue and
resulted in incremental revenue of approximately $1.9 million in the quarter. We recognized revenue from the termination fee under the proportional performance method in accordance with Staff
Accounting Bulletin ("SAB") No. 104 "Revenue Recognition" and have completed substantially all of the services required under the termination agreement.

PacifiCare
Health Systems, Inc. ("PacifiCare"), one of our largest clients, has reduced the level of service from the stated baseline contract amounts in accordance with its right under the
contract terms, thereby reducing the contract value. During the Second Quarter ended June 30, 2004, PacifiCare requested that we further reduce service levels to levels below the minimums
provided in our contract. The requested change was not consistent with the terms of our contract with PacifiCare and would have resulted in a reduction in our monthly billings to PacifiCare.
Accordingly, we did not agree to this change. Since then, through the quarter ended on September 30, 2004, we have continued providing

25

---



services
at or above the minimum levels set forth in the contract. We anticipate that we may be renegotiating our Outsourcing contract with PacifiCare at some point in the future.

Development & Integration.Development & Integration service revenues for Third Quarter ended September 30, 2004 were
$45.7 million, an increase of $0.9 million, or 2.1%, compared to the Second Quarter ended June 30, 2004. Development & Integration service revenues for the Third Quarter
ended September 30, 2004 increased $3.9 million, or 9.2%, and for the nine months ended September 30, 2004 increased $7.6 million, or 6.1% over the same periods in 2003
partly due to the revenues associated with the acquisition of Fast Track in the Third Quarter ended September 30, 2004.

Other IT Services.Other IT Services revenues for the Third Quarter ended September 30, 2004 were $65.3 million, a decrease
of $5.1 million, or 7.3%, compared to the Second Quarter ended June 30, 2004. Other IT Services revenues for the Third Quarter ended September 30, 2004 decreased
$2.1 million, or 3.2%, and for the first nine months of 2004 decreased $3.3 million, or 1.6%, over the same periods in 2003. During the Second Quarter ended June 30, 2004 we
agreed to a 5% price reduction for one of our large customers and mitigated the impact of that price reduction on gross margin by negotiating lower pricing of our subcontractor personnel.

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

|                                        |  | Three Months Ended
September 30, |         | Increase
(Decrease) |   | Nine Months Ended
September 30, |   | Increase
(Decrease)
|--------------------------------------- |  | -------------------------------- | ------- | ------------------- | - | ------------------------------- | - | -------------------
|
|Revenues                                |  | $                                | 234,827 |                     | $ | 200,421                         |   | $                  
|Salaries, wages, and other direct costs |  |                                  | 166,216 |                     |   | 137,413                         |   |                    
|                                        |  |                                  |         |                     |   |                                 |   |                    
|Gross margin                            |  | $                                | 68,611  |                     | $ | 63,008                          |   | $                  
|                                        |  |                                  |         |                     |   |                                 |   |                    
|Gross margin %                          |  |                                  | 29.2    | %                   |   | 31.4                            | % |                    

Salaries, wages, and other direct costs

Salaries, wages, and other direct costs for the Third Quarter ended September 30, 2004 were $166.2 million, an increase of $4.5 million compared to
$161.7 million in the Second Quarter ended June 30, 2004. Salaries, wages, and other direct costs for the Third Quarter ended September 30, 2004 increased $28.8 million, or
21.0%, and for the first nine months of 2004 increased $59.8 million, or 14.3%, over the same periods in 2003. These increases were primarily attributable to costs of client service personnel
to support the increased service revenues as well as an increase in direct costs to support the revenues generated by our newly acquired Nims business. Salaries, wages, and other direct costs were
70.8% of total revenues for the Third Quarter ended September 30, 2004 and were 70.0% of total revenues for the first nine months of 2004, compared to 68.6% and 68.7% of total revenues for the
same periods in 2003, respectively.

Total
billable employees for all operations were 7,099 as of September 30, 2004, compared to 7,062 total billable employees as of June 30, 2004 and 5,949 as of September 30, 2003.
This includes a base of billable employees within our India operations of 1,450, which represents an increase of 23 employees, or 1.6%, over the Second Quarter ended June 30, 2004 and an
increase of 656 employees, or 82.6%, over the Third Quarter ended September 30, 2003. We added our India operation in March 2002 with our acquisition of SignalTree Solutions. In
addition, this includes a base of 350 billable employees within our Keane Worldzen operations. We acquired our controlling interest in Keane Worldzen in October 2003. In addition to these
employees, we occasionally use subcontract

26

---



personnel
to augment our billable staff, which represented 624 subcontractors as of September 30, 2004. Overall utilization rates for all three periods remained stable as we increased the
number of billable employees.

Gross margin

Our management believes gross margin(revenues less salaries, wages, and other direct costs)provides an important measure of
our profitability. Gross margin for the Third Quarter ended September 30, 2004 decreased $1.4 million, or 2.0%, compared to the Second Quarter ended June 30, 2004 due to lower
seasonal utilization rates resulting from the higher number of vacation days during the summer months. Gross Margin for the Third Quarter ended September 30, 2004 increased $5.6 million,
or 8.9%, and for the first nine months of 2004 increased $14.0 million, or 7.3%, over the same periods in 2003. Gross margin as a percentage of revenues for the Third Quarter ended
September 30, 2004 was 29.2% and for the first nine months of 2004 was 30.0% compared to 31.4% and 31.3% for the same periods in 2003, respectively, and 30.2% for the Second Quarter ended
June 30, 2004. Although gross margin for the Third Quarter ended September 30, 2004 decreased by approximately 100 basis points compared to the Second Quarter ended June 30, 2004,
we believe that the relatively constant gross margin percentage over the past four quarters is indicative of a more stable environment for IT services, and firmer utilization rates, as well as the
benefit of our global sourcing capabilities. The lower labor cost associated with the increased use of offshore resources at our India facilities helped reduce the impact of lower pricing of our
services on gross margin. We continue to closely monitor utilization rates and other direct costs in an effort to avoid adverse impacts on our gross margin.

Selling, general, and administrative expenses

SG&A expenses for the Third Quarter ended September 30, 2004 decreased $1.6 million, or 3.1%, compared to the Second Quarter ended June 30, 2004. The
decrease in SG&A expenses was due to lower incentive compensation costs in the Third Quarter of 2004 compared to the Second Quarter of 2004 and expense savings resulting from the integration of the
operations of Nims. SG&A expenses for the Third Quarter ended September 30, 2004 increased $2.9 million, or 6.0%, and for the first nine months of 2004 increased $10.4 million, or
7.1%, over the same periods in 2003. SG&A expenses for the Third Quarter ended September 30, 2004 were $51.0 million, or 21.7% of total revenues, and for the first nine months of 2004
were $156.9 million, or 23.0% of total revenues, as compared to $48.1 million, or
24.0% of total revenues, and $146.5 million, or 24.1% of total revenues, respectively, for the same periods in 2003. The increase in SG&A expenses for the Third Quarter of 2004 and the first
nine months of 2004 was due in part to the additional expenses associated with our newly acquired businesses, Keane Worldzen in the Fourth Quarter ended December 31, 2003 and Nims in the First
Quarter ended March 31, 2004. Also contributing to the increase in SG&A expenses were higher marketing costs and higher costs associated with the growth of our India operations. We have begun
to see SG&A expenses as a percentage of revenues decrease as a result of the integration of the operations of Nims and increasing revenues.

Amortization of intangible assets

Amortization of intangible assets for the Third Quarter ended September 30, 2004 was $4.1 million, and for the first nine months of 2004 was $12.1 million,
which is flat compared to the same periods in 2003. The amortization of intangible assets for 2004 was reduced by certain intangibles that have become fully amortized, offset in part by the additional
intangible assets resulting from our Nims acquisition in the First Quarter ended March 31, 2004 and, to a lesser extent, our Fast Track acquisition in the Third Quarter ended
September 30, 2004.

Restructuring charges, net

During the Third Quarter of 2003, we recorded a restructuring charge of $0.9 million for a workforce reduction. During the Second Quarter of 2003, we reevaluated our
estimates recorded for the

27

---



restructuring
charge taken in 2002 and as a result recorded an expense reduction of $0.6 million for workforce reductions. For the nine months ended September 30, 2003, the net impact of
these actions resulted in a net expense of $0.3 million in our consolidated statement of income.

Interest and dividend income

Interest and dividend income for the Third Quarter ended September 30, 2004 was $0.9 million and for the first nine months of 2004 was $2.9 million
compared to $0.7 million and $1.7 million, respectively, for the same periods in 2003. The increases in interest and dividend income were the result of higher average cash balances and
marketable securities. The higher average cash balances and marketable securities was due to the investment of the net proceeds from the issuance of our 2.0% Convertible Subordinate Debentures due
2013 ("Debentures") issued in June 2003 and strong cash flow, offset in part by the impact of our share repurchases during 2003 and the nine months ended September 30, 2004. To the
extent we use our cash and marketable securities to fund acquisitions, our operations, and capital investments, our interest income will decline in future periods.

Interest expense

Interest expense for the Third Quarter ended September 30, 2004 was $1.4 million and for the first nine months of 2004 was $4.3 million, compared to
$1.5 million and $2.6 million, respectively, for the same periods in 2003. The increase in interest expense was primarily related to the issuance of our Debentures and the occupation of
our corporate facility. The accounting for the facility as explained in Note 9 "Related Parties, Commitments, and Contingencies" requires us to impute interest expense on the accrued building
costs.

Other (expense) income, net

Other expense, net was $0.2 million for the Third Quarter ended September 30, 2004 and other income, net was $0.1 million for the first nine months of 2004
compared to expense of $0.1 million and income of $7.1 million, respectively, for the same periods in 2003. Other income, net during the First Quarter of 2003 included a
$7.3 million, $4.4 million after tax, favorable judgment in an arbitration award proceeding related to damages for breach of an agreement between Signal Corporation and our Federal
Systems subsidiary.

Minority Interest

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

Income taxes

The provision for income taxes represents the amounts owed for federal, state, and foreign taxes. Our effective tax rate was 39.6% for the Third Quarter ended
September 30, 2004 and was 39.8% for the first nine months of 2004. Our effective tax rate was 40% for the Third Quarter ended September 30, 2003 and the first nine months of 2003. The
determination of the provision for income tax expense, deferred tax assets and liabilities and related valuation allowance involves judgment. As a global company, we are required to calculate and
provide for income taxes in each of the tax jurisdictions where we operate. This involves making judgments regarding the recoverability of deferred tax assets, which can affect the overall effective
tax rate. In addition, changes in the geographic mix or estimated level of pre-tax income can affect the overall effective tax rate. Our estimated effective tax rate for the full year
ended December 31, 2004 increased from 40.0% to 41.2% as a result of changes in our

28

---



geographic
mix of income. During the Third Quarter ended September 30, 2004, certain events occurred, which impacted our tax provision. These events include the expiration of certain state
statutes and changes in estimates, which resulted in a reduction to our tax provision of approximately $1.1 million, and the enactment of certain tax laws, which resulted in an imposition of
tax retroactive to January 1, 2004 and that resulted in an increase to our tax provision of approximately $0.6 million. The net impact of these events was a reduction of our tax
provision by approximately $0.5 million, resulting in an approximate 350 basis point reduction on our effective tax rate in the Third Quarter ended September 30, 2004 and an approximate
140 basis point reduction on our effective tax rate for the nine months ended September 30, 2004. In accordance with Statement of Financial Accounting Standards "SFAS" No. 5 ("SFAS 5"),
"Accounting for Contingencies," and SFAS No. 109 ("SFAS 109"), "Accounting for Income Taxes," we have adjusted our tax reserves in the period where the conditions under SFAS 5 are no
longer met and as of the enactment date of the new tax laws.

Net income

Net income for the Third Quarter ended September 30, 2004 was flat compared to the Second Quarter ended June 30, 2004. Net income increased to $8.1 million
for the Third Quarter ended September 30, 2004 compared to net income of $5.5 million for the Third Quarter of 2003 due to the improved operating income. The decrease of net income by
$1.1 million for the first nine months of 2004 compared to the same period in 2003 was primarily due to net income in 2003 included a non-recurring gain of $4.4 million after
tax from a favorable judgment in an arbitration proceeding, which was partially offset by the higher operating income in 2004.

RECENT ACCOUNTING PRONOUNCEMENTS

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

In
May 2003, the EITF reached a consensus on Issue No. 01-08 ("EITF 01-8"), "Determining Whether an Arrangement Contains a Lease." EITF 01-08 provides
guidance on how to determine whether an arrangement contains a lease that is within the scope of SFAS No. 13 ("SFAS 13"), "Accounting for Leases." The guidance in EITF 01-08
is based on whether the arrangement conveys to the purchaser

29

---



(lessee)
the right to use a specific asset. EITF 01-08 is effective for arrangements entered into or modified in the Second Quarter of 2004. The adoption of this statement did not have a
significant effect on our unaudited condensed consolidated financial position or results of operations.

In
December 2003, the FASB issued SFAS No. 132 (revised 2003) ("SFAS 132 as revised"), "Employers' Disclosures about Pensions and Other Post Retirement Benefits." This Statement
revises employers' disclosures about pension plans and other postretirement benefit plans but does not change the measurement or recognition provisions of SFAS No. 87, "Employers' Accounting
for Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" and SFAS No. 106, "Employer's
Accounting for Postretirement Benefits Other than Pensions." SFAS 132 as revised requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of
defined benefit pension plans and other postretirement plans. This Statement is effective for financial statements with fiscal years ending after December 15, 2003, except the additional
disclosure information about foreign plans is effective for fiscal years ending after June 15, 2004. We have a foreign defined benefit plan and, as a result, will include the required
additional disclosures as of December 31, 2004.

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

In
September 2004, the EITF reached consensus on Issue No. 04-8 ("EITF 04-8"), "The Effect of Contingently Convertible Debt on Diluted Earnings per Share," which
requires that contingently convertible debt should be included in the calculation of diluted earnings per share using the if-converted method regardless of whether the market price trigger
has been met. Under the if-converted method, the debt is considered converted to shares, with the resulting number of shares included in the denominator of the earnings per share
calculation and the related interest expense (net of tax) added back to the numerator of the earnings per share calculation. See Note 2 "Earnings Per Share Data" in the notes to the
accompanying unaudited condensed consolidated financial statements for additional disclosure. The effective date of the consensus in this Issue will coincide with the effective date of the proposed
FASB SFAS No. 128 ("SFAS 128R"), "Earnings per Share, an amendment of FASB Statement No. 128", which is expected to be effective and applied to reporting periods ending after
December 15, 2004. The adoption of this EITF is expected to result in a reduction of diluted earnings per share for the Fourth Quarter ended December 31, 2004 by approximately $0.01 and
for the years ended December 31, 2004 and 2003 by approximately $.02 and $.01, respectively.

In
October 2004, the FASB concluded that the proposed Statement 123R, "Share-Based Payment," which would require all companies to measure compensation cost for all share-based payments,
including employee stock options, at fair value, would be effective for public companies (except small business issuer as defined in SEC Regulation S-B) for interim or annual
periods beginning after June 15, 2005. Retroactive application of the requirements of SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," not Statement 123R, to
the beginning of the fiscal year that includes the effective date would be permitted, but not required and early adoption of Statement 123R is

30

---



encouraged.
The FASB is planning on issuing the final statement in December 2004. The FASB has tentatively concluded that companies could adopt the new standard in one of two ways. First, under
the modified prospective transition method, a company would recognize share-based employee compensation cost from the beginning of the fiscal period in which the recognition provisions are first
applied as if the fair-value-based accounting method had been used to account for all employee awards granted, modified, or settled after the effective date and to any awards that were not
fully vested as of the effective date. Measurement and attribution of compensation cost for awards that are nonvested as of the effective date of the proposed Statement would be based on the same
estimate of the grant-date fair value and the same attribution method used previously under SFAS 123 (either for recognition or pro forma purposes). Second, under the modified
retrospective transition method, a company would recognize employee compensation cost for periods presented prior to the adoption of Statement 123R in accordance with the original provisions of
SFAS 123; that is, an entity would recognize employee compensation cost in the amounts reported in the pro forma disclosures provided in accordance with SFAS 123. A company would not be
permitted to make any changes to those amounts upon adoption of the proposed Statement unless those changes represent a correction of an error (and are disclosed accordingly). For periods after the
date of adoption of Statement 123R, the modified prospective transition method described above would be applied. We are in the process of determining the impact of this statement on our unaudited
condensed consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES



|Nine months ended September 30,       |                                   | 2004 |       | 2003    |  
|------------------------------------- | --------------------------------- | ---- | ----- | ------- | -
|                                      | Cash flows provided by (used for) |      |       |         |  
|                                      | Operating activities              |      | $     | 34,783  |  
|                                      | Investing activities              |      |       | (6,636  | )
|                                      | Financing activities              |      |       | (25,112 | )
|Effect of exchange rate on cash       |                                   |      | (67   | )       |  
|                                      |                                   |      |       |         |  
|Increase in cash and cash equivalents |                                   | $    | 2,968 |         | $
|                                      |                                   |      |       |         |  

We
have historically financed our operations with cash generated from operations. We use the net cash generated from our operations to fund capital expenditures, mergers and acquisitions, and stock
repurchases. If we were to experience a decrease in revenue as a result of a decrease in demand for our services or a decrease in our ability to collect receivables, we would be required to reduce
discretionary spending related to SG&A expenses and adjust our workforce in an effort to maintain profitability. At September 30, 2004, we had $182.3 million in cash and cash equivalents
and marketable securities. We intend to continue to use our cash and cash equivalents and marketable securities for general corporate purposes, which may include additional repurchases of our common
stock under existing or future share repurchase programs and the funding of future acquisitions and other corporate transactions.

31

---





Cash flows provided by operating activities

Net cash provided by operating activities totaled $34.8 million for the nine months ended September 30, 2004, as compared to cash provided by operations of
$60.0 million for the nine months ended September 30, 2003. The decrease in net cash provided by operating activities was driven in part by the absence of a $7.3 million payment
that we received in connection with an arbitration proceeding in the First Quarter of 2003, $8.3 million of higher tax payments during the nine months ended September 30, 2004 and higher
working capital requirements. Accounts receivable increased $20.3 million to $139.4 million in the nine months ended September 30, 2004 compared to the Fourth Quarter ended
December 31, 2003. The accounts receivable increase was largely driven by the revenue growth experienced in the first nine months of 2004. However, Day Sales Outstanding ("DSO"), an indicator
of the effectiveness of our accounts receivable collections, was 53 days as of September 30, 2004 compared to 53 days as of December 31, 2003 and 55 days as of
September 30, 2003. We calculate DSO using the trailing three months total revenues divided by the number of days in the quarter to determine daily revenues. The average accounts receivable
balance for the three-month period is then divided by daily revenues.

Cash flows used for investing activities

Investing activities in the nine months ended September 30, 2004 and 2003 were primarily for investments, capital expenditures and acquisitions.

During
the nine months ended September 30, 2004, we purchased $49.0 million and sold $72.6 million in marketable securities, generating a net source of cash of
$23.6 million, as compared to purchases of $102.9 million and sales of $8.2 million, or a net use of cash of $94.7 million, in the nine months ended September 30,
2003. In addition, we invested $8.9 million and $9.3 million in property and equipment, and capitalized software costs in connection with the implementation of our PeopleSoft Enterprise
Resource Planning applications as of September 30, 2004 and 2003, respectively. On February 27, 2004, we acquired Nims, an information technology and consulting services company. We paid
$18.1 million in cash, including transaction costs and net of cash acquired, for all of the outstanding capital stock of Nims. The purchase price may increase with the potential to pay up to an
additional $15.0 million in earn-out consideration over the next three years, contingent upon the achievement of certain future financial targets. On July 13, 2004, we
acquired Fast Track, a privately held consulting firm based in the United Kingdom that manages the design, integration, and rapid deployment of large-scale SAP implementations. In exchange for all of
Fast Track's outstanding capital stock, we paid approximately $3.2 million in cash, including transactions costs, with the potential to pay up to approximately $5.0 million,
additionally, in earn-out consideration over the next two years, contingent upon the achievement of certain future financial targets. In the first nine months of
2003, we paid $0.9 million as earn-out consideration in connection with a 2002 acquisition.

Cash flows (used for) provided by financing activities

Net cash flows used for financing activities was $25.1 million for the nine months ended September 30, 2004 compared to net cash provided of $88.5 million
for the nine months ended September 30, 2003. The decrease reflects $150.0 million of proceeds from the issuance of our Debentures in June 2003. Net proceeds from the issuance
were approximately $108.3 million after investing $37.3 million in a repurchase of 3 million shares of our common stock and approximately $4.4 million in debt issuance
costs. See Note 7 "Convertible Subordinated Debentures" in the notes to the accompanying unaudited condensed consolidated financial statements for additional disclosure on our Debentures. Net
cash flows used for financing activities were primarily for the repurchase of our common stock. The

32

---



following
is a summary of our repurchase activity for the nine months ended September 30, 2004 and 2003 (dollars in thousands):

|                                        |  | 2004       |   | 2003
|--------------------------------------- |  | ---------- | - | ----
|
|Prior year authorizations at January 1, |  | 3,181,200  |   |     
|Authorizations                          |  | 3,000,000  |   |     
|Repurchases                             |  | (2,127,300 | ) | $   
|Expirations                             |  | (1,182,300 | ) |     
|                                        |  |            |   |     
|Shares remaining as of September 30,    |  | 2,871,600  |   |     
|                                        |  |            |   |     

These
share repurchases more than offset the shares issued under our various stock ownership programs. Under these stock ownership programs, we issued 511,779 shares and 591,004 shares and received
proceeds of $5.5 million and $4.3 million for the nine months ended September 30, 2004 and 2003, respectively. Between May 1999 and September 30, 2004, we have
invested approximately $259.8 million to repurchase approximately 20.6 million shares of our common stock under ten separate authorizations.

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

Increase in cash and cash equivalents

Our cash and cash equivalents totaled $59.7 million and $91.4 million at September 30, 2004, and 2003, respectively.

33

---



IMPACT OF INFLATION AND CHANGING PRICES

Inflationary increases in costs have not been material in recent years and, to the extent permitted by competitive pressures, are passed on to clients through increased billing
rates. Rates charged by us are based on the cost of labor and market conditions within the industry.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

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

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

We have pursued, and intend to continue to pursue, strategic acquisitions. Failure to successfully integrate acquired businesses or assets may adversely affect our financial
performance.In recent years, we have grown significantly through acquisitions. From January 1, 1999 through September 30, 2004, we have completed 14
acquisitions. The aggregate merger and consideration costs of these acquisitions totaled approximately $416.6 million. Our future growth may be based in part on selected acquisitions. At any
given time, we may be in various stages of considering acquisition opportunities. We may not be able to find and identify desirable acquisition targets or be successful in entering into a definitive

34

---



agreement
with any one target. In addition, even if we reach a definitive agreement with a target, we may not be able to complete any future acquisition.

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

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

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

We face significant competition for our services, and our failure to remain competitive could limit our ability to maintain existing clients or attract new
clients.The market for our services is highly competitive. The technology for custom software services can change rapidly. The market is fragmented, and no company holds a
dominant position. Consequently, our competition for client assignments and experienced personnel varies significantly from city to city and by the type of service provided. Some of our competitors
are larger and have greater technical, financial, and marketing resources and greater name recognition in the markets they serve than we do. In addition, clients may elect to increase their internal
information systems resources to satisfy their custom software development and integration needs.

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

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

We conduct business in the UK, Canada, and India, which exposes us to a number of difficulties inherent in international activities.As a result of our
acquisition of a controlling interest in Keane Worldzen in October 2003 and the acquisition of SignalTree Solutions in March 2002, we now have three software development facilities in
India. As of September 30, 2004, we had approximately 1,465 technical professionals in the region, including Keane Worldzen. India is currently experiencing conflicts with Pakistan over the
disputed territory of Kashmir as well as clashes between different religious groups within the country. These conflicts, in addition to other unpredictable developments in the political, economic, and
social conditions in India, could eliminate or reduce the availability of these development and professional services. If access to these services were to be unexpectedly eliminated or significantly
reduced, our ability to meet development objectives important to our strategy to add

35

---



offshore
delivery capabilities to the services we provide would be hindered, and our business could be harmed.

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

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

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

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

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

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

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

36

---



on,
such indebtedness or to obtain the requisite consents from the holders of any such indebtedness to permit the repurchase of the Debentures. If we are unable to repay all of such indebtedness or
are unable to obtain the necessary consents, we will be unable to offer to repurchase the Debentures, which would constitute an event of default under the indenture for the Debentures, which itself
could constitute a default under our senior revolving credit facility or under the terms of any future indebtedness that we may incur. In addition, the events that constitute a designated event under
the indenture for the Debentures are events of default under our senior revolving credit facility and may also be events of default under other indebtedness that we may incur in the future.

We incurred indebtedness when we sold our Debentures. We may incur additional indebtedness in the future. The indebtedness created by the sale of our Debentures, and any future
indebtedness, could adversely affect our business and our ability to make full payment on the Debentures.Our aggregate level of indebtedness increased in connection with the
sale of our Debentures. As of September 30, 2004, we had approximately $191.0 million of outstanding indebtedness and had the ability to incur additional debt under our revolving credit
facility. We may also obtain additional long-term debt and working capital lines of credit to meet future financing needs, which would have the effect of increasing our total leverage. Any
increase in our leverage could have significant negative consequences, including:

Our
ability to satisfy our future obligations, including debt service on our Debentures, depends on our future operating performance and on economic, financial, competitive, and other factors beyond
our control. Our business may not generate sufficient cash flow to meet these obligations or to successfully execute our business strategy. If we are unable to service our debt and fund our business,
we may be forced to reduce or delay capital expenditures, seek additional financing or equity capital, restructure or refinance our debt or sell assets. We may not be able to obtain additional
financing or refinance existing debt or sell assets on terms acceptable to us or at all.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We
do not engage in trading market risk, sensitive instruments or purchasing hedging instruments or "other than trading" instruments that are likely to expose us to market risk, whether interest rate,
foreign currency exchange, and commodity price or equity price risk. We have not purchased options or entered into swaps or forward or futures contracts. We invest primarily in tax-exempt
municipal bonds as well as U.S. government obligations and corporate bonds. As a result, our primary market risk exposure is that of interest rate risk to our investments, which would affect the
carrying value of those investments. Since January 1, 2001, the United States Federal Reserve Board has significantly decreased certain benchmark interest rates, which has led to a general
decline in market interest rates. Recently, the United States Federal Reserve Board has begun increasing benchmark interest rates and during the Second Quarter ended June 30, 2004, raised them
25 basis points. A significant increase in interest

37

---



rates
would increase the rate of return on our cash and cash equivalents, but would have a negative impact on the carrying value of our marketable securities. Changes in market rates and the related
impact on the fair value of our investments would not generally affect net income as our investments are fixed rate securities and are classified as available-for-sale.
Investments classified as available-for-sale are carried at fair value with unrealized gains and losses recorded as a component of accumulated other comprehensive loss in the
accompanying unaudited condensed consolidated balance sheets. However, when the investments are sold, the unrealized losses are recorded as realized losses and included in net income in the
accompanying unaudited condensed consolidated statements of income. During the Third Quarter ended September 30, 2004, we had a net unrealized gain of $0.4 million and for the nine
months ended September 30, 2004, we had a net unrealized loss of $0.7 million, respectively.

Additionally,
we transact business in the UK, Canada, and India and as such have exposure associated with movement in foreign currency exchange rates. For the nine months ended September 30,
2004 compared to the same period in 2003, the fluctuation in foreign currency exchange rates negatively impacted net income by approximately $1.3 million. Relative to the foreign currency
exposures existing at September 30, 2004, a 10% unfavorable movement would have resulted in an additional $3.2 million reduction of net income for the nine months ended
September 30, 2004. Net revenues derived from our foreign operations totaled approximately 5% of our total revenues for the nine months ended September 30, 2004.

Item 4. Controls and Procedures

Keane
maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded,
processed and summarized and reported within the specified time periods. Our management, with the participation of our President and Chief Executive Officer and our Senior Vice President of Finance
and Administration and Chief Financial Officer, evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2004. Based on this evaluation, our President and Chief
Executive Officer and our Senior Vice President of Finance and Administration and Chief Financial Officer concluded that, as of September 30, 2004, our disclosure controls and procedures were
(1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our President and Chief Executive Officer and our Senior Vice
President of Finance and Administration and Chief Financial Officer by others within these entities, particularly during the period in which this report was being prepared, and (2) effective,
in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Security and Exchange Commission's rules and forms.

Since
2003, we have been in the process of implementing a PeopleSoft Enterprise Resource Planning ("ERP") system for the majority of our processes and operations. We currently plan to implement the
following PeopleSoft modules: Resource Management, General Ledger, Accounts Payable, Expense and Time Reporting, Accounts Receivable, Contracts Management, Project Accounting, Billing and Enterprise
Planning Management. The implementation of the ERP system is being phased in over time throughout Keane and we currently plan to complete the implementation for the majority of our processes and
operations in 2005. During the fiscal quarter ended September 30, 2004, we implemented the General Ledger and Accounts Receivable modules for the majority of our operations. In addition to
these modules, to date, we have implemented Resource Management, Accounts Payable, Expense Reporting, and Enterprise Planning Management. The second phase of the implementation, which is planned for
2005, will include Contracts Management, Time Reporting, Project Accounting and Billing.

38

---



Implementing
an ERP system involves significant changes in business processes and extensive organizational training. We believe the phased-in approach we are taking reduces the risks
associated with making these changes. In addition, we are taking the necessary steps to monitor and maintain appropriate internal controls during this period.

During
the fiscal quarter ended September 30, 2004, there have not been any significant changes in our internal controls 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 likely to materially affect, our internal control over financial
reporting, except as relating to the implementation of an ERP system, as described above.

39

---





Keane, Inc.

Part II. Other Information

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds



ISSUER PURCHASES OF EQUITY SECURITIES

|                  |  | (a) |  | (b) |   | (c) |   | (d)
|----------------- |  | --- |  | --- | - | --- | - | ---
|
|07/01/04-07/30/04 |  |    |  | $   |  |     |  |    
|08/01/04-08/31/04 |  |    |  | $   |  |     |  |    
|09/01/04-09/30/04 |  |    |  | $   |  |     |  |    
|                  |  |     |  |     |   |     |   |    
|Total:            |  |    |  | $   |  |     |  |    
|                  |  |     |  |     |   |     |   |    

---

Item 6. Exhibits



40

---







Signatures

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

|                             |  | KEANE, INC.
(Registrant)                                                                                                                                   
|---------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|Date        November 4, 2004 |  | /s/ Brian T. KeaneBrian T. Keane
President and Chief Executive Officer                                                                                     
|Date        November 4, 2004 |  | /s/ John J. LeahyJohn J. Leahy
Senior Vice President of Finance and
Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)

41

---





Exhibit Index

|Exhibit
No. |  | Description                                                                                   
|----------- |  | ----------------------------------------------------------------------------------------------
|            |  |                                                                                               
|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.              

42

---



QuickLinks