** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**
| **(Mark One)**                                                                                                                                                                                       | ** ** | ** **                                                                                    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                 |       |                                                                                          |
| **x**                                                                                                                                                                                                | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
| ** **                                                                                                                                                                                           | ** ** | ** **                                                                                    |
| **For the  quarterly period ended June 30, 2006**                                                                                                                                                    |
| ** **                                                                                                                                                                                           | ** ** | ** **                                                                                    |
| **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 Number1-7516**

** **

**KEANE, INC.**

(Exact name of registrant as specified in its charter)

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

 

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

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes** **x**  **No** **o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):   Largeaccelerated filer** **o   Acceleratedfiler** **x   Non-acceleratedfiler** **o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).   Yes** **o**  **No** **x

As of June 30, 2006, there were 58,324,879 shares of the registrant’sCommon Stock, $.10 par value per share, and no shares of the registrant’sClass B Common Stock, $.10 par value per share, issued and outstanding.

 

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** **

**Keane, Inc.**

**Table ofContents**
| **Part I.**   | ** ** | **Financial  Information**                                                                                                     |   |   |
|---------------|------------|--------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|          |       |                                                                                                                           |   |   |
| Item  1.      |       | Unaudited Condensed Consolidated Statements of Income  for the three and six months ended June 30, 2006 and 2005          |   |   |
|          |       |                                                                                                                           |   |   |
|          |       | Unaudited Condensed Consolidated Balance Sheets as of  June 30, 2006 and December 31, 2005                                     |   |   |
|          |       |                                                                                                                           |   |   |
|          |       | Unaudited Condensed Consolidated Statements of Cash  Flows for the six months ended June 30, 2006 and 2005 |   |   |
|          |       |                                                                                                                           |   |   |
|          |       | Notes to Unaudited Condensed Consolidated Financial  Statements                                                                |   |   |
|          |       |                                                                                                                           |   |   |
| Item 2.       |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                    |   |   |
|          |       |                                                                                                                           |   |   |
| Item 3.       |       | Quantitative and Qualitative Disclosures About Market  Risk                                                                    |   |   |
|          |       |                                                                                                                           |   |   |
| Item 4.       |       | Controls and Procedures                                                                                                        |   |   |
|          |       |                                                                                                                           |   |   |
| **Part  II.** | ** ** | **Other  Information**                                                                                                         |   |   |
|          |       |                                                                                                                           |   |   |
| Item  1A.     |       | Risk Factors                                                                                                                   |   |   |
|          |       |                                                                                                                           |   |   |
| Item 2.       |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                                   |   |   |
|          |       |                                                                                                                           |   |   |
| Item 4.       |       | Submission of Matters to a Vote of Security Holders                                                                            |   |   |
|          |       |                                                                                                                           |   |   |
| Item 6.       |       | Exhibits                                                                                                                       |   |   |
|          |       |                                                                                                                           |   |   |
| Signatures    |       |                                                                                                                           |
|          |       |                                                                                                                           |   |   |
| Exhibit Index |       |                                                                                                                           |

 

2

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**Part I.Financial Information**

**Item1. Financial Statements**

**Keane, Inc.**

**UnauditedCondensed Consolidated Statements of Income**
| ** **                                                                       | ** ** | **Three Months Ended June 30,**                  | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                                             | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                       | ** ** | **(In thousands except per share amounts)** | ** ** |
| **Revenues**                                                                     |       | $                                                                    | 242,635    |                                              | $          | 237,818 |   | $ | 486,212 |   | $ | 470,022 |   |
| ** **                                                                       | ** ** | ** **                                                           | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating expenses**                                                           | ** ** | ** **                                                           | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries, wages, and other direct costs                                          |       | 171,510                                                              |       | 166,461                                           |       | 344,761 |   | 328,654 |   |
| Selling, general, and administrative expenses                                    |       | 51,606                                                               |       | 56,304                                            |       | 107,488 |   | 110,476 |   |
| Amortization of intangible assets                                                |       | 3,855                                                                |       | 3,860                                             |       | 7,706 |   | 7,930 |   |
| Restructuring charges, net                                                       |       | 1,390                                                                |       | —                                            |       | 2,661 |   | — |   |
| **Operating  income**                                                            |       | 14,274                                                               |       | 11,193                                            |       | 23,596 |   | 22,962 |   |
|                                                                             |       |                                                                 |       |                                              |       |   |   |   |   |
| **Other income (expense)**                                                       | ** ** | ** **                                                           | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest and dividend income                                                     |       | 1,285                                                                |       | 1,128                                             |       | 2,485 |   | 2,233 |   |
| Interest expense                                                                 |       | (1,672                                                               | )          | (1,406                                            | )          | (3,068 | ) | (2,822 | ) |
| Other income (expense), net                                                      |       | 284                                                                  |       | (174                                              | )          | (121 | ) | (190 | ) |
| Minority interest                                                                |       | 11                                                                   |       | 190                                               |       | (16 | ) | 873 |   |
| **Income  before income taxes**                                                  |       | 14,182                                                               |       | 10,931                                            |       | 22,876 |   | 23,056 |   |
| Provision for  income taxes                                                      |       | 4,783                                                                |       | 3,888                                             |       | 8,087 |   | 8,738 |   |
| **Net  income**                                                                  |       | $                                                                    | 9,399      |                                              | $          | 7,043 |   | $ | 14,789 |   | $ | 14,318 |   |
|                                                                             |       |                                                                 |       |                                              |       |   |   |   |   |
| Basic earnings  per share                                                        |       | $                                                                    | 0.16       |                                              | $          | 0.11 |   | $ | 0.25 |   | $ | 0.23 |   |
|                                                                             |       |                                                                 |       |                                              |       |   |   |   |   |
| Diluted earnings  per share                                                      |       | $                                                                    | 0.15       |                                              | $          | 0.11 |   | $ | 0.24 |   | $ | 0.22 |   |
|                                                                             |       |                                                                 |       |                                              |       |   |   |   |   |
| Basic weighted  average common shares outstanding                                |       | 57,755                                                               |       | 61,675                                            |       | 58,099 |   | 61,932 |   |
| Diluted weighted  average common shares and common share equivalents outstanding |       | 66,470                                                               |       | 70,492                                            |       | 66,706 |   | 70,776 |   |

 

*Theaccompanying notes are an integral part of the unaudited condensed consolidatedfinancial statements.*

3

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** **

**Keane, Inc.**

**UnauditedCondensed Consolidated Balance Sheets**
| ** **                                                                                                                                            | ** ** | **June 30,**                                                              | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                            | ** ** | ** 2006**                                                                 | ** ** | ** 2005**        | ** ** |
| ** **                                                                                                                                            | ** ** | **(Dollars in thousands,  except per share amounts)** | ** ** |
| **Assets**                                                                                                                                            | ** ** | ** **                                                                     | ** ** | ** **            | ** ** |
| Current:                                                                                                                                              |       |                                                                           |       |                  |       |
| Cash and cash equivalents                                                                                                                             |       | $                                                                              | 74,124     |                  | $          | 71,570 |   |
| Restricted cash                                                                                                                                       |       | 855                                                                            |       | 1,745                 |       |
| Marketable securities                                                                                                                                 |       | 76,537                                                                         |       | 95,796                |       |
| Accounts receivable, net                                                                                                                              |       | 172,485                                                                        |       | 160,019               |       |
| Prepaid expenses and deferred taxes                                                                                                                   |       | 29,721                                                                         |       | 16,954                |       |
| Total current assets                                                                                                                                  |       | 353,722                                                                        |       | 346,084               |       |
| Marketable  securities, long-term                                                                                                                     |       | 13,894                                                                         |       | —                |       |
| Property and equipment,  net                                                                                                                          |       | 75,506                                                                         |       | 77,583                |       |
| Goodwill                                                                                                                                              |       | 315,797                                                                        |       | 314,536               |       |
| Customer lists,  net                                                                                                                                  |       | 35,058                                                                         |       | 41,050                |       |
| Other intangible  assets, net                                                                                                                         |       | 4,475                                                                          |       | 6,173                 |       |
| Deferred  contract costs related to TTA agreement                                                                                                     |       | 21,607                                                                         |       | 8,550                 |       |
| Other assets,  net                                                                                                                                    |       | 13,326                                                                         |       | 13,318                |       |
| Total assets                                                                                                                                          |       | $                                                                              | 833,385    |                  | $          | 807,294 |   |
| ** **                                                                                                                                            | ** ** | ** **                                                                     | ** ** | ** **            | ** ** |
| **Liabilities**                                                                                                                                       | ** ** | ** **                                                                     | ** ** | ** **            | ** ** |
| Current:                                                                                                                                              |       |                                                                           |       |                  |       |
| Short-term debt                                                                                                                                       |       | $                                                                              | 3          |                  | $          | 7 |   |
| Accounts payable                                                                                                                                      |       | 6,608                                                                          |       | 11,489                |       |
| Accrued expenses and other liabilities                                                                                                                |       | 52,000                                                                         |       | 46,529                |       |
| Accrued restructuring                                                                                                                                 |       | 2,275                                                                          |       | 2,781                 |       |
| Accrued compensation                                                                                                                                  |       | 36,952                                                                         |       | 44,835                |       |
| Deferred revenue                                                                                                                                      |       | 8,757                                                                          |       | 6,932                 |       |
| Total current liabilities                                                                                                                             |       | 106,595                                                                        |       | 112,573               |       |
| Long-term debt                                                                                                                                        |       | 150,000                                                                        |       | 150,001               |       |
| Accrued  long-term building costs                                                                                                                     |       | 38,716                                                                         |       | 39,004                |       |
| Accrued  long-term restructuring                                                                                                                      |       | 2,599                                                                          |       | 2,823                 |       |
| Other long-term  liabilities                                                                                                                          |       | 13,354                                                                         |       | 16,493                |       |
| Deferred  long-term revenue                                                                                                                           |       | 23,465                                                                         |       | 11,155                |       |
| Deferred income  taxes                                                                                                                                |       | 36,005                                                                         |       | 30,864                |       |
| Total liabilities                                                                                                                                     |       | 370,734                                                                        |       | 362,913               |       |
| Minority  Interest                                                                                                                                    |       | 3,785                                                                          |       | 3,769                 |       |
|                                                                                                                                                  |       |                                                                           |       |                  |       |
| Commitments and  contingencies                                                                                                                        |       |                                                                           |       |                  |       |
| ** **                                                                                                                                            | ** ** | ** **                                                                     | ** ** | ** **            | ** ** |
| **Stockholders’ Equity**                                                                                                                         | ** ** | ** **                                                                     | ** ** | ** **            | ** ** |
| Preferred Stock,  par value $.01, authorized 2,000,000 shares, issued none                                                                            |       | —                                                                         |       | —                |       |
| Common Stock,  par value $.10, authorized 200,000,000 shares, 58,324,879 issued and  outstanding at June 30, 2006 and 58,135,289 at December 31, 2005 |       | 5,832                                                                          |       | 5,814                 |       |
| Additional  paid-in capital                                                                                                                           |       | —                                                                         |       | —                |       |
| Accumulated  other comprehensive loss                                                                                                                 |       | (7,239                                                                         | )          | (12,124               | )          |
| Retained  earnings                                                                                                                                    |       | 460,273                                                                        |       | 449,349               |       |
| Unearned  compensation                                                                                                                                |       | —                                                                         |       | (2,427                | )          |
| Total stockholders’ equity                                                                                                                       |       | 458,866                                                                        |       | 440,612               |       |
| Total  liabilities and stockholders’ equity                                                                                                      |       | $                                                                              | 833,385    |                  | $          | 807,294 |   |

 

*Theaccompanying notes are an integral part of the unaudited condensed consolidatedfinancial statements.*

4

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** **

**Keane, Inc.**

**Unaudited Condensed ConsolidatedStatements of Cash Flows**
| ** **                                                                                          | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                                                                          | ** ** | **(Dollars in thousands)**              | ** ** |
| **Cash flows from operating  activities:**                                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net income                                                                                          |       | $                                                 | 14,789     |   | $ | 14,318 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:                  |       |                                              |       |   |   |
| Depreciation and amortization                                                                       |       | 15,538                                            |       | 14,200 |   |
| Deferred income taxes                                                                               |       | 4,473                                             |       | 5,630 |   |
| Provision for doubtful accounts                                                                     |       | 4,592                                             |       | 3,119 |   |
| Minority interest                                                                                   |       | 16                                                |       | (873 | ) |
| (Gain) on sale of property and equipment                                                            |       | (251                                              | )          | (159 | ) |
| Loss on sale of investments                                                                         |       | 113                                               |       | 134 |   |
| Stock-based compensation                                                                            |       | 1,504                                             |       | 281 |   |
| Other charges, net                                                                                  |       | (525                                              | )          | (636 | ) |
| Changes in  operating assets and liabilities, net of acquisitions:                                  |       |                                              |       |   |   |
| (Increase) in accounts receivable                                                                   |       | (17,058                                           | )          | (15,338 | ) |
| (Increase) in prepaid expenses and other assets                                                     |       | (26,801                                           | )          | (4,455 | ) |
| Increase (decrease) in accounts payable, accrued  expenses, deferred revenue, and other liabilities |       | 12,089                                            |       | (6,922 | ) |
| **Net cash provided by operating activities**                                                       |       | 8,479                                             |       | 9,299 |   |
| ** **                                                                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| **Cash flows from investing  activities:**                                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Purchase of investments                                                                             |       | (40,500                                           | )          | (23,407 | ) |
| Sale and maturities of investments                                                                  |       | 46,061                                            |       | 33,185 |   |
| Purchase of property and equipment                                                                  |       | (6,251                                            | )          | (7,931 | ) |
| Restricted cash                                                                                     |       | 311                                               |       | 35 |   |
| Proceeds from the sale of property and equipment                                                    |       | 575                                               |       | 773 |   |
| Payments for current year acquisitions, net of cash  acquired                                       |       | —                                            |       | (1,270 | ) |
| Payments for prior years acquisitions, net of cash  acquired                                        |       | (3,333                                            | )          | (3,122 | ) |
| **Net cash used for investing activities**                                                          |       | (3,137                                            | )          | (1,737 | ) |
| ** **                                                                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| **Cash flows from financing  activities:**                                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Principal payments under capital lease obligations                                                  |       | (5                                                | )          | (161 | ) |
| Proceeds from issuance of common stock                                                              |       | 6,226                                             |       | 2,353 |   |
| Repurchase of common stock                                                                          |       | (9,290                                            | )          | (17,563 | ) |
| **Net cash used for financing activities**                                                          |       | (3,069                                            | )          | (15,371 | ) |
|                                                                                                |       |                                              |       |   |   |
| Effect of  exchange rate changes on cash                                                            |       | 281                                               |       | (6 | ) |
| **Net  increase (decrease) in cash and cash equivalents**                                           |       | 2,554                                             |       | (7,815 | ) |
| **Cash  and cash equivalents at beginning of period**                                               |       | 71,570                                            |       | 67,488 |   |
| **Cash  and cash equivalents at end of period**                                                     |       | $                                                 | 74,124     |   | $ | 59,673 |   |
| ** **                                                                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| **Supplemental information:**                                                                       | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Income taxes  paid                                                                                  |       | $                                                 | 15,045     |   | $ | 9,725 |   |
| Interest paid                                                                                       |       | $                                                 | 1,500      |   | $ | 1,505 |   |

 

*Theaccompanying notes are an integral part of the unaudited condensed consolidatedfinancial statements.*

5

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**Keane, Inc.**

**Notesto Unaudited Condensed Consolidated Financial Statements**

**Note 1.      Basisof Presentation**

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with generally accepted accounting principles for interim financialinformation and, accordingly, do not include all of the information andfootnotes required by generally accepted accounting principles for completefinancial statements. The accompanying unaudited condensed consolidatedfinancial statements include the accounts of Keane, Inc. and our whollyand majority owned subsidiaries. In the opinion of management, all adjustments,consisting primarily of normal recurring accruals, considered necessary for afair presentation of the results of operations for the interim periods reportedand of our financial condition as of the date of the interim balance sheet havebeen included. Operating results for the three and six months ended June 30,2006 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2006 or for any other period.

The balance sheetat December 31, 2005 has been derived from our audited consolidatedfinancial statements at that date but does not include all of the informationand footnotes required by generally accepted accounting principles for completefinancial statements.

Certainreclassifications have been made to the 2005 financial statements to conform tothe 2006 presentation.  These reclassifications have no effect onpreviously reported net income or stockholder’s equity.

For furtherinformation, refer to the consolidated financial statements and footnotesthereto included in our Annual Report on Form 10-K for the year endedDecember 31, 2005 filed with the Securities and Exchange Commission onMarch 16, 2006.

**Note 2.       StockBased Compensation**

EffectiveJanuary 1, 2006, we adopted Statement of Financial Accounting Standard (“SFAS”)No. 123 (revised 2004) (“SFAS 123(R)”) “Share Based Payment.” Generally,the approach in SFAS 123(R) is similar to the approach described in SFASNo 123, (“SFAS 123”) “Accounting for Stock Based Compensation.” However, SFAS123(R) requires all share-based payments granted to employees that areultimately expected to vest and do actually vest, including grants of employeestock options, to be recognized in the income statement based on their fairvalue at the date of grant. Pro forma disclosure is no longer an alternative.

We adopted SFAS123(R) under the modified prospective method. Under this method, beginningon January 1, 2006, we recognized compensation cost for all share-basedpayments to employees based on the grant date estimate of fair value for thoseawards. We have used the Black-Scholes option-pricing model to determine fairvalue for all share-based payments. Prior period financial information has notbeen restated.

As ofJune 30, 2006, we had several share-based compensation plans that aredescribed below. The adoption of SFAS 123(R) on January 1, 2006 hadthe following impact on our results of operations for the three and six monthsended June 30, 2006: operating profit before tax was lower byapproximately $1.0 million and $1.5 million, respectively, net income was lowerby approximately $0.6 million and $1.0 million, respectively, basic EPS was lowerby approximately $.01 and $.02, respectively, and diluted EPS was lower by ­­­$.01and $.02, respectively. The total income tax benefit recognized in the incomestatement for share-based compensation agreements for the three and six monthsended June 30, 2006 was approximately $0.3 million and $0.5 million. There was no tax benefit realized from stock options exercised during thethree and six months ended June 30, 2006. We received $1.7 million and $4.4 million from stock option exercisesfor the three and six months ended June 30, 2006. As of June 30, 2006, wehad approximately $4.4 million of unrecognized compensation cost related tostock option awards that we expect to be recognized as expense over a weightedaverage period of 3.6 years.

**Modifications**

On May 10, 2006,we entered into a Resignation and Consulting Agreement with Brian T. Keane, ourformer President and Chief Executive Officer. Pursuant to the Resignation andConsulting Agreement, we modified the terms of certain of Mr. Keane’s stockawards. We extended the exercise period for his vested stock options untilDecember 31, 2006 and provided that 10,000 shares of restricted stock thatwould otherwise vest on December 16, 2006 would continue to vest despite hisresignation.

6

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On June 13, 2006, weentered into a Settlement Agreement with Georgina Fisk, our Vice President ofMarketing, Brian T. Keane, our former President and Chief Executive Officer,John Keane, Sr., the Chairman of our Board of Directors, and John Keane, Jr., amember of our Board of Directors (the “Settlement Agreement”). The SettlementAgreement was entered into in connection with the resolution of Ms. Fisk’spreviously reported allegations concerning Brian Keane. Pursuant to theSettlement Agreement, we modified the terms of certain of Ms. Fisk’s stockawards. We extended the exercise period for her vested stock options untilDecember 31, 2006 and provided that 2,500 shares of restricted stock that wouldotherwise vest on December 16, 2006 would continue to vest despite herresignation as of June 30, 2006. As a result of these modifications and theforfeiture of Mr. Keane’s and Ms. Fisk’s remaining unvested restricted stockand stock options, during the Second Quarter of 2006, we recognized $0.3million of incremental stock-based compensation expense.

The followingtable illustrates the effect on net income and earnings per share as if we hadapplied the fair value recognition provisions of SFAS 123 to our stock-basedemployee compensation for the three and six months ended June 30, 2005.
| ** **                                                                                                                                                  | ** ** | **Three Months ended  June 30, 2005** | ** ** | **Six months ended  June 30, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| Net income—as reported (1)                                                                                                              |       | $                                                         | 7,043      |                                                    | $          | 14,318 |   |
| Add: Stock-based  employee compensation expense included in reported net income, net  of related tax effects                                      |       | 83                                                        |       | 166                                                     |       |
| Deduct: Total  stock-based employee compensation expense determined  under the fair value method for all awards, net of related tax  effects |       | (1,387                                                    | )          | (2,748                                                  | )          |
|                                                                                                                                                        |       |                                                      |       |                                                    |       |
| Net income — pro  forma                                                                                                                                |       | $                                                         | 5,739      |                                                    | $          | 11,736 |   |
|                                                                                                                                                        |       |                                                      |       |                                                    |       |
| Earnings per share:                                                                                                                                         |       |                                                      |       |                                                    |       |
| Basic—as reported                                                                                                                                      |       | $                                                         | 0.11       |                                                    | $          | 0.23 |   |
| Basic—pro forma                                                                                                                                        |       | $                                                         | 0.09       |                                                    | $          | 0.19 |   |
| Diluted—as  reported (1)                                                                                                                               |       | $                                                         | 0.11       |                                                    | $          | 0.22 |   |
| Diluted—pro forma (1)                                                                                                                                  |       | $                                                         | 0.09       |                                                    | $          | 0.18 |   |

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(1)             SeeNote 3 “Earnings Per Share Data” for reconciliation of net income asreported to net income used in calculation of diluted earnings per share.

For periods priorto the adoption of SFAS 123(R), we elected to follow Accounting PrinciplesBoard Opinion (“APB”) No. 25 (“APB 25”), “Accounting for Stock Issued toEmployees,” and related FASB Interpretation No. 44 (“FIN 44”), “Accountingfor Certain Transactions Involving Stock Compensation” in accounting for ourshare based payment awards. Under APB 25, since the exercise price of ouremployee stock options equaled the market price of the underlying stock on thedate of the grant, no compensation expense was recorded in our financialstatements.  However, compensation expense related to restricted stockawards and certain Keane Worldzen stock options was recorded ratably over therestriction and vesting period, respectively, and was included in the selling,general, and administrative expenses in the accompanying unaudited condensedconsolidated statements of income.

Prior to theadoption of SFAS 123(R) and during the Fourth Quarter of 2005, weaccelerated the vesting of certain stock options in which the exercise price ofthe awards  exceeded the market price ofthe stock on the date of modification. As a result of the acceleration,approximately 2.1 million shares subject to options, constitutingapproximately 47% of the total of unvested options outstanding at that timebecame immediately exercisable. The acceleration impacted approximately 570employees. Under APB 25 and FIN 44, no compensation expense was recognized inour financial statements for the acceleration of vesting of these options sincethe closing price per share of our common stock on the dates of accelerationwas greater than the exercise prices of the unvested options that weaccelerated. The primary purpose of the accelerated vesting was to enable us toavoid recognizing in our income statement non-cash compensation expenseassociated with these options in future periods, upon our adoption ofSFAS 123(R) on January 1, 2006. Absent the acceleration of theoptions described above, from and after our adoption of SFAS 123(R), wewould have been required to recognize approximately $10.5 million inpre-tax non-cash compensation expense over the remaining vesting terms of thestock options, based on valuation calculations using the Black-Scholes optionpricing model.

7

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**ShareBased Compensation Plans:**

        **Stock Incentive Plans**

        Our1998 Stock Incentive Plan, amended in December 1999, provides for grantsof stock options and restricted stock for up to 7,000,000 shares of our commonstock to our employees, officers, directors, consultants, and advisors. Thecontractual life of options granted under this plan ranges from five to tenyears from the date of grant; the plan requires a purchase price of not lessthan 100% of the fair market value of the stock as of the date of grant; andthe options may be exercisable at such time or times as our Board of Directorsin each case determines. In general, our stock options vest over a five-yearperiod on a graded vesting schedule and their compensation cost is recorded ona straight-line basis over the share-vesting period.  Our restricted stockawards typically vest over a five-year period on a graded vesting schedule. Wevalue restricted stock awards based on the closing price of our common stock onthe date of grant, less the nominal consideration received. We recordcompensation cost on a straight-line basis over the share-vesting period. Thecumulative amount of compensation cost recorded on stock options and restrictedstock at any date is at least equal to the fair value of the awards that haveactually vested as of that date.

        InDecember 2000, we initiated a “Time Accelerated Restricted Stock AwardPlan” (“TARSAP”) under our 1998 Stock Incentive Plan, whereby the vesting ofcertain stock options is directly impacted by our performance. The vesting ofstock options granted under the TARSAP accelerates when we achieve specifiedprofitability criteria. If these criteria are not met, these options will vestfive years after the date of grant and expire at the end of 10 years.Since our TARSAP awards vest based upon performance or service, we use theBlack-Scholes option pricing model to value these awards. We recognizecompensation expense for TARSAP awards on a straight-line basis over thevesting period unless we determine that the achievement of the performancecriteria is probable. Once probable, we recognize all remaining unrecognizedcompensation over the remaining period from which it becomes probable to theperformance achievement date.

        Our2001 Stock Incentive Plan provides for grants of stock options for up to7,000,000 shares of our common stock to our employees, officers, directors, andadvisors. The contractual life of options granted under the plan ranges fromfive to ten years from the date of grant; the plan requires a purchase price ofnot less than 100% of the fair market value of the stock as of the date ofgrant; and the options may be exercisable at such time or times as ourBoard of Directors in each case determines.  The vesting of stock optionsunder this plan is done on a pro-rata basis over the service life of the award.We recognize compensation expense for awards under this plan on a straight-linebasis over the vesting period of the entire award.

        Underall of our stock plans, we may grant options that are intended to qualify asincentive stock options under Section 422 of the Internal Revenue Code (“incentivestock options”) or nonstatutory options not intended to qualify as incentivestock options.

        Uponexercise of stock options, we issue shares from our authorized, but unissuedshares.

**Stock Repurchases**

       In October 2005, we announced the approval by our Board of Directors of aprogram for the repurchase of 3.0 million shares of our common stock (“theOctober 2005 Program”). The repurchases may be made on the open market orin negotiated transactions, and the timing and amount of shares to be purchasedwill be determined by our management based on its evaluation of market andeconomic conditions and other factors. As of June 30, 2006, there wereapproximately 1.8 million shares that remained available for repurchase underthis program.

       **Employee Stock Purchase Plan**

 **       **OurEmployee Stock Purchase Plan (“ESPP”) provides for the purchase of 6,550,000shares of our common stock. Effective January 1, 2006, we modified ourESPP to allow qualifying employees to purchase shares at 95% of the marketvalue of our common stock on the last day of each six-month purchase period.Previously, qualifying employees were able to purchase stock at 85% of themarket value of the stock on the offering commencement date or the last day ofthe purchase period, whichever was lower. Prior to January 1, 2006, ourESPP was non-compensatory as defined in APB 25, and accordingly, we did notrecognize compensation expense in our consolidated financial statements.However, our ESPP would have been compensatory under SFAS 123(R) had wenot modified its terms. Our modification of the ESPP effective January 1,2006 reduced the purchase discount to 5% of the market value of our commonstock and removed the look-back provision and therefore, the ESPP isnon-compensatory under SFAS 123(R).

        OnFebruary 13, 2003, our Board of Directors approved a UK ESPP. We allocated500,000 shares of the total number of 

8

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shares reserved under ourESPP for issuance under the UK ESPP. Our modification of the ESPP was alsoeffective for the UK ESPP. Consistent with the terms of our ESPP, the optionsunder the UK ESPP are non-compensatory under SFAS 123(R) and accordingly,we have not recognized any stock-based compensation expense associated with ourESPP or UK ESPP during the Second Quarter of 2006 or the six months ended June30, 2006.

        Thefair market value of each stock option is estimated using the Black-Scholesoption-pricing model, assuming no expected dividends with the followingweighted-average assumptions:
| ** **                              | ** ** | **For the Three  Months ended  June 30, 2006** | ** ** | **For the Three  Months ended  June 30, 2005** | ** ** | **For the Six  Months ended  June 30, 2006** | ** ** | **For the Six  Months ended  June 30, 2005** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| Options granted                         |       | 35,000                                                                  |       | 58,000                                                                  |       | 521,000                                                               |       | 76,500                                                                |       |
| Weighted-average  exercise price        |       | $                                                                       | 13.26      |                                                                    | $          | 12.46                                                                 |       | $                                                                     | 11.75      |   | $ | 12.67 |   |
| Weighted-average  grant date fair value |       | $                                                                       | 3.98       |                                                                    | $          | 4.81                                                                  |       | $                                                                     | 4.84       |   | $ | 5.04 |   |
| Expected life (in  years)               |       | 3.30                                                                    |       | 3.96                                                                    |       | 4.52                                                                  |       | 4.04                                                                  |       |
| Expected stock  price volatility        |       | 33.44                                                                   | %          | 44.03                                                                   | %          | 41.62                                                                 | %          | 44.95                                                                 | %          |
| Risk-free interest rate                 |       | 4.82                                                                    | %          | 3.80                                                                    | %          | 4.30                                                                  | %          | 3.85                                                                  | %          |

 

  We derivedour estimate of an expected option life based on a review of our historicoption holding periods, including a consideration of the holding periodinherent in currently vested but unexercised options. We believe that thishistorical data is currently the best estimate of the expected term of a newoption. We reviewed historical data for groups of employees and determined thatthe type of award was an indicator of the exercise behavior.  For 2006,the expected option lives range from 3.3 to 5.5 years.

               We derived the estimated stockprice volatility based on a review of our actual historic stock pricescommensurate with the expected life of the award. For the Second Quarter of2006, there was only one day where stock options were granted, and they werevalued using an estimated volatility of 33.44%. We believe that the historicalstock price volatility is an accurate indicator of future stock priceperformance.

               SFAS 123(R) requires that weestimate forfeitures at the time of grant and that we revise, if necessary, insubsequent periods if actual forfeitures differ from these estimates. The term “forfeitures”is distinct from “cancellations” or “expirations” and represents only theunvested portion of the surrendered option. Similar to the analysis for theexpected option life, we reviewed historical forfeiture data for groups ofemployees and determined the appropriate forfeiture rate ranges from 0-23% forthe applicable employee group. Therefore, upon adoption of SFAS 123(R) weapplied an annual forfeiture rate of 0-23% to all unvested options as ofDecember 31, 2005. We will re-evaluate this analysis quarterly and adjustthe forfeiture rate as necessary. Ultimately, the actual expense recognizedover the vesting period will only be for those shares that vest.

               The risk-free interest rate is theyield on zero-coupon U.S. Treasury securities for a period that is commensuratewith the expected life assumption is used as the risk-free interest rate.

        A summary of stock option activity under all of our plans for the six monthsended June 30, 2006 is as follows:
| ** **                                     | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|------------------------------------------------|------------|------------|------------|----------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | ** ** | ** ** | ** **                             | ** ** | **(years)**                                          | ** ** | ** **                      | ** ** |
| Options  outstanding at December 31, 2005 |       | 4,880,930  |       | $                                      | 12.04      |                                                 | —     |                            | $          | — |   |
|                                           |       |       |       |                                   |       |                                                 |       |                            |       |
| Granted                                        |       | 521,000    |       | $                                      | 11.75      |                                                 | —     |                            | —     |   |
|                                           |       |       |       |                                   |       |                                                 |       |                            |       |
| Exercised                                      |       | (483,622   | )          | $                                      | 9.73       |                                                 | —     |                            | —     |   |
|                                           |       |       |       |                                   |       |                                                 |       |                            |       |
| Forfeited /  Expired                           |       | (605,287   | )          | $                                      | 10.98      |                                                 | —     |                            | —     |   |
|                                           |       |       |       |                                   |       |                                                 |       |                            |       |
| Options  outstanding at June 30, 2006     |       | 4,313,021  |       | $                                      | 12.40      |                                                 | 5.4        |                            | $          | 9,474,546 |   |
|                                           |       |       |       |                                   |       |                                                 |       |                            |       |
| Options exercisable at  June 30, 2006     |       | 2,956,180  |       | $                                      | 13.40      |                                                 | 4.5        |                            | $          | 2,489,561 |   |

 

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The totalintrinsic value of options exercised (i.e., the difference between the marketprice at exercise and the price paid by the employee to exercise the options)during the six months ended June 30, 2006 and 2005, was approximately $1.8million and $0.3 million, respectively. The aggregate intrinsic value ofoptions outstanding and options exercisable as of June 30, 2006 is basedon the difference between the closing price of our common stock onJune 30, 2006, which was $12.50, and the exercise price of the applicableoption. In calculating the aggregate intrinsic value, we excluded those optionswhose exercise price was greater than the closing price per share of our commonstock as of June 30, 2006. Shares available for future issuance under ourstock option plans at June 30, 2006 were 8,841,722.

        **Restricted Stock**

|                                      | ** ** | **Shares** | ** ** | **Weighted average  grant date  fair value** | ** ** |
|--------------------------------------|------------|------------|------------|-------------------------------------------------------------|------------|
| Nonvested at  December 31, 2005 |       | 190,000    |       | $                                                           | 14.16      |   |
| Granted                              |       | 285,000    |       | 11.40                                                       |       |
| Vested                               |       | (25,000    | )          | 11.09                                                       |       |
| Forfeited                            |       | (37,500    | )          | 15.09                                                       |       |
| Nonvested at  June 30, 2006     |       | 412,500    |       | $                                                           | 12.17      |   |

 

The majority ofour restricted stock awards vest over a five-year period on a graded vestingschedule. We have valued the restricted stock awards based on the closing priceof our common stock on the date of grant, less the nominal considerationreceived. We record compensation cost on a straight-line basis over theshare-vesting period. The weighted average grant date fair value of restrictedstock awards granted during the three and six months ended June 30, 2006was $11.98 and $11.40, respectively. We recorded expense associated with ourrestricted stock awards of approximately $0.1 million  and $0.2 million for the three and six monthsended June 30, 2006, respectively.  For the three and six months ended June 30, 2005, we recorded expenseassociated with our restricted stock awards of approximately $0.1 million and$0.2 million, respectively.  As of June30, 2006, we had approximately $4.7 million of unrecognized compensation costrelated to restricted stock awards that we will recognize as expense over aweighted average period of 2.2 years. As of June 30, 2006, we had 25,000 sharesof vested restricted stock awards.

**Note 3.      EarningsPer Share Data**

Basic earnings pershare is computed using only the weighted-average number of common sharesoutstanding during the period. Diluted earnings per share is computed using theweighted-average number of common shares outstanding during the period, plusthe dilutive effect of potential future issuances of common stock relating tostock option awards and other potentially dilutive securities. In calculatingdiluted earnings per share, the dilutive effect of stock options is computedusing the average market price for the respective period. Potential sharesrelated to certain of our outstanding stock options and restricted stock awardswere excluded from the computation of earnings per share because they wereanti-dilutive in the periods presented, but could be dilutive in the future.The following table sets forth the computation of basic and diluted earningsper share (in thousands, except per share data):
| ** **                                                                                                                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                            | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income used  for basic earnings per share                                                                                         |       | $                                               | 9,399      |                                          | $          | 7,043 |   | $ | 14,789 |   | $ | 14,318 |   |
| Interest expense  associated with convertible debentures, including amortization of debt  issuance costs                              |       | 970                                             |       | 970                                           |       | 1,940 |   | 1,940 |   |
| Related tax  effect                                                                                                                   |       | (396                                            | )          | (396                                          | )          | (792 | ) | (792 | ) |
| Net income used  for diluted earnings per share                                                                                       |       | $                                               | 9,973      |                                          | $          | 7,617 |   | $ | 15,937 |   | $ | 15,466 |   |
|                                                                                                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average  number of common shares outstanding used in calculation of basic earnings per  share                                |       | 57,755                                          |       | 61,675                                        |       | 58,099 |   | 61,932 |   |
| Incremental  shares from restricted stock, employee stock purchase plan, and the assumed  exercise of dilutive stock options          |       | 540                                             |       | 642                                           |       | 432 |   | 669 |   |
| Incremental  shares from assumed conversion of convertible debentures                                                                 |       | 8,175                                           |       | 8,175                                         |       | 8,175 |   | 8,175 |   |
| Weighted average  number of common shares and common share equivalents outstanding used in  calculation of diluted earnings per share |       | 66,470                                          |       | 70,492                                        |       | 66,706 |   | 70,776 |   |
|                                                                                                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Earnings per share                                                                                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                                                                                                 |       | $                                               | 0.16       |                                          | $          | 0.11 |   | $ | 0.25 |   | $ | 0.23 |   |
| Diluted                                                                                                                               |       | $                                               | 0.15       |                                          | $          | 0.11 |   | $ | 0.24 |   | $ | 0.22 |   |
|                                                                                                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Anti dilutive  common stock equivalents related to stock options                                                                      |       | 1,517                                           |       | 1,704                                         |       | 1,927 |   | 1,703 |   |
| Anti-dilutive  restricted stock                                                                                                       |       | 220                                             |       | 145                                           |       | 143 |   | 145 |   |

 

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        Our 2.0% Convertible SubordinatedDebentures due 2013 (the “Debentures”) are convertible at the option of theholder into shares of our common stock at an initial conversion rate of 54.4989shares of common stock per $1,000 principal amount of Debentures, which isequivalent to an initial conversion price of approximately $18.349 per share.Approximately 8.2 million shares of our common stock would be issuable upon theconversion of all of the outstanding Debentures. In accordance with theEmerging Issues Task Force’s (“EITF”) Issue No 04-8, “The Effect ofContingently Convertible Debt on Diluted Earnings per Share,” we are requiredto include contingently convertible debt in the calculation of diluted earningsper share using the if-converted method regardless of whether the market pricetrigger has been met. See Note 9 “Convertible Subordinated Debentures” forfurther discussion on the Debentures and their conversion features.

**Note 4.      ComprehensiveIncome and Accumulated Other Comprehensive Loss**

SFAS No. 130(“SFAS 130”), “Reporting Comprehensive Income,” establishes rules for thereporting and display of comprehensive income and its components. Components ofcomprehensive income include net income and certain transactions that havegenerally been reported in the consolidated statement of stockholders’ equity.Other comprehensive income is comprised of currency translation adjustments,available-for-sale securities valuation adjustments, and adjustments related toa foreign defined benefit plan.

Totalcomprehensive income (i.e., net income plus available-for-sale securitiesvaluation adjustments, currency translation adjustments and adjustments relatedto a foreign defined benefit plan, net of tax) was $12.2 million and $19.7million for the three and six months ended June 30, 2006, respectively, and was$6.5 million and $13.3 million for the three and six months ended June 30,2005, respectively.  See Note 6 “BenefitPlans” for a discussion of the minimum pension liability adjustments.

The followingtable summarizes the components of accumulated other comprehensive loss, net oftaxes (dollars in thousands):
| **As of**                            | ** ** | **June 30,   2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|
| Foreign currency  translation adjustments |       | $                             | 2,009      |                        | $          | 1,551 |   |
| Securities  valuation adjustment          |       | (602                          | )          | (732                        | )          |
| Minimum pension  liability adjustment     |       | (8,646                        | )          | (12,943                     | )          |
|                                      |       |                          |       |                        |       |
| Accumulated other  comprehensive loss     |       | $                             | (7,239     | )                           | $          | (12,124 | ) |

 

**Note 5.      SignificantContracts**

*VictoriaTTA Contract*

On July 26,2005, Keane Australia Micropayment Consortium Pty Ltd (“Kamco”), awholly-owned subsidiary of Keane

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and the Public TransportTicketing Body trading as Transport Ticketing Authority (the “TTA”) of theState of Victoria, Australia, entered into a $494.0 million AUD, orapproximately $367.0 million (based on the exchange rate on that date of$.74285 AUD per $1.00), contract (the “Victoria TTA contract”) to deliver apublic transit ticketing system for the State of Victoria. Keane hasestablished and is leading a consortium of four transit and technology expertsto design, build, implement and maintain a micropayment smartcard technologysystem and related equipment for the TTA. Keane’s consortium includes automaticfare collection specialists ACS Solutions Schweiz AG (a subsidiary ofAffiliated Computer Services, Inc.), ERG, and Giesecke & DevrientAustralasia (“G&D”).

The Victoria TTAcontract has a term of approximately twelve years, including two years ofdevelopment work, referred to as the Build phase, and ten years of operationand maintenance, referred to as the Operate phase. The Build phase representsthe development and implementation of the comprehensive solution includinghardware, card distribution and software. The Operate phase represents themaintenance of the software, hardware and comprehensive solution,refurbishments and replacements, hosting and management of the subcontractors.The TTA has an option to extend the contract for an additional two years at thecompletion of the Operate phase. The Build phase of the project is comprised oftwelve phases beginning with the mobilization phase and ending with theoperational proving phase. Each phase during the Build phase requires acceptanceby the TTA. At the end of the fifth year of the Operate phase, the TTA cancancel the Victoria TTA contract at its option. In connection with the VictoriaTTA contract, Keane delivered a guarantee to the TTA (the “Guarantee”) pursuantto which Keane has guaranteed certain obligations of Kamco under the VictoriaTTA contract.

Payments under theVictoria TTA contract during the Build phase are based on the completion ofmilestones during the Build phase. Payments during the Operate phase are basedon the level of service provided and are billed monthly. During the Operatephase the TTA may benchmark rates following the fourth and ninth anniversarydates of the Victoria TTA contract and negotiate adjustments if the ratesexceed prevailing market costs for comparable services.

The TTA mayterminate the Victoria TTA contract for convenience at any time and pay onlyfor work completed, subject to specified termination fees. These terminationfees consist primarily of 1% of the remaining amount of contractual revenuesover the twelve-year term. During the contract term, the TTA may terminate theVictoria TTA contract for events of default, subject to Kamco’s right to cure.Upon the failure to perform by Kamco or its subcontractors, the TTA may step inand take over the role of prime contractor in place of Kamco.

Kamco hasobligations under the Victoria TTA contract with respect to both projectmanagement and performance of subcontractors. There are numerousindemnification provisions within the Victoria TTA contract, some of which arecustomarily included through the normal course of business. We have agreed tohold TTA harmless against losses arising from a breach of representationsrelated to such matters as title to assets sold and licensed or certainintellectual property rights, improper disclosures of confidential information,personal injuries or property damages. As the prime contractor for the VictoriaTTA contract, in certain cases Kamco is entitled to the benefit ofcorresponding indemnifications from its subcontractors. We also retain theright to enforce the subcontracts and to seek damages for nonperformance fromour subcontractors. Subject to a number of exclusions, Kamco’s maximumliability is capped at $73.2 million ($100 million AUD). Under the VictoriaTTA contract, liquidated damages, for which Kamco may be liable, are assessedat $36,587 ($50,000 AUD) per day for each day the specified phase completion isbehind schedule, but are limited to $7.3 million ($10 million AUD).The first $3.7 million ($5 million AUD) in liquidated damages issplit evenly among Kamco and certain subcontractors. The next $3.7 million($5 million AUD) is apportioned based on responsibility for the delay.

The Victoria TTA contract also requires that Kamcoprovide security and performance bonds in the amount of $21.9 million($30 million AUD) during the two-year Build phase and in the amount of$11.0 million ($15 million AUD) during the twelve-year term. One ofthe banks associated with our credit facility issued a $32.9 million ($45 millionAUD) letter of credit dated July 14, 2005 against our credit facility infulfillment of the security and performance bonds. Keane has guaranteedperformance and payment by Kamco in the event that Kamco is unable to completethe work or meet its payment obligations.

Under EITFNo. 00-21 (“EITF 00-21”), “Revenue Arrangements with MultipleDeliverables,” in order to account for the deliverables within a contractseparately, all delivered items must have standalone value, the vendor musthave objective and reliable evidence of fair value of the undelivereditem(s) and if the client has a general right of return relative to thedelivered item, delivery or performance of the undelivered items is probablyand substantially within the vendor’s control. We have concluded that objectiveevidence of fair value does not exist for all of the elements within theOperate phase. Accordingly, the elements within the Build and Operate phasescannot be separated into multiple units of accounting and therefore, must beaccounted for as a single unit of accounting. As a result, we are deferring allrevenues and costs directly associated with the delivery of services during theBuild phase and we will recognize all revenues and direct costs for thecontract over the ten-year period of the Operate phase currently estimated tobegin in mid-2007.

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The mobilizationphase of the project is complete and during the Fourth Quarter of 2005, wereceived our first milestone payment of $8.5 million USD ($12 millionAUD). In June of 2006, we received milestone payments of $13.3 million ($18.1million AUD) from the TTA for performance to date under the terms of thecontract. For the six months ended June 30, 2006 and for the year endedDecember 31, 2005, we deferred all revenues and costs directly associatedwith the delivery of products and services and expensed approximately $1.5million and $3.4 million, respectively in indirect costs. As ofJune 30, 2006 and December 31, 2005, there was approximately $20.8million ($28.5 million AUD) and $8.8 million ($12.0 million AUD),respectively of deferred long-term revenue and approximately $21.6 million($29.5 million AUD) and $8.6 million ($11.7 million AUD), respectively, ofdeferred costs included in the accompanying unaudited condensed consolidatedbalance sheets. The deferred long-term revenue consists of cash paymentsreceived to date. See Note 12 “Segment Information” for a discussion onthe determination of reportable segments.

*PacifiCare*

OnDecember 20, 2005, UnitedHealth Group Incorporated, an affiliate of UnitedHealthCare Services, Inc. (“United HealthCare”), completed its acquisitionof PacifiCare. On January 20, 2006, we entered into a five-year masterservices agreement with United HealthCare effective January 1, 2006.Simultaneously, we and PacifiCare terminated our Information TechnologyServices Agreement, dated January 11, 2002, effective January 1,2006. Our original Information Technology Services Agreement with PacifiCareprovided for an outsourcing arrangement with a ten-year term and$500 million in contract value. As a result of the ending of the originalagreement with PacifiCare we will receive a $10.1 million payment in twoequal installments on July 30, 2006 and July 30, 2007. The first halfwill be recognized over the 18 month period from January 1, 2006 toJune 30, 2007. The second half will be recognized at such time the amountbecomes due in management’s judgment. If additional services are procuredpursuant to the master services agreement, any remaining portion of thepayments will be recognized over the period such services are provided. Underthe new master services agreement with United HealthCare we will receiveapproximately $21 million for a specified level of services provided fromJanuary 1, 2006 through June 30, 2007. Revenues from PacifiCare inthe Second Quarter and six months ended June 30, 2006, were approximately$0.2 million and $2.0 million lower than revenues from PacifiCare in the sameperiods in 2005.

**Note6.      Benefit Plans**

*PensionPlan*

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

As a result of theavailability of more recent measurements of both the plan assets andobligations under the UK DBP, during the Second Quarter and six months endedJune 30, 2006, we recorded a reduction to the required minimum liability underthe DBP of approximately $2.6 million and $4.3 million, respectively, throughAccumulated other comprehensive loss.  As of June 30, 2006 and December31, 2005, the unfunded UK pension liability was approximately $12.1 million and$15.3 million, respectively, and is included in Other long-term liabilities inthe accompanying unaudited condensed consolidated balance sheets.  As a result of recent legislation in the UK,we agreed with the trustees of the UK DBP to increase the employercontributions by approximately $0.2 million for 2006, for a total of approximately$0.4 million in employer contributions for 2006 and to increase the employercontributions in the future based on the financial performance of the UKsubsidiary. In addition, we will incur a pension levy for approximately $0.3million per year.

Net periodic pension costof the UK DBP for the three and six months ended June 30, 2006 and 2005 ispresented as follows (dollars in thousands): 

|                                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                             |       | $                                               | 15         |                                          | $          | 15 |   | $ | 29 |   | $ | 30 |   |
| Interest cost                            |       | 535                                             |       | 477                                           |       | 1,048 |   | 973 |   |
| Expected return  on plan assets          |       | (533                                            | )          | (439                                          | )          | (1,045 | ) | (896 | ) |
| Amortization of  prior service cost      |       | —                                          |       | —                                        |       | — |   | — |   |
| Amortization of  transitional obligation |       | —                                          |       | —                                        |       | — |   | — |   |
| Recognized  actuarial loss               |       | 146                                             |       | 111                                           |       | 286 |   | 227 |   |
| Net periodic  pension cost               |       | $                                               | 163        |                                          | $          | 164 |   | $ | 318 |   | $ | 334 |   |

 

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*IncentiveCompensation Plan*

During the SecondQuarter of 2006, we changed the terms of one of our incentive compensationplans and as a result, we recorded $2.6 million of lower compensation expensein the Second Quarter of 2006,****whichincluded a reversal of approximately $0.8 million for a change in estimate ofamounts previously accrued**,**  compared to the First Quarter of 2006. Forthe Second Quarter and six months ended June 30, 2006, we recorded $0.9 millionand $ 0.8 million of lower incentive compensation compared to the same periodsin 2005. Previously, this plan was based on annual targets, including annualperformance targets. During the Second Quarter of 2006, we changed the plan to bebased on quarterly targets.

**Note 7.      BusinessAcquisitions**

*CrestaTesting, Inc.*

        OnJune 1, 2005, we acquired Cresta Testing, Inc. (“Cresta”), a softwaretesting company that specialized in managed services, test strategy andtraining, and functional and performance testing. In exchange for all of theoutstanding capital stock of Cresta, we paid $0.6 million in cash, ofwhich $60,000 was held back to secure indemnification obligations of the Crestastockholders. We also agreed to pay up to an additional $0.5 million inearn-out consideration over two years from the acquisition date, contingentupon the achievement of certain future financial targets. The earn-outconsideration is also dependent on the employment of a certain Cresta employee;therefore, in accordance with SFAS No. 141 (“SFAS 141”), “BusinessCombinations”, we will record any additional earn-out consideration ascompensation expense. The $60,000 held back was deposited as restricted cashand accrued and included in Accrued expenses and other liabilities in theaccompanying consolidated balance sheet. The acquisition has been accounted forunder the purchase method in accordance with SFAS 141 and SFASNo. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets”. Thetotal cost of the acquisition through June 30, 2006 was $0.6 million,which included net assets acquired of approximately $0.4 million. Totalassets acquired of $0.7 million consisted primarily of cash of$0.1 million and accounts receivable of $0.6 million. The purchaseprice allocation was finalized as of December 31, 2005. The operatingresults of Cresta have been included in our consolidated statement ofoperations beginning June 2, 2005.

*ArcStreamSolutions, Inc.*

        OnApril 4, 2005, we acquired certain assets and assumed specifiedliabilities of ArcStream Solutions, Inc. (“ArcStream”) for a base purchaseprice of zero ($0.00) dollars, subject to a working capital adjustment, and anadditional earn-out consideration based on the performance of the ArcStreambusiness during the remainder of 2005. The earn-out period ended onDecember 31, 2005 and no earn-out consideration was paid. ArcStream was abusiness and technology consulting firm based in Watertown, Massachusetts, thatspecialized in helping organizations compete through the use of advancedtechnologies and process improvement. As a former stockholder of ArcStream,John Keane, Jr. would have been entitled to a portion of any additionalconsideration. John Keane, Jr. was the founder, President and ChiefExecutive Officer of ArcStream. He is also the brother of Brian Keane, ourformer President and CEO, the son of John Keane, Sr., the Chairman of ourBoard, and a member of our Board of Directors. In addition, in connection withthe transaction, John Keane, Jr., agreed to guarantee certainindemnification obligations of ArcStream and we paid John Keane, Jr.$21,875 pursuant to a consulting arrangement to assist in the transition of theacquired business. The transaction was approved by both our Audit Committee andour Board of Directors. The operating results of the acquired ArcStream assetshave been included in our consolidated statement of operations beginningApril 5, 2005.

*netNuminaSolutions, Inc.*

        OnFebruary 28, 2005, we acquired netNumina Solutions, Inc. (“netNumina”),a software development company based in Cambridge, Massachusetts thatspecialized in technology strategy, architecture, and custom development, toenhance our capabilities in Development and Integration services. In exchangefor all of the outstanding capital stock of netNumina, we agreed to pay$5.7 million, of which $0.6 million was held back to secureindemnification obligations of the netNumina stockholders. As of June 30,2006, we had paid the $5.1 million not held back and during the FirstQuarter of 2006, the $0.6 million held back was delivered to the formerNetNumina shareholders. The acquisition has been accounted for under thepurchase method in accordance with SFAS 141 and SFAS 142. The totalcost of the transaction through June 30, 2006 was $4.8 million, whichincluded net assets of approximately $5.2 million. Total assets acquiredof $7.8 million consisted primarily

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of cash of$4.6 million and accounts receivable of $2.3 million. In connectionwith the purchase price allocation we recorded a $0.5 million fair valueadjustment to reduce property and equipment that resulted from an excess bookvalue of the assets acquired over the purchase price and recorded deferred taxassets of $2.0 million. As a result, we have not recorded any goodwill orintangible assets in connection with this acquisition. The valuation andpurchase price allocation were finalized as of December 31, 2005. Theoperating results of netNumina have been included in our consolidatedstatements of income beginning March 1, 2005.

        Atthe date of the acquisition of NetNumina, we entered into a plan to reduce theworkforce by eight non-billable employees. As a result, we initially recorded arestructuring liability of $1.0 million related to severance, all of whichhas been paid as of June 30, 2006. In accordance with EITF Issue No. 95-3(“EITF 95-3”), “Recognition of Liabilities in Connection with a PurchaseBusiness Combination,” these costs, which are not associated with thegeneration of future revenues and have no future economic benefit, werereflected as assumed liabilities in the allocation of the purchase price to thenet assets acquired.

*FastTrack Holdings Limited*

        OnJuly 13, 2004, we acquired Fast Track Holdings Limited (“Fast Track”), aprivately held consulting firm based in the United Kingdom that manages thedesign, integration, and deployment of large-scale SAP implementations. Inexchange for all of Fast Track’s outstanding capital stock, we paidapproximately $3.4 million in cash, including transaction costs. We alsoagreed to pay up to an additional approximately $5.0 million in earn-outconsideration over the next two years, contingent upon the achievement ofcertain future financial targets. Based on Fast Track’s financial results throughJuly 31, 2005, the first earn-out totaling approximately $2.0 millionwas not achieved. Payment for earn-out consideration earned throughJuly 31, 2006, could have been up to approximately $2.9 million, butbased on the financial performance through July 2006, the second earn-out wasnot achieved. The acquisition has been accounted for under the purchase methodin accordance with SFAS 141 and SFAS 142. The portion of the purchaseprice related to the intangible assets was finalized and identified utilizingstandard valuation procedures and techniques. The total cost of the acquisitionthrough June 30, 2006 was $4.1 million, which included net assetsacquired of approximately ($0.2) million, goodwill of approximately$3.1 million and intangible assets of approximately $1.1 million, themajority of which is being amortized on a straight-line basis over two years,and approximates the expected period of benefit. Total assets acquired of$2.1 million consisted primarily of accounts receivable of $1.9 million.The operating results of Fast Track have been included in our consolidatedstatement of operations beginning July 14, 2004.

        Atthe date of acquisition, we entered into a plan to exit certain activities, toconsolidate facilities and to implement a workforce reduction. As a result, werecorded a restructuring liability of $0.3 million related to the leaseobligations and certain other costs for those facilities and $0.1 millionrelated to severance and retention, all of which has been paid as of June 30,2006. In accordance with EITF 95-3, these costs, which are not associated withthe generation of future revenues and have no future economic benefit, werereflected as assumed liabilities in the allocation of the purchase price to thenet assets acquired.

*NimsAssociates, Inc.*

        OnFebruary 27, 2004, we acquired Nims Associates, Inc. (“Nims”), aninformation technology and consulting services company with offices in theMidwest and Advanced Development Centers (“ADCs”) in Indianapolis and Dallas,to expand our client base, primarily in the financial and insurance industries.In exchange for all of Nims’ outstanding capital stock, we paid$18.2 million in cash to the shareholders of Nims, with the potential topay up to an additional $15.0 million in earn-out consideration over thenext three years, contingent upon the achievement of certain future financialtargets. The acquisition was accounted for under the purchase method inaccordance with SFAS 141 and SFAS 142. The additional payments for earn-outconsideration will be accounted for as additional purchase price. The firstearn-out was achieved as of March 1, 2005 and, as a result, we paid$3.3 million in earn-out consideration in April 2005 and recorded acorresponding increase in Goodwill. Based on the financial performance as ofDecember 31, 2005, the second earn-out of $3.3 million was also achievedand paid in April 2006. As of June 30, 2006, there is $8.3 million inearn-out consideration remaining that could be achieved over the next year. Thetotal cost of the acquisition through June 30, 2006 was $29.5 million,which includes net assets acquired of approximately $5.4 million, goodwillof approximately $17.1 million and intangible assets of $7.0 million.The intangible assets are primarily amortized on a straight-line basis over10 years, which approximates the expected period of benefit. Total assetsacquired of $8.8 million consisted primarily of accounts receivable of$5.6 million. The portion of the purchase price related to the intangibleassets was finalized and identified by utilizing standard valuation proceduresand techniques.

        Atthe date of acquisition, we entered into a plan to exit certain activities, toconsolidate facilities and to implement a workforce reduction of 22non-billable employees. As a result, we recorded a restructuring liability of$1.3 million related to the lease obligations and certain other costs forthose facilities and $0.3 million related to severance and retention, ofwhich all of the severance was paid and $0.8 million for the lease obligationswas paid as of June 30, 2006. In accordance with EITF 95-3, these

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costs, which were notassociated with the generation of future revenues and had no future economicbenefit, were reflected as assumed liabilities in the allocation of thepurchase price to the net assets acquired. As of June 30, 2006, the planhas been completed and there is no remaining liability associated with thelease obligation costs.

*KeaneWorldzen*

        OnOctober 17, 2003, we acquired a controlling interest in Keane WorldzenInc. (“Keane Worldzen”), a privately held Business Process Outsourcing (“BPO”)firm. In connection with the acquisition, we paid $9.0 million to acquirethe Series A preferred shares of Worldzen Holdings Limited held by anunrelated third party. We contributed to Keane Worldzen our Worldzen HoldingsLimited shares, $4.3 million in cash and certain assets of our KeaneConsulting Group (“KCG”), our business consulting arm. This transaction wasaccounted for under the purchase method in accordance with SFAS 141 andSFAS 142. As a result of the initial transaction, we owned approximately62% of Keane Worldzen’s outstanding capital stock. The former majorityshareholders of Worldzen Holdings Limited contributed their Worldzen HoldingsLimited shares to Keane Worldzen in exchange for approximately 38% of KeaneWorldzen’s outstanding capital stock and are currently members of KeaneWorldzen’s management. The assets and liabilities contributed to Keane Worldzenwere recorded in relation to each shareholder’s ownership percentage in KeaneWorldzen as follows: (i) carryover basis related to assets and liabilitiescontributed to Keane Worldzen for which the individual shareholder had a priorinterest; and (ii) fair value for assets and liabilities for which anindividual shareholder had no prior interest. The acquisition was intended tostrengthen our position in the BPO market. As a result, we initially recordedgoodwill of approximately $13.8 million in the accompanying consolidatedbalance sheets.

        OnApril 1, 2005, we increased our equity position in Keane Worldzen pursuantto the purchase option discussed below to approximately 81% with an additionalcapital contribution of approximately $5.0 million in cash and $3.0 millionfrom the conversion of existing cash advances to equity. We purchasedapproximately 36.0 million shares at a cost of approximately $.22 pershare. As a result of the additional capital contribution, we continue toconsolidate the results of Keane Worldzen, but are also able to consolidate itsresults for tax purposes beginning April 1, 2005. Upon our additionalcapital contribution, the minority interest shareholders owned approximately19% of the issued and outstanding capital stock of Keane Worldzen. InDecember 2005, the minority shareholders executed their right under thefirst put option to require us to purchase approximately 5% of their shares fora stated value of $2.8 million as discussed below. As a result, we paidthe $2.8 million for an additional 5% ownership interest associated withthe first put option and as of June 30, 2006, own approximately 86% of theissued and outstanding capital stock of Keane Worldzen.

        Inconnection with our acquisition of a controlling interest in Keane Worldzen inOctober 2003, we obtained the right to purchase certain of the remainingshares held by the minority shareholders of Keane Worldzen at different timesduring 2006 to 2009 (“call options”) and the right to acquire additional sharesdirectly from Worldzen at a fixed price stated at the acquisition date through2005 (“purchase option”). Our purchase option allowed us to purchase additionalshares directly from Worldzen to obtain up to 80% of the total outstandingshares of Worldzen through December 31, 2005. Our first call option isexercisable during the period beginning on January 1, 2006 and ending onDecember 31, 2006, is based on the same fixed price as is the purchaseoption and allows us to acquire up to 80% of the total outstanding shares ofWorldzen at the time the first call option is exercised. The fair value of thepurchase and first call option, using a Black-Scholes valuation model, wasapproximately $3.8 million and was recorded at the original acquisitiondate. During 2005, we acquired 80% of the outstanding shares of Keane Worldzenthrough the exercise of the purchase option and reclassified the value of thepurchase and first call option to goodwill. The other call options areexercisable at the fair market value of the underlying shares to obtainspecified ownership levels during the call periods, which are exercisable atcertain times during the period January 1, 2007 through December 31,2009. Since these other call options can only be exercised at the fair value ofthe underlying shares, no amounts have been recorded for these call options inour consolidated financial statements.

        Alsoin connection with the acquisition, the minority shareholders were given theright to require us to purchase certain of their remaining shares at varioustimes (“put options”) subject to the achievement of certain operating andfinancial milestones related to Keane Worldzen’s business performance. Thefirst put option, the term of which was October 17, 2003 throughDecember 31, 2005, was exercisable based on a stated value for theunderlying shares of $2.8 million and was exercised and paid inDecember 2005. The fair value of this put option, using a Black-Scholesvaluation model, was approximately $279,000 at the acquisition date and was recognizedas compensation expense in the accompanying consolidated financial statementsthrough December 31, 2005. The other put options are exercisable at fairmarket value for the underlying shares during the put periods, which areexercisable at certain times during the period January 1, 2008 throughMarch 1, 2010. Because these other put options can only be exercised atthe fair value of the underlying shares, no amounts have been recorded as ofJune 30, 2006 for these put options in our consolidated financial statements.

        Theresults of operations of these acquired companies have been included in ourconsolidated statements of income from the

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dates of acquisition. Theexcess of the purchase price over the fair value of the net assets has been allocatedto identifiable intangible assets and goodwill. Identifiable intangible assetsassociated with these acquisitions are being amortized on a straight-line basisover periods ranging from two to 10 years and approximate the expectedperiods of benefit. Pro forma results of operations for Cresta, ArcStream, andnetNumina have not been provided since these acquisitions were not materialeither individually or in the aggregate in the year of acquisition.

**Note 8.      Restructurings**

*Workforcereductions*

We are continuing the implementation of amulti-faceted internal reorganization, which we call the “One KeaneTransformation.” Our goals in implementing the One Keane Transformationinclude: the replacement of our current regional operations structure with anoverlapping structure including regional client relationship organizations,delivery organizations based on business lines and vertical industry expertise,and global shared services for sales and human resources, aimed at loweringcost.

During the SecondQuarter of 2006 we reduced our workforce at certain locations by 59 employeesdue to our One Keane Transformation, most of whom had an expected terminationdate in the Second Quarter of 2006. The employees affected in the reductionwere non-billable and billable and we believe were employees whose roles couldbe reduced based upon the current business needs in their respectivelocations.  As a result, we recordedapproximately $1.4 million for severance costs during the Second Quarter endedJune 30, 2006 in the accompanying unaudited condensed consolidated financialstatements.   The remaining liability asof June 30, 2006 is $0.3 million, which we expect to pay in the Third Quarterof 2006.

Also in connectionwith the One Keane Transformation, during the First Quarter of 2006 we reducedour workforce at certain locations by 53 employees most of whom had an expectedtermination date in the First Quarter of 2006. The employees affected in thereduction were both non-billable and billable and we believe were employeeswhose roles could be reduced based upon the current business needs in theirrespective locations. As a result, we recorded approximately $1.3 million forseverance costs in the accompanying unaudited condensed consolidated financialstatements. Of this amount, approximately $0.5 million related to personnel inthe United Kingdom and approximately $0.8 million related to personnel from ourlocations in the US.  As of June 30,2006, the remaining liability related to these charges is $0.2 million, whichwe expect to pay in the Third Quarter of 2006.

In accordance withSFAS No. 146 (“SFAS 146”) “Accounting for Costs Associated with Exit orDisposal Activities”, for those employees whose service period was greater than60 days, the expense is being booked ratably over the service period. Cashexpenditures during the six months ended June 30, 2006 related to First Quarterand Second Quarter of 2006 workforce reductions were approximately $2.2million.

In connection withthe netNumina acquisition discussed in Note 7 “Business Acquisitions”, weentered into a plan to reduce the workforce by eight employees, most of whomhad an expected termination date in the Second Quarter of 2005. The employeesaffected in the reduction were non-billable personnel whose responsibilitieshave been integrated into our existing operations to realize the synergies ofthe two operations. We recorded a liability of $1.0 million associatedwith severance and other termination benefits and the plan was complete as ofSeptember 30, 2005. In accordance with EITF 95-3, these costs have beenreflected as assumed liabilities in the allocation of the purchase price to thenet assets acquired**.  **Cash expenditures related toNetNumina severance costs during the six months ended June 30, 2006 and June30, 2005, were $0.2 million and $0.6 million, respectively. As of June 30,2006, there was no liability remaining.

In connection withthe Fast Track acquisition discussed in Note 7 “Business Acquisitions”, weentered into a plan to reduce the workforce by seven employees, most of whomhad a termination date of October 31, 2004. The employees affected in thereduction were non-billable personnel whose responsibilities were integratedinto our existing operations to realize the synergies of the two operations. Werecorded a liability of approximately $0.1 million associated with severance,retention, and other termination benefits, completed the plan by March 31,2005, and paid the entire $0.1 million in severance and retention. Inaccordance with EITF 95-3, these costs were reflected as assumed liabilities inthe allocation of the purchase price to the net assets acquired**.**

In connection withthe Nims acquisition discussed in Note 7 “Business Acquisitions”, weentered into a plan to reduce the workforce by 22 employees, most of whom had atermination date of April 30, 2004. The employees affected in thereduction were non-billable personnel whose responsibilities were integratedinto our existing operations to realize the synergies of the two operations. Werecorded a liability of $0.3 million associated with severance, retention andother termination benefits and, by

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March 31, 2005, had completed the plan and paid$0.3 million in severance and retention. In accordance with EITF 95-3, thesecosts were reflected as assumed liabilities in the allocation of the purchaseprice to the net assets acquired**.**

*Branchoffice closures*

                During December 2005, in accordancewith SFAS 146, we accrued $0.6 million for a restructuring of one ofour real estate locations that we vacated. Also during the Fourth Quarter of2005, we performed an evaluation of our restructuring balances for propertiesrestructured in prior periods and determined we had approximately $0.6 millionin excess cost over our current needs. This change in estimate was a result ofnegotiating early lease terminations, obtaining a subtenant, or lower facilitycosts. The net impact of these actions did not have an effect on ourconsolidated statement of income. Cash expenditures for the six months endedJune 30, 2006 related to the 2005 property restructuring were $0.3million. As of June 30, 2006 and December 31, 2005, the remaining reservebalances were $0.3 million and $0.6 million, respectively.

                During December 2004, in accordancewith SFAS 146, we accrued $2.3 million for a restructuring of one ofour real estate locations that we vacated. Additionally, during the FourthQuarter of 2004, we performed an evaluation of our restructuring balances forproperties restructured in prior periods and determined that we had excesscosts-accrued of $2.4 million, as a result of negotiating early leaseterminations or obtaining a subtenant. The net impact of these actions resultedin a net expense reduction to the restructuring charge of $0.1 million inthe Fourth Quarter of 2004 in our consolidated statement of income. Cashexpenditures during the six months ended June 30, 2006 and June 30, 2005related to the 2004 property restructurings totaled approximately $0.2 millionand $0.3 million, net of sublease income of approximately $0.1 million and$10,000, respectively.  As of June 30, 2006 and December 31,2005, the remaining reserve balances were $1.9 million and $2.1 million,respectively.

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

                In connection with the Nimsacquisition noted above, we entered into a plan to exit certain activities andto consolidate certain facilities. As a result, we recorded an initialrestructuring liability of $1.4 million related to the lease obligationand certain other costs for eight facilities. During the Fourth Quarter of2004, we revised our original estimate for Nims-related lease obligations andreduced the accrual by $0.1 million. In accordance with EITF 95-3, thesecosts, which were not associated with the generation of future revenues and hadno future economic benefit, were reflected as assumed liabilities in theallocation of the purchase price to the net assets acquired. Cash expendituresin the for the six months ended June 30, 2006 and June 30, 2005 related to allNims-related branch office closings totaled approximately $55,000 and $0.1million, respectively, which is net of approximately $63,000 and $74,000,respectively, of sublease payments received. As of June 30, 2006 andDecember 31, 2005, the remaining reserve balances were $0.4 million and $0.5million, respectively.

DuringDecember 2003, in accordance with SFAS 146, we accrued$0.9 million for a restructuring of two of our real estate locations fromwhich we no longer were receiving economic benefit. Additionally, during theFourth Quarter of 2003, we performed an evaluation of our restructuringbalances for properties restructured in prior periods and determined as aresult of negotiating early lease terminations or obtaining a subtenant hadapproximately $1.0 million in excess costs accrued. In prior years, inaccordance with EITF Issue No. 94-3 (“EITF 94-3”), “Liability Recognitionfor Certain Employee Termination Benefits and Other Costs to Exit an Activity(Including Certain Costs Incurred in a Restructuring),” we performed reviews ofour business strategy and concluded that consolidating some of our branchoffices was key to our success. Cash expenditures during the six months endedJune 30, 2006 and June 30, 2005, for all branch office closingsrelating to restructuring charges in 2003 and prior years were $0.6 millionand  $1.2 million, respectively, which is net of approximately$0.3 million and $0.7 million, respectively, of sublease paymentsreceived. As of June 30, 2006 and December 31, 2005, the totalremaining reserve balance for branch office closings relating to restructuringin 2003 and prior years was $1.7 million and $2.3 million, respectively.

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The activity for the six months ended June 30, 2006and June 30, 2005 associated with restructuring charges is as follows (inthousands, except per share data):
| ** **                                                            | ** ** | **January 1,  2005  Balance** | ** ** | **Cash  Expenditures,  Net** | ** ** | **Acquisition  Related  Charges in  Fiscal 2005** | ** ** | **June 30,  2005  Balance** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------|------------|------------------------------|------------|-------------------------------------------------------------|------------|----------------------------------|------------|
| **Branch office closures and  other  expenditures by year of action** | ** ** | ** **                         | ** ** | ** **                   | ** ** | ** **                                                  | ** ** | ** **                       | ** ** |
| 1999                                                                  |       | $                                  | 19         |                         | $          | —                                                      |       | $                                | —     |   | $ | 19 |   |
| 2000                                                                  |       | 5                                  |       | —                       |       | —                                                      |       | 5                                |       |
| 2001                                                                  |       | 559                                |       | (113                         | )          | —                                                      |       | 446                              |       |
| 2002                                                                  |       | 4,278                              |       | (895                         | )          | —                                                      |       | 3,383                            |       |
| 2003                                                                  |       | 234                                |       | (140                         | )          | —                                                      |       | 94                               |       |
| 2004                                                                  |       | 3,491                              |       | (821                         | )          | —                                                      |       | 2,670                            |       |
| 2005                                                                  |       | —                             |       | —                       |       | —                                                      |       | —                           |       |
|                                                                  |       | 8,586                              |       | (1,969                       | )          | —                                                      |       | 6,617                            |       |
| **2004 Workforce reduction**                                          |       | 91                                 |       | (84                          | )          | —                                                      |       | 7                                |       |
| **2005 Workforce reduction**                                          |       | —                             |       | (559                         | )          | 985                                                         |       | 426                              |       |
| ** **                                                            |       |                               |       |                         |       |                                                        |       |                             |       |
| **Total Restructuring Balance**                                       |       | $                                  | 8,677      |                         | $          | (2,612                                                      | )          | $                                | 985        |   | $ | 7,050 |   |

 
| ** **                                                            | ** ** | **January 1,  2006  Balance** | ** ** | **Cash  Expenditures,  Net** | ** ** | **Charges in  Fiscal 2006** | ** ** | **June 30,  2006,  Balance** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------|------------|------------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|
| **Branch office closures and  other  expenditures by year of action** | ** ** | ** **                         | ** ** | ** **                   | ** ** | ** **                            | ** ** | ** **                        | ** ** |
| 2000                                                                  |       | $                                  | 78         |                         | $          | (9                                    | )          | $                                 | —     |   | $ | 69 |   |
| 2001                                                                  |       | 243                                |       | (47                          | )          | —                                |       | 196                               |       |
| 2002                                                                  |       | 1,935                              |       | (497                         | )          | —                                |       | 1,438                             |       |
| 2003                                                                  |       | 15                                 |       | —                       |       | —                                |       | 15                                |       |
| 2004                                                                  |       | 2,588                              |       | (220                         | )          | —                                |       | 2,368                             |       |
| 2005                                                                  |       | 581                                |       | (257                         | )          | —                                |       | 324                               |       |
|                                                                  |       | 5,440                              |       | (1,030                       | )          | —                                |       | 4,410                             |       |
| **2005 Workforce reduction**                                          |       | 164                                |       | (164                         | )          | —                                |       | —                            |       |
| **2006 Workforce reduction**                                          |       | —                             |       | (2,197                       | )          | 2,661                                 |       | 464                               |       |
| ** **                                                            |       |                               |       |                         |       |                                  |       |                              |       |
| **Total Restructuring Balance**                                       |       | $                                  | 5,604      |                         | $          | (3,391                                | )          | $                                 | 2,661      |   | $ | 4,874 |   |

 

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

**Note 9.      ConvertibleSubordinated Debentures**

In June 2003, we issued in a private placement$150.0 million principal amount of 2.0% Convertible SubordinatedDebentures due 2013. The Debentures are unsecured and subordinated in right ofpayment to all of our senior indebtedness. The Debentures accrue regularinterest at a rate of 2.0% per year. Interest is payable semi-annually inarrears on June 15 and December 15 of each year, beginningDecember 15, 2003. Beginning with the six-month interest period commencingJune 15, 2008, we will pay additional contingent interest during anysix-month interest period if the trading price of the Debentures for each ofthe five trading days immediately preceding the first day of the interestperiod equals or exceeds 120% of the principal amount of the Debentures. Duringany interest period when contingent interest is payable, the contingentinterest payable per 

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$1,000 principal amountof Debentures will equal 0.35% calculated on the average trading price of$1,000 principal amount of Debentures during the five trading days immediatelypreceding the first day of the applicable six-month interest period and will bepayable in arrears. On or after June 15, 2008, we may, by providing atleast 30-day notice to the holders, redeem any of the Debentures at aredemption price equal to 100% of the principal amount of the Debentures, plusaccrued interest and unpaid interest, if any, and liquidated damages, if any,to, but excluding, the redemption date.

The Debentures are convertible at the option of theholder into shares of our common stock at an initial conversion rate of 54.4989shares per $1,000 principal amount of Debentures, which is equivalent to aninitial conversion price of approximately $18.349 per share, subject toadjustments, prior to the close of business on the final maturity date onlyunder the following circumstances: (a) during any fiscal quartercommencing after September 30, 2003, and only during such fiscal quarter,if the closing sale price per share of our common stock exceeds 120% of theconversion price (approximately $22.019) for at least 20 trading days in the 30consecutive trading day period ending on the last trading day of the precedingfiscal quarter; (b) during the five business days after any five consecutivetrading day period in which the trading price per $1,000 principal amount ofDebentures for each day of that period was less that 98% of the product of theclosing sale price per share of our common stock and the number of sharesissuable upon conversion of $1,000 principal amount of the Debentures;(c) if the Debentures have been called for redemption; or (d) uponthe occurrence of specified corporate transactions. See Note 3 “Earnings PerShare Data” for further discussion of the Debentures.

Debt issuance costs wereapproximately $4.4 million and are included in Other assets, net, in theaccompanying unaudited condensed consolidated balance sheets. These costs arebeing amortized to interest expense over five years on a straight-line basis.As of June 30, 2006 and December 31, 2005, the unamortized debt issuancecosts were approximately $1.7 million and $2.2 million, respectively.

**Note 10.      CapitalStock**

OnOctober 25, 2005, we announced that our Board of Directors had authorizedus to repurchase an additional 3 million shares of our common stock overthe next twelve months effective October 20, 2005. Between May 1999and June 30, 2006, we invested approximately $324.0 million to repurchaseapproximately 25.9 million shares of our common stock under twelve separateauthorizations. The additional paid in capital was reduced to zero as of June30, 2006 and December 31, 2005, as a result of our cumulative sharerepurchases. During the six months ended June 30, 2006, we repurchased a totalof approximately 726,800 shares of common stock for approximately $9.3 million.See “Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Liquidity and Capital Resources” for further discussion on sharerepurchases.

During the sixmonths ended June 30, 2006, a total of 631,391 shares of our common stock wereexercised or purchased by participants under our stock option plans, ESPP andUK ESPP. In addition, we granted 285,000 shares of restricted stock during thesix months ended June 30, 2006.

**Note 11.      RelatedParties, Commitments, and Contingencies**

*RelatedParty Transactions*

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

OnOctober 31, 2001, Gateway LLC entered into a $39.4 millionconstruction loan with Citizens Bank of Massachusetts (the “Gateway Loan”) inconnection with the New Facility and an adjacent building located at 20 CitySquare, Boston, Massachusetts. John Keane Family LLC and John F. Keane areeach liable for certain obligations under the Gateway Loan if and to the extentGateway LLC requires funds to comply with its obligations under the GatewayLoan. Stephen D. Steinour, who was a member of our Board of Directors, wasChief Executive Officer of Citizens Bank of Pennsylvania. On November 17,2005, Mr. Steinour resigned as a member of the Board of Directors due tohis promotion to President of Citizens Financial Group, Inc. and theresultant travel demands. Citizens Bank of Massachusetts and Citizens Bank ofPennsylvania are subsidiaries of Citizens Financial Group, Inc.Mr. Steinour was not involved in the approval process for the GatewayLoan. In June 2005, the Gateway Loan was refinanced to a non-recoursepermanent loan with CitiGroup.

We began occupyingthe New Facility and making lease payments in March 2003. Based upon ourknowledge of lease 

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payments for comparablefacilities in the Boston area, we believe that the lease payments under thelease for the New Facility, which will be approximately $3.2 million peryear ($33.00 per square foot for the first 75,000 square feet and $35.00 persquare foot for the remainder of the premises) for the first six years of thelease term and approximately $3.5 million per year ($36.00 per square footfor the first 75,000 square feet and $40.00 per square foot for the remainderof the premises) for the remainder of the lease term, plus specifiedpercentages of any annual increases in real estate taxes and operatingexpenses, were, at the time we entered into the lease, as favorable to us asthose which could have been obtained from an independent third party. Leasepayments to Gateway LLC during the six months ended June 30, 2006 and 2005were approximately $1.7 million and $1.8 million, respectively.

In view of theserelated party transactions, we concluded that, during the construction phase ofthe New Facility, the estimated construction in progress costs for the NewFacility would be capitalized in accordance with EITF Issue No. 97-10, “TheEffect of Lessee Involvement in Asset Construction.” A liability in the sameamount was included in the caption “Accrued long-term building costs” in theaccompanying consolidated balance sheets. For purposes of the consolidatedstatements of cash flows, we characterized this treatment as a non-cashfinancing activity.

As a result of thecompletion of the construction phase and our current occupancy, the relatedcapitalized costs are now classified as “Building” and are included in propertyand equipment, net, in the accompanying consolidated balance sheets. Aliability for the same amount appears as accrued expenses and other liabilitiesand accrued long-term building costs, representing our short and long-termcomponents. The costs of the building are being amortized on a straight-linebasis over a 39-year useful life. Additionally, the obligation will be reducedover the life of the lease at an interest rate of 8.67%. The net effect of theamortization that is included in the operating results approximates the rentexpense resulting from the contractual payments we are required to make underthe lease.

InFebruary 1985, we entered into a lease, which subsequently was extended toa term of 20 years, with City Square Limited Partnership (“City Square”),pursuant to which we leased approximately 34,000 square feet of office anddevelopment space in a building located at Ten City Square, in Boston,Massachusetts. As of December 31, 2005, we leased approximately 88% ofthis building and the remaining 12% was leased by other tenants. John F.Keane, Chairman of our Board of Directors, and Philip J. Harkins, a memberof our Board of Directors, are limited partners of City Square. Based upon ourknowledge of lease payments for comparable facilities in the Boston area, webelieve that the lease payments under this lease, which were approximately$1.0 million per year ($30.00 per square foot) at the end of the leaseterm (which expired in February 2006), plus specified percentages of anyannual increases in real estate taxes and operating expenses, which wereapproximately $0.2 million per year, were, at the time we entered into thelease, as favorable to us as those which could have been obtained from anindependent third party. As a result of our occupancy of the New Facility (asdescribed above), we vacated and obtained a subtenant for approximately 17% ofTen City Square.

As a result of thevacancy at Ten City Square in December 2002, we reserved the remaininglease payments due to City Square for the remainder of the lease term, resultingin a charge of approximately $3.9 million in the Fourth Quarter of 2002.In February 2006, our lease for Ten City Square expired and the buildingwas sold to a third party. For the six months ended June 30, 2006 and2005, we paid approximately $0.2 million and $0.6 million, respectively, inlease payments and as of June 30, 2006 had a remaining reserve balance of$0.2 million.

InJanuary 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidationof Variable Interest Entities,” as amended by FASB InterpretationNo. 46(R) (“FIN 46(R)”) in December 2003, which requires theconsolidation of a variable interest entity, as defined, by its primarybeneficiary. Primary beneficiaries are those companies that are subject to amajority of the risk of loss or entitled to receive a majority of the entity’sresidual returns, or both. In determining whether it is the primary beneficiaryof a variable interest entity, an entity with a variable interest shall treatvariable interests in that same entity held by its related parties as its owninterests.

We have evaluatedthe applicability of FIN 46(R) to our relationship with each of CitySquare and Gateway LLC and determined that we are not required to consolidatethese entities within our consolidated financial statements. We have determinedthat Gateway LLC is not a variable interest entity as the equity investment issufficient to absorb the expected losses and the holders of the equityinvestment do not lack any of the characteristics of a controlling interest. Wehave concluded that as we no longer occupy the space at Ten City Square and nolonger derive any benefit from leasing the space, we would not be determined tobe the related party most closely associated with City Square. As a result, wewill continue to account for our leases with City Square and Gateway LLCconsistent with our historical practices in accordance with generally acceptedaccounting principles. We believe that we do not have an interest in anyvariable interest entities that would require consolidation.

In July 2003,our Audit Committee approved a related-party transaction involving a member ofour Board of Directors. 

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We sub-contracted withArcStream to develop and assist in the implementation of a wireless electronicapplication at two client sites. In accordance with this transaction, we agreedto pay ArcStream a royalty fee for potential future installations during theseven-year license period. John F. Keane, Jr., a member of our Boardof Directors, was Chief Executive Officer, a director, and founder ofArcStream. John F. Keane, Jr. is the son of John F.Keane, Sr., Chairman of our Board of Directors, and the brother ofBrian T. Keane, our former President, Chief Executive Officer anddirector. Effective June 21, 2004, our Audit Committee approved thetermination of our agreement with ArcStream and a payment of $150,000 by us toArcStream in exchange for a release of all parties from any further performanceor payment obligations under the original agreement. The termination was forconvenience and was not related to ArcStream’s performance under the agreement.On April 4, 2005, we acquired certain assets and assumed specifiedliabilities of ArcStream for a base purchase price of ($0.00) dollars, subjectto a working capital adjustment and additional consideration based on theperformance of the ArcStream business during the remainder of 2005. Inaddition, in connection with the transaction, John Keane, Jr. agreed toguarantee certain indemnification obligations of ArcStream and we paid JohnKeane, Jr. $21,875 pursuant to a consulting arrangement to assist in thetransition of the acquired business. See Note 7 “Business Acquisitions”for a further discussion of the acquisition.

In July 2005,our Audit Committee approved a related party transaction authorizing us toprovide services to Citizens Bank, N.A., in connection with the development ofan internet application and related support services. As discussed above,Stephen D. Steinour was previously a member of our Board of Directors and as ofNovember 2005 was promoted to President of Citizen’s FinancialGroup, Inc. an affiliate of Citizens Bank, N.A. Under the terms of thisapproval, the engagement value is estimated to be approximately$1.6 million. The rates charged under this engagement are comparable tothose charged to an independent third party. For the six months endedJune 30, 2006, we did not receive any payments under the agreement and hadno accounts receivable outstanding.

*Commitmentsand Contingencies*

We lease the NewFacility from Gateway LLC as described above. We lease additional office spaceand apartments in more than 70 locations in North America, the UK, Australiaand India under operating leases and capital leases, some of which may berenewed for periods up to five years, subject to increased rental fees.

We are a guarantorwith respect to a line of credit for Innovate EC, an entity in which weacquired a minority equity position as a result of a previous acquisition. Thetotal line of credit is for $600,000. We guarantee $300,000 of this obligation.The line is subject to review by the lending institution. We would be requiredto meet our guarantor obligation in the event the lending institution refusesto extend the credit facility and Innovate EC is unable to satisfy itsobligation.

In February 2003, we entered into a$50.0 million unsecured revolving credit facility (the “credit facility”)with two banks. The terms of the credit facility required us to maintain amaximum total funded debt and other financial ratios. The credit facility alsoincluded covenants that, subject to certain specific exceptions andlimitations, among other things, restricted our ability to incur additionaldebt, make certain acquisitions or disposition of assets, create liens, and paydividends. Between June 2003 and July 2005, we and the two banksamended certain provisions of the credit facility including the allowable limitfor letters of credit within the total facility and for the purposes of issuinga letter of credit to satisfy bank guarantees with respect to the Victoria TTAcontract with the State of Victoria, Australia. One of the banks issued$32.9 million ($45 million AUD) letters of credit dated July 14,2005 against our credit facility in connection with our Victoria TTA contract.This credit facility was terminated in connection with our entrance into a newcredit facility, described below, on September 15, 2005.

OnSeptember 15, 2005, we entered into a five-year revolving credit facility(the “new credit facility”) with a syndicate of banks (the “lenders”) in theamount of $200.0 million, plus an additional amount of up to$50.0 million subject to certain terms and conditions (the “loan amount”).The new credit facility has various nonfinancial and financial covenants, whichinclude a total leverage ratio, a senior leverage ratio and a quick ratio. Thenew credit facility replaced our previous $50.0 million unsecured revolving credit facility. Pursuant to thenew credit facility, we may borrow funds from the lenders up to the loan amountwith a $50.0 million sub limit for letters of credit. During the FirstQuarter of 2006, we amended the new credit facility to allow for certainforeign currency hedging at the subsidiary level. The annual commitment feepayable quarterly is at an initial rate of 0.20% per annum on the unused amountof revolving credit commitments, subject to adjustment based on a seniorleverage ratio as defined in the new credit facility and up to a maximum perannum rate of 0.25%. To the extent there are letters of credit outstandingunder the new credit facility, we will pay the administrative agent a letter ofcredit fee, initially 1.0% annually, subject to adjustment based on the seniorleverage ratio as defined and up to a maximum per annum rate of 1.5%. Inconnection with the new credit facility, we paid $1.3 million in relateddebt issuance costs. As of June 30, 2006, there was approximately $122.7million available for borrowing after considering $33.5 million ofoutstanding letters of credit and after considering certain financialcovenants. These letters of credit include the $32.9 million($45 million AUD) letter of credit issued in July 2005 against ourprevious credit facility in connection with our Victoria TTA contract.

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During the ThirdQuarter of 2002, in connection with an acquisition of a business complementaryto our own, we initially recorded $3.0 million as deferred revenue relatedto contingent service credits and issued a $3.0 million non-interestbearing note payable as partial consideration. During the six months ended June30, 2005, we recognized revenue of approximately $0.6 million in relationto the contingent service credits and reduced each of the related deferredrevenue and note by approximately $0.3 million. The note had a one-yearterm with a one-year extension, which expired on September 25, 2005. As ofJune 30, 2006 and December 31, 2005, the deferred revenue and notepayable balances were each zero. In connection with the Nims acquisition andbased on the financial performance related to the first earn-out, we paid$3.3 million in earn-out consideration in April 2005 and recorded acorresponding increase to Goodwill. The second earn-out was achieved as ofDecember 31, 2005. As a result, we accrued the related $3.3 millionin earn-out consideration as of December 31, 2005 with a correspondingincrease to Goodwill, which was paid in April of 2006. As of June 30,2006, there is an additional potential $8.3 million in earn-out considerationremaining that could be achieved over the next year.

*Guaranteesand Indemnifications*

In connection withcertain contracts, we have been required to deliver security or performancebonds for the benefit of our clients. These bonds give the beneficiary theright to obtain payment from the issuer of the bond if certain specified eventsoccur or fail to occur. In addition, we have various agreements in which we maybe obligated to indemnify our clients or third parties with respect to certainmatters. Generally, these indemnification provisions are included in contractsarising in the normal course of business under which we customarily agree tohold the indemnified party harmless against losses arising from a breach ofrepresentations related to such matters as title to assets sold and licensed orcertain intellectual property rights, improper disclosures of confidentialinformation, personal injuries, or property damages. Typically, there are nospecific dollar limits associated with indemnifications. In general, the termof the indemnifications will correspond to the contract term such that the harmor damage must occur during the contract period. Therefore, claims may beraised after completion of the contract associated with the indemnificationprovision, but the damage must have been caused during the contract term. As aprime contractor under certain contracts, we are responsible for theperformance of our subcontractors and would be required to arrange forperformance in the event the subcontractors failed to perform. However, wewould retain our right to enforce the subcontracts and to seek damages fornonperformance from our subcontractors. A limited number of our contractsinclude liquidated damages provisions, which would require us to make per diempayments for late deliveries. Further, our obligations under these agreementsmay be limited in terms of time and/or amount and, in some instances, we mayhave recourse against third parties, including our subcontractors, for certainpayments made by us. It is not possible to predict the maximum potential amountof future payments under these indemnification agreements due to theconditional nature of our obligations and the unique facts of each particularagreement.

Kamco has obligations under the Victoria TTA contractwith respect to both project management and performance of subcontractors.There are numerous indemnification provisions within the Victoria TTA contract,some of which are customarily included through the normal course of business.We have agreed to hold TTA harmless against losses arising from a breach ofrepresentations related to such matters as title to assets sold and licensed orcertain intellectual property rights, improper disclosures of confidentialinformation, personal injuries, or property damages. As the prime contractor forthe Victoria TTA contract, in certain cases, Kamco is entitled to correspondingindemnifications from its subcontractors. Subject to a number of exclusions,Kamco’s maximum liability is capped at $73.2 million ($100 millionAUD). Under the Victoria TTA contract, liquidated damages, for which Kamco maybe liable, are assessed at $36,587 ($50,000 AUD) per day for each day thespecified phase completion is behind schedule, but are limited to$7.3 million ($10 million AUD). The first $3.7 million($5 million AUD) in liquidated damages is split evenly amongst Kamco andcertain subcontractors. The next $3.7 million ($5 million AUD) isapportioned based on responsibility for the delay. In addition, we have a totalof $32.9 million ($45 million AUD) letters of credit issued againstthe new facility as surety bonds to ensure due and proper performance of ourobligations under the Victoria TTA contract**.**

*Settlement*

On May 10, 2006,Brian T. Keane resigned, effective immediately, as President, Chief ExecutiveOfficer and a director of Keane. In connection with Mr. Keane’s resignation, weentered into a Resignation and Consulting Agreement with Mr. Keane, effectiveMay 10, 2006. Pursuant to the agreement, Mr. Keane resigned, and we acceptedhis resignation as President, Chief Executive Officer and a director and fromall other positions including offices, directorships or employment he held withus or any of our affiliates or related entities. Mr. Keane may not permithimself to be considered for election to our board of directors at any timeprior to December 31, 2010.

Pursuant to the Resignation and Consulting Agreement,from June 1, 2006 until December 31, 2007, Mr. Keane has agreed to provide upto a maximum of 150 days of consulting services to us as may be requested byour board of directors.  We 

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will pay Mr. Keane anaggregate of $494,000 for his consulting services, payable in equal monthlyinstallments of $26,000 from June 1, 2006 through December 31, 2007. AfterJanuary 1, 2007, Mr. Keane may terminate his agreement to provide consultingservices upon 30 days written notice to us and we will cease making monthlyconsulting payments to Mr. Keane upon any such termination.

In addition, pursuant tothe Resignation and Consulting Agreement:

·                    We have agreedto provide Mr. Keane with the right to continue to participate in our groupmedical and dental benefit plans to the extent permitted by and subject to theConsolidated Omnibus Budget Reconciliation Act, or “COBRA”.

·                    We have agreedto pay toward the premium for such coverages the same amount as we pay towardthe premiums for our active eligible employees with the same level ofcoverages.

·                    All of Mr.Keane’s outstanding stock options and restricted stock awards ceased to vestafter May 10, 2006, except that 10,000 shares of restricted stock that wouldotherwise vest on December 16, 2006 will continue to vest despite hisresignation.

·                    We agreed toextend the exercise period for Mr. Keane’s vested stock options to December 31,2006.

·                    Mr. Keaneagreed to release us from any claims he may have against us or our affiliates,including claims relating to Mr. Keane’s employment with us and hisresignation, provided that the release will not affect any right he may have toseek indemnification under our restated articles of incorporation.

On May 10, 2006,our Board of Directors appointed John J. Leahy, Keane’s Executive VicePresident of Finance and Administration and Chief Financial Officer, to serveas our President and Chief Executive Officer on an interim basis effective immediately. In addition, to ensure clear leadership and continuity during this periodof transition, the Board formed the Office of the President, consisting ofRichard S. Garnick, President, North American Services and Global BusinessLines; Russell J. Campanello, Senior Vice President, Human Resources; and JohnJ. Leahy. The Board is conducting a search for a permanent CEO and expects thissearch to include both internal and external candidates. A special committee ofthree Directors, chaired by John Fain and including Larry Begley and MariaCirino, is working closely with the Office of the President to ensure that thistransition will not disrupt the Company’s focus on customers, the One Keanetransformation initiative, and the creation of shareholder value.

On June 8,2006, we entered into a Settlement Agreement with Georgina Fisk, the Company’sformer Vice President of Marketing, Brian Keane, the former Chief ExecutiveOfficer, John Keane, Sr., the Chairman of our Board of Directors, and JohnKeane, Jr., a member of the our Board of Directors (the “SettlementAgreement”). The Settlement Agreement was entered into connection with theresolution of Ms. Fisk’s previously reported allegations concerning BrianKeane. The Settlement Agreement includes the following terms:

·                     Ms. Fisk’sresignation as our Vice President of Marketing effective June 30, 2006;

·                     Payment by usand/or our insurer to Ms. Fisk of $1,140,000;

·                     The extensionof Ms. Fisk’s right to exercise any vested stock options held by her untilDecember 31, 2006;

·                     Agreement byus not to exercise our right to repurchase 2,500 shares of restricted stockheld by Ms. Fisk which vest on December 16, 2006 until afterDecember 31, 2006;

·                     Mutualreleases between Ms. Fisk and the Company, Brian Keane, John Keane, Sr.and John Keane, Jr.;

·                     Mutualagreements by all parties as to confidentiality and non-disparagement; and

·                     Waiver by usof our right to enforce non-competition provisions of Ms. Fisk’s agreementwith us concerning confidential information and our right to enforcenon-solicitation provisions of such agreement after January 1, 2007.

We are involved in other litigation and various legalmatters, which have arisen in the ordinary course of business. We do notbelieve that the ultimate resolution of these matters will have a materialadverse effect on our financial condition, results of operations, or cashflows.

**Note 12.      SegmentInformation**

Based onqualitative and quantitative criteria established by SFAS No. 131 (“SFAS 131”),“Disclosures about Segments of an Enterprise and Related Information,” weoperate within two reportable segments: Professional Services and TransportationTicketing Solutions. In these segments, we offer an integrated mix ofend-to-end business solutions, such as Outsourcing, Development andIntegration, and Other services. Keane delivers these services through anintegrated network of regional branches in North America, the UK, and Australiaand through ADC’s in the U.S., Canada and India. The Chief Operating 

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Decision Maker (“CODM”)evaluates performance and determines the allocation of resources based on theoperating profit or loss at the local branch level. Within ProfessionalServices, each branch is set-up to deliver all of our service offerings and theexpectation is to provide a consistent level of profitability with eachoffering type. No individual branch meets the quantitative criteria establishedby SFAS 131 and therefore have been presented in one reportable segment.

With the entranceinto the Transportation Ticketing Solution market in 2005 as a result of ourentering into the Victoria TTA contract, we have determined that the economiccharacteristics of the services and the distinct client base would require aseparate reportable segment. The expertise required for the development andmanagement of the Victoria TTA contract is unique to its delivery. We haveevaluated our provision of solutions and services under the Victoria TTAcontract under the qualitative and quantitative criteria established bySFAS 131 and have concluded these services represent a new reportablesegment, in addition to our existing reportable segment Professional Services.As of and for the six months ended June 30, 2006, we have not recognizedany revenues or direct costs for this segment, there was approximately $1.2million of property, plant and equipment associated with Kamco, and werecognized approximately $1.5 million in indirect expenses for thissegment. As a result, we have not provided any additional segment data.

See Note 5 “SignificantContracts” for a discussion of the Victoria TTA contract.

In accordance withthe enterprise-wide disclosure requirements of SFAS 131, our geographicinformation is as follows (dollars in thousands):

Geographicrevenues are presented net of intercompany revenues between the geographiclocations. We have no single client that provides revenues that equal or exceed10 percent of our consolidated revenues, except for the various agenciesof the Federal Government, which represented an aggregate of approximately11.0% and 9.5% for the three months ended June 30, 2006 and 2005,respectively.  For the six months endedJune 30, 2006 and 2005, the various agencies of the Federal governmentaccounted for 10.9% and 9.5% of our consolidated revenues for the six monthsended June 30, 2006 and 2005, respectively.
| ** **    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **    | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **    | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Revenues**  |       |                             |       |                           |       |   |   |   |   |
| Domestic      |       | $                                | 230,640    |                           | $          | 222,889 |   | $ | 462,544 |   | $ | 441,022 |   |
| International |       |                             |       |                           |       |   |   |   |   |
| UK            |       | 7,234                            |       | 11,017                         |       | 14,441 |   | 21,431 |   |
| Other         |       | 4,761                            |       | 3,912                          |       | 9,227 |   | 7,569 |   |
| Subtotal      |       | 11,995                           |       | 14,929                         |       | 23,668 |   | 29,000 |   |
| Total         |       | $                                | 242,635    |                           | $          | 237,818 |   | $ | 486,212 |   | $ | 470,022 |   |

 
| ** **                      | ** ** | **At June 30, 2006** | ** ** | **At December 31, 2005** | ** ** |
|---------------------------------|------------|-------------------------------------|------------|-----------------------------------------|------------|
| **Property  & Equipment:**  |       |                                |       |                                    |       |
| Domestic                        |       | $                                   | 61,160     |                                    | $          | 63,234 |   |
| International                   |       |                                |       |                                    |       |
| UK                              |       | 194                                 |       | 232                                     |       |
| Other                           |       | 14,152                              |       | 14,117                                  |       |
| Subtotal                        |       | 14,346                              |       | 14,349                                  |       |
| Total Property  & Equipment |       | $                                   | 75,506     |                                    | $          | 77,583 |   |

 

**Note 13.      IncomeTaxes**

Our policy is toestablish reserves for taxes that may become payable in future years as aresult of an examination by tax authorities. In accordance with SFAS No. 5 (“SFAS5”), “Accounting for Contingencies,” we establish the reserves based upon ourassessment of exposure associated with permanent tax differences and interestexpense applicable to both permanent and temporary difference adjustments. Thetax reserves are analyzed periodically and adjusted, as events occur to warrantadjustment to the reserves, such as when the statutory period for assessing taxon a given tax return or period expires, the reserve associated with thatperiod is reduced. In addition, the adjustment to the reserve may reflectadditional exposure based on current calculations. Similarly, if taxauthorities provide administrative guidance or a decision is rendered in thecourts, appropriate adjustments will be made to the tax reserve.

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The provision forincome taxes represents the amounts we owe for federal, state, and foreigntaxes. Our effective tax rate was 33.7% for the Second Quarter ended June 30,2006 and was 35.4% for the six months ended June 30, 2006. Our effective taxrate was 35.6% for the Second Quarter ended June 30, 2005 and 37.9% the sixmonths ended June 30, 2005. The decrease in our effective tax rate in theSecond Quarter and six months ended June 30, 2006 was due to a change ingeographic mix of income and the recognition of a foreign deferred tax benefitin the Second Quarter of 2006. The foreign deferred tax benefit relates to theexpiration of an India tax holiday and as a result income is now taxable inthat jurisdiction. We recorded a net deferred tax benefit as a result oftaxable timing differences in that jurisdiction. The determination of theprovision for income tax expense, deferred tax assets and liabilities andrelated valuation allowance involves judgment. As a global company, we arerequired to calculate and provide for income taxes in each of the taxjurisdictions where we operate. This involves making judgments regarding therecoverability of deferred tax assets, which can affect the overall effectivetax rate. In addition, changes in the geographic mix or estimated level ofpre-tax income can affect the overall effective tax rate.  As a result ofowning greater than 80% of the outstanding voting stock of Keane Worldzen,beginning April 1, 2005, we are able to record a tax benefit on the lossesassociated with Keane Worldzen, thereby reducing our annual effective tax rate.See Note 7 “Business Acquisitions” for further discussion on our ownership inKeane Worldzen.

**Item2.      Management’s Discussion and Analysis of Financial Condition andResults of Operations**

This Quarterly Report onForm 10-Q contains forward-looking statements within the meaning ofSection 21E of the Securities Exchange Act of 1934, as amended, andSection 27A of the Securities Act of 1933, as amended. For purposes ofthese Acts, any statement that is not a statement of historical fact may bedeemed a forward-looking statement. For example, statements containing thewords “believes,” “anticipates,” “plans,” “expects,” “estimates,” “intends,” “may,”“projects,” “will,” “would” and similar expressions may be forward-lookingstatements. We caution investors not to place undue reliance on anyforward-looking statements in this Quarterly Report on Form 10-Q. We undertakeno obligation to publicly update any forward-looking statements, whether as aresult of new information, future events or otherwise. There are a number offactors that could cause our actual results to differ materially from thoseindicated by these forward-looking statements, including without limitation thefactors set forth in Part II, Item 1A under the caption “Risk Factors.” These factors and the other cautionary statements made in this quarterly reportshould be read as being applicable to all related forward-looking statementswherever they appear in this quarterly report. If one or more of these factorsmaterialize, or if any underlying assumptions prove incorrect, our actualresults, performance, or achievements may vary materially from any futureresults, performance or achievements expressed or implied by theseforward-looking statements.

The following discussionand analysis should be read in conjunction with the unaudited condensedconsolidated financial statements and related notes included elsewhere in thisQuarterly Report on Form 10-Q and the audited consolidated financialstatements and related notes included in our Annual Report on Form 10-Kfor the year ended December 31, 2005, and with the information under the heading“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” in our Annual Report on Form 10-K for the year endedDecember 31, 2005.

**STRATEGY**

Our goal is to berecognized as one of the world’s premier business process and IT service providersby our clients, employees, and shareholders. We believe that we can achievethis goal by helping clients transform their IT and business operations throughthe consistent delivery of high-value consulting, development, and outsourcingservices. Specifically, we believe that applications services and businessprocess services are large and synergistic growth markets, and that asignificant business trend is corporations leveraging Application Services,Business Process Services (“BPS”), and global delivery to achieve meaningfulcost reductions and business improvement. We believe that our depth ofcapability in each of these areas, along with our vertical expertise, strongclient relationships and process management capabilities, position us well tocapitalize on this market opportunity.

In support of thisevolution in market demand, we are migrating Keane’s organizational structurefrom a geographic network of local branches to an integrated global matrix. Wehave termed the process for this transformation “One Keane.” In the future weplan to align client relationships and business development activities bygeographic region, but business solutions will be designed and delivered byintegrated global Business Lines and Vertical Practices. We believe that thisnew organization better positions Keane to deliver high-value, transformationalsolutions that bundle vertical expertise, business process and applicationsservices, intellectual property through a technology platform or a proprietary referencearchitecture, and cost effective global delivery. Moreover we expect it willincrease Keane’s flexibility and scalability, eliminate redundancy and excesscosts, and improve the career growth opportunities that we offer our employees.

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**OVERVIEW**

**CriticalAccounting Policies**

*Stock-BasedCompensation*

Our adoption of Statement of Financial AccountingStandard No. 123 (revised 2004) “Share Based Payment” (“SFAS 123(R)”) inthe First Quarter of 2006 requires that we recognize stock-based compensation expenseassociated with stock options in our statement of income, rather than discloseit in a pro forma footnote to our consolidated financial statements.Determining the amount of stock-based compensation to be recorded requires usto develop estimates to be used in calculating the grant-date fair value ofstock options. We calculate the grant-date fair values using the Black-Scholesvaluation model. The use of valuation models requires us to make estimates ofthe following assumptions:

Expected volatility — We derived the estimated stockprice volatility based on a review of our actual historic stock pricescommensurate with the expected life of the award. For stock options granted inthe Second Quarter of 2006, the estimated volatility was 33.44%. We believethat the historical stock price volatility is an accurate indicator of futurestock price performance.

Expected option life — Our estimate of an expectedoption life was derived based on a review of our historic option holdingperiods, including a consideration of the holding period inherent in currentlyvested but unexercised options. We believe that this historical data iscurrently the best estimate of the expected term of a new option. We reviewedhistorical data for groups of employees and determined that the type of awardwas an indicator of the exercise behavior.

Risk-free interest rate — We used the yield onzero-coupon U.S. Treasury securities for a period that is commensurate with theexpected term assumption as the risk-free interest rate. The amount ofstock-based compensation recognized during a period is based on the value ofthe portion of the awards that are ultimately expected to vest. SFAS123(R) requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates. The term “forfeitures” is distinct from “cancellations” or “expirations”and represents only the unvested portion of the surrendered option. Similar tothe analysis for the expected option life, we reviewed historical forfeituredata for groups of employees and determined the appropriate forfeiture rateranges from 0-23% for the applicable employee group. Therefore, we have appliedan annual forfeiture rate of 0-23% to all unvested options as ofDecember 31, 2005. We will re-evaluate this analysis quarterly and adjustthe forfeiture rate as necessary. Ultimately, we will recognize the actualexpense over the vesting period only for the shares that vest.

There were no otherchanges in our Critical Accounting Policies during the six months ended June30, 2006.

**Componentsof Revenues**

We seek to helpclients improve their business and IT effectiveness. We classify our serviceofferings into the following three categories: Outsourcing,Development & Integration, and Other Services. We have not recordedany revenue associated with Transport Ticketing Solutions. See Note 5 “SignificantContracts” for a discussion of the Victoria TTA contract.

*Outsourcing:  *Ouroutsourcing services include Application Services and Business ProcessOutsourcing (“BPO”). Our Application Services help clients manage existingbusiness systems more efficiently and more reliably, improving the performanceof these applications while frequently reducing costs. Under our ApplicationService offering, we assume responsibility for managing a client’s businessapplications with the goal of instituting operational efficiencies that enhanceflexibility, free up client personnel resources, and achieve higher usersatisfaction. We enter into large, long-term contracts for the provision ofApplication Services, which generally do not require any capital outlay by us.These contracts usually span three to five years with the ability to renew. Wetypically receive a fixed monthly fee in return for meeting or exceeding acontractually agreed upon service level. However, because our clients typicallyhave the ability to reduce services under their contracts, our monthly fees maybe reduced from the stated contract amounts. Outsourcing services also includesongoing maintenance related to the product sales for our Healthcare SolutionsDivision.

Through our global delivery model we can offer clientsthe flexibility and economic advantage of allocating work among a variety ofdelivery options. These include onsite at a client’s facility, nearshore inHalifax, Nova Scotia, and Toronto, Ontario, and offshore at one of our fourdevelopment centers in India. This integrated, flexible mix of cost-effective onsite,nearshore, and offshore delivery is now a component of most of our newApplication Services engagements. The distribution of work across multiplelocations is typically based on a client’s cost, technology, and riskmanagement requirements.

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Our BPS are provided by our majority owned subsidiary,Keane Worldzen, which we acquired on October 17, 2003. Keane Worldzenspecializes in providing BPS to clients with complex processes in the financialservices, insurance, and healthcare industries, and to clients with back-officeprocesses in several industries. Keane Worldzen’s BPS are designed to reducethe cost and increase the efficiency of our clients’ business transactions,enabling companies to focus on their more profitable activities and avoid thedistraction of non-core back-office processes. Keane Worldzen provides theselow-cost, high-value outsourcing services from operations in both the U.S. andIndia.

*Development &Integration:*   As application software becomes morecomplex, it requires sophisticated integration between front-end and back-endsystems to enhance access to critical corporate data, enable processimprovements, and improve client service. Many of our Development &Integration projects focus on solutions for the integration of enterpriseapplications, supply chain, and client service problems. We also provideDevelopment & Integration services to the public sector, whichincludes agencies within the U.S. Federal Government, various states, and otherlocal government entities. Additionally, our Healthcare Solutions Divisionprovides software solutions and integration support to both acute and long-termcare providers.

*OtherServices:*   Other Services are primarily comprised of ITconsulting, business consulting, project management, and supplemental staffengagements that are principally billed on a time and materials basis.

Global economic and political conditions may causecompanies to be cautious about increasing their use of consulting and ITservices, but we continue to see a demand for our services. We continue toexperience pricing pressure from competitors as well as from clients facingpressure to control costs. In addition, the growing use of offshore resourcesto provide lower-cost service delivery capabilities within our industry continuesto be a source of pressure on revenues. We also experience wage inflation,primarily in India, as the demand for those resources increases. In order forus to remain successful in the near term, we must continue to maintain and growour client base, provide high-quality service and satisfaction to our existingclients, and take advantage of cross-selling opportunities. In the currenteconomic environment, we must provide our clients with service offerings thatare appropriately priced, satisfy their needs, and provide them with measurablebusiness benefits. While we have recently experienced a steady demand for ourservices, we believe that it is too early to determine if developments willtranslate into sustainable improvements in our pricing or margins for 2006 andover the longer term.

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

·              First, they are vertically drivenin that they are value propositions designed to address specific needs,challenges, or opportunities within an industry.

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

·              Third, these solutions may alsoinvolve a business process component, including process reengineering andbusiness process outsourcing.

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

·              And finally, these solution setsfrequently incorporate our global delivery capabilities.

We believe that our deep industry knowledgedifferentiates us from our competitors, allowing us to go beyond simplydelivering cost and performance improvements to our clients, and allowing us todeliver transformational business benefits and, ultimately, help grow ourbusiness and integrate our comprehensive capabilities.

**Componentsof Operating Expenses**

The primary categories of our operating expensesinclude: salaries, wages, and other direct costs; selling, general, andadministrative expenses; and amortization of intangible assets. Salaries,wages, and other direct costs are primarily driven by the cost ofclient-service personnel, which consists mainly of compensation,sub-contractor, and other personnel costs, and other non-payroll costs. Sellingexpenses are driven primarily by business development activities and clienttargeting, image-development and branding activities. General and administrativeexpenses primarily include costs for non-client facing personnel, informationsystems, and office space, which we seek to manage at levels consistent withchanges in the activity 

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levels in our business.We continue to anticipate changes in demand for our services and to identifycost management initiatives to balance our mix of resources to meet current andprojected future demand in our markets. We will also continue to use our globalsourcing as part of our cost-effective delivery model.

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

**EMPLOYEES**

As of June 30, 2006, we had 9,360 totalemployees, including 8,164 business and technical professionals whose servicesare billable to clients. This includes a base of 2,904 employees in India,including our Keane Worldzen operations. We sometimes supplement our technicalstaff by utilizing subcontractors, which as of June 30, 2006, consisted of487 full-time professionals.

**NEWCONTRACT BOOKINGS**

New contract bookings for the three months ended June30, 2006 were $239.0 million, a decrease of $20.1 million, or 7.8%, compared tonew contract bookings of $259.2 million for the same period in 2005. For thethree months ended June 30, 2006, Outsourcing bookings decreased 37.1% to$82.3 million, Development & Integration bookings increased 13.2% to$45.4 million, and Other services bookings increased 26.1% to $111.3 millioncompared to the same period in 2005.

New contract bookings for the six months ended June30, 2006 decreased $44.1 million, or 8.4%, over new contract bookings of $527.3million for the six months ended June 30, 2005. For the six months endedJune 30, 2006, Outsourcing bookings decreased 29.2% to $175.2 million,Development & Integration bookings increased 7.3% to $93.1 million,and Other services bookings increased 11.3% to $214.9 million, compared to thesame period in 2005.

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

**CONSOLIDATEDRESULTS OF OPERATIONS**

**2006Compared to 2005**
| ** **                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Increase  (Decrease)** | ** ** | **Six Months Ended  June 30,** | ** ** | **Increase  (Decrease)** | ** ** |
|-------------------------------------|------------|-------------------------------------------------|------------|--------------------------|------------|-----------------------------------------------|------------|--------------------------|------------|
| ** **                          | ** ** | **2006**                                        | ** ** | **%**                    | ** ** | **2005**                                      | ** ** | **%**                    | ** ** | **$** | ** ** | **%** | ** ** | **2006** | ** ** | **%** | ** ** | **2005** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| Outsourcing                         |       | $                                               | 123,362    |                     | 51         |                                          | $          | 119,111                  |       | 50 |   | $ | 4,251 |   | 3.6 |   | $ | 243,706 |   | 50 |   | $ | 236,373 |   | 50 |   | $ | 7,333 |   | 3.1 |   |
| Development &  Integration |       | 39,959                                          |       | 16                       |       | 42,784                                        |       | 18                       |       | (2,825 | ) | (6.6 | ) | 80,965 |   | 17 |   | 84,010 |   | 18 |   | (3,045 | ) | (3.6 | ) |
| Other Services                      |       | 79,314                                          |       | 33                       |       | 75,923                                        |       | 32                       |       | 3,391 |   | 4.5 |   | 161,541 |   | 33 |   | 149,639 |   | 32 |   | 11,902 |   | 8.0 |   |
| Total                               |       | $                                               | 242,635    |                     | 100        |                                          | $          | 237,818                  |       | 100 |   | $ | 4,817 |   | 2.0 |   | $ | 486,212 |   | 100 |   | $ | 470,022 |   | 100 |   | $ | 16,190 |   | 3.4 |   |

 

**Revenues**

Revenues for the Second Quarter ended June 30, 2006were $242.6 million compared to revenues of $243.6 million for the FirstQuarter ended March 31, 2006 and compared to revenues of $237.8 million for theSecond Quarter ended June 30, 2005. Sequentially, revenues remained relativelyunchanged compared to the First Quarter of 2006.   The increase in revenues compared to theSecond Quarter of 2005 was mainly due to increased revenues from existingcustomers as a result of increased client demand and higher market share ofKeane consultants. These increases more than offset the decrease in revenuesfrom IBM.  In the Third Quarter endedSeptember 30, 2005, we sold our IBM business to another provider. Theselower volumes from IBM and the sale of the contracts resulted in a revenuereduction of approximately $6.6 million and $14.2 million for the SecondQuarter and six months ended June 30, 2006, respectively, compared to thesame period in 2005. Additionally, effective March 31, 2006, we soldcertain components of our Puerto Rico operations. As a result of thedivestiture, we expect a $3.1 million reduction in revenue for the remainder of2006 compared to 2005.

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Revenues for the six months ended June 30, 2006 were$486.2 million compared to revenues of $470.0 million for the six  months ended June 30, 2005.   This increase in revenues was mainly due tohigher revenues from existing clients resulting from increased client demandand higher market share of Keane consultants and due to having a full sixmonths of revenues from netNumina Solutions, Inc. (“netNumina”), which weacquired on February 28, 2005.   See Note7 “Business Acquisitions” for a description of this acquired business.  These increases were partially offset by thedecrease in revenues from IBM and PacifiCare (as discussed below), in additionto lower revenues from the UK.

We have concluded that objective evidence of fairvalue does not exist for all of the elements within the Victoria TTA contract.Accordingly, each of the elements cannot be separated into multiple units ofaccounting and therefore, must be accounted for as a single unit of accounting.As a result, we are deferring all revenues and costs directly associated withthe delivery of products and services during two years of development work,referred to as the Build phase, and we will recognize all revenues and directcosts for the contract over the ten-year period of operation and maintenance,referred to as the Operate phase, currently estimated to begin in mid-2007. In2005 and for the six months ended June 30, 2006, all revenues and direct andincremental costs associated with the delivery of products and services havetherefore been deferred. See Note 5 “Significant Contracts” in the notes to theaccompanying unaudited condensed consolidated financial statements for furtherdiscussion on our accounting for the TTA contract.

*Outsourcing*.   Outsourcing service revenues for the Second Quarterended June 30, 2006 were $123.4 million, an increase of $3.0 million, or2.5%, compared to the First Quarter ended March 31, 2006.   The sequential increase was primarily due toincreased revenues generated from existing clients from our ApplicationServices.  Outsourcing revenues for theSecond Quarter ended June 30, 2006 increased $4.3 million, or 3.6%, from the SecondQuarter ended June 30, 2005.  Outsourcingrevenues for the six months ended June 30, 2006 increased $7.3 million or 3.1%,over the same period in 2005.  Theincrease in Outsourcing service revenues for the Second Quarter and six monthsended June 30, 2006 was primarily due ­­­­­to increased IT demand  from existing customers, compared to the sameperiods in 2005.

On December 20, 2005, UnitedHealth GroupIncorporated, an affiliate of United HealthCare Services, Inc. (“UnitedHealthCare”), completed its acquisition of PacifiCare. On January 20,2006, we entered into a five-year master services agreement with UnitedHealthCare effective January 1, 2006. Simultaneously, we and PacifiCareterminated our Information Technology Services Agreement, dated January 11,2002, effective January 1, 2006. Our original Information TechnologyServices Agreement with PacifiCare provided for an outsourcing arrangement witha ten-year term and $500 million in contract value. As a result of theending of the original agreement with PacifiCare we will receive a$10.1 million payment in two equal installments on July 30, 2006 andJuly 30, 2007. The first half will be recognized over the 18 month periodfrom January 1, 2006 to June 30, 2007. The second half will berecognized at such time as the amount becomes due in management’s judgment. Ifadditional services are procured pursuant to the master services agreement, anyremaining portion of the payments will be recognized over the period suchservices are provided. Under the new master services agreement with UnitedHealthCare we will receive approximately $21 million for a specified levelof services provided from January 1, 2006 through June 30, 2007.Revenues from PacifiCare in the three and six months ended June  30, 2006,were approximately $0.2 million and $2.0 million lower than revenues fromPacifiCare during the same periods in 2005.

*Development &Integration*.   Development &Integration service revenues for the Second Quarter ended June 30, 2006 were$40.0 million, a decrease of $1.0 million, or 2.6% compared to the FirstQuarter ended March 31, 2006.  Thesequential decrease was primarily due to lower revenues from a few existingclients in the Second Quarter of 2006.  Development & Integration service revenues decreased $2.8 million,or 6.6% compared to the Second Quarter ended June 30, 2005.     Development & Integration revenues forthe six months ended June 30, 2006 decreased $3.0 million, or 3.6%, compared tothe same period in 2005.  These decreasesin revenues were attributable to the termination of a client and lower revenuesfrom the UK, which were offset in part by increased revenues from existingclients driven by more effective client penetration strategies and increasedclient demand.

*Other Services*.   Other Services revenues for the Second Quarter endedJune 30, 2006 were $79.3 million, a decrease of $2.9 million, or 3.5%,compared to the First Quarter ended March 31, 2006. This sequentialdecrease was primarily due to decreased revenues for supplemental staffingplacements.   Other Services revenues forthe Second Quarter ended June 30, 2006 increased $3.4 million, or 4.5%, and forthe six months ended June 30, 2006, increased $11.9 million or 8.0%, over thesame periods in 2005.  These increaseswere primarily due to increases in additional supplemental staffing placementswith existing clients, which were partially offset by decreased revenues fromIBM.

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The following table summarizes certain line items fromour unaudited condensed consolidated statements of income (dollars inthousands):
| ** **                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Increase  (Decrease)** | ** ** | **Six Months Ended  June 30,** | ** ** | **Increase  (Decrease)** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|--------------------------|------------|-----------------------------------------------|------------|--------------------------|------------|
| ** **                                    | ** ** | **2006**                                        | ** ** | **2005**                 | ** ** | **$**                                         | ** ** | **%**                    | ** ** | **2006** | ** ** | **2005** | ** ** | **$** | ** ** | **%** | ** ** |
| Revenues                                      |       | $                                               | 242,635    |                     | $          | 237,818                                       |       | $                        | 4,817      |   | 2.0 |   | $ | 486,212 |   | $ | 470,022 |   | $ | 16,190 |   | 3.4 |   |
| Salaries, wages,  and other direct costs |       | 171,510                                         |       | 166,461                  |       | 5,049                                         |       | 3.0                      |       | 344,761 |   | 328,654 |   | 16,107 |   | 4.9 |   |
| Gross margin                                  |       | $                                               | 71,125     |                     | $          | 71,357                                        |       | $                        | (232       | ) | (0.3 | ) | $ | 141,451 |   | $ | 141,368 |   | $ | 83 |   | 0.1 |   |
| Gross margin %                                |       | 29.3                                            | %          | 30.0                     | %          |                                          |       |                     |       | 29.1 | % | 30.1 | % |   |   |   |   |

 

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

Salaries, wages, and other direct costs for the SecondQuarter ended June 30, 2006 were $171.5 million, an increase of $1.7 million,or 1.0%, compared to the First Quarter ended March 31, 2006.  Salaries,wages, and other direct costs for the Second Quarter ended June 30, 2006increased $5.0 million, or 3.0%, and for the six months ended June 30, 2006increased $16.1 million, or 4.9%, over the same periods in 2005. Theseincreases were primarily attributable to the higher costs of client servicepersonnel to support increased service revenues.  Salaries, wages, andother direct costs were 70.7% of total revenues for the Second Quarter endedJune 30, 2006, and for the six months ended June 30, 2006 were 70.9% of totalrevenues, compared to 70.0% and 69.9% of total revenues for the same periods in2005, respectively.

Total billable employees for all operations were 8,164as of June 30, 2006, compared to 8,121 as of March 31, 2006 and 7,364 totalbillable employees as of June 30, 2005. This includes 2,538 billable employeesin India, which includes Keane Worldzen, and represents an increase of 154employees, or 6.5%, over the First Quarter ended March 31, 2006 and an increaseof 908 employees, or 55.7%, over the Second Quarter ended June 30, 2005. In addition to these employees, we occasionally use subcontract personnel toaugment our billable staff, which represented 487 full-time professionals as ofJune 30, 2006. Overall utilization rates for all three periods remained stableas we increased the number of billable employees.

**Grossmargin**

Our management believes gross margin*(revenues less salaries, wages, and other directcosts)* provides an important measure of our profitability. Grossmargin for the Second Quarter ended June 30, 2006 increased $0.8 millionsequentially from the First Quarter ended March 31, 2006.   Gross margin for the Second Quarter endedJune 30, 2006 decreased $0.2 million, or 0.3%, and for the six months endedJune 30, 2006 increased $0.1 million, or 0.1%, over the same periods in2005.  Gross margin as a percentage of revenues for the Second Quarterended June 30, 2006 was 29.3% compared to 28.9% for the First Quarter endedMarch 31, 2006 and 30.0% for the same period in 2005. Gross margin as apercentage of revenues for the six months ended June 30, 2006 was 29.1%compared to 30.1% for the same period in 2005. The decrease in gross margin as a percentage of revenues during thethree months ended June 30, 2006, when compared to the same period in 2005, wasprimarily due to additional provisions recorded in the Second Quarter of 2006for amounts deemed uncollectible, which were reflected as reductions to revenue.For the six months ended June 30, 2006, the decrease compared to the sameperiod in 2005 was partially due to the revenue reductions recorded in theSecond Quarter of 2006 and a $1.9 million revenue reduction recorded in theFirst Quarter ended March 31, 2006.  Wecontinue to closely monitor utilization rates and other direct costs in aneffort to avoid adverse impacts on our gross margin.

**Selling,general, and administrative expenses**
| ** **                                                | ** ** | **Three Months  Ended June 30,** | ** ** | **Increase  (Decrease)** | ** ** | **Six Months Ended  June 30,** | ** ** | **Increase  (Decrease)** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------|------------|------------------------------------------|------------|--------------------------|------------|
| ** **                                                | ** ** | **2006**                                        | ** ** | **2005**                 | ** ** | **$**                                    | ** ** | **%**                    | ** ** | **2006** | ** ** | **2005** | ** ** | **$** | ** ** | **%** | ** ** |
| Selling,  general, and administrative expenses (SG&A) |       | $                                               | 51,606     |                     | $          | 56,304                                   |       | $                        | (4,698     | ) | (8.3 | ) | $ | 107,488 |   | $ | 110,476 |   | $ | (2,988 | ) | (2.7 | ) |
| SG&A as a % of  revenue                          |       | 21.3                                            | %          | 23.7                     | %          |                                     |       |                     |       | 22.1 | % | 23.5 | % |   |   |   |   |
|                                                           |            |                                                 |            |                          |            |                                          |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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SG&A expensesinclude salaries for our corporate and administrative employees, sales andmarketing expenses, as well as the cost of our administrative facilities,including related depreciation expense. SG&A expenses for the SecondQuarter ended June 30, 2006 decreased $4.3 million, or 7.7% compared to theFirst Quarter ended March 31, 2006. SG&A expenses for the Second Quarterended June 30, 2006 decreased $4.7 million, or 8.3%, and for the six monthsended June 30, 2006 decreased $3.0 million, or 2.7%, over the same periods in2005. The decreases in SG&A expenses compared to 2005 were due to lowerpersonnel costs, lower incentive compensation and efficiencies created from ourOne Keane Transformation initiative. During the Second Quarter of 2006, wechanged the terms of our incentive compensation plans and as a result, werecorded $2.6 million of lower compensation expense in the Second Quarter of2006, which included a reversal of approximately $0.8 million for a changein estimate for amounts previously accrued, compared to the First Quarter of2006. For the Second Quarter and six months ended June 30, 2006, we recorded$0.9 million and $0.8 million of lower incentive compensation compared to thesame periods in 2005. These decreases in SG&A expenses offset the $1.3million of settlement and legal costs, net of insurance proceeds, incurred inthe Second Quarter of 2006 related to the allegations against our former CEOand $1.0 million of stock-based compensation. SG&A expenses for the Second Quarter and six months ended June 30,2006 were 21.3% and 22.1% of total revenues, respectively, as compared to 23.7%and 23.5% of total revenues, respectively, for the same periods in 2005. Thedecrease in SG&A expenses as a percentage of revenue for the three and sixmonth ended June 30, 2006 was due to the lower personnel costs and lowerincentive compensation, One Keane transformation efficiencies and higherrevenues for each period.

*Stock-BasedCompensation*

On January 1,2006, we adopted SFAS 123(R) using the modified prospective applicationmethod. We calculate compensation cost on the date of grant using the fairvalue of the options as determined by the Black-Scholes valuation model. TheBlack-Scholes valuation model requires us to determine several assumptions asnoted above under “Critical Accounting Policies”.

The adoption ofSFAS 123(R) had the following impact on our results of operations for theSecond Quarter and six months ended June 30, 2006: operating profit before taxwas lower by $1.0 million and $1.5 million, respectively, net income was lowerby approximately $0.6 million and $1.0 million respectively, basic earnings pershare (“EPS”) was lower by approximately $.01 and $.02, respectively, anddiluted EPS was lower by $.01 and $.02, respectively.

On May 10, 2006,we entered into a Resignation and Consulting Agreement with Brian T. Keane, ourformer President and Chief Executive Officer. Pursuant to the Resignation andConsulting Agreement, we modified the terms of certain of Mr. Keane’s stockawards. We extended the exercise period for his vested stock options untilDecember 31, 2006 and provided that 10,000 shares of restricted stock thatwould otherwise vest on December 16, 2006 would continue to vest despite hisresignation. On June 13, 2006, we entered into a Settlement Agreement withGeorgina Fisk, our Vice President of Marketing, Brian T. Keane, our formerChief Executive Officer, John Keane, Sr., the Chairman of our Board ofDirectors, and John Keane, Jr., a member of our Board of Directors (the “SettlementAgreement”). The Settlement Agreement was entered into in connection with theresolution of Ms. Fisk’s previously reported allegations concerning BrianKeane. Pursuant to the Settlement Agreement, we modified the terms of certainof Ms. Fisk’s stock awards.  We extendedthe exercise period for her vested stock options until December 31, 2006 andprovided that 2,500 shares of restricted stock that would otherwise vest onDecember 16, 2006 would continue to vest despite her resignation effective June30, 2006. As a result of these modifications and the forfeiture of Mr. Keane’sand Ms. Fisk’s remaining unvested restricted stock and stock options during theSecond Quarter of 2006, we recognized $0.3 million of incremental stock-basedcompensation expense.

Prior to theadoption of SFAS 123(R), we accounted for share-based payments to employeesusing Accounting Principles Board Opinion No. 25’s (“APB 25”), “Accountingfor Stock Issued to Employees”, intrinsic value method and, as such, generallyrecognized no compensation cost for employee stock options. The adoption ofSFAS 123(R) under the modified prospective application method allowed usto recognize compensation cost beginning with the effective date (a) basedon the requirement of SFAS 123(R) for all share-based payments grantedafter the effective date and (b) based on the requirements of SFAS 123 forall awards granted to employees prior to the effective date of SFAS123(R) that remain unvested on the effective date. Under the modifiedprospective application method, prior periods are not restated for the effectof SFAS 123(R).

Prior to theadoption of SFAS 123(R), during the Fourth Quarter of 2005, we accelerated thevesting of certain stock options in which the exercise price of the award  exceeded the market price of the stock on thedate of acceleration. As a result of the acceleration, approximately2.1 million shares subject to options constituting approximately 47% ofthe total of unvested options outstanding at that time became immediatelyexercisable. The acceleration impacted approximately 570 employees. Under APB25 and Financial Accounting Standards Board (“FASB”) Interpretation No. 44(“FIN 44”), “Accounting for Certain Transactions Involving Stock Compensation”,no compensation expense was recognized in the financial statements for theacceleration of vesting of these options since the closing common stock priceper share on the dates of acceleration were greater than the exercise prices ofthe unvested options accelerated. The primary purpose of the acceleratedvesting was to enable us to avoid recognizing in our income statement non-cashcompensation expense associated with these options in future periods, upon

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our adoption ofSFAS 123(R) on January 1, 2006. Absent the acceleration of theoptions described above, from and after our adoption of SFAS 123(R), wewould have been required to recognize approximately $10.5 million inpre-tax non-cash compensation expense over the remaining vesting terms of thestock options, based on valuation calculations using the Black-Scholes optionpricing model.

As of June 30,2006, we had approximately $4.4 million of unrecognized compensation costrelated to stock option awards that we expect to be recognized as expense overa weighted average period of 3.6 years. As of June 30, 2006, we hadapproximately $4.7 million of unrecognized compensation cost related torestricted stock awards that we will recognize as expense over a weightedaverage period of 2.2 years.

See Note 2 “Stock-BasedCompensation” in the notes to the accompanying unaudited condensed consolidatedfinancial statements for further information regarding our adoption of SFAS123(R).

**Amortizationof intangible assets**

Amortization of intangible assets for the SecondQuarter ended June 30, 2006 was $3.9 million, which remained relativelyunchanged compared to the same period in 2005. Amortization for the six months ended was $7.7 million, a decrease of$0.2 million or 2.8% over the same period in 2005.  The decrease in amortization of intangibleassets was primarily due to certain intangibles becoming fully amortized.

**Restructuringcharges, net**

       During the First Quarter and SecondQuarter of 2006, we reduced our workforce at certain locations by 53 and 59employees, respectively, most of whom had an expected termination date withinthe quarter of the reduction. The employees affected by the reductions wereboth non-billable and billable employees whose roles could be reduced basedupon the business needs in their respective locations. As a result, we expensed$1.3 million and $1.4 million in the First and Second Quarter of 2006,respectively, in severance costs related to our One Keane Transformation.During the six months ended June 30, 2006, we paid $2.2 million of severancerelated to these workforce reductions. The remaining liability of $0.5 millionis expected to be paid by the end of the Third Quarter of 2006. While wecurrently do not have a formally approved plan of restructuring, we could incuradditional restructuring costs throughout the remainder of 2006 as we continuewith our One Keane Transformation.

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

 
| ** **                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Increase  (Decrease)** | ** ** | **Six Months Ended  June 30,** | ** ** | **Increase  (Decrease)** | ** ** |
|---------------------------------|------------|-------------------------------------------------|------------|--------------------------|------------|-----------------------------------------------|------------|--------------------------|------------|
| ** **                      | ** ** | **2006**                                        | ** ** | **2005**                 | ** ** | **$**                                         | ** ** | **2006**                 | ** ** | **2005** | ** ** | **$** | ** ** |
| **Other income (expense)**      |       |                                            |       |                     |       |                                          |       |                     |       |   |   |   |   |
| Interest and  dividend income   |       | $                                               | 1,285      |                     | $          | 1,128                                         |       | $                        | 157        |   | $ | 2,485 |   | $ | 2,233 |   | $ | 252 |   |
| Interest expense                |       | (1,672                                          | )          | (1,406                   | )          | (266                                          | )          | (3,068                   | )          | (2,822 | ) | (246 | ) |
| Other income  (expense)         |       | 284                                             |       | (174                     | )          | 458                                           |       | (121                     | )          | (190 | ) | 69 |   |
| Minority  interest              |       | 11                                              |       | 190                      |       | (179                                          | )          | (16                      | )          | 873 |   | (889 | ) |
| **Other income (expense), net** |       | $                                               | (92        | )                        | $          | (262                                          | )          | $                        | 170        |   | $ | (720 | ) | $ | 94 |   | $ | (814 | ) |

 

**Interestand dividend income**

                Interest and dividend income forthe Second Quarter ended June 30, 2006 was $1.3 million and for the six monthsended June 30, 2006 was $2.5 million compared to $1.1 million and $2.2 millionfor the same periods in 2005, respectively. For the Second Quarter and sixmonths ended June 30, 2006, the increases in interest and dividend income wereprimarily attributable to a change in the holdings of our investment portfolioand higher interest rates compared to the Second Quarter and six months endedJune 30, 2005.  To the extent we use ourcash and marketable securities to fund acquisitions, our operations, andcapital investments, our interest income will decline in future periods.

**Interestexpense**

       Interest expense for the Second Quarterended June 30, 2006 was $1.7 million and was $3.1 million for the six months 

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ended June 30, 2006, anincrease of $0.3 million and $0.2 million, respectively, when compared to thesame periods in 2005. Interest expense increased for the three and sixmonths ended June 30, 2006 due to fees related to our line of credit, which weobtained in the Third Quarter of 2005. We also record interest expense on the accrued building costs associatedwith our corporate facility as explained in Note 11 “Related Parties,Commitments, and Contingencies” in the notes to the accompanying unauditedcondensed consolidated financial statements.

**Other(expense) income, net**

Other income, net was $0.3 million for the SecondQuarter ended June 30, 2006, compared to other expense of $0.2 million for thesame period in 2005.  For the six monthsended June 30, 2006, other expense was $0.1 million compared to other expenseof $0.2 million and for the same period in 2005.  The increase in otherincome, net and the decrease in other expense, net for the Second Quarter andsix months ended June 30, 2006 were primarily due to foreign exchange gains.

**MinorityInterest**

Minority interestincome (expense) for the Second Quarter ended June 30, 2006 was income of$11,000 and for the six months ended June 30, 2006 was expense of  $16,000, a decrease of $0.2 million and $0.9million compared to the same periods in 2005, respectively. The decreases inminority interest income are due to the improved profitability of KeaneWorldzen in 2006 compared to 2005. In addition, for the six months ended June30, 2006, the decrease in minority interest income was due to Keane’s higherownership percentage in Keane Worldzen effective April 1, 2005. The amount inminority interest income represents the loss attributable to minority shareholdersof Keane Worldzen for the period presented.  We completed our acquisitionof a controlling interest in Keane Worldzen in the Fourth Quarter of 2003,which resulted in an initial equity position of approximately 62% of the issuedand outstanding capital stock of Keane Worldzen and our consolidation of theresults of Keane Worldzen. Consistent with the right to increase our ownershipposition over time, we increased our equity position to approximately 81% inApril 2005 with an additional capital contribution of approximately $5.0million in cash and $3.0 million from the conversion of an outstanding loan toequity. Consistent with the minority shareholders’ rights, the minorityshareholders exercised their first put option in December 2005, which requiredus to purchase approximately 5% of their outstanding shares for$2.8 million. As a result of our additional capital contribution and theminority shareholders’ exercise of the first put option, we own approximately86% of the outstanding capital stock of Keane Worldzen and the minorityinterest shareholders own approximately 14% of the issued and outstandingcapital stock of Keane Worldzen. We continue to consolidate the results ofKeane Worldzen but recognize 86% of the results of operations. The put optionsare explained in further detail in Note 7 “Business Acquisitions” in thenotes to the accompanying condensed consolidated financial statements.

**Incometaxes**

                The following table summarizesthe changes in provision for income taxes included in our condensedconsolidated statements of income (dollars in thousands):
| ** **                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Income before  income taxes |       | $                                               | 14,182     |                                          | $          | 10,931 |   | $ | 22,876 |   | $ | 23,056 |   |
| Provision for  income taxes |       | 4,783                                           |       | 3,888                                         |       | 8,087 |   | 8,738 |   |
| **Net  income**             |       | $                                               | 9,399      |                                          | $          | 7,043 |   | $ | 14,789 |   | $ | 14,318 |   |
|                        |       |                                            |       |                                          |       |   |   |   |   |
| **Effective Tax Rate**      |       | 33.7                                            | %          | 35.6                                          | %          | 35.4 | % | 37.9 | % |

 

The provision forincome taxes represents the amounts owed for federal, state, and foreigntaxes.  Our effective tax rate was 33.7% for the Second Quarter ended June30, 2006 and was 35.4% for the first six months of 2006, compared to 35.6% and37.9% for the same periods in 2005. The decrease in our effective tax ratefor the three and six months ended June 30, 2006 was due primarily to thechange in geographic mix of income in the Second Quarter of 2006 and therecognition of a foreign deferred tax benefit. The foreign deferred tax benefitrelates to the expiration of an India tax holiday and as a result income is nowtaxable in that jurisdiction.  Werecorded a net deferred tax benefit as a result of taxable timing differencesin that jurisdiction. The determination of the provision for income taxexpense, deferred tax assets and liabilities and related valuation allowanceinvolves judgment by our management. As a global company, we are required tocalculate and provide for income taxes in each of the tax jurisdictions wherewe operate. This involves making judgments regarding the recoverability ofdeferred tax assets, which can affect the overall effective tax rate. Inaddition, changes in the geographic mix or estimated level of pre-tax incomecan affect the overall effective tax rate.

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**Netincome**

Net incomeincreased to $9.4 million for the Second Quarter ended June 30, 2006 comparedto $7.0 million for the Second Quarter ended June 30, 2005 primarily due to adecrease in SG&A expenses, an increase in revenues, and a lower effectivetax rate.    Net income increased by$0.5 million for the six months ended June 30, 2006 compared to the same periodin 2005 primarily due to a lower effective tax rate.

**RECENTACCOUNTING PRONOUNCEMENTS**

In July 2006, theFASB issued FASB Interpretation (“FIN”) No. 48 (“FIN 48”), “Accounting forUncertainty in Income Taxes - An Interpretation of FASB Statement No. 109.” FIN48 clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with FASB Statement No. 109, “Accountingfor Income Taxes.” FIN 48 also prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return and providesguidance on derecognition, classification, interest and penalties, andaccounting in interim periods, disclosure, and transition.

The evaluation ofa tax position in accordance with FIN 48 is a two-step process. The first stepis a recognition process whereby the enterprise determines whether it is morelikely than not that a tax position will be sustained upon examination,including resolution of any related appeals or litigation processes, based onthe technical merits of the position. In evaluating whether a tax position hasmet the more-likely-than-not recognition threshold, the enterprise shouldpresume that the position will be examined by the appropriate taxing authoritythat has full knowledge of all relevant information. The second step is ameasurement process whereby a tax position that meets the more-likely-than-notrecognition threshold is calculated to determine the amount of benefit torecognize in the financial statements. The tax position is measured at thelargest amount of benefit that is greater than 50% likely of being realizedupon ultimate settlement.

The provisions of FIN 48 are effective for fiscalyears beginning after December 15, 2006. The provisions of FIN 48 are to beapplied to all tax positions upon initial adoption of this standard. Only taxpositions that meet the more-likely-than-not recognition threshold at theeffective date may be recognized or continue to be recognized upon adoption ofFIN 48. The cumulative effect of applying the provisions of FIN 48 should bereported as an adjustment to the opening balance of retained earnings (or otherappropriate components of equity or net assets in the statement of financialposition) for that fiscal year. We are evaluating the impact of FIN 48 on ourconsolidated financial position, results of operations and cash flows.

 InFebruary 2006, the FASB issued SFAS No. 155 (“SFAS 155”), “Accountingfor Certain Hybrid Instruments.” This Statement amends FASB StatementsNo. 133, “Accounting for Derivative Instruments and Hedging Activities”,and No. 140, “Accounting for Transfers and Servicing of Financial Assetsand Extinguishments of Liabilities”. SFAS 155 resolves issues addressed inStatement 133 Implementation Issue No. D1, “Application of Statement 133to Beneficial Interests in Securitized Financial Assets.”  This Statementis effective for all financial instruments acquired or issued after thebeginning of an entity’s first fiscal year that begins after September 15,2006. We do not believe the adoption of SFAS 155 will have a material impact onour consolidated financial position, results of operations or cash flows.

**LIQUIDITYAND CAPITAL RESOURCES**

**ConsolidatedFinancial Condition (in thousands)**
| **Six Months Ended June 30,** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Cash Flows  Provided By (Used For)                |       |     |       |     |       |
| Operating  activities                             |       | $        | 8,479      |     | $          | 9,299 |   |
| Investing  activities                             |       | (3,137   | )          | (1,737   | )          |
| Financing activities                              |       | (3,069   | )          | (15,371  | )          |
| Effect of  exchange rate on cash                  |       | 281      |       | (6       | )          |
|                                              |       |     |       |     |       |
| Increase (decrease) in  Cash and cash equivalents |       | $        | 2,554      |     | $          | (7,815 | ) |

 

We havehistorically financed our operations with cash generated from operations. Inaddition, in 2003, we raised $150.0 million in proceeds from the issuance ofour debentures. We use the net cash generated from these sources to fundcapital expenditures, mergers and acquisitions, and stock repurchases. If wewere to experience a decrease in revenue as a result of a

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decrease in demand forour services or a decrease in our ability to collect receivables, we would berequired to reduce discretionary spending related to SG&A expenses andadjust our workforce in an effort to maintain profitability. At June 30, 2006,we had $164.6 million in cash and cash equivalents and marketable securities.In addition, on September 15, 2005, we entered into a $200 millionfive-year credit facility, of which approximately $122.7 million is availablefor borrowing as of June 30, 2006, after considering $­­­­33.5 million ofoutstanding letters of credit and after considering certain financialcovenants.   We intend to continue to useour cash and cash equivalents and marketable securities for general corporatepurposes, which may include additional repurchases of our common stock underexisting or future share repurchase programs and the funding of futureacquisitions and other corporate transactions.

**Cashflows provided by operating activities**

Net cash provided by operating activities totaled $8.5million for the six months ended June 30, 2006 compared to net cash provided byoperating activities of $9.3 million for the six months ended June 30,2005.  The decrease in net cash provided by operating activities wasdriven by slower accounts receivable collection and timing of cash payments,partially offset by the receipt of $13.3 million ($18 million AUD) of milestonepayments during the Second Quarter of 2006 related to the Victoria TTAcontract. We completed the implementation of the Time Reporting, ContractsManagement, Project Accounting, and Billing PeopleSoft modules for our NorthAmerican Services during the Second Quarter of 2006. As a result, weexperienced delays in invoicing our customers. These delays combined with the changesin personnel resulting from the One Keane Transformation resulted in slowercollection of our accounts receivable. Days Sales Outstanding (“DSO”), anindicator of the effectiveness of our accounts receivable collections, was 63days as of June 30, 2006, compared to 58 days as of December 31, 2005 and 54days as of June 30, 2005. We calculate DSO using the trailing three monthstotal revenue divided by the number of days in the quarter to determine dailyrevenue.  The average accounts receivable balance for the three-monthperiod is then divided by daily revenue.

**Cashflows used for investing activities**

Net cash used for investing activities for the sixmonths ended June 30, 2006 was $3.1 million compared to net cash used byinvesting activities of $1.7 million for the six months ended June 30, 2005.

*MarketableSecurities:* During the six months ended June 30, 2006, wepurchased $40.5 million and sold $46.1 million in marketable securities,generating a net source of cash of $5.6 million, compared to purchases of $23.4million and sales of $33.2 million, which generated a net source of cash of$9.8 million in the first six months of 2005.  The net proceeds from thesetransactions were used to fund our share repurchases and our operationalrequirements.

*Propertyand Equipment:* We invested $6.3 million in property andequipment for the six months ended June 30, 2006, primarily to purchasesoftware, computers and computer related equipment for our U.S. operations andproperty and equipment to support our growing operations in Australia andIndia.  During the six months ended June30, 2005, we invested $7.9 million into property and equipment and capitalizedsoftware costs in connection with the implementation of our PeopleSoftEnterprise Resource Planning applications. During the Second Quarter ended June 30, 2006, we received proceeds of$0.6 million related to the sale of several condominiums that had been in thepast used as an employee benefit.

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

On February 28,2005, we acquired netNumina. In exchange for all of the outstanding capitalstock of netNumina, we agreed to pay $5.7 million, of which $0.6 million washeld back to secure indemnification obligations of the netNumina stockholdersand acquired $4.6 million in cash.  As of June 30, 2005, we had paid $4.7million of the $5.1 million not held back based on the NetNumina stockcertificates surrendered for cancellation as of that date.  The $0.6 million held back was initiallydeposited as restricted cash and during the First Quarter of 2006 was deliveredto the former NetNumina stockholders.

          On February 27, 2004, we acquiredNims Associates Inc. (“Nims”). We paid $18.2 million in cash, includingtransaction costs and net of cash acquired, for all of the outstanding capitalstock of Nims. The purchase price may increase with the potential to pay up toan additional $15.0 million in earn-out consideration over three yearsfrom the acquisition, contingent upon the achievement of certain futurefinancial targets. The first earn-out was achieved as of March 1, 2005and, as a result, we paid $3.3 million in earn-out consideration inApril 2005. Based on Nims’ financial performance as of December 31,2005, the second

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earn-out was achieved. Asa result, we accrued an additional $3.3 million in earn-out considerationas of December 31, 2005, which we paid in April of 2006. In additionto the first two earn-outs, there is an additional potential $8.3 millionin earn-out considerations that, as of June 30, 2006, could be achievedover the next year.

**Cashflows used for financing activities**

Net cash flows used for financing activities was $3.1million for the six months ended June 30, 2006, compared to net cash used forfinancing activities of $15.4 million for the six months ended June 30,2005.   Net cash flows used for financing activities for both 2006and 2005 were primarily for the repurchase of our common stock, and werepartially offset by proceeds received from the issuance of stock associatedwith our employee stock purchase and stock option plans.  The following isa summary of our repurchase activity for the six months ended June 30, 2006 and2005 (dollars in thousands):
| ** **                                    | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                    | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|                                          |       |       |       |       |       |   |   |   |   |
| Prior year  authorizations at January 1, |       | 2,553,990  |       |       |       | 2,871,600 |   |   |   |
| Authorizations                                |       | —     |       |       |       | 3,000,000 |   |   |   |
| Repurchases paid                              |       | (726,800   | )          | $          | 9,290      |   | (1,352,500 | ) | $ | 17,563 |   |
| Repurchases  accrued                          |       | —     |       |       |       | (107,500 | ) | $ | 1,477 |   |
| Expirations                                   |       | —     |       |       |       | (1,763,900 | ) |   |   |
| Shares remaining as of  June 30,         |       | 1,827,100  |       |       |       | 2,647,000 |   |   |   |
|                                               |            |            |            |            |            |  |  |  |  |  |  |

 

On October 25, 2005, we announced the approval byour Board of Directors of a program for the repurchase of 3.0 million shares ofour common stock (“the October 2005 Program”). The repurchases may be madeon the open market or in negotiated transactions, and the timing and amount ofshares to be purchased will be determined by our management based on itsevaluation of market and economic conditions and other factors. Unlessterminated earlier by resolution of our Board of Directors, theOctober 2005 Program will expire upon the earlier of the date werepurchase all shares authorized for repurchase thereunder or October 25,2006.

These share repurchases more than offset the sharesissued under our various stock incentive programs. Under thesestock incentive programs, we issued 916,391 shares and 223,804 shares andreceived proceeds of $6.2 million and $2.4 million for the six months endedJune 30, 2006 and 2005, respectively. Between May 1999 andJune 30, 2006, we have invested approximately $324.0 million to repurchaseapproximately 25.9 million shares of our common stock under twelve separateauthorizations.

In February 2003, we entered into a$50.0 million unsecured revolving credit facility (the “credit facility”)with two banks. The terms of the credit facility required us to maintain amaximum total funded debt and other financial ratios. The credit facility alsoincluded covenants that, subject to certain specific exceptions andlimitations, among other things, restricted our ability to incur additionaldebt, make certain acquisitions or disposition of assets, create liens, and paydividends. Between June 2003 and July 2005, we and the two banksamended certain provisions of the credit facility including the allowable limitfor letters of credit within the total facility and for the purposes of issuinga letter of credit to satisfy bank guarantees with respect to the TransportTicketing Authority (“TTA”) contract with the State of Victoria, Australia. Oneof the banks issued a $32.9 million ($45 million AUD) letter of credit datedJuly 14, 2005 against our credit facility in connection with our VictoriaTTA contract. This credit facility was terminated in connection with ourentrance into a new credit facility, described below, in September 2005.

On September 15, 2005, we entered into afive-year revolving credit facility (the “new credit facility”) with asyndicate of banks (the “lenders”) in the amount of $200.0 million, plus anadditional amount of up to $50.0 million subject to certain terms andconditions (the “loan amount”). The new credit facility has variousnonfinancial and financial covenants, which include a total leverage ratio, asenior leverage ratio and a quick ratio. The new credit facility replaced ourprevious $50.0 million unsecured revolving credit facility. Pursuant to the newcredit facility, we may borrow funds from the lenders up to the loan amountwith a $50.0 million sub limit for letters of credit. During the First Quarterof 2006, we amended the new credit facility to allow for certain foreigncurrency hedging at the subsidiary level. The annual commitment fee payablequarterly is at an initial rate of 0.20% per annum on the unused amount ofrevolving credit commitments, subject to adjustment based on a senior leverageratio as defined in the new credit facility and up to a maximum per annum rateof 0.25%. To the extent there are letters of credit outstanding under the newcredit facility, we will pay the administrative agent a letter of credit fee,initially 1.0% annually, subject to adjustment based on the senior leverageratio as defined in the new credit facility, and up to a maximum per annum rateof 1.5%. In connection with the new credit facility, we paid $1.3 million inrelated debt issuance costs. As of June 30,

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2006, we had no debtoutstanding under the new credit facility. However, there are $33.5 million ofoutstanding letters of credit against the new credit facility, which includethe $32.9 million ($45 million AUD) letters of credit issued in July 2005against our previous credit facility in connection with our Victoria TTAcontract.

Based on our current operating plan, we believe thatour cash and cash equivalents on hand, marketable securities, cash flows fromoperations, and our new credit facility will be sufficient to meet our currentcapital requirements for at least the next 12 months.

In connection with certain contracts, we have beenrequired to deliver security or performance bonds for the benefit of ourclients. These bonds give the beneficiary the right to obtain payment from theissuer of the bond if certain specified events occur or fail to occur. Inaddition, we have various agreements in which we may be obligated to indemnifyour clients or third parties with respect to certain matters. Generally, theseindemnification provisions are included in contracts arising in the normalcourse of business under which we customarily agree to hold the indemnifiedparty harmless against losses arising from a breach of representations relatedto such matters as title to assets sold and licensed or certain intellectualproperty rights, improper disclosures of confidential information, personalinjuries or property damages. Typically, there are no specific dollar limitsassociated with indemnifications. In general, the term of the indemnificationswill correspond to the contract term such that the harm or damage must occurduring the contract period. Therefore, claims may be raised after completion ofthe contract associated with the indemnification provision, but the damage musthave been caused during the contract term. As a prime contractor under certaincontracts, we are responsible for the performance of our subcontractors andwould be required to arrange for performance in the event the subcontractorsfailed to perform. However, we would retain our right to enforce thesubcontracts and to seek damages for nonperformance from our subcontractors. Alimited number of our contracts include liquidated damages provisions, whichwould require us to make per diem payments for late deliveries. Further, ourobligations under these agreements may be limited in terms of time and/oramount and, in some instances, we may have recourse against third parties,including our subcontractors, for certain payments made by us. It is notpossible to predict the maximum potential amount of future payments under theseindemnification agreements due to the conditional nature of our obligations andthe unique facts of each particular agreement.

We have agreed to numerous indemnification provisionsin connection with the Victoria TTA contract. As the prime contractor for theVictoria TTA contract, Kamco is the beneficiary of correspondingindemnifications obligations by its subcontractors. Subject to a number ofexclusions, Kamco’s maximum liability is capped at $73.2 million($100 million AUD). Under the Victoria TTA contract, liquidated damages,for which Kamco may be liable, are assessed at $36,587 ($50,000 AUD) per dayfor each day the specified phase completion is behind schedule, but are limitedto $7.3 million ($10 million AUD). The first $3.7 million($5 million AUD) in liquidated damages is split evenly amongst Kamco andcertain subcontractors. The next $3.7 million ($5 million AUD) isapportioned based on responsibility for the delay. In addition, we have a totalof $32.9 million ($45 million AUD) letters of credit issued againstthe new facility as surety bonds to ensure due and proper performance of ourobligations under the Victoria TTA contract.

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

Our cash and cash equivalents totaled $74.1 millionand $59.7 million at June 30, 2006, and 2005, respectively.

**IMPACTOF INFLATION AND CHANGING PRICES**

Inflationaryincreases in costs have not been material in recent years and, to the extentpermitted by competitive pressures, are passed on to clients through increasedbilling rates. Rates charged by us are based on the cost of labor and marketconditions within the industry.

**Item3.           Quantitative andQualitative Disclosures About Market Risk**

We do not engagein trading market risk, sensitive instruments or purchasing hedging instrumentsor “other than trading” instruments that are likely to expose us to marketrisk, whether interest rate, foreign currency exchange, and commodity price orequity price risk. We have not purchased options or entered into swaps orforward or futures contracts. However, on October 20, 2005, our Board ofDirectors approved our foreign exchange risk management policy, which allows usto invest in hedging instruments for the purpose of hedging foreign currencyrisk.

*InterestRate Risk*

We investprimarily in U.S. government obligations as well as corporate bonds andtax-exempt municipal bonds. As a result, our primary market risk exposure isthat of interest rate risk to our investments, which would affect the carryingvalue of

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those investments. During2004, the United States Federal Reserve Board began increasing benchmarkinterest rates and at the June 2006 meeting of the Federal Open MarketCommittee increased rates for the seventeenth time, a total of 425 basispoints. A significant increase in interest rates would increase the rate ofreturn on our cash and cash equivalents, but would have a negative impact onthe carrying value of our marketable securities. Our interest income wouldchange by approximately $0.7 million for the six months ended June 30,2006 and 2005, respectively, for each 100 basis point increase or decreasein interest rates. The fair value of our investment portfolio at June 30,2006 would decrease by approximately $0.6 million for a 100 basis pointincrease or decrease in rates, compared to a change of $1.4 million for anincrease or decrease of 100 basis points at June 30, 2005. The fair value ofour investment portfolio at December 31, 2005 would decrease byapproximately $1.0 million for a 100 basis point increase in rates and increaseby approximately $0.9 million for each 100 basis point decrease in rates.

Changes in marketrates and the related impact on the fair value of our investments would notgenerally affect net income as our investments are fixed rate securities andare classified as available-for-sale. Investments classified as available-for-saleare carried at fair value with unrealized gains and losses recorded as acomponent of accumulated other comprehensive loss in the accompanyingconsolidated balance sheets. However, when the investments are sold, theunrealized losses are recorded as realized losses and included in net income inthe accompanying consolidated statements of income.

As ofJune 30, 2006 we held available-for-sale securities that had aggregategross unrealized losses of approximately $1.0 million, which represents adecrease of approximately $0.2 million and $0.1 million from December 31,2005 and June 30, 2005, respectively. In November 2005, the FASB issuedStaff Position No. FAS 115-1 (“FSP 115-1”), “The Meaning ofOther-Than-Temporary Impairment and its Application to Certain Investments.”FSP 115-1 provides accounting guidance for determining and measuringother-than-temporary impairments of debt and equity securities, and confirmsthe disclosure requirements for investments in unrealized loss positions asoutlined in EITF 03-01. We analyze our investments for impairments on anongoing basis. Factors considered in determining whether a loss is temporaryinclude the length of time and extent to which the securities have been in anunrealized loss position and our ability and intent to hold the investment fora period of time sufficient to allow for any anticipated market recovery. Allsuch securities have been in a continuous unrealized loss position for lessthan 12 months, except for the $13.9 million of long-term Marketablesecurities included in the accompanying unaudited condensed consolidatedbalance sheet. As of June 30, 2006, we have classified these securities aslong-term as they have been in an unrealized loss position for more than 12months and mature beyond June 30, 2007. We believe that the impairments tothese investments are not other-than-temporary at this time as these securitiesare all highly rated investments which have been subject to routine marketchanges that have not been significant to date and we have the ability andintent to hold these investments for a period of time sufficient to allow forthe anticipated market recovery.

*ForeignCurrency Ris*k

We transactbusiness in the UK, Canada, India, and Australia and as a result have exposureassociated with movement in foreign currency exchange rates. For the three andsix months ended June 30, 2006, the fluctuation in foreign currencyexchange rates negatively impacted operating income by approximately $0.4million and $0.5 million, respectively, as compared to the same periods in2005. Relative to the foreign currency exposures existing at June 30,2006, a 10% unfavorable movement would have resulted in an additional $2.2million and $4.3 million reduction of operating income for the three and six monthsended June 30, 2006. Net revenues derived from our foreign operationstotaled approximately 5% of our total revenues for the three and six monthsended June 30, 2006, respectively, and totaled approximately 6% for boththe three and six months ended June 30, 2005, respectively. We have adopted apolicy allowing and governing the hedging of foreign currency; however, as ofJune 30, 2006, we had not engaged in any hedging transactions.

**Item4.           Controls andProcedures**

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

We maintaindisclosure controls and procedures designed to ensure that information requiredto be disclosed in reports filed under the Securities Exchange Act of 1934, asamended, is recorded, processed and summarized and reported within thespecified time periods. Our management, with the participation of our ExecutiveVice President of Finance and Administration and Chief Financial Officer, whois also our Interim President and Chief Executive Officer, evaluated theeffectiveness of our disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Exchange Act) as ofJune 30, 2006. Based on this evaluation, our Interim President and ChiefExecutive Officer, Executive Vice President of Finance and Administration andChief Financial Officer concluded that, as of June 30, 2006, our disclosurecontrols and procedures were (1) designed to ensure that materialinformation relating to us, including our consolidated subsidiaries, is madeknown to our Interim President and Chief Executive Officer and our ExecutiveVice President of Finance and Administration and Chief Financial Officer byothers within these entities, particularly during the period in which thisreport was being prepared, and (2) effective, in that they providereasonable assurance that information required to be disclosed by us in thereports that we file

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or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules andforms.

**Changesin Internal Control Over Financial Reporting**

During the threemonths ended June 30, 2006, except as indicated below, there have not beenany significant changes in our internal controls over financial reporting (asdefined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting. As has been previously reported, weare in the process of implementing a PeopleSoft Enterprise Resource Planning (“ERP”)system for the majority of our processes and operations. During the SecondQuarter of 2006, we essentially completed the phase in of the  Time Reporting, Contracts Management, ProjectAccounting, and Billing modules for our North American Services. We believe thephased-in approach we are taking reduces the risks associated with making thesechanges. We believe that internal controls over financial reporting related tothese system and process changes were effective as of June 30, 2006. We plan tocontinue the roll out of these modules in a deliberate phased approach toensure internal controls over financial reporting remain effective.

**Keane, Inc.**

**Part II.    Other Information**

**Item1A.    Risk Factors**

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

**Our “One Keane” Transformationinitiative may not be successfully implemented, which could materially affectour results of operations.**   We have recently undertaken the early stages of amulti-faceted internal reorganization, which we call the “One KeaneTransformation.” Our goals in implementing the One Keane Transformationinclude: the replacement of our current regional operations structure with anoverlapping structure including regional client relationship organizations,delivery organizations based on business lines (such as applications servicesand business transformation services) and vertical industry expertise(including financial services and health care) and global shared services forsales and human resources, aimed at lowering cost. We expect that the One KeaneTransformation will be an ongoing process over the next 6-12 months andwill touch all areas of Keane, requiring significant internal resources,including significant attention from our management. If we are unable to successfullyimplement the One Keane Transformation, or a successful implementation does notachieve our stated objectives, it could result in loss of employee morale, aninability to lower our delivery costs and compete in the global market, andcould materially affect our results of operations.

**Our engagement with Melbourne,Victoria Transport Ticketing Authority, or Victoria TTA contract, exposes us toa number of different risks inherent in such long-term, large-scale, fixed-feeprojects.**   We have been awarded a contract to perform services inrelation to the development, operation and maintenance of a public transportticketing system for the state of Victoria, Australia. This engagement willrequire significant management attention and financial resources, and couldadversely affect our results of operations in a number of ways. These include:

·              initial costs could potentiallyresult in lower operating margins for the project in the beginning stages;

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

·              dependence on subcontractors andpotential subcontractor non-performance;

·                                               atcertain times, the TTA may terminate the Victoria TTA contract for convenience,subject to certain termination fees and for events of default, subject to ourwholly-owned subsidiary Kamco’s right to cure;

·                                               complexitiesin interpreting and delivering the broad range of functional and technicalrequirements required under the project contract;

·                                               difficultiesin working with multiple parties in defining these functional and technicalrequirements and achieving acceptance of deliverables;

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·              project delays could expose us toliquidating damages;

·              fluctuations in foreign currencyexchange rates;

·                                               theadditional liability we have undertaken both to guarantee performance of oursubsidiary under the contract and the entrance into performance and securitybonds under our credit facility.

**Our quarterlyoperating results have varied, and are likely to continue to varysignificantly. This may result in volatility in the market price of our commonstock.**   We have experienced and expect tocontinue to experience fluctuations in our quarterly results. Our gross marginsvary based on a variety of factors including employee utilization rates and thenumber and type of services performed during a particular period. A variety offactors influence our revenue in a particular quarter, including:

·              general economic conditions, whichmay influence investment decisions or cause downsizing;

·              the number and requirements ofclient engagements;

·              employee utilization rates;

·              changes in the rates we can chargeclients for services;

·              acquisitions; and

·              other factors, many of which arebeyond our control.

A significant portion of our expenses does not varyrelative to revenue. As a result, if revenue in a particular quarter does notmeet expectations, our operating results could be materially adverselyaffected, which in turn may have a material adverse impact on the market priceof our common stock. In addition, many of our engagements are terminablewithout client penalty. An unanticipated termination of a major project couldresult in an increase in underutilized employees and a decrease in revenue andprofits.

**We continue toposition ourselves to achieve increasing percentages of revenues and growththrough outsourcing. If we are successful in obtaining new outsourcingcontracts, we may experience increased pressure on our overall margins duringthe early stages of these contracts.**   This strategy could result in higher concentrationsof revenues and contributions to income from a smaller number of larger clientscontracting for customized outsourcing solutions. If we were to receive ahigher concentration of our revenues from a smaller number of clients, ourrevenues could decrease significantly if one or more of these clients decreasedtheir spending. Outsourcing contracts are generally long-term contracts thatrequire additional staffing in the initial phases of the contract period, whichoften results in lower gross margins at the beginning of these contracts.

**Ifour clients are not satisfied with our services, we may have exposure toliabilities, which could adversely affect our profitability and financialcondition as well as our ability to compete for future work.**   Ifwe fail to meet our contractual obligations, we could be subject to legalliability, which could adversely affect our business, operating results andfinancial condition. The provisions we typically include in our contracts thatare designed to limit our exposure to legal claims relating to our services andthe applications we develop may not protect us or may not be enforceable undersome circumstances or under the laws of some jurisdictions. It is possible,because of the nature of our business, that we will be sued in the future. Inaddition, although we maintain professional liability insurance, the policylimits may not be adequate to provide protection against all potentialliabilities. Moreover, as a consulting firm, we depend to a large extent on ourrelationships with our clients and our reputation for high-quality services toretain and attract clients and employees. As a result, claims made against ourwork may damage our reputation, which in turn, could impact our ability tocompete for new work and negatively impact our revenue and profitability.

**Thetermination of a contract by a significant client could reduce our revenue andprofitability or adversely affect our financial condition.  **Ourfive largest clients, excluding the federal government, accounted forapproximately 25.1% and 23.6% of our revenue for the three and six months endedJune 30, 2006, respectively, although no individual client accounted for morethan 7.2% and 6.7%, respectively, of our total revenue for either period. Thevarious agencies of the federal government represent our largest client,accounting for approximately 11.0% and 10.9% of total revenue for the three andsix months ended June 30, 2006, respectively.  We strive to develop long-term relationshipswith our clients. Most individual client 

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assignments are fromthree to twelve months; however, many of our client relationships havecontinued for many years. Our clients typically retain us on a non-exclusive,engagement-by-engagement basis. Although they may be subject to penaltyprovisions, clients may generally cancel a contract at any time. Under manycontracts, clients may reduce their use of our services under such contractwithout penalty. In addition, contracts with the federal government containprovisions and are subject to laws and regulations that provide the federalgovernment with rights and remedies not typically found in commercialcontracts. Among other things, the federal government, as well as other publicsector clients, may terminate contracts with short notice, for convenience andmay cancel multi-year contracts if funds become unavailable. The TTA also hasthe ability to terminate its contract with us for convenience, subject to thepayment of termination fees.  Ifcontracts are terminated, our revenue may decline and if we are unable toeliminate associated costs in a timely manner, our profitability would decline.In the three and six months ended June 30, 2006, approximately 19.6% ofour revenue was from public sector clients, including U.S. Federal, state, andlocal governments and agencies. Often government spending programs depend uponthe budgetary capability to support such programs.  Most states must operate under a balancedbudget. As a result of such budget and deficit considerations, our existing andfuture revenues and profitability could be adversely affected by reducedgovernment IT spending.

**Unfavorablegovernment audits could require us to refund payments we have received, toforego anticipated revenue, and could subject us to penalties and sanctions.  **Thegovernment agencies we contract with generally have the authority to audit andreview our contracts with them. As part of that process, the government agencyreviews our performance on the contract, our pricing practices, our coststructure and our compliance with applicable laws, regulations and standards.If the audit agency determines that we have improperly received reimbursement,we would be required to refund any such amount. If a government audit uncoversimproper or illegal activities by us or we otherwise determine that these activitieshave occurred, we may be subject to civil and criminal penalties andadministrative sanctions, including termination of contracts, forfeitures ofprofits, suspension of payments, fines and suspension or disqualification fromdoing business with the government. Any such unfavorable determination couldadversely impact our ability to bid for new work.

**Wehave pursued, and intend to continue to pursue, strategic acquisitions. Failureto successfully integrate acquired businesses or assets may adversely affectour financial performance.  **In recent years, we havegrown significantly through acquisitions. From January 1, 1999 throughJune 30, 2006, we completed 17 acquisitions. The aggregate merger andconsideration costs of these acquisitions totaled approximately$437.2 million. Our future growth may be based in part on selectedacquisitions. At any given time, we may be in various stages of consideringacquisition opportunities. We may not be able to find and identify desirableacquisition targets or be successful in entering into a definitive agreementwith any one target. In addition, even if we reach a definitive agreement witha target, we may not be able to complete any future acquisition.

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

We have recorded a significant amount of goodwill andother intangible assets resulting from our acquisitions. We review our goodwilland identifiable assets for impairment in accordance with SFAS 142 and SFASNo. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal ofLong-Lived Assets,” respectively. If the estimated future cash flows of thereporting units related to the underlying assets are not sufficient to supportthe carrying value of the associated underlying assets, we may be required torecord impairment charges related to goodwill and other intangible assets. Anymaterial loss resulting from an impairment charge could have a material adverseeffect on our results of operations. As of June 30, 2006, our goodwilltotaled $315.8 million, customer lists totaled $35.1 million and otherintangible assets totaled $4.5 million.

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

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

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

In the healthcare software systems market, we competewith some companies that are larger in the healthcare market and have greaterfinancial resources than we do. We believe that significant competitive factorsin the healthcare software systems market include size and demonstrated abilityto provide service to targeted healthcare markets.

We may not be able to compete successfully againstcurrent or future competitors. In addition, competitive pressures maymaterially adversely affect our business, financial condition, and results ofoperations.

**Weconduct business in the UK, Canada, India, and Australia, which exposes us to anumber of difficulties inherent in international activities.**  We have four software development facilitiesin India. As of June 30, 2006, we had approximately 2,545 technicalprofessionals in the India, including those at Keane Worldzen. India iscurrently experiencing conflicts with Pakistan over the disputed territory ofKashmir as well as clashes between different religious groups within thecountry. These conflicts, in addition to other unpredictable developments inthe political, economic, and social conditions in India, could eliminate orreduce the availability of these development and professional services. Ifaccess to these services were to be unexpectedly eliminated or significantlyreduced, our ability to meet development objectives important to our strategyto add offshore delivery capabilities to the services we provide would behindered, and our business could be harmed.

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

Our operations in the UK, Canada, India and Australiaare subject to currency exchange rate fluctuations, foreign exchangerestrictions, changes in taxation, and other difficulties in managingoperations internationally and overseas. We may not be successful in managingour international operations. In addition, there has been political discussionand debate related to worldwide competitive sourcing, particularly from theUnited States to offshore locations. There is proposed federal and statelegislation currently pending related to this issue. It is too early todetermine whether or in what form this legislation will be adopted; however,future legislation, if enacted, could have an adverse effect on our business,results of operations and financial condition.

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

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

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

**Wemay be prohibited from repurchasing, and may not have the financial resourcesto repurchase, our Debentures on the date for repurchase at the option of theholder or upon a designated event, as required by the indenture governing ourDebentures, which could cause defaults under our senior revolving creditfacility and any other indebtedness we may incur in the future.  **TheDebenture holders have the right to require us to repurchase all or a portionof their Debentures on June 15, 2008. The Debenture holders may alsorequire us to repurchase all or a portion of their Debentures upon a designatedevent, as defined in the indenture governing the Debentures. If the Debentureholders elect to require us to repurchase their Debentures on any of the abovedates or if a designated event were to occur, we may not have enough funds topay the repurchase price for all tendered Debentures. We are currentlyprohibited under our senior revolving credit facility from 

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repurchasing anyDebentures if a designated event were to occur. We may also be prohibited underany indebtedness we may incur in the future from purchasing any Debenturesprior to their stated maturity. In these circumstances, we will be required torepay the entire outstanding principal of, and pay any accrued and unpaidinterest on, such indebtedness or to obtain the requisite consents from theholders of any such indebtedness to permit the repurchase of the Debentures. Ifwe are unable to repay all of such indebtedness or are unable to obtain thenecessary consents, we will be unable to offer to repurchase the Debentures,which would constitute an event of default under the indenture for theDebentures, which itself could constitute a default under our senior revolvingcredit facility or under the terms of any future indebtedness that we mayincur. In addition, the events that constitute a designated event under theindenture for the Debentures are events of default under our senior revolvingcredit facility and may also be events of default under other indebtedness thatwe may incur in the future.

**Weincurred indebtedness when we sold our Debentures. We may incur additionalindebtedness in the future. The indebtedness created by the sale of ourDebentures, and any future indebtedness, could adversely affect our businessand our ability to make full payment on the Debentures.  **Ouraggregate level of indebtedness increased in connection with the sale of ourDebentures. As of June 30, 2006, we had approximately $189.3 millionof outstanding indebtedness and had the ability to incur additional debt underour revolving credit facility. We may also obtain additional long-term debt andworking capital lines of credit to meet future financing needs, which wouldhave the effect of increasing our total leverage. Any increase in our leveragecould have significant negative consequences, including:

·              increasing our vulnerability toadverse economic and industry conditions;

·              limiting our ability to obtainadditional financing;

·              limiting our ability to makeacquisitions;

·                                              requiringthe dedication of a substantial portion of our cash flow from operations toservice our indebtedness, thereby reducing the amount of our cash flowavailable for other purposes, including capital expenditures;

·                                              limitingour flexibility in planning for, or reacting to, changes in our business andthe industries in which we compete; and

·                                                placingus at a possible competitive disadvantage with less leveraged competitors andcompetitors that may have better    access to capital resources.

Our ability tosatisfy 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 notgenerate sufficient cash flow to meet these obligations or to successfullyexecute our business strategy. If we are unable to service our debt and fundour business, we may be forced to reduce or delay capital expenditures, seekadditional financing or equity capital, restructure or refinance our debt orsell assets. We may not be able to obtain additional financing or refinanceexisting debt or sell assets on terms acceptable to us or at all.

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**Item2.      Unregistered Sales of Equity Securities and Use of Proceeds**

(c)           Thefollowing table provides information about purchases by Keane during the sixmonths ended June 30, 2006 of equity securities that are registered by Keanepursuant to Section 12 of the Exchange Act:

**ISSUER PURCHASES OF EQUITY SECURITIES**
| **Period**        | ** ** | **(a)  Total Number of  Shares (or Units)  Purchased  (1)** | ** ** | **(b)  Average Price  Paid per Share  (or Unit)** | ** ** | **(c)  Total Number of  Shares Purchased  as Part of Publicly  Announced Plans  or Programs  (2)** | ** ** | **(d)  Maximum Number of  Shares that May Yet Be  Purchased Under the  Plans or Programs  (2)** | ** ** |
|-------------------|------------|---------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 04/01/06-04/30/06 |       | —                                                                          |       | $                                                                | —     |                                                                                                                                       | —     |                                                                                                                                              | 2,183,400  |   |
| 05/01/06-05/31/06 |       | 366,661                                                                         |       | $                                                                | 13.91      |                                                                                                                                       | 356,300    |                                                                                                                                              | 1,827,100  |   |
| 06/01/06-06/30/06 |       | —                                                                          |       | $                                                                | —     |                                                                                                                                       | —     |                                                                                                                                              | —     |   |
| Total:            |       | 366,661                                                                         |       | $                                                                | 13.91      |                                                                                                                                       | 356,300    |                                                                                                                                              | 1,827,100  |   |

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(1)             Includesthe repurchase by the Company of 10,361 shares to cover the minimum statutorytax liability related to the vesting of restricted stock awards held by anexecutive of the Company. This repurchase was not pursuant to a publiclyannounced program.

(2)             OnOctober 25, 2005, we announced the approval by our Board of Directors of aprogram for the repurchase of 3.0 million shares of our common stock. Therepurchases may be made on the open market or in negotiated transactions, andthe timing and amount of shares to be purchased will be determined by ourmanagement based on its evaluation of market and economic conditions and otherfactors. Unless terminated earlier by resolution of our Board of Directors, theOctober 2005 program will expire upon the earlier of the date werepurchase all shares authorized for repurchase thereunder or October 25,2006.

**Item4.      Submission of Matters to a Vote of Security Holders**

The following matters were submitted to a vote of thestockholders at our 2006 Annual Meeting of Stockholders held on May 18, 2006(the “Annual Meeting”):  (1) to elect two Class I directors for the ensuingthree years and (2) to ratify and approve the selection of Ernst & YoungLLP as the Company’s independent registered public accounting firm for thecurrent year. The number of shares of common stock outstanding and eligible tovote as of the record date of March 27, 2006 was 58,284,326.  Each ofthese matters was approved by the requisite vote of our stockholders. Set forthbelow is the number of votes cast for, against, or withheld, as well as thenumber of abstentions and broker non-votes as to the respective matter,including a separate tabulation with respect to each nominee for director.

**Proposal1: electing three Class I directors for the ensuing three years**

| Nominees           | ** ** | **For**    | ** ** | **Withheld** |
|--------------------|------------|------------|------------|--------------|
| Lawrence P. Begley |       | 51,582,117 |       | 2,878,666    |
| Philip J. Harkins  |       | 49,097,571 |       | 5,373,213    |

 

The Proxy Statement for the Annual Meeting alsoincluded the nomination of Brian Keane to serve as a Class I director. However,in connection with his resignation as our President and Chief Executive Officerand a member of our Board of Directors, Mr. Keane agreed not to stand forreelection at the Annual Meeting.

The other members of the Keane Board of Directorswhose terms of office continued after the Annual Meeting were, Maria A. Cirino,John H. Fain, John F. Keane, John F. Keane Jr., John F. Rockart and James D.White.

**Proposal2: ratifying and approving the selection of Ernst & Young LLP as Keane’sindependent registered public accounting firm for the current year**

| For        | ** ** | **Against** | ** ** | **Abstain** |
|------------|------------|-------------|------------|-------------|
| 53,527,167 |       | 896,888     |       | 36,729      |

 

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**Item 6.    Exhibits**
| 10.1   |   | Settlement Agreement by and between Ms. Georgina  Fisk, Keane, Inc., Mr. John Keane, Sr., Mr. John Keane, Jr. and Mr. Brian  Keane, dated June 8, 2006 (incorporated by reference to Exhibit 10.1 to the  Registrant’s Current Report on Form 8-K, dated June 8, 2006, filed on June  13, 2006). |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.2   |   | Retention Agreement by and between Keane, Inc. and  Russell J. Campanello (incorporated by reference to Exhibit 10.1 to the  Registrant’s Current Report on Form 8-K, dated June 23, 2006, filed on June  23, 2006).                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.3   |   | Retention Agreement by and between Keane, Inc. and  Richard S. Garnick (incorporated by reference to Exhibit 10.2 to the  Registrant’s Current Report on Form 8-K, dated June 23, 2006, filed on June  23, 2006).                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.4   |   | Retention Agreement by and between Keane, Inc. and  John J. Leahy (incorporated by reference to Exhibit 10.3 to the Registrant’s  Current Report on Form 8-K, dated June 23, 2006, filed on June 23, 2006).                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 10.5   |   | Retention Agreement by and between Keane, Inc. and  Laurence D. Shaw (incorporated by reference to Exhibit 10.4 to the  Registrant’s Current Report on Form 8-K, dated June 23, 2006, filed on June  23, 2006).                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                  |
| 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 and Chief Financial Officer.                                                                                                                                                                                    |

 

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**Signatures**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                                              |   | KEANE, INC.                                                                                                                                                                                         |
|----------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                         |   | (Registrant)                                                                                                                                                                                        |
|                                         |   |                                                                                                                                                                                                |
|  Date     August 8, 2006 |   | /s/ JOHN J. LEAHY                                                                                                                                                                                   |
|                                         |   |                                                                                                                                                                                                |
|                                         |   | John J. Leahy  Executive Vice President of Finance and  Administration and Chief Financial Officer  (Principal Financial and Accounting Officer)  and Interim President and Chief Executive Officer |

 

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**Exhibit Index**
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                       |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1            |       | Settlement Agreement by and between Ms. Georgina  Fisk, Keane, Inc., Mr. John Keane, Sr., Mr. John Keane, Jr. and Mr. Brian  Keane, dated June 8, 2006 (incorporated by reference to Exhibit 10.1 to the  Registrant’s Current Report on Form 8-K, dated June 8, 2006, filed on June  13, 2006). |
|            |       |                                                                                                                                                                                                                                                                                                  |
| 10.2            |       | Retention Agreement by and between Keane, Inc. and  Russell J. Campanello (incorporated by reference to Exhibit 10.1 to the  Registrant’s Current Report on Form 8-K, dated June 23, 2006, filed on June  23, 2006).                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                  |
| 10.3            |       | Retention Agreement by and between Keane, Inc. and  Richard S. Garnick (incorporated by reference to Exhibit 10.2 to the  Registrant’s Current Report on Form 8-K, dated June 23, 2006, filed on June  23, 2006).                                                                                |
|            |       |                                                                                                                                                                                                                                                                                                  |
| 10.4            |       | Retention Agreement by and between Keane, Inc. and  John J. Leahy (incorporated by reference to Exhibit 10.3 to the Registrant’s  Current Report on Form 8-K, dated June 23, 2006, filed on June 23, 2006).                                                                                      |
|            |       |                                                                                                                                                                                                                                                                                                  |
| 10.5            |       | Retention Agreement by and between Keane, Inc. and  Laurence D. Shaw (incorporated by reference to Exhibit 10.4 to the  Registrant’s Current Report on Form 8-K, dated June 23, 2006, filed on June  23, 2006).                                                                                  |
|            |       |                                                                                                                                                                                                                                                                                                  |
| 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 and Chief Financial Officer.                                                                                                                                                                                    |

 

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