**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**(Mark One)**
| **ý**** QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|--------------------------------------------------------------------------------------------------------------|

 

**For the quarter ended March 31, 2003**

 

**OR**

** **
| **o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|----------------------------------------------------------------------------------------------------|

 

**For the transition periodfrom                  to                  **

 

**Commission File Number 1-7516**

 

**KEANE, INC.**

(Exact name of registrant as specified in its charter)

 

| **MASSACHUSETTS**                                                                 |   | **04-2437166**                           |
|-----------------------------------------------------------------------------------|--------|------------------------------------------|
| (State or other jurisdictions of  incorporation or organization)                  |   | (I.R.S. Employer Identification  Number) |
|                                                                              |   |                                     |
| **100  City Square, Boston, Massachusetts**                                       |   | **02129**                                |
| (Address of principal executive offices)                                          |   | (Zip Code)                               |
|                                                                              |   |                                     |
| Registrant’s telephone 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 the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes (ý)No (o)

 

Indicate by check markwhether the registrant is an accelerated filer as defined in Rule 12b-2 of theSecurities Exchange Act of 1934, as amended. Yes (ý) No (o)

 

As of March 31, 2003, thenumber of issued and outstanding shares of Common Stock (excluding 9,105,432shares held in treasury) and Class B Common Stock are 66,439,959 and 284,599shares, respectively.

 

 

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**Keane, Inc. and Subsidiaries**

**Table of Contents**

 
| **Part 1**     | ** Financial  Information**                                                                               |
|----------------|----------------------------------------------------------------------------------------------------------------|
|           |                                                                                                           |
| Item 1.        | Unaudited  Condensed Consolidated Balance Sheets as of March 31, 2003 and December 31,  2002                   |
|           |                                                                                                           |
|           | Unaudited  Condensed Consolidated Statements of Income for the three months ended March  31, 2003 and 2002     |
|           |                                                                                                           |
|           | Unaudited  Condensed Consolidated Statements of Cash Flows for the three months ended  March 31, 2003 and 2002 |
|           |                                                                                                           |
|           | 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 1.        | Legal  Proceedings                                                                                             |
|           |                                                                                                           |
| Item 5.        | Other  Information                                                                                             |
|           |                                                                                                           |
| Item  6.       | Exhibits  and Reports on Form 8-K                                                                              |
|           |                                                                                                           |
| Signature Page |
|           |                                                                                                           |
| Certifications |

 

2

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**Keane, Inc. and Subsidiaries**

**Part I  FinancialInformation**

 

**Item1.  Financial Statements****Condensed Consolidated Balance Sheets**

** **
|                                            |   | **March 31,  2003** |    | **December 31,  2002** |   |
|-------------------------------------------------|--------|---------------------|---------|------------------------|--------|
|                                            |   | **(Unaudited)**     |    | **(See Note A)**       |   |
|                                            |   | **(In thousands)**  |    |
| **Assets**                                      |   |                |    |                   |   |
| Current:                                        |   |                |    |                   |   |
| Cash and cash  equivalents                      |   | $                   | 23,885  |                   | $      | 46,383 |   |
| Marketable securities                           |   | 30,526              |    | 21,872                 |   |
| Accounts receivable,  net:                      |   |                |    |                   |   |
| Trade                                           |   | 135,451             |    | 129,432                |   |
| Other                                           |   | 1,063               |    | 1,004                  |   |
| Prepaid expenses and  deferred taxes            |   | 40,321              |    | 37,430                 |   |
| Total current assets                            |   | 231,246             |    | 236,121                |   |
|                                            |   |                |    |                   |   |
| Property and equipment,  net                    |   | 25,581              |    | 24,729                 |   |
| Building                                        |   | 40,888              |    | 40,888                 |   |
| Goodwill                                        |   | 276,865             |    | 277,435                |   |
| Customer lists, net                             |   | 66,372              |    | 69,193                 |   |
| Other intangible  assets, net                   |   | 16,409              |    | 17,613                 |   |
| Deferred taxes and  other assets, net           |   | 18,304              |    | 19,695                 |   |
|                                            |   | $                   | 675,665 |                   | $      | 685,674 |   |
| **Liabilities**                                 |   |                |    |                   |   |
| Current:                                        |   |                |    |                   |   |
| Accounts payable                                |   | 12,472              |    | 11,986                 |   |
| Accrued expenses and  other liabilities         |   | 36,910              |    | 34,917                 |   |
| Accrued building costs                          |   | 298                 |    | 234                    |   |
| Accrued restructuring                           |   | 12,587              |    | 13,694                 |   |
| Accrued compensation                            |   | 37,937              |    | 36,346                 |   |
| Notes payable                                   |   | 3,100               |    | 3,100                  |   |
| Accrued income taxes                            |   | 5,415               |    | 81                     |   |
| Unearned income                                 |   | 7,224               |    | 11,535                 |   |
| Current capital lease  obligations              |   | 794                 |    | 887                    |   |
| Total current  liabilities                      |   | 116,737             |    | 112,780                |   |
|                                            |   |                |    |                   |   |
| Accrued long-term  building costs               |   | 40,590              |    | 40,654                 |   |
| Accrued long-term  restructuring                |   | 10,116              |    | 12,541                 |   |
| Deferred income taxes                           |   | 28,314              |    | 28,343                 |   |
| Long-term portion of  capital lease obligations |   | 559                 |    | 772                    |   |
|                                            |   |                |    |                   |   |
| **Stockholders’  equity**                  |   |                |    |                   |   |
| Common stock                                    |   | 7,555               |    | 7,555                  |   |
| Class B common stock                            |   | 28                  |    | 28                     |   |
| Additional paid-in  capital                     |   | 166,560             |    | 166,598                |   |
| Accumulated other  comprehensive income         |   | (1,583              | )       | (1,411                 | )      |
| Retained earnings                               |   | 380,103             |    | 369,542                |   |
| Less treasury stock, at  cost                   |   | (73,314             | )       | (51,728                | )      |
| Total stockholders’  equity                |   | 479,349             |    | 490,584                |   |
|                                            |   | $                   | 675,665 |                   | $      | 685,674 |   |

 

*Theaccompanying notes are an integral part of the consolidated financialstatements.*

 

3

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**Keane, Inc. and SubsidiariesCondensed Consolidated Statementsof Income (Unaudited)**

** **
|                                                                               |   | **Three Months Ended March 31,**             |    |
|------------------------------------------------------------------------------------|--------|----------------------------------------------|---------|
|                                                                               |   | **2003**                                     |    | **2002** |   |
|                                                                               |   | **(In Thousands Except Per Share  Amounts)** |    |
|                                                                               |   |                                         |    |   |   |
| Total revenues                                                                     |   | $                                            | 204,662 |   | $ | 221,259 |   |
| Salaries, wages, and  other direct costs                                           |   | 142,431                                      |    | 157,833 |   |
| Selling, general, and  administrative expenses                                     |   | 48,075                                       |    | 52,291 |   |
| Amortization of  intangible assets                                                 |   | 4,047                                        |    | 3,308 |   |
| Operating income                                                                   |   | 10,109                                       |    | 7,827 |   |
|                                                                               |   |                                         |    |   |   |
| Interest and dividend  income                                                      |   | 348                                          |    | 1,024 |   |
| Interest expense                                                                   |   | 33                                           |    | 67 |   |
| Other (income), net                                                                |   | (7,177                                       | )       | (470 | ) |
| Income before income  taxes                                                        |   | 17,601                                       |    | 9,254 |   |
|                                                                               |   |                                         |    |   |   |
| Provision for income  taxes                                                        |   | 7,040                                        |    | 3,701 |   |
|                                                                               |   |                                         |    |   |   |
| Net income                                                                         |   | $                                            | 10,561  |   | $ | 5,553 |   |
|                                                                               |   |                                         |    |   |   |
| Net income per share  (basic)                                                      |   | $                                            | 0.15    |   | $ | 0.07 |   |
|                                                                               |   |                                         |    |   |   |
| Net income per share  (diluted)                                                    |   | $                                            | 0.15    |   | $ | 0.07 |   |
|                                                                               |   |                                         |    |   |   |
| Weighted average common  shares outstanding (basic)                                |   | 69,072                                       |    | 75,727 |   |
| Weighted average common  shares and common share equivalents outstanding (diluted) |   | 69,106                                       |    | 76,670 |   |

 

*Theaccompanying notes are an integral part of the consolidated financialstatements.*

 

4

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**Keane, Inc. and Subsidiaries**

**CondensedConsolidated Statements of Cash Flows****(Unaudited)**

 
|                                                                                                            |   | **Three Months Ended March 31,** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                                            |   | **2003**                         |   | **2002** |   |
|                                                                                                            |   | **(In Thousands)**               |   |
| **Cash flows from operating activities:**                                                                       |   |                             |   |   |   |
| Net  income                                                                                                     |   | $                                | 10,561 |   | $ | 5,553 |   |
| Adjustments  to reconcile net income to net cash provided by (used for) operating  activities:                  |   |                             |   |   |   |
| Depreciation  and amortization                                                                                  |   | 6,679                            |   | 5,937 |   |
| Deferred  income taxes                                                                                          |   | (561                             | )      | (882 | ) |
| Provision  for doubtful accounts, net                                                                           |   | (666                             | )      | (64 | ) |
| (Gain)  loss on sale of property and equipment                                                                  |   | (18                              | )      | 113 |   |
| Changes  in operating assets and liabilities, net of acquisitions:                                              |   |                             |   |   |   |
| Increase  in accounts receivable                                                                                |   | (5,412                           | )      | (4,675 | ) |
| Increase  in prepaid expenses and other assets                                                                  |   | (1,670                           | )      | (6,823 | ) |
| Decrease  in accounts payable, accrued expenses, accrued restructuring, unearned  income, and other liabilities |   | (2,914                           | )      | (5,344 | ) |
| Increase  in income taxes payable                                                                               |   | 6,036                            |   | 3,503 |   |
| **Net cash provided by (used for) operating activities**                                                        |   | 12,035                           |   | (2,682 | ) |
|                                                                                                            |   |                             |   |   |   |
| **Cash flows from investing activities:**                                                                       |   |                             |   |   |   |
| Purchase  of investments                                                                                        |   | (9,964                           | )      | (9,141 | ) |
| Sale  and maturities of investments                                                                             |   | 1,310                            |   | 47,654 |   |
| Purchase  of property and equipment                                                                             |   | (2,856                           | )      | (2,652 | ) |
| Proceeds  from the sale of property and equipment                                                               |   | 59                               |   | 14 |   |
| Payments  for current year acquisitions                                                                         |   | —                           |   | (62,861 | ) |
| Payments  for prior years acquisitions                                                                          |   | (903                             | )      | — |   |
| **Net cash used for investing activities**                                                                      |   | (12,354                          | )      | (26,986 | ) |
|                                                                                                            |   |                             |   |   |   |
| **Cash flows from financing activities:**                                                                       |   |                             |   |   |   |
| Principal  payments under capital lease obligations                                                             |   | (263                             | )      | (289 | ) |
| Proceeds  from issuance of common stock                                                                         |   | 1,942                            |   | 3,576 |   |
| Repurchase  of common stock                                                                                     |   | (23,574                          | )      | — |   |
| **Net cash (used for) provided by financing activities**                                                        |   | (21,895                          | )      | 3,287 |   |
|                                                                                                            |   |                             |   |   |   |
| Effect  of exchange rate changes on cash                                                                        |   | (284                             | )      | (365 | ) |
| Net  decrease in cash and cash equivalents                                                                      |   | (22,498                          | )      | (26,746 | ) |
| Cash  and cash equivalents at beginning of period                                                               |   | 46,383                           |   | 65,556 |   |
| **Cash and cash equivalents at end of period**                                                                  |   | $                                | 23,885 |   | $ | 38,810 |   |
|                                                                                                            |   |                             |   |   |   |
| **Supplemental Information:**                                                                                   |   |                             |   |   |   |
| Income  taxes paid                                                                                              |   | $                                | 1,052  |   | $ | 398 |   |

 

*Theaccompanying notes are an integral part of the consolidated financialstatements.*

 

5

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**Keane, Inc. and Subsidiaries**

**Notes to Unaudited Condensed Consolidated FinancialStatements**

(In Thousands Except Per Share Amounts)

 
| **Note  A.** | **Basis  of Presentation**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         | The accompanying  unaudited condensed consolidated financial statements have been prepared in  accordance with generally accepted accounting principles for interim  financial information and, accordingly, they do not include all of the  information and footnotes required by generally accepted accounting principles  for complete financial statements.  In  the opinion of management, all adjustments considered necessary for a fair  presentation of the results of operations for the interim periods reported  and of the Company’s financial condition as of the date of the interim  balance sheet have been included.   Operating results for the three-month period ended March 31, 2003 are  not necessarily indicative of the results that may be expected for the year  ending December 31, 2003 or for any other period. |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|         | The balance  sheet at December 31, 2002 has been derived from the audited financial  statements at that date, but does not include all of the information and  footnotes required by generally accepted accounting principles for complete  financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|         | Certain  reclassifications have been made to the 2002 financial statements to conform  to the 2003 presentation.  Such  reclassifications have no effect on previously reported net income or  stockholders’ equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|         | For further  information, refer to the consolidated financial statements and footnotes  thereto included in the Company’s Annual Report on Form 10-K for the year  ended December 31, 2002 and filed with the Securities and Exchange Commission  on March 26, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **Note  B.** | **Earnings  Per Share Data**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|         | Computation of  net income per share for the three months ended March 31, 2003 and 2002 is as  follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 
|                                                                                                     |   | **Three Months Ended March 31,** |   |
|----------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                                     |   | **2003**                         |   | **2002** |   |
| Net income                                                                                               |   | $                                | 10,561 |   | $ | 5,553 |   |
|                                                                                                     |   |                             |   |   |   |
| Weighted average number  of common shares outstanding used in calculation of basic earnings per share    |   | 69,072                           |   | 75,727 |   |
| Incremental shares from  the assumed exercise of dilutive stock options                                  |   | 34                               |   | 943 |   |
| Weighted average number  of common shares outstanding used in calculation of diluted earnings per  share |   | 69,106                           |   | 76,670 |   |
|                                                                                                     |   |                             |   |   |   |
| Earnings per share                                                                                       |   |                             |   |   |   |
| Basic                                                                                                    |   | $                                | 0.15   |   | $ | 0.07 |   |
|                                                                                                     |   |                             |   |   |   |
| Diluted                                                                                                  |   | $                                | 0.15   |   | $ | 0.07 |   |

 
| **Note  C.** | **Stock-Based  Compensation**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         | The Company’s  stock-based compensation plans provide for grants of stock options to  employees, officers and directors of, and consultants and advisors to, the  Company at a purchase price of not less than 100% of the fair market value of  the Company’s stock on the date of grant.   This stock-based compensation is accounted for utilizing the intrinsic  value method in accordance with the provisions of Accounting Principles Board  Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees,” |

 

6

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|   | and related  Interpretations.  As such, the Company  does not recognize stock-based compensation expense in its calculation of net  income as reported in its condensed consolidated financial statements.                                                                                                                                                       |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                  |
|   | Had the Company  accounted for stock-based compensation utilizing the fair value method and  provisions proscribed in Statement of Financial Accounting Standards No. 123  (FAS No. 123), “Accounting for Stock-Based Compensation,”**the Company’s net income and income per  share would have been reduced to the pro forma amounts indicated below: |

 
|                                                                                                                              |   | **Three Months Ended March 31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                                                              |   | **2003**                         |   | **2002** |   |
| Net income - as  reported                                                                                                         |   | $                                | 10,561 |   | $ | 5,553 |   |
| Less: Total stock-based  employee compensation expense determined under the fair value method for all  awards, net of tax effects |   | 2,080                            |   | 2,864 |   |
|                                                                                                                              |   |                             |   |   |   |
| Net income - pro forma                                                                                                            |   | $                                | 8,481  |   | $ | 2,689 |   |
|                                                                                                                              |   |                             |   |   |   |
| Net  income per share                                                                                                             |   |                             |   |   |   |
| Basic  - as reported                                                                                                              |   | $                                | 0.15   |   | $ | 0.07 |   |
| Basic  - pro forma                                                                                                                |   | $                                | 0.12   |   | $ | 0.04 |   |
|                                                                                                                              |   |                             |   |   |   |
| Diluted  - as reported                                                                                                            |   | $                                | 0.15   |   | $ | 0.07 |   |
| Diluted  - pro forma                                                                                                              |   | $                                | 0.12   |   | $ | 0.04 |   |

 
|         | The Company also  grants restricted stock for a fixed number of shares to employees for nominal  consideration.  Compensation expense  related to restricted stock awards is recorded ratably over the restriction  period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **Note  D.** | **Comprehensive  Income**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|         | Total  comprehensive income (i.e. net income plus available-for-sale securities  valuation adjustments, currency translation adjustments and adjustments  related to a foreign defined benefit plan, net of tax) for the three-month  period ended March 31, 2003 and 2002 was $10.7 million and $6.5 million,  respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **Note  E.** | **Business  Acquisitions**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|         | On March 15,  2002, Keane acquired SignalTree Solutions Holding, Inc. (SignalTree  Solutions), a privately held, United States-based corporation with two  software development facilities in India and additional operations in the  United States.  Under the terms of the  merger agreement, Keane paid $68.2 million in cash for SignalTree Solutions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         | The Company  accounted for the acquisition as a purchase, pursuant to which the assets and  liabilities of SignalTree Solutions, including intangible assets, were  recorded at their respective fair values.   All identifiable intangible assets are being amortized over their  estimated useful lives with the exception of goodwill.  The financial position, results of  operations and cash flows of SignalTree Solutions were included in the  Company’s financial statements effective as of the acquisition date.                                                                                                                                                                                                                                                                                                                          |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         | The total cost  of the acquisition was $78.9 million.   Portions of the purchase price, including intangible assets, were  identified by independent appraisers utilizing proven valuation procedures  and techniques.  Goodwill was recorded  at $41.3 million and other identified intangible assets were valued at $21.5  million.  At the date of acquisition,  the Company entered into a plan to exit certain activities and consolidate  facilities.  As a result, the Company  recorded a restructuring liability of $1.6 million related to the lease  obligations and certain other costs for the consolidated facilities.  In accordance with EITF 95-3, “Recognition  of Liabilities in Connection with a Purchase Business Combination,” these  costs have been reflected in the purchase price of the acquisition. |

 

7

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|   | The components  of the purchase price allocation are as follows: |
|--------|------------------------------------------------------------------|

 
|                                       |   | **December 31,  2002** |   | **Total****Adjustments** |   | **March 31,****2003** |   |
|--------------------------------------------|--------|------------------------|--------|--------------------------|--------|-----------------------|--------|
| **Consideration  and merger costs:**       |   |                   |   |                     |   |                  |   |
| Consideration paid                         |   | $                      | 66,927 |                     | $      | —                |   | $ | 66,927 |   |
| Transaction costs                          |   | 1,303                  |   | 5                        |   | 1,308                 |   |
| Restructuring                              |   | 1,553                  |   | —                   |   | 1,553                 |   |
| Deferred tax liability                     |   | 9,120                  |   | —                   |   | 9,120                 |   |
| **Total**                                  |   | $                      | 78,903 |                     | $      | 5                     |   | $ | 78,908 |   |
|                                       |   |                   |   |                     |   |                  |   |
| **Allocation  of purchase price:**         |   |                   |   |                     |   |                  |   |
| Net asset value  acquired                  |   | $                      | 16,133 |                     | $      | 245                   |   | $ | 16,378 |   |
| Customer lists  (seven-year life)          |   | 18,800                 |   | —                   |   | 18,800                |   |
| Non-complete agreements  (three-year life) |   | 2,700                  |   | —                   |   | 2,700                 |   |
| Goodwill                                   |   | 41,270                 |   | (240                     | )      | 41,030                |   |
| **Total**                                  |   | $                      | 78,903 |                     | $      | 5                     |   | $ | 78,908 |   |

 
|   | The following  table presents the condensed balance sheet disclosing the amounts assigned to  each of the major assets acquired and liabilities assumed of SignalTree  Solutions at the acquisition date and 2003 adjustments recorded to finalize  the purchased balance sheet: |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
|                             |   | **December 31,  2002** |   | **Total  Adjustments** |   | **March 31,  2003** |   |
|----------------------------------|--------|------------------------|--------|------------------------|--------|---------------------|--------|
| **Condensed  balance sheet:**    |   |                   |   |                   |   |                |   |
| Cash                             |   | $                      | 2,650  |                   | $      | —              |   | $ | 2,650 |   |
| Accounts receivable              |   | 7,304                  |   | —                 |   | 7,304               |   |
| Other current assets             |   | 3,562                  |   | (2                     | )      | 3,560               |   |
| Property, plant,  equipment, net |   | 8,011                  |   | (75                    | )      | 7,936               |   |
| **Total  assets**                |   | 21,527                 |   | (77                    | )      | 21,450              |   |
|                             |   |                   |   |                   |   |                |   |
| Accounts payable                 |   | 569                    |   | (16                    | )      | 553                 |   |
| Accrued compensation             |   | 1,569                  |   | —                 |   | 1,569               |   |
| Other liabilities                |   | 3,256                  |   | (306                   | )      | 2,950               |   |
| **Net  assets**                  |   | $                      | 16,133 |                   | $      | 245                 |   | $ | 16,378 |   |

 
|   | The unaudited  pro forma combined condensed statements of income below present the  historical statements of the Company and its acquisition of SignalTree Solutions  on March 15, 2002 as if the acquisition had occurred at January 1, 2002.  Unaudited pro forma combined condensed  financial information is presented for comparative purposes only and is not  necessarily indicative of the results of operations that would have actually  been reported had the acquisition occurred at the beginning of the periods  presented, nor is it necessarily indicative of future financial position or  results of operations. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
|                            |   | **Three Months Ended March 31,** |    |
|---------------------------------|--------|----------------------------------|---------|
|                            |   | **2003**                         |    | **2002** |   |
| Total revenues                  |   | $                                | 204,662 |   | $ | 231,468 |   |
| Net income                      |   | 10,561                           |    | 4,371 |   |
| Net income per share  (basic)   |   | 0.15                             |    | 0.06 |   |
| Net income per share  (diluted) |   | 0.15                             |    | 0.06 |   |
|                                 |        |                                  |         |  |  |  |  |

 
|   | In addition to  the SignalTree Solutions acquisition, the Company completed an acquisition of  a business complementary to the Company’s business strategy during the Third  Quarter of 2002.  The merger and  consideration costs of this acquisition, which were accounted for using the  purchase method of accounting, totaled $13.4 million in 2002.  The purchase price included contingent  consideration based |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

8

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|         | upon operating  performance of the acquired business.   During the First Quarter of 2003, the Company paid an additional  $895,000 related to earn-outs and has recorded this amount as additional  purchase price.  Future earn-outs are  based on specific net revenue targets.   Payments for achieving these goals will range from $1.0 to $2.0 million  in future periods.  The Company also  recorded $3.0 million as deferred revenue related to contingent service  credits and issued a $3.0 million non-interest bearing note payable as  partial consideration.  The note has a  one-year term with a possible one-year extension based on additional acquisition  service credits.  As of March 31,  2003, the Company had not recorded additional contingent liabilities in  relation to the earn-outs.                                                                                                                                                                                                                                                                                                                                                                    |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|         | The results of  operations of these acquired companies have been included in the Company’s  condensed consolidated statement of income from the date of acquisition.  The excess of the purchase price over the  fair value of the net assets has been allocated to identifiable intangible  assets and goodwill.  Identifiable  intangible assets are being amortized on a straight-line basis over periods  ranging from three to seven years.   Pro forma results of operations for these acquisitions have not been  provided, as they were not material to the Company on either an individual or  an aggregate basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **Note  F.** | **Restructuring**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|         | In the Fourth  Quarters of 2002, 2001, 2000, and 1999, the Company recorded restructuring  charges of $17.6 million, $10.4 million, $8.6 million, and $13.7 million,  respectively.  Of these charges, $3.2  million, $4.4 million, $1.7 million and $3.8 million related to a workforce  reduction of approximately 229, 900, 200 and 600 employees for the years  2002, 2001, 2000 and 1999, respectively.   In 2002, the Company also released excess accruals of $251,000 in  connection with workforce reduction, which resulted in a net workforce  restructuring charge of $2.9 million.   Cash expenditures in the First Quarter of 2003 related to workforce  reductions were $1.1 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|         | The Company also  performed a review of its business strategy and concluded that consolidating  some of its branch offices was key to its success.  As a result of this review, the Company’s restructuring charges  included $12.1 million in 2002, $4.0 million in 2001, $3.5 million in 2000,  and $5.1 million in 1999 for branch office closings and certain other  expenditures.  In conjunction with the  review during the Fourth Quarter of 2002, the Company also performed a review  of accrual balances for properties restructured in prior years.  As a result, the Company determined that  the cost to consolidate and/or close certain non-profitable offices would be  higher than the original estimate.   The change in estimates resulted in a net charge to the Company’s  restructuring liability of $756,000 and $1.2 million in 2002 and 2001,  respectively.  The resulting net  charge in 2002 and 2001 was $12.9 million and $5.1 million,  respectively.  Cash expenditures in  the First Quarter of 2003 related to branch office closures and other  expenditures were $2.4 million.                                                           |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|         | On November 30,  2001, the Company completed the acquisition of Metro Information Services,  Inc. (Metro).  At the date of  acquisition, the Company entered into a plan to exit certain activities and  consolidate facilities.  As a result,  the Company recorded a restructuring liability of $11.0 million in 2001  related to the lease obligations and certain other costs for the consolidated  facilities.  During 2002, the Company  adjusted the valuation of the liability assumed for the restructured  facilities and for other matters unresolved at the time of the acquisition by  $3.1 million.  On March 15, 2002, Keane  acquired SignalTree Solutions.  At the  date of acquisition, the Company entered into a plan to exit certain  activities and consolidate facilities.   As a result, the Company recorded a restructuring liability of $1.6  million related to the lease obligations and certain other costs for the  consolidated facilities.  In  accordance with EITF 95-3, “Recognition of Liabilities in Connection with a  Purchase Business Combination,” these costs have been reflected in the purchase  price of the acquisition. |

 

9

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|   | The activity for  the First Quarter of 2003 associated with the restructuring charge is as  follows: |
|--------|------------------------------------------------------------------------------------------------------|

 
|                                           |   | **January 1, 2003  Balance** |   | **Cash  Expenditures** |   | **March 31, 2003  Balance** |   |
|------------------------------------------------|--------|------------------------------|--------|------------------------|--------|-----------------------------|--------|
| Branch office closures  and other expenditures |   |                         |   |                   |   |                        |   |
| 1999                                           |   | $                            | 623    |                   | $      | (133                        | )      | $ | 490 |   |
| 2000                                           |   | 760                          |   | (217                   | )      | 543                         |   |
| 2001                                           |   | 6,615                        |   | (1,066                 | )      | 5,549                       |   |
| 2002                                           |   | 14,952                       |   | (985                   | )      | 13,967                      |   |
|                                           |   | 22,950                       |   | (2,401                 | )      | 20,549                      |   |
| Workforce reduction  2002                      |   | 3,285                        |   | (1,131                 | )      | 2,154                       |   |
| **Total  restructuring balance**               |   | $                            | 26,235 |                   | $      | (3,532                      | )      | $ | 22,703 |   |

 
|         | The  restructuring balance is included in accrued current restructuring costs and  accrued long-term restructuring costs in the condensed consolidated balance  sheets.                                                                                                                                                                                                                                                                                                                                                                              |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| **Note  G.** | **Segment  Information**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|         | Based on  qualitative and quantitative criteria established by Statement of Financial  Accounting Standards No. 131 (FAS 131), “Disclosures about Segments of an  Enterprise and Related Information,” the Company operates within one  reportable segment: *Professional Services.* In this segment, the  Company offers an integrated mix of end-to-end business solutions, such as  Business Consulting (Plan), Application Development and Integration (Build),  and Application Development and Management Outsourcing (Manage). |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|         | In accordance  with the enterprise wide disclosure requirements of FAS 131, the Company’s  geographic information is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                |

 
|                                             |   | **Geographic location** |    | **Deferred Tax  Assets** |   | **Total** |   |
|--------------------------------------------------|--------|-------------------------|---------|--------------------------|--------|-----------|--------|
|                                             |   | **Domestic**            |    | **International**        |   |      |   |
| **Three  Months Ended March 31, 2003** |   |                    |    |                     |   |      |   |   |   |
| Revenues                                         |   | $                       | 198,972 |                     | $      | 5,690     |   | — |   | $ | 204,662 |   |
| Long-lived assets                                |   | 404,661                 |    | 25,761                   |   | 13,997    |   | 444,419 |   |
|                                             |   |                    |    |                     |   |      |   |   |   |
| **Three  Months Ended March 31, 2002** |   |                    |    |                     |   |      |   |   |   |
| Revenues                                         |   | $                       | 211,563 |                     | $      | 9,696     |   | — |   | $ | 221,259 |   |
| Long-lived assets                                |   | 374,075                 |    | 27,837                   |   | 22,164    |   | 424,076 |   |

 
|         | The Company has  no single customer that provides revenues that equal or exceed 10 percent of  its consolidated revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **Note  H.** | **Related  Parties, Commitments, and Contingencies**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|         | The principal  executive office of the Company as of March 31, 2003, was located at 100 City  Square in Boston, Massachusetts (the “New Facility”).  The Company leases the New Facility from  Gateway Developers LLC (“Gateway LLC”) as described below.  The Company leases additional office space  and apartments in more than seventy locations in North America, the United  Kingdom, and India under operating leases and capital leases, some of which  may be renewed for periods up to five years, subject to increased rental  fees. |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|         | In October 2001,  the Company entered into a lease with Gateway LLC for a term of twelve years,  pursuant to which the Company agreed to lease approximately 95,000 square  feet of office and development space.   The Company leases approximately 57% of the New Facility and the  remaining 43% is, or will be, occupied by other tenants.  John Keane Family LLC is a member of  Gateway LLC.  The                                                                                                                                                   |

 

10

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|   | members of John  Keane Family LLC are trusts for the benefit of John F. Keane, Chairman of the  Board of the Company, and his immediate family members.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | On October 31,  2001, Gateway LLC entered into a $39.4 million construction loan with  Citizens Bank of Massachusetts (the “Gateway Loan”) in connection with the  New Facility and an adjacent building located at 20 City Square, Boston,  Massachusetts.  John Keane Family LLC  and John F. Keane are each liable for certain obligations under the Gateway  Loan if and to the extent Gateway LLC requires funds to comply with its  obligations under the Gateway Loan.   Stephen D. Steinour, a director of the Company, is Chief Executive  Officer of Citizens Bank of Pennsylvania.   Citizens Bank of Massachusetts and Citizens Bank of Pennsylvania are  subsidiaries of Citizens Financial Group, Inc. Mr. Steinour was not involved  in the approval process for the Gateway Loan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | The Company  began occupying the New Facility and making lease payments in March  2003.  Based upon its knowledge of  lease payments for comparable facilities in the Boston area, the Company  believes that the lease payments under the lease for the New Facility, which  will be approximately $3.2 million per year ($33.00 per square foot for the  first 75,000 square feet and $35.00 per square foot for the remainder of the  premises) for the first six years of the lease term and approximately $3.5  million per year ($36.00 per square foot for the first 75,000 square feet and  $40.00 per square foot for the remainder of the premises) for the remainder  of the lease term, plus specified percentages of any annual increases in real  estate taxes and operating expenses, were, at the time the Company entered  into the lease, as favorable to the Company as those which could have been  obtained from an independent third party.                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | In view of these  related party transactions, the Company concluded that, during the  construction phase of the New Facility, the estimated construction in  progress costs for the New Facility would be capitalized in accordance with  EITF No. 97-10, “The Effect of Lessee Involvement in Asset Construction.”  A credit in the same amount was included  in the caption “Accrued construction-in-progress costs.”  For purposes of the consolidated statement  of cash flows, the Company characterized this treatment as a non-cash  financing activity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | Due to  completion of the construction phase and its current occupancy, the related  capitalized costs are now classified as “Building” in the accompanying  balance sheets.  A credit for the same  amount appears as accrued building costs into both its short and long-term  components.  The Company will amortize  the cost of the building on a straight-line basis over a 39-year useful  life.  Additionally, the obligation  will be reduced over the life of the lease at an interest rate of 8.67%.  The net effect of the amortization that  will be included in the operating results will approximate the rent expense  resulting from the contractual payments the Company is required to make under  the lease.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | In February  1985, the Company entered into a lease, which subsequently was extended to a  term of 20 years, with City Square Limited Partnership (“City Square”),  pursuant to which the Company leased approximately 34,000 square feet of  office and development space in a building located at Ten City Square, in  Boston, Massachusetts.  The Company  now leases approximately 88% of this building and the remaining 12% is leased  by other tenants.  John F. Keane,  Chairman of the Board of the Company, and Philip J. Harkins, a director of  the Company, are limited partners of City Square.  Based upon its knowledge of lease payments for comparable  facilities in the Boston area, the Company believes that the lease payments  under this lease, which will be approximately $0.8 million per year ($25.00  per square foot) for the remainder of the lease term (until February 2006),  plus specified percentages of any annual increases in real estate taxes and  operating expenses, were, at the time the Company entered into the lease, as  favorable to the Company as those which could have been obtained from an  independent third party. As a result of its occupancy of the New Facility (as  described above), the Company is in the process of seeking a third party to  sublease the space it occupied at Ten City Square. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | As a result of  the vacancy at Ten City Square in December 2002, the Company reserved the remaining  lease payments due to City Square for the remainder of the lease term,  resulting in a charge of approximately $3.9 million in the Fourth Quarter of  2002 financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | In January 2003,  the Financial Accounting Standards Board issued Interpretation No. 46 (FIN  46), “Consolidation of Variable Interest Entities,” which requires the  consolidation of a variable interest entity, as defined, by its primary  beneficiary.  Primary beneficiaries  are those companies that are subject to a majority of the risk of loss or  entitled to receive a majority of the entity’s residual returns, or  both.  In                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

11

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|   | determining  whether it is the primary beneficiary of a variable interest entity, an  entity with a variable interest shall treat variable interests in that same  entity held by its related parties as its own interests.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | The Company is  currently evaluating whether or not City Square and Gateway LLC are variable  interest entities, as defined by FIN 46 and, if so, whether or not the  Company is the primary beneficiary of these entities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | If the Company  determines that City Square or Gateway LLC, or both, are variable interest  entities, the Company will be required to consolidate the financial position  and results of operation of the entity or entities for which it determines it  is the primary beneficiary.  Such  consolidation will be required beginning July 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | If the Company  concludes it is not required to consolidate either of these entities and that  it is the primary beneficiary, the Company will continue to account for its  leases with City Square and Gateway LLC in accordance with generally accepted  accounting principles.  With respect  to the Gateway LLC lease, if the Company concludes it is not required to  consolidate this entity, the Company will continue to amortize the asset and  liability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | In March 2003,  the Company’s Audit Committee approved a related party transaction involving  a director of the Company.  The  Company has subcontracted with Guardent, Inc. (“Guardent”) for a customer  project.  Maria Cirino, a director of  the Company, is an executive officer, director, and shareholder of  Guardent.  The payments from the  Company to Guardent are not expected to exceed approximately $25,000.  In addition, the Audit Committee permitted  the Company to engage Guardent as a sub-contractor for the purposes of  providing future services to the Company’s customers.  No payment by the Company to Guardent for  a single engagement may exceed $75,000 and no payment by the Company to  Guardent for all engagements in any calendar year may exceed $250,000.                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | In April 2003,  the Company’s Audit Committee again approved a related party transaction  involving a director of the Company.   The Company has sub-contracted with ArcStream, Inc (“ArcStream”) for  two customer projects.   John F. Keane, Jr., a director of the Company, is Chief  Executive Officer, director, and founder of ArcStream, Inc.  John F. Keane, Jr. is the son of  John F. Keane, Sr., the Company’s Chairman of the Board of Directors, and the  brother of Brian T. Keane, the Company’s President, Chief Executive Officer  and a director.  The payments by the  Company to ArcStream related to these projects are not expected to exceed  $50,000.  In addition, the Audit  Committee permitted the Company to engage ArcStream as a sub-contractor for  the purposes of providing future services to the Company’s customers.  No payment by the Company to ArcStream for  a single engagement may exceed $75,000 and no payment by the Company to  ArcStream for all engagements in any calendar year may exceed $250,000. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | The Company is a  guarantor with respect to a line of credit for Innovate EC, an entity in  which the Company acquired a minor equity position as a result of a previous  acquisition.  The total line of credit  is for $600,000.  The Company  guarantees $300,000 of this obligation.   The line is subject to review by the lending institution.  The Company would be required to meet its  guarantor obligation in the event the lending institution refuses to extend  the credit facility and Innovate EC is unable to satisfy its obligation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | During the First  Quarter of 2003, the Company paid $895,000 related to certain earn out  considerations in connection with an acquisition made during the Third  Quarter of 2002.** **Future earn-outs are based on specific net revenue  targets.  Payments for achieving these  goals will range from $1.0 to $2.0 million in future periods.  The Company also recorded, in the Third  Quarter of 2002, $3.0 million as deferred revenue related to contingent  service credits and issued a $3.0 million non-interest bearing note payable  as partial consideration.  The note  has a one-year term with a possible one-year extension based on additional  acquisition service credits.                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | In April 1998,  United Services Planning Association, Inc. and Independent Research Agency  for Life Insurance, Inc. filed a complaint in the District Court for Tarrant  County, Texas (Civil Action No. 96-173235-98) against the Company and two of  its employees alleging that the Company misrepresented its ability to  complete a project contracted for by the plaintiffs and concealed from the  plaintiffs material facts related to the status of the project.  The parties are currently engaged in  discovery.  The case is scheduled to  go to trial in October of 2003.  The  plaintiffs seek monetary relief.  The  Company believes                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

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|   | that it has a  meritorious defense to the plaintiff’s complaint and intends to contest the  claims vigorously.  However, the  Company is presently unable to assess the likely outcome of the matter.                                                                                                                                                                                                                                  |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | During the First  Quarter of 2003, the Company received a $7.3 million award in connection with  an arbitration proceeding initiated by the Company in 2000 against Signal  Corporation for a breach of an agreement between Signal Corporation and the  Company’s Federal Systems subsidiary.                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | The Company is  involved in other litigation and various legal matters, which have arisen in  the ordinary course of business.  The  Company does not believe that the ultimate resolution of these matters will  have a material adverse effect on its financial condition, results of  operations, or cash flows.  The  Company believes these litigation matters are without merit and intends to  defend these matters vigorously. |

 

13

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**Keane, Inc. and Subsidiaries**

**Item2.   Management’s Discussion and Analysis of Financial Conditionand Results of Operations**

 

This Report containsforward-looking statements within the meaning of Section 21E of the SecuritiesExchange Act of 1934, as amended, and Section 27A of the Securities Act of1933, as amended.  For purposes of theseActs, any statement that is not a statement of historical fact may be deemed aforward-looking statement.  For example,statements containing the words “believes,” “anticipates,” “plans,” “expects,”and similar expressions may be forward-looking statements.  Keane cautions investors not to place unduereliance on any forward-looking statements in this Report.  Keane undertakes no obligation to publiclyupdate any forward-looking statements, whether as a result of new information,future events or otherwise.  There are anumber of factors that could cause our actual results to differ materially fromthose indicated by these forward-looking statements, including withoutlimitation, the factors set forth below under the caption “Certain Factors ThatMay Affect Future Results.”  These factorsand the other cautionary statements made in this quarterly report should beread as being applicable to all related forward-looking statements whereverthey appear in this quarterly report. If one or more of these factors materialize, or if any underlyingassumptions prove incorrect, the Company’s actual results, performance orachievements may vary materially from any future results, performance orachievements expressed or implied by these forward-looking statements.

 

**RESULTS OF OPERATIONS**

TheCompany’s total revenue for the First Quarter of 2003 was $204.7 million, a7.5% decrease from revenue of $221.3 million for the First Quarter of2002.  This decrease in total revenuewas primarily the result of clients continuing to defer discretionary technology-relatedexpenditures as a result of economic uncertainty.

 

Revenue from theCompany’s Plan services was $13.6 million in the First Quarter of 2003, adecrease of 26.5% from revenue of $18.5 million in the First Quarter of2002.  Plan revenue is comprisedprimarily of business consulting services, including the Company’s ApplicationsRationalization Service, delivered by Keane Consulting Group, the Company’sbusiness consulting arm.  Additional ITfocused consulting services within Plan are sold and implemented out of theCompany’s network of branch offices. The decrease in Plan revenue was primarily the result of the deferral ofconsulting projects and a decrease in billing rates caused by general economicconditions.

 

Revenue from theCompany’s Build services was $50.1 million in the First Quarter of 2003, adecrease of 10.4% from revenue of $55.9 million in the First Quarter of2002.  The Company’s Build revenue,which consists primarily of Application Development and Integration (AD&I)business, was adversely affected during the First Quarter of 2003 by thedeferral of software development projects due to the current reduction incapital spending related to technology. However, the decline in Build revenue was offset in part by revenuegenerated from the less cyclical healthcare and public sector verticalmarkets.  Compared to the Fourth Quarterof 2002, First Quarter of 2003 Build revenue was 1.8% lower, reflecting whatthe Company believes to be a more stable but still challenging environment forApplication Development and Integration services.

 

Revenue from theCompany’s Manage services, which consist primarily of Applications Outsourcingservice as well as Staff Augmentation services and other Maintenance andMigration services, was $141.0 million during the First Quarter of 2003, adecrease of 4.0% from revenue of $146.9 million in the First Quarter of2002.  Although not immune from economicfluctuations, Applications Outsourcing revenues are more stable than revenueassociated with Plan or Build due to the long-term and recurring nature ofoutsourcing contracts and the cost-saving benefits related to outsourcing.  Generally, under an Applications Outsourcingagreement, the Company receives a fixed monthly fee in return for meeting orexceeding a contractually agreed upon service level.  Applications Outsourcing agreements generally do not require anycapital outlay from the Company. Outsourcing revenue and expense are recognized on a monthly basisconsistent with the service provided by the Company to its customers.  The Company does not employpercentage-of-completion accounting on its outsourcing agreements.

 

Within its ApplicationsOutsourcing business, the Company carefully monitors and reports what itdesignates as large, long-term Application Outsourcing engagements.  These deals represent outsourcing contractsthat have been signed since January of 2000, and that are valued at a minimumof $5.0 million in revenue.  The Companybelieves that these engagements are representative of the type of ApplicationsOutsourcing business that forms the core element of its growth strategy.  During the First Quarter of 2003, long-termstrategic Applications Outsourcing engagements generated $53.4 million inrevenue, a 33.2% increase from $40.1 million in the First Quarter of 2002.  Total revenue from large long-termApplications Outsourcing customers, including cross-sales of additional Planand 

 

14

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Build business, was $66.1million during the First Quarter of 2003, representing 32.3% of the Company’stotal revenue.

 

TheCompany observed signs of increasing stability of demand within its customerbase during the First Quarter of 2003. However, it has not yet seen indications of a broad-based andsustainable trend of an increase in discretionary IT spending.  As a result, the Company anticipatescontinuing softness in its AD&I business, which represents a majority ofits Build sector, and its Plan sector, until economic conditions improve andcustomers once again begin funding technology projects.  However, the Company continues to seeongoing opportunities in its Applications Outsourcing business, whichrepresents a majority of its Manage sector, as well as opportunities within thehealthcare and public sector vertical markets. Keane’s Outsourcing Services has been enhanced with the addition of twoAdvanced Development Centers in India in addition to its near shore facilitiesin Halifax, Nova Scotia.  The Companybelieves that outsourcing provides greater stability of revenue due tolong-term contracts and recurring revenue.

 

Salaries, wages, andother direct costs for the First Quarter of 2003 were $142.4 million, or 69.6%of total revenue, compared to $157.8 million, or 71.3% of total revenue, forthe First Quarter of 2002.  The decreasein direct costs was primarily attributable to ongoing efforts to bring costs inalignment with anticipated revenue.

 

Total billable employeesfor all operations were 5,925 as of March 31, 2003, compared to 6,175 totalbillable employees as of December 31, 2002 and 6,301 as of March 31, 2002.  In addition to these employees, the Companymay occasionally sub-contract personnel to augment its billable staff.  The year-over-year decrease was the resultof bringing personnel resources, which account for the vast majority of theCompany’s direct costs, in alignment with the Company’s current and expectedrevenue stream.  The Company’s base ofbillable employees within its India operation was 500 billable employees as ofMarch 31, 2003.  The Company acquiredits India operation in March 2002 with its acquisition of SignalTree Solutions.

 

The Company’s grossmargin (revenue less salaries, wages, and other direct costs as a percentage ofrevenue) for the First Quarter of 2003 was 30.4%, as compared to 28.7% for theFirst Quarter of 2002.  The increase ingross margin was largely the result of improved utilization and lower severancecosts related to the Company’s base of billable personnel in NorthAmerica.  The Company believes thisimprovement is also the result of the implementation of its long-term strategy,and that it reflects the significant operating leverage within its businessmodel as economic conditions stabilize and begin to improve.

 

Selling, General &Administrative (“SG&A”) expenses for the First Quarter of 2003 were $48.1million, or 23.5% of total revenue, as compared to $52.3 million, or 23.6% oftotal revenue, for the First Quarter of 2002. The decrease in SG&A expenses was attributable to cost synergiesobtained from the acquisition of Metro as well as the Company’s continuingfocus on tightly controlling discretionary expenses.

 

Amortization ofintangible assets for the First Quarter of 2003 was $4.0 million, or 2.0% oftotal revenue, compared to $3.3 million, or 1.5% of total revenue, for theFirst Quarter of 2002.  The increase inamortization of intangible assets was primarily attributable to additionalintangible assets resulting from the Company’s acquisitions****of SignalTree Solutions andone other acquisition complementary to the Company’s business strategy madeduring the Third Quarter of 2002.

 

Interest and dividendincome totaled $348,000 for the First Quarter of 2003, compared to $1.0 millionfor the First Quarter of 2002.  Thedecrease in interest and dividend income was attributable to lower cash balancesand marketable securities earning interest and dividends due to the Company’suse of cash to repurchase shares of it’s common stock, as well as interest ratedeclines.  Other income was $7.2 millionfor the First Quarter of 2003, as compared to other income of $470,000 in theFirst Quarter of 2002.  Other incomeduring the First Quarter of 2003 increased due to a $7.3 million favorablejudgment in an arbitration award proceeding related to damages for breach of anagreement between Signal Corporation and Keane Federal Systems.

 

The Company’s effectivetax rate was 40.0% for the First Quarter of both 2003 and 2002.

 

**LIQUIDITY AND CAPITAL RESOURCES**

The Company is focused oncontinuing to generate strong cash flow in order to fund potential mergers andacquisitions, stock repurchases, and build long-term shareholder value.  The Company’s cash and investments at March31, 2003, decreased to $54.4 million from $68.3 million at December 31, 2002.  This decrease was primarily 

 

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attributable to theCompany’s stock repurchase program, pursuant to which the Company acquiredshares for a purchase price totaling $23.6 million during the First Quarter of2003.

 

Net cash provided byoperating activities totaled $12.0 million for the First Quarter of 2003compared to a $2.6 net use of cash by operating activities for the FirstQuarter of 2002.  During the FirstQuarter of 2003, the Company received a $7.3 million award in connection withan arbitration proceeding initiated by the Company in 2000 against SignalCorporation for a breach of an agreement between Signal Corporation and theCompany’s Federal Systems subsidiary. Also during the First Quarter of 2003, the Company paid approximately$3.5 million associated with previously reported restructuring charges.

 

Net cash used ininvesting activities was $12.4 million and $27.0 million for the First Quarterof 2003 and 2002, respectively.  Netcash used in investing activities in each of these periods was primarily the resultof investments, acquisitions, and capital expenditures.  During the First Quarter of 2003, theCompany purchased investments of $10.0 million in marketable securities andspent $2.9 million on property and equipment along with $903,000 for paymentsrelated to prior years acquisitions.  Inconnection with an acquisition made during the Third Quarter of 2002, theCompany may incur additional payments related to certain earn-outconsiderations that are based on achieving specific net revenue targets.** **Paymentsfor achieving these goals will range from $1.0 to $2.0 million in futureperiods.  The Company also recorded, inthe Third Quarter of 2002, $3.0 million as deferred revenue related tocontingent service credits and issued a $3.0 million non-interest bearing notepayable as partial consideration.  Thenote has a one-year term with a possible one-year extension based on additionalacquisition service credits.

 

Net cash used forfinancing activities totaled $21.9 million for the First Quarter of 2003 comparedto $3.3 million in cash provided by financing activities for the First Quarterof 2002.  In the First Quarter of 2003,cash used in financing activities is the result of the Company’s previouslyauthorized stock repurchase program.  OnOctober 25, 2002, the Board of Directors authorized the Company to repurchase 5million shares of its common stock over the next 12 months.  This repurchase authorization was inaddition to two prior share repurchase authorizations in September 2001 andJuly 2002.  The repurchases may be madeon the open market or in negotiated transactions, and the timing and amount ofshares repurchased will be determined by the Company’s management based on itsevaluation of market and economic conditions and other factors.  During the First Quarter of 2003, theCompany purchased 3,052,100 shares of its common stock under this authorizationfor a total investment of $23.6 million at an average price per share of$7.72.  The remaining authorized amountis 624,300 shares from the authorization given on October 25, 2002.  Between May 1999 and March 31, 2003, theCompany has invested $186.6 million to repurchase 15,007,900 shares of itscommon stock under seven separate authorizations.

 

In February 2003, theCompany entered into a new $ 50.0 million revolving credit agreement with twobanks.  The credit facility replaces aprevious $10.0 million demand line of credit, which expired in July 2002.  The terms of the credit facility require theCompany to maintain a maximum total funded debt and other financialratios.  Based on the Company’s currentoperating plan, the Company believes that its cash and cash equivalents onhand, marketable securities, cash flows from operations, and its new line ofcredit will be sufficient to meet its current capital requirements for at leastthe next twelve months.

 

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**IMPACT OF INFLATION AND CHANGING PRICES**

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

 

**CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS**

The following important factors,among others, could cause actual results to differ materially from thoseindicated by forward-looking statements made in this Quarterly Report on Form10-Q and presented elsewhere by management from time to time.

 

**Keane’squarterly operating results have varied, and are likely to continue to varysignificantly.  This may result involatility in the market price of Keane’s shares.**  Keane has experienced and expects tocontinue to experience fluctuations in its quarterly results.  Keane’s gross margins vary based on avariety of factors including employee utilization rates and the number and typeof services performed by Keane during a particular period.  A variety of factors influence Keane’srevenue in a particular quarter, including:

 

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

•    the number and requirements of client engagements;

•    employee utilization rates;

•    changes in the rates Keane can charge clients forservices;

•    acquisitions; and

•    other factors, many of which are beyond Keane’scontrol.

 

A significant portion ofKeane’s expenses do not vary relative to revenue.  As a result, if revenue in a particular quarter does not meetexpectations, Keane’s operating results could be materially adversely affected,which in turn may have a material adverse impact on the market price of Keanecommon stock.  In addition, many ofKeane’s engagements are terminable without client penalty.  An unanticipated termination of a majorproject could result in an increase in underutilized employees and a decreasein revenue and profits.

 

**Keanehas pursued, and intends to continue to pursue, strategic acquisitions.  Failure to successfully integrate acquiredbusinesses or assets may adversely affect Keane’s financial performance.**  In recent years, Keane has grownsignificantly through acquisitions. From January 1, 1999 through March 31, 2003, Keane has completed elevenacquisitions.  The aggregate merger andconsideration costs of these acquisitions totaled approximately $359.8million.  Keane’s future growth may bebased in part on selected acquisitions. At any given time, Keane may be in various stages of consideringacquisition opportunities.  Keane canprovide no assurances that it will be able to find and identify desirableacquisition targets or that it will be successful in entering into a definitiveagreement with any one target.  Inaddition, even if Keane reaches a definitive agreement with a target, there isno assurance that Keane will complete any future acquisition.

 

Keane typicallyanticipates that each acquisition will bring benefits, such as an increase inrevenue.  Prior to completing anacquisition, however, it is difficult to determine if Keane can realize thesebenefits.  Accordingly, there is a riskthat an acquired company may not achieve an increase in revenue or otherbenefits for Keane.  In addition, anacquisition may result in unexpected costs, expenses, and liabilities.  Any of these events could have a materialadverse effect on Keane’s business, financial condition, and results ofoperations.

 

The process ofintegrating acquired companies into Keane’s existing business may also resultin unforeseen difficulties.  Unforeseenoperating difficulties may absorb significant management attention, which Keanemight otherwise devote to its existing business.  In addition, the process may require significant financialresources that Keane might otherwise allocate to other activities, includingthe ongoing development or expansion of Keane’s existing operations.

 

Finally, futureacquisitions could result in Keane having to incur additional debt and/orcontingent liabilities.  Any of thesepossibilities could have a material adverse effect on Keane’s business,financial condition, and result of operations.

 

**Keanefaces significant competition for its services, and its failure to remaincompetitive could limit its ability to maintain existing clients or attract newclients.**  The marketfor Keane’s services is highly competitive. The technology for custom software services can change rapidly.  The market is fragmented, and no companyholds a dominant position. Consequently, Keane’s competition for client assignments and experiencedpersonnel varies 

 

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significantly from cityto city and by the type of service provided. Some of Keane’s competitors are larger and have greater technical,financial, and marketing resources and greater name recognition in the marketsthey serve than does Keane.  Inaddition, clients may elect to increase their internal information systemsresources to satisfy their custom software development and integration needs.

 

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

 

Keane may not be able tocompete successfully against current or future competitors.  In addition, competitive pressures faced byKeane may materially adversely affect its business, financial condition, andresults of operations.

 

**Keaneconducts business in the United Kingdom, Canada, and India, which exposes it toa number of difficulties inherent in international activities.**  As a result of its acquisition of SignalTreeSolutions in March 2002, Keane has two software development facilities inIndia.  Moreover, Keane has addedapproximately 500 technical professionals to its professional servicesorganization in the region.  India iscurrently experiencing conflicts with Pakistan over the disputed territory ofKashmir as well as clashes between different religious groups within thecountry.  These conflicts, in additionto other unpredictable developments in the political, economic, and socialconditions in India, could eliminate or reduce the availability of thesedevelopment and professional services. If access to these services were to be unexpectedly eliminated orsignificantly reduced, Keane’s ability to meet development objectives importantto its new strategy would be hindered, and its business could be harmed.

 

If Keane fails to manageits geographically dispersed organization, it may fail to meet or exceed itsfinancial objectives and its revenues may decline.  Keane performs development activities in the United States,Canada, and in India, and has offices throughout the United States, the UnitedKingdom, Canada, and India.  Thisgeographic dispersion requires substantial management resources that locallybased competitors do not need to devote to their operations.

 

Keane’s operations in theUnited Kingdom, Canada, and India are subject to currency exchange rate fluctuations,foreign exchange restrictions, changes in taxation, and other difficulties inmanaging operations overseas.  Keane maynot be successful in its international operations.

 

**Keanemay be unable to re-deploy its professionals effectively if engagements areterminated unexpectedly, which would adversely affect its results ofoperations.**  Keane’sclients can cancel or reduce the scope of their engagements with Keane on shortnotice.  If they do so, Keane may beunable to reassign its professionals to new engagements without delay.  The cancellation or reduction in scope of anengagement could, therefore, reduce the utilization rate of Keane’sprofessionals, which would have a negative impact on Keane’s business, financialcondition, and results of operations.

 

As a result of these andother factors, the Company’s past financial performance should not be relied onas an indication of future performance. Keane believes that period-to-period comparisons of its financial resultsare not necessarily meaningful and it expects that results of operations mayfluctuate from period to period in the future.

 

**Keane’sgrowth could be limited if it is unable to attract personnel in the InformationTechnology and business consulting industries.**  Keane believes that its future success willdepend in large part on its ability to continue to attract and retain highlyskilled technical and management personnel. The competition for such personnel is intense.  Keane may not succeed in attracting and retaining the personnelnecessary to develop its business.  IfKeane does not, its business, financial condition, and result of operationscould be materially adversely affected.

 

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**Item3.    Quantitative and QualitativeDisclosure About Market Risk**

 

The Company does notengage in trading market risk sensitive instruments or purchasing hedginginstruments or “other than trading” instruments that are likely to expose theCompany to market risk, whether interest rate, foreign currency exchange, andcommodity price or equity price risk. The Company has not purchased options or entered into swaps or forwardor futures contracts.  The Company’sprimary market risk exposure is that of interest rate risk on its investments,which would affect the carrying value of those investments.  Since January 1, 2001, the United StatesFederal Reserve Board has significantly decreased certain benchmark interestrates, which has led to a general decline in market interest rates.  The decline in market interest rates hasresulted in a significant decline in the Company’s interest income.  Additionally, the Company transacts businessin the United Kingdom, Canada, and India and as such has exposure associatedwith movement in foreign currency exchange rates.

 

**Item4.    Controls and Procedures**

 

a)             Evaluationof Disclosure Controls and Procedures. Based on their evaluation of the Company’s disclosure controls andprocedures (as defined in Rules 13a-14(c) and 15d-14(c) under the SecuritiesExchange Act of 1934) as of a date within 90 days of the filing date of thisQuarterly Report on Form 10-Q, the Company’s Chief Executive Officer and ChiefFinancial Officer have concluded that the Company’s disclosure controls andprocedures are designed to ensure that information required to be disclosed bythe Company in the reports that it files or submits under the Exchange Act isrecorded, processed, summarized, and reported within the time periods specifiedin the Securities and Exchange Commission’s (SEC) rules and forms and areoperating in an effective manner.

 

b)            Changesin Internal Controls.  There were nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect these controls subsequent to the date of their mostrecent evaluation.

 

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**Keane,Inc. and Subsidiaries**

**Part II****             OtherInformation**

 
| **Item  1.** | **Legal Proceedings**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         | In April 1998,  United Services Planning Association, Inc. and Independent Research Agency  for Life Insurance, Inc. filed a complaint in the District Court for Tarrant  County, Texas (Civil Action No. 96-173235-98) against the Company and two of  its employees alleging that the Company misrepresented its ability to  complete a project contracted for by the plaintiffs and concealed from the  plaintiffs material facts related to the status of the project.  The parties are currently engaged in  discovery.  The case is scheduled to  go to trial in October 2003.  The  plaintiffs seek monetary relief.  The  Company believes that it has a meritorious defense to the plaintiff’s  complaint and intends to contest the claims vigorously.  However, the Company is presently unable  to assess the likely outcome of the matter.                                                                                                                          |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|         | During the First  Quarter of 2003, the Company received a $7.3 million award in connection with  an arbitration proceeding initiated by the Company in 2000 against Signal  Corporation for a breach of an agreement between Signal Corporation and the  Company’s Federal Systems subsidiary.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|         | The Company is  involved in other litigation and various legal matters, which have arisen in  the ordinary course of business.  The  Company does not believe that the ultimate resolution of these matters will  have a material adverse effect on its financial condition, results of operations,  or cash flows.  The Company believes  these litigation matters are without merit and intends to defend these  matters vigorously.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| **Item  5.** | **Other Information**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|         | On September 26,  2002, the Company filed a Tender Offer Statement in connection with its offer  to exchange currently held stock options with new options.  The downturn in the stock market and the  resulting underwater position of the Company’s stock options had created a  potential motivation and retention issue with key employees and executives of  the Company.  Consistent with the  Company’s philosophy of using stock options to motivate and retain management  and employees, on August 20, 2002, the Company’s Board of Directors approved  the opportunity for employees to request that the Company exchange  outstanding options to purchase shares of the Company’s Common Stock, which  were granted on or after January 1, 2000 and have an exercise price of $12.00  or greater per share, for new options to purchase shares of Common Stock on  substantially the following terms (“the Offer”).  Pursuant the terms of the Offer: |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|         | (i)                                     all eligible and  outstanding options issued under all of the Company’s stock option plans  could be exchanged for new options at an exchange rate of four for every five  surrendered;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|         | (ii)                                  the grant date of  the new options would be the first business day that is at least six months  and one day after the date of the expiration of the Offer; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|         | (iii)                               the exercise price of  each new option would be the closing price of the Company’s common stock on  the new grant date, which is at least six months and one day after the  expiration of the Offer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|         | The Offer  expired on October 7, 2002 (the “expiration date”).  Options for 1,888,394 shares of the Company’s common stock with  a weighted average exercise price of $20.45 were eligible for the Offer.  Of this amount, 1,458,298 options were  surrendered for exchange, with 324,902 options being retained, with the  balance of the 105,194 being canceled because of terminations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|         | For the  1,458,298 options surrendered for exchange at a rate of 4 new options for  every 5 surrendered, the Company granted new stock options for an aggregate  of 1,079,959 shares at an exercise price of $8.28 per share on April 8,  2003.  The balance of the surrendered  options were canceled because of terminations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

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**Item 6.  Exhibits andReports on Form 8-K**
| (a)    | Exhibit - 99.1  Certification by the Registrant’s President and Chief Executive Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                        |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                            |
|   | Exhibit - 99.2  Certification by the Registrant’s Senior Vice President of Finance and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |
|   |                                                                                                                                                                                                                            |
| (b)    | Reports on Form  8-K.  The Company did not file any  reports on Form 8-K during the three months ended March 31, 2003.                                                                                                     |

 

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**Signatures**

 

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

 

 
|   |         |   | KEANE, INC.                                                                                                  |
|--------|--------------|--------|--------------------------------------------------------------------------------------------------------------|
|   |         |   | (Registrant)                                                                                                 |
|   |         |   |                                                                                                         |
|   |         |   |                                                                                                         |
| Date   | May 12, 2003 |   | /s/ Brian T.  Keane                                                                                          |
|   |         |   | Brian T. Keane                                                                                               |
|   |         |   | President and  Chief Executive Officer                                                                       |
|   |         |   |                                                                                                         |
|   |         |   |                                                                                                         |
| Date   | May 12, 2003 |   | /s/ John J.  Leahy                                                                                           |
|   |         |   | John J. Leahy                                                                                                |
|   |         |   | Senior Vice  President of Finance and  Chief Financial Officer  (Principal Financial and Accounting Officer) |

 

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**Certifications**

 

I, Brian T. Keane,certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Keane, Inc.;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations, and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)                   designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)                  evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                   presented inthis quarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)                   all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize, andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                  any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officer and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
|                                  |           | /s/ Brian T. Keane                     |   |
|---------------------------------------|----------------|----------------------------------------|--------|
| Dated:   May  12, 2003 | Brian T. Keane |
|                                  |           | President and Chief Executive  Officer |

 

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I, John J. Leahy, certifythat:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Keane, Inc.;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations, and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)                   designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which this quarterlyreport is being prepared;

 

b)                  evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                   presented inthis quarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)                   all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize, andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                  any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officer and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
|                                  |          | /s/ John J. Leahy                           |   |
|---------------------------------------|---------------|---------------------------------------------|--------|
| Dated:   May  12, 2003 | John J. Leahy |
|                                  |          | Senior Vice President  of Finance and Chief |
|                                  |          | Financial Officer                           |

 

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