** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

**(MarkOne)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**For the quarterly period ended March 31,2006**

**Or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

 

**Forthe transition periodfrom                          to**

**Commission File Number 1-7516**

**KEANE, INC.**

(Exact name ofregistrant as specified in its charter)

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

 

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

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x   No o

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

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o   No x

As of March 31,2006, there were 58,309,338 shares of the registrant’s Common Stock, $.10 parvalue per share, and no shares of the registrant’s Class B Common Stock,$.10 par value per share, issued and outstanding.

 

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**Keane, Inc.**

**Tableof Contents**
| **Part I.**   | ** ** | **Financial  Information**                                                                                         |       |       |
|--------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **         | ** ** | ** **                                                                                                         | ** ** | ** ** |
| Item  1.           |       | Unaudited Condensed Consolidated Statements of Income  for the three months ended March 31, 2006 and 2005     |       |       |
|               |       |                                                                                                               |       |       |
|               |       | Unaudited Condensed Consolidated Balance Sheets as of  March 31, 2006 and December 31, 2005              |       |       |
|               |       |                                                                                                               |       |       |
|               |       | Unaudited Condensed Consolidated Statements of Cash  Flows for the three months ended March 31, 2006 and 2005 |       |       |
|               |       |                                                                                                               |       |       |
|               |       | Notes to Unaudited Condensed Consolidated Financial  Statements                                                    |       |       |
|               |       |                                                                                                               |       |       |
| Item 2.            |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                        |       |       |
|               |       |                                                                                                               |       |       |
| Item 3.            |       | Quantitative and Qualitative Disclosures About Market  Risk                                                        |       |       |
|               |       |                                                                                                               |       |       |
| Item  4.           |       | Controls  and Procedures                                                                                           |       |       |
|               |       |                                                                                                               |       |       |
| **Part II.**  | ** ** | **Other  Information**                                                                                             |       |       |
| ** **         | ** ** | ** **                                                                                                         | ** ** | ** ** |
| Item 1A.           |       | Risk Factors                                                                                                       |       |       |
|               |       |                                                                                                               |       |       |
| Item 2.            |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                       |       |       |
|               |       |                                                                                                               |       |       |
| Item 5.            |       | Other Information                                                                                                  |       |       |
|               |       |                                                                                                               |       |       |
| Item 6.            |       | Exhibits                                                                                                           |       |       |
|               |       |                                                                                                               |       |       |
| Signatures         |       |                                                                                                               |       |       |
|               |       |                                                                                                               |       |       |
| Exhibit Index |       |                                                                                                               |       |       |

 

2

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**Part I.Financial Information**

**Item1. Financial Statements**

**Keane, Inc.**

**UnauditedCondensed Consolidated Statements of Income**
| ** **                                                                                         | ** ** | **Three Months Ended March 31,**                 | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2006**                                                             | ** ** | **2005** | ** ** |
| ** **                                                                                         | ** ** | **(In thousands except per share amounts)** | ** ** |
| **Revenues**                                                                                       |       | $                                                                    | 243,577    |   | $ | 232,204 |   |
|                                                                                               |       |                                                                 |       |   |   |
| **Operating expenses**                                                                             |       |                                                                 |       |   |   |
| Salaries, wages,  and other direct costs                                                           |       | 173,251                                                              |       | 162,193 |   |
| Selling,  general, and administrative expenses                                                     |       | 55,882                                                               |       | 54,172 |   |
| Amortization of  intangible assets                                                                 |       | 3,851                                                                |       | 4,070 |   |
| Restructuring  charges, net                                                                        |       | 1,271                                                                |       | — |   |
| **Operating  income**                                                                              |       | 9,322                                                                |       | 11,769 |   |
|                                                                                               |       |                                                                 |       |   |   |
| **Other income (expense)**                                                                         | ** ** | ** **                                                           | ** ** | ** ** | ** ** |
| Interest and  dividend income                                                                      |       | 1,200                                                                |       | 1,105 |   |
| Interest expense                                                                                   |       | (1,396                                                               | )          | (1,416 | ) |
| Other expense,  net                                                                                |       | (405                                                                 | )          | (16 | ) |
| Minority  interest                                                                                 |       | (27                                                                  | )          | 683 |   |
| **Income  before income taxes**                                                                    |       | 8,694                                                                |       | 12,125 |   |
| Provision for  income taxes                                                                        |       | 3,304                                                                |       | 4,850 |   |
| **Net  income**                                                                                    |       | $                                                                    | 5,390      |   | $ | 7,275 |   |
|                                                                                               |       |                                                                 |       |   |   |
| Basic earnings  per share                                                                          |       | $                                                                    | 0.09       |   | $ | 0.12 |   |
|                                                                                               |       |                                                                 |       |   |   |
| Diluted earnings  per share                                                                        |       | $                                                                    | 0.09       |   | $ | 0.11 |   |
|                                                                                               |       |                                                                 |       |   |   |
| Basic weighted  average common shares outstanding                                                  |       | 58,131                                                               |       | 62,156 |   |
| Diluted weighted  average common shares and common share equivalents outstanding    |       | 66,630                                                               |       | 71,028 |   |

 

*The accompanying notes are anintegral part of the unaudited condensed consolidated financial statements.*

3

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**Keane, Inc.**

**UnauditedCondensed Consolidated Balance Sheets** 
| ** **                                                                                                                                                       | ** **   | **As of**                                                                 | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|--------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                       | ** **   | **March 31,  2006**                                                       | ** ** | **December 31,  2005** | ** ** |
| ** **                                                                                                                                                       | *** *** | **(Dollars in thousands,  except per share amounts)** | ** ** |
| **Assets**                                                                                                                                                       | ** **   | ** **                                                                     | ** ** | ** ** | ** ** |
| Current:                                                                                                                                                         |         |                                                                           |       |   |   |
| Cash and cash equivalents                                                                                                                                        |         | $                                                                              | 61,191     |   | $ | 71,570 |   |
| Restricted cash                                                                                                                                                  |         | 1,154                                                                          |       | 1,745 |   |
| Marketable securities                                                                                                                                            |         | 68,103                                                                         |       | 95,796 |   |
| Accounts receivable, net                                                                                                                                         |         | 167,168                                                                        |       | 160,019 |   |
| Prepaid expenses and deferred taxes                                                                                                                              |         | 24,350                                                                         |       | 16,954 |   |
| Total current asset                                                                                                                                              |         | 321,966                                                                        |       | 346,084 |   |
| Marketable  securities, long-term                                                                                                                                |         | 14,924                                                                         |       | — |   |
| Property and  equipment, net                                                                                                                                     |         | 76,794                                                                         |       | 77,583 |   |
| Goodwill                                                                                                                                                         |         | 314,764                                                                        |       | 314,536 |   |
| Customer lists,  net                                                                                                                                             |         | 38,054                                                                         |       | 41,050 |   |
| Other intangible  assets, net                                                                                                                                    |         | 5,323                                                                          |       | 6,173 |   |
| Deferred  contract costs related to TTA agreement                                                                                                                |         | 12,316                                                                         |       | 8,550 |   |
| Other assets,  net                                                                                                                                               |         | 14,018                                                                         |       | 13,318 |   |
|                                                                                                                                                             |         | $                                                                              | 798,159    |   | $ | 807,294 |   |
| **Liabilities**                                                                                                                                                  |         |                                                                           |       |   |   |
| Current:                                                                                                                                                         |         |                                                                           |       |   |   |
| Short-term debt                                                                                                                                                  |         | $                                                                              | 5          |   | $ | 7 |   |
| Accounts payable                                                                                                                                                 |         | 5,400                                                                          |       | 11,489 |   |
| Accrued expenses and other liabilities                                                                                                                           |         | 48,374                                                                         |       | 46,529 |   |
| Accrued restructuring                                                                                                                                            |         | 2,469                                                                          |       | 2,781 |   |
| Accrued compensation                                                                                                                                             |         | 30,554                                                                         |       | 44,835 |   |
| Deferred revenue                                                                                                                                                 |         | 8,357                                                                          |       | 6,932 |   |
| Total current liabilities                                                                                                                                        |         | 95,159                                                                         |       | 112,573 |   |
| Long-term debt                                                                                                                                                   |         | 150,001                                                                        |       | 150,001 |   |
| Accrued  long-term building costs                                                                                                                                |         | 38,862                                                                         |       | 39,004 |   |
| Accrued  long-term restructuring                                                                                                                                 |         | 2,801                                                                          |       | 2,823 |   |
| Other long-term  liabilities                                                                                                                                     |         | 15,159                                                                         |       | 16,493 |   |
| Deferred  long-term revenue                                                                                                                                      |         | 10,737                                                                         |       | 11,155 |   |
| Deferred income  taxes                                                                                                                                           |         | 32,912                                                                         |       | 30,864 |   |
| Total liabilities                                                                                                                                                |         | 345,631                                                                        |       | 362,913 |   |
| Minority  interest                                                                                                                                               |         | 3,796                                                                          |       | 3,769 |   |
|                                                                                                                                                             |         |                                                                           |       |   |   |
| Commitments and  contingencies                                                                                                                                   |         |                                                                           |       |   |   |
|                                                                                                                                                             |         |                                                                           |       |   |   |
| **Stockholders’ equity**                                                                                                                                    | ** **   | ** **                                                                     | ** ** | ** ** | ** ** |
| Preferred Stock,  par value $.01, authorized 2,000,000 shares, issued none                                                                                       |         | —                                                                         |       | — |   |
| Common stock,  par value $.10, authorized 200,000,000 shares, 58,309,338 issued and  outstanding at March 31, 2006 and 58,135,289 at December 31, 2005 |         | 5,831                                                                          |       | 5,814 |   |
| Additional  paid-in capital                                                                                                                                      |         | —                                                                         |       | — |   |
| Accumulated  other comprehensive loss                                                                                                                            |         | (10,054                                                                        | )          | (12,124 | ) |
| Retained  earnings                                                                                                                                               |         | 452,955                                                                        |       | 449,349 |   |
| Unearned  compensation                                                                                                                                           |         | —                                                                         |       | (2,427 | ) |
| Total stockholders’ equity                                                                                                                                  |         | 448,732                                                                        |       | 440,612 |   |
| Total  liabilities and stockholders’ equity                                                                                                                 |         | $                                                                              | 798,159    |   | $ | 807,294 |   |

 

*The accompanying notes are an integralpart of the unaudited condensed consolidated financial statements.*

4

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**Keane, Inc.**

**UnauditedCondensed Consolidated Statements of Cash Flows**

** **
| ** **                                                                                                 | ** ** | **Three Months Ended March  31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2006**                                                   | ** ** | **2005** | ** ** |
| ** **                                                                                                 | ** ** | **(Dollars in thousands)**                       | ** ** |
| **Cash flows from operating activities:**                                                                  | ** ** | ** **                                                 | ** ** | ** ** | ** ** |
| Net income                                                                                                 |       | $                                                          | 5,390      |   | $ | 7,275 |   |
| Adjustments to  reconcile net income to net cash (used for) provided by operating activities:              |       |                                                       |       |   |   |
| Depreciation and  amortization                                                                             |       | 7,585                                                      |       | 7,165 |   |
| Deferred income  taxes                                                                                     |       | 2,030                                                      |       | 2,711 |   |
| Provision for  doubtful accounts                                                                           |       | 1,540                                                      |       | 1,193 |   |
| Minority  interest                                                                                         |       | 27                                                         |       | (683 | ) |
| Gain on sale of  property and equipment                                                                    |       | (144                                                       | )          | (168 | ) |
| Loss on sale of  investments                                                                               |       | 84                                                         |       | 34 |   |
| Other charges,  net                                                                                        |       | (448                                                       | )          | (208 | ) |
| Changes in operating  assets and liabilities, net of acquisitions:                                         |       |                                                       |       |   |   |
| (Increase) in  accounts receivable                                                                         |       | (8,689                                                     | )          | (15,352 | ) |
| (Increase)  decrease in prepaid expenses and other assets                                                  |       | (12,961                                                    | )          | 1,838 |   |
| (Decrease)  increase in accounts payable, accrued expenses, deferred revenue, and other  liabilities  |       | (16,315                                                    | )          | 4,399 |   |
| Increase in  income taxes payable                                                                          |       | —                                                     |       | 925 |   |
|                                                                                                       |       |                                                       |       |   |   |
| **Net  cash (used for) provided by operating activities**                                                  |       | (21,901                                                    | )          | 9,129 |   |
|                                                                                                       |       |                                                       |       |   |   |
| **Cash flows from investing  activities:**                                                                 |       |                                                       |       |   |   |
| Purchase of  investments                                                                                   |       | (30,000                                                    | )          | (13,858 | ) |
| Sale and  maturities of investments                                                                        |       | 43,681                                                     |       | 16,619 |   |
| Purchase of  property and equipment                                                                        |       | (2,998                                                     | )          | (4,759 | ) |
| Restricted cash                                                                                            |       | —                                                     |       | (587 | ) |
| Proceeds from  the sale of property and equipment                                                          |       | 412                                                        |       | 366 |   |
| Payments for  current year acquisitions, net of cash acquired                                              |       | —                                                     |       | 4,584 |   |
|                                                                                                       |       |                                                       |       |   |   |
| **Net  cash provided by investing activities**                                                             |       | 11,095                                                     |       | 2,365 |   |
|                                                                                                       |       |                                                       |       |   |   |
| **Cash flows from financing  activities:**                                                                 |       |                                                       |       |   |   |
| Principal  payments under capital lease obligations                                                        |       | (1                                                         | )          | (105 | ) |
| Proceeds from  issuance of common stock                                                                    |       | 4,469                                                      |       | 2,059 |   |
| Repurchase of  common stock                                                                                |       | (4,331                                                     | )          | — |   |
|                                                                                                       |       |                                                       |       |   |   |
| **Net  cash provided by financing activities**                                                             |       | 137                                                        |       | 1,954 |   |
|                                                                                                       |       |                                                       |       |   |   |
| Effect of  exchange rate changes on cash                                                                   |       | 290                                                        |       | 33 |   |
| **Net  (decrease) increase in cash and cash equivalents**                                                  |       | (10,379                                                    | )          | 13,481 |   |
| **Cash  and cash equivalents at beginning of period**                                                      |       | 71,570                                                     |       | 67,488 |   |
|                                                                                                       |       |                                                       |       |   |   |
| **Cash  and cash equivalents at end of period**                                                            |       | $                                                          | 61,191     |   | $ | 80,969 |   |
|                                                                                                       |       |                                                       |       |   |   |
| **Supplemental information:**                                                                              |       |                                                       |       |   |   |
| Income taxes  paid                                                                                         |       | $                                                          | 7,248      |   | $ | 1,466 |   |
| Interest paid                                                                                              |       | $                                                          | —     |   | $ | 3 |   |

 

*The accompanying notes are anintegral part of the unaudited condensed consolidated financial statements.*

5

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**Keane, Inc.**

**Notesto Unaudited Condensed Consolidated Financial Statements**

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

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with generally accepted accounting principles for interim financialinformation and, accordingly, do not include all of the information andfootnotes required by generally accepted accounting principles for completefinancial statements. The accompanying unaudited condensed consolidated financialstatements include the accounts of Keane, Inc. and our wholly and majorityowned subsidiaries. In the opinion of management, all adjustments, consistingprimarily of normal recurring accruals, considered necessary for a fairpresentation of the results of operations for the interim periods reported andof our financial condition as of the date of the interim balance sheet havebeen included. Operating results for the three months ended March 31, 2006are not necessarily indicative of the results that may be expected for the yearending December 31, 2006 or for any other period.

The balance sheet at December 31,2005 has been derived from our audited consolidated financial statements atthat date but does not include all of the information and footnotes required bygenerally accepted accounting principles for complete financial statements.

Certain reclassificationshave been made to the 2005 financial statements to conform to the 2006presentation. These reclassifications have no effect on previously reported netincome or stockholder’s equity.

For further information,refer to the consolidated financial statements and footnotes thereto includedin our Annual Report on Form 10-K for the year ended December 31,2005 filed with the Securities and Exchange Commission on March 16, 2006.

**Note 2.        Stock Based Compensation**

Effective January 1, 2006, we adoptedStatement of Financial Accounting Standard (“SFAS”) No. 123 (revised2004), (“SFAS 123(R)”) “Share Based Payment”. Generally, the approach in SFAS123(R) is similar to the approach described in Statement of FinancialAccounting Standard No 123, (“SFAS 123”) “Accounting for Stock BasedCompensation”. However, SFAS 123(R) requires all share-based paymentsgranted to employees that are ultimately expected to vest and do actually vest,including grants of employee stock options, to be recognized in the incomestatement based on their fair value at the date of grant. Pro forma disclosureis no longer an alternative.

We adopted SFAS 123(R) under themodified prospective method. Under this method, beginning on January 1,2006, we recognized compensation cost for all share-based payments to employeesbased on the grant date estimate of fair value for those awards. We have usedthe Black-Scholes option-pricing model to determine fair value for allshare-based payments. Prior period financial information has not been restated.

As of March 31, 2006, we had several share-basedcompensation plans that are described below. The adoption of SFAS 123(R) onJanuary 1, 2006 had the following impact on our results of operations forthe three months ended March 31, 2006: operating profit before tax waslower by approximately $0.5 million, net income was lower by approximately $0.4million, basic EPS was lower by approximately $0.01 and diluted EPS was lowerby less than one cent. The total income tax benefit recognized in the incomestatement for share-based compensation agreements for the three months ended March 31,2006 was approximately $0.2 million.  There was no tax benefit realized from stockoptions exercised during the three months ended March 31, 2006.

Wereceived $2.7 million from stock option exercises for the three months ended March 31,2006. As of March 31, 2006, we had approximately $5.9 million ofunrecognized compensation cost related to stock option awards that we expect tobe recognized as expense over a weighted average period of 3.7 years.

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The following table illustrates the effecton net income and earnings per share as if we had applied the fair value recognitionprovisions of SFAS 123 to our stock-based employee compensation for the threemonths ended March 31, 2005.
| ** **                                                                                                                                  | ** ** | **Three Months  ended  March 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| Net income—as  reported (1)                                                                                                            |       | $                                                  | 7,275      |   |
| Add: Stock-based  employee compensation expense included in reported net income, net of related  tax effects                           |       | 83                                                 |       |
| Deduct: Total  stock-based employee compensation expense determined under the fair value  method for all awards, net of related tax effects |       | (1,361                                             | )          |
|                                                                                                                                        |       |                                               |       |
| Net income — pro  forma                                                                                                                |       | $                                                  | 5,997      |   |
|                                                                                                                                        |       |                                               |       |
| Earnings per share:                                                                                                                         |       |                                               |       |
| Basic—as  reported                                                                                                                     |       | $                                                  | 0.12       |   |
| Basic—pro forma                                                                                                                        |       | $                                                  | 0.10       |   |
| Diluted—as  reported (1)                                                                                                               |       | $                                                  | 0.11       |   |
| Diluted—pro  forma (1)                                                                                                                 |       | $                                                  | 0.09       |   |

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(1)             See Note 3 “EarningsPer Share” for reconciliation of net income as reported to net income used incalculation of diluted earnings per share.

For periods prior to the adoption of SFAS123(R), we elected to follow Accounting Principles Board Opinion (“APB”) No. 25(“APB 25”), “Accounting for Stock Issued to Employees,” and related FinancialAccounting Standards Board (“FASB”) Interpretation No. 44 (“FIN 44”), “Accountingfor Certain Transactions Involving Stock Compensation” in accounting for ourshare based payment awards. Under APB 25, since the exercise price of ouremployee stock options equaled the market price of the underlying stock on thedate of the grant, no compensation expense was recorded in the financialstatements.  However, compensation expense related torestricted stock awards and certain Keane Worldzen stock options was recordedratably over the restriction and vesting period, respectively, and was includedin the selling, general, and administrative expenses in the accompanyingunaudited condensed consolidated statements of income.

Prior to theadoption of SFAS 123(R) and during the Fourth Quarter of 2005, weaccelerated the vesting of certain stock options in which the exercise price ofthe awards had exceeded the market price of the stock on the date ofmodification. As a result, of the acceleration, approximately 2.1 millionshares subject to options, constituting approximately 47% of the total ofunvested options outstanding at that time became immediately exercisable. Theacceleration impacted approximately 570 employees. Under APB 25 and FIN 44, nocompensation expense was recognized in the financial statements for theacceleration of vesting of these options since the closing price per share ofour common stock on the dates of acceleration were greater than the exerciseprices of the unvested options that we accelerated. The primary purpose of theaccelerated vesting was to enable us to avoid recognizing in our incomestatement non-cash compensation expense associated with these options in futureperiods, upon our adoption of SFAS 123(R) on January 1, 2006.Absent the acceleration of the options described above, from and after ouradoption of SFAS 123(R), we would have been required to recognizeapproximately $10.5 million in pre-tax non-cash compensation expense overthe remaining vesting terms of the stock options, based on valuation calculationsusing the Black-Scholes option pricing model.

**Share Based CompensationPlans:**

        **StockIncentive Plans**

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

7

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period. The cumulativeamount of compensation cost recorded on stock options and restricted stock atany date is at least equal to the fair value of the awards that have actuallyvested as of that date.

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

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

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

        Upon exercise of stock options, weissue shares from our authorized, but unissued shares.

        In October 2005, we announced theapproval by our Board of Directors of a program for the repurchase of3.0 million shares of our common stock (“the October 2005 Program”).The repurchases may be made on the open market or in negotiated transactions,and the timing and amount of shares to be purchased will be determined by ourmanagement based on its evaluation of market and economic conditions and otherfactors. As of March 31, 2006, there were approximately 2.2 million sharesthat remained available for repurchase under this program.

        **Employee Stock Purchase Plan**

 **       **Our Employee Stock Purchase Plan(“ESPP”) provides for the purchase of 6,550,000 shares of our common stock.Effective January 1, 2006, we modified our ESPP to allow qualifyingemployees to purchase shares at 95% of the market value of our common stock onthe last day of each six-month purchase period. Previously, qualifyingemployees were able to purchase stock at 85% of the market value of the stockon the offering commencement date or the last day of the purchase period,whichever was lower. Prior to January 1, 2006, our ESPP wasnon-compensatory as defined in APB 25, and accordingly, we did not recognizecompensation expense in our consolidated financial statements. However, ourESPP would have been compensatory under SFAS 123(R) had we not modifiedthe terms of the ESPP. Our modification of the ESPP effective January 1,2006 reduced the purchase discount to 5% of the market value of our commonstock and removed the look-back provision and therefore, the ESPP isnon-compensatory under SFAS 123(R).

          On February 13, 2003, our Boardof Directors approved a UK ESPP. We allocated 500,000 shares of the totalnumber of shares reserved under our ESPP for issuance under the UK ESPP. Ourmodification of the ESPP was also effective for the UK ESPP. Consistent withthe terms of our ESPP, the options under the UK ESPP are non-compensatory underSFAS 123(R) and accordingly, we have not recognized any stock-basedcompensation expense associated with our ESPP or UK ESPP during the FirstQuarter of 2006.

        Thefair market value of each stock option is estimated using the Black-Scholesoption-pricing model, assuming no expected dividends with the followingweighted-average assumptions:

|                                         | ** ** | **For the Three  Months ended  March 31, 2006** | ** ** | **For the Three  Months ended  March 31, 2005** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| Options granted                         |       | 486,000                                                                  |       | 18,500                                                                   |       |
| Weighted-average  exercise price        |       | $                                                                        | 11.64      |                                                                     | $          | 13.33 |   |
| Weighted-average  grant date fair value |       | $                                                                        | 4.90       |                                                                     | $          | 5.76 |   |
| Expected life  (in years)               |       | 4.6                                                                      |       | 4.3                                                                      |       |
| Expected stock  price volatility        |       | 42.22                                                                    | %          | 47.79                                                                    | %          |
| Risk-free interest rate                 |       | 4.26                                                                     | %          | 4.01                                                                     | %          |

 

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        We derived our estimate of an expectedoption life based on a review of our historic option holding periods, includinga consideration of the holding period inherent in currently vested butunexercised options. We believe that this historical data is currently the bestestimate of the expected term of a new option. We reviewed historical data forgroups of employees and determined that the type of award was an indicator ofthe exercise behavior.  For 2006, theoption lives range from 4.4 years to 5.5 years.

        We derived the estimated stock pricevolatility based on a review of our actual historic stock prices commensuratewith the expected life of the award. For the First Quarter of 2006, theestimated volatility ranges from 41.1% to 46.9%. We believe that the historicalstock price volatility is an accurate indicator of future stock priceperformance.

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

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

         A summary ofstock option activity under all of our plans for the First Quarter ended March 31,2006 is as follows:
| ** **                                     | ** ** | **Shares**                                                                                                                                                                                                        | ** ** | **Weighted   Average   Exercise   Price** | ** ** | **Weighted-   Average   Remaining   Contractual   Term** | ** ** | **Aggregate   Intrinsic   Value** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                     | ** ** | **                                 (years)** | ** ** |
| Options  outstanding at December 31, 2005 |       | 4,880,930                                                                                                                                                                                                         |       | $                                                        | 12.04      |                                                                         | —     |                                        | $          | — |   |
|                                           |       |                                                                                                                                                                                                              |       |                                                     |       |                                                                         |       |                                        |       |
| Granted                                        |       | 486,000                                                                                                                                                                                                           |       | 11.64                                                    |       | —                                                                       |       | —                                      |       |
|                                           |       |                                                                                                                                                                                                              |       |                                                     |       |                                                                         |       |                                        |       |
| Exercised                                      |       | (302,141                                                                                                                                                                                                          | )          | 9.35                                                     |       | —                                                                       |       | —                                      |       |
|                                           |       |                                                                                                                                                                                                              |       |                                                     |       |                                                                         |       |                                        |       |
| Forfeited /  Expired                           |       | (142,383                                                                                                                                                                                                          | )          | 14.35                                                    |       | —                                                                       |       | —                                      |       |
|                                           |       |                                                                                                                                                                                                              |       |                                                     |       |                                                                         |       |                                        |       |
| Options  outstanding at March 31, 2006    |       | 4,922,406                                                                                                                                                                                                         |       | $                                                        | 12.12      |                                                                         | 6.6        |                                        | $          | 19,145,051 |   |
|                                           |       |                                                                                                                                                                                                              |       |                                                     |       |                                                                         |       |                                        |       |
| Options exercisable at  March 31, 2006    |       | 3,161,228                                                                                                                                                                                                         |       | $                                                        | 13.28      |                                                                         | 6.2        |                                        | $          | 8,987,383 |   |

 

The total intrinsic valueof options exercised (i.e., the difference between the market price at exerciseand the price paid by the employee to exercise the options) during the threemonths ended March 31, 2006 and 2005, was approximately $­­­­­­­1.0million and $0.1 million, respectively. The aggregate intrinsic value ofoptions outstanding and options exercisable as of March 31, 2006 is basedon the difference between the closing price of our common stock on March 31,2006, which was $15.75, and the exercise price of the applicable option. Incalculating the aggregate intrinsic value, we excluded those options whoseexercise price was greater than the closing price per share of our common stockas of March 31, 2006. Shares available for future issuance under our stockoption plans at March 31, 2006 were 8,596,318.

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         **Restricted Stock**

|                                      | ** ** | **Shares** | ** ** | **Weighted average  grant date  fair value** | ** ** |
|--------------------------------------|------------|------------|------------|-------------------------------------------------------------|------------|
| Nonvested at  December 31, 2005 |       | 190,000    |       | $                                                           | 14.16      |   |
| Granted                              |       | 65,000     |       | $                                                           | 11.15      |   |
| Vested                               |       | —     |       | —                                                      |       |
| Forfeited                            |       | —     |       | —                                                      |       |
| Nonvested at  March 31, 2006    |       | 255,000    |       | $                                                           | 13.39      |   |

 

The majority of ourrestricted stock awards vest over a five-year period on a graded vestingschedule. We have valued the restricted stock awards based on the closing priceof our common stock on the date of grant, less the nominal considerationreceived. We record compensation cost on a straight-line basis over theshare-vesting period. The weighted average grant date fair value of restrictedstock awards granted during the three months ended March 31, 2006 was$11.15. We did not grant any restricted stock awards during the First Quarterof 2005. We recorded expense of approximately $0.1 million for each of thethree months ended March 31, 2006 and 2005, respectively, associated withour restricted stock awards. As of March 31, 2006, there was approximately$2.6 million of unrecognized compensation cost related to restricted stockawards that we will recognize as expense over a weighted average period of 3.9years. As of March 31, 2006, there were no vested restricted stock awards.

**Note 3.****        Earnings Per Share**

Basic earnings per share is computed using only the weighted-averagenumber of common shares outstanding during the period. Diluted earnings pershare is computed using the weighted-average number of common sharesoutstanding during the period, plus the dilutive effect of potential futureissuances of common stock relating to stock option awards and other potentiallydilutive securities. In calculating diluted earnings per share, the dilutiveeffect of stock options is computed using the average market price for therespective period. Potential shares related to certain of our outstanding stockoptions and restricted stock awards were excluded from the computation ofearnings per share because they were anti-dilutive in the periods presented,but could be dilutive in the future. The following table sets forth thecomputation of basic and diluted earnings per share (in thousands, except pershare data):
| **Three Months Ended March 31,**                                                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income used  for basic earnings per share                                                                                         |       | $        | 5,390      |     | $          | 7,275 |   |
| Interest expense  associated with convertible debentures, including amortization of debt  issuance costs                              |       | 970      |       | 970      |       |
| Related tax  effect                                                                                                                   |       | (396     | )          | (396     | )          |
| Net income used  for diluted earnings per share                                                                                       |       | $        | 5,964      |     | $          | 7,849 |   |
|                                                                                                                                  |       |     |       |     |       |
| Weighted average  number of common shares outstanding used in calculation of basic earnings per  share                      |       | 58,131   |       | 62,156   |       |
| Incremental  shares from restricted stock, employee stock purchase plan, and the assumed  exercise of dilutive stock options          |       | 324      |       | 697      |       |
| Incremental  shares from assumed conversion of convertible debentures                                                                 |       | 8,175    |       | 8,175    |       |
| Weighted average  number of common shares and common share equivalents outstanding used in  calculation of diluted earnings per share |       | 66,630   |       | 71,028   |       |
| Earnings per share                                                                                                                    |       |     |       |     |       |
| Basic                                                                                                                                 |       | $        | 0.09       |     | $          | 0.12 |   |
| Diluted                                                                                                                               |       | $        | 0.09       |     | $          | 0.11 |   |
|                                                                                                                                  |       |     |       |     |       |
| Anti-dilutive  common stock equivalents related to outstanding stock options                                                          |       | 2,336    |       | 1,701    |       |
| Anti-dilutive  restricted stock                                                                                                       |       | 125      |       | 140      |       |

 

Our 2.0% ConvertibleSubordinated Debentures due 2013 (the “Debentures”) are convertible at theoption of the holder into shares of our common stock at an initial conversionrate of 54.4989 shares of common stock per $1,000 principal amount ofDebentures, which is equivalent to an initial conversion price of approximately$18.349 per share. Approximately 8.2 million shares of our common stock wouldbe issuable upon the conversion of all of the outstanding Debentures. Inaccordance with the Emerging Issues Task Force’s (“EITF”) Issue No 04-8, “TheEffect of Contingently Convertible Debt on Diluted Earnings per Share,” we arerequired to include contingently convertible debt in the calculation of dilutedearnings per share using the if-converted method regardless of whether themarket price trigger has been met. See Note 9 “Convertible SubordinatedDebentures” for further discussion on the Debentures and their conversionfeatures.

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

SFAS No. 130 (“SFAS 130”),“Reporting Comprehensive Income,” establishes rules for the reporting anddisplay of comprehensive income and its components. Components of comprehensiveincome include net income and certain transactions that have generally beenreported in the consolidated statement of stockholders’ equity. Othercomprehensive income is comprised of currency translation adjustments,available-for-sale securities valuation adjustments, and adjustments related toa foreign defined benefit plan.

Total comprehensiveincome (i.e., net income plus available-for-sale securities valuationadjustments, currency translation adjustments and adjustments related to aforeign defined benefit plan, net of tax) was $7.5 million and $6.8 million forthe three 

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months ended March 31,2006 and 2005, respectively. See Note 6 “Pension Plan” for a discussion of theminimum pension liability adjustments.

The following tablesummarizes the components of accumulated other comprehensive loss, net of taxes(dollars in thousands):
| **As of**                            | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Foreign currency  translation adjustments |       | $                        | 1,800      |                        | $          | 1,551 |   |
| Securities  valuation adjustment          |       | (642                     | )          | (732                        | )          |
| Minimum pension  liability adjustment     |       | (11,212                  | )          | (12,943                     | )          |
|                                      |       |                     |       |                        |       |
| Accumulated other  comprehensive loss     |       | $                        | (10,054    | )                           | $          | (12,124 | ) |

 

**Note5.       Significant Contracts**

*VictoriaTTA Contract*

        OnJuly 26, 2005, Keane Australia Micropayment Consortium Pty Ltd (“Kamco”),a wholly-owned subsidiary of Keane and the Public Transport Ticketing Bodytrading as Transport Ticketing Authority (the “TTA”) of the State of Victoria,Australia, entered into a $494.0 million AUD, or approximately$367.0 million (based on the exchange rate of $.74285 AUD per $1.00),contract (the “Victoria TTA contract”) to deliver a public transit ticketingsystem for the State of Victoria. The Victoria TTA contract has a term ofapproximately twelve years, including two years of development work, referredto as the Build phase, and ten years of operation and maintenance, referred toas the Operate phase. The Build phase represents the development andimplementation of the comprehensive solution including hardware, card distributionand software. The Operate phase represents the maintenance of the software,hardware and comprehensive solution, refurbishments and replacements, hostingand management of the subcontractors. The TTA has an option to extend thecontract for an additional two years at the completion of the Operate phase.The Build phase of the project is comprised of twelve phases beginning with themobilization phase and ending with the operational proving phase. Each phaseduring the Build phase requires acceptance by the TTA. At the end of the fifthyear of the Operate phase, the TTA can cancel the Victoria TTA contract at itsoption. Keane has established and is leading a consortium of four transit andtechnology experts to design, build, implement and maintain a micropaymentsmartcard technology system and related equipment for the TTA. Keane’sconsortium includes automatic fare collection specialists ACS Solutions SchweizAG (a subsidiary of Affiliated Computer Services, Inc.), ERG, and Giesecke &Devrient Australasia (“G&D”). In connection with the Victoria TTA contract,Keane delivered a guarantee to the TTA (the “Guarantee”) pursuant to whichKeane has guaranteed certain obligations of Kamco under the Victoria TTAcontract.

         Payments under the Victoria TTA contractare based on the completion of milestones during the Build phase. Paymentsduring the Operate phase are based on the level of service provided and arebilled monthly. During the Operate phase the TTA may benchmark rates followingthe fourth and ninth anniversary dates of the Victoria TTA contract andnegotiate adjustments if the rates exceed prevailing market costs forcomparable services.

        TheTTA may terminate the Victoria TTA contract for convenience at any time and payonly for work completed, subject to specified termination fees. Thesetermination fees consist primarily of 1% of the remaining amount of contractualrevenues over the twelve-year term. During the contract term, the TTA mayterminate the Victoria TTA contract for events of default, subject to Kamco’sright to cure. Upon the failure to perform by Kamco or its subcontractors, theTTA may step in and take over the role of prime contractor in place of Kamco.

        Kamcohas obligations under the Victoria TTA contract with respect to both projectmanagement and performance of subcontractors. There are numerousindemnification provisions within the Victoria TTA contract, some of which arecustomarily included through the normal course of business. We have agreed tohold TTA harmless against losses arising from a breach of representationsrelated to such matters as title to assets sold and licensed or certainintellectual property rights, improper disclosures of confidential information,personal injuries or property damages. As the prime contractor for the VictoriaTTA contract, in certain cases Kamco is entitled to the benefit ofcorresponding indemnifications from its subcontractors. We also retain theright to enforce the subcontracts and to seek damages for nonperformance from oursubcontractors. Subject to a number of exclusions, Kamco’s maximum liability iscapped at $72 million ($100 million AUD). Under the Victoria TTAcontract, liquidated damages, for which Kamco may be liable, are assessed at$36,000 ($50,000 AUD) per day for each day the specified phase completion isbehind schedule, but are limited to $7.2 million ($10 million AUD).The first $3.6 million ($5 million AUD) in liquidated damages issplit evenly amongst Kamco and certain subcontractors. The next$3.6 million ($5 million AUD) is apportioned based on responsibilityfor the delay.

        TheVictoria TTA contract also requires that Kamco provide security and performancebonds in the amount of $21.5 million ($30 million AUD) during thetwo-year Build phase and in the amount of $10.8 million ($15 millionAUD) during the twelve-year term. One of the banks associated with our creditfacility issued a $32.3 million ($45 million AUD) letter of creditdated July 14, 2005 against our credit facility in fulfillment of thesecurity and performance bonds. Keane has guaranteed performance and payment by

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Kamco in the event thatKamco is unable to complete the work or meet its payment obligations.

        UnderEmerging Issues Task Force (“EITF”) No. 00-21 (“EITF 00-21”), “RevenueArrangements with Multiple Deliverables,” in order to account for thedeliverables within a contract separately, all delivered items must havestandalone value, the vendor must have objective and reliable evidence of fairvalue of the undelivered item(s) and if the client has a general right ofreturn relative to the delivered item, delivery or performance of theundelivered items is probably and substantially within the vendor’s control. Wehave concluded that objective evidence of fair value does not exist for all ofthe elements within the Operate phase. Accordingly, the elements within theBuild and Operate phases cannot be separated into multiple units of accountingand therefore, must be accounted for as a single unit of accounting. As a result,we are deferring all revenues and costs directly associated with the deliveryof services during the Build phase and we will recognize all revenues anddirect costs for the contract over the ten-year period of the Operate phasecurrently estimated to begin in mid-2007.

         The mobilization phase of the projectis complete and during the Fourth Quarter of 2005, Kamco received its firstmilestone payment of $8.5 million USD ($12 million AUD). For thethree months ended March 31, 2006 and for the year ended December 31,2005, we deferred all revenues and direct costs and expensed approximately $0.7million and $3.4 million, respectively in indirect costs. As of March 31,2006 and December 31, 2005, there was approximately $8.5 million ($12million AUD) and $8.8 million ($12 million AUD), respectively of deferredlong-term revenue and approximately $12.3 million ($17.5 million AUD) and$8.6 million ($11.7 million AUD) of deferred costs included in theaccompanying unaudited condensed consolidated balance sheets. See Note 12 “SegmentInformation” for a discussion on the determination of reportable segments.

*PacifiCare*

In 2004,PacifiCare, one of our largest clients, reduced the level of service from thestated baseline contract amounts in accordance with its right under thecontract terms, thereby reducing the original contract value. We providedservices at or above the baseline levels set forth in the original contract atagreed upon rates. On December 20, 2005, UnitedHealth Group Incorporated,an affiliate of United HealthCare Services, Inc. (“United HealthCare”),completed its acquisition of PacifiCare. On January 20, 2006, we enteredinto a five-year master services agreement with United HealthCare Services, Inc.effective January 1, 2006. Simultaneously, we and PacifiCare terminatedour Information Technology Services Agreement, dated January 11, 2002,effective January 1, 2006. Our original Information Technology ServicesAgreement with PacifiCare provided for an outsourcing arrangement with aten-year term and $500 million in contract value. As a result of theending of the original agreement with PacifiCare we will receive a$10.1 million payment in two equal installments on July 30, 2006 and July 30,2007. The first half will be recognized over the 18 month period January 1,2006 to June 30, 2007. The second half will be recognized at such time theamount becomes due in management’s judgment. If additional services areprocured pursuant to the master services agreement, any remaining portion ofthe payments will be recognized over the period such services are provided.Under the new master services agreement with United HealthCare we will receiveapproximately $21 million for a specified level of services provided from January 1,2006 through June 30, 2007. Revenues from PacifiCare in the First Quarterended March 31, 2006, were approximately $2.1 million lower than revenuesfrom PacifiCare in the First Quarter ended March 31, 2005.

**Note6.****        Pension Plan**

Our United Kingdom (“UK”)defined benefit plan (“DBP”) provides pension benefits to employees of our UKsubsidiary who were active on August 4, 1999, and not to employees whojoined after that date. Benefits are based on the employees’ compensation andservice. Our policy is to fund amounts required by applicable governmentregulations.

As a result of theavailability of more recent measurements of both the plan assets andobligations under the UK DBP, during the three months ended March 31,2006, we recorded a decrease in the required minimum liability of approximately$1.7 million through Accumulated other comprehensive loss. As of March 31,2006, and December 31, 2005, the UK pension liability was approximately$13.8 million and $15.3 million, respectively, and is included in Otherlong-term liabilities in the accompanying unaudited condensed consolidatedbalance sheets.  Recent legislation inthe UK could have a significant impact on the future funding levels requiredunder the UK DBP. We are currently reviewing various alternatives regarding thestructure of the UK Pension. Based upon information available to date, weexpect the increase in funding levels could range from approximately $1.0million to $2.0 million on an annual basis in 2006 and beyond.

Net periodic pension costof the UK DBP for the three months ended March 31, 2006 and 2005 ispresented as follows (dollars in thousands):

| Three months ended March 31, | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Service cost                                     |       | $        | 14         |     | $          | 15 |   |
| Interest cost                                    |       | 513      |       | 496      |       |
| Expected return  on plan assets                  |       | (512     | )          | (457     | )          |
| Amortization of  prior service cost              |       | —   |       | —   |       |
| Amortization of  transitional obligation         |       | —   |       | —   |       |
|                                                  |            |          |            |          |            |  |  |

 

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| Recognized  actuarial loss                                    |   | 140    |   | 116    |   |
|---------------------------------------------------------------|--------|--------|--------|--------|--------|
| Net periodic  pension cost                                    |   | $      | 155    |   | $      | 170 |   |
| Curtailment  loss/(gain)                                      |   | — |   | — |   |
| Net periodic pension  expense after allowance for curtailment |   | $      | 155    |   | $      | 170 |   |

 

**Note 7.****        Business Acquisitions**

*CrestaTesting, Inc.*

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

*ArcStreamSolutions, Inc.*

        OnApril 4, 2005, we acquired certain assets and assumed specifiedliabilities of ArcStream Solutions, Inc. (“ArcStream”) for a base purchaseprice of zero ($0.00) dollars, subject to a working capital adjustment, and anadditional earn-out consideration based on the performance of the ArcStreambusiness during the remainder of 2005. The earn-out period ended on December 31,2005 and no earn-out consideration was paid. ArcStream was a business andtechnology consulting firm based in Watertown, Massachusetts, that specializedin helping organizations compete through the use of advanced technologies andprocess improvement. As a former stockholder of ArcStream, John Keane, Jr.would have been entitled to a portion of any additional consideration. JohnKeane, Jr. was the founder, President and Chief Executive Officer ofArcStream. He is also the brother of Brian Keane, our CEO, the son of JohnKeane, Sr., the Chairman of our Board, and a member of our Board ofDirectors. In addition, in connection with the transaction, John Keane, Jr.,agreed to guarantee certain indemnification obligations of ArcStream and wepaid John Keane, Jr. $21,875 pursuant to a consulting arrangement toassist in the transition of the acquired business. The transaction was approvedby both our Audit Committee and our Board of Directors. The operating resultsof the acquired ArcStream assets have been included in our consolidatedstatement of operations beginning April 5, 2005.

*netNuminaSolutions, Inc.*

        OnFebruary 28, 2005, we acquired netNumina Solutions, Inc. (“netNumina”),a software development company based in Cambridge, Massachusetts thatspecialized in technology strategy, architecture, and custom development, toenhance our capabilities in Development and Integration services. In exchangefor all of the outstanding capital stock of netNumina, we agreed to pay$5.7 million, of which $0.6 million was held back to secureindemnification obligations of the netNumina stockholders. As of March 31,2006, we had paid the $5.1 million not held back and during the First Quarterof 2006, the $0.6 million held back was delivered to the shareholders. Theacquisition has been accounted for under the purchase method in accordance withSFAS 141 and SFAS 142. The total cost of the transaction through March 31,2006 was $4.8 million, which included net assets of approximately$5.2 million. Total assets acquired of $7.8 million consistedprimarily of cash of $4.6 million and accounts receivable of$2.3 million. In connection with the purchase price allocation we recordeda $0.5 million fair value adjustment to reduce property and equipment thatresulted from an excess book value of the assets acquired over the purchaseprice and recorded deferred tax assets of $2.0 million. As a result, wehave not recorded any goodwill or intangible assets in connection with thisacquisition. The valuation and purchase price allocation are final as of December 31,2005. The operating results of netNumina have been included in our consolidatedstatements of income beginning March 1, 2005.

        Atthe date of the acquisition of NetNumina, we entered into a plan to implement aworkforce reduction of eight non-billable employees. As a result, we initiallyrecorded a restructuring liability of $1.0 million related to severance,all of which has been paid as of March 31, 2006. In accordance with EITFIssue No. 95-3 (“EITF 95-3”), “Recognition of Liabilities inConnection with a Purchase Business Combination,” these costs, which are notassociated with the generation of future revenues and have no future economicbenefit, were reflected as assumed liabilities in the allocation of thepurchase price to the net assets acquired.

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*FastTrack Holdings Limited*

        OnJuly 13, 2004, we acquired Fast Track Holdings Limited (“Fast Track”), aprivately held consulting firm based in the United Kingdom that manages thedesign, integration, and deployment of large-scale SAP implementations. Inexchange for all of Fast Track’s outstanding capital stock, we paidapproximately $3.4 million in cash, including transaction costs. We alsoagreed to pay up to an additional approximately $5.0 million in earn-outconsideration over the next two years, contingent upon the achievement ofcertain future financial targets. Based on Fast Track’s financial resultsthrough July 31, 2005, the first earn-out totaling approximately$2.0 million was not achieved. Payment for earn-out consideration earnedthrough July 31, 2006, if any, may range up to approximately$2.9 million. The additional payment for earn-out consideration, if any,will be accounted for as additional purchase price. The acquisition has beenaccounted for under the purchase method in accordance with SFAS 141 andSFAS 142. The portion of the purchase price related to the intangibleassets was finalized and identified utilizing standard valuation procedures andtechniques. The total cost of the acquisition through March 31, 2006 was$4.1 million, which included net assets acquired of approximately ($0.2)million, goodwill of approximately $3.1 million and intangible assets ofapproximately $1.1 million, the majority of which is being amortized on astraight-line basis over two years, and approximates the expected period ofbenefit. Total assets acquired of $2.1 million consisted primarily ofaccounts receivable of $1.9 million. The operating results of Fast Trackhave been included in our consolidated statement of operations beginning July 14,2004.

        Atthe date of acquisition, we entered into a plan to exit certain activities, toconsolidate facilities and to implement a workforce reduction. As a result, werecorded a restructuring liability of $0.3 million related to the leaseobligations and certain other costs for those facilities and $0.1 millionrelated to severance and retention, all of which has been paid as of March 31,2006. In accordance with EITF 95-3, these costs, which are not associatedwith the generation of future revenues and have no future economic benefit,were reflected as assumed liabilities in the allocation of the purchase priceto the net assets acquired.

*NimsAssociates, Inc.*

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

        Atthe date of acquisition, we entered into a plan to exit certain activities, toconsolidate facilities and to implement a workforce reduction of 22non-billable employees. As a result, we recorded a restructuring liability of$1.3 million related to the lease obligations and certain other costs forthose facilities and $0.3 million related to severance and retention, ofwhich all of the severance was paid and $0.8 million for the lease obligationswas paid as of March 31, 2006. In accordance with EITF 95-3, thesecosts, which were not associated with the generation of future revenues and hadno future economic benefit, were reflected as assumed liabilities in theallocation of the purchase price to the net assets acquired. As of March 31,2006, the remaining liability associated with the lease obligation costs wasapproximately $0.5 million.

*KeaneWorldzen*

        OnOctober 17, 2003, we acquired a controlling interest in Keane WorldzenInc. (“Keane Worldzen”), a privately held Business Process Outsourcing (“BPO”) firm.In connection with the acquisition, we paid $9.0 million to acquire the Series Apreferred shares of Worldzen Holdings Limited held by an unrelated third party.We contributed to Keane Worldzen our Worldzen Holdings Limited shares,$4.3 million in cash and certain assets of our Keane Consulting Group (“KCG”),our business consulting arm. This transaction was accounted for under thepurchase method in accordance with SFAS 141 and SFAS 142. As a resultof the initial transaction, we owned approximately 62% of Keane Worldzen’soutstanding capital stock. The former majority shareholders of WorldzenHoldings Limited contributed their Worldzen Holdings Limited shares to KeaneWorldzen in exchange for approximately 38% of Keane Worldzen’s outstandingcapital stock and are currently members of Keane Worldzen’s management. Theassets and liabilities contributed to Keane Worldzen were recorded in relationto each shareholder’s ownership percentage in Keane Worldzen as follows: (i) carryoverbasis related to assets and liabilities contributed to Keane Worldzen for whichthe individual shareholder had a prior interest; and (ii) fair value forassets and liabilities for which an individual shareholder had no priorinterest. The acquisition was intended to strengthen our position in the BPOmarket. As a result, we initially recorded goodwill of approximately$13.8 million in the accompanying consolidated balance sheets.

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        OnApril 1, 2005, we increased our equity position in Keane Worldzen pursuantto the purchase option discussed below to approximately 81% with an additionalcapital contribution of approximately $5.0 million in cash and$3.0 million from the conversion of existing cash advances to equity. Wepurchased approximately 36.0 million shares at a cost of approximately$.22 per share. As a result of the additional capital contribution, we continueto consolidate the results of Keane Worldzen, but are also able to consolidateits results for tax purposes beginning April 1, 2005. Upon our additionalcapital contribution, the minority interest shareholders owned approximately19% of the issued and outstanding capital stock of Keane Worldzen. In December 2005,the minority shareholders executed their right under the first put option torequire us to purchase approximately 5% of their shares for a stated value of$2.8 million as discussed below. As a result, we paid the$2.8 million for an additional 5% ownership interest associated with thefirst put option and as of March 31, 2006, own approximately 86% of theissued and outstanding capital stock of Keane Worldzen.

        Inconnection with our acquisition of a controlling interest in Keane Worldzen in October 2003,we obtained the right to purchase certain of the remaining shares held by theminority shareholders of Keane Worldzen at different times during 2006 to 2009(“call options”) and the right to acquire additional shares directly fromWorldzen at a fixed price stated at the acquisition date through 2005 (“purchaseoption”). Our purchase option allowed us to purchase additional shares directlyfrom Worldzen to obtain up to 80% of the total outstanding shares of Worldzenthrough December 31, 2005. Our first call option is exercisable during theperiod beginning on January 1, 2006 and ending on December 31, 2006,is based on the same fixed price as is the purchase option and allows us toacquire up to 80% of the total outstanding shares of Worldzen at the time thefirst call option is exercised. The fair value of the purchase and first calloption, using a Black-Scholes valuation model, was approximately$3.8 million and was recorded at the original acquisition date. During2005, we acquired 80% of the outstanding shares of Keane Worldzen through theexercise of the purchase option and reclassified the value of the purchase andfirst call option to goodwill. The other call options are exercisable at thefair market value of the underlying shares to obtain specified ownership levelsduring the call periods, which are exercisable at certain times during the periodJanuary 1, 2007 through December 31, 2009. Since these other calloptions can only be exercised at the fair value of the underlying shares, noamounts have been recorded for these call options in our consolidated financialstatements.

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

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

**Note 8.****        Restructurings**

*Workforcereductions*

       During the First Quarter of 2006 wereduced our workforce at certain locations by 53 employees due to our One KeaneTransformation, most of whom had an expected termination date in the FirstQuarter of 2006. The employees affected in the reduction were both non-billableand billable and we believe were employees whose roles could be reduced basedupon the current business needs in their respective locations. As a result, werecorded approximately $1.3 million for severance costs in the accompanyingunaudited condensed consolidated financial statements. Of this amount,approximately $0.5 million related to personnel in the United Kingdom andapproximately $0.8 million related to personnel from our locations in the US.In accordance with SFAS No. 146 (“SFAS 146”) “Accounting for CostsAssociated with Exit or Disposal Activities”, for those employees whose serviceperiod was greater than 60 days, the expense is being booked ratably over theservice period. Cash expenditures in the First Quarter of 2006 related to thisworkforce reduction were approximately $0.8 million.  As of March 31, 2006, the remainingreserve balance was $0.5 million, which we expect to be paid in the Second andThird Quarters of 2006.

        Inconnection with the netNumina acquisition discussed in Note 7 “BusinessAcquisitions”, we entered into a plan to reduce the workforce by eightemployees, most of whom had an expected termination date in the Second Quarterof 2005. The employees affected in the reduction were non-billable personnelwhose responsibilities have been integrated into our existing operations torealize the synergies of the two operations. We recorded a liability of$1.0 million associated with severance and other termination benefits andthe plan was complete as of March 31, 2006. In accordance with EITF 95-3,these costs have been reflected as assumed liabilities in the allocation of thepurchase price to the net assets acquired. During the First Quarter of 2006,cash expenditures related to netNumima severance and retention were $0.2million.

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        Inconnection with the Fast Track acquisition discussed in Note 7 “BusinessAcquisitions”, we entered into a plan to reduce the workforce by sevenemployees, most of whom had a termination date of October 31, 2004. Theemployees affected in the reduction were non-billable personnel whoseresponsibilities were integrated into our existing operations to realize thesynergies of the two operations. We recorded a liability of approximately $0.1million associated with severance, retention, and other termination benefits,completed the plan by the end of the First Quarter of 2005, and paid the entire$0.1 million in severance and retention. In accordance with EITF 95-3,these costs were reflected as assumed liabilities in the allocation of thepurchase price to the net assets acquired.

        Inconnection with the Nims acquisition discussed in Note 7 “BusinessAcquisitions”, we entered into a plan to reduce the workforce by 22 employees,most of whom had a termination date of April 30, 2004. The employeesaffected in the reduction were non-billable personnel whose responsibilitieswere integrated into our existing operations to realize the synergies of thetwo operations. We recorded a liability of $0.3 million associated withseverance, retention and other termination benefits and, by March 31,2005, had completed the plan and paid $0.3 million in severance and retention. Inaccordance with EITF 95-3, these costs were reflected as assumedliabilities in the allocation of the purchase price to the net assets acquired.

*Branchoffice closures*

        DuringDecember 2005, in accordance with SFAS 146, we accrued$0.6 million for a restructuring of one of our real estate locations thatwe vacated. Also during the Fourth Quarter of 2005, we performed an evaluationof our restructuring balances for properties restructured in prior periods anddetermined we had approximately $0.6 million in excess cost over ourcurrent needs. This change in estimate was a result of negotiating early leaseterminations, obtaining a subtenant, or lower facility costs. The net impact ofthese actions did not have an effect on our consolidated statement of income.Cash expenditures in the First Quarter ended March 31, 2006 related to the2005 property restructuring were $0.1 million. As of March 31, 2006 and December 31,2005, the remaining reserve balances were $0.5 million and $0.6 million,respectively.

        DuringDecember 2004, in accordance with SFAS 146, we accrued$2.3 million for a restructuring of one of our real estate locations thatwe vacated. Additionally, during the Fourth Quarter of 2004, we performed anevaluation of our restructuring balances for properties restructured in priorperiods and determined that we had excess costs-accrued of $2.4 million,as a result of negotiating early lease terminations or obtaining a subtenant.The net impact of these actions resulted in a net expense reduction to therestructuring charge of $0.1 million in the Fourth Quarter of 2004 in ourconsolidated statement of income. Cash expenditures during the First Quarter of2006 and 2005 related to the 2004 property restructurings totaled approximately$0.1 million for both periods, net of sublease income of approximately $30,000and $0, respectively.  As of March 31,2006 and December 31, 2005, the remaining reserve balances were $2.0million and $2.1million, respectively.

         Inconnection with the Fast Track acquisition noted above, we entered into a planto exit certain activities and to consolidate certain facilities. As a result,we recorded a restructuring liability of $0.4 million related to the leaseobligation and certain other costs for one facility. In accordance with EITF 95-3,these costs, which were not associated with the generation of future revenuesand had no future economic benefit, were reflected as assumed liabilities inthe allocation of the purchase price to the net assets acquired. The totalrestructuring liability was paid in the First Quarter of 2005.

         Inconnection with the Nims acquisition noted above, we entered into a plan toexit certain activities and to consolidate certain facilities. As a result, werecorded an initial restructuring liability of $1.4 million related to thelease obligation and certain other costs for eight facilities. During theFourth Quarter of 2004, we revised our original estimate for Nims-related leaseobligations and reduced the accrual by $0.1 million. In accordance withEITF 95-3, these costs, which were not associated with the generation offuture revenues and had no future economic benefit, were reflected as assumedliabilities in the allocation of the purchase price to the net assets acquired.Cash expenditures in the First Quarter of 2006 and 2005 related to allNims-related branch office closings totaled approximately $33,000 and$0.1 million, respectively, which is net of approximately $25,000 and$28,000, respectively, of sublease payments received. As of March 31, 2006and December 31, 2005, the remaining reserve balances were $0.5 millionfor each period.

        DuringDecember 2003, in accordance with SFAS 146, we accrued$0.9 million for a restructuring of two of our real estate locations fromwhich we no longer were receiving economic benefit. Additionally, during theFourth Quarter of 2003, we performed an evaluation of our restructuringbalances for properties restructured in prior periods and determined as aresult of negotiating early lease terminations or obtaining a subtenant hadapproximately $1.0 million in excess costs accrued. In prior years, inaccordance with EITF Issue No. 94-3 (“EITF 94-3”), “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (Including Certain Costs Incurred in a Restructuring),” weperformed reviews of our business strategy and concluded that consolidatingsome of our branch offices was key to our success. Cash expenditures in theFirst Quarter ended March 31, 2006 and March 31, 2005, for all branchoffice closings relating to restructuring charges in 2003 and prior years were$0.4 million and  $0.8 million,respectively, which is net of approximately $0.2 million and $0.3 million,respectively, of sublease payments received. As of March 31, 2006 and December 31,2005, the total remaining reserve balance for branch office closings relatingto restructuring in 2003 and prior years was $1.9 million and$2.3 million, respectively.

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The activity for thethree months ended March 31, 2006 and March 31, 2005 associated withrestructuring charges is as follows (in thousands):
| ** **                                                           | ** ** | **January 1,  2005  Balance** | ** ** | **Cash  Expenditures,  Net** | ** ** | **Change in  current and  prior year’s  estimate** | ** ** | **Charges in  Fiscal 2005** | ** ** | **Acquisition  Related  Charges in  Fiscal 2005** | ** ** | **March 31,  2005  Balance** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------|------------|------------------------------|------------|------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------|------------|
| **Branch office closures and  other expenditures by year of action** |       |                               |       |                         |       |                                                                   |       |                                  |       |                                                        |       |                              |       |
| 1999                                                                 |       | $                                  | 19         |                         | $          | —                                                                 |       | $                                     | —     |                                                        | $          | —                            |       | $ | — |   | $ | 19 |   |
| 2000                                                                 |       | 5                                  |       | (4                           | )          | —                                                                 |       | —                                |       | —                                                      |       | 1                                 |       |
| 2001                                                                 |       | 559                                |       | (108                         | )          | —                                                                 |       | —                                |       | —                                                      |       | 451                               |       |
| 2002                                                                 |       | 4,278                              |       | (530                         | )          | —                                                                 |       | —                                |       | —                                                      |       | 3,748                             |       |
| 2003                                                                 |       | 234                                |       | (150                         | )          | —                                                                 |       | —                                |       | —                                                      |       | 84                                |       |
| 2004                                                                 |       | 3,491                              |       | (574                         | )          | —                                                                 |       | —                                |       | —                                                      |       | 2,917                             |       |
|                                                                 |       |                               |       |                         |       |                                                                   |       |                                  |       |                                                        |       |                              |       |
|                                                                 |       | 8,586                              |       | (1,366                       | )          | —                                                                 |       | —                                |       | —                                                      |       | 7,220                             |       |
| **2004  Workforce reduction**                                        |       | 91                                 |       | (70                          | )          | —                                                                 |       | —                                |       | —                                                      |       | 21                                |       |
| **2005  Workforce reduction**                                        |       | —                             |       | —                       |       | —                                                                 |       | —                                |       | 980                                                         |       | 980                               |       |
|                                                                 |       |                               |       |                         |       |                                                                   |       |                                  |       |                                                        |       |                              |       |
| **Total  Restructuring Balance**                                     |       | $                                  | 8,677      |                         | $          | (1,436                                                                 | )          | $                                     | —     |                                                        | $          | —                            |       | $ | 980 |   | $ | 8,221 |   |

 
| ** **                                                           | ** ** | **January 1,  2006  Balance** | ** ** | **Cash  Expenditures,  Net** | ** ** | **Change in  current and  prior year’s  estimate** | ** ** | **Charges in  Fiscal 2006** | ** ** | **Acquisition  Related  Charges in  Fiscal 2006** | ** ** | **March 31,  2006,  Balance** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------|------------|------------------------------|------------|------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------|------------|
| **Branch office closures and  other expenditures by year of action** |       |                               |       |                         |       |                                                                   |       |                                  |       |                                                        |       |                               |       |
| 2000                                                                 |       | $                                  | 78         |                         | $          | (9                                                                     | )          | $                                     | —     |                                                        | $          | —                             |       | $ | — |   | $ | 69 |   |
| 2001                                                                 |       | 243                                |       | (18                          | )          | —                                                                 |       | —                                |       | —                                                      |       | 225                                |       |
| 2002                                                                 |       | 1,935                              |       | (358                         | )          | —                                                                 |       | —                                |       | —                                                      |       | 1,577                              |       |
| 2003                                                                 |       | 15                                 |       | —                       |       | —                                                                 |       | —                                |       | —                                                      |       | 15                                 |       |
| 2004                                                                 |       | 2,588                              |       | (108                         | )          | —                                                                 |       | —                                |       | —                                                      |       | 2,480                              |       |
| 2005                                                                 |       | 581                                |       | (128                         | )          | —                                                                 |       | —                                |       | —                                                      |       | 453                                |       |
|                                                                 |       |                               |       |                         |       |                                                                   |       |                                  |       |                                                        |       |                               |       |
|                                                                 |       | 5,440                              |       | (621                         | )          | —                                                                 |       | —                                |       | —                                                      |       | 4,819                              |       |
| **2005  Workforce reduction**                                        |       | 164                                |       | (164                         | )          | —                                                                 |       | —                                |       | —                                                      |       | —                             |       |
| **2006  Workforce reduction**                                        |       | —                             |       | (820                         | )          | —                                                                 |       | 1,271                                 |       | —                                                      |       | 451                                |       |
|                                                                 |       |                               |       |                         |       |                                                                   |       |                                  |       |                                                        |       |                               |       |
| **Total  Restructuring Balance**                                     |       | $                                  | 5,604      |                         | $          | (1,605                                                                 | )          | $                                     | —     |                                                        | $          | 1,271                              |       | $ | — |   | $ | 5,270 |   |

 

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

**Note 9.****        Convertible Subordinated Debentures**

In June 2003, weissued in a private placement $150.0 million principal amount of 2.0%Convertible Subordinated Debentures due 2013. The Debentures are unsecured andsubordinated in right of payment to all of our senior indebtedness. TheDebentures accrue regular interest at a rate of 2.0% per year. Interest ispayable semi-annually in arrears on June 15 and December 15 of eachyear, beginning December 15, 2003. Beginning with the six-month interestperiod commencing June 15, 2008, we will pay additional contingentinterest during any six-month interest period if the trading price of theDebentures for each of the five trading days immediately preceding the firstday of the interest period equals or exceeds 120% of the principal amount ofthe Debentures. During any interest period when contingent interest is payable,the contingent interest payable per $1,000 principal amount of Debentures willequal 0.35% calculated on the average trading price of $1,000 principal amountof Debentures during the five trading days immediately preceding the first dayof the applicable six-month interest period and will be payable in arrears.

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

The Debentures areconvertible at the option of the holder into shares of our common stock at aninitial conversion rate of 54.4989 shares per $1,000 principal amount ofDebentures, which is equivalent to an initial conversion price of approximately$18.349 per share, subject to adjustments, prior to the close of business onthe final maturity date only under the following circumstances: (a) duringany fiscal quarter commencing after September 30, 2003, and only duringsuch fiscal quarter, if the closing sale price per share of our common stockexceeds 120% of the conversion price (approximately $22.019) for at least 20trading days in the 30 consecutive trading day period ending on the lasttrading day of the preceding fiscal quarter; (b) during the five businessdays after any five consecutive trading day period in which the trading priceper $1,000 principal amount of Debentures for each day of that period 

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was less that 98% of theproduct of the closing sale price per share of our common stock and the numberof shares issuable upon conversion of $1,000 principal amount of theDebentures; (c) if the Debentures have been called for redemption; or (d) uponthe occurrence of specified corporate transactions. See Note 3 “Earnings PerShare” for further discussion of the Debentures.

Debt issuance costs wereapproximately $4.4 million and are included in Other assets, net, in theaccompanying unaudited condensed consolidated balance sheets. These costs arebeing amortized to interest expense over five years on a straight-line basis.As of March 31, 2006 and December 31, 2005, respectively, theunamortized debt issuance costs were approximately $2.0 million and $2.2million, respectively.

**Note 10.****        Capital Stock**

        OnOctober 25, 2005, we announced that our Board of Directors had authorizedus to repurchase an additional 3 million shares of our common stock overthe next twelve months effective October 20, 2005. Between May 1999and March 31, 2006, we invested approximately $319.0 million torepurchase approximately 25.5 million shares of our common stock underfifteen separate authorizations. The additional paid in capital was reduced tozero as of March 31, 2006 and December 31, 2005, as a result of ourcumulative share repurchases. During the First Quarter of 2006, we repurchaseda total of approximately 370,500 shares of common stock for approximately$4.3 million. See “Management’s Discussion and Analysis of FinancialCondition and Results of Operations, Liquidity and Capital Resources” forfurther discussion on share repurchases.

         During the three months ended March 31,2006, a total of 479,550 shares of our common stock were exercised or purchasedby participants under our stock option plans, ESPP and UK ESPP. In addition, wegranted 65,000 shares of restricted stock during the three months ended March31, 2006.

**Note 11.****          Related Parties, Commitments, andContingencies**

*RelatedParty Transactions*

        Ourprincipal executive office is located at 100 City Square in Boston,Massachusetts (the “New Facility”). In October 2001, we entered into alease with Gateway Developers LLC (“Gateway LLC”) for a term of 12 years,pursuant to which we agreed to lease approximately 95,000 square feet of officeand development space in the New Facility. We lease approximately 57% of the NewFacility and the remaining 43% is, or will be, occupied by other tenants. JohnKeane Family LLC is a member of Gateway LLC. The members of John Keane FamilyLLC are trusts for the benefit of John F. Keane, Chairman of our Board ofDirectors, and his immediate family members.

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

        Webegan occupying the New Facility and making lease payments in March 2003.Based upon our knowledge of lease payments for comparable facilities in theBoston area, we believe that the lease payments under the lease for the NewFacility, which will be approximately $3.2 million per year ($33.00 persquare foot for the first 75,000 square feet and $35.00 per square foot for theremainder of the premises) for the first six years of the lease term andapproximately $3.5 million per year ($36.00 per square foot for the first75,000 square feet and $40.00 per square foot for the remainder of thepremises) for the remainder of the lease term, plus specified percentages ofany annual increases in real estate taxes and operating expenses, were, at thetime we entered into the lease, as favorable to us as those which could havebeen obtained from an independent third party. Lease payments to Gateway LLC inthe First Quarters ended March 31, 2006 and 2005 were each approximately$0.9 million.

        Inview of these related party transactions, we concluded that, during theconstruction phase of the New Facility, the estimated construction in progresscosts for the New Facility would be capitalized in accordance with EITF Issue No. 97-10,“The Effect of Lessee Involvement in Asset Construction.” A liability in thesame amount was included in the caption “Accrued long-term building costs” inthe accompanying consolidated balance sheets. For purposes of the consolidatedstatements of cash flows, we characterized this treatment as a non-cashfinancing activity.

        Asa result of the completion of the construction phase and our current occupancy,the related capitalized costs are now classified as “Building” and are includedin property and equipment, net, in the accompanying consolidated balancesheets. A liability for the same amount appears as accrued expenses and otherliabilities and accrued long-term building costs, representing our short andlong-term components. The costs of the building are being amortized on astraight-line basis over a 39-year useful life. Additionally, theobligation will be reduced over the life of the lease at an interest rate of8.67%. The net effect of the amortization that is included in the operatingresults approximates the rent expense resulting from the contractual paymentswe are required to make under the lease.

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

        Asa result of the vacancy at Ten City Square in December 2002, we reservedthe remaining lease payments due to City Square for the remainder of the leaseterm, resulting in a charge of approximately $3.9 million in the FourthQuarter of 2002. In February 2006, our lease for Ten City Square expiredand the building was sold to a third party. For the three months ended March 31,2006 and 2005, we paid approximately $0.2 million and $0.3 million,respectively, in lease payments and as of March 31, 2006 had a remainingreserve balance of $0.2 million.

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

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

        InJuly 2003, our Audit Committee approved a related-party transactioninvolving a member of our Board of Directors. We sub-contracted with ArcStreamto develop and assist in the implementation of a wireless electronicapplication at two client sites. In accordance with this transaction, we agreedto pay ArcStream a royalty fee for potential future installations during the seven-yearlicense period. John F. Keane, Jr., a member of our Board ofDirectors, was Chief Executive Officer, a director, and founder of ArcStream.John F. Keane, Jr. is the son of John F. Keane, Sr.,Chairman of our Board of Directors, and the brother of Brian T. Keane, ourPresident, Chief Executive Officer and a director. Effective June 21,2004, our Audit Committee approved the termination of our agreement withArcStream and a payment of $150,000 by us to ArcStream in exchange for arelease of all parties from any further performance or payment obligationsunder the original agreement. The termination was for convenience and was notrelated to ArcStream’s performance under the agreement. On April 4, 2005,we acquired certain assets and assumed specified liabilities of ArcStream for abase purchase price of ($0.00) dollars, subject to a working capital adjustmentand additional consideration based on the performance of the ArcStream businessduring the remainder of 2005. In addition, in connection with the transaction,John Keane, Jr. agreed to guarantee certain indemnification obligations ofArcStream and we paid John Keane, Jr. $21,875 pursuant to a consultingarrangement to assist in the transition of the acquired business. SeeNote 7 “Business Acquisitions” for a further discussion of theacquisition.

        InJuly 2005, our Audit Committee approved a related party transactionauthorizing us to provide services to Citizens Bank, N.A., in connection withthe development of an internet application and related support services. Asdiscussed above, Stephen D. Steinour was previously a member of our Board ofDirectors and as of November 2005 was promoted to President of Citizen’sFinancial Group, Inc. an affiliate of Citizens Bank, N.A. Under the termsof this approval, the engagement value is estimated to be approximately$1.6 million. The rates charged under this engagement are comparable tothose charged to an independent third party. For the three months ended March 31,2006, we did not receive any payments under the agreement and had no accountsreceivable outstanding.

*Commitmentsand Contingencies*

        Welease the New Facility from Gateway LLC as described above. We lease additionaloffice space and apartments in more than 70 locations in North America, the UK,Australia and India under operating leases and capital leases, some of whichmay be renewed for periods up to five years, subject to increased rental fees.

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        Weare a guarantor with respect to a line of credit for Innovate EC, an entity inwhich we acquired a minority equity position as a result of a previousacquisition. The total line of credit is for $600,000. We guarantee $300,000 ofthis obligation. The line is subject to review by the lending institution. Wewould be required to meet our guarantor obligation in the event the lendinginstitution refuses to extend the credit facility and Innovate EC is unable tosatisfy its obligation.

        InFebruary 2003, we entered into a $50.0 million unsecured revolvingcredit facility (“credit facility”) with two banks. The terms of the creditfacility required us to maintain a maximum total funded debt and otherfinancial ratios. The credit facility also included covenants that, subject tocertain specific exceptions and limitations, among other things, restricted ourability to incur additional debt, make certain acquisitions or disposition ofassets, create liens, and pay dividends. Between June 2003 and July 2005,we and the two banks amended certain provisions of the credit facility includingthe allowable limit for letters of credit within the total facility and for thepurposes of issuing a letter of credit to satisfy bank guarantees with respectto the Victoria TTA contract with the State of Victoria, Australia. One of thebanks issued a $32.3 million ($45 million AUD) letter of credit datedJuly 14, 2005 against our credit facility in connection with our VictoriaTTA contract. This credit facility was terminated in connection with ourentrance into a new credit facility, described below, on September 15,2005.

        OnSeptember 15, 2005, we entered into a five-year revolving credit facility(the “new credit facility”) with a syndicate of banks (the “lenders”) in theamount of $200.0 million, plus an additional amount of up to$50 million subject to certain terms and conditions (the “loan amount”).The new credit facility has various nonfinancial and financial covenants, whichinclude a total leverage ratio, a senior leverage ratio and a quick ratio. Thenew credit facility replaces our existing $50.0 million unsecuredrevolving credit facility. Pursuant to the new credit facility, we may borrowfunds from the lenders up to the loan amount with a $50 million sub limitfor letters of credit. During the First Quarter of 2006, we amended the newcredit facility to allow for certain foreign currency hedging at the subsidiarylevel. The annual commitment fee payable quarterly is at an initial rate of0.20% per annum on the unused amount of revolving credit commitments, subjectto adjustment based on a senior leverage ratio as defined in the new creditfacility and up to a maximum per annum rate of 0.25%. To the extent there areletters of credit outstanding under the new credit facility, we will pay theadministrative agent a letter of credit fee, initially 1.0% annually, subjectto adjustment based on the senior leverage ratio as defined and up to a maximumper annum rate of 1.5%. In connection with the new credit facility, we paid$1.3 million in related debt issuance costs. As of March 31, 2006,there was approximately $106.4 million available for borrowing afterconsidering $32.9 million of outstanding letters of credit and afterconsidering certain financial covenants. These letters of credit include the$32.3 million ($45 million AUD) letter of credit issued in July 2005against our previous credit facility in connection with our Victoria TTAcontract.

During the ThirdQuarter of 2002, in connection with an acquisition of a business complementaryto our own, we initially recorded $3.0 million as deferred revenue relatedto contingent service credits and issued a $3.0 million non-interestbearing note payable as partial consideration. During the First Quarter of2005, we recognized revenue of approximately $0.2 million in relation to thecontingent service credits and reduced each of the related deferred revenue andnote by approximately $0.1 million. The note had a one-year term with aone-year extension, which expired on September 25, 2005. As of March 31,2006 and December 31, 2005, the deferred revenue and note payable balanceswere each zero. In connection with the Nims acquisition and based on thefinancial performance related to the first earn-out, we paid $3.3 millionin earn-out consideration in April 2005 and recorded a corresponding increaseto Goodwill. The second earn-out was achieved as of December 31, 2005. Asa result, we accrued the related $3.3 million in earn-out consideration asof December 31, 2005 with a corresponding increase to Goodwill, which waspaid in April of 2006. As of March 31, 2006, there is anadditional potential $8.3 million in earn-out considerations that could beachieved over the next year.

*Guarantees and Indemnifications*

        Inconnection with certain contracts, we have been required to deliver security orperformance bonds for the benefit of our clients. These bonds give thebeneficiary the right to obtain payment from the issuer of the bond if certainspecified events occur or fail to occur. In addition, we have variousagreements in which we may be obligated to indemnify our clients or thirdparties with respect to certain matters. Generally, these indemnificationprovisions are included in contracts arising in the normal course of businessunder which we customarily agree to hold the indemnified party harmless againstlosses arising from a breach of representations related to such matters astitle to assets sold and licensed or certain intellectual property rights,improper disclosures of confidential information, personal injuries, orproperty damages. Typically, there are no specific dollar limits associatedwith indemnifications. In general, the term of the indemnifications willcorrespond to the contract term such that the harm or damage must occur duringthe contract period. Therefore, claims may be raised after completion of thecontract associated with the indemnification provision, but the damage musthave been caused during the contract term. As a prime contractor under certaincontracts, we are responsible for the performance of our subcontractors andwould be required to arrange for performance in the event the subcontractorsfailed to perform. However, we would retain our right to enforce thesubcontracts and to seek damages for nonperformance from our subcontractors. Alimited number of our contracts include liquidated damages provisions, whichwould require us to make per diem payments for late deliveries. Further, ourobligations under these agreements may be limited in terms of time and/oramount and, in some instances, we may have recourse against third parties,including our subcontractors, for certain payments made by us. It is notpossible to predict the maximum potential amount of future payments under theseindemnification agreements due to the conditional nature of our obligations andthe unique facts of each particular agreement.

        Kamcohas obligations under the Victoria TTA contract with respect to both projectmanagement and performance of

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subcontractors. There arenumerous indemnification provisions within the Victoria TTA contract, some ofwhich are customarily included through the normal course of business. We haveagreed to hold TTA harmless against losses arising from a breach ofrepresentations related to such matters as title to assets sold and licensed orcertain intellectual property rights, improper disclosures of confidentialinformation, personal injuries, or property damages. As the prime contractorfor the Victoria TTA contract, in certain cases, Kamco is entitled tocorresponding indemnifications from its subcontractors. Subject to a number ofexclusions, Kamco’s maximum liability is capped at $72 million($100 million AUD). Under the Victoria TTA contract, liquidated damages,for which Kamco may be liable, are assessed at $36,000 ($50,000 AUD) per dayfor each day the specified phase completion is behind schedule, but are limitedto $7.2 million ($10 million AUD). The first $3.6 million($5 million AUD) in liquidated damages is split evenly amongst Kamco andcertain subcontractors. The next $3.6 million ($5 million AUD) isapportioned based on responsibility for the delay. In addition, we have a totalof $32.3 million ($45 million AUD) letters of credit issued againstthe new facility as surety bonds to ensure due and proper performance of ourobligations under the Victoria TTA contract.

        Weare involved in other litigation and various legal matters, which have arisenin the ordinary course of business. We do not believe that the ultimateresolution of these matters will have a material adverse effect on our financialcondition, results of operations, or cash flows.

**Note 12.****      Segment Information**

        Basedon qualitative and quantitative criteria established by SFAS No. 131 (“SFAS 131”),“Disclosures about Segments of an Enterprise and Related Information,” we operate within two reportablesegments: Professional Services and Transportation Ticketing Solutions. Inthese segments, we offer an integrated mix of end-to-end business solutions,such as Outsourcing, Development and Integration, and Other services. Keanedelivers these services through an integrated network of regional branches inNorth America, the UK, and Australia and through ADC’s in the U.S., Canada andIndia. The Chief Operating Decision Maker (“CODM”) evaluates performance anddetermines the allocation of resources based on the operating profit or loss atthe local branch level. Within Professional Services, each branch is set-up todeliver all of our service offerings and the expectation is to provide aconsistent level of profitability with each offering type. No individual branchmeets the quantitative criteria established by SFAS 131 and therefore havebeen presented in one reportable segment.

        Withthe entrance into the Transportation Ticketing Solution market in 2005 as aresult of our winning the Victoria TTA contract, we have determined that theeconomic characteristics of the services and the distinct client base wouldrequire a separate reportable segment. The expertise required for thedevelopment and management of the Victoria TTA contract is unique to itsdelivery. We have evaluated our provision of solutions and services under theVictoria TTA contract under the qualitative and quantitative criteriaestablished by SFAS 131 and have concluded these services represent a newreportable segment, in addition to our existing reportable segment ProfessionalServices. As of and for the three months ended March 31, 2006 and as of March 31,2006, we have not recognized any revenues or direct costs, there wasapproximately $1.1 million of property, plant and equipment associated withKamco, and we recognized approximately $0.7 million in indirect expenses. Asa result, we have not provided any additional segment data.

        SeeNote 5 “Significant Contracts” for a discussion of the Victoria TTAcontract.

        Inaccordance with the enterprise-wide disclosure requirements of SFAS 131,our geographic information is as follows (dollars in thousands):

        Geographicrevenues are presented net of intercompany revenues between the geographiclocations. We have no single client that provides revenues that equal or exceed10 percent of our consolidated revenues, except for the various agenciesof the Federal Government, which represented 10.7% and 9.0% of our consolidatedrevenues for the three months ended March 31, 2006 and 2005, respectively.
| ** **    | ** ** | **Three Months Ended** | ** ** | ** **         | ** ** | ** **                       | ** ** |
|---------------|------------|----------------------------------|------------|--------------------|------------|----------------------------------|------------|
| ** **    | ** ** | **March 31,**               | ** ** | **March 31,** | ** ** | **At March 31,**       | ** ** | **At December 31,** | ** ** |
| ** **    | ** ** | **2006**                         | ** ** | **2005**           | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **    | ** ** | **Revenues**                     | ** ** | **Revenues**       | ** ** | **Property and  Equipment** | ** ** | **Property and  Equipment** | ** ** |
| Domestic      |       | $                                | 231,904    |               | $          | 218,133                          |       | $ | 62,121 |   | $ | 63,234 |   |
| International |       |                             |       |               |       |                             |       |   |   |
| UK            |       | 7,207                            |       | 10,414             |       | 216                              |       | 232 |   |
| Other         |       | 4,466                            |       | 3,657              |       | 14,457                           |       | 14,117 |   |
| Subtotal      |       | 11,673                           |       | 14,071             |       | 14,673                           |       | 14,349 |   |
| Total         |       | $                                | 243,577    |               | $          | 232,204                          |       | $ | 76,794 |   | $ | 77,583 |   |

 

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**Item2.****         Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

This Quarterly Report on Form 10-Qcontains forward-looking statements within the meaning of Section 21E ofthe Securities Exchange Act of 1934, as amended, and Section 27A of theSecurities Act of 1933, as amended. For purposes of these Acts, any statementthat is not a statement of historical fact may be deemed a forward-lookingstatement. For example, statements containing the words “believes,” “anticipates,”“plans,” “expects,” “estimates,” “intends,” “may,” “projects,” “will,” “would”and similar expressions may be forward-looking statements. We caution investorsnot to place undue reliance on any forward-looking statements in this QuarterlyReport on Form 10-Q. We undertake no obligation to publicly updateany forward-looking statements, whether as a result of new information, futureevents or otherwise. There are a number of factors that could cause our actualresults to differ materially from those indicated by these forward-lookingstatements, including without limitation the factors set forth in Part II,Item 1A under the caption “Risk Factors.”  These factors and the othercautionary statements made in this quarterly report should be read as beingapplicable to all related forward-looking statements wherever they appear inthis quarterly report. If one or more of these factors materialize, or if anyunderlying assumptions prove incorrect, our actual results, performance, orachievements may vary materially from any future results, performance orachievements expressed or implied by these forward-looking statements.

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

**STRATEGY**

        Ourgoal is to be recognized as one of the world’s premier business process and ITservice providers by our clients, employees, and shareholders. We believe thatwe can achieve this goal by helping clients transform their IT and businessoperations through the consistent delivery of high-value consulting,development, and outsourcing services. Specifically, we believe thatapplications services and business process services are large and synergisticgrowth markets, and that a significant business trend is corporationsleveraging Application Services, Business Process Services (“BPS”), and globaldelivery to achieve meaningful cost reductions and business improvement. Webelieve that our depth of capability in each of these areas, along with ourvertical expertise, strong client relationships and process managementcapabilities, position us well to capitalize on this market opportunity.

        Insupport of this evolution in market demand, we are migrating Keane’sorganizational structure from a geographic network of local branches to anintegrated global matrix, which we have termed “One Keane.” In the future weplan to align client relationships and business development activities bygeographic region, but business solutions will be designed and delivered byintegrated global Business Lines and Vertical Practices. We believe that thisnew organization better positions Keane to deliver high-value, transformationalsolutions that bundle vertical expertise, business process and applicationsservices, intellectual property through a technology platform or a proprietaryreference architecture, and cost effective global delivery. Moreover we expectit will increase Keane’s flexibility and scalability, eliminate redundancy andexcess costs, and improve the career growth opportunities that we offer ouremployees.

**OVERVIEW**

**CriticalAccounting Policies**

*Stock-Based Compensation*

Our adoption of Statement of Financial Accounting Standard No. 123(revised 2004), “Share Based Payment” (“SFAS 123(R)”) in the first quarter of2006 requires that we recognize stock-based compensation expense associatedwith stock options in the statement of income, rather than disclose it in a proforma footnote to the consolidated financial statements. Determining the amountof stock-based compensation to be recorded requires us to develop estimates tobe used in calculating the grant-date fair value of stock options. We calculatethe grant-date fair values using the Black-Scholes valuation model. The use ofvaluation models requires us to make estimates of the following assumptions:

Expected volatility — Wederived the estimated stock price volatility based on a review of our actualhistoric stock prices commensurate with the expected life of the award. For theFirst Quarter of 2006, the estimated volatility ranges from 41.1% to 46.9%. Webelieve that the historical stock price volatility is an accurate indicator offuture stock price performance.

Expected option life — Our estimate of an expected option life wasderived based on a review of our historic option holding periods, including aconsideration of the holding period inherent in currently vested butunexercised options. We believe that this historical data is currently the bestestimate of the expected term of a new option. We reviewed historical data forgroups of employees and determined that the type of award was an indicator ofthe exercise behavior.

Risk-free interest rate — We used the yield on zero-coupon U.S.Treasury securities for a period that is commensurate with the 

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expected term assumption as the risk-free interest rate.

The amount of stock-basedcompensation recognized during a period is based on the value of the portion ofthe awards that are ultimately expected to vest. SFAS 123(R) requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates. The term “forfeitures”is distinct from “cancellations” or “expirations” and represents only theunvested portion of the surrendered option. Similar to the analysis for theexpected option life, we reviewed historical forfeiture data for groups ofemployees and determined the appropriate forfeiture rate ranges from 0-23%for the applicable employee group. Therefore, we have applied an annualforfeiture rate of 0-23% to all unvested options as of December 31,2005. We will re-evaluate this analysis quarterly and adjust the forfeiturerate as necessary. Ultimately, we will recognize the actual expense over thevesting period only for the shares that vest.

There were noother changes in our Critical Accounting Policies during the First Quarter of2006.

**Componentsof Revenues**

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

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

        Throughour global delivery model we can offer clients the flexibility and economicadvantage of allocating work among a variety of delivery options. These includeonsite at a client’s facility, nearshore in Halifax, Nova Scotia, and Toronto,Ontario, and offshore at one of our four development centers in India. Thisintegrated, flexible mix of cost-effective onsite, nearshore, and offshoredelivery is now a component of most of our new Application Outsourcingengagements. The distribution of work across multiple locations is typicallybased on a client’s cost, technology, and risk management requirements.

        OurBPS are provided by our majority owned subsidiary, Keane Worldzen, which weacquired on October 17, 2003. Keane Worldzen specializes in providing BPSto clients with complex processes in the financial services, insurance, andhealthcare industries, and to clients with back-office processes in several industries.Keane Worldzen’s BPS are designed to reduce the cost and increase theefficiency of our clients’ business transactions, enabling companies to focuson their more profitable activities and avoid the distraction of non-coreback-office processes. Keane Worldzen provides these low-cost, high-valueoutsourcing services from operations in both the U.S. and India.

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

*        OtherServices:*    Other Services are primarilycomprised of IT consulting, business consulting, project management, andsupplemental staff engagements that are principally billed on a time andmaterials basis.

        Globaleconomic and political conditions may cause companies to be cautious aboutincreasing their use of consulting and IT services, but we continue to see ademand for our services. We continue to experience pricing pressure fromcompetitors as well as from clients facing pressure to control costs. Inaddition, the growing use of offshore resources to provide lower-cost servicedelivery capabilities within our industry continues to be a source of pressureon revenues. We also experience wage inflation, primarily in India, as thedemand for those resources increases. In order for us to remain successful inthe near term, we must continue to maintain and grow our client base, providehigh-quality service and satisfaction to our existing clients, and takeadvantage of cross-selling opportunities. In the current economic environment,we must provide our clients with service offerings that are appropriatelypriced, satisfy their needs, and provide them with measurable businessbenefits. While we have recently experienced a steady demand for our services,we believe that it is too early to determine if developments will translateinto sustainable improvements in our pricing or margins for 2006 and over thelonger term.

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        Thereis a great deal of competition in the provision of Outsourcing services. Webelieve our evolving go-to-market strategy, where we seek to provide highvalue, repeatable business solutions to our clients, differentiates us from ourcompetitors. We offer solutions that combine various Keane services andcapabilities in response to a specific industry or client need. Thesevertically-focused solution sets may include application services, businessprocess outsourcing, an underlying technology platform or intellectualproperty, and global delivery. The solution sets that we offer to our clientsmay be comprised of five major elements.

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

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

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

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

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

       We believe that our deep industryknowledge differentiates us from our competitors, allowing us to go beyondsimply delivering cost and performance improvements to our clients, andallowing us to deliver transformational business benefits and, ultimately, helpgrow our business and integrate our comprehensive capabilities.

**Componentsof Operating Expenses**

        Theprimary categories of our operating expenses include: salaries, wages, andother direct costs; selling, general, and administrative expenses; andamortization of intangible assets. Salaries, wages, and other direct costs areprimarily driven by the cost of client-service personnel, which consists mainlyof compensation, sub-contractor, and other personnel costs, and othernon-payroll costs. Selling expenses are driven primarily by businessdevelopment activities and client targeting, image-development and brandingactivities. General and administrative expenses primarily include costs fornon-client facing personnel, information systems, and office space, which weseek to manage at levels consistent with changes in the activity levels in ourbusiness. We continue to anticipate changes in demand for our services and toidentify cost management initiatives to balance our mix of resources to meetcurrent and projected future demand in our markets. We will also continue touse our global sourcing as part of our cost-effective delivery model.

        We evaluate ourimprovement in profitability by comparing gross margins, and SG&A expensesas a percentage of revenues. Other key metrics that we use to manage andevaluate the performance of our business include new contract bookings, the numberof billable personnel, and utilization rates. We calculate utilization rates bydividing the total billable hours per consultant by the total hours available,including sick, holiday, and vacation, from the consultant.

**EMPLOYEES**

As of March 31,2006, we had 9,403 total employees, including 8,121 business and technicalprofessionals whose services are billable to clients. This includes a base of2,718 employees in India, including our Keane Worldzen operations. We sometimessupplement our technical staff by utilizing subcontractors, which as of March 31,2006, consisted of 517 full-time professionals.

**NEWCONTRACT BOOKINGS**

New contract bookings forthe three months ended March 31, 2006 were $244.2 million, a decrease of$23.9 million, or 8.9%, over new contract bookings of $268.1 million for thesame period in 2005. For the three months ended March 31, 2006,Outsourcing bookings decreased 20.4% to $92.8 million, Development &Integration bookings increased 2.2% to $47.7 million, and Other servicesbookings decreased 1.2% to $103.6 million compared to the same period in 2005.

New contract bookings forthe three months ended March 31, 2006 increased $4.5 million, or 1.9%,over new contract bookings of $239.7 million for the three months ended December 31,2005. For the three months ended March 31, 2006, Outsourcing bookingsdecreased 29.0% to $92.8 million, Development & Integration bookingsincreased 63.1% to $47.7 million, and Other services bookings increased 30.1%to $103.6 million, compared to the three months ended December 31, 2005.

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

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**CONSOLIDATEDRESULTS OF OPERATIONS**

**2006Compared to 2005**

|                                     | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase  (Decrease)** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|--------------------------|------------|
| ** **                          | ** ** | **2006**                                         | ** ** | **%**                    | ** ** | **2005** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| Outsourcing                         |       | $                                                | 120,344    |                     | 49         |   | $ | 117,262 |   | 50 |   | $ | 3,082 |   | 2.6 |   |
| Development &  Integration |       | 41,006                                           |       | 17                       |       | 41,226 |   | 18 |   | (220 | ) | (0.5 | ) |
| Other Services                      |       | 82,227                                           |       | 34                       |       | 73,716 |   | 32 |   | 8,511 |   | 11.5 |   |
| Total                               |       | $                                                | 243,577    |                     | 100        | % | $ | 232,204 |   | 100 | % | $ | 11,373 |   | 4.9 |   |

 

**Revenues**

Revenues for the FirstQuarter ended March 31, 2006 were $243.6 million compared to revenues of$232.2 million for the First Quarter ended March 31, 2005 and compared torevenues of $246.3 million for the Fourth Quarter ended December 31, 2005.The increase in revenues compared to the First Quarter ended March 31,2005 was mainly due to increased revenues from existing clients, the additionof several large new clients, and revenues from netNumina Solutions, Inc.(“netNumina”), which we acquired on February 28, 2005. See Note 7 “BusinessAcquisitions” in the notes to the accompanying unaudited condensed consolidatedfinancial statements for a description of our acquired businesses. Theseincreases were partially offset by decreases in revenues from IBM andPacifiCare both discussed below. The sequential decrease in revenues wasprimarily due to client reductions and due to the fact that during the FirstQuarter ended March 31, 2006, we recorded a $1.9 million revenue reductionassociated with the recognition of a loss on a fixed-price contract. Effective March 31,2006, we sold certain components of our Puerto Rico operations. As a result ofthe divestiture, we expect a $4.7 million reduction in revenue for theremainder of 2006 compared to 2005.

We have concluded thatobjective evidence of fair value does not exist for all of the elements withinthe Victoria TTA contract. Accordingly, each of the elements cannot beseparated into multiple units of accounting and therefore, must be accountedfor as a single unit of accounting. As a result, we are deferring all revenuesand costs directly associated with the delivery of products and services duringtwo years of development work, referred to as the Build phase, and we willrecognize all revenues and direct costs for the contract over the ten-yearperiod of operation and maintenance, referred to as the Operate phase,currently estimated to begin in mid-2007. In 2005 and the First Quarter of2006, all revenues and direct and incremental costs associated with thedelivery of products and services have therefore been deferred. See Note 5 “SignificantContracts” in the notes to the accompanying unaudited condensed consolidatedfinancial statements for further discussion on our accounting for the TTAcontract.

During the Fourth Quarterof 2004, IBM notified us that they would be reducing their purchasingrequirements. During the First Quarter ended March 31, 2005, IBM alsonotified us that Keane and other current vendor resources would be included ina proposal process for both current and future business. In July 2005, wedecided to withdraw from our staff augmentation relationship with IBM. In theThird Quarter ended September 30, 2005, we sold our IBM business toanother provider. These lower volumes from IBM and the sale of the businessresulted in a revenue reduction of approximately $7.4 million in the FirstQuarter ended March 31, 2006 compared to the same period in 2005.

*Outsourcing*.Outsourcing service revenues for the First Quarter ended March 31, 2006were $120.3 million, an increase of $3.1 million, or 2.6%, compared to theFirst Quarter ended March 31, 2005. The increase in Outsourcing servicerevenues compared to the First Quarter ended March 31, 2005 was primarilydue to revenues generated from new and existing customers from our ApplicationOutsourcing and BPO offerings, which more than offset decreases in revenuesfrom PacifiCare. Outsourcing service revenues for the First Quarter ended March 31,2006 decreased $0.3 million, or 0.2%, compared to the Fourth Quarter ended December 31,2005.

In 2004, PacifiCare, oneof our largest clients, reduced the level of service from the stated baselinecontract amounts in accordance with its right under the contract terms, therebyreducing the original contract value. We provided services at or above thebaseline levels set forth in the original contract at agreed upon rates. On December 20,2005, UnitedHealth Group Incorporated, an affiliate of United HealthCareServices, Inc. (“United HealthCare”), completed its acquisition ofPacifiCare. On January 20, 2006, we entered into a five-year masterservices agreement with United HealthCare Services, Inc. effective January 1,2006. Simultaneously, we and PacifiCare terminated our Information TechnologyServices Agreement, dated January 11, 2002, effective January 1,2006. Our original Information Technology Services Agreement with PacifiCareprovided for an outsourcing arrangement with a ten-year term and$500 million in contract value. As a result of the ending of the originalagreement with PacifiCare we will receive a $10.1 million payment in twoequal installments on July 30, 2006 and July 30, 2007. The first halfwill be recognized over the 18 month period January 1, 2006 to June 30,2007. The second half will be recognized at such time the amount becomes due inmanagement’s judgment. If additional services are procured pursuant to themaster services agreement, any remaining portion of the payments will berecognized over the period such services are provided. Under the new masterservices agreement with United HealthCare we will receive approximately$21 million for a specified level of services provided from January 1,2006 through June 30, 2007. Revenues from PacifiCare in the First Quarterended March 31, 2006, were approximately $2.1 million lower than revenuesfrom PacifiCare in the First Quarter ended March 31, 2005.

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*Development &Integration*. Development & Integration servicerevenues for the First Quarter ended March 31, 2006 were $41.0 million andessentially unchanged compared to the First Quarter ended March 31, 2005.The higher revenues from existing clients and revenues from netNumina offsetthe lower revenues from the UK, IBM and existing clients. Development &Integration service revenues for the First Quarter ended March 31, 2006decreased $4.5 million, or 10.0%, over the Fourth Quarter ended December 31,2005. The sequential decrease was driven by lower revenues from our healthcareproducts and services and lower revenues from the UK and existing clients.

*OtherServices*. Other Services revenues for the First Quarter endedMarch 31, 2006 were $82.2 million, an increase of $8.5 million, or 11.5%,compared to the First Quarter ended March 31, 2005. This increase wasprimarily due to additional supplemental staffing placements offset by lowerrevenues from IBM. Other Services revenues for the First Quarter ended March 31,2006 increased $2.1 million, or 2.7% compared to the Fourth Quarter ended December 31,2005. The sequential increase is primarily due to supplemental staffingplacements from existing clients.

The following tablesummarizes certain line items from our condensed consolidated statements ofincome (dollars in thousands):

|                                               | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase  (Decrease)** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|--------------------------|------------|
| ** **                                    | ** ** | **2006**                                         | ** ** | **2005**                 | ** ** | **$** | ** ** | **%** | ** ** |
| Revenues                                      |       | $                                                | 243,577    |                     | $          | 232,204 |   | $ | 11,373 |   | 4.9 |   |
| Salaries, wages,  and other direct costs |       | 173,251                                          |       | 162,193                  |       | 11,058 |   | 6.8 |   |
| Gross margin                                  |       | $                                                | 70,326     |                     | $          | 70,011 |   | $ | 315 |   | 0.4 |   |
| Gross margin %                                |       | 28.9                                             | %          | 30.2                     | %          |   |   |   |   |

 

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

Salaries, wages, andother direct costs for the First Quarter ended March 31, 2006 were $173.3million, an increase of $11.1 million, or 6.8%, compared to $162.2 million inthe First Quarter   ended March 31,2005. The increase was primarily attributable to higher costs of client servicepersonnel to support the increased service revenues. Salaries, wages, and otherdirect costs were 71.1% of total revenues for the First Quarter ended March 31,2006 compared to 69.8% of total revenues for the same period in 2005.

Total billable employeesfor all operations were 8,121 as of March 31, 2006, compared to 8,208 asof December 31, 2005 and to 7,236 as of March 31, 2005. This includes2,384 billable employees in India, which includes Keane Worldzen, andrepresents an increase of 101 employees, or 4.4%, over the year ended December 31,2005 and an increase of 893 employees or 59.9% over the three months ended March 31,2005. In addition to these employees, we occasionally use subcontract personnelto augment our billable staff, which represented 517 full-time professionals asof March 31, 2006. Overall utilization rates for both periods remainedstable as we increased the number of billable employees.

**Grossmargin**

Our management believesgross margin*(revenues less salaries, wages,and other direct costs)* provides an important measure of ourprofitability. Gross margin as a percentage of revenue for the First Quarterended March 31, 2006 was lower compared to the First Quarter of 2005. Grossmargin as a percentage of revenues for the First Quarter ended March 31,2006 was 28.9% compared to 30.2% for the same period in 2005. The decrease ingross margin is partially due to the $1.9 million revenue reduction recorded inthe First Quarter ended March 31, 2006 associated with the recognition ofa loss on a fixed price contract. We continue to closely monitor utilizationrates and other direct costs in an effort to avoid adverse impacts on our grossmargin.

**Selling,general, and administrative expenses**

|                                                           | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase  (Decrease)** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------|------------|
| ** **                                                | ** ** | **2006**                                         | ** ** | **2005**                 | ** ** | **$** | ** ** | **%** | ** ** |
| Selling,  general, and administrative expenses (SG&A) |       | $                                                | 55,882     |                     | $          | 54,172 |   | $ | 1,710 |   | 3.2 |   |
| SG&A as a % of  revenue                               |       | 22.9                                             | %          | 23.3                     | %          |   |   |   |   |
|                                                           |            |                                                  |            |                          |            |  |  |  |  |  |  |  |

 

SG&A expenses includesalaries for our corporate and branch administrative employees, sales andmarketing expenses, as well as the cost of our administrative facilities,including related depreciation expense. SG&A expenses for the First Quarterended March 31, 2006 increased $1.7 million, or 3.2%, over the same periodin 2005. The increase in SG&A expenses was primarily due to the higherlabor and labor related costs, expenses associated with the Victoria TTA contractand the inclusion of stock-based compensation for 2006. The First Quarter of2006 includes approximately $0.7 million of expenses associated with theVictoria TTA contract.  SG&A expensesfor the First Quarter ended March 31, 2006 and 2005 were 22.9% and 23.3%of total revenues, respectively. The decrease in 

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SG&A expenses as apercentage of revenue were mainly due to the higher revenues.

*Stock-Based Compensation*

On January 1, 2006, we adoptedSFAS 123(R) using the modified prospective application method. Wecalculate compensation cost on the date of grant using the fair value of theoptions as determined by the Black-Scholes valuation model. The Black-Scholesvaluation model requires us to determine several assumptions as noted aboveunder “Critical Accounting Policies”.

In the First Quarter of 2006, we recognized $0.5 million of totalstock-based compensation expense as a result of the adoption of SFAS 123(R).The adoption of SFAS 123(R) impacted diluted EPS for the First Quarter of2006 by less than one cent.

Prior to the adoption of SFAS 123(R), we accounted for share-basedpayments to employees using Accounting Principles Board Opinion No. 25’s (“APB25”), “Accounting for Stock Issued to Employees”, intrinsic value method and,as such, generally recognized no compensation cost for employee stock options.The adoption of SFAS 123(R) under the modified prospective applicationmethod allowed us to recognize compensation cost beginning with the effectivedate (a) based on the requirement of SFAS 123(R) for all share-basedpayments granted after the effective date and (b) based on therequirements of SFAS 123 for all awards granted to employees prior to theeffective date of SFAS 123(R) that remain unvested on the effective date.Under the modified prospective application method, prior periods are notrestated for the effect of SFAS 123(R).

Prior to the adoption ofSFAS 123(R), during the Fourth Quarter of 2005, we accelerated the vesting ofcertain stock options in which the exercise price of the award had exceeded themarket price of the stock on the date of acceleration. As a result of theacceleration, approximately 2.1 million shares subject to optionsconstituting approximately 47% of the total of unvested options outstanding atthat time became immediately exercisable. The acceleration impactedapproximately 570 employees. Under APB 25 and Financial Accounting StandardsBoard (“FASB”) Interpretation No. 44 (“FIN 44”), “Accounting for CertainTransactions Involving Stock Compensation”, no compensation expense wasrecognized in the financial statements for the acceleration of vesting of theseoptions since the closing common stock price per share on the dates ofacceleration were greater than the exercise prices of the unvested optionsaccelerated. The primary purpose of the accelerated vesting was to enable us toavoid recognizing in our income statement non-cash compensation expenseassociated with these options in future periods, upon our adoption ofSFAS 123(R) on January 1, 2006. Absent the acceleration of theoptions described above, from and after our adoption of SFAS 123(R), wewould have been required to recognize approximately $10.5 million inpre-tax non-cash compensation expense over the remaining vesting terms of thestock options, based on valuation calculations using the Black-Scholes optionpricing model.

As of March 31, 2006, the total compensation cost related tounvested stock option awards not yet recognized in the statement of income asapproximately $5.9 million, which will be recognized over a weighted averageperiod of 3.7 years. As of March 31, 2006, the total compensationcost related to unvested restricted stock awards not yet recognized in thestatement of income was approximately $2.6 million, which will be recognizedover a weighted average period of 3.9 years.

See Note 2 “Stock-Based Compensation” in the notes to the accompanyingunaudited condensed consolidated financial statements for further informationregarding our adoption of SFAS 123(R).

**Amortizationof intangible assets**

Amortization ofintangible assets for the First Quarter ended March 31, 2006 was $3.9million, a decrease of $0.2 million, or 5.4%, over the same period in 2005. Thedecrease in amortization of intangible assets was primarily due to certainintangibles becoming fully amortized.

**Restructuringcharges, net**

Duringthe First Quarter of 2006, we expensed $1.3 million in severance costsassociated with workforce reductions related to our One Keane Transformation.  Of this amount, $0.8 million was paid duringthe First Quarter ended March 31, 2006 and the remaining reserve balanceof $0.5 million is expected to be paid by the Third Quarter of 2006. As wecontinue with our One Keane Transformation initiative, we could  incur additional restructuring coststhroughout 2006, but currently there is no formal approved plan.

**Otherincome (expense)**

The following tablesummarizes the non-operating items from our condensed consolidated statementsof income (dollars in thousands):

|                                 | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase  (Decrease)** | ** ** |
|---------------------------------|------------|--------------------------------------------------|------------|--------------------------|------------|
| ** **                      | ** ** | **2006**                                         | ** ** | **2005**                 | ** ** | **$ ** | ** ** |
| **Other  income (expense)**     | ** ** | ** **                                       | ** ** | ** **               | ** ** | ** ** | ** ** |
| Interest and  dividend income   |       | $                                                | 1,200      |                     | $          | 1,105 |   | $ | 95 |   |
| Interest expense                |       | (1,396                                           | )          | (1,416                   | )          | 20 |   |
| Other (expense)  income, net    |       | (405                                             | )          | (16                      | )          | (389 | ) |
| Minority  interest              |       | (27                                              | )          | 683                      |       | (710 | ) |
| **Other (expense) income, net** |       | $                                                | (628       | )                        | $          | 356 |   | $ | (984 | ) |

** **

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**Interestand dividend income**

Interest and dividendincome for the First Quarter ended March 31, 2006 was $1.2 millioncompared to $1.1 million for the same period in 2005. The increase in interestand dividend income was primarily attributable to higher investments held bycertain foreign subsidiaries for the First Quarter ended March 31, 2006compared to the same period in 2005. To the extent we use our cash andmarketable securities to fund acquisitions, our operations, and capitalinvestments, our interest income will decline in future periods.

**Interestexpense**

Interest expense for theFirst Quarter ended March 31, 2006 was $1.4 million and unchanged comparedto the same period in 2005. Interest expense was unchanged since our Debentureswere outstanding for the entire three months in both the First Quarters ended March 31,2006 and 2005. We also record interest expense on the accrued building costsassociated with our corporate facility as explained in Note 11 “RelatedParties, Commitments, and Contingencies” in the notes to the accompanyingunaudited condensed consolidated financial statements.

**Other(expense) income, net**

Other expense, net was$0.4 million for the First Quarter ended March 31, 2006 and was $16,000for the same period in 2005. The increase was primarily due to foreign exchangegains and losses.

**MinorityInterest**

Minorityinterest (expense) income for the First Quarter ended March 31, 2006 wasexpense of approximately $27,000 and for the First Quarter ended March 31,2005 was income of $0.7 million. The decrease in minority interest income isdue to Keane’s increased ownership percentage in Keane Worldzen effective April 1,2005 and the improved performance of Keane Worldzen in the First Quarter of2006 compared to a net loss in the First Quarter of 2005. The amount inminority interest income represents the (income) loss attributable to minorityshareholders of Keane Worldzen for the period presented. We completed our acquisitionof a controlling interest in Keane Worldzen in the Fourth Quarter for 2003,which resulted in an initial equity position of approximately 62% of the issuedand outstanding capital stock of Keane Worldzen and our consolidation of theresults of Keane Worldzen. Consistent with the right to increase our ownershipposition over time, we increased our equity position to approximately 81% in April 2005with an additional capital contribution of approximately $5.0 million incash and $3.0 million from the conversion of existing cash advances toequity. Consistent with the minority shareholders’ rights, the minorityshareholders exercised their first put option in December 2005, whichrequired us to purchase approximately 5% of their outstanding shares for$2.8 million. As a result of our additional capital contribution and theminority shareholders’ exercise of the first put option, we own approximately86% of the outstanding capital stock of Keane Worldzen and the minorityinterest shareholders own approximately 14% of the issued and outstandingcapital stock of Keane Worldzen. We continue to consolidate the results ofKeane Worldzen but recognize 86% of the results of operations. The put optionsare explained in further detail in Note 7 “Business Acquisitions” in thenotes to the accompanying condensed consolidated financial statements.

**Incometaxes**

The following tablesummarizes the changes in provision for income taxes included in our condensedconsolidated statements of income (dollars in thousands):

|                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------|------------|--------------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Income before  income taxes |       | $                                                | 8,694      |   | $ | 12,125 |   |
| Provision for  income taxes |       | 3,304                                            |       | 4,850 |   |
| Net Income                  |       | $                                                | 5,390      |   | $ | 7,275 |   |
|                        |       |                                             |       |   |   |
|                        |       | 38.0                                             | %          | 40.0 | % |

 

**Reported Tax Rate**

The provision for incometaxes represents the amounts owed for federal, state, and foreign taxes. Oureffective tax rate was 38.0% for the First Quarter ended March 31, 2006and 40.0% for the First Quarter of 2005. The determination of the provision forincome tax expense, deferred tax assets and liabilities and related valuationallowance involves judgment. As a global company, we are required to calculateand provide for income taxes in each of the tax jurisdictions where we operate.This involves making judgments regarding the recoverability of deferred taxassets, which can affect our overall effective tax rate. The decrease in oureffective tax rate is due to changes in the geographic mix of income and theimpact of consolidating Keane Worldzen for a full year for tax purposes.

**Netincome**

Net income for the FirstQuarter ended March 31, 2006 decreased $1.9 million compared to the FirstQuarter of 2005. The decrease in net income was primarily due to the severancecosts, stock-based compensation, and revenue reduction associated with the 

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recognition of a loss ona fixed-price contract recorded in the First Quarter of 2006, offset by a lowereffective tax rate.

**RECENTACCOUNTING PRONOUNCEMENTS**

 In February 2006, the FASBissued SFAS No. 155 (“SFAS 155”), “Accounting for Certain HybridInstruments.” This Statement amends FASB Statements No. 133, “Accountingfor Derivative Instruments and Hedging Activities”, and No. 140, “Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities”. SFAS 155 resolves issues addressed in Statement 133Implementation Issue No. D1, “Application of Statement 133 to BeneficialInterests in Securitized Financial Assets.” This Statement is effective for all financial instruments acquired orissued after the beginning of an entity’s first fiscal year that begins after September 15,2006. We do not believe the adoption of SFAS 155 will have a material impact onour consolidated financial position, results of operations or cash flows.

**LIQUIDITYAND CAPITAL RESOURCES**

**ConsolidatedFinancial Condition (in thousands)**
| **Three Months Ended March 31,** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash Flows (Used For)  Provided By                   |       |     |       |     |       |
| Operating  activities                                |       | $        | (21,901    | )        | $          | 9,129 |   |
| Investing  activities                                |       | 11,095   |       | 2,365    |       |
| Financing  activities                                |       | 137      |       | 1,954    |       |
| Effect of  exchange rate on cash                     |       | 290      |       | 33       |       |
|                                                 |       |     |       |     |       |
| (Decrease) Increase in  Cash and cash equivalents    |       | $        | (10,379    | )        | $          | 13,481 |   |

 

We have historicallyfinanced our operations with cash generated from operations. In addition, weraised $150.0 million in proceeds from the issuance of our Debentures. We usethe net cash generated from these sources to fund capital expenditures, mergersand acquisitions, and stock repurchases. If we were to experience a decrease inrevenue as a result of a decrease in demand for our services or a decrease inour ability to collect receivables, we would be required to reducediscretionary spending related to SG&A expenses and adjust our workforce inan effort to maintain profitability. At March 31, 2006, we had $144.2million in cash and cash equivalents and marketable securities. In addition, onSeptember 15, 2005, we entered into a $200 million five-year creditfacility, of which approximately $106.4 million is available for borrowing asof March 31, 2006, after considering $32.9 million of outstanding lettersof credit and after considering certain financial covenants. We intend tocontinue to use our cash and cash equivalents and marketable securities forgeneral corporate purposes, which may include additional repurchases of our commonstock under existing or future share repurchase programs and the funding offuture acquisitions and other corporate transactions.

**Cashflows (used for) provided by operating activities**

Net cash used inoperating activities totaled $21.9 million for the three months ended March 31,2006 compared to net cash provided by operating activities of $9.1 million forthe three months ended March 31, 2005. Net cash used by operatingactivities was driven by cash payments of salaries and bonuses accrued as of December 31,2005, an increase in accounts receivable, income taxes paid and funding forKeane Australia Micropayment Consortium Pty Ltd. (“Kamco”) and the Victoria TTAcontract. Days Sales Outstanding (“DSO”), an indicator of our accountsreceivable collections, was 60 days as of March 31, 2006, compared to 58days as of December 31, 2005, and to 52 days as of March 31, 2005.The increase in DSO was due to the increase in Accounts receivable, net. Wecalculate DSO using the trailing three months total revenue divided by thenumber of days in the quarter to determine daily revenue. The average accountsreceivable balance for the three-month period is then divided by daily revenue.

**Cashflows provided by investing activities**

Net cash provided byinvesting activities for the three months ended March 31, 2006 was $11.1million compared to net cash provided for investing activities of $2.4 millionfor the three months ended March 31, 2005.

*MarketableSecurities:* During the three months ended March 31,2006, we purchased $30.0 million and sold $43.7 million in marketablesecurities, generating a net source of cash of $13.7 million, compared topurchases of $13.9 million and sales of $16.6 million in the first three monthsof 2005. The net proceeds from these transactions were used to fund our sharerepurchases and our operational requirements.

*Propertyand Equipment:* We invested $3.0 million in property andequipment during the three months ended March 31, 2006, primarily tosupport our growing operations in Australia and India. During the three monthsended March 31, 2005, we invested $4.8 million in property and equipmentand capitalized software costs in connection with the implementation of ourPeopleSoft Enterprise Resource Planning applications.

*BusinessAcquisitions:*  On February 28,2005, we acquired NetNumina Inc. (“NetNumina”). In exchange for all of theoutstanding capital stock of netNumina, we paid $5.7 million in cash, ofwhich $0.6 million was held back to secure indemnification obligations of 

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the netNuminastockholders and acquired $4.6 million in cash. The $0.6 million heldback was initially deposited as restricted cash and was delivered to theshareholders in the three months ended March 31, 2006.

On February 27,2004, we acquired Nims Associates Inc. (“Nims”). We paid $18.2 million incash, including transaction costs and net of cash acquired, for all of theoutstanding capital stock of Nims. The purchase price may increase with thepotential to pay up to an additional $15.0 million in earn-out considerationover three years from the acquisition, contingent upon the achievement ofcertain future financial targets. The first earn-out was achieved as of March 1,2005 and as a result, we paid $3.3 million in earn-out consideration in April 2005.Based on Nims’ financial performance as of December 31, 2005, the secondearn-out was achieved. As a result, we accrued an additional $3.3 millionin earn-out consideration as of December 31, 2005, which we paid in April of2006. In addition to  the first twoearn-outs, there is an additional potential $8.3 million in earn-outconsiderations that, as of March 31, 2006, could be achieved over the nextyear.

**Cashflows provided by financing activities**

Net cash flows providedby financing activities was $0.1 million for the three months ended March 31,2006, compared to net cash provided by financing activities of $2.0 million forthe three months ended March 31, 2005.  Net cash flows provided by financingactivities for the three months ended March 31, 2006 was from proceedsreceived from the issuance of stock associated with our employee stock purchaseand stock option plans offset by cash used for the repurchase of our commonstock. The following is a summary of our repurchase activity for the threemonths ended March 31, 2006 and 2005 (dollars in thousands):

|                                               | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                    | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|                                          |       |       |       |       |       |   |   |   |   |
| Prior year  authorizations at January 1, |       | 2,553,900  |       |       |       | 2,871,600 |   |   |   |
| Authorizations                                |       | —     |       | —     |       |   |   |   |   |
| Repurchases paid                              |       | (370,500   | )          | $          | 4,331,084  |   | — |   | $ | — |   |
| Repurchases  accrued                          |       | —     |       |       |       | — |   |   |   |
| Expirations                                   |       | —     |       |       |       | — |   |   |   |
| Shares remaining as of  March 31,        |       | 2,183,400  |       |       |       | 2,871,600 |   |   |   |
|                                               |            |            |            |            |            |  |  |  |  |  |  |

 

On October 25, 2005,we announced the approval by our Board of Directors of a program for therepurchase of 3.0 million shares of our common stock (“the October 2005Program”). The repurchases may be made on the open market or in negotiatedtransactions, and the timing and amount of shares to be purchased will bedetermined by our management based on its evaluation of market and economicconditions and other factors. Unless terminated earlier by resolution of ourBoard of Directors, the October 2005 Program will expire upon the earlierof the date we repurchase all shares authorized for repurchase thereunder or October 25,2006.

These share repurchaseswere more than offset by shares issued under our various stock incentiveprograms. Under these stock incentive programs, we issued 544,550 sharesand 189,188 shares and received proceeds of $4.5 million and $2.0 million forthe three months ended March 31, 2006 and 2005, respectively. Between May 1999and March 31, 2006, we have invested approximately $319.0 million torepurchase approximately 25.5 million shares of our common stock under twelveseparate authorizations.

In February 2003, weentered into a $50.0 million unsecured revolving credit facility (the “creditfacility”) with two banks. The terms of the credit facility required us tomaintain a maximum total funded debt and other financial ratios. The creditfacility also included covenants that, subject to certain specific exceptionsand limitations, among other things, restricted our ability to incur additionaldebt, make certain acquisitions or disposition of assets, create liens, and paydividends. Between June 2003 and July 2005, we and the two banksamended certain provisions of the credit facility including the allowable limitfor letters of credit within the total facility and for the purposes of issuinga letter of credit to satisfy bank guarantees with respect to the TransportTicketing Authority (“TTA”) contract with the State of Victoria, Australia. Oneof the banks issued a $32.3 million ($45 million AUD) letter of credit dated July 14,2005 against our credit facility in connection with our Victoria TTA contract. Thiscredit facility was terminated in connection with our entrance into a newcredit facility, described below, in September 2005.

On September 15,2005, we entered into a five-year revolving credit facility (the “new creditfacility”) with a syndicate of banks (the “lenders”) in the amount of $200.0million, plus an additional amount of up to $50.0 million subject to certainterms and conditions (the “loan amount”). The new credit facility has variousnonfinancial and finanical covenants, which include a total leverage ratio, asenior leverage ratio and a quick ratio. The new credit facility replaced ourexisting $50.0 million unsecured revolving credit facility. Pursuant to the newcredit facility, we may borrow funds from the lenders up to the loan amountwith a $50.0 million sub limit for letters of credit. During the First Quarterof 2006, we amended the new credit facility to allow for certain foreigncurrency hedging at the subsidiary level. The annual commitment fee payablequarterly is at an initial rate of 0.20% per annum on the unused amount ofrevolving credit commitments, subject to adjustment based on a senior leverageratio as defined in the new credit facility and up to a maximum per annum rateof 0.25%. To the extent there are letters of credit outstanding under the newcredit facility, we will pay the administrative agent a letter of credit fee,initially 1.0% annually, subject to adjustment based on the senior leverageratio as defined in the new credit facility, and up to a maximum per annum rateof 1.5%. In connection with the new credit facility, we paid $1.3 million inrelated debt issuance costs. As of March 31, 2006, we had no debtoutstanding under the new credit facility. However, there are $32.9 million ofoutstanding letters of credit against the new credit facility, which includethe $32.3 million ($45 million AUD) letters of credit issued in July 2005against our previous credit facility in connection with our Victoria TTAcontract. 

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Based on our currentoperating plan, we believe that our cash and cash equivalents on hand,marketable securities, cash flows from operations, and our new credit facilitywill be sufficient to meet our current capital requirements for at least thenext 12 months.

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

We have agreed tonumerous indemnification provisions in connection with the Victoria TTAcontract. As the prime contractor for the Victoria TTA contract, Kamco is thebeneficiary of corresponding indemnifications obligations by itssubcontractors. Subject to a number of exclusions, Kamco’s maximum liability iscapped at $72 million ($100 million AUD). Under the Victoria TTAcontract, liquidated damages, for which Kamco may be liable, are assessed at$36,000 ($50,000 AUD) per day for each day the specified phase completion isbehind schedule, but are limited to $7.2 million ($10 million AUD).The first $3.6 million ($5 million AUD) in liquidated damages is splitevenly amongst Kamco and certain subcontractors. The next $3.6 million($5 million AUD) is apportioned based on responsibility for the delay. Inaddition, we have a total of $32.3 million ($45 million AUD) lettersof credit issued against the new facility as surety bonds to ensure due andproper performance of our obligations under the Victoria TTA contract.

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

Our cash and cashequivalents totaled $61.2 million and $81.0 million at March 31, 2006, and2005, respectively.

**IMPACTOF INFLATION AND CHANGING PRICES**

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

**Item3.****         Quantitative and Qualitative Disclosures About Market Risk**

We do not engage intrading market risk, sensitive instruments or purchasing hedging instruments or“other than trading” instruments that are likely to expose us to market risk,whether interest rate, foreign currency exchange, and commodity price or equityprice risk. We have not purchased options or entered into swaps or forward orfutures contracts. However, on October 20, 2005, our Board of Directorsapproved our foreign exchange risk management policy, which allows us to investin hedging instruments for the purpose of hedging foreign currency risk.

*InterestRate Risk*

We invest primarily inU.S. government obligations as well as corporate bonds and tax-exempt municipalbonds. As a result, our primary market risk exposure is that of interest raterisk to our investments, which would affect the carrying value of thoseinvestments. During 2004, the United States Federal Reserve Board beganincreasing benchmark interest rates and at the January 2006 meeting of theFederal Open Market Committee increased rates for the fourteenth time, a totalof 350 basis points. A significant increase in interest rates would increasethe rate of return on our cash and cash equivalents, but would have a negativeimpact on the carrying value of our marketable securities. Our interest incomewould change by approximately $0.7 million for the three months ended March 31,2006 and March 31, 2005, respectively, for each 100 basis pointincrease or decrease in interest rates. The fair value of our investmentportfolio at March 31, 2006 would decrease by approximately $0.5 millionfor a 100 basis point increase in rates and increase by approximately $0.6 millionfor each 100 basis point decrease in rates. The fair value of our investmentportfolio at December 31, 2005 would decrease by approximately $1.0million for a 100 basis point increase in rates and increase by approximately$0.9 million for each 100 basis point decrease in rates.

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Changes in market ratesand the related impact on the fair value of our investments would not generallyaffect net income as our investments are fixed rate securities and areclassified as available-for-sale. Investments classified as available-for-sale arecarried at fair value with unrealized gains and losses recorded as a componentof accumulated other comprehensive loss in the accompanying consolidatedbalance sheets. However, when the investments are sold, the unrealized lossesare recorded as realized losses and included in net income in the accompanyingconsolidated statements of income.

As of March 31, 2006and December 31, 2005, we held available-for-sale securities that hadaggregate gross unrealized losses of approximately $1.1 million and$1.2 million, respectively. In November 2005, the FASB issued StaffPosition No. FAS 115-1 (“FSP 115-1”), “The Meaning ofOther-Than-Temporary Impairment and its Application to Certain Investments.”FSP 115-1 provides accounting guidance for determining and measuringother-than-temporary impairments of debt and equity securities, and confirmsthe disclosure requirements for investments in unrealized loss positions asoutlined in EITF 03-01. We analyze our investments for impairments on anongoing basis. Factors considered in determining whether a loss is temporaryinclude the length of time and extent to which the securities have been in anunrealized loss position and our ability and intent to hold the investment fora period of time sufficient to allow for any anticipated market recovery. Allsuch securities have been in a continuous unrealized loss position for lessthan 12 months, except for the $14.9 million of long-term Marketablesecurities included in the accompanying unaudited condensed consolidated balancesheet. As of March 31, 2006, we have classified these securities aslong-term as they have been in an unrealized loss position for more than 12months and mature beyond March 31, 2007. We believe that the impairmentsto these investments are not other-than-temporary at this time as thesesecurities are all highly rated investments which have been subject to routinemarket changes that have not been significant to date and we have the abilityand intent to hold these investments for a period of time sufficient to allowfor the anticipated market recovery.

*ForeignCurrency Ris*k

We transact business inthe UK, Canada, India, and Australia and as such have exposure associated withmovement in foreign currency exchange rates. For the First Quarter ended March 31,2006, the fluctuation in foreign currency exchange rates negatively impactedoperating income by approximately $0.1 million as compared to the same periodin 2005. Relative to the foreign currency exposures existing at March 31,2006, a 10% unfavorable movement would have resulted in an additional $2.1million reduction of operating income for the First Quarter ended March 31,2006. Net revenues derived from our foreign operations totaled approximately4.8% and 6.1% of our total revenues for the First Quarters ended March 31,2006 and 2005, respectively. We have adopted a policy with respect to thehedging of foreign currency; however, as of March 31, 2006, we had notengaged in any hedging transactions.

**Item4.****         Controls and Procedures**

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

We maintain disclosurecontrols and procedures designed to ensure that information required to bedisclosed in reports filed under the Securities Exchange Act of 1934, asamended, is recorded, processed and summarized and reported within thespecified time periods. Our management, with the participation of our ExecutiveVice President of Finance and Administration and Chief Financial Officer, whois also our Interim President and Chief Executive Officer, evaluated theeffectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) as of March 31, 2006. Basedon this evaluation, our President and Chief Executive Officer and our ExecutiveVice President of Finance and Administration and Chief Financial Officerconcluded that, as of March 31, 2006, our disclosure controls andprocedures were (1) designed to ensure that material information relatingto us, including our consolidated subsidiaries, is made known to our Presidentand Chief Executive Officer and our Executive Vice President of Finance andAdministration and Chief Financial Officer by others within these entities,particularly during the period in which this report was being prepared, and (2) effective,in that they provide reasonable assurance that information required to bedisclosed by us in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms.

**Changesin Internal Control Over Financial Reporting**

During the three monthsended March 31, 2006, except as indicated below, there have not been anysignificant changes in our internal controls over financial reporting (asdefined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting. As has beenpreviously reported, we are in the process of implementing a PeopleSoftEnterprise Resource Planning (“ERP”) system for the majority of our processesand operations. During the First Quarter of 2006, we continued to phase in themodules for Time Reporting, Contracts Management, Project Accounting, andBilling. We believe the phased-in approach we are taking reduces the risksassociated with making these changes. We believe that internal controls overfinancial reporting related to these system and process changes were effectiveas of March 31, 2006. We plan to continue the roll out of these modules ina deliberate phased approach to ensure internal controls over financialreporting remain effective.

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**Keane, Inc.**

**Part II.****            Other Information**

**Item1A.    Risk Factors**

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

**Our “OneKeane” Transformation initiative may not be successfully implemented, whichcould materially affect our results of operations.**  Wehave recently undertaken the early stages of a multi-faceted internal reorganization,which we call the “One Keane Transformation.” Our goals in implementing the OneKeane Transformation include: the replacement of our current regionaloperations structure with an overlapping structure including regional clientrelationship organizations, delivery organizations based on business lines(such as applications services and business transformation services) andvertical industry expertise (including financial services and health care) andglobal shared services for sales and human resources, aimed at lowering cost.We expect that the One Keane Transformation will be an ongoing process over thenext 12-24 months and will touch all areas of Keane, requiringsignificant internal resources, including significant attention from ourmanagement. If we are unable to successfully implement the One KeaneTransformation, or a successful implementation does not achieve our statedobjectives, it could result in loss of employee morale, an inability to lowerour delivery costs and compete in the global market, and could materiallyaffect our results of operations.

**Ourengagement with Melbourne, Victoria Transport Ticketing Authority, or VictoriaTTA contract, exposes us to a number of different risks inherent in suchlong-term, large-scale, fixed-fee projects.**  Wehave been awarded a contract to perform services in relation to thedevelopment, operation and maintenance of a public transport ticketing systemfor the state of Victoria, Australia. This engagement will require significantmanagement attention and financial resources, and could adversely affect ourresults of operations in a number of ways. These include:

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

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

·              dependence on subcontractors andpotential subcontractor non-performance;

·                                          atcertain times, the TTA may terminate the Victoria TTA contract for convenience,subject to certain termination fees and for events of default, subject to Kamco’sright to cure;

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

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

·              project delays could expose us toliquidating damages;

·              fluctuations in foreign currencyexchange rates;

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

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

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

·              the number and requirements ofclient engagements;

·              employee utilization rates;

·              changes in the rates we can chargeclients for services;

·              acquisitions; and

·              other factors, many of which arebeyond our control.

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

**Wecontinue to position ourselves to achieve increasing percentages of revenuesand growth through outsourcing. If we are successful in obtaining newoutsourcing contracts, we may experience increased pressure on our overallmargins during the early stages of these contracts.**  Thiscould result in higher concentrations of revenues and contributions to incomefrom a smaller number of larger clients on customized outsourcing solutions. Ifwe were to receive a higher concentration of our revenues from a smaller numberof clients, our revenues could decrease significantly if one or more of theseclients decreased their spending. Outsourcing contracts are generally long-termcontracts that require additional staffing in the initial phases of thecontract period, which often results in lower gross margins at the beginning ofthese contracts.

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

**Thetermination of a contract by a significant client could reduce our revenue andprofitability or adversely affect our financial condition.**  Ourfive largest clients, excluding the federal government, accounted forapproximately 22.0% of our revenue in the First Quarter ended March 31,2006, and 18.9% for the three months ended March 31, 2005, although noindividual client accounted for more than 6.2% and 6.0%, respectively, of ourtotal revenue for either period. The various agencies of the federal governmentrepresent our largest client, accounting for approximately 10.7% of totalrevenue for the First Quarter ended March 31, 2006 and approximately 9.0%of total revenue for the First Quarter ended March 31, 2005. We strive todevelop long-term relationships with our clients. Most individual clientassignments are from three to twelve months; however, many of our clientrelationships have continued for many years. Our clients typically retain us ona non-exclusive, engagement-by-engagement basis. Although they may be subjectto penalty provisions, clients may generally cancel a contract at any time.Under many contracts, clients may reduce their use of our services under suchcontract without penalty. In addition, contracts with the federal governmentcontain provisions and are subject to laws and regulations that provide thefederal government with rights and remedies not typically found in commercialcontracts. Among other things, the federal government, as well as other publicsector clients, may terminate contracts with short notice, for convenience andmay cancel multi-year contracts if funds become unavailable. When contracts areterminated, our revenue may decline and if we are unable to eliminateassociated costs in a timely manner, our profitability may decline. In theFirst Quarter ended March 31, 2006, approximately 19.6% of our revenue wasfrom public sector clients, including U.S. Federal, state, and local governmentsand agencies. Often government spending programs are dependent upon thebudgetary capability to support such programs. Many government budgets havebeen adversely impacted by the economic slowdown. Most states must operateunder a balanced budget. As a result of such budget and deficit considerations,our existing and future revenues and profitability could be adversely affectedby reduced government IT spending.

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

**We havepursued, and intend to continue to pursue, strategic acquisitions. Failure tosuccessfully integrate acquired businesses or assets may adversely affect ourfinancial performance.**  In recent years, we havegrown significantly through acquisitions. From January 1, 1999 through March 31,2006, we completed 17 acquisitions. The aggregate merger and considerationcosts of these acquisitions totaled approximately $437.2 million. Ourfuture growth may be based in part on selected acquisitions. At any given time,we may be in various stages of considering acquisition opportunities. We maynot be able to find and identify desirable acquisition targets or be successfulin entering into a definitive agreement with any one target. In addition, evenif we reach a definitive agreement with a target, we may not be able tocomplete any future acquisition.

We typically anticipatethat each acquisition will bring benefits, such as an increase in revenue.Prior to completing an acquisition, 

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however, it is difficultto determine if these benefits will be realized. Accordingly, there is a riskthat an acquired company may not achieve an increase in revenue or otherbenefits for us. In addition, an acquisition may result in unexpected costs,expenses, and liabilities. Any of these events could have a material adverseeffect on our business, financial condition, and results of operations.

We have recorded asignificant amount of goodwill and other intangible assets resulting from ouracquisitions. We review our goodwill and identifiable assets for impairment inaccordance with SFAS 142 and SFAS No. 144 (“SFAS 144”), “Accounting forthe Impairment or Disposal of Long-Lived Assets,” respectively. If theestimated future cash flows of the reporting units related to the underlyingassets are not sufficient to support the carrying value of the associatedunderlying assets, we may be required to record impairment charges related togoodwill and other intangible assets. Any material loss resulting from animpairment charge could have a material adverse effect on our results ofoperations. As of March 31, 2006, our goodwill totaled $314.8 million,customer lists totaled $38.1 million and other intangibles assets totaled $5.3million.

The process ofintegrating acquired companies into our existing business might also result inunforeseen difficulties. Unforeseen operating difficulties may absorbsignificant management attention, which we may otherwise devote to our existingbusiness. In addition, the process may require significant financial resourcesthat we might otherwise allocate to other activities, including the ongoingdevelopment or expansion of our existing operations.

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

**We facesignificant competition for our services, and our failure to remain competitivecould limit our ability to maintain existing clients or attract new clients.**  Themarket for our services is highly competitive. The technology for customsoftware services can change rapidly. The market is fragmented, and no companyholds a dominant position. Consequently, our competition for client assignmentsand experienced personnel varies significantly from city to city and by thetype of service provided. Some of our competitors are larger and have greatertechnical, financial, and marketing resources and greater name recognition inthe markets they serve than we do. In addition, clients may elect to increasetheir internal information systems resources to satisfy their custom softwaredevelopment and integration needs.

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

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

**Weconduct business in the UK, Canada, India, and Australia, which exposes us to anumber of difficulties inherent in international activities.**Wehave four software development facilities in India. As of March 31, 2006,we had approximately 2,398 technical professionals in the region, includingKeane Worldzen. India is currently experiencing conflicts with Pakistan overthe disputed territory of Kashmir as well as clashes between different religiousgroups within the country. These conflicts, in addition to other unpredictabledevelopments in the political, economic, and social conditions in India, couldeliminate or reduce the availability of these development and professionalservices. If access to these services were to be unexpectedly eliminated orsignificantly reduced, our ability to meet development objectives important toour strategy to add offshore delivery capabilities to the services we providewould be hindered, and our business could be harmed.

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

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

In addition, there hasbeen political discussion and debate related to worldwide competitive sourcing,particularly from the United States to offshore locations. There is proposedfederal and state legislation currently pending related to this issue. It istoo early to determine whether or in what form this legislation will beadopted; however, future legislation, if enacted, could have an adverse effecton our business, results of operations and financial condition.

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

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

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

**We maybe prohibited from repurchasing, and may not have the financial resources torepurchase, our Debentures on the date for repurchase at the option of theholder or upon a designated event, as required by the indenture governing ourDebentures, which could cause defaults under our senior revolving creditfacility and any other indebtedness we may incur in the future.**  TheDebenture holders have the right to require us to repurchase all or a portionof their Debentures on June 15, 2008. The Debenture holders may alsorequire us to repurchase all or a portion of their Debentures upon a designatedevent, as defined in the indenture governing the Debentures. If the Debentureholders elect to require us to repurchase their Debentures on any of the abovedates or if a designated event were to occur, we may not have enough funds topay the repurchase price for all tendered Debentures. We are currently prohibitedunder our senior revolving credit facility from repurchasing any Debentures ifa designated event were to occur. We may also be prohibited under anyindebtedness we may incur in the future from purchasing any Debentures prior totheir stated maturity. In these circumstances, we will be required to repay theentire outstanding principal of, and pay any accrued and unpaid interest on,such indebtedness or to obtain the requisite consents from the holders of anysuch indebtedness to permit the repurchase of the Debentures. If we are unableto repay all of such indebtedness or are unable to obtain the necessaryconsents, we will be unable to offer to repurchase the Debentures, which wouldconstitute an event of default under the indenture for the Debentures, whichitself could constitute a default under our senior revolving credit facility orunder the terms of any future indebtedness that we may incur. In addition, theevents that constitute a designated event under the indenture for theDebentures are events of default under our senior revolving credit facility andmay also be events of default under other indebtedness that we may incur in thefuture.

**Weincurred indebtedness when we sold our Debentures. We may incur additionalindebtedness in the future. The indebtedness created by the sale of ourDebentures, and any future indebtedness, could adversely affect our businessand our ability to make full payment on the Debentures.**  Ouraggregate level of indebtedness increased in connection with the sale of ourDebentures. As of March 31, 2006, we had approximately $189.4 millionof outstanding indebtedness and had the ability to incur additional debt underour revolving credit facility. We may also obtain additional long-term debt andworking capital lines of credit to meet future financing needs, which wouldhave the effect of increasing our total leverage. Any increase in our leveragecould have significant negative consequences, including:

·              increasing our vulnerability toadverse economic and industry conditions;

·              limiting our ability to obtainadditional financing;

·              limiting our ability to makeacquisitions;

·              requiring the dedication of asubstantial portion of our cash flow from operations to service ourindebtedness, thereby reducing the amount of our cash flow available for otherpurposes, including capital expenditures;

·              limiting our flexibility inplanning for, or reacting to, changes in our business and the industries inwhich we compete; and

·              placing us at a possiblecompetitive disadvantage with less leveraged competitors and competitors thatmay have better access to capital resources.

Our ability to satisfyour future obligations, including debt service on our Debentures, depends onour future operating performance and on economic, financial, competitive, andother factors beyond our control. Our business may not generate sufficient cashflow to meet these obligations or to successfully execute our businessstrategy. If we are unable to service our debt and fund our business, we may beforced to reduce or delay capital expenditures, seek additional financing orequity capital, restructure or refinance our debt or sell assets. We may not beable to obtain additional financing or refinance existing debt or sell assetson terms acceptable to us or at all.

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

(c)          The following table provides information about purchases by Keane during thethree months ended March 31, 2006 of equity securities that are registeredby Keane pursuant to Section 12 of the Exchange Act:

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**ISSUER PURCHASES OF EQUITY SECURITIES**
| **Period**        | ** ** | **(a)  Total Number of  Shares (or Units)  Purchased** | ** ** | **(b)  Average Price  Paid per Share  (or Unit)** | ** ** | **(c)  Total Number of  Shares Purchased  as Part of Publicly  Announced Plans  or Programs  (1)** | ** ** | **(d)  Maximum  Number of  Shares that  May Yet Be  Purchased  Under the  Plans or  Programs  (1)** | ** ** |
|-------------------|------------|----------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|
| 01/01/06-01/31/06 |       | —                                                                     |       | $                                                                     | —     |                                                                                                                                       | —     |                                                                                                                              | 2,553,900  |   |
| 02/01/06-02/28/06 |       | 370,500                                                                    |       | $                                                                     | 11.69      |                                                                                                                                       | 370,500    |                                                                                                                              | 2,183,400  |   |
| 03/01/06-03/31/06 |       | —                                                                     |       | $                                                                     | —     |                                                                                                                                       | —     |                                                                                                                              | 2,183,400  |   |
| Total:            |       | 370,500                                                                    |       | $                                                                     | 11.69      |                                                                                                                                       | 370,500    |                                                                                                                              | 2,183,400  |   |

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

**Item 5.****           Other Information**

 

On May 10, 2006, Brian T. Keane resigned, effective immediately, asPresident, Chief Executive Officer and a director of Keane. 

 

In connection with Mr. Keane’s resignation, we entered into aResignation and Consulting Agreement with Mr. Keane, effective May 10, 2006.Pursuant to the agreement, Mr. Keane resigned, and we accepted his resignationas President, Chief Executive Officer and a director and from all otherpositions including offices, directorships or employment he held with us or anyof our affiliates or related entities. Mr. Keane also agreed to withdraw hiscandidacy for reelection as a director at our Annual Meeting of Shareholderscurrently scheduled for Thursday, May 18, 2006 and may not permit himself to beconsidered for election to our board of directors at any time prior to December31, 2010. As a result of Mr. Keane’s resignation there will be one vacantposition on our Board.  The Board mayelect to fill this vacancy following the 2006 Annual Meeting.

 

Pursuant to the Resignation and Consulting Agreement, from June 1, 2006until December 31, 2007, Mr. Keane has agreed to provide up to a maximum of 150days of consulting services to us as may be requested by our board ofdirectors.  We will pay Mr. Keane anaggregate of $494,000 for his consulting services, payable in equal monthlyinstallments of $26,000 from June 1, 2006 through December 31, 2007. AfterJanuary 1, 2007, Mr. Keane may terminate his agreement to provide consultingservices upon 30 days written notice to us and we will cease making monthlyconsulting payments to Mr. Keane upon any such termination. 

 

In addition, pursuant to the Resignation and Consulting Agreement:

 

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

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

·                  All of Mr.Keane’s outstanding stock options and restricted stock awards will cease tovest after May 10, 2006, except that 10,000 shares of restricted stock thatwould otherwise vest on December 16, 2006 will continue to vest. 

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

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

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On May 10, 2006, our Board of Directors appointed John J. Leahy, 48,Keane’s Executive Vice President of Finance and Administration and ChiefFinancial Officer, to serve as our President and Chief Executive Officer on aninterim basis effective immediately.  Mr. Leahy joined Keane inAugust 1999 as Senior Vice President of Finance and Administration andChief Financial Officer. During 2005, Mr. Leahy was promoted to ExecutiveVice President of Finance and Administration and Chief Financial Officer. From1982 to August 1999, Mr. Leahy was employed by PepsiCo, Inc., amultinational consumer products corporation, during which time he held a numberof positions, serving most recently as Vice President of Business Planning andDevelopment for Pepsi-Cola International. There was no arrangement orunderstanding between Mr. Leahy and any other persons pursuant to which Mr.Leahy was appointed interim President and Chief Executive Officer and there areno family relationships or related party transactions between Mr. Leahy andKeane. 

 

We have previously entered into a change in control agreement with Mr.Leahy, dated March 11, 2005. Pursuant to this agreement, in the event Mr.Leahy’s employment is terminated by us without cause or by Mr. Leahy for goodreason in connection with a change in control of Keane, Mr. Leahy would receive(i) continued payment of his salary and targeted annual bonus for a periodof thirty-six months; (ii) 18 months of continued health, dental andfinancial planning benefit coverage; (iii) full vesting of outstandingstock options and restricted shares, if any; and (iv) if the paymentsprovided to him exceed the amount that triggers excise tax underSection 4999 of the Tax Code, an increase or “gross-up” of the payments toreflect the impact of this excise tax. 

 

A copy of the press release announcing Mr. Keane’s resignation and Mr.Leahy’s appointment is attached to this report as Exhibit 99.1 and a copy ofthe Resignation and Consulting Agreement with Mr. Keane is attached to thisreport as Exhibit 10.2.

** **

**Item6.****         Exhibits**

Exhibit 10.1—First Amendment to Revolving CreditFacility dated March 21, 2006, by and between the Registrant, and Bank ofAmerica and a syndicate of banks

Exhibit 10.2—Resignation and Consulting Agreement,dated May 10, 2006, by and between the Registrant and Brian T. Keane.

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

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

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

Exhibit 99.1—PressRelease entitled “Keane, Inc. Announces Resignation of President and CEO;Company Forms Office of the President,” issued by the Registrant onMay 10, 2006.

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**Signatures**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                                                      |   | KEANE, INC.                                                                                                                                                                                         |
|------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                 |   | (Registrant)                                                                                                                                                                                        |
|                                                 |   |                                                                                                                                                                                                |
|  Date    May 10,  2006 |   | /s/ JOHN J.  LEAHY                                                                                                                                                                                  |
|                                                 |   |                                                                                                                                                                                                |
|                                                 |   | John J. Leahy  Executive Vice President of Finance and  Administration and Chief Financial Officer  (Principal Financial and Accounting Officer)  and Interim President and Chief Executive Officer |

 

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**Exhibit Index**
| Exhibit  No. | ** ** | **Description**                                                                                                                                                                    | ** ** |
|--------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|         |       |                                                                                                                                                                               |       |
| 10.1         |       | First Amendment to Revolving Credit Facility dated  March 21, 2006, by and between the Registrant, and Bank of America and a  syndicate of banks                              |       |
|         |       |                                                                                                                                                                               |       |
| 10.2         |       | Resignation and Consulting Agreement, dated  May 10, 2006, by and between the Registrant and Brian T. Keane.                                                                  |       |
|         |       |                                                                                                                                                                               |       |
| 31.1         |       | Certification pursuant to Exchange Act  Rules 13a-14 and 15d-14 of the Chief Executive Officer.                                                                               |       |
|         |       |                                                                                                                                                                               |       |
| 31.2         |       | Certification pursuant to Exchange Act  Rules 13a-14 and 15d-14 of the Chief Financial Officer.                                                                               |       |
|         |       |                                                                                                                                                                               |       |
| 32.1         |       | Certification pursuant to 18 U.S.C. Section 1350  of the Chief Executive Officer and Chief Financial Officer.                                                                 |       |
|         |       |                                                                                                                                                                               |       |
| 99.1         |       | Press Release entitled “Keane, Inc. Announces  Resignation of President and CEO; Company Forms Office of the President,”  issued by the Registrant on May 10, 2006. |       |

 

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