** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

**FORM 10-Q**

** **

**(Mark One)**

 

ý**          ****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the quarterly period endedSeptember 30, 2005**

 

**Or**

 

o**          ****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the transition periodfrom                          to**

 

**CommissionFile Number 1-7516**

** **

**KEANE, INC.**

(Exact name of registrant asspecified 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 mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past90 days. Yes ý   No o

 

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

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes   o   Noý

 

As of September 30, 2005, there were 59,075,982 shares of theregistrant’s Common Stock, $.10 par value per share, and no shares of theregistrant’s Class B Common Stock, $.10 par value per share, issued andoutstanding.

 

 

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**Keane, Inc.**

 

**Table of Contents**

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

 

2

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**Part I. Financial Information**

** **

**Item 1. Financial Statements**

** **

**Keane, Inc.**

** **

**Unaudited Condensed Consolidated Statements ofIncome**

** **

 
| ** **                                                                       | ** ** | **Three Months Ended September 30,**   | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                                    | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                       | ** ** | **(In thousands except per share amounts)** | ** ** |
|                                                                             |       |                                        |       |                                     |       |   |   |   |   |
| **Revenues**                                                                     |       | $                                           | 239,563    |                                     | $          | 234,827 |   | $ | 709,585 |   | $ | 682,363 |   |
| ** **                                                                       |       |                                        |       |                                     |       |   |   |   |   |
| **Operating  expenses**                                                          |       |                                        |       |                                     |       |   |   |   |   |
| Salaries, wages, and other direct costs                                          |       | 171,016                                     |       | 166,216                                  |       | 499,670 |   | 477,916 |   |
| Selling, general, and administrative  expenses                                   |       | 54,495                                      |       | 51,029                                   |       | 164,971 |   | 156,911 |   |
| Amortization of intangible assets                                                |       | 3,780                                       |       | 4,137                                    |       | 11,710 |   | 12,085 |   |
|                                                                             |       |                                        |       |                                     |       |   |   |   |   |
| **Operating  income**                                                            |       | 10,272                                      |       | 13,445                                   |       | 33,234 |   | 35,451 |   |
|                                                                             |       |                                        |       |                                     |       |   |   |   |   |
| **Other  income (expense)**                                                      |       |                                        |       |                                     |       |   |   |   |   |
| Interest and dividend income                                                     |       | 1,121                                       |       | 920                                      |       | 3,354 |   | 2,850 |   |
| Interest expense                                                                 |       | (1,403                                      | )          | (1,414                                   | )          | (4,225 | ) | (4,252 | ) |
| Other (expense) income, net                                                      |       | (367                                        | )          | (172                                     | )          | (557 | ) | 119 |   |
| Minority interest                                                                |       | 158                                         |       | 546                                      |       | 1,031 |   | 1,816 |   |
|                                                                             |       |                                        |       |                                     |       |   |   |   |   |
| **Income  before income taxes**                                                  |       | 9,781                                       |       | 13,325                                   |       | 32,837 |   | 35,984 |   |
| Provision  for income taxes                                                      |       | 895                                         |       | 5,274                                    |       | 9,633 |   | 14,338 |   |
|                                                                             |       |                                        |       |                                     |       |   |   |   |   |
| **Net  income**                                                                  |       | $                                           | 8,886      |                                     | $          | 8,051 |   | $ | 23,204 |   | $ | 21,646 |   |
|                                                                             |       |                                        |       |                                     |       |   |   |   |   |
| Basic  earnings per share                                                        |       | $                                           | 0.15       |                                     | $          | 0.13 |   | $ | 0.38 |   | $ | 0.34 |   |
|                                                                             |       |                                        |       |                                     |       |   |   |   |   |
| Diluted  earnings per share                                                      |       | $                                           | 0.14       |                                     | $          | 0.12 |   | $ | 0.36 |   | $ | 0.32 |   |
|                                                                             |       |                                        |       |                                     |       |   |   |   |   |
| Basic  weighted average common shares outstanding                                |       | 59,897                                      |       | 61,868                                   |       | 61,265 |   | 62,793 |   |
| Diluted weighted average common shares and  common share equivalents outstanding |       | 68,638                                      |       | 70,970                                   |       | 70,074 |   | 71,995 |   |

 

*The accompanying notes are an integral part of the unaudited condensedconsolidated financial statements.*

 

3

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**Keane, Inc.**

 

**Unaudited Condensed Consolidated BalanceSheets**

** **
| ** **                                      | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **(In thousands)**           | ** ** |
| **Assets**                                      |       |                         |       |                        |       |
| Current:                                        |       |                         |       |                        |       |
| Cash and cash equivalents                       |       | $                            | 43,497     |                        | $          | 67,488 |   |
| Restricted cash                                 |       | 1,859                        |       | 986                         |       |
| Marketable securities                           |       | 106,928                      |       | 130,678                     |       |
| Accounts receivable, net                        |       | 157,231                      |       | 126,467                     |       |
| Prepaid expenses and deferred taxes             |       | 30,755                       |       | 16,515                      |       |
|                                            |       |                         |       |                        |       |
| Total current assets                            |       | 340,270                      |       | 342,134                     |       |
|                                            |       |                         |       |                        |       |
| Property and  equipment, net                    |       | 75,748                       |       | 76,761                      |       |
| Goodwill                                        |       | 310,205                      |       | 305,965                     |       |
| Customer  lists, net                            |       | 44,054                       |       | 53,040                      |       |
| Other  intangible assets, net                   |       | 7,120                        |       | 9,904                       |       |
| Other  assets, net                              |       | 16,621                       |       | 16,390                      |       |
|                                            |       |                         |       |                        |       |
| Total assets                                    |       | $                            | 794,018    |                        | $          | 804,194 |   |
|                                            |       |                         |       |                        |       |   |   |
| **Liabilities**                                 |       |                         |       |                        |       |
| Current:                                        |       |                         |       |                        |       |
| Short-term debt                                 |       | $                            | 36         |                        | $          | 892 |   |
| Accounts payable                                |       | 8,138                        |       | 9,511                       |       |
| Accrued restructuring                           |       | 2,976                        |       | 3,513                       |       |
| Unearned income                                 |       | 6,992                        |       | 6,837                       |       |
| Accrued compensation                            |       | 33,056                       |       | 39,763                      |       |
| Accrued expenses and other liabilities          |       | 50,323                       |       | 39,269                      |       |
|                                            |       |                         |       |                        |       |
| Total current liabilities                       |       | 101,521                      |       | 99,785                      |       |
|                                            |       |                         |       |                        |       |
| Long-term  debt                                 |       | 150,076                      |       | 150,017                     |       |
| Accrued long-term  building costs               |       | 39,143                       |       | 39,545                      |       |
| Accrued long-term  restructuring                |       | 3,119                        |       | 5,164                       |       |
| Other long-term  liabilities                    |       | 15,477                       |       | 16,030                      |       |
| Deferred  income taxes                          |       | 33,305                       |       | 25,924                      |       |
|                                            |       |                         |       |                        |       |
| Total liabilities                               |       | 342,641                      |       | 336,465                     |       |
|                                            |       |                         |       |                        |       |
| **Minority  Interest**                          |       | 4,995                        |       | 6,026                       |       |
|                                            |       |                         |       |                        |       |
| **Stockholders’  Equity**                  |       |                         |       |                        |       |
| Common stock                                    |       | 5,908                        |       | 6,218                       |       |
| Additional  paid-in capital                     |       | —                       |       | 33,752                      |       |
| Accumulated  other comprehensive loss           |       | (6,294                       | )          | (6,657                      | )          |
| Retained  earnings                              |       | 449,209                      |       | 431,046                     |       |
| Unearned  compensation                          |       | (2,441                       | )          | (2,656                      | )          |
|                                            |       |                         |       |                        |       |
| Stockholders’  equity                      |       | 446,382                      |       | 461,703                     |       |
|                                            |       |                         |       |                        |       |
| Total liabilities and stockholders’ equity |       | $                            | 794,018    |                        | $          | 804,194 |   |

 

*The accompanying notes are an integral part of the unaudited condensedconsolidated financial statements.*

 

4

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**Keane, Inc.**

 

**Unaudited Condensed Consolidated Statementsof Cash Flows**

** **
| ** **                                                                                         | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| ** **                                                                                         | ** ** | **(Dollars in thousands)**               | ** ** |
| **Cash  flows from operating activities:**                                                         |       |                                     |       |   |   |
| Net income                                                                                         |       | $                                        | 23,204     |   | $ | 21,646 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:                 |       |                                     |       |   |   |
| Depreciation and amortization                                                                      |       | 21,260                                   |       | 21,262 |   |
| Deferred income taxes                                                                              |       | 7,548                                    |       | 4,091 |   |
| Provision for doubtful accounts                                                                    |       | 4,388                                    |       | 5,227 |   |
| Minority interest                                                                                  |       | (1,031                                   | )          | (1,816 | ) |
| (Gain) loss on sale of property and  equipment                                                     |       | (168                                     | )          | 26 |   |
| Gain (loss) on sale of investments                                                                 |       | 157                                      |       | (63 | ) |
| Other charges, net                                                                                 |       | (365                                     | )          | (3,098 | ) |
| Changes in operating assets and  liabilities, net of acquisitions:                                 |       |                                     |       |   |   |
| (Increase) in accounts receivable                                                                  |       | (31,710                                  | )          | (28,278 | ) |
| (Increase) in prepaid expenses and other  assets                                                   |       | (13,950                                  | )          | (2,653 | ) |
| (Decrease) increase in accounts payable,  accrued expenses, unearned income, and other liabilities |       | (2,727                                   | )          | 19,682 |   |
| Increase (decrease) in income taxes payable                                                        |       | 770                                      |       | (1,243 | ) |
|                                                                                               |       |                                     |       |   |   |
| **Net cash  provided by operating activities**                                                     |       | 7,376                                    |       | 34,783 |   |
|                                                                                               |       |                                     |       |   |   |
| **Cash  flows from investing activities:**                                                         |       |                                     |       |   |   |
| Purchase of investments                                                                            |       | (35,363                                  | )          | (48,969 | ) |
| Sale and maturities of investments                                                                 |       | 58,172                                   |       | 72,612 |   |
| Purchase of property and equipment                                                                 |       | (10,721                                  | )          | (8,937 | ) |
| Restricted cash                                                                                    |       | 5                                        |       | (185 | ) |
| Proceeds from the sale of property and  equipment                                                  |       | 790                                      |       | 239 |   |
| Payments for current year acquisitions, net  of cash acquired                                      |       | (1,668                                   | )          | (21,331 | ) |
| Payments for prior years acquisitions, net  of cash acquired                                       |       | (3,132                                   | )          | (65 | ) |
|                                                                                               |       |                                     |       |   |   |
| **Net cash provided by (used for) investing  activities**                                          |       | 8,083                                    |       | (6,636 | ) |
|                                                                                               |       |                                     |       |   |   |
| **Cash  flows from financing activities:**                                                         |       |                                     |       |   |   |
| Debt issuance costs                                                                                |       | (1,279                                   | )          | (42 | ) |
| Principal payments under capital lease  obligations                                                |       | (215                                     | )          | (430 | ) |
| Proceeds from issuance of common stock                                                             |       | 4,374                                    |       | 5,456 |   |
| Repurchase of common stock                                                                         |       | (42,113                                  | )          | (30,096 | ) |
|                                                                                               |       |                                     |       |   |   |
| **Net cash  used for financing activities**                                                        |       | (39,233                                  | )          | (25,112 | ) |
|                                                                                               |       |                                     |       |   |   |
| Effect of  exchange rate changes on cash                                                           |       | (217                                     | )          | (67 | ) |
| **Net  (decrease) increase in cash and cash equivalents**                                          |       | (23,991                                  | )          | 2,968 |   |
| **Cash and  cash equivalents at beginning of period**                                              |       | 67,488                                   |       | 56,736 |   |
|                                                                                               |       |                                     |       |   |   |
| **Cash and  cash equivalents at end of period**                                                    |       | $                                        | 43,497     |   | $ | 59,704 |   |
|                                                                                               |       |                                     |       |   |   |
| **Supplemental  information:**                                                                     |       |                                     |       |   |   |
| Income taxes  paid                                                                                 |       | $                                        | 19,450     |   | $ | 11,489 |   |
| Interest  paid                                                                                     |       | $                                        | 1,505      |   | $ | 1,561 |   |

 

*The accompanying notes are an integral part of the unaudited condensedconsolidated financial statements.*

 

5

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**Keane, Inc.**

 

**Notes to Unaudited Condensed ConsolidatedFinancial Statements**

** **

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

** **

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with generally accepted accounting principlesfor interim financial information and, accordingly, do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements. The accompanying unaudited condensedconsolidated financial statements include the accounts of Keane, Inc. andour wholly and majority owned subsidiaries. In the opinion of management, alladjustments, consisting primarily of normal recurring accruals, considerednecessary for a fair presentation of the results of operations for the interimperiods reported and of our financial condition as of the date of the interim balancesheet have been included. Operating results for the three and nine months endedSeptember 30, 2005 are not necessarily indicative of the results that maybe expected for the year ending December 31, 2005 or for any other period.

 

The balance sheet at December 31, 2004 has been derived from ouraudited consolidated financial statements at that date but does not include allof the information and footnotes required by generally accepted accountingprinciples for complete financial statements.

 

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

 

For further information, refer to the consolidated financial statementsand footnotes thereto included in our Annual Report on Form 10-K for theyear ended December 31, 2004 filed with the Securities and ExchangeCommission on March 15, 2005.

 

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

** **

The computation of earnings per share for the three and nine monthsended September 30, 2005 and 2004 is as follows (in thousands, except pershare data):

 
| ** **                                                                                                                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                            | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income  used for basic earnings per share                                                                                         |       | $                                          | 8,886      |                                      | $          | 8,051 |   | $ | 23,204 |   | $ | 21,646 |   |
| Interest expense associated with  convertible debentures, including amortization of debt issuance costs, net of  tax effect           |       | 881                                        |       | 586                                       |       | 2,057 |   | 1,750 |   |
|                                                                                                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Net income  used for diluted earnings per share                                                                                       |       | $                                          | 9,767      |                                      | $          | 8,637 |   | $ | 25,261 |   | $ | 23,396 |   |
|                                                                                                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Weighted average number of common shares  outstanding used in calculation of basic earnings per share                                 |       | 59,897                                     |       | 61,868                                    |       | 61,265 |   | 62,793 |   |
| Incremental shares from restricted stock,  employee stock purchase plan, and the assumed exercise of dilutive stock  options          |       | 566                                        |       | 927                                       |       | 634 |   | 1,027 |   |
| Incremental shares from assumed conversion  of convertible Debentures                                                                 |       | 8,175                                      |       | 8,175                                     |       | 8,175 |   | 8,175 |   |
| Weighted average number of common shares  and common share equivalents outstanding used in calculation of diluted earnings  per share |       | 68,638                                     |       | 70,970                                    |       | 70,074 |   | 71,995 |   |
|                                                                                                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Earnings per  share                                                                                                                   |       |                                       |       |                                      |       |   |   |   |   |
| Basic                                                                                                                                 |       | $                                          | 0.15       |                                      | $          | 0.13 |   | $ | 0.38 |   | $ | 0.34 |   |
| Diluted                                                                                                                               |       | $                                          | 0.14       |                                      | $          | 0.12 |   | $ | 0.36 |   | $ | 0.32 |   |

 

6

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Potential common shares consist of employee stock options andrestricted common stock. Employee stock options to purchase 1,695,348 and1,370,067 shares for the three months ended September 30, 2005 and 2004,and 1,700,250 and 1,380,726 shares for the nine months ended September 30,2005 and 2004, respectively, were outstanding, but were not included in thecomputation of diluted earnings per share because the exercise price of thestock options was greater than the average share price of the common sharesduring the period and, therefore, their effect would have been anti-dilutive.

 

Our 2.0% Convertible Subordinated Debentures due 2013 (the “Debentures”)are convertible at the option of the holder into shares of our common stock atan initial conversion rate of 54.4989 shares of common stock per $1,000principal amount of Debentures, which is equivalent to an initial conversionprice of approximately $18.349 per share. The Debentures become convertibleunder the following circumstances: (a) during any fiscal quartercommencing after September 30, 2003 when, among other circumstances, theclosing price per share of our common stock is more than 120% of the conversionprice (approximately $22.019 per share) for at least 20 trading days in the 30consecutive trading days ending on the last trading day of the preceding fiscalquarter; (b) during the five business days after any five consecutivetrading day period in which the trading price per $1,000 principal amount ofDebentures for each day of that period was less that 98% of the product of theclosing sale price per share of our common stock and the number of sharesissuable upon conversion of $1,000 principal amount of the Debentures; (c) ifthe Debentures have been called for redemption; or (d) upon the occurrenceof specified corporate transactions. Approximately 8.2 million shares of ourcommon stock would be issuable upon the conversion of all of the outstandingDebentures.

 

We adopted the provisions of Emerging Issues Task Force (“EITF”) Issue No. 04-8(“EITF 04-8”), “The Effect of Contingently Convertible Debt on Diluted Earningsper Share,” in the Fourth Quarter of 2004.  EITF 04-8 requires that weinclude contingently convertible debt in the calculation of diluted earningsper share using the if-converted method regardless of whether the market pricetrigger has been met. Under the if-converted method, the debt is consideredconverted to shares, with the resulting number of shares included in the denominatorof the earnings per share calculation and the related interest expense (net oftax) added back to the numerator of the earnings per share calculation. EITF04-8 also requires the restatement of previously reported diluted earnings pershare upon adoption. Therefore, the weighted average impact of the 8.2 millionshares issuable upon conversion of the Debentures has been included in thecalculation of diluted earnings per share for the three and nine months ended September 30,2005 and 2004.

 

**Note 3.****           Stock-Based Compensation (See Note 13.  “Subsequent Events”)**

** **

We have stock-based compensation plans for which we have adopted thedisclosure-only provisions of SFAS No. 148 (“SFAS 148”), “Accountingfor Stock-Based Compensation—Transition and Disclosure,” an amendment of SFAS No. 123(“SFAS 123”), “Accounting for Stock-Based Compensation.” Accordingly, nocompensation expense has been recognized for our stock-based compensation plansother than for restricted stock and certain stock options. As permitted by SFAS148 and SFAS 123, we account for our stock-based compensation in accordancewith Accounting Principles Board (“APB”) Opinion No. 25 (“APB 25”), “Accountingfor Stock Issued to Employees.”

 

Inaccordance with APB 25 we use the intrinsic value-based method to account forstock option grants and restricted stock awards. We grant stock options for afixed number of shares to employees with an exercise price equal to the closingprice of the shares at the date of grant and therefore, do not recognize compensationexpense. We also grant restricted stock for a fixed number of shares toemployees for nominal consideration. In 2003, in connection with ouracquisition of a majority interest in Keane Worldzen, certain employees weregranted Keane Worldzen stock options. In accordance with Financial AccountingStandards Board (“FASB”) 

 

7

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InterpretationNo. 44 (“FIN 44”), “Accounting for Certain Transactions Involving StockCompensation,” and SFAS No. 141 (“SFAS 141”), “Business Combinations,”these stock options were recorded as unearned compensation at the date ofacquisition and vest over the life of the stock option. Compensation expenserelated to restricted stock awards and the Keane Worldzen stock options isrecorded ratably over the restriction and vesting period, respectively, and isincluded in the selling, general, and administrative expenses in theaccompanying consolidated statements of income. Our Employee Stock PurchasePlan (“ESPP”) is non-compensatory as defined in APB 25, and accordingly, we donot recognize compensation expense in our consolidated financial statements.

 

Had compensation expense for our stock-based compensation plans beendetermined based on the fair value at the grant dates as calculated inaccordance with SFAS 123 and using the Black-Scholes option-pricing model,we would have recorded additional compensation expense and our net income andearnings per share for the three and nine months ended September 30, 2005and 2004 would have been reduced to the pro forma amounts indicated below (inthousands, except per share data):

 
| ** **                                                                                                                          | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2005**                                  | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net  income—as reported (1)                                                                                                    |       | $                                         | 8,886      |                                      | $          | 8,051 |   | $ | 23,204 |   | $ | 21,646 |   |
| Add: Stock-based employee compensation  expense included in reported net income, net of related tax effects                         |       | 85                                        |       | 82                                        |       | 251 |   | 305 |   |
| Deduct: Total stock-based employee  compensation expense determined under the fair value method for all awards,  net of tax effects |       | (1,625                                    | )          | (1,341                                    | )          | (4,430 | ) | (3,940 | ) |
|                                                                                                                                |       |                                      |       |                                      |       |   |   |   |   |
| Net  income—pro forma                                                                                                          |       | $                                         | 7,346      |                                      | $          | 6,792 |   | $ | 19,025 |   | $ | 18,011 |   |
|                                                                                                                                |       |                                      |       |                                      |       |   |   |   |   |
| Earnings per  share                                                                                                                 |       |                                      |       |                                      |       |   |   |   |   |
| Basic—as  reported                                                                                                             |       | $                                         | 0.15       |                                      | $          | 0.13 |   | $ | 0.38 |   | $ | 0.34 |   |
| Basic—pro  forma                                                                                                               |       | $                                         | 0.12       |                                      | $          | 0.11 |   | $ | 0.31 |   | $ | 0.29 |   |
| Diluted—as  reported                                                                                                           |       | $                                         | 0.14       |                                      | $          | 0.12 |   | $ | 0.36 |   | $ | 0.32 |   |
| Diluted—pro  forma                                                                                                             |       | $                                         | 0.12       |                                      | $          | 0.10 |   | $ | 0.30 |   | $ | 0.27 |   |

 

----

 (1) See Note 2 “Earnings Per Share Data” for reconciliationof net income as reported to net income used in calculation of diluted earningsper share.

 

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

** **

SFAS No. 130 (“SFAS 130”), “Reporting Comprehensive Income,”establishes rules for the reporting and display of comprehensive incomeand its components. Components of comprehensive income include net income andcertain transactions that have generally been reported in the consolidatedstatement of stockholders’ equity. Other comprehensive income is comprised ofcurrency translation adjustments, available-for-sale securities valuationadjustments, and adjustments related to a foreign defined benefit plan.

 

Total comprehensive income (i.e., net income plus available-for-salesecurities valuation adjustments, currency translation adjustments and adjustmentsrelated to a foreign defined benefit plan, net of tax) was $10.3 million and$23.6 million for the three and nine months ended September 30, 2005,respectively, and was $8.2 million and $15.5 million for the three andnine months ended September 30, 2004, respectively. See Note 5 “PensionPlan” for a discussion of the minimum pension liability adjustments.

 

The following table summarizes the components of accumulated othercomprehensive loss, net of taxes (dollars in thousands):

 
| **As of**                                 | ** ** | **September 30, 2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Foreign  currency translation adjustments |       | $                           | 5,291      |                        | $          | 4,004 |   |
| Securities  valuation adjustment          |       | (796                        | )          | (514                        | )          |
| Minimum  pension liability adjustment     |       | (10,789                     | )          | (10,147                     | )          |
|                                      |       |                        |       |                        |       |
| Accumulated  other comprehensive loss     |       | $                           | (6,294     | )                           | $          | (6,657 | ) |

 

8

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**Note5.****           PensionPlan**

** **

Our United Kingdom (“UK”) defined benefit plan (“DBP”) provides pensionbenefits to employees of our UK subsidiary who were active on August 4,1999, and not to employees who joined after that date.  Benefits are based on the employees’compensation and service.  Our policy is to fund amounts required byapplicable government regulations.  The measurement date for the UK DBP isDecember 31.

 

During the First Quarter of 2004, we decided to close our UK DBP tofuture salary accruals effective April 1, 2004. Accordingly, we accountedfor the closing of the UK DBP as a curtailment under SFAS No. 88 (“SFAS 88”), “Employers’ Accounting for Settlements and Curtailments of Defined BenefitPension Plans and for Termination Benefits.”  In 2004, we recorded acurtailment loss of approximately $0.2 million to expense the unrecognizedprior service cost, and we recorded an additional required minimum liability ofapproximately $6.6 million through Accumulated other comprehensive loss in theaccompanying unaudited condensed consolidated balance sheets.  As a resultof the availability of more recent measurements of both the plan assets andobligations under the UK DBP, during the Third Quarter of 2005, we recorded adecrease in the required minimum liability of approximately $1.1 millionthrough Accumulated other comprehensive loss. For the nine months ended September 30, 2005, we have recorded anet increase in the required minimum liability of approximately $0.6 millionthrough Accumulated other comprehensive loss. As of September 30, 2005,the UK pension liability was approximately $13.3 million and is included inOther long-term liabilities in the accompanying unaudited condensed consolidatedbalance sheets.

 

Net periodic pension cost of the UK DBP for the three and nine monthsended September 30, 2005 and 2004 is presented as follows (dollars inthousands):

 

 
| ** **                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                                                  |       | $                                          | 14         |                                      | $          | — |   | $ | 44 |   | $ | 233 |   |
| Interest  cost                                                |       | 475                                        |       | 443                                       |       | 1,448 |   | 1,349 |   |
| Expected  return on plan assets                               |       | (437                                       | )          | (385                                      | )          | (1,333 | ) | (1,173 | ) |
| Amortization  of prior service cost                           |       | —                                     |       | —                                    |       | — |   | — |   |
| Amortization  of transitional obligation                      |       | —                                     |       | —                                    |       | — |   | — |   |
| Recognized  actuarial loss                                    |       | 111                                        |       | 120                                       |       | 338 |   | 366 |   |
| Net periodic  pension cost                                    |       | $                                          | 163        |                                      | $          | 178 |   | $ | 497 |   | $ | 775 |   |
| Curtailment  loss/(gain)                                      |       | —                                     |       | —                                    |       | — |   | 183 |   |
| Net periodic pension expense after  allowance for curtailment |       | $                                          | 163        |                                      | $          | 178 |   | $ | 497 |   | $ | 958 |   |

 

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

** **

*Cresta Testing, Inc.*

* *

On June 1, 2005, we acquired Cresta Testing, Inc. (“Cresta”),a software testing company that specializes in managed services, test strategyand training, and functional and performance testing. In exchange for all ofthe outstanding capital stock of Cresta, we paid $0.6 million in cash, of which$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 the next two years, contingent upon the achievementof certain future financial targets. The earn-out consideration is alsodependent on the employment of a certain Cresta employee, therefore, inaccordance with SFAS No. 141 (“SFAS 141”), “Business Combinations,” wewill record any additional earn-out consideration as compensationexpense.  The $60,000 held back was deposited as restricted cash andaccrued and included in Accrued expenses and other liabilities in theaccompanying unaudited condensed consolidated balance sheet. The acquisitionhas been accounted for under the purchase method in accordance withSFAS 141 and SFAS No. 142 (“SFAS 142”), “Goodwill and OtherIntangible Assets.” The total cost of the acquisition through September 30,2005 was $0.6 million, which included net assets acquired of approximately $0.4million. Total assets acquired of $0.7 million consisted primarily of cash of$0.1 million and accounts receivable of $0.6 million. The purchase priceallocation is preliminary as of September 30, 2005. The operating resultsof Cresta have been included in our condensed consolidated statement ofoperations beginning June 2, 2005.

 

*ArcStream Solutions, Inc.*

* *

On April 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. No earn-out consideration has been paid.ArcStream is a 

 

9

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business and technology consulting firm based in Watertown,Massachusetts, that specializes in helping organizations compete through theuse of advanced technologies and process improvement.  As a stockholder ofArcStream, John Keane, Jr. will be entitled to a portion of any additionalconsideration. John Keane, Jr. is the founder, President and ChiefExecutive Officer of ArcStream.  He is also the brother of Brian Keane,the CEO of the Company, the son of John Keane, Sr., the Chairman of theBoard, and a member of Keane’s Board of Directors.  In addition, inconnection with the transaction, John Keane, Jr., agreed to guaranteecertain indemnification obligations of ArcStream and the Company paid JohnKeane, Jr. $21,875 pursuant to a consulting arrangement to assist in thetransition of the acquired business. The transaction was approved by both theAudit Committee and the Board of Directors of the Company.  The operatingresults of the acquired ArcStream assets have been included in our condensedconsolidated statement of operations beginning April 5, 2005.

 

*netNumina Solutions, Inc.*

* *

On February 28, 2005, we acquired netNumina Solutions, Inc. (“netNumina”),a software development company based in Cambridge, Massachusetts thatspecializes in technology strategy, architecture, and custom development, toenhance our capabilities in Development and Integration services.  Inexchange for all of the outstanding capital stock of netNumina, we agreed topay $5.7 million, of which $0.6 million was held back to secure indemnificationobligations of the netNumina stockholders. As of September 30, 2005, wepaid the $5.1 million not held back and the $0.6 million held back wasdeposited as restricted cash and included in Accrued expenses and otherliabilities in the accompanying unaudited condensed consolidated balancesheet.  The acquisition has been accounted for under the purchase methodin accordance with SFAS 141 and SFAS 142.  The total cost of thetransaction through September 30, 2005 was $4.8 million, which includednet assets of approximately $5.2 million.  Total assets acquired of $7.8million consisted primarily of cash of $4.6 million and accounts receivable of$2.3 million.  In connection with the purchase price allocation werecorded a $0.5 million fair value adjustment to reduce property and equipmentthat resulted from an excess book value of the assets acquired over thepurchase price and recorded deferred tax assets of $2.0 million.  As aresult, we have not recorded any goodwill or intangible assets in connectionwith this acquisition. The valuation and purchase price allocation arepreliminary as of September 30, 2005.  The operating results ofnetNumina have been included in our unaudited condensed consolidated statementsof income beginning March 1, 2005.

 

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

 

*Fast Track Holdings Limited*

* *

On July 13, 2004, we acquired Fast Track Holdings Limited (“FastTrack”), a privately held consulting firm based in the United Kingdom thatmanages the design, integration, and deployment of large-scale SAPimplementations. In exchange for all of Fast Track’s outstanding capital stock,we paid approximately $3.4 million in cash, including transactioncosts.  We also agreed to pay up to an additional approximately$5.0 million in earn-out consideration over the next two years, contingentupon the achievement of certain future financial targets. Based on Fast Track’sfinancial results through July 31, 2005, the first earn-out totalingapproximately $2.0 million was not achieved. Payment for earn-out considerationearned through July 31, 2006, if any, may range up to approximately $2.9 million.The additional payment for earn-out consideration, if any, will be accountedfor as additional purchase price. The acquisition has been accounted for underthe purchase method in accordance with SFAS 141 and SFAS 142. The portion of the purchase price related to the intangible assets has beenfinalized and was identified utilizing standard valuation procedures andtechniques. The total cost of the acquisition through September 30, 2005was $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 periodof benefit. 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 unaudited condensed consolidated statement ofoperations beginning July 14, 2004.

 

At the date of acquisition, we entered into a plan to exit certainactivities, to consolidate facilities and to implement a workforcereduction.  As a result, we recorded a restructuring liability of $0.4million related to the lease obligations and certain other costs for thosefacilities and $0.1 million related to severance and retention. Inaccordance with EITF 95-3, these costs, which are not associated with thegeneration of future revenues and have no future economic benefit, werereflected as assumed liabilities in the allocation of the purchase price to thenet assets acquired.

 

*Nims Associates, Inc.*

* *

On February 27, 2004, we acquired Nims Associates, Inc. (“Nims”),an information technology and consulting services company with offices in theMidwest and Advanced Development Centers (“ADCs”) in Indianapolis and Dallas,to expand our customer base, primarily in the financial and insuranceindustries. 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 additional payments for earn-out consideration 

 

10

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will be accounted for as additional purchase price. The first earn-outwas achieved as of March 1, 2005 and, as a result, we paid $3.3 million inearn-out consideration in April 2005 and recorded a corresponding increasein Goodwill.  As of September 30, 2005, there is a remaining $11.7million in earn-out consideration that could be achieved over the next twoyears.  The acquisition was accounted for under the purchase method inaccordance with SFAS 141 and SFAS 142. The total cost of theacquisition through September 30, 2005 was $26.1 million, whichincludes net assets acquired of approximately $5.4 million, goodwill ofapproximately $13.7 million and intangible assets of $7.0 million.The intangible assets are primarily amortized on a straight-line basis over10 years, which approximates the expected period of benefit. Total assetsacquired of $8.8 million consisted primarily of accounts receivable of$5.6 million. The portion of the purchase price related to the intangibleassets has been finalized and was identified by utilizing standard valuationprocedures and techniques. The operating results of Nims have been included inour unaudited condensed consolidated statements of income beginning March 1,2004.

 

At the date of acquisition, we entered into a plan to exit certainactivities, to consolidate facilities and to implement a workforce reduction of22 non-billable employees. As a result, we recorded a restructuring liabilityof $1.3 million related to the lease obligations and certain other costsfor those facilities and $0.3 million related to severance and retention.In accordance with EITF 95-3, these costs, which are not associated with thegeneration of future revenues and have no future economic benefit, arereflected as assumed liabilities in the allocation of the purchase price to thenet assets acquired.

 

The unaudited pro forma combined condensed statements of income belowpresent our historical statements and our acquisition of Nims on February 27,2004 as if the purchase had occurred at January 1, 2004. The followingunaudited pro forma combined condensed financial information is presented forcomparative purposes only and is not necessarily indicative of the results ofoperations that would have actually been reported had the purchase occurred atthe beginning of the periods presented, nor is it necessarily indicative offuture financial position or results of operations (dollars in thousands,except per share data):

 
| **For the nine months ended September 30,** | ** ** | **2004**      | ** ** |
|--------------------------------------------------|------------|---------------|------------|
| ** **                                       | ** ** | **Unaudited** | ** ** |
| Revenues                                         |       | $             | 690,868    |   |
| Net income  (1)                                  |       | 21,845        |       |
| Basic  earnings per share                        |       | 0.35          |       |
| Diluted  earnings per share                      |       | 0.33          |       |
|                                                  |            |               |            |  |

 

----

 (1) See Note 2 “Earnings Per Share Data” for reconciliationof net income as reported to net income used in calculation of diluted earningsper share.

 

*Keane Worldzen*

* *

On October 17, 2003, we acquired a controlling interest in KeaneWorldzen, a privately held Business Process Outsourcing (“BPO”) firm. Inconnection 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. As a result, we initially recorded goodwill of approximately$13.8 million in the accompanying unaudited condensed consolidated balancesheets.

 

On April 1, 2005, we increased our equity position in KeaneWorldzen to approximately 81% with an additional capital contribution ofapproximately $5.0 million in cash and $3.0 million from the conversion of anoutstanding loan to equity. As a result of the additional capital contribution,we continue to consolidate the results of Keane Worldzen, but are also able toconsolidate its results for tax purposes beginning April 1, 2005. Upon ouradditional capital contribution, the minority interest shareholders ownapproximately 19% of the issued and outstanding capital stock of KeaneWorldzen.

 

In connection with our acquisition of a controlling interest in KeaneWorldzen in October 2003, we obtained the right to purchase certain of theremaining shares held by the minority shareholders of Keane Worldzen atdifferent times (“call options”). Our first call option is exercisable duringthe period beginning on January 1, 2006 and ending on December 31,2006 and is based on a stated value for the underlying shares of$6.5 million. The fair value of the first call option, using a BlackScholes valuation model, is approximately $3.8 million and is included inother assets in the accompanying unaudited condensed consolidated balancesheets. The other call options are exercisable at the fair market value of theunderlying shares during the call periods, which are exercisable 

 

11

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at certain times during the period January 1, 2007 through December 31,2009. Since these other call options can only be exercised at the fair value ofthe underlying shares, no amounts have been recorded for these call options inour unaudited condensed consolidated financial statements.

 

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

 

The results of operations of these acquired companies have beenincluded in our unaudited condensed consolidated statements of income from thedate of acquisition. The excess of the purchase price over the fair value ofthe net assets has been allocated to identifiable intangible assets andgoodwill. Identifiable intangible assets associated with these acquisitions arebeing amortized on a straight-line basis over periods ranging from two to10 years and approximate the expected periods of benefit. Pro formaresults of operations for Cresta, ArcStream, netNumina, and Fast Track have notbeen provided since these acquisitions were not material either individually orin the aggregate in the year of acquisition.

 

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

** **

*Workforce reductions*

* *

In connection with the netNumina acquisition noted above, we enteredinto a plan to reduce the workforce by eight employees, most of whom had anexpected termination date in the Second Quarter of 2005.  The employeesaffected in the reduction are non-billable personnel whose responsibilitieshave been integrated into our existing operations to realize the synergies ofthe two operations.  We recorded a liability of $1.0 million associatedwith severance and other termination benefits and the plan is substantiallycompleted as of September 30, 2005.  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.  Cash expenditures for the ninemonths ended September 30, 2005 related to the netNumina severance andretention accruals was $0.8 million. As of September 30, 2005, theremaining balance was $0.2 million.

 

In connection with the Fast Track acquisition noted above, we enteredinto a plan to reduce the workforce by seven employees, most of whom had atermination date of October 31, 2004. The employees affected in thereduction were non-billable personnel whose responsibilities were integratedinto our existing operations to realize the synergies of the two operations. Werecorded a liability of approximately $0.1 million associated with severance,retention and other termination benefits, completed the plan by the end of theFirst Quarter of 2005, and paid the entire $0.1 million in severance andretention. In accordance with EITF 95-3, these costs have been reflected asassumed liabilities in the allocation of the purchase price to the net assets acquired.

 

In connection with the Nims acquisition noted above, we entered into aplan to reduce the workforce by 22 employees, most of whom had a terminationdate of April 30, 2004. The employees affected in the reduction werenon-billable personnel whose responsibilities were integrated into our existingoperations to realize the synergies of the two operations. We recorded aliability of $0.3 million associated with severance, retention and othertermination benefits, completed the plan by the end of the First Quarter of2005, and paid the entire $0.3 million in severance and retention.  Inaccordance with EITF 95-3, these costs have been reflected as assumedliabilities in the allocation of the purchase price to the net assets acquired.

 

*Branch office closures*

* *

During December 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 were over-accrued by $2.4 million, as a resultof negotiating early lease terminations or obtaining a subtenant.  The netimpact 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 for the nine months ended September 30,2005 related to the 2004 property restructurings totaled $0.3 million.  Asof September 30, 2005, the remaining reserve balance was $1.9 million.

 

In connection with the Fast Track acquisition noted above, we enteredinto a plan to exit certain activities and to consolidate certain facilities.As a result, we recorded a restructuring liability of $0.4 million relatedto the lease obligation and certain other costs for one facility. In accordancewith EITF 95-3, these costs, which are not associated with the generation offuture revenues and have no future economic benefit, are reflected as assumedliabilities in the allocation of the purchase price to the net assetsacquired.  The total restructuring liability was paid in the First Quarterended March 31, 2005.

 

12

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In connection with the Nims acquisition noted above, we entered into aplan to exit certain activities and to consolidate certain facilities. As aresult, we recorded an initial restructuring liability of $1.4 million relatedto the lease obligation and certain other costs for eight facilities. Duringthe Fourth Quarter of 2004, we determined that our original estimate forNims-related lease obligations was too high and reduced the accrual by $0.1million.  In accordance with EITF 95-3, these costs, which are notassociated with the generation of future revenues and have no future economicbenefit, are reflected as assumed liabilities in the allocation of the purchaseprice to the net assets acquired.  Cash expenditures for the nine monthsended September 30, 2005 related to all Nims-related branch officeclosings totaled $0.2 million, which is net of approximately $97,000 ofsublease payments received.  As of September 30, 2005, the remainingreserve balance was $0.6 million.

 

During December 2003, in accordance with SFAS 146, we accrued $0.9million for a restructuring of two of our real estate locations from which weno 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 that wewere over-accrued by $1.0 million, as a result of negotiating early leaseterminations or obtaining a subtenant.  In prior years, in accordance withEITF Issue No. 94-3, we performed reviews of our business strategy andconcluded that consolidating some of our branch offices was key to oursuccess.  Cash expenditures for the period ended September 30, 2005for all branch office closings relating to restructuring charges in 2003 andprior years were $1.7 million, which is net of approximately$0.9 million of sublease payments received.  As of September 30,2005, the total remaining reserve balance for branch office closings relatingto restructuring in 2003 and prior years was $3.4 million.

 

As part of our acquisitions of Metro Information Services, Inc. (“Metro”)on November 30, 2001 and SignalTree Solutions (“SignalTree”) on March 15,2002, we entered into a plan to exit certain activities and to consolidatefacilities and recorded restructuring liabilities.  Included in the totalof $1.7 million branch office cash expenditures for restructuring charges in2003 and prior years were cash payments of $0.1 million and $0.2 million, netof sublease income, for the lease obligations and other expenses associated withthe restructured locations assumed for the Metro and SignalTree acquisitions,respectively.  As of September 30, 2005, included in the totalremaining reserve balance of $3.4 million was a remaining lease obligationliability of approximately $0.5 million and $0.8 million for Metro andSignalTree, respectively.

 

The activity for the nine months ended September 30, 2005associated with restructuring charges is as follows (in thousands):

 
| ** **                                         | ** ** | **January 1,  2005  Balance** | ** ** | **Cash  Expenditures,  Net** | ** ** | **Acquisition  Related  Charges in  Fiscal 2005** | ** ** | **September 30,  2005 Balance** | ** ** |
|----------------------------------------------------|------------|------------------------------------|------------|------------------------------|------------|---------------------------------------------------|------------|--------------------------------------|------------|
| **Branch office closures and other  expenditures** |       |                               |       |                         |       |                                              |       |                                 |       |
| 1999                                               |       | $                                  | 18         |                         | $          | —                                            |       | $                                    | —     |   | $ | 18 |   |
| 2000                                               |       | 4                                  |       | 42                           |       | —                                            |       | 46                                   |       |
| 2001                                               |       | 560                                |       | (221                         | )          | —                                            |       | 339                                  |       |
| 2002                                               |       | 4,280                              |       | (1,354                       | )          | —                                            |       | 2,926                                |       |
| 2003                                               |       | 232                                |       | (140                         | )          | —                                            |       | 92                                   |       |
| 2004                                               |       | 3,492                              |       | (988                         | )          | —                                            |       | 2,504                                |       |
| 2005                                               |       | —                             |       | —                       |       | —                                            |       | —                               |       |
|                                               |       | 8,586                              |       | (2,661                       | )          | —                                            |       | 5,925                                |       |
| **2004  Workforce reduction**                      |       | 91                                 |       | (91                          | )          | —                                            |       | —                               |       |
| **2005  Workforce reduction**                      |       | —                             |       | (815                         | )          | 985                                               |       | 170                                  |       |
| **Total  Restructuring Balance**                   |       | $                                  | 8,677      |                         | $          | (3,567                                            | )          | $                                    | 985        |   | $ | 6,095 |   |

 

The restructuring balance is included in current accrued restructuringand accrued long-term restructuring costs in the accompanying condensedunaudited consolidated balance sheets.

 

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

 

In June 2003, we issued in a private placement $150.0 millionprincipal amount of 2.0% Convertible Subordinated Debentures due 2013. The Debentures are unsecured and subordinated in right of payment to all of oursenior indebtedness. The Debentures accrue regular interest at a rate of 2.0%per year. Interest is payable semi-annually in arrears on June 15 and December 15of each year, beginning December 15, 2003. Beginning with the six-monthinterest period commencing June 15, 2008, we will pay additionalcontingent interest during any six-month interest period if the trading priceof the Debentures for each of the five trading days immediately preceding thefirst day of the interest period equals or exceeds 120% of the principal amountof the Debentures. During any interest period when contingent interest ispayable, the contingent interest payable per $1,000 principal amount ofDebentures will equal 0.35% calculated on the average trading price of $1,000principal amount of Debentures during the five trading days 

 

13

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immediately preceding the first day of the applicable six-monthinterest period and will be payable in arrears.

 

On or after June 15, 2008, we may, by providing at least 30-daynotice to the holders, redeem any of the Debentures at a redemption price equalto 100% of the principal amount of the Debentures, plus accrued interest andunpaid interest, if any, and liquidated damages, if any, to, but excluding, theredemption date.

 

The Debentures are convertible at the option of the holder into sharesof our common stock at an initial conversion rate of 54.4989 shares per $1,000principal amount of Debentures, which is equivalent to an initial conversionprice of approximately $18.349 per share, subject to adjustments, prior to theclose of business on the final maturity date only under the followingcircumstances: (a) during any fiscal quarter commencing after September 30,2003, and only during such fiscal quarter, if the closing sale price per shareof our common stock exceeds 120% of the conversion price (approximately$22.019) for at least 20 trading days in the 30 consecutive trading day periodending on the last trading day of the preceding fiscal quarter; (b) duringthe five business days after any five consecutive trading day period in whichthe trading price per $1,000 principal amount of Debentures for each day ofthat period was less that 98% of the product of the closing sale price pershare of our common stock and the number of shares issuable upon conversion of$1,000 principal amount of the Debentures; (c) if the Debentures have beencalled for redemption; or (d) upon the occurrence of specified corporatetransactions. See Note 2 “Earnings Per Share Data” for further discussion ofthe Debentures.

 

Debt issuance costs were approximately $4.4 million and areincluded in other assets, net, in the accompanying unaudited condensedconsolidated balance sheets. These costs are being amortized to interestexpense over five years on a straight-line basis. As of September 30, 2005and December 31, 2004, the unamortized debt issuance costs wereapproximately $2.4 million and $3.1 million, respectively.

 

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

 

On June 14, 2005, we announced that our Board of Directors hadauthorized us to repurchase an additional 3 million shares of our commonstock over the next 12 months effective June 13, 2005. Thisauthorization replaced our June 14, 2004 authorization to purchase3.0 million shares of our common stock, of which only 1.2 million shareswere repurchased prior to its expiration. During the Third Quarter ended September 30,2005, we repurchased approximately 2.1 million shares for $24.8 million.Between May 1999 and September 30, 2005, we have investedapproximately $303.6 million to repurchase approximately 24.1 million shares ofour common stock under eleven separate authorizations. As a result of our sharerepurchases, additional paid-in-capital was reduced to zero and we recorded anadditional $5.0 million reduction directly to retained earnings in connectionwith the share repurchases in the Third Quarter ended September 30, 2005. 

 

During the nine months ended September 30, 2005, a total of399,347 shares of our common stock were exercised or purchased by participantsunder our stock option plans, ESPP and UK ESPP. In addition, 10,296 shares ofour common stock were issued to five of our directors in lieu of cash aspayment for the annual directors fee or meeting attendance fees. See Note 13. “SubsequentEvents” for discussion of the authorization to repurchase an additional 3.0million shares of our common stock.  

 

**Note 10.****         Related Parties, Commitments, andContingencies**

** **

*Related Party Transactions*

* *

Our principal 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 theNew Facility and the remaining 43% is, or will be, occupied by other tenants.John Keane Family LLC is a member of Gateway LLC. The members of John KeaneFamily LLC are trusts for the benefit of John F. Keane, Chairman of our Boardof Directors, and his immediate family members.

 

On October 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 are eachliable 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, a member of our Board of Directors, is ChiefExecutive Officer of Citizens Bank of Pennsylvania. Citizens Bank ofMassachusetts and Citizens Bank of Pennsylvania are subsidiaries of CitizensFinancial Group, Inc. Mr. Steinour was not involved in the approvalprocess for the Gateway Loan.  In June 2005, the Gateway Loan wasrefinanced to a non-recourse permanent loan with CitiGroup.

 

We began 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, 

 

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as favorable to us as those which could have been obtained from anindependent third party. Lease payments to Gateway LLC in the nine months endedSeptember 30, 2005 were approximately $2.6 million.

 

In view of these related party transactions, we concluded that, duringthe construction phase of the New Facility, the estimated construction inprogress costs for the New Facility would be capitalized in accordance withEITF Issue No. 97-10, “The Effect of Lessee Involvement in AssetConstruction.” A liability in the same amount was included in the caption “Accruedlong-term building costs” in the accompanying unaudited condensed consolidatedbalance sheets. For purposes of the unaudited condensed consolidated statementsof cash flows, we characterized this treatment as a non-cash financingactivity.

 

As a result of the completion of the construction phase and our currentoccupancy, the related capitalized costs are now classified as “Building” andare included in property and equipment, net, in the accompanying unauditedcondensed consolidated balance sheets. A liability for the same amount appearsas accrued expenses and other liabilities and accrued long-term building costs,representing our short and long-term components. The costs of the building arebeing amortized on a straight-line basis over a 39-year useful life.Additionally, the obligation will be reduced over the life of the lease at aninterest rate of 8.67%. The net effect of the amortization that is included inthe operating results approximates the rent expense resulting from thecontractual payments we are required to make under the lease.

 

In February 1985, we entered into a lease, which subsequently wasextended to a term of 20 years, with City Square Limited Partnership (“CitySquare”), pursuant to which we leased approximately 34,000 square feet ofoffice and development space in a building located at Ten City Square, inBoston, Massachusetts. We now lease approximately 88% of this building and theremaining 12% is leased by other tenants. John F. Keane, Chairman of our Boardof Directors, and Philip J. Harkins, a member of our Board of Directors, arelimited partners of City Square. Based upon our knowledge of lease payments forcomparable facilities in the Boston area, we believe that the lease paymentsunder this lease, which will be approximately $1.0 million per year($30.00 per square foot) for the remainder of the lease term (until February 2006),plus specified percentages of any annual increases in real estate taxes andoperating expenses, which will be approximately $0.2 million per year,were, at the time we entered into the lease, as favorable to us as those whichcould have been obtained from an independent third party. As a result of ouroccupancy of the New Facility (as described above), we vacated and we haveobtained a subtenant for approximately 17% of Ten City Square.

 

As aresult of the vacancy at Ten City Square in December 2002, we reserved theremaining 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 the nine months ended September 30, 2005, we paidapproximately $0.9 million in lease payments and as of September 30,2005 we had a remaining reserve balance of $1.0 million.

 

In January 2003, the FASB issued Interpretation No. 46 (“FIN46”), “Consolidation of Variable Interest Entities,” as amended by FASBInterpretation No. 46(R) (“FIN 46(R)”) in December 2003, whichrequires the consolidation of a variable interest entity, as defined, by itsprimary beneficiary. Primary beneficiaries are those companies that are subjectto a majority of the risk of loss or entitled to receive a majority of theentity’s residual returns, or both. In determining whether it is the primarybeneficiary of a variable interest entity, an entity with a variable interestshall treat variable interests in that same entity held by its related partiesas its own interests.

 

We have evaluated the applicability of FIN 46(R) to our relationshipwith each of City Square and Gateway LLC and determined that we are notrequired to consolidate these entities within our unaudited condensedconsolidated financial statements. We have determined that Gateway LLC is not avariable interest entity as the equity investment is sufficient to absorb theexpected losses and the holders of the equity investment do not lack any of thecharacteristics of a controlling interest. We have concluded that as we nolonger occupy the space at Ten City Square and no longer derive any benefitfrom leasing the space, we would not be determined to be the related party mostclosely associated with City Square. As a result, we will continue to accountfor our leases with City Square and Gateway LLC consistent with our historicalpractices in accordance with generally accepted accounting principles. Webelieve that we do not have an interest in any variable interest entities thatwould require consolidation.

 

In July 2003, our Audit Committee approved a related partytransaction involving a member of our Board of Directors. We sub-contractedwith ArcStream to develop and assist in the implementation of a wirelesselectronic application at two customer sites. In accordance with thistransaction, we agreed to pay ArcStream a royalty fee for potential futureinstallations during the seven-year license period. John F. Keane, Jr., amember of our Board of Directors, is Chief Executive Officer, a director, andfounder 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 the Company paid John Keane, Jr. $21,875 pursuant to aconsulting arrangement to assist in the transition of the acquired business.See Note 6 “Business Acquisitions” for a further discussion of the acquisition.

 

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In July 2005, our Audit Committee approved a related partytransaction authorizing us to provide services to Citizens Bank, N.A., inconnection with the development of an internet application and related supportservices. As discussed above, Stephen D. Steinour, a member of our Board ofDirectors, is Chief Executive Officer of Citizens Bank of Pennsylvania, asubsidiary of Citizens Bank, N.A. Under the terms of this approval, theengagement value is estimated to be approximately $1.6 million. The ratescharged under this engagement are comparable to those charged to an independentthird party. During the Third Quarter ended September 30, 2005, nopayments were received, however we have approximately $0.2 million in accountreceivables outstanding. 

 

*Commitments and Contingencies*

* *

We lease the New Facility from Gateway LLC as described above. We leaseadditional office space and apartments in more than 70 locations in NorthAmerica, the United Kingdom, India, and Australia under operating leases andcapital leases, some of which may be renewed for periods up to five years,subject to increased rental fees.

 

We are a guarantor with respect to a line of credit for Innovate EC, anentity in which we acquired a minority equity position as a result of aprevious acquisition. The total line of credit is for $600,000. We guarantee$300,000 of this obligation. The line is subject to review by the lendinginstitution. We would be required to meet our guarantor obligation in the eventthe lending institution refuses to extend the credit facility and Innovate ECis unable to satisfy its obligation.

 

In connection with certain contracts, we have been required to deliversecurity or performance bonds for the benefit of our customers. These bondsgive the beneficiary the right to obtain payment from the issuer of the bond ifcertain specified events occur or fail to occur. In addition, we have variousagreements in which we may be obligated to indemnify our customers 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 or propertydamages.  As a prime contractor undercertain contracts, we are responsible for the performance of our subcontractorsand would be required to arrange for performance in the event thesubcontractors failed to perform. However, we would retain our right to enforcethe subcontracts and to seek damages for nonperformance from oursubcontractors.  A limited number of ourcontracts include liquidated damages provisions, which would require us to makeper diem payments for late deliveries. Further, our obligations under these agreements may be limited in termsof time and/or amount and, in some instances, we may have recourse againstthird parties, including our subcontractors, for certain payments made by us.It is not possible to predict the maximum potential amount of future paymentsunder these indemnification agreements due to the conditional nature of ourobligations and the unique facts of each particular agreement. 

 

During the Third Quarter of 2002, in connection with an acquisition ofa business complementary to our own, we initially recorded $3.0 million asdeferred revenue related to contingent service credits and issued a$3.0 million non-interest bearing note payable as partial consideration.During the nine months ended September 30, 2005, we recognized revenue ofapproximately $1.2 million in relation to the contingent service creditsand reduced each of the related deferred revenue and note by approximately$0.6 million. As of September 30, 2005, the remaining deferredrevenue and note payable balances were each zero.  The note expired on September 25, 2005. 

 

We are involved in litigation and various legal matters, which havearisen in the ordinary course of business. We do not believe that the ultimateresolution of these matters will have a material adverse effect on ourfinancial condition, results of operations, or cash flows.

 

*Credit Facility*

* *

In February 2003, we entered into a $50.0 million unsecuredrevolving credit facility (“credit facility”) with two banks. The terms of thecredit facility 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 facilityincluding the allowable limit for letters of credit within the total facilityand for the purposes of issuing a letter of credit to satisfy bank guaranteeswith respect to the Transport Ticketing Authority (“TTA”) contract with theState of Victoria, Australia. One of the banks issued a $34 million ($45million AUD) letter of credit dated July 14, 2005 against our creditfacility in connection with our Victoria TTA contract. This credit facility wasterminated in connection with our entrance into a new credit facility,described below, on September 15, 2005.

 

On September 15, 2005, we entered into a five-year revolvingcredit facility (“the new credit facility”) with a syndicate of banks (the “lenders”)in the amount of $200.0 million, plus an additional amount of up to $50 millionsubject to certain terms and conditions (the “loan amount”). The new creditfacility replaces our existing $50.0 million unsecured revolving creditfacility. Pursuant to the new credit facility, we may borrow funds from thelenders up to the loan amount with a $50 million sub limit for letters ofcredit.  The annual commitment feepayable quarterly is at an initial rate of 0.20% per annum on the unused amountof revolving credit commitments, subject to adjustment based on a seniorleverage ratio as defined in the new credit facility and up to a maximum per 

 

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annum rate of 0.25%. To the extent there are letters of creditoutstanding under the new credit facility, we will pay the administrative agenta letter of credit fee, initially 1.0% annually, subject to adjustment based onthe senior leverage ratio as defined and up to a maximum per annum rate of1.5%. In connection with the new credit facility, we paid $1.3 million inrelated debt issuance costs. As of September 30, 2005, we had no debtoutstanding under the new credit facility. However, the $34 million ($45million AUD) letter of credit issued in July 2005 against our previouscredit facility in connection with our Victoria TTA contract is outstandingagainst the new credit facility. 

 

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

 

Based on qualitative and quantitative criteria established by SFAS No. 131(“SFAS 131”), “Disclosures about Segments of an Enterprise and RelatedInformation,” we operate within one reportable segment:*Professional Services.* In this segment,we offer an integrated mix of end-to-end business solutions, such asApplication and Business Process Outsourcing, Development &Integration and Other IT Services.

 

In accordance with the enterprise wide disclosure requirements ofSFAS 131, our geographic information is as follows (in thousands):

 
| ** **       | ** ** | **Three Months Ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **       | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:        |       |                                      |       |                                     |       |   |   |   |   |
| Domestic         |       | $                                         | 224,174    |                                     | $          | 222,066 |   | $ | 665,196 |   | $ | 645,613 |   |
| International    |       | 15,389                                    |       | 12,761                                   |       | 44,389 |   | 36,750 |   |
| Total  Revenues: |       | $                                         | 239,563    |                                     | $          | 234,827 |   | $ | 709,585 |   | $ | 682,363 |   |

 
| ** **                           | ** ** | **At September 30,  2005** | ** ** | **At December 31,  2004** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| Property &  Equipment:      |       |                            |       |                           |       |
| Domestic                             |       | $                               | 63,379     |                           | $          | 64,173 |   |
| International                        |       | 12,369                          |       | 12,588                         |       |
| Total  Property & Equipment |       | $                               | 75,748     |                           | $          | 76,761 |   |

 

No single customer provides revenues that equal or exceed10 percent of our consolidated revenues.

 

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

** **

Our policy is to establish reserves for taxes that may become payablein future years as a result of an examination by tax authorities. In accordancewith SFAS No. 5 (“SFAS 5”), “Accounting for Contingencies,” we establishthe reserves based upon our assessment of exposure associated with permanenttax differences and interest expense applicable to both permanent and temporarydifference adjustments. The tax reserves are analyzed periodically andadjusted, as events occur to warrant adjustment to the reserves, such as whenthe statutory period for assessing tax on a given tax return or period expires,the reserve associated with that period is reduced. In addition, the adjustmentto the reserve may reflect additional exposure based on current calculations.Similarly, if tax authorities provide administrative guidance or a decision isrendered in the courts, appropriate adjustments will be made to the taxreserve.

 

The provision for income taxes represents the amounts owed for federal,state, and foreign taxes.  Our effective tax rate was 9.2% for the ThirdQuarter ended September 30, 2005 and was 29.3% for the first nine monthsof 2005, compared to 39.6% and 39.8% for the same periods in 2004,respectively.  During the Third Quarter ended September 30, 2005, werecorded a $2.8 million reduction to our tax reserves due to the expiration ofcertain statutes of limitation. In accordance with SFAS 5 and SFAS No. 109(“SFAS 109”), “Accounting for Income Taxes” we adjusted our tax reserves in theperiod where the conditions under SFAS 5 are no longer met, which resulted in areduction of our tax provision.  In addition, as a result of owninggreater than 80% of the outstanding voting stock of Keane Worldzen, beginning April 1,2005, we are able to record a tax benefit on the losses associated with KeaneWorldzen, thereby reducing our annual effective tax rate. Management currentlyestimates that our effective tax rate, excluding these discrete items, willapproximate 37.9% during the remainder of 2005. However, changes in thegeographic mix or estimated level of pre-tax income can negatively orpositively impact our effective tax rate. 

 

During the Third Quarter ended September 30, 2004, the increase inour estimated effective tax rate for the full year ended December 31, 2004was a result of changes in the geographic mix of income. In addition, as aresult of the expiration of certain statutes of limitation, changes inestimates and the enactment of certain tax laws, we recorded a net reduction ofour tax provision by approximately $0.5 million in that period. In accordancewith SFAS 5 and SFAS 109, we adjusted our tax reserves in the period where theconditions under SFAS 5 were no longer met and as of the enactment date of thenew tax laws. The determination of the provision for income tax expense,deferred tax assets and liabilities and related valuation allowance involvesjudgment. As a global 

 

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company, we are required to calculate and provide for income taxes ineach of the tax jurisdictions where we operate. This involves making judgmentsregarding the recoverability of deferred tax assets, which can affect theoverall effective tax rate. 

 

**Note 13.****         Subsequent Events**

 

On October 25, 2005, we announced the approval by our Board ofDirectors of the repurchase of 3.0 million shares of our common stock pursuantto a stock repurchase program (“the October 2005 Program”).  The repurchases may be made on the openmarket or in negotiated transactions, and the timing and amount of shares to bepurchased will be determined by our management based on its evaluation of marketand economic conditions and other factors. Unless terminated earlier byresolution of our Board of Directors, the October 2005 Program will expireupon the earlier of the date we repurchase all shares authorized for repurchasethereunder or October 25, 2006.

 

On October 20, 2005, our Board of Directors approved theacceleration of the vesting of Keane stock options granted prior to August 1,2005 with an exercise price of $11.44 or greater, including those held by ourexecutive officers (other than Laurence Shaw, who is resident in the UnitedKingdom) but not including (1) those held by non-employee directors and (2) thoseheld by employees of the Company or its subsidiaries based in the UnitedKingdom (including Laurence Shaw) and India (the “UK/India Options”).  Weare investigating further the personal tax consequences of acceleration of theUK/India Options.  The exercise price of the unvested options acceleratedranged from $12.16 to $18.30. On October 20, 2005, the closing stock priceper share of our common stock on the New York Stock Exchange, which will beused for measurement of compensation, was $10.63.

 

Our Board of Directors and we considered several factors in determiningto accelerate the vesting of these options. The primary purpose of the acceleratedvesting is to enable us to avoid recognizing in our income statement non-cashcompensation expense associated with these options in future periods, upon theCompany’s adoption of FASB Statement (“SFAS”) No. 123R (“SFAS 123R”), “Share-BasedPayment,” as of January 1, 2006. Absent the acceleration of the optionsdescribed above, including the UK/India Options, from and after its adoption ofSFAS 123R, we would have been required to recognize approximately $11.0 millionin pre-tax non-cash compensation expense over the remaining vesting terms ofthe stock options, based on valuation calculations using the Black-Scholesmethodology.  As a result of the acceleration of unvested stock optionsdescribed above, the stock-based compensation expense under SFAS No. 123, “Accounting for Stock-Based Compensation,” will only be reflected in ourfootnote disclosures in our financial statements included in our periodicreports.

 

We also believe that because the accelerated stock options haveexercise prices in excess of the fair market value of our common stock on thedate of their acceleration, the accelerated stock options were not fullyachieving their original objective of incentive compensation and employeeretention.  We believe that the acceleration may have a positive effect onemployee morale and retention.  We believe this decision is in the bestinterests of Keane and its shareholders. As a result of the acceleration,approximately 1.7 million shares subject to options (including the UK/India Options),constituting approximately 36% of the total number of outstanding sharessubject to unvested options, became immediately exercisable.

 

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

** **

This Quarterly Report on Form 10-Q contains forward-lookingstatements within the meaning of Section 21E of the Securities ExchangeAct of 1934, as amended, and Section 27A of the Securities Act of 1933, asamended.  For purposes of these Acts, any statement that is not astatement of historical fact may be deemed a forward-looking statement. For example, statements containing the words “believes,” “anticipates,” “plans,”“expects,” “estimates,” “intends,” “may,” “projects,” “will,” “would” andsimilar expressions may be forward-looking statements.  We cautioninvestors not to place undue reliance on any forward-looking statements in thisQuarterly Report on Form 10-Q.  We undertake no obligation topublicly update any forward-looking statements, whether as a result of newinformation, future events or otherwise.  There are a number of factorsthat could cause our actual results to differ materially from those indicatedby these forward-looking statements, including without limitation the factorsset forth below under the caption “Certain Factors That May Affect FutureResults.”  These factors and the other cautionary statements made in thisquarterly report should be read as being applicable to all relatedforward-looking statements wherever they appear in this quarterly report. If one or more of these factors materialize, or if any underlying assumptionsprove incorrect, our actual results, performance, or achievements may varymaterially from any future results, performance or achievements expressed orimplied by these forward-looking statements.

 

The following discussion and analysis should be read in conjunctionwith the unaudited condensed consolidated financial statements and relatednotes included elsewhere in this Quarterly Report on Form 10-Q and theaudited consolidated financial statements and related notes included in ourAnnual Report on Form 10-K for the year ended December 31, 2004, andwith the information under the heading “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in our Annual Report on Form 10-Kfor the year ended December 31, 2004.

 

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**OVERVIEW**

 

**Components of Revenues**

 

We seek to help clients improve their business and informationtechnology (“IT”) effectiveness. We classify our service offerings into thefollowing three categories: Outsourcing, Development & Integration,and Other IT Services.

 

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

 

Through our global delivery model we can offer customers theflexibility and economic advantage of allocating work among a variety ofdelivery options. These include onsite at a client’s facility, nearshore inHalifax, Nova Scotia, and Toronto, Ontario, and offshore at one of our fourdevelopment centers in India. In 2004, we extended our global network ofAdvanced Development Centers with the opening of new facilities in Toronto,Ontario and Hyderabad, India. This integrated, flexible mix of cost-effectiveonsite, nearshore, and offshore delivery is now a component of most of our newApplication Outsourcing engagements. The distribution of work across multiplelocations is typically based on a client’s cost, technology, and riskmanagement requirements.

 

Our Business Process Outsourcing (“BPO”) services are provided by ourmajority owned subsidiary, Keane Worldzen, Inc. (“Keane Worldzen”), whichwe acquired on October 17, 2003. Keane Worldzen specializes in providingBPO services to clients with complex processes in the financial services,insurance, and healthcare industries, and to clients with back-office processesin several industries. Keane Worldzen’s BPO services are designed to reduce thecost and increase the efficiency of our clients’ business transactions,enabling companies to focus on their more profitable activities and avoid thedistraction of non-core back-office processes. Keane Worldzen provides theselow-cost, high-value outsourcing services from operations in both the UnitedStates (“U.S.”) and India.

 

*Development & Integration:*  Asapplication software becomes more complex, it requires sophisticatedintegration between front-end and back-end systems to enhance access tocritical corporate data, enable process improvements, and improve customerservice. Many of our Development & Integration projects focus onsolutions for the integration of enterprise applications, supply chain, andcustomer service problems. We also provide Development & Integrationservices to the public sector, which includes agencies within the U.S. FederalGovernment, various states, and other local government entities. Additionally,our Healthcare Solutions Division provides software solutions and integrationsupport to both acute and long-term care providers.

 

*Other IT Services:*  OtherIT Services are primarily comprised of IT consulting, project management, andsupplemental staff engagements that are principally billed on a time andmaterials basis.

 

Global economic and political conditions may cause companies to becautious about increasing their use of consulting and IT services, but wecontinue to see a demand for our services. We continue to experience pricingpressure from competitors as well as from clients facing pressure to controlcosts. In addition, the growing use of offshore resources to provide lower-costservice delivery capabilities within our industry continues to be a source ofpressure on revenues. We also experience wage inflation, primarily in India, asthe demand for those resources increases. In order for us to remain successfulin the near term, we must continue to maintain and grow our client base,provide high-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 more steady demand for ourservices, we believe that it is too early to determine if developments willtranslate into sustainable improvements in our pricing or margins for 2005 andover the longer term.

 

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

 

*•**             *First, they are vertically driven inthat they are value propositions designed to address specific needs,challenges, or opportunities within an industry.

 

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*•**             *Second, they may include Applicationservices, 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.

 

While, we are still in the early stages of implementing this new marketstrategy, we believe that our deep industry knowledge will differentiate usfrom our competitors, allow us to go beyond simply delivering cost andperformance improvements to our clients, and allow us to deliver transformationalbusiness benefits and, ultimately, help grow our business and integrate ourcomprehensive capabilities.

 

**Components of Operating Expenses**

 

The primary categories of our operating expenses include: salaries,wages, and other direct costs; selling, general and administrative expenses;and amortization of intangible assets. Salaries, wages, and other direct costsare primarily driven by the cost of client-service personnel, which consistsmainly of 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 our improvement in profitability by comparing gross margins,and selling, general, and administrative (“SG&A”) expenses as a percentageof revenues. Other key metrics that we use to manage and evaluate theperformance of our business include new contract bookings, the number ofbillable 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 September 30, 2005, we had 8,957 total employees, including7,598 business and technical professionals whose services are billable toclients. This includes a base of 2,214 employees in India, including our KeaneWorldzen operations. We sometimes supplement our technical staff by utilizingsubcontractors, which as of September 30, 2005, consisted of 570 full-timeprofessionals.

 

**NEW CONTRACT BOOKINGS**

 

New contract bookings for the three months ended September 30,2005 were $600.4 million, an increase of $395.2 million, or 192.6%, over newcontract bookings of $205.2 million for the three months ended September 30,2004. For the three months ended September 30, 2005, Outsourcing bookingsincreased 213.0% to $339.6 million, Development & Integration bookingsincreased 317.5% to $155.0 million, and Other IT bookings decreased 11.0% to$105.9 million compared to the same period in 2004. New contract bookings forthe three months ended September 30, 2005 include the $367.0 millionTransport Ticketing Authority (“TTA”) contract with the State Government ofVictoria, Australia; $256.9 million of the TTA contract is included inOutsourcing bookings and $110.1 million of the TTA contract is included inDevelopment & Integration bookings. 

 

New contract bookings for the nine months ended September 30, 2005increased $230.6 million, or 25.7%, over new contract bookings of $897.1million for the nine months ended September 30, 2004. For the nine monthsended September 30, 2005, Outsourcing bookings increased 23.8% to $590.1million, Development & Integration bookings increased 115.5% to $238.5million, and Other IT bookings decreased 3.4% to 299.1 million, compared to thesame period in 2004.

 

We provide information regarding our bookings because we believe itrepresents useful information regarding changes in the volume of our newbusiness over time. However, information regarding our new bookings is notcomparable to, nor should it be substituted for, an analysis of our revenues.Cancellations and/or reductions in existing contracted amounts are notreflected in new contract 

 

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bookings.

 

**CONSOLIDATED RESULTS OF OPERATIONS**

 

**2005 Compared to 2004**

 
| ** **                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Increase  (Decrease)** | ** ** | **Nine months ended  September 30,** | ** ** | **Increase  (Decrease)** | ** ** |
|------------------------------------|------------|--------------------------------------------|------------|--------------------------|------------|-------------------------------------------|------------|--------------------------|------------|
| ** **                         | ** ** | **2005**                                   | ** ** | **%**                    | ** ** | **2004**                                  | ** ** | **%**                    | ** ** | **$** | ** ** | **%** | ** ** | **2005** | ** ** | **%** | ** ** | **2004** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| Outsourcing                        |       | $                                          | 126,620    |                     | 53         |                                      | $          | 123,819                  |       | 53 |   | $ | 2,801 |   | 2.3 |   | $ | 375,062 |   | 53 |   | $ | 345,587 |   | 51 |   | $ | 29,475 |   | 8.5 |   |
| Development & Integration |       | 41,884                                     |       | 17                       |       | 45,710                                    |       | 19                       |       | (3,826 | ) | (8.4 | ) | 126,067 |   | 18 |   | 132,389 |   | 19 |   | (6,322 | ) | (4.8 | ) |
| Other IT Services                  |       | 71,059                                     |       | 30                       |       | 65,298                                    |       | 28                       |       | 5,761 |   | 8.8 |   | 208,456 |   | 29 |   | 204,387 |   | 30 |   | 4,069 |   | 2.0 |   |
| Total                              |       | $                                          | 239,563    |                     | 100        | %                                         | $          | 234,827                  |       | 100 | % | $ | 4,736 |   | 2.0 |   | $ | 709,585 |   | 100 | % | $ | 682,363 |   | 100 |   | $ | 27,222 |   | 4.0 |   |

 

**Revenues**

 

Revenues for the Third Quarter ended September 30, 2005 were$239.6 million compared to revenues of $237.8 million for the Second Quarterended June 30, 2005 and compared to revenues of $234.8 million for theThird Quarter ended September 30, 2004. The sequential increase inrevenues was mainly due to higher revenues from new and existing clients,offset by decreases in revenues from IBM. The increase in revenues compared tothe Third Quarter ended September 30, 2004 was partly due to revenues fromnetNumina Solutions, Inc. (“netNumina”), which we acquired on February 28,2005, and higher revenues from new and existing clients, offset by decreases inrevenues from IBM discussed below and the termination of a large customer inthe Third Quarter ended September 30, 2004. 

 

Revenues for the nine months ended September 30, 2005 were $709.6million, an increase of $27.2 million, or 4.0% compared to revenues for thenine months ended September 30, 2004. The increase was primarily due tothe revenues associated with our acquisitions of netNumina, Nims Associated, Inc.(“Nims”), which we acquired on February 27, 2004, and Fast Track HoldingsLimited (“Fast Track”), which we acquired on July 13, 2004, and increasesin revenues from both new and existing customers. The increase in revenues waspartially offset by the reductions in revenues discussed below from a large UKclient, IBM, PacifiCare, and the termination of a large customer in the ThirdQuarter ended September 30, 2004. See Note 6. “Business Acquisitions” fora description of our acquired businesses. 

 

During the Fourth Quarter of 2004, both a large UK client and IBMnotified us that they would be reducing their purchasing requirements. Weexpect the reduction of purchasing requirements from the UK client will reduceour total annual revenues by approximately $10.0 million to $13.0 million in2005. During the First Quarter ended March 31, 2005, IBM also notified usthat Keane and other current vendor resources would be included in a proposalprocess for both current and future business. In July 2005, we decided towithdraw from our staff augmentation relationship with IBM. In the ThirdQuarter ended September 30, 2005, we sold our IBM business to anotherprovider and expect the withdrawal from our relationship with IBM will reduce ourrevenues for the Fourth Quarter of 2005 by approximately $4.6 million comparedto the Third Quarter of 2005. 

 

*Outsourcing*. Outsourcing service revenues for the Third Quarter ended September 30,2005 were $126.6 million, an increase of $0.8 million, or 0.6%, compared to theSecond Quarter ended June 30, 2005. The sequential increase inrevenues was mainly due to higher revenues from existing clients. Outsourcingservice revenues for the Third Quarter ended September 30, 2005 increased$2.8 million, or 2.3%, over the same period in 2004.The increase in Outsourcingservice revenues compared to the Third Quarter ended September 30, 2004was partly due to revenues generated from new and existing customers from ourApplication Outsourcing and BPO offerings, as well as revenues associated withnetNumina. Outsourcing service revenues for the nine months ended September 30,2005 increased $29.5 million, or 8.5%, over the same period in 2004. Theincrease reflects approximately $19.8 million of higher revenues generated byNims due to a full nine months of results in 2005, revenues generated bynetNumina and higher revenues from new and existing customers from both our BPOand Application Outsourcing offerings, which more than offsets lower revenuesassociated with PacifiCare, reductions from a large UK client and thetermination of a large customer in the Third Quarter ended September 30,2004.

 

PacifiCare, one of our largest clients, has reduced the level ofservice from the stated baseline contract amounts in accordance with its rightunder the contract terms, thereby reducing the contract value. We have providedservices at or above the baseline levels set forth in the contract.  Inaccordance with the contract terms, PacifiCare engaged an independent thirdparty to conduct a benchmark study to compare our billing rates with those ofcomparable companies on comparable engagements. The independent third partyissued a report stating that Keane’s rates are higher than the rate identifiedin the benchmark study. While we do not necessarily agree with the results ofthe benchmark study, we entered into discussions with PacifiCare and we haveagreed to reduce the rates. Revenues from PacifiCare in the Third Quarter endedSeptember 30, 2005, were approximately $0.4 million lower than revenuesfrom PacifiCare in the Second Quarter ended June 30, 2005. We expect areduction in revenues from PacifiCare of approximately $3.0 million in theFourth Quarter of 2005 compared to the same period in 2004.

 

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*Development & Integration*. Development & Integration service revenues for the Third Quarter endedSeptember 30, 2005 were $41.9 million, a decrease of $0.5 million, or1.3%, compared to the Second Quarter ended June 30, 2005. The sequentialdecrease was primarily due to lower revenues from our healthcare product andservices.  Development & Integration service revenues for theThird Quarter ended September 30, 2005 decreased $3.8 million, or 8.4%,over the same period in 2004. Development & Integration revenues forthe nine months ended September 30, 2005 were $126.1 million, a decreaseof $6.3 million, or 4.8%, over the same period in 2004. The decrease for thequarter and nine months were primarily due to the lower revenues from the largeUK client, IBM, and existing customers, but were partially offset by revenuesfrom netNumina. Higher Fast Track revenues due to a full nine months of resultsin 2005 partially offset the decrease for the nine months ended September 30,2005.

 

*Other IT Services*. Other IT Services revenues for the Third Quarter ended September 30, 2005were $71.1 million, an increase of $1.5 million, or 2.2%, compared to theSecond Quarter ended June 30, 2005.  Other IT Services revenues forthe Third Quarter ended September 30, 2005 increased $5.8 million, or8.8%, and for the nine months ended September 30, 2005, increased $4.1million, or 2.0%, over the same periods in 2004. These increases were primarilydue to additional supplemental staffing placements offset by lower revenuesfrom IBM.  

 

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

 
| ** **                                    | ** ** | **Three Months Ended September 30,** | ** ** | **Increase  (Decrease)** | ** ** | **Nine months ended  September 30,** | ** ** | **Increase  (Decrease)** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|--------------------------|------------|-------------------------------------------|------------|--------------------------|------------|
| ** **                                    | ** ** | **2005**                                  | ** ** | **2004**                 | ** ** | **$**                                     | ** ** | **%**                    | ** ** | **2005** | ** ** | **2004** | ** ** | **$** | ** ** | **%** | ** ** |
| Revenues                                      |       | $                                         | 239,563    |                     | $          | 234,827                                   |       | $                        | 4,736      |   | 2.0 |   | $ | 709,585 |   | $ | 682,363 |   | $ | 27,222 |   | 4.0 |   |
| Salaries,  wages, and other direct costs |       | 171,016                                   |       | 166,216                  |       | 4,800                                     |       | 2.9                      |       | 499,670 |   | 477,916 |   | 21,754 |   | 4.6 |   |
| Gross margin                                  |       | $                                         | 68,547     |                     | $          | 68,611                                    |       | $                        | (64        | ) | (0.1 | ) | $ | 209,915 |   | $ | 204,447 |   | $ | 5,468 |   | 2.7 |   |
| Gross margin%                                 |       | 28.6                                      | %          | 29.2                     | %          |                                      |       |                     |       | 29.6 | % | 30.0 | % |   |   |   |   |

 

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

 

Salaries, wages, and other direct costs for the Third Quarter ended September 30,2005 were $171.0 million, an increase of $4.5 million, or 2.7%, compared to$166.5 million in the Second Quarter ended June 30, 2005.  Salaries,wages, and other direct costs for the Third Quarter ended September 30,2005 increased $4.8 million, or 2.9%, and for the first nine months of 2005increased $21.8 million, or 4.6%, over the same periods in 2004. Theseincreases were primarily attributable to higher costs of client servicepersonnel to support the increased service revenues.  Salaries, wages, andother direct costs were 71.4% of total revenues for the Third Quarter ended September 30,2005, and for the nine months ended September 30, 2005 were 70.4% of totalrevenues, compared to 70.8% and 70.0% of total revenues for the same periods in2004, respectively.

 

Total billable employees for all operations were 7,598 as of September 30,2005, compared to 7,364 as of June 30, 2005 and 7,099 total billableemployees as of September 30, 2004. This includes 1,910 billable employeesin India, which includes Keane Worldzen, and represents an increase of 280employees, or 17.2%, over the Second Quarter ended June 30, 2005 and anincrease of 460 employees, or 31.7%, over the Third Quarter ended September 30,2004.  We added our India operation in March 2002 with ouracquisition of SignalTree Solutions and we acquired our controlling interest inKeane Worldzen in October 2003. In addition to these employees, weoccasionally use subcontract personnel to augment our billable staff, whichrepresented 570 full-time professionals as of September 30, 2005. Overallutilization rates for all three periods remained stable as we increased thenumber of billable employees.

 

**Gross margin**

 

Our management believes gross margin*(revenues less salaries, wages, and other direct costs)* provides animportant measure of our profitability. Gross margin for the Third Quarterended September 30, 2005 decreased $0.1 million, or 0.1%, and for thefirst nine months of 2005 increased $5.5 million, or 2.7%, over the sameperiods in 2004.  Gross margin as a percentage of revenues for the ThirdQuarter ended September 30, 2005 was 28.6% compared to 29.2% for the sameperiod in 2004 and 30.0% for the Second Quarter ended June 30, 2005. Grossmargin as a percentage of revenues for the first nine months of 2005 was 29.6%compared to 30.0% for the same period in 2004. The lower labor cost associatedwith the increased use of offshore resources at our India facilities helpedreduce the impact of lower pricing of our services on gross margin. We continueto closely monitor utilization rates and other direct costs in an effort toavoid adverse impacts on our gross margin.

 

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**Selling, general, and administrative expenses**

 
| ** **                                                | ** ** | **Three Months Ended September 30,** | ** ** | **Increase  (Decrease)** | ** ** | **Nine months ended  September 30,** | ** ** | **Increase  (Decrease)** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------|------------|--------------------------|------------|-------------------------------------------|------------|--------------------------|------------|
| ** **                                                | ** ** | **2005**                                  | ** ** | **2004**                 | ** ** | **$**                                     | ** ** | **%**                    | ** ** | **2005** | ** ** | **2004** | ** ** | **$** | ** ** | **%** | ** ** |
| Selling,  general, and administrative expenses (SG&A) |       | $                                         | 54,495     |                     | $          | 51,029                                    |       | $                        | 3,466      |   | 6.8 |   | $ | 164,971 |   | $ | 156,911 |   | $ | 8,060 |   | 5.1 |   |
| SG&A as a% of revenue                                 |       | 22.7                                      | %          | 21.7                     | %          |                                      |       |                     |       | 23.2 | % | 23.0 | % |   |   |   |   |
|                                                           |            |                                           |            |                          |            |                                           |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

SG&A expenses include salaries for our corporate and branchadministrative employees, sales and marketing expenses, as well as the cost ofour administrative facilities, including related depreciation expense. SG&Aexpenses for the Third Quarter ended September 30, 2005 increased $3.5million, or 6.8%, and for the first nine months of 2005 increased $8.1 million,or 5.1%, over the same periods in 2004. These increases in SG&A expenseswere primarily due the to labor and labor related costs, expenses associatedwith the Victoria TTA contract and costs associated with our growth in India.The Third Quarter and first nine months of 2005 include approximately $1.0million and $ 2.0 million, respectively, of expenses associated with theVictoria TTA contract.   SG&A expenses for the Third Quarter andnine months ended September 30, 2005 were 22.7% and 23.2% of totalrevenues, respectively, as compared to 21.7% and 23.0% of total revenues,respectively, for the same periods in 2004. The increases in SG&A expensesas a percentage of revenue were mainly due to the costs of the Victoria TTAcontract and the labor and labor related costs. 

 

**Amortization of intangible assets**

 

Amortization of intangible assets for the Third Quarter ended September 30,2005 was $3.8 million, a decrease of $0.4 million, or 8.6%, over the sameperiod in 2004. The decrease in amortization of intangible assets was primarilydue to certain intangibles becoming fully amortized offset by the amortizationof intangible assets resulting from the Fast Track acquisition completed in theThird Quarter ended September 30, 2004. Amortization of intangible assetsfor the nine months ended September 30, 2005 was $11.7 million, a decreaseof $0.4 million, or 3.1% compared to the same period in 2004. The decrease inamortization of intangible assets for the nine months was also due to certainintangibles becoming fully amortized offset by the amortization of intangibleassets associated with Fast Track and amortization of intangible assetsassociated with Nims.  

 

The following table summarizes the non-operating items from ourcondensed consolidated statements of income (dollars in thousands)

 
| ** **                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Increase  (Decrease)** | ** ** | **Nine Months Ended  September 30,** | ** ** | **Increase  (Decrease)** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|--------------------------|------------|-------------------------------------------|------------|--------------------------|------------|
| ** **                      | ** ** | **2005**                                   | ** ** | **2004**                 | ** ** | **$**                                     | ** ** | **2005**                 | ** ** | **2004** | ** ** | **$** | ** ** |
| **Other income (expense)**      |       |                                       |       |                     |       |                                      |       |                     |       |   |   |   |   |
| Interest and dividend income    |       | $                                          | 1,121      |                     | $          | 920                                       |       | $                        | 201        |   | $ | 3,354 |   | $ | 2,850 |   | $ | 504 |   |
| Interest expense                |       | (1,403                                     | )          | (1,414                   | )          | 11                                        |       | (4,225                   | )          | (4,252 | ) | 27 |   |
| Other (expense) income, net     |       | (367                                       | )          | (172                     | )          | (195                                      | )          | (557                     | )          | 119 |   | (676 | ) |
| Minority interest               |       | 158                                        |       | 546                      |       | (388                                      | )          | 1,031                    |       | 1,816 |   | (785 | ) |
| **Other (expense) income, net** |       | $                                          | (491       | )                        | $          | (120                                      | )          | $                        | (371       | ) | $ | (397 | ) | $ | 533 |   | $ | (930 | ) |

 

**Interest and dividend income**

 

Interest and dividend income for the Third Quarter ended September 30,2005 was $1.1 million and for the first nine months of 2005 was $3.4 millioncompared to $0.9 million and $2.9 million for the same periods in 2004,respectively. These increases in interest and dividend income were primarilyattributable to the increase in average cash and cash equivalents balances andhigher interest rates for the Third Quarter and nine months ended September 30,2005 compared to the same periods in 2004. To the extent we use our cash andmarketable securities to fund acquisitions, our operations, and capitalinvestments, our interest income will decline in future periods.

 

**Interest expense**

 

Interest expense for the Third Quarter ended September 30, 2005was $1.4 million and was $4.2 million for the first nine months of 2005compared to $1.4 million and $4.3 million for the same periods in 2004,respectively.  Interest expense wasunchanged because our Debentures were outstanding for the entire Third Quarterand nine months ended September 30, 2005 and 2004. We also record interestexpense on the accrued building costs associated with our corporate facility asexplained in Note 10 “Related Parties, 

 

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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 Third Quarter ended September 30,2005 and was $0.6 million for the first nine months of 2005, compared toexpense of $0.2 million and income of $0.1 million, respectively, for the sameperiods in 2004.  These decreases were primarily due to foreign exchangelosses.

 

**Minority Interest**

 

Minority interest income for the Third Quarter ended September 30,2005 was $0.2 million and for the first nine months of 2005 was $1.0 million, adecrease of $0.4 million and $0.8 million, respectively, compared to the sameperiods in 2004. The decreases in minority interest income are due to Keane’shigher ownership percentage in Keane Worldzen effective April 1, 2005. Theamount in minority interest income represents the loss attributable to minorityshareholders of Keane Worldzen for the period presented.  We completed ouracquisition of a controlling interest in Keane Worldzen in the Fourth Quarterfor 2003, which resulted in an initial equity position of approximately 62% ofthe issued and outstanding capital stock of Keane Worldzen and ourconsolidation of the results of Keane Worldzen. Consistent with the right toincrease our ownership position over time, we increased our equity position toapproximately 81% in April 2005 with an additional capital contribution ofapproximately $5.0 million in cash and $3.0 million from the conversion of anoutstanding loan to equity. Effective April 1, 2005, as a result of theadditional capital contribution, we continue to consolidate the results ofKeane Worldzen but recognize 81% of the results of operations.  As aresult of our additional capital contribution, the minority interestshareholders own approximately 19% of the issued and outstanding capital stockof Keane Worldzen.

 

**Income taxes**

 

The following table summarizes the changes in provision for incometaxes included in our condensed consolidated statements of income (dollars inthousands)

 
| ** **                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                           | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Income before income taxes           |       | $                                          | 9,781      |                                      | $          | 13,325 |   | $ | 32,837 |   | $ | 35,984 |   |
| Provision for income taxes           |       | 895                                        |       | 5,274                                     |       | 9,633 |   | 14,338 |   |
| Net Income                           |       | $                                          | 8,886      |                                      | $          | 8,051 |   | $ | 23,204 |   | $ | 21,646 |   |
|                                 |       |                                       |       |                                      |       |   |   |   |   |
| **Reported Tax Rate**                |       | 9.2                                        | %          | 39.6                                      | %          | 29.3 | % | 39.8 | % |
| **Impact of certain discrete items** |       | 28.7                                       | %          | 3.5                                       | %          | 8.6 | % | 1.4 | % |

 

The provision for income taxes represents the amounts owed for federal,state, and foreign taxes.  Our effective tax rate was 9.2% for the ThirdQuarter ended September 30, 2005 and was 29.3% for the first nine monthsof 2005, compared to 39.6% and 39.8% for the same periods in 2004,respectively.  During the Third Quarter ended September 30, 2005, werecorded a $2.8 million reduction to our tax reserves due to the expiration ofcertain statutes of limitation. In accordance with SFAS No. 5 (“SFAS 5”), “Accountingfor Contingencies,” and SFAS No. 109 (“SFAS 109”), “Accounting for IncomeTaxes” we adjusted our tax reserves in the period where the conditions underSFAS 5 are no longer met, which resulted in a reduction of our tax provision. In addition, as a result of owning greater than 80% of the outstandingvoting stock of Keane Worldzen, beginning April 1, 2005, we are able torecord a tax benefit on the losses associated with Keane Worldzen, therebyreducing our annual effective tax rate. Management currently estimates that oureffective tax rate, excluding these discrete items, will approximate 37.9%during the remainder of 2005. However, changes in the geographic mix orestimated level of pre-tax income can negatively or positively impact oureffective tax rate. The determination of the provision for income tax expense,deferred tax assets and liabilities and related valuation allowance involvesjudgment. As a global company, we are required to calculate and provide forincome taxes in each of the tax jurisdictions where we operate. This involvesmaking judgments regarding the recoverability of deferred tax assets, which canaffect our overall effective tax rate

 

During the Third Quarter ended September 30, 2004, the increase inthe our estimated effective tax rate for the full year ended December 31,2004 was a result of changes in the geographic mix of income. In addition, as aresult of the expiration of certain statutes of limitation, changes inestimates and the enactment of certain tax laws, we recorded a net reduction ofour tax provision by approximately $0.5 million in that period. In accordancewith SFAS 5 and SFAS 109, we adjusted our tax reserves in the period 

 

24

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where the conditions under SFAS 5 were no longer met and as of theenactment date of the new tax laws. 

 

**Net income**

 

Net income for the Third Quarter ended September 30, 2005 andfirst nine months of 2005 increased $0.8 million and $1.6 million,respectively, compared to the same periods in 2004.  The increases in netincome were primarily due to the reduction in our tax reserves related to theexpiration of certain statutes of limitation discussed above. 

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004)(“SFAS 123(R)”), “Share-Based Payment,” which is a revision ofSFAS 123 and supersedes APB 25 and its related implementation guidance.Generally, the approach in SFAS 123(R) is similar to the approachdescribed in SFAS 123. However, SFAS 123(R) requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the income statement based on their fair values at the date ofgrant. Pro forma disclosure is no longer an alternative. In April 2005,the Securities and Exchange Commission (“SEC”) announced that it would providefor a phased-in implementation process for SFAS 123(R). Specifically, the SECwill require public companies that are not small business issuers as defined inSEC Regulation S-B to adopt SFAS 123(R) no later than the beginning of the firstfiscal year beginning after June 15, 2005.  Therefore, we arerequired to adopt SFAS 123(R) on January 1, 2006.

 

SFAS 123(R) permits public companies to adopt its requirementsusing one of two methods: a “modified prospective” method, in which compensationcost is recognized beginning with the effective date (a) based on therequirements of SFAS 123(R) for all share-based payments granted after theeffective date and (b) based on the requirements of SFAS 123 for allawards granted to employees prior to the effective date of SFAS 123(R)that remain unvested on the effective date, and a “modified retrospective”method which includes the requirements of the modified prospective methoddescribed above, but also permits entities to restate based on the amountspreviously recognized under SFAS 123 for purposes of pro forma disclosureseither (a) all prior periods presented or (b) prior interim periodsof the year of adoption. We plan to adopt SFAS 123(R) using the modifiedprospective method. As permitted by SFAS 123, we currently account forshare-based payments to employees using APB 25’s intrinsic value method.Accordingly, the adoption of SFAS 123(R)’s fair value method will have asignificant impact on our results of operations. On October 20, 2005, ourBoard of Directors approved the acceleration of the vesting of certain Keanestock options granted prior to August 1, 2005 with an exercise price of$11.44 or greater. See Note 13. “Subsequent Events” in the footnotes to theaccompanying unaudited condensed consolidated financial statements for furtherdiscussion on the impact of the option acceleration. We are evaluating theimpact of SFAS 123(R) in future periods.

 

In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107regarding the Staff’s interpretation of SFAS 123(R). This interpretationprovides the Staff’s views regarding interactions between SFAS 123(R) andcertain SEC rules and regulations and provides interpretations of thevaluation of share-based payments for public companies. The interpretiveguidance is intended to assist companies in applying the provisions of SFAS123(R) and investors and users of the financial statements in analyzing theinformation provided. The Company will follow the guidance prescribed in SAB No. 107in connection with its adoption of SFAS. 123(R) in the First Quarter of2006. 

 

In May 2005, the FASB issued SFAS No. 154 (“SFAS 154”), “AccountingChanges and Error Corrections” which replaces Accounting Principles BoardOpinion No. 20 “Accounting Changes” and SFAS No. 3, “ReportingAccounting Changes in Interim Financial Statements—An Amendment of APB Opinion No. 28.”SFAS 154 provides guidance on the accounting for and reporting of accountingchanges and error corrections. It establishes retrospective application, or thelatest practicable date, as the required method for reporting a change inaccounting principle and the reporting of a correction of an error. SFAS 154 iseffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005. The Company does not believe that theadoption of SFAS 154 will have a material impact on its consolidated results ofoperations and financial condition.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

**Consolidated Financial Condition (inthousands)**

 
| **Nine Months Ended September 30,**          | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash Flows Provided By (Used For)                 |       |       |       |       |       |
| Operating activities                              |       | $          | 7,376      |       | $          | 34,783 |   |
| Investing activities                              |       | 8,083      |       | (6,636     | )          |
| Financing activities                              |       | (39,233    | )          | (25,112    | )          |
| Effect of exchange rate on cash                   |       | (217       | )          | (67        | )          |
|                                              |       |       |       |       |       |
| (Decrease) Increase in Cash and cash  equivalents |       | $          | (23,991    | )          | $          | 2,968 |   |

 

We have historically financed our operations with cash generated fromoperations. In addition, in 2003, we raised $150.0 million in proceeds from theissuance of our debentures. We use the net cash generated from these sources tofund capital expenditures, mergers and acquisitions, and stock repurchases. Ifwe were to experience a decrease in revenue as a result of a decrease in demandfor our services or a decrease in our ability to collect receivables, we wouldbe required to reduce discretionary spending related to SG&A expenses andadjust our workforce in an effort to maintain profitability. At September 30,2005, we had $150.4 million in cash and cash equivalents and marketablesecurities. In addition, on September 15, 2005, we entered into a $200million five-year credit facility, of which approximately $165.8 million isavailable for borrowing, after considering $34.2 million of outstanding lettersof credit. We intend to continue to use our cash and cash equivalents andmarketable securities for general corporate purposes, which may includeadditional repurchases of our common stock under existing or future sharerepurchase programs and the funding of future acquisitions and other corporatetransactions.

 

**Cash flows provided by operating activities**

 

Net cash provided by operating activities totaled $7.4 million for thenine months ended September 30, 2005 compared to net cash provided byoperating activities of $34.8 million for the nine months ended September 30,2004.  The decrease in net cash provided by operating activities wasdriven by lower accounts receivable collection, deferral of costs associatedwith the Victoria TTA contract, and the timing of prepaid insurance and othercash payments. Days Sales Outstanding (“DSO”), an indicator of our accountsreceivable collections, was 56 days as of September 30, 2005, compared to52 days as of December 31, 2004 and 53 days as of September 30, 2004.We calculate DSO using the trailing three months total revenue divided by thenumber of days in the quarter to determine daily revenue.  The averageaccounts receivable balance for the three-month period is then divided by dailyrevenue. 

 

**Cash flows provided by (used for) investingactivities**

 

Net cash provided by investing activities for the nine months ended September 30,2005 was $8.1 million compared to net cash used for investing activities of$6.6 million for the nine months ended September 30, 2004.

 

*Marketable Securities:*During the nine months ended September 30, 2005, we purchased $35.4million and sold $58.2 million in marketable securities, generating a netsource of cash of $22.8 million, compared to purchases of $49.0 million andsales of $72.6 million in the first nine months of 2004.  The net proceedsfrom these transactions were used to fund our share repurchases andacquisitions.

 

*Property and Equipment:*We invested $10.7 million and $8.9 million in property and equipment, andcapitalized software costs in connection with the implementation of ourPeopleSoft Enterprise Resource Planning applications as of September 30,2005 and 2004, respectively.

 

*Business Acquisitions:*On June 1, 2005, we acquired Cresta.  In exchange for all of theoutstanding capital stock of Cresta, we paid $0.6 million in cash, of which$60,000 was held back to secure indemnification obligations of the Crestastockholders, with the potential to pay up to an additional $0.5 million inearn-out consideration over the next two years, contingent upon the achievementof certain future financial targets. The $60,000 held back was deposited asrestricted cash and also accrued and included in Accrued expenses and otherliabilities in the accompanying unaudited condensed consolidated balance sheet.

 

On February 28, 2005, we acquired netNumina. In exchange for allof the outstanding capital stock of netNumina, we agreed to pay $5.7 million,of which $0.6 million was held back to secure indemnification obligations ofthe netNumina stockholders and acquired $4.6 million in cash.  As of September 30,2005, we have paid the $5.1 million not held back for the netNumina stockcertificates surrendered for cancellation. The $0.6 million held back wasdeposited as restricted cash, and included in Accrued expenses and otherliabilities in the accompanying unaudited condensed consolidated balance sheet.

 

On February 27, 2004, we acquired Nims. In exchange for all of theoutstanding capital stock of Nims, we paid $18.2 million in cash,including transaction costs and net of cash acquired. The purchase price forNims may increase with the potential to pay up to an additional$15.0 million in earn-out consideration over three years from theacquisition, contingent upon the achievement of certain future financialtargets.  The first earn-out was achieved as of March 1, 2005 and asa result, we paid $3.3 million in earn-out consideration in April 2005. Asof September 30, 2005, there is a remaining $11.7 million in earn-outconsideration that could be achieved over the next two years. During the SecondQuarter ended June 30, 2005, we also received a tax refund related to theNims acquisition of approximately $0.2 million.

 

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**Cash flows used for financing activities**

 

Net cash flows used for financing activities was $39.2 million for thenine months ended September 30, 2005, compared to net cash used forfinancing activities of $25.1 million for the nine months ended September 30,2004.   Net cash flows used for financing activities for both 2005and 2004 were primarily for the repurchase of our common stock, and werepartially offset by proceeds received from the issuance of stock associatedwith our employee stock purchase and stock option plans.  The following isa summary of our repurchase activity for the nine months ended September 30,2005 and 2004 (dollars in thousands):

 
| ** **                                   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                   | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|                                         |       |       |       |       |       |   |   |   |   |
| Prior year authorizations at January 1, |       | 2,871,600  |       |       |       | 3,181,200 |   |   |   |
| Authorizations                               |       | 3,000,000  |       |       |       | 3,000,000 |   |   |   |
| Repurchases paid                             |       | (3,367,220 | )          | $          | 42,113     |   | (2,127,300 | ) | $ | 30,096 |   |
| Repurchases accrued                          |       | (150,000   | )          | $          | 1,700      |   | — |   |   |   |
| Expirations                                  |       | (1,763,900 | )          |       |       | (1,182,300 | ) |   |   |
| Shares remaining as of September 30,    |       | 590,480    |       |       |       | 2,871,600 |   |   |   |
|                                              |            |            |            |            |            |  |  |  |  |  |  |

 

On October 25, 2005, we announced the approval by our Board ofDirectors of the repurchase of 3.0 million shares of our common stock pursuantto a stock repurchase program (“the October 2005 Program”).  The repurchases may be made on the openmarket or in negotiated transactions, and the timing and amount of shares to bepurchased will be determined by our management based on its evaluation ofmarket and economic conditions and other factors. Unless terminated earlier byresolution of our Board of Directors, the October 2005 Program will expireupon the earlier of the date we repurchase all shares authorized for repurchasethereunder or October 25, 2006.

 

These share repurchases more than offset the shares issued under ourvarious stock incentive programs. Under these stock incentive programs, weissued 399,347 shares and 511,779 shares and received proceeds of $4.4 millionand $5.5 million for the nine months ended September 30, 2005 and 2004,respectively. Between May 1999 and September 30, 2005, we haveinvested approximately $303.6 million to repurchase approximately 24.1 millionshares of our common stock under eleven separate authorizations.

 

In February 2003, we entered into a $50.0 million unsecuredrevolving credit facility (“credit facility”) with two banks. The terms of thecredit facility 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 facilityincluding the allowable limit for letters of credit within the total facilityand for the purposes of issuing a letter of credit to satisfy bank guaranteeswith respect to the Transport Ticketing Authority (“TTA”) contract with theState of Victoria, Australia. One of the banks issued a $34 million ($45million AUD) letter of credit dated July 14, 2005 against our creditfacility in connection with our Victoria TTA contract.  This credit facility was terminated inconnection with our entrance into a new credit facility, described below, in September 2005.

 

On September 15, 2005, we entered into a five-year revolvingcredit facility (“the new credit facility”) with a syndicate of banks (the “lenders”)in the amount of $200.0 million, plus an additional amount of up to $50 millionsubject to certain terms and conditions (the “loan amount”). The new creditfacility replaces our existing $50.0 million unsecured revolving creditfacility. Pursuant to the new credit facility, we may borrow funds from thelenders up to the loan amount with a $50 million sub limit for letters ofcredit.  The annual commitment feepayable quarterly is at an initial rate of 0.20% per annum on the unused amountof revolving credit commitments, subject to adjustment based on a seniorleverage ratio as defined in the new credit facility and up to a maximum perannum rate of 0.25%. To the extent there are letters of credit outstandingunder the new credit facility, we will pay the administrative agent a letter ofcredit fee, initially 1.0% annually, subject to adjustment based on the seniorleverage ratio as defined in the new credit facility, and up to a maximum perannum rate of 1.5%. In connection with the new credit facility, we paid $1.3million in related debt issuance costs. As of September 30, 2005, we hadno debt outstanding under the new credit facility. However, the $34 million($45 million AUD) letter of credit issued in July 2005 against ourprevious credit facility in connection with our Victoria TTA contract isoutstanding against the new credit facility. Based on our current operatingplan, we believe that our cash and cash equivalents on hand, marketablesecurities, cash flows from operations, and our new credit facility will besufficient to meet our current capital requirements for at least the next12 months.

 

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

 

Our cash and cash equivalents totaled $43.5 million and $59.7 millionat September 30, 2005, and 2004, respectively.

 

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**IMPACT OF INFLATION AND CHANGING PRICES**

 

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

 

**CERTAIN FACTORS THAT MAY AFFECT FUTURERESULTS**

 

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

 

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

 

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

 

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

 

*•**             *employee utilization rates;

 

*•**             *changes in the rates we can chargeclients for services;

 

*•**             *acquisitions; and

 

***•****             *other factors, many of which arebeyond our control.

 

A significant portion of our expenses does not vary relative torevenue. As a result, if revenue in a particular quarter does not meetexpectations, our operating results could be materially adversely affected,which in turn may have a material adverse impact on the market price of ourcommon stock. In addition, many of our engagements are terminable withoutclient penalty. An unanticipated termination of a major project could result inan increase in underutilized employees and a decrease in revenue and profits.

 

**We continue to position ourselves to achieveincreasing percentages of revenues and growth through outsourcing. If we aresuccessful in obtaining new outsourcing contracts, we may experience increasedpressure on our overall margins 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 our clients are not satisfied with ourservices, we may have exposure to liabilities, which could adversely affect ourprofitability and financial condition as well as our ability to compete forfuture work.**    If we fail to meetour contractual obligations, we could be subject to legal liability, whichcould adversely affect our business, operating results and financial condition.The provisions we typically include in our contracts that are designed to limitour exposure to legal claims relating to our services and the applications wedevelop may not protect us or may not be enforceable under some circumstancesor under the laws of some jurisdictions. It is possible, because of the natureof our business, that we will be sued in the future. In addition, although wemaintain professional liability insurance, the policy limits may not beadequate to provide protection against all potential liabilities. Moreover, asa consulting firm, we depend to a large extent on our relationships with ourclients and our reputation for high-quality services to retain and attractclients and employees. As a result, claims made against our work may damage ourreputation, which in turn, could impact our ability to compete for new work andnegatively impact our revenue and profitability.

 

**The termination of a contract by asignificant client could reduce our revenue and profitability or adverselyaffect our financial condition.**    Ourfive largest clients, excluding the federal government, accounted forapproximately 19.5% of our revenue in the Third Quarter ended September 30,2005, and 19.0% for the nine months ended September 30, 2005, although noindividual client accounted for more than 6.0% of our total revenue for eitherperiod. The various agencies of the federal government represent our largestclient, accounting for approximately 9.8% of total revenue for the ThirdQuarter ended September 30, 2005 and approximately 9.5% of total revenuefor the nine months ended September 30, 2005. We strive to developlong-term relationships with our clients. Most individual client assignmentsare from three to twelve months; however, many of our client relationships havecontinued for many years. Our clients typically retain us on a non-exclusive,engagement-by-engagement basis. Although they may be subject to penaltyprovisions, clients may generally cancel a contract at any time. Under manycontracts, clients may reduce their use of our services under such contractwithout penalty. In addition, contracts with the federal government containprovisions and are subject to laws and regulations that provide the federalgovernment with rights and remedies not typically found in commercial 

 

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contracts. Among other things, the federal government, as well as otherpublic sector clients, may terminate contracts with short notice, forconvenience and may cancel multi-year contracts if funds become unavailable.When contracts are terminated, our revenue may decline and if we are unable toeliminate associated costs in a timely manner, our profitability may decline.In the Third Quarter and nine months ended September 30, 2005,approximately 18.9% and 18.7%, respectively, of our revenue was from publicsector clients, including U.S. Federal, state, and local governments andagencies. Often government spending programs are dependent upon the budgetarycapability to support such programs. Many government budgets have beenadversely impacted by the economic slowdown. Most states must operate under abalanced budget. As a result of such budget and deficit considerations, ourexisting and future revenues and profitability could be adversely affected byreduced government IT spending.

 

**Our recently announced engagement withMelbourne, Victoria Transport Ticketing Authority, or TTA, exposes us to anumber of different risks inherent in such long-term, large-scale, fixed-feeprojects. ** We have been awarded a contract toperform services in relation to the development, operation and maintenance of apublic transport ticketing system for the state of Victoria, Australia.  We are in the process of finalizing ourrelated subcontractor arrangements and evaluating their impact on theappropriate accounting treatment and revenue that we recognize under thiscontract.  This engagement will requiresignificant management attention and financial resources, and could adverselyaffect our results of operations in a number of ways. These include:

 

•              variabilityin the timing of our ability to recognize revenue as services are performedover the life of the TTA contract based on the application of appropriateaccounting principles.

 

•              start-upcosts could potentially result in initial lower operating margins for theproject;

 

•              difficultiesand costs of staffing and managing complex projects and operations in a newgeographic market place;

 

•              dependenceon subcontractors and potential subcontractor non-performance;

 

•              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;

 

**•**              projectdelays caused by reasons beyond our control;

 

**•**              fluctuationsin foreign currency exchange 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.

 

**Unfavorable government audits could requireus to refund payments we have received, to forego anticipated revenue, andcould 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 have pursued, and intend to continue topursue, strategic acquisitions. Failure to successfully integrate acquiredbusinesses or assets may adversely affect our financial performance.**    Inrecent years, we have grown significantly through acquisitions. From January 1,1999 through September 30, 2005, we completed 17 acquisitions. Theaggregate merger and consideration costs of these acquisitions totaledapproximately $423.1 million. Our future growth may be based in part onselected acquisitions. At any given time, we may be in various stages ofconsidering acquisition opportunities. We may not be able to find and identifydesirable acquisition targets or be successful in entering into a definitiveagreement with any one target. In addition, even if we reach a definitiveagreement with a target, we may not be able to complete any future acquisition.

 

We typically anticipate that each acquisition will bring benefits, suchas an increase in revenue. Prior to completing an acquisition, however, it isdifficult to determine if these benefits will be realized. Accordingly, thereis a risk that an acquired company may not achieve an increase in revenue orother benefits for us. In addition, an acquisition may result in unexpectedcosts, expenses, and liabilities. Any of these events could have a materialadverse effect on our business, financial condition, and results of operations.

 

We have recorded a significant amount of goodwill and other intangibleassets resulting from our acquisitions. We review our goodwill and identifiableassets for impairment in accordance with SFAS 142 and SFAS No. 144 (“SFAS144”), “Accounting for the Impairment or Disposal of Long-Lived Assets,”respectively.  If the estimated future cash flows of the reporting unitsrelated to the underlying assets are not sufficient to support the carryingvalue of the associated underlying assets, we may be required to record 

 

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impairment charges related to goodwill and other intangible assets. Anymaterial loss resulting from an impairment charge could have a material adverseeffect on our results of operations. As of September 30, 2005, ourgoodwill totaled $310.2 million, customer lists totaled $44.1 million and otherintangibles assets totaled $7.1 million.

 

The process of integrating acquired companies into our existingbusiness might also result in unforeseen difficulties. Unforeseen operatingdifficulties may absorb significant management attention, which we mayotherwise devote to our existing business. In addition, the process may requiresignificant financial resources that we might otherwise allocate to otheractivities, including the ongoing development or expansion of our existingoperations.

 

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

 

**We face significant competition for ourservices, and our failure to remain competitive could limit our ability to maintainexisting 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 healthcare software systems market, we compete with somecompanies that are larger in the healthcare market and have greater financialresources than we do. We believe that significant competitive factors in thehealthcare software systems market include size and demonstrated ability toprovide service to targeted healthcare markets.

 

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

 

**We conduct business in the UK, Canada, India,and Australia, which exposes us to a number of difficulties inherent ininternational activities.**    As aresult of our acquisition of a controlling interest in Keane Worldzen in October 2003and the acquisition of SignalTree Solutions in March 2002, we now havefour software development facilities in India. As of September 30, 2005,we had approximately 1,930 technical professionals in the region, includingKeane Worldzen. India is currently experiencing conflicts with Pakistan overthe disputed territory of Kashmir as well as clashes between differentreligious groups within the country. These conflicts, in addition to otherunpredictable developments in the political, economic, and social conditions inIndia, could eliminate or reduce the availability of these development andprofessional services. If access to these services were to be unexpectedlyeliminated or significantly reduced, our ability to meet development objectivesimportant to our strategy to add offshore delivery capabilities to the serviceswe provide would be hindered, and our business could be harmed.

 

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

 

Our operations in the UK, Canada, India and Australia are subject tocurrency exchange rate fluctuations, foreign exchange restrictions, changes intaxation, and other difficulties in managing operations overseas. We may not besuccessful in managing our international operations.

 

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

 

**We may be unable to re-deploy ourprofessionals effectively if engagements are terminated unexpectedly, whichwould adversely affect our results of operations.**    Ourclients can cancel or reduce the scope of their engagements with us on shortnotice. If they do so, we may be unable to reassign our professionals to newengagements without delay. The cancellation or reduction in scope of anengagement could, therefore, reduce the utilization rate of our professionals,which would have a negative impact on our business, financial condition, andresults of operations.

 

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

 

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**Our growth could be limited if we are unableto attract and retain personnel in the information technology and businessconsulting 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 may be prohibited from repurchasing, andmay not have the financial resources to repurchase, our Debentures on the datefor repurchase at the option of the holder or upon a designated event, asrequired by the indenture governing our Debentures, which could cause defaultsunder our senior revolving credit facility and any other indebtedness we mayincur in the future.**    TheDebenture holders have the right to require us to repurchase all or a portionof their Debentures on June 15, 2008. The Debenture holders may alsorequire us to repurchase all or a portion of their Debentures upon a designatedevent, as defined in the indenture governing the Debentures. If the Debentureholders elect to require us to repurchase their Debentures on any of the abovedates or if a designated event were to occur, we may not have enough funds topay the repurchase price for all tendered Debentures. We are currentlyprohibited under our senior revolving credit facility from repurchasing anyDebentures if a designated event were to occur. We may also be prohibited underany indebtedness we may incur in the future from purchasing any Debenturesprior to their stated maturity. In these circumstances, we will be required torepay all of the outstanding principal of, and pay any accrued and unpaidinterest on, such indebtedness or to obtain the requisite consents from theholders of any such indebtedness to permit the repurchase of the Debentures. Ifwe are unable to repay all of such indebtedness or are unable to obtain thenecessary consents, we will be unable to offer to repurchase the Debentures,which would constitute an event of default under the indenture for theDebentures, which itself could constitute a default under our senior revolvingcredit facility or under the terms of any future indebtedness that we mayincur. In addition, the events that constitute a designated event under theindenture for the Debentures are events of default under our senior revolvingcredit facility and may also be events of default under other indebtedness thatwe may incur in the future.

 

**We incurred indebtedness when we sold ourDebentures. We may incur additional indebtedness in the future. Theindebtedness created by the sale of our Debentures, and any futureindebtedness, could adversely affect our business and our ability to make fullpayment on the Debentures.**    Ouraggregate level of indebtedness increased in connection with the sale of ourDebentures. As of September 30, 2005, we had approximately$189.8 million of outstanding indebtedness and had the ability to incuradditional debt under our revolving credit facility. We may also obtainadditional long-term debt and working capital lines of credit to meet futurefinancing needs, which would have the effect of increasing our total leverage.Any increase in our leverage could have significant negative consequences,including:

 

*•**             *increasing our vulnerability toadverse economic and industry conditions;

 

***•****             *limiting our ability to obtainadditional financing;

 

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

 

*•**             *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 in planningfor, or reacting to, changes in our business and the industries in which wecompete; and

 

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

 

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

 

**Item 3.****            Quantitative and Qualitative DisclosuresAbout Market Risk**

 

We do not engage in trading market risk, sensitive instruments orpurchasing hedging instruments or “other than trading” instruments that arelikely to expose us to market risk, whether interest rate, foreign currencyexchange, and commodity price or equity price risk. We have not purchasedoptions or entered into swaps or forward or futures contracts.  However, on October 20, 2005, our Boardof Directors approved our foreign exchange risk management policy, which willallow us to invest in hedging instruments for the purpose of hedging foreigncurrency risk.

 

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*Interest Rate Risk*

 

We invest primarily in U.S. government obligations as well astax-exempt municipal bonds and corporate bonds. As a result, our primary marketrisk exposure is that of interest rate risk to our investments, which wouldaffect the carrying value of those investments. During 2004, the United StatesFederal Reserve Board began increasing benchmark interest rates and at the September 2005meeting of the Federal Open Market Committee increased rates for the eleventhtime, a total of 275 basis points. A significant increase in interest rateswould increase the rate of return on our cash and cash equivalents, but wouldhave a negative impact on the carrying value of our marketable securities. Ourinterest income would change by approximately $0.6 million and $0.7 million forthe nine months ended September 30, 2005 and September 30, 2004,respectively, for each 100 basis point increase or decrease in interestrates. The fair value of our investment portfolio at September 30, 2005would decrease by approximately $1.3 million for a 100 basis point increase inrates and increase $1.1 million for a 100 basis point decrease in rates. Thefair value of our investment portfolio at December 31, 2004 would changeby approximately $1.8 million for each 100 basis point increase ordecrease in rates.

 

Changes in market rates and the related impact on the fair value of ourinvestments would not generally affect net income as our investments are fixedrate securities and are classified as available-for-sale. Investmentsclassified as available-for-sale are carried at fair value with unrealizedgains and losses recorded as a component of accumulated other comprehensiveloss in the accompanying consolidated balance sheets. However, when theinvestments are sold, the unrealized losses are recorded as realized losses andincluded in net income in the accompanying consolidated statements of income.As of September 30, 2005, we had a net unrealized loss of approximately$1.3 million, which represents an increase of $0.2 million and $0.5 millionfrom June 30, 2005 and December 31, 2004, respectively.

 

*Foreign Currency Risk*

 

We transact business in the UK, Canada, India, and Australia and assuch have exposure associated with movement in foreign currency exchange rates.For the Third Quarter and nine months ended September 30, 2005 compared tothe same periods in 2004, the fluctuation in foreign currency exchange ratesnegatively impacted operating income by approximately $1.2 million and $2.7million, respectively. Relative to the foreign currency exposures existing at September 30,2005, a 10% unfavorable movement would have resulted in an additional $1.8million reduction of operating income for the Third Quarter ended September 30,2005 and additional $5.0 million reduction of operating income for the ninemonths ended September 30, 2005. Net revenues derived from our foreignoperations totaled approximately 6% of our total revenues for both the ThirdQuarter and nine months ended September 30, 2005, respectively, andtotaled approximately 5% of our total revenues for both the Third Quarter andnine months ended September 30, 2004.

 

**Item 4.****            Controls and Procedures**

 

**Conclusion Regarding the Effectiveness ofDisclosure Controls and Procedures**

 

Keane maintains disclosure controls and procedures designed to ensurethat information required to be disclosed in reports filed under the SecuritiesExchange Act of 1934, as amended, is recorded, processed and summarized andreported within the specified time periods. Our management, with theparticipation of our President and Chief Executive Officer and our ExecutiveVice President of Finance and Administration and Chief Financial Officer,evaluated the effectiveness of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)as of September 30, 2005. Based on this evaluation, our President andChief Executive Officer and our Executive Vice President of Finance andAdministration and Chief Financial Officer concluded that, as of September 30,2005, our disclosure controls and procedures were (1) designed to ensurethat material information relating to us, including our consolidatedsubsidiaries, is made known to our President and Chief Executive Officer andour Executive Vice President of Finance and Administration and Chief FinancialOfficer by others within these entities, particularly during the period inwhich this report was being prepared, and (2) effective, in that theyprovide reasonable assurance that information required to be disclosed by us inthe reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms.

 

**Changes in Internal Control Over FinancialReporting**

 

During the three months ended September 30, 2005, except asindicated below, there have not been any significant changes in our internalcontrols over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.  As has been previously reported, we are in the process ofimplementing a PeopleSoft Enterprise Resource Planning (“ERP”) system for themajority of our processes and operations.  During the Third Quarter of2005, we continued to phase in the modules for Time Reporting, ContractsManagement, Project Accounting, Billing and Revenue Recognition in our NorthAmerican operations.  We believe that internal controls over financialreporting related to these system and process changes were effective as of September 30,2005.  We plan to continue the roll out of these modules in a deliberatephased approach to ensure internal controls over financial reporting remaineffective.

 

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**Keane,Inc.**

 

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

 

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

 

(c)           The following tableprovides information about purchases by Keane during the three months ended September 30,2005 of equity securities that are registered by Keane pursuant to Section 12of the Exchange Act:

 

**ISSUERPURCHASES 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) (2)** | ** ** | **(d)  Maximum Number of  Shares that May Yet Be  Purchased Under the  Plans or Programs  (1) (2)** | ** ** |
|-------------------|------------|--------------------------------------------------------|------------|---------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|
| 07/01/05-07/31/05 |       | 803,320                                                |       | $                                                 | 12.67      |                                                                                                             | 803,320    |                                                                                                          | 1,844,380  |   |
| 08/01/05-08/31/05 |       | 450,300                                                |       | $                                                 | 11.86      |                                                                                                             | 450,300    |                                                                                                          | 1,394,080  |   |
| 09/01/05-09/30/05 |       | 803,600                                                |       | $                                                 | 11.52      |                                                                                                             | 803,600    |                                                                                                          | 590,480    |   |
| Total:            |       | 2,057,220                                              |       |                                              |       |                                                                                                             |       | $                                                                                                             | 590,480    |   |
|                   |            |                                                        |            |                                                   |            |                                                                                                                  |            |                                                                                                               |            |  |  |

 

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(1)          On June 14, 2005, we announced theapproval by our Board of Directors of the repurchase of 3.0 million sharesof our common stock pursuant to a stock repurchase program (“the June 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 June 2005 Program will expire upon the earlier ofthe date we repurchase all shares authorized for repurchase thereunder or June 13,2006.

 

(2)          On October 25, 2005, we announced theapproval by our Board of Directors of the repurchase of 3.0 million sharesof our common stock pursuant to the October 2005 Program. The amount inthis column excludes the 3.0 million shares under 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.

 

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

 

Exhibit 10.1– Revolving Credit Facility dated September 15, 2005, by and between theRegistrant, and Bank of America and a syndicate of banks

 

Exhibit 10.2†– New Ticketing Solution Projection Agreement between Keane AustraliaMicropayment Consortium and the Transport Ticketing Authority dated July 26,2005

 

Exhibit 31.1—Certification pursuant to Exchange Act Rules 13a-14and 15d-14 of the Chief Executive Officer.

 

Exhibit 31.2—Certification pursuant to Exchange Act Rules 13a-14and 15d-14 of the Chief Financial Officer.

 

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

 

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

 

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† Confidential treatment requested as to certain portions, whichportions have been filed separately with the Securities and Exchange Commission.

 

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**Signatures**

 

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

 

 
|                                                     |   | KEANE, INC.                                                                                                                                    |
|----------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                     |   | (Registrant)                                                                                                                                   |
|                                                     |   |                                                                                                                                           |
|  Date    November 7,  2005 |   | /s/ Brian T. Keane                                                                                                                             |   |
|                                                     |   |                                                                                                                                           |
|                                                     |   | Brian T. Keane President and Chief Executive Officer                                                                                      |
|                                                     |   |                                                                                                                                           |
|  Date    November 7,  2005 |   | /s/ John J. Leahy                                                                                                                              |   |
|                                                     |   |                                                                                                                                           |
|                                                     |   | John J. LeahyExecutive Vice President of Finance and  Administration and Chief Financial Officer  (Principal Financial and Accounting Officer) |

 

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Exhibit Index

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                              |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                         |
| 10.1             |       | Revolving Credit Facility dated September 15,  2005, by and between the Registrant, and Bank of America and a syndicate of  banks                       |
|             |       |                                                                                                                                                         |
| 10.2†       |       | New Ticketing Solution Projection Agreement  between Keane Australia Micropayment Consortium and the Transport  Ticketing Authority dated July 26, 2005 |
|             |       |                                                                                                                                                         |
| 31.1             |       | Certification pursuant to Exchange Act Rules 13a-14  and 15d-14 of the Chief Executive Officer.                                                         |
|             |       |                                                                                                                                                         |
| 31.2             |       | Certification pursuant to Exchange Act Rules 13a-14  and 15d-14 of the Chief Financial Officer.                                                         |
|             |       |                                                                                                                                                         |
| 32.1             |       | Certification pursuant to 18 U.S.C. Section 1350  of the Chief Executive Officer.                                                                       |
|             |       |                                                                                                                                                         |
| 32.2             |       | Certification pursuant to 18 U.S.C. Section 1350  of the Chief Financial Officer.                                                                       |
|             |       |                                                                                                                                                         |
|                  |
|             | †     | Confidential treatment requested as to  certain portions, which portions have been filed separately with the  Securities and Exchange Commission.            |

 

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