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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

X		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the Fiscal Year Ended December 31, 2001

OR

		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the Transition Period From:                                                        To:

Commission File No.: 0-9233

American Management Systems, Incorporated
(Exact name of registrant as specified in its charter)

4050 Legato Road
Fairfax, Virginia 22033

(Address of principal executive office)

Registrant’s Telephone No., Including Area Code: (703) 267-8000

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act: Common Stock

Par Value $0.01

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes      X     No          

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.          

The aggregate market value of voting stock held by non-affiliates of the Registrant as of March 25, 2002 was $759,842,384.

As of March 25, 2002, 40,245,889 shares of common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement to be issued in conjunction with the registrant’s Annual Meeting of Stockholders to be held June 7, 2002 are incorporated by reference into Part III of this Form 10-K.

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CONTENTS

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PART I

ITEM 1. BUSINESS

     Overview

     American Management Systems, Incorporated (“AMS” or “the Company”), an international, information-technology consulting firm, was incorporated in the State of Delaware on February 2, 1970. The Company’s mission is to provide enterprise-wide business and technology solutions that dramatically improve business performance and create value for clients. The Company’s business approach blends deep industry knowledge with strategic services and technology innovation to design and deliver integrated, end-to-end solutions. Since 1970, AMS has been committed to technology innovation through internal development and best-of-breed partnerships, the growth of its people and the delivery of excellence in all engagements. The Company’s key solutions include systems integration and development, customer relationship management, and business and technology consulting.

     AMS measures success based on the results and benefits achieved by its clients. AMS is a trusted business partner for many of the largest and most respected organizations in the markets in which it specializes, including eight out of ten of the world’s largest communication firms; many of the top U.S. banks; most federal agencies; 43 state and local governments, some of the largest energy companies in the U.S., Canada and Europe; and hundreds of companies in the Fortune 500. In 2001 approximately 85% of the Company’s revenues came from clients it worked with in previous years. A key element to the Company’s strategy is establishing an extensive network of strategic alliances, partnerships and joint ventures to provide best-of-breed solutions.

     AMS services clients worldwide. In order to serve clients outside of the United States, AMS has expanded internationally by establishing subsidiaries or foreign branches. Exhibit 21 of this Form 10-K provides a complete listing of all twenty-four active AMS subsidiaries (and branches). Revenues attributable to AMS’s international clients were approximately $190 million in 2001, $196 million in 2000 and $227 million in 1999. Additional financial information regarding revenues from international customers, long-lived assets, and deferred tax assets by geographic areas of operation is provided in Notes 7 and 13 of the consolidated financial statements appearing in Part II, Item 8 of this Form 10-K. A discussion of the risks attendant with AMS’s foreign operations is provided in Item 7A of this Form 10-K.

     The Company, which operates as one segment, focuses on clients in specific industries, which are referred to as target markets. Organizations in the Company’s target markets – New Media and Communications Firms, Financial Services Institutions, State and Local Governments and Education, Federal Government Agencies, and Other Corporate Clients – have a crucial need to exploit the potential benefits of information and systems integration technology. The Company helps clients fulfill this need by ensuring quality project execution and by managing a professional staff that is composed of experts in the necessary technical and functional disciplines.

     New Media and Communications Firms

     AMS markets systems consulting and integration services to both local exchange and interexchange carriers, cellular and wireless telephone companies as well as cable, new media, and DSL providers. The Company’s services encompass developing and implementing AMS’s software products specializing in billing and operational support systems, customer relationship management, credit and collections management and web enablement.

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     Financial Services Institutions

     AMS provides systems consulting and integration services, as well as application software products, to financial institutions and insurance companies worldwide. The Company specializes in corporate and international banking, credit and collections management, and trade services and payments. The Company focuses on providing next generation solutions by incorporating its own suite of products while partnering with industry providers and clients to deliver results for large, complex jobs.

     State and Local Governments and Education

     The Company provides information technology consulting and systems integration services to state, local, and provincial governments as well as many universities and community colleges. AMS provides these organizations industry experience and expertise in delivering financial, tax, human services and revenue management applications; public safety and transportation functions; and environmental systems. AMS is working with both clients and industry providers to develop statewide electronic malls to allow all state and local agencies to purchase goods and services from approved vendors over the web.

     Federal Government Agencies

     AMS’s clients include most U.S. defense agencies and a majority of U.S. civilian agencies. AMS’s long-term relationships with Federal Government Agencies continue to enhance a deep industry expertise that is central to providing management consulting services and systems integration that generate solutions for these clients. AMS’s services include developing and implementing enterprise business solutions, acquisition business systems, and resource management applications.

     Other Corporate Clients

     AMS provides enterprise-wide business and technology services for firms in other industries, including healthcare and utilities. AMS’s suite of management and technology solutions includes complex billing, supplier support, patient financial services and patient medical records management.

     Patents, Trademarks and Licenses

     A significant component of AMS’s business is the development of proprietary software products, either with its own funds or on a jointly funded basis with other organizations. The Company expended $55 million, $76 million, and $102 million in 2001, 2000, and 1999, respectively, for research and development associated with proprietary software. These products are principally licensed as elements of custom tailored systems, and, to a lesser extent, as stand-alone applications. While the Company’s various proprietary intellectual property rights are important to its success, AMS believes its business as a whole is not materially dependent on any particular patent, trademark or license. The Company owns a number of patents and trademarks, which vary in duration, relating to its products. These protections may not prevent competitors from independently developing products similar to the Company’s, nor can there be any assurance that these protections will deter improper use of AMS technology.

     Contracts and Significant Customers

     For large systems integration projects, AMS often contracts for one phase (design, development, or implementation) at a time. AMS generally contracts either on the basis of reimbursement of costs plus a fixed fee, a fixed or ceiling price for each phase, unit rates for time and materials used, or services sold at unit prices. In most cases, the Company receives monthly or milestone progress payments. AMS pioneered an innovative approach for its state tax and revenue clients to finance their projects. Under this type of contract, the amounts due the Company are payable based upon actual benefits derived by the client. Generally, the Company’s contracts are terminable by the customer without penalty on short notice with appropriate compensation to the Company for actual work performed. Most contracts with federal

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government agencies allow for an annual audit. In 2001, AMS earned approximately 29% of its total revenue, or $342 million, from the U.S. Government. No other customer accounted for 10% or more of revenues in 2001.

     Marketing is performed principally by senior staff and by a relatively small number of full-time salespeople for each target market. In the Federal Government Agencies target market, AMS replies selectively to requests for proposals. Certain of the Company’s software products and computer services are sold by a small group of full-time salespeople and, for those products and services, AMS advertises in trade publications and exhibits at industry conventions.

     Competitive Factors

     AMS operates in an intensely competitive market subject to rapid change. AMS’s competitors primarily include consulting and system integration firms and certain large accounting firms that have significant consulting operations. In addition, prospective clients may decide to use their own staff to perform projects rather than engage an outside firm. The Company’s clients include state and local governments, federal agencies, Fortune 500 companies and medium sized companies.

     The Company continues to address weakening in the information technology market. The reduced demand by customers for information technology and consulting services has resulted in fierce competition among service providers to win business. This has resulted in intense price competition evidenced by the Company’s declining profit margins from 2000 to 2001.

     During 2001, the Company implemented a restructuring plan to reduce costs, consolidate operating activities and streamline internal operations by moving to a shared services model. As a result of these efforts, costs have begun to be more closely aligned with reduced revenue levels in the business.

     People

     AMS’s success is highly dependent on its ability to continue to attract and retain qualified employees. To maintain its technical expertise and responsiveness to evolving client needs, the Company provides its employees with continuing education and professional development. Through its performance review system, the Company seeks to reward employees who exemplify its core values including exceptional customer service and delivery of sophisticated solutions.

     As of December 31, 2001, AMS had approximately 7,000 employees worldwide. The Company’s employees are not represented by any labor union.

ITEM 2. PROPERTIES

     AMS’s corporate headquarters are located in Fairfax, Virginia. In addition, there are 49 other offices worldwide including the European headquarters in The Hague, The Netherlands and 11 other European countries. The Company does not own any real property. Substantially all of the Company’s office space is leased under long-term leases with varying expiration dates. AMS currently has facilities in excess of its needs. During 2001, the Company consolidated facilities as part of its restructuring plan as discussed in Note 8 of the consolidated financial statements appearing in Part II, Item 8 of this Form 10-K. The restructuring charge associated with this plan included costs to be incurred through 2006 related to facilities that are subleased, or expected to be subleased, at rates below the Company’s costs.

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ITEM 3. LEGAL PROCEEDINGS

     American Management Systems, Inc. and Federal Insurance Company v. National Union Fire Insurance Company of Pittsburgh, PA, No. 3-00CV682B-CIV (U.S. District Court for the Southern District of Mississippi, Jackson County Division). As previously reported in the Company’s recent periodic reports, on September 11, 2000, AMS filed a lawsuit against National Union Fire Insurance Company (“National Union”), one of its insurance carriers, seeking damages arising from National Union’s failure to take advantage of opportunities to settle the case captioned State of Mississippi v. American Management Systems, Inc., No. 251-99.382-CIV (Circuit Court of Hinds County, Mississippi) (discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2000) within National Union’s policy limits. AMS and National Union agreed to a final settlement of this matter under which National Union, among other things, paid AMS the sum of $43 million during the fourth quarter of 2001. This matter and National Union Fire Insurance Company of Pittsburgh, PA v. American Management Systems, Inc. and Federal Insurance Company have been dismissed with prejudice.

     National Union Fire Insurance Company of Pittsburgh, PA v. American Management Systems, Inc. and Federal Insurance Company. This matter was settled as a part of the settlement of American Management Systems, Inc. and Federal Insurance Company v. National Union Fire Insurance Company of Pittsburgh, PA, No. 3-00CV682B-CIV (U.S. District Court for the Southern District of Mississippi, Jackson County Division), as discussed above.

     Mehle v. American Management Systems, Inc., No. 1:01CV01544 (United States District Court for the District of Columbia), appeal filed. As previously reported in the Company’s recent periodic reports, on July 17, 2001, the Federal Retirement Thrift Investment Board (the “Thrift Board”) gave written notice to AMS stating that the Thrift Board had terminated for default its contract with AMS for development and implementation of an automated record-keeping system for the federal employee Thrift Savings Plan. On the same date, the Thrift Board’s executive director, Roger W. Mehle, purporting to act as “managing fiduciary” of the Thrift Savings Fund, filed a companion lawsuit against AMS relating to AMS’s performance of the contract seeking compensatory damages of $50 million and punitive damages of $300 million, plus re-procurement costs, costs and expenses of litigation (including reasonable attorneys’ fees) and prejudgment interest.

     AMS moved to dismiss the lawsuit filed by Mr. Mehle. On November 30, 2001, the District Court issued an order granting AMS’s motion to dismiss Mr. Mehle’s lawsuit for lack of jurisdiction. Mr. Mehle has appealed that order. AMS has filed both procedural and dispositive motions with the United States Court of Appeals that are pending. Those motions are opposed by Mr. Mehle. On January 25, 2002, the U.S. Department of Justice filed a motion on behalf of the U.S. Government to intervene and a motion to dismiss Mr. Mehle’s appeal, which are also pending. Those motions are also opposed by Mr. Mehle. The Court of Appeals has not set a briefing schedule or a date for oral arguments on the merits of the appeal.

     American Management Systems, Inc. v. United States, No. 01-586 (Fed. Cl.). AMS believes that the appropriate forum for resolving its dispute over the Thrift Board contract is in the United States Court of Federal Claims (“CFC”), a court of specialized jurisdiction that ordinarily entertains all disputes relating to U.S. government contracts. To that end, AMS filed suit in the CFC against the United States, which is the contracting party in the Thrift Board contract, seeking reversal of the Thrift Board’s decision terminating the contract for default and asking the court to convert the termination into a termination for convenience. The U.S. Department of Justice is defending the United States in this action. The United States has moved to dismiss AMS’s complaint on jurisdictional grounds, arguing that jurisdiction in the CFC is inappropriate because the Thrift Board is a non-appropriated fund instrumentality (“NAFI”), asserting it does not use or have access to appropriated government funds to pay its expenses and other obligations. AMS has opposed the motion to dismiss, that is pending. The CFC has not set a briefing schedule or a date for oral arguments on the Government’s motion to dismiss.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     There were no matters submitted to a vote of security holders during the fourth quarter of 2001.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

     The common stock of American Management Systems, Incorporated, is traded on the NASDAQ over-the-counter market under the symbol AMSY. References to the stock prices are the high and low bid prices during the calendar quarters indicated.

     The approximate number of stockholders of record of the Company’s common stock as of March 25, 2002 was 1,026.

     The Company has never paid any cash dividends on its common stock and does not currently anticipate paying dividends in the foreseeable future. AMS’s current policy is to invest retained earnings in the operation and expansion of its business. Future dividend policy with respect to its common stock will be determined by the Board of Directors based upon the Company’s earnings, financial condition, capital requirements, and other then-existing conditions.

ITEM 6. SELECTED FINANCIAL DATA

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
               CONDITION AND RESULTS OF OPERATIONS

     The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and related notes included in Part II, Item 8 of this Annual Report on Form 10-K. Investors are cautioned that forward-looking statements have been made in this document. Forward-looking statements may also be made in other filings with the SEC, the Company’s press releases and in other documents. In addition, the Company, through its management, may make oral forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking statements are subject to risks, uncertainties and changes in circumstances that could cause actual results to differ materially from such statements. The words “anticipates,” “believes,” “expects,” “estimates,” “intends,” “plans” and similar expressions are intended to identify forward-looking statements. These statements are made on the basis of management’s current views and expectations. The statements are not guarantees of future performance. The Company undertakes no obligation to publicly update or revise any forward-looking statements.

     A wide range of factors could materially affect future developments and performance, including, but not limited to: risks in project delivery and staffing, risk of revenues not being realized when and in the amounts expected, risk of increased competition in the markets in which the Company operates, risk of changes in economic conditions that could affect client expenditures, as well as other factors described in Item 7 under the caption, “Factors That May Affect Future Results.”

Presentation

Revenue

     The Company derives its revenue primarily from contracts for business and information-technology solutions. Revenue recognition is based upon the terms of the Company’s contracts. Revenues on fixed-price contracts are recognized using the percentage-of-completion method based upon the percentage of costs incurred to date in relation to total estimated costs. Revenues on cost-reimbursable contracts are recognized to the extent of costs incurred plus a proportionate amount of the fee earned. Revenues on time-and-materials contracts are recognized to the extent of billable rates times hours delivered plus expenses incurred. Revenues from benefits-funded contracts are deferred until it can be predicted with reasonable certainty that the client’s benefit stream will generate amounts sufficient to fund the contract. After that time, revenues from benefits-funded contracts are also generally recognized on a percentage-of-completion basis. Reimbursements, including those relating to travel and other out-of-pocket expenses, are included in revenues, and an equivalent amount of reimbursable expenses are included in client project expense. In each of the past three years, the Company’s software license and maintenance revenue was less than 10% of its total revenue.

Operating Expenses

     The Company’s major types of operating expenses include: client project; selling, general and administrative; research and product support; depreciation and amortization; restructuring charge; special charge; and contract litigation settlements.

Client Project

     Client project expenses include direct expenses to provide services to our clients such as compensation costs, travel and out-of-pocket expenses, and costs for subcontractors.

Selling, General and Administrative

     Selling, general and administrative (“SG&A”) expenses include expenses not directly related to the delivery of client services such as compensation for support personnel, costs for information systems, incentive compensation, selling and marketing expenses, and recruiting and training expenses.

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Research and Product Support

     Research and product support expenses include research and development expenses incurred as part of the software development cycle that are not capitalizable under accounting rules as well as support/maintenance of existing software.

Depreciation and Amortization

     Depreciation and amortization include the amortization of internally developed and purchased software as well as goodwill. Also included are the depreciation of furniture, equipment and leasehold improvements.

Restructuring Charge

     This item includes expenses associated with implementing the Company’s formal restructuring plan announced in February of 2001.

Special Charge

     This item includes significant expenses associated with the write-off of certain software assets no longer expected to provide future value and reserves in connection with certain client engagements.

Contract Litigation Settlements

     This item includes activity arising from the Company’s resolution of contractual litigation disputes.

Interest Expense

     Interest expense (net of interest income) is primarily related to interest incurred on borrowings.

Other Income/Expense

     Other income/expense includes activity not related to AMS’s primary business. For example, other income/expense includes gains and losses on the disposal of assets, market gains and losses on Company-owned life insurance policies and premium expense for Company-owned life insurance policies.

Loss on Equity Investments

     Loss on equity investments reflects the Company’s share, as a joint venture investor, in the operating results of Competix, Inc. (“Competix”).

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Historical Results of Operations

     The following table sets forth the unaudited percentage of revenues represented by items in the Company’s consolidated income statement for the periods presented.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Revenue

     Revenue for 2001 was $1,183 million, a decrease of $96 million, or 8%, compared to 2000. Revenue from U.S. clients declined 8% to $994 million, while revenue from international clients dropped 3% to $190 million. Revenue with international clients is primarily comprised of work with customers in the New Media and Communications Firms and Financial Services Institutions target markets across Europe and increasingly across Asia and the Pacific Rim. Business with international clients represented 16% and 15% of the Company’s total revenue in 2001 and 2000, respectively.

     In 2001, revenue declined in all of the Company’s target markets with the exception of New Media and Communications Firms’ revenue which was flat. See Note 13 of the consolidated financial statements for further discussion. For the first half of 2001, revenue increased $13 million, or 2%, compared with the first half of 2000. However, the events of September 11th, coupled with the weak Information Technology market and the troubled global economy significantly affected revenue in the second half of 2001. During the second half of 2001, revenue declined $109 million, or 17%, when compared to the second half of 2000.

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In addition, revenue declined in the second half of 2001 as a result of the strategic pause in client work with the Department of Defense on the development of version 5.0 of the Standard Procurement System. The work stoppage with the Thrift Board also contributed to the revenue decline in the second half of 2001. Despite this decline, in 2001, as in preceding years, approximately 85% of the Company’s revenue came from clients with whom the Company had performed work previously.

Operating Expenses

     Total operating expenses before restructuring, special charges and contract litigation settlements for 2001 were $1,097 million, a decrease of $72 million, or 6%, compared with 2000. As a percentage of revenue, operating expenses before restructuring, special charges and contract litigation settlements increased from 91% in 2000 to 93% in 2001.

Client Project

     Client project expenses were $661 million in 2001, a decrease of $16 million, or 2%, compared with 2000. Client project expenses declined due to the slowdown or conclusion of project work for several large customers. As a percentage of revenue, client project expenses were 56% in 2001 versus 53% in 2000. The weakening of the information technology market resulted in intense competition among service providers to win business. This climate fostered fierce price competition that eroded gross profit margins in 2001.

Selling, General and Administrative

     SG&A expenses were $352 million in 2001, a decrease of $59 million, or 14% compared with 2000. As a percentage of revenue, SG&A declined from 31% in 2000 to 30% in 2001. The decline was attributable primarily to reductions in incentive compensation and staff related expenses resulting from cost management efforts, including a decrease in the Company’s headcount, to bring costs more in line with revenue levels in the business.

Research and Product Support

     Research and product support expenses were $37 million in 2001, a decrease of $10 million compared with 2000. The decrease was primarily driven by the completion, in fiscal year 2000, of the Company’s next generation customer care and billing software system, Tapestry®.

Depreciation and Amortization

     Depreciation and amortization expenses were $46 million in 2001, an increase of $11 million compared with 2000. The increase resulted in large part from the inclusion in 2001 of a full year of amortization expense for the Company’s customer care and billing software system, Tapestry®. Amortization expense was recorded for only part of the year in 2000. In addition, 2001 included a full year of amortization expense for goodwill related to Synergy Consulting, Inc. (“Synergy”), an acquisition that was completed during the second half of 2000. Given the required adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (“SFAS 142”) amortization of goodwill will cease January 1, 2002. While the full impact of SFAS 142 on AMS’s financial position and results of operations will not be known until the Company completes its impairment testing, it is expected to result in a decline in the quarterly amortization of goodwill by $0.5 million per quarter in 2002 relative to 2001.

Restructuring Charge

     In February 2001, the Company announced a formal restructuring plan to reduce costs, consolidate operating activities and streamline internal operations by moving to a shared services model. The 2001 restructuring charge of $62 million includes $38 million for severance of staff, $20 million for consolidation of facilities and $4 million related to the write-off of software that no longer fits into the Company’s strategy, and other related restructuring costs.

Special Charge

     The 2001 special charge of $34 million relates to the write-off of software assets that are no longer expected to provide future value, reserves in connection with certain client engagements and a $19 million write-down associated with the customer care and billing software system, Tapestry®. The Tapestry® write-down was based on a significant decline in spending in the New Media and Communications Firms target

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market, a review that indicated the asset’s net realizable value was less than its unamortized capitalized costs.

Contract Litigation Settlements

     Contract litigation settlements (income) expense was $(41) million in 2001 compared to $35 million in 2000. The charge of $35 million recorded in 2000 was related to the Company’s settlement of a lawsuit filed by the State of Mississippi. The income of $(41) million, net of costs, recorded in 2001, resulted from the Company’s resolution of its dispute with National Union Fire Insurance Company described in Item 3 of this Form 10-K.

Interest Expense

     Interest expense (net of interest income) was $5 million in 2001 compared to $3 million in 2000. Interest expense increased from 2000 to 2001 due to increased average debt and higher credit facility fees despite lower average interest rates. In addition, the Company accelerated the payment of its term notes and made corresponding accelerated interest payments that were based on the present value of the remaining interest expense. As of the end of 2001, the Company had no outstanding borrowings.

Other Income/Expense

     Other income was $3 million in 2001 compared to $5 million in 2000. Approximately $4 million of other income recorded in 2000 related to expenses recovered as a result of the finalization of a contract settlement with a former client, Bezeq. For additional information see Note 12 to the consolidated financial statements. Gains on life insurance policies of $1 million were included in other income in 2001.

Loss on Equity Investments

     In late 1998, Competix was established as a joint venture between AMS and the Bank of Montreal to provide online loan application processing services to small and mid-sized financial institutions. The Company’s share of Competix’s losses was $3 million in 2001 compared to $6 million in 2000. In 2000, the Company’s loss of $6 million was partially offset by a $4 million gain on the sale of a portion of its investment. At year-end 2001, the Company has no remaining basis in the Competix venture.

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

Revenue

     Revenue for 2000 was $1,279 million, an increase of $39 million, or 3%, compared with 1999. Revenue from U.S. clients increased $69 million, or 7%, while revenue from international clients decreased $30 million or 13%. The decline in revenue from international clients was largely due to lower than expected growth in the New Media and Communications Firms target market as a result of significant consolidations in the industry and larger than anticipated decreases in client spending. Business with international clients accounted for 15% and 18% of the Company’s total revenue in 2000 and 1999, respectively.

     The Federal Government Agencies target market achieved revenues of $353 million in 2000, an increase of 18% over 1999, largely due to the continued expansion and extension of contracted work with the Department of Defense for the Company’s Standard Procurement System. The Financial Services Institutions target market achieved revenues of $214 million in 2000, an increase of 10% over 1999, primarily due to increased business with new clients as the market rebounded from consolidations in the industry and Y2K lockdowns. The Other Corporate Clients target market achieved revenues of $67 million in 2000, an increase of 8% over 1999, due to continued growth attributable to clients in the utilities and healthcare markets.

     The New Media and Communications Firms target market realized revenues of $317 million in 2000, a decrease of 6% over 1999, primarily due to significant consolidations in the industry and larger than anticipated decreases in client spending. The State and Local Governments and Education target market

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realized revenues of $328 million in 2000, a decrease of 5% from 1999 due to the completion of several large engagements and slower project starts given a prolonged procurement cycle.

Operating Expenses

     Total operating expenses before contract litigation settlements for 2000 were $1,169 million, an increase of $47 million, or 4%, compared with 1999. As a percentage of revenue, operating expenses before contract litigation settlements increased from 90% in 1999 to 91% in 2000.

Client Project

     Client project expenses were $677 million in 2000, an increase of $23 million, or 3%, from 1999. As a percentage of revenue, client project expenses were 53% in both 2000 and 1999.

Selling, General and Administrative

     SG&A expenses were $411 million in 2000, an increase of $25 million, or 7% compared with 1999. As a percentage of revenue, SG&A increased from 30% in 1999 to 31% in 2000. The increase in 2000 was primarily due to the Company’s employees devoting a larger amount of their time to business development and marketing activities due to longer than expected slowdowns related to Y2K.

Research and Product Support

     Research and product support expenses were $47 million in 2000, a decrease of $3 million compared with 1999. The decrease was due to a different mix of software development efforts that were underway in 2000 verses 1999. No one single development effort accounted for the decline.

Depreciation and Amortization

     Depreciation and amortization expenses were $35 million in 2000, an increase of $1 million from 1999.

Contract Litigation Settlements

     Contract litigation settlements expenses were $35 million in 2000 and $20 million in 1999. The charge of $35 million recorded in 2000 was related to the Company’s settlement of a lawsuit filed by the State of Mississippi. In 1999, the Israeli telephone company, Bezeq, filed suit against a subsidiary of the Company. In connection with that litigation, the Company recorded $20 million in 1999 to increase its reserve for potential losses related to this contract. In 2000, the Company’s subsidiary and Bezeq entered into a settlement agreement. The settlement amount did not exceed the $27 million reserved for potential losses under the contract.

Interest Expense

     Interest expense (net of interest income) was $3 million in 2000 compared to $0 in 1999. Interest expense increased from 1999 to 2000 primarily due to increased average debt resulting from the Company’s settlement with the State of Mississippi, the acquisition of Synergy, other investments in strategic alliances, and increased average interest rates.

Other Income/Expense

     Other income was $5 million in 2000 compared to $3 million in 1999. Approximately $4 million of other income recorded in 2000 related to expenses recovered as a result of the finalization of the contract settlement with Bezeq. For additional information, see Note 12 to the consolidated financial statements. Gains on life insurance policies of $1 million were included in other income in 1999.

Loss on Equity Investments

     In late 1998, Competix was established as a joint venture between AMS and the Bank of Montreal to provide online loan application processing services to small and mid-sized financial institutions. The Company’s share of Competix’s losses was $6 million in 2000 compared to $4 million in 1999. In 2000, the Company’s loss of $6 million was partially offset by a $4 million gain on the sale of a portion of its investment.

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Liquidity and Capital Resources

     The Company provides for its operating cash requirements primarily through funds generated from operations. The Company has a loan agreement with a group of lenders, including Bank of America, as Administrative Agent, and Wachovia Bank, as Documentation Agent, that provides a multi-currency revolving credit facility not to exceed $120 million, under which there were no borrowings outstanding at December 31, 2001. This credit facility is available for general corporate purposes, including working capital borrowings, capital investments and other obligations.

     The credit facility includes covenants relating to the maintenance of certain financial ratios and may impose restrictions on the Company’s ability to pay dividends. Effective March 21, 2001 and September 28, 2001, the borrowing agreement was amended to exclude certain restructuring and special charges from the calculation of the fixed charge coverage ratio. The minimum requirements for this ratio were decreased for the quarters ending December 31, 2001, March 31, 2002 and June 30, 2002. Effective December 30, 2001, the borrowing agreement was further amended to exclude certain restructuring and special charges from the calculation of the fixed charge coverage ratio and the total debt to earnings before income taxes, depreciation and amortization (EBITDA) ratio. The revolving credit facility expires on January 9, 2003.

     During 2001, the Company repaid in full its term loan agreements with both Bank of America and Wachovia Bank, leaving no term loan balances outstanding at December 31, 2001.

     The Company’s cash and cash equivalents were $53 million at December 31, 2001 compared with $43 million at December 31, 2000, an increase of $10 million or 23%. The increase in cash and cash equivalents was due to $112 million in cash provided by operating activities offset by $50 million in cash used in investing activities, $49 million in cash used in financing activities and $3 million related to the negative effect of exchange rate changes.

     Cash provided by operating activities was primarily due to income from operations adjusted for depreciation, amortization, and non-cash restructuring charges and special charge asset write-offs. Income from operations includes cash received in the amount of $41 million, net of costs, in connection with the contract litigation settlement with National Union Fire Insurance Company. This cash receipt activity was offset by approximately $34 million of cash paid related to the Company’s restructuring charges.

     Cash used in investing activities during 2001 was $50 million, which predominantly represents investments in the purchase and development of computer software. Investments were also made to expand the Company’s strategic alliances in the financial services market.

     Cash used in financing activities during 2001 was $49 million. The Company made payments (net of borrowings) of $35 million on the line of credit as well as payments of $17 million to repay the balance of the Company’s outstanding term notes payable. The Company also received proceeds of approximately $2 million during the period from the exercise of stock options. The Company made no material repurchases of common stock during 2001.

     The Company enters into large, long-term contracts and, as a result, periodically maintains individually significant receivable balances with certain major clients. At December 31, 2001, the Company had approximately $40 million in accounts receivable, classified as a long-term contract receivable in other assets, under a predominantly cost-plus incentive fee contract with the Thrift Board. See Item 2, Legal Proceedings for a discussion of pending litigation involving the Thrift Board. The Company also had approximately $26 million in accounts receivable under a benefits-funded contract with the Virginia Department of Revenue, of which $4 million was classified as a long-term contract receivable in other assets. No other single customer represents greater than 10% of outstanding receivables.

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     As discussed previously in the Company’s Form 10-K filed March 30, 2001, the Company recorded a charge of $35 million to pre-tax earnings in the second half of 2000 due to the settlement of a lawsuit filed by the State of Mississippi and the payment of related expenses. The Company made final payments in the first quarter of 2001 reducing the remaining liability to zero. The Company has no remaining payments associated with this provision. Approximately $12 million of the $35 million paid, as well as amounts paid by the Company’s insurers, was used to purchase guaranteed funding contracts in the names of the State agencies which are to receive the settlement payments. In the remote event that the insurance companies from which the Company purchased the guaranteed funding contracts are unable to make the settlement payments, the Company remains contingently liable.

Significant Accounting Policies

     The Notes to the Consolidated Financial Statements contain a summary of the Company’s significant accounting policies, including a discussion of recently-issued accounting pronouncements. Certain of those policies, including, but not limited to revenue recognition and software development costs, and the related net realizable value analyses, are considered important to the portrayal of the Company’s financial condition because they require management to make complex or subjective judgements, some of which relate to matters that are inherently uncertain. Actual results may differ from these judgements under different assumptions or conditions. Additional information regarding the Company’s accounting policies is included in Note 1 to the consolidated financial statements.

Factors that May Affect Future Results

     While AMS’s management is optimistic about the Company’s long-term prospects, the following issues and uncertainties, among others, should be considered in evaluating its outlook.

     Over the next several years, the Company expects to experience growth in revenues which should enable the Company to improve its profit margins, which have been reduced from time to time as a result of various factors including restructuring, special, and litigation settlement charges. Revenues and profit margins also may be reduced from time to time as a result of events beyond the Company’s control, such as adverse changes in general economic conditions in the U.S. and internationally and disruptions in commercial activities occasioned by actual or threatened terrorist activity and armed conflict.

Project Delivery and Staffing

     The Company faces continuing risks in the area of project delivery and staffing. AMS strives to be a firm that delivers on time and in accordance with specifications regardless of the complexity of the application and the technology. The Company’s customers often have a great deal at stake in being able to meet market and regulatory demands, and demand very ambitious delivery requirements. In order to meet its contractual commitments, AMS must continue to successfully recruit, train, and assimilate entry-level and experienced employees annually. AMS must also continue to provide experienced senior managers on its engagements, especially for large, complex projects. Moreover, this staff must be re-deployed on projects globally. Staffing projects in certain less industrialized countries can pose special risks and challenges.

Project Management

     There is also the risk of failing to successfully manage large projects and the risk that the unanticipated delay, suspension, re-negotiation or cancellation of a large project could have an adverse effect on operating results. Any such development in a project could result in a decline in revenues or profits, the need to relocate staff, a lawsuit or other dispute with a client regarding money owed, or damages incurred as a result of alleged non-performance by AMS and a diminution of AMS’s reputation. Changing client requirements, such as scope changes and process issues, and delays in client acceptance of interim project deliverables, are other examples of risks of non-performance, especially in large complex projects. All of these risks are magnified in the largest projects and target markets simply because of their size. The Company’s business is characterized by large contracts producing high percentages of the Company’s revenues. For example, approximately 50% of the Company’s total revenues in 2001 were derived from business with 25 individual clients.

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Benefits-Funded Contracts

     There is also the risk of revenues not being realized in the amounts or at the times expected, as is the case, for example, with certain contracts in the State and Local Governments and Education target market. On certain large contracts, the Company’s fees are paid out of the benefits (for example, increased revenues from tax collections) that the client achieves. The Company defers recognition of such revenues until management can predict, with reasonable certainty, that the benefit stream will generate amounts sufficient to fund the contract. From that point forward revenues are recognized on a percentage-of-completion basis. As the number of such contracts, and the Company’s experience with predicting the timing and certainty of such revenues, have increased over time, revenues on all of the current multi-year benefits-funded contracts are being recognized on a percentage-of-completion basis. The Company faces the risk that clients may not achieve the amount of benefits anticipated. Factors beyond the Company’s control, such as economic downturns, tax base erosion, and state budget cutbacks that result in fewer state resources being available to generate benefits, may result in revenues not being realized at the times or in the amounts expected.

Competition

     The Company also faces the risk of increased competition in the markets in which it operates. In addition to any risk that the Company’s competitors may create, some of the Company’s current or prospective clients may decide to perform projects with their in-house staff that the Company might otherwise have undertaken. The Company also faces the risk of shrinking markets resulting from mergers and other consolidations of clients or prospective clients. Increased competition from industry rivals, as well as decisions by clients to outsource fewer projects or to consolidate with others in the Company’s target markets, could have a negative effect on pricing, revenues and margins. The Company also faces the risk of reduced demand for consulting and system integration services if the market moves toward additional business process outsourcing and application outsourcing. A failure by the Company to respond quickly to market changes could have a negative effect on revenues and margins.

Other Risks

     Events such as declines in revenues or profits, downturns in the industry in which the Company operates and downturns in the stock markets generally could result in immediate fluctuations in the trading price and volume of the Company’s stock. In addition, the Company is subject to risks associated with its international operations. Contracts being performed in non-Western countries can have higher delivery risks for a variety of reasons. Because the Company operates in a rapidly changing and highly competitive market, additional risks not discussed in this Form 10-K may emerge from time to time. The Company cannot predict such risks or assess the effect, if any, that such risks may have on its business. Consequently, the Company’s various forward-looking statements, made, or to be made, should not be relied upon as a prediction of actual results.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

     Approximately 16% of the Company’s total revenues in 2001, 15% in 2000, and 18% in 1999 were derived from international clients. The Company’s practice is to negotiate contracts in the same currency in which the predominant expenses are incurred, thereby mitigating the exposure to foreign currency exchange fluctuations. It is not possible to accomplish this in all cases; thus, there is some risk that profits will be affected by foreign currency exchange fluctuations. In a further effort to mitigate foreign currency exchange risk, the Company has established a notional cash pool with a European bank. This arrangement allows the Company to better utilize its cash resources among its subsidiaries, thereby mitigating foreign currency conversion risks. The Company also actively manages the excess cash balances in the cash pool, which tends to increase net interest income. In the past, the Company had employed limited hedging of inter-company transactions through derivative instruments (foreign currency swap contracts); however, as of December 31, 2001, the Company had no such outstanding derivative contracts.

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INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders of
American Management Systems, Incorporated
Fairfax, Virginia

We have audited the accompanying consolidated balance sheets of American Management Systems, Incorporated and subsidiaries (the Company) as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders’ equity, cash flows, and comprehensive income for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of American Management Systems, Incorporated and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

McLean, Virginia
February 20, 2002

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

American Management Systems, Incorporated and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

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American Management Systems, Incorporated and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(continued)

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American Management Systems, Incorporated and Subsidiaries

CONSOLIDATED BALANCE SHEETS

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American Management Systems, Incorporated and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended December 31, 2001, 2000, 1999 (In millions)

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American Management Systems, Incorporated and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS