Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission File Number: 0-9233

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

(703) 267-8000
(Registrant’s telephone number, including area code)

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 per share

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. ______

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

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 28, 2002 was $788,581,010.

The number of shares of the registrant’s common stock outstanding as of March 24, 2003 was 42,379,461.

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 May 9, 2003 are incorporated by reference into Part III of this Form 10-K.

i

CONTENTS

ii

PART I

ITEM 1.     BUSINESS

Overview

American Management Systems, Incorporated, a global business and information technology consulting firm, was incorporated in the State of Delaware on February 2, 1970. We use the terms “AMS,” “we,” “our,” and “us” to refer to American Management Systems, Incorporated and its subsidiaries. Our mission is to partner with customers to improve their business performance through the intelligent use of information technology. Our business approach blends deep industry knowledge with strategic services, technology innovation and project delivery expertise to help business and government collect revenues, improve customer relationships, reduce risk, cut costs, and comply with complex regulatory requirements. Our key solutions include business consulting, IT solutions and outsourcing.

AMS serves 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-six active AMS subsidiaries (and branches). Revenues attributable to AMS’s international clients were approximately $132.6 million in 2002, $189.6 million in 2001 and $196.3 million in 2000. Additional financial information regarding revenues from international customers, long-lived assets, and deferred tax assets by geographic areas of operation is provided in Notes 18 and 11 of the consolidated financial statements appearing in Part II, Item 8 of this Form 10-K.

We operate as one segment and focus on clients in specific industries, called our target markets. We have the following five target markets: Federal Government Agencies; State and Local Governments and Education; Communications, Media and Entertainment (formerly New Media and Communications Firms); Financial Services Institutions; and Other Corporate Clients.

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15 (d) of the Exchange Act are made available free of charge on our internet websire at ams.com as soon as reasonably practicable after we electronically file such material with, or furnish it to , the Securities and Exchange Commission.

Federal Government Agencies

AMS provides information technology solutions to help U.S. defense, military, and civilian agencies and civilian government contractors upgrade and integrate legacy systems, streamline processes and secure information. AMS’s long-term relationships with federal government agencies continue to enhance a deep industry expertise that is central to providing management consulting and systems integration services. AMS’s key services in this target market include acquisition and procurement systems, customer relationship management and enterprise contract and financial management.

State and Local Governments and Education

We provide information technology consulting and systems integration services to state and local governments as well as many universities and school districts. AMS provides these organizations industry experience and expertise in the following areas: digital government, tax and revenue, health and human services, public safety and transportation, and administrative and financial management. Our innovative, benefits-funded contracting options enable state governments to do more with less.

Communications, Media and Entertainment

AMS markets systems consulting and integration services to local exchange carriers, integrated communications providers, internet service providers, cable companies, wireless operators as well as content, media and entertainment companies. Our services in this target market include billing, churn management, credit risk and collections, enterprise application security, mobile data, order management,

1

outsourcing and real-time enterprise integration. Using our products and services, businesses in this industry are addressing their most pressing challenges in today’s economy: decreasing revenues, controlling costs and reducing risk.

Financial Services Institutions

We enable banks, insurance companies and retail investment firms to shift from merely selling products to providing integrated services with proven technology and effective execution of business strategy. AMS specializes in credit services, trade services and payments, insurance solutions and retirement services for these clients. AMS partners with best-in-class technology firms such as EISI, Filenet, Marketswitch, Siebel Systems and SunGard.

Other Corporate Clients

AMS provides technology solutions to healthcare enterprises and firms in other industries. Our key services for our other corporate clients include workflow automation, system consolidation, and information technology planning and implementation.

Employees

Our success is highly dependent on our ability to continue to attract and retain qualified employees. As of December 31, 2002, we had approximately 6,300 employees worldwide. We are committed to the professional development of our employees through continuing education. In 1998, AMS University (AMSU) was founded, a company-wide leadership and professional development initiative. AMSU provides staff members at all levels with the skills they need to advance to higher positions, and keep up to date on leadership, management, technology, and other essential areas. During 2002, we introduced the company-wide balanced scorecard program that creates systemized performance assessments and aligns individual performance with our company goals. Our employees are not represented by any labor union.

Patents, Trademarks and Licenses

A significant component of AMS’s business is the development of proprietary software products. We expended $51.7 million, $55.1 million, and $75.5 million in 2002, 2001, and 2000, respectively, for research and development associated with proprietary software. These products may be licensed as a stand-alone application, as elements of custom tailored systems, or integrated with a variety of other systems as part of an enterprise information technology architecture. In addition to proprietary software, we have developed proprietary methodologies, techniques, and practices that are routinely used to deliver solutions for clients. AMS has established policies and practices related to the use and protection of proprietary and confidential information and intellectual property. We protect our intellectual assets through appropriate contractual arrangements with employees and third parties, as well as reliance on trade secret, copyright, patent and trademark laws.

AMS holds a number of patents and pending patent applications of various durations in the United States and other countries in which we conduct business. While AMS’s various proprietary intellectual property rights are valuable to us and important to our success, we believe our business as a whole is not materially dependent on any particular patent, trademark or license.

2

Contracts

A significant portion of our contracts is for large systems integration projects that often provide for the integration and customization of core software. These contracts generally include the sale of software, integration services, training and maintenance. Large systems integration projects are often structured in phases (design, development and implementation) for delivery and contract management purposes. Occasionally these phases are negotiated and contracted separately, with client acceptance at the end of each phase. More often, these phases are negotiated and contracted at the same time. AMS pioneered an innovative approach for our state and city revenue or taxation clients to finance their projects, called benefits-funded contracts. This type of contract is generally contracted based upon a fixed price, however, the amounts due to us are payable from actual monetary benefits derived by the client.

In addition to these large systems integration projects, we also enter into contracts to provide off-the-shelf software and training and consulting services. For these types of contracts, revenues are generally recognized on the basis of unit rates for time-and-materials used, a fixed or ceiling price, or reimbursement of costs plus a fixed fee. In most cases, we receive monthly or milestone progress payments.

Disclosures Regarding Forward-Looking Statements

Investors are cautioned that this Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, relating to our operations that are based on our current expectations, estimates and projections. Words such as “anticipates,” “believes,” “expects,” “estimates,” “intends,” and similar expressions are used to identify these forward-looking statements. These statements are subject to risks, uncertainty and changes in circumstances. Forward-looking statements are based on assumptions as to future events that may not prove to be accurate. Actual results may differ materially from what is expressed or forecast in these forward-looking statements. The reasons for this include changes in general economic and political conditions, including fluctuations in exchange rates, and the factors discussed below under the section entitled “Risk Factors.” We specifically disclaim any obligation to update these forward-looking statements. These forward-looking statements should not be relied upon as representing our estimates or views as of any subsequent date.

RISK FACTORS

Risks Related to Our Industry

The current economic downturn has caused, and future economic downturns may cause, our revenues to decline.
Our revenues declined $196.6 million during fiscal year 2002. We continue to operate in a challenging economic environment in the United States and abroad. Disruptions in commercial activities occasioned by actual or threatened terrorist activity or armed conflict, could have a material adverse effect on our operating results. AMS has implemented a restructuring plan to reduce costs and align our workforce with changing market conditions and new business strategies. As a result of these efforts, costs have begun to be more closely aligned with reduced revenue levels in the business. However, current and future cost-management initiatives may not be sufficient to maintain our margins if the current challenging economic environment is prolonged.

The level of business activity of our clients, which is affected by economic conditions, affects our results of operations. We cannot predict the impact that the current global economic downturn will have on our future revenues, nor can we predict when economic conditions will improve. During an economic

3

downturn, such as the one we are experiencing now, our clients and potential clients often cancel, reduce or defer existing contracts and delay entering into new engagements. In general, companies also decide to undertake fewer information technology systems projects during difficult economic times, resulting in limited implementations of new technology and smaller engagements. Because there are fewer engagements in a downturn, competition usually increases and pricing for services may decline as competitors, particularly companies with significant financial resources, decrease rates to maintain or increase their market share in our industry. Our pricing, revenues and profitability could be negatively affected as a result of these factors.

Our business will be negatively affected if we are not able to anticipate and keep pace with rapid changes in technology.
Rapidly changing technologies such as frequent new product and service introductions and evolving industry standards characterize our market. If we cannot keep pace with these changes, our business could suffer.

Our success will depend, in part, on our ability to develop and implement management and technology services that anticipate and keep pace with rapid and continuing changes in technology, evolving industry standards and changing client preferences. Our success will also depend on our ability to develop and implement ideas for the successful application of existing and new technologies. We may not be successful in anticipating or addressing these developments on a timely basis or our ideas may not be successful in the marketplace. Also, products and technologies developed by our competitors may make our services less competitive or obsolete. Any one of these circumstances could have a material adverse effect on our ability to obtain and successfully complete client engagements.

The consulting, technology and outsourcing markets are highly competitive, and we may not be able to compete effectively.
AMS operates in an intensely competitive market. The reduced demand by customers for information technology and consulting services has resulted in fierce competition among service providers to win business. Based on revenues and the number of consultants we have, we are smaller than some of our competitors, which gives them a competitive advantage over us. Many of our competitors are taking greater advantage of the lower labor costs in certain countries to allow them to reduce prices. Our competitors primarily include consulting and other professional service firms and system integration firms. In addition, prospective clients may decide to use their own staff to perform projects rather than engage an outside firm.

Our industry is experiencing rapid changes in its competitive landscape. Some of our competitors have sought access to public and private capital and others have merged or consolidated with better-capitalized partners. These changes may create more or larger and better-capitalized competitors with enhanced abilities to address client needs and compete more effectively for market share, geographic presence, skilled professionals, and large-scale government contracts. Any of these circumstances could result in price reductions, reduced profitability, and loss of market share for us.

Our success is highly dependent on our ability to recruit and retain talented employees.
Our business involves the delivery of professional services and is highly labor-intensive. Our success depends largely on our ability to attract, develop, motivate and retain highly skilled professionals. To attract and retain the number of employees we need to grow our business, we may have to increase our compensation levels in the future. This would adversely affect our operating margins.

For 2002, our annual voluntary turnover rate for total staff was approximately 10.9%, a decline of 3.9% from the prior year. If we were to experience the loss of a significant number of our professionals in the

4

future, it could adversely affect our operating results, including our ability to obtain and successfully complete important client engagements, effectively compete, or grow our business.

Risks Related to Our Business

We rely on relatively few customers for a significant portion of our business.
We rely on a few large customers, particularly U.S. federal government agencies and departments, to provide a substantial portion of our revenues. Contracts with U.S. federal government agencies and departments accounted for 34.8%, 28.9%, and 27.6% of our revenues in 2002, 2001 and 2000, respectively. We believe that federal government contracts will continue to be a source of a significant amount of our revenues for the foreseeable future. For this reason, any issue that compromises our relationship with agencies of the federal government would cause serious harm to our business. Among the key factors in maintaining our relationships with federal government agencies are our performance on individual contracts and delivery orders, the strength of our professional reputation, the relationships of our key executives with client personnel and our compliance with complex procurement laws and regulations related to the formation, administration and performance of federal government contracts. In addition, our failure to obtain and maintain necessary security clearances may limit our ability to perform classified work for government clients, which could cause us to lose business. Security breaches in sensitive government systems we have developed also could damage our reputation and eligibility for additional work and expose us to significant losses. To the extent that our performance does not meet client expectations, or our reputation or relationships with one or more of our key clients, particularly in our Federal Government Agencies target market, are impaired, our revenues and operating results could be materially harmed. Reductions, delays or cancellations from one or more of these significant clients, or the loss of one or more of these clients, would have a material adverse effect on our revenues, profitability and cash flow.

During 2002 and 2001, the global telecommunications market significantly deteriorated, reflecting a significant decrease in capital spending. Our sales and results of operations have been adversely affected by this market deterioration. Of our $196.6 million drop in revenues from 2001 to 2002, $124.7 million, or 63.4%, was due to lower revenues in our Communications, Media and Entertainment target market. If capital investment levels by telecommunication firms continue to decline, or if our Communications, Media and Entertainment target market does not improve, or improves at a slower pace than we anticipate, our revenues and profitability could be adversely affected.

Adverse changes in federal government fiscal spending could have a negative effect on our business.
Changes in federal government spending policies or budget priorities could directly affect our financial performance. Among the factors that could harm our federal government contracting business are:

	•		curtailment of the federal government’s use of consulting and technology services firms;
	•		a significant decline in spending by the federal government, in general, or by specific departments or agencies in particular;
	•		the adoption of new laws or regulations that affect companies that provide services to the federal government;
	•		delays in the payment of our invoices by government payment offices; and
	•		general economic and political conditions.

These or other factors could cause federal government agencies and departments to reduce their purchases under contracts, to exercise their right to terminate contracts, to issue temporary stop work orders, or not to exercise options to renew contracts, any of which would cause us to lose future revenues. We have contracts in place with many federal departments and agencies, and federal government spending reductions or budget cutbacks at these departments or agencies could materially harm our continued performance under these contracts, or limit the award of additional contracts from these agencies.

5

Profitability on our contracts may be adversely affected by project-related risks.
We may not be profitable if we do not accurately estimate the cost of large engagements that are conducted on a fixed-price basis. A significant percentage of our engagements are performed on a fixed-price basis. Billing for fixed-price engagements is made in accordance with the contract terms agreed to with our client. Revenues are recognized based on the percentage of costs incurred to date in relation to total estimated costs to be incurred over the duration of the respective contract. When making proposals for these types of engagements, we rely on our estimates of costs and timing for completing the projects. These estimates reflect our best judgment regarding the efficiencies of our methodologies and professionals as we plan to apply them to the projects. Any increased or unexpected costs or unanticipated delays in connection with the performance of fixed-price contracts, including delays caused by factors outside our control, could make these contracts less profitable or unprofitable.

Our contracts can be terminated by our clients with short notice. Our clients typically retain us on a non-exclusive, engagement-by-engagement basis, rather than under exclusive long-term contracts. Generally, our clients can terminate our contracts without penalty upon written notice and with appropriate compensation to AMS for actual work performed. Longer-term, larger and more complex contracts typically provide for reimbursement of termination costs such as employee relocation expenses and lease termination penalties. Additionally, large client projects involve multiple engagements or phases, and there is a risk that a client may choose not to retain us for additional phases of a project or that a client will cancel or delay additional planned engagements. These terminations, cancellations or delays could result from factors unrelated to our work product or the progress of the project, but could be related to business or financial conditions of the client or the economy generally. When contracts are terminated, we lose the associated future revenues and we may not be able to recoup all associated costs.

Federal government contracts contain provisions giving government clients a variety of rights that are unfavorable to us, including the ability to terminate a contract at any time for convenience. Federal government contracts contain provisions and are subject to laws and regulations that provide government clients with rights and remedies not typically found in commercial contracts. These rights and remedies allow government clients, among other things, to:

	•		reduce or modify contracts;
	•		terminate our facility security clearances and thereby prevent us from receiving classified contracts;
	•		cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable;
	•		prohibit future awards with a particular agency due to a finding of organizational conflict of interest based upon prior related work performed for the agency that would give a contractor an unfair advantage over competing contractors;
	•		subject the award of contracts to protest by competitors, which may require the contracting federal agency or department to suspend our performance pending the outcome of the protest and may also result in a requirement to resubmit bids for the reduction or modification of the awarded contract; and
	•		suspend or debar us from doing business with the federal government or with a particular governmental agency.

If a government client terminates one of our contracts for convenience, we may recover, at most, only our incurred or committed costs, settlement expenses, and profit on work completed prior to the termination. If a federal government client were to unexpectedly terminate or cancel one or more of our significant contracts, decline to exercise an option to renew a multi-year contract, or suspend or debar us from doing business with government agencies, we could experience a material decline in our revenues.

6

Our profitability will suffer if we are not able to maintain our pricing and utilization rates and control our costs.
Our profitability on time-and-materials contracts is a function of the rates we are able to charge for our services and the utilization rate, or chargeability, of our professionals. Accordingly, if we are not able to maintain the rates we charge for our services or an appropriate utilization rate for our professionals, our profitability will suffer. The rates we are able to charge for our services are affected by a number of factors, including:

	•		our clients’ perception of our ability to add value through our services;
	•		introduction of new services or products by us or our competitors;
	•		pricing policies of our competitors and other competitive factors; and
	•		general economic conditions.

Our utilization rates are also affected by a number of factors, including:

	•		our ability to transition employees from completed projects to new engagements;
	•		our ability to forecast demand for our services and thereby maintain an appropriately sized workforce; and
	•		our ability to manage attrition.

Our profitability is also a function of our ability to control our costs and improve our efficiency. As we increase the number of our professionals and execute our strategy for growth, we may not be able to manage a significantly larger and more diverse workforce, control our costs or improve our efficiency.

There are risks inherent in a strategy that includes the acquisition of other businesses.
One of our strategies is to pursue growth through acquisitions. We may not be able to identify suitable acquisition candidates at prices that we consider appropriate. The integration of acquired business operations could disrupt our business by diverting management attention away from day-to-day operations. Integrating personnel with disparate business backgrounds and combining different corporate cultures may increase the difficulties of integration. We also may not realize cost efficiencies or synergies that we anticipate when selecting our acquisition candidates. Acquisition candidates may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition which could reduce our future reported earnings.

We may face legal liabilities or damage to our professional reputation from claims made against our work.
We create, implement and maintain information technology solutions that are often critical to the operations of our clients’ businesses. Our ability to complete large projects as expected often is adversely affected by unanticipated delays, renegotiations, and changing customer requirements or project delays. Such problems could subject us to legal liability, which could adversely affect our business, operating results and financial condition, as well as cause a diminution of our professional reputation. We typically include provisions in our contracts which are designed to limit our exposure to legal claims relating to our services and the applications we develop. These provisions may not protect us or may not be enforceable under some circumstances or under the laws of some jurisdictions.

Our profitability may decline due to financial and operational risks inherent in worldwide operations.
We have offices in 12 countries around the world. AMS subsidiaries are incorporated in 16 foreign countries. Approximately 13.4% of our revenues in 2002, 16.0% in 2001 and 15.3% in 2000 were attributable to international activities. As a result, we are subject to the following risks:

	•		currency fluctuations;
	•		price controls or restrictions on exchange of foreign currency;
	•		the burdens of complying with a wide variety of national and local laws;
	•		differences in, and uncertainties arising from, local business culture and practices;

7

	•		multiple, and sometimes conflicting, laws and regulations, including tax laws;
	•		operating losses incurred in certain countries as we develop our international service delivery capabilities and the non-deductibility of those losses for tax purposes;
	•		the absence in some jurisdictions of effective laws to protect our intellectual property rights;
	•		restrictions on the movement of cash and other assets;
	•		restriction on the import and export of certain technologies;
	•		restrictions on the repatriation of earnings; and
	•		political, social and economic instability.

Any or all of these risks could impact our global business operations and cause our profitability to decline.

Our services or solutions may infringe upon the intellectual property rights of others.
We cannot be sure that our services and offerings do not infringe on the intellectual property rights of third parties, and we may have infringement claims asserted against us. These claims may be costly, harm our reputation, and prevent us from offering some services and offerings. Historically, in some of our contracts, we have agreed to indemnify our clients for certain expenses or liabilities resulting from claimed infringements of the intellectual property rights of third parties. In some instances, the amount of these indemnities may be greater than the revenues we receive from the client. Any claims or litigation in this area, whether we ultimately win or lose, could be time-consuming and costly, injure our reputation, or require us to enter into royalty or licensing arrangements. Any limitation on our ability to sell or use products or services that incorporate challenged software or technologies could cause us to lose revenue-generating opportunities or require us to incur additional expenses to modify solutions for future projects.

We have only a limited ability to protect our intellectual property rights.
Our success depends, in part, upon our ability to protect our proprietary methodologies and other intellectual property that we use to provide our services. The laws of some countries in which we conduct business may offer only limited protection of our intellectual property rights. AMS’s general practice is to pursue patent or other appropriate intellectual property protection that is reasonable and necessary to protect and leverage our intellectual assets.

AMS asserts trademark rights in and to our name, product names, logos and other markings used to identify our goods and services in the marketplace. We routinely file for and have been granted trademark registrations from the U.S. Patent and Trademark Office and other trademark offices worldwide.

Despite our efforts, the steps taken to protect our intellectual property may not be adequate to prevent or deter infringement or other misappropriation of intellectual property, and we may not be able to detect unauthorized use of our intellectual property, or take appropriate steps to enforce our intellectual property rights.

ITEM 2.     PROPERTIES

AMS’s corporate headquarters are located in Fairfax, Virginia with 50 offices worldwide. European headquarters are in The Hague, The Netherlands and AMS has offices in 10 other foreign 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 and 2002, the Company consolidated facilities as part of its restructuring plan as discussed in Note 12 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.

8

ITEM 3.     LEGAL PROCEEDINGS

Mehle v. American Management Systems, Inc., No. 1:01CV01544 (United States District Court for the District of Columbia), appeal pending. As previously reported in the Company’s periodic filings with the SEC, 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 United States District Court for the District of Columbia issued an order granting AMS’s motion to dismiss Mr. Mehle’s lawsuit for lack of jurisdiction. Mr. Mehle appealed that order. AMS filed both procedural and dispositive motions with the Court of Appeals. On January 25, 2002, the U.S. Department of Justice filed a motion on behalf of the U.S. Government to intervene which has been granted, and a motion to dismiss Mr. Mehle’s appeal. Both the Government’s motion to dismiss the appeal and AMS’s motion to dismiss the appeal were opposed by Mr. Mehle and are pending. A motion by AMS, whose position was supported by the United States, to strike the appearance of private counsel representing Mr. Mehle, also was filed and was opposed by Mr. Mehle. That motion is also pending. In November 2002, Mr. Mehle resigned from his position as Executive Director of the Thrift Board. As a result, Mr. James Petrick, the Thrift Board’s current Acting-Executive Director, was substituted as the named appellant and the case is now captioned Petrick v. American Management Systems, Inc., No. 01-7197 (United States Court of Appeals for the District of Columbia Circuit). The Court of Appeals heard oral argument on March 7, 2003 and the case has been submitted for decision.

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 case. The United States moved to dismiss AMS’s Complaint for lack of jurisdiction, arguing that the Thrift Board is a non-appropriated fund instrumentality. AMS opposed the Government’s jurisdictional motion. By written opinion and order dated August 30, 2002, the CFC denied the United States’ motion to dismiss, concluding that jurisdiction did, in fact, exist. On September 12, 2002, the United States filed its Answer to AMS’s Complaint, thereby responding to AMS’s claims in the CFC. On November 1, 2002, the United States filed a motion seeking permission from the CFC to immediately appeal the CFC’s August 30, 2002 decision, and an order suspending further proceedings in the CFC pending the resolution of any such appeal. AMS opposed this request. On January 9, 2003, the CFC authorized the United States to seek immediate review from the U.S. Court of Appeals for the Federal Circuit (“the Federal Circuit”) and stayed further proceedings in the CFC pending final action by the Federal Circuit on the United States’ request for immediate review. The United States subsequently requested that the Federal Circuit grant immediate review. On February 26, 2003, by written order, the Federal Circuit denied the United States’ request for interlocutory appeal. Following the denial of its request for immediate appellate review, the

9

United States requested that the CFC revisit its August 30, 2002 opinion and then re-certify the matter to the Federal Circuit. AMS has opposed that request. The issue is now pending before the CFC.

Other Procedural Matters Relating to the Thrift Board. On July 16, 2002, AMS submitted a contract termination settlement proposal and claim to the Thrift Board seeking recovery of approximately $58.5 million of unpaid costs and fees incurred in performing the contract and winding it down in accordance with the termination for convenience provisions of the contract. The proposal was submitted pursuant to the instructions given by the Thrift Board’s contracting officer at the time of termination and in accordance with the terms of the contract and the Federal Acquisition Regulation. The submission of a government contractor’s settlement proposal is a routine step in the administrative process of terminating a federal government contract. On August 16, 2002, the Thrift Board denied any liability to pay the settlement proposal and claim. AMS intends to challenge the Thrift Board’s decision with respect to these matters.

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 2002.

10

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 24, 2003 was 2,234.

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 dividends on the common stock of AMS, if any, will be at the discretion of its Board of Directors and will depend on the Company’s earnings, financial condition, capital requirements, credit facility covenants and other then-existing conditions.

ITEM 6.     SELECTED FINANCIAL DATA

Income Statement Data

Balance Sheet Data

11

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 our consolidated financial statements and notes included in Part II, Item 8 of this Annual Report on Form 10-K. We use the terms “AMS,” “we,” “our,” and “us” in this report to refer to American Management Systems, Incorporated and its subsidiaries.

Overview

We are a global business and information technology consulting firm serving clients worldwide. We partner with customers to improve their business performance through the intelligent use of information technology. Our business approach blends deep industry knowledge with strategic services, technology innovation and project delivery expertise to help business and government collect revenues, improve customer relationships, reduce risk, cut costs, and comply with complex regulatory requirements. Our key services include business consulting, IT solutions and outsourcing.

We deliver our consulting and system integration services through five industry groups, called target markets, in which we have significant industry knowledge. We invest in emerging technologies through the development of proprietary products and business partnerships. Our focus on specific industries allows us to tailor our offerings to reflect an understanding of the markets in which our clients operate.

We derive our revenues primarily from contracts for business and information technology solutions. The economic environment and level of business activity from our clients affects our revenues. Due to the slowdown in the economy, political uncertainty and weak information technology market during 2001 and 2002, clients reduced or postponed their spending on information technology and consulting services, slowing down the number of new contracts we entered into.

During 2002, we strengthened our leadership team and organizational structure. We created a new sales force to cross-sell our services to customers in all of our target markets. This team added 70 new customers in 2002. We continued to align our costs with market conditions through our restructuring plan and will continue to do so as market demand changes. Future cost-management efforts may not be sufficient to maintain our operating margins given a delayed economic recovery.

In keeping with our strategy to focus on core businesses and invest in areas that complement our strategies, during 2002, we sold our global utilities practice. Additionally, we entered into an agreement to acquire certain assets of Proponix (Canada), Inc. and Proponix (Australia) Pty. Limited, collectively referred to as “Proponix,” a leading provider of back-office letter of credit trade processing for global banks. We expect to close this transaction in March or April of 2003. Additionally, to complement our portfolio of offerings in the Communications, Media and Entertainment target market, we acquired the interconnection gateway software of Quintessent Communications during 2002. This allows AMS to offer full-service interconnection gateway solutions.

In 2002, we transitioned to a matrix business model with horizontal service lines leveraging expertise and efficiencies across all of our vertical target markets. Our service lines, which include Managed Services, Enterprise Integration, and Innovation and Transformation, house our core offerings. The service lines invent, develop and implement offerings across all of our target markets. They also maintain standard methodologies for our offerings and applications and provide expertise to support business development efforts.

12

Presentation

Revenues
We derive our revenues primarily from contracts for business and information technology solutions. Our contracts are generally on a fixed-price, time-and-materials or cost-reimbursable basis. With our fixed-price contracts, we believe that we have the ability to produce reasonably dependable estimates regarding the extent of progress towards completion. As such, revenues on these contracts are recognized using the percentage-of-completion basis of accounting based on the percentage of costs incurred in relation to total estimated costs to be incurred over the duration of the contract. These estimates are continuously reviewed during the term of the contract and may result in our revision of recognized revenues and estimated total costs during the period in which changes in circumstances are identified. Revenues on time-and-materials contracts are recognized to the extent of billable rates times hours delivered plus reimbursable expenses incurred. Revenues on cost-reimbursable contracts are recognized to the extent of costs incurred plus a proportionate amount of the fee earned.

Significant portions of our revenues are from contracts that include the sale of our proprietary software solutions, the majority of which relate to large systems integration projects that provide for the integration and customization of our core software. These long-term production-type contracts generally include the delivery of software, integration and customization services, training and maintenance. For these contracts, the entire contract value is generally recognized as revenue using the percentage-of-completion basis of accounting. Large systems integration projects with certain federal clients are structured in phases (e.g., base contract period plus option periods). Option periods for federal client contracts are typically exercised upon government appropriations and at the client’s discretion. These federal contracts require formal acceptance at the end of each phase. Phases may be on a time-and-materials and/or fixed-price basis. Since these federal clients only commit to one phase at a time, we recognize revenue by phase for these contracts.

We also enter into contracts for business purposes that we refer to as benefits-funded contracts. These contracts are similar to our other large systems integration fixed-price contracts; however, the amounts due to us are payable from actual monetary benefits derived by the client. Benefits-funded contracts are used solely in situations where the client receives tangible and quantifiable monetary benefits directly from the new system and processes we implemented. These clients have historically been state or city departments of revenue or taxation, with the systems implemented consisting of new integrated tax systems that enable the organizations to find incremental lost tax revenues. For these contracts, we recognize revenues only to the extent that we can predict, with reasonable certainty, that the benefit stream will generate amounts sufficient to fund the value upon which revenue recognition is based.

Less than ten percent of our revenues include the sale of off-the-shelf software for which there are no significant integration or modification services necessary. These contracts often bundle maintenance or other services along with the sale of the software. Maintenance and product support services sold with software generally provide for minor programming corrections, new releases and help-desk support. The terms of the maintenance agreements vary with each client but maintenance is generally sold for a twelve-month period with renewals occurring annually based upon renewal rates stated in the original contract. For contracts that include off-the-shelf software and maintenance or other services, we assign part of the contract value to each element of the contract based upon its relative fair value and recognize revenues for the license fee once the software has been delivered. Maintenance revenues are recognized ratably over the maintenance period and service revenues are recognized as services are delivered.

13

Additionally, we enter into contracts with clients that do not include the sale or integration of software. These contracts include general consulting or training and are typically performed on a time-and-materials or cost-reimbursable basis.

Certain of our contracts relate to systems that we implement and host for clients. Revenues are recognized on these contracts in accordance with the contractual terms on a straight-line or transaction-volume basis, as appropriate.

On all of our contracts, expense reimbursements, including those relating to travel and out-of-pocket expenses, are included in revenues, and an equivalent amount of reimbursable expenses are included in cost of revenues.

Operating Expenses and Gains
Our major types of operating expenses include the following:

	• Cost of Revenues include direct expenses to provide products and services to our clients such as compensation costs, travel and out-of-pocket expenses, costs for subcontractors, amortization of purchased and developed software for external sale to customers, product support and maintenance costs.

• Selling, General and Administrative (“SG&A”) expenses include expenses not directly related to the delivery of products or services such as compensation for support personnel, rent expense, costs for information systems, selling and marketing expenses, recruiting and training expenses, depreciation expense, and amortization expense for internal-use software. Prior to January 1, 2002 the amortization of goodwill was also included. Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” which was adopted January 1, 2002, requires the discontinuation of goodwill amortization.

	• Research and Development expenses include research and development expenses incurred as part of the software development cycle that are not capitalized.

	• Restructuring Charge includes expenses associated with implementing our formal restructuring plan, primarily relating to employee severance and abandoned facilities.

	• Software Asset Impairments include significant expenses associated with the write-down of certain software assets to current net realizable value.

	• Gain on Sale of Utilities Practice includes the proceeds, net of expenses, from the sale of our global utilities practice in line with our strategy to exit non-core businesses.

Interest Expense
Interest expense (net of interest income) is related to interest incurred on borrowings and fees on our revolving credit facility. It also includes interest expense related to our deferred compensation plan.

Other Income
Other income (net of other expense) includes activity not related to our primary business. For example, other income includes gains and losses on the disposal of assets and market gains and losses and premium expense on company-owned life insurance policies.

14

Loss on Equity Investments
Loss on equity investments reflects our share, as a joint venture investor, in the operating results of Competix, Inc.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. Application of these policies is particularly important to the portrayal of our financial condition and results of operations. Accounting policies and estimates that management believes are most critical to our financial condition and operating results pertain to revenue recognition, net realizable value of software, income taxes and variable compensation. We have discussed the application of these critical accounting policies with our Independent Auditors and the Audit Committee of our Board of Directors.

Revenue Recognition
Most of our revenues are generated from contractual arrangements, some of which are complex in nature. Many of these contracts require significant revenue recognition judgments, particularly in the areas of progress towards completion, multiple-element arrangements and, primarily with respect to our benefits-funded contracts, collectibility. Our contracts are generally on a fixed-price, time-and-materials or cost-reimbursable basis. Revenues on fixed-price contracts are recognized using the percentage-of-completion basis of accounting based on the percentage of costs incurred in relation to total estimated costs to be incurred over the duration of the contract. Revenues on time-and-materials contracts are recognized to the extent of billable rates times hours delivered plus reimbursable expenses incurred. Revenues on cost-reimbursable contracts are recognized to the extent of costs incurred plus a proportionate amount of the fee earned.

In using the percentage-of-completion basis of accounting for our fixed-price, including benefits-funded, contracts, we make important judgments in estimating total costs to complete the contracts in determining revenue recognition. These judgments underlie our determinations regarding overall contract value and contract profitability. As such, these estimates are continuously reviewed during the term of the contract and may result in our revision of recognized revenues in the period in which changes in circumstances are identified. Circumstances that may result in changes to recognized revenues include changes in estimates of costs required to complete an engagement, changes in staffing mix and changes in client participation, as well as other factors.

Our benefits-funded contracts are similar to our other large systems integration fixed-price contracts with the exception that the amounts due to us are payable from actual monetary benefits derived by the client. As such, these contracts require us to apply judgments in determining whether the full contract value will be funded and what the expected profitability on the contract will be. Benefits-funded contracts are used solely in situations where the client receives tangible and quantifiable monetary benefits directly from the new system and processes we implemented. For these contracts, we recognize revenues only to the extent that we can predict, with reasonable certainty, that the benefit stream will generate amounts sufficient to fund the value upon which revenue recognition is based.

15

Net Realizable Value of Software
We develop software for external sale and capitalize the associated software development costs once technological feasibility has been established. We regularly evaluate the net realizable value of capitalized software using the estimated, undiscounted, net cash flows of the underlying products. Asset balances that exceed the expected net realizable value are written off as Software Asset Impairments.

Income Taxes
Determining the consolidated provision for income tax expense, deferred tax assets and liabilities and related valuation allowance involves judgments. As a global company with subsidiaries in 16 foreign countries and the U.S., we are required to calculate and provide for income taxes in each of the tax jurisdictions where we operate. This involves estimating current tax exposures in each jurisdiction as well as making judgments regarding the recoverability of deferred tax assets. Tax exposures can involve complex issues and may require an extended period to resolve. Changes in the geographic mix or estimated levels of annual pre-tax income can affect the overall effective tax rate.

Variable Compensation
Variable compensation is a significant discretionary expense that is highly dependent upon management estimates and judgments, particularly at each interim reporting date. In arriving at the amount of expense to recognize, management believes it makes reasonable estimates and judgments using all significant information available. Expenses accrued for variable compensation are based on actual quarterly and annual performance versus plan targets and other factors. Amounts accrued are subject to change in future periods until annual results are finalized if future performance is below plan targets or the performance levels anticipated in prior periods.

16

Historical Results of Operations

The following table sets forth the unaudited percentage of revenues represented by items in our consolidated income statements for the periods presented. Certain amounts reported in previous years have been reclassified to conform with the 2002 presentation.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Revenues
Revenues for 2002 were $986.7 million, a decrease of $196.6 million, or 16.6%, compared to 2001. Revenues with U.S. clients declined 14.0% to $854.1 million, while revenues from international clients dropped 30.0% to $132.6 million. Revenues with international clients are primarily comprised of work with customers in the Communications, Media and Entertainment and Financial Services Institutions target markets across Europe, Asia and the Pacific Rim. This decline internationally is consistent with the decline in information technology spending in those industries overall. Business with international clients represented 13.4% and 16.0% of our total revenues in 2002 and 2001, respectively.

As a result of the difficult economic and uncertain political environment, our revenues declined in 2002. With the exception of the Federal Government Agencies target market, revenues declined in all of our target markets. See Note 18 of the consolidated financial statements in Part II, Item 8 of this Form 10-K for details. The revenue growth in the Federal Government Agencies target market reflected increased defense-related spending and several large-scale implementations of our federal financial management

17

solution Momentum®. All other target markets declined from the same period of the prior year as clients reduced or deferred their spending on information technology and consulting services due to the slowdown in the economy. Due to the global economic weakening in the telecommunications industry, our Communications, Media and Entertainment target market experienced the most significant decline, accounting for $124.7 million, or 63.4%, of the $196.6 million drop in revenues from 2001 to 2002. Our Financial Services Institutions and State and Local Governments and Education target markets represented $45.8 million and $21.4 million, respectively, of our revenue decline from 2001 to 2002. For 2002, the portion of our total revenues derived from our Federal Government Agencies and State and Local Governments and Education target markets (collectively referred to as Public Sector) was 62.4% in 2002 and 53.8% in 2001. Our Communications, Media and Entertainment and Financial Services Institutions target markets accounted for 19.6% and 12.3%, respectively, of our total 2002 revenues. Approximately 85% of our consolidated revenues came from clients with whom we had performed work previously.

Operating Expenses
Operating expenses in 2002 were $944.2 million, a decrease of $207.3 million, or 17.5%, from 2001. As a percentage of revenues, operating expenses decreased from 97.3% in 2001 to 95.7% in 2002. During 2001 and 2002, the Company took significant charges for restructuring and software asset impairments and recorded gains on the sale of our utilities practice (2002) and a contract litigation settlement (2001). Excluding these items, operating expenses as a percentage of revenues were 93.5% in 2002 and 93.2% in 2001. We continue to implement cost management initiatives aimed at keeping operating costs in line with our forward view of the market.

Cost of Revenues
Cost of revenues were $582.0 million in 2002, a decrease of $140.5 million, or 19.4%, compared with 2001. Cost of revenues declined due to the reduction of project work for customers due to the slowdown in the global economy and information technology spending in particular. As a percentage of revenues, cost of revenues were 59.0% in 2002 versus 61.1% in 2001. During 2002, as a result of our evaluation of outstanding receivables at December 31, 2002, we recorded $8.7 million less to bad debt expense in comparison to 2001. This decrease was related to the overall improvement in the status and estimated collectability of our receivables. We estimate that our allowance for doubtful accounts is adequate to cover any potential exposure to unpaid accounts receivable relating to our customers in the telecommunications and other industries that have been experiencing declining financial performance. The 2002 decrease in cost of revenues was partially due to an overall reduction in variable compensation of $9.2 million compared to 2001. It is also representative of the overall decline in revenue. In 2001, cost of revenues included a $5.3 million loss reserve in connection with certain client engagements while 2002 included none. These decreases were partially offset by increased amortization expense of $3.9 million from 2001 to 2002 for purchased software.

Selling, General and Administrative
SG&A expenses were $315.7 million in 2002, a decrease of $42.9 million, or 12.0%, compared with 2001 and an increase as a percentage of revenues from 30.3% for 2001 to 32.0% for 2002. The decline was primarily attributable to reductions in variable compensation and other staff-related expenses due to our reduced headcount and cost management efforts throughout 2002. The decline was partially offset by higher insurance costs, increased business development expenses attributable to our investment in a new sales force, and $1.9 million of consulting fees related to the analysis and preparation of amended Federal income tax returns for the years 1996 through 2000.

Research and Development
Research and development expenses were $24.8 million in 2002, an increase of $3.0 million, or 13.6% over 2001 and an increase as a percentage of revenues from 1.8% in 2001 to 2.5% in 2002. This increase

18

was primarily due to the inclusion of $6.7 million of expenses, beginning in the second quarter of 2002, to support our customer care and billing software system, Tapestry®. The increase was partially offset by the transition of several projects from research and development to capitalized development.

Restructuring Charge
In a continuing effort to match our workforce with market conditions and align our personnel with new business strategies, we incurred a $22.1 million restructuring charge in 2002, or 2.2% of revenues. The charge included $17.6 million for severance and severance-related costs and $4.5 million related to changes in estimates associated with our liability for the closure and consolidation of facilities, primarily attributable to declining real estate market conditions and the timing of anticipated subtenant rental agreements. Restructuring costs were $59.8 million for 2001 or 5.1% of revenues. The charge included $37.8 million for severance and severance-related costs, $20.5 million for the consolidation of facilities and $1.5 million for other related restructuring costs.

Software Asset Impairments
Software Asset Impairments were $19.6 million in 2002 compared to $29.8 million in 2001. The entire $19.6 million charge in 2002 and $19.2 million of the charge in 2001 was for the write-down of software assets related to our large-scale, enterprise-wide telecommunications billing system, Tapestry®, based on a significant decline in spending in the Communications, Media and Entertainment target market which indicated the assets’ net realizable values were less than their unamortized, capitalized costs. The remaining book value of the Tapestry® asset was $11.3 million as of December 31, 2002. In addition, in 2001, we recorded a $10.6 million charge related to a decline in expected net realizable values of certain other software assets, as well as for software that no longer fit our business strategies.

Gain on Sale of Utilities Practice
In 2002 we sold our global utilities practice for a net gain of $19.9 million. The divesture was in line with our strategy to exit non-core businesses and generate capital to invest in areas of strategic focus. The assets sold were limited to contracts, certain intellectual property rights, accounts receivable, and a negotiated transfer of certain key employees.

Interest Expense
Interest expense, net of interest income, decreased $4.3 million, or 92%, from 2001 to 2002 due to lower interest expense because we had no outstanding borrowings under our credit facility or former term loan agreements during 2002. As of December 31, 2002, we had no outstanding borrowings. Net interest expense for 2002 included $1.4 million of interest income attributable to amended prior years Federal income tax returns claiming additional research and experimentation tax credits. The $1.4 million of interest income was offset by interest expense related to our deferred compensation program.

Other Income
Other income was negligible in 2002 compared to $2.8 million in 2001. The decline was due to the absence in 2002 of gains on life insurance policies of $1.4 million and gains on the disposition of space leases of $1.4 million that were included in other income in 2001.

Income Taxes
Our effective company-wide income tax rate decreased from 41% for 2001 to 33% for 2002. The decline was attributable to expected refunds on prior years’ Federal income tax returns as a result of additional research and experimentation tax credits. We estimate our effective tax rate for 2003 will be approximately 41%.

19

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

Revenues
Revenues for 2001 were $1,183.3 million, a decrease of $96.0 million, or 7.5%, compared to 2000. Revenues from U.S. clients declined 8.2% to $993.7 million, while revenues from international clients dropped 3.4% to $189.6 million. Revenues with international clients were primarily comprised of work with customers in the Communications, Media and Entertainment and Financial Services Institutions target markets across Europe, Asia and the Pacific Rim. Business with international clients represented 16.0% and 15.3% of our total revenues in 2001 and 2000, respectively.

In 2001, revenues declined in all of our target markets with the exception of Communications, Media and Entertainment revenues, which were flat. See Note 18 of the consolidated financial statements in Part II, Item 8 of this Form 10-K for further discussion. For the first half of 2001, revenues increased $12.9 million, or 2.0%, 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 revenues in the second half of 2001. During the second half of 2001, revenues declined $108.9 million, or 16.8%, when compared to the second half of 2000. In addition, revenues 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 our consolidated revenues came from clients with whom we had performed work previously.

Operating Expenses
Our operating expenses in 2001 were $1,511.5 million, a decrease of $49.1 million, or 4.1%, from 2000. As a percentage of revenues, operating expenses increased from 93.8% in 2000 to 97.3% in 2001. Total operating expenses before restructuring, software asset impairments and contract litigation settlement for 2001 were $1,102.9 million, a decrease of $64.4 million, or 5.5%, compared with 2000. As a percentage of revenues, operating expenses before restructuring, software asset impairments and contract litigation settlement increased from 91.2% in 2000 to 93.2% in 2001.

Cost of Revenues
Cost of revenues were $722.5 million in 2001, a decrease of $10.6 million, or 1.4%, compared with 2000. Amortization expense for purchased and internally developed software increased $10.7 million compared with 2000. The increase resulted in large part from the inclusion in 2001 of a full year of amortization expense for Tapestry®, which finished development in late 2000. In addition, in 2000 we received a $0.9 million refund related to a software royalty fee that the Company had previously recorded to cost of revenues related to the Bezeq contract. These net increases in expense were offset by $10.1 million in lower variable compensation during 2001. In addition, cost of revenues declined due to the slowdown or conclusion of project work for several large customers. As a percentage of revenues, cost of revenues was 61.1% in 2001 versus 57.3% 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 $358.6 million in 2001, a decrease of $46.1 million, or 11.4% compared with 2000. As a percentage of revenues, SG&A declined from 31.6% in 2000 to 30.3% in 2001. The decline was attributable primarily to reductions in variable compensation and other staff-related expenses resulting from cost management efforts, including a decrease in our headcount, to bring costs more in line with revenue levels in the business. In addition, in 2001 we recovered court costs of $0.8 million, previously recorded to SG&A, as part of our settlement of the Bezeq contract. This amount slightly offset our other SG&A expenses.

20

Research and Development
Research and development expenses were $21.8 million in 2001, a decrease of $7.7 million, or 26.1%, compared with 2000. The decrease was driven by the transition of several projects related to our Federal Government Agencies and State and Local Government and Education target markets from research and development to capitalized development. The decrease was also due to a decline, in fiscal year 2001, of non-capitalized development costs on our next generation customer care and billing software, Tapestry®.

Contract Litigation Settlement
Contract litigation settlement income was $41.0 million in 2001 compared to $33.2 million of expense in 2000. A charge of $35.2 million recorded in 2000 was related to our settlement of a lawsuit filed by the State of Mississippi. This was offset by insurance recoveries of $2.0 million related to a settlement of the Bezeq contract that occurred in 2000. The income of $41.0 million, net of costs, recorded in 2001, resulted from the resolution of our dispute with National Union Fire Insurance Company described in Note 17 of the consolidated financial statements in Part II, Item 8 of this Form 10-K.

Interest Expense
Interest expense (net of interest income) was $4.7 million in 2001 compared to $3.4 million in 2000. Interest expense increased 37.7% from 2000 to 2001 due to increased average debt and higher credit facility fees despite lower average interest rates. In addition, we accelerated the payment of our 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, we had no outstanding borrowings.

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. Our share of Competix’s losses was $3.0 million in 2001 compared to $5.9 million in 2000. In 2000, our loss of $5.9 million was partially offset by a $3.5 million gain on the sale of a portion of our investment. As of December 31, 2001, we had no remaining basis in the Competix venture.

Liquidity and Capital Resources

Sources of Cash

Our primary sources of liquidity are cash flows from operations, our $160 million bank credit facility and available cash reserves of $136.2 million as of December 31, 2002.

Bank Credit Facility

During 2002, we had an unsecured revolving credit facility with a group of lenders that provided borrowing capacity not to exceed $120 million, under which no borrowings were outstanding during 2002. This bank credit facility was available for general corporate purposes, including working capital borrowings, capital investments and other obligations. This facility was replaced on November 13, 2002, with a new three-year unsecured revolving bank credit agreement with a group of lenders that provide borrowings not to exceed $160 million. This credit facility is available for working capital borrowings, capital expenditures, acquisitions, and other corporate purposes. At December 31, 2002 no borrowings were outstanding under this new bank credit facility. During 2002, we complied with all covenants included in both credit facilities.

AMS may borrow funds under the new bank credit agreement in the approved currencies, subject to certain minimum amounts per borrowing. Interest rates on such borrowings will generally range from

21

LIBOR plus 1.13% to 1.75% per annum, depending on our debt-to-EBITDA ratio, as defined in the agreement. We are required to pay a facility fee ranging from 0.50% to 0.65% per annum on the total facility based on our debt-to-EBITDA ratio.

The new bank credit agreement includes covenants relating to the maintenance of certain financial ratios, and imposes restrictions on our ability to pay dividends, repurchase stock, or make acquisitions, divestitures and investments. The new bank credit agreement expires on November 13, 2005.

Cash Flow for the Years Ended December 31, 2002, 2001 and 2000

Our balance of cash and cash equivalents was $136.2 million and $53.3 million at December 31, 2002 and 2001, respectively, an increase of $82.8 million. This increase was due to cash provided by operating activities during 2002 including a $19.9 million net gain on the sale of our global utilities practice, offset primarily by investments in equipment and purchased and developed software.

Net cash provided by operating activities was $105.0 million during 2002, a decrease of $7.2 million from 2001. This decrease was primarily attributable to a significant receipt in 2001 of $41.0 million (net of costs) from a contract litigation settlement with National Union Fire Insurance Company. Offsetting this receipt in 2001, were higher payments for employee variable compensation in 2001 as compared to 2002. Net cash used in investing activities was $31.5 million for 2002, compared to $50.0 million for 2001. The decline primarily was due to reduced investments in the purchase of property and equipment and a reduced rate of investment in a strategic alliance in the Financial Services Institutions target market. Net cash provided by financing activities was $5.2 million for 2002, compared to net cash used in financing activities of $49.4 million for 2001. The increase in cash provided by financing activities resulted from no payments on borrowings occurring in 2002 and an increased inflow of cash from stock option exercises and the Employee Stock Purchase Plan.

Our total cash and cash equivalents at December 31, 2001 increased $10.1 million, or 23%, from $43.2 million at December 31, 2000. This increase was due to cash provided by operating activities, including $41 million (net of costs) from the contract litigation settlement with National Union Fire Insurance Company, offset by investing and financing activities. Investing activities primarily included the purchase of equipment and the purchase and development of computer software. Financing activities included the payoff of our line of credit and the accelerated repayment of all our outstanding term loans, which reduced our debt to zero as of December 31, 2001.

Net cash provided by operating activities was $112.1 million during 2001, an increase of $109.9 million from 2000. This increase was primarily due to a large payment of $35.2 million in 2000 for the settlement of our contract dispute with the State of Mississippi. In 2001 we recovered these costs along with certain other expenses, through a $41.0 million net settlement with our insurance provider. In addition, variable compensation payments were approximately $27 million higher in 2000 versus 2001. Net cash used in investing activities declined $51.1 million in 2001 from $101.1 million at December 31, 2000 due to reduced investments in acquisitions, primarily $20.0 million for Synergy in 2000, and the purchase and development of software. Net cash used in financing activities was $49.4 million in 2001, compared to cash provided by financing activities of $36.7 million during 2000. Cash provided by financing activities during 2000 included proceeds from our line of credit of $88.0 million, offset by repayments of $59.1 million on our term loans and line of credit. Cash used in financing activities during 2001 was primarily due to the $51.5 million repayment, net of borrowings, of all of our outstanding debt.

22

Significant Client Receivables

We enter into large, long-term contracts and, as a result, periodically maintain significant receivable balances with certain major clients. At December 31, 2002, and 2001 we had approximately $40.5 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 Part II, Item 3, Legal Proceedings of this Form 10-K, for a discussion of pending litigation involving the Thrift Board. At December 31, 2002 and 2001 our three largest individual clients, under numerous contracts, accounted for approximately 62.4% and 52.5% of our accounts receivable. No other single customer represented greater than ten percent of outstanding receivables at the end of fiscal 2002 or 2001.

New Accounting Pronouncements

On January 1, 2002, AMS adopted Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which addresses the financial accounting and reporting for the impairment of long-lived assets. This statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” SFAS 144 also supersedes Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” The adoption of this Statement did not have a material effect on our financial statements.

In June 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” (“SFAS 146”) which was effective January 1, 2003. SFAS 146 nullifies Emerging Issues Task Force (“EIFT”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring).” SFAS 146 requires that an exit or disposal activity-related cost be recognized when the liability is incurred instead of when an entity commits to an exit plan. We do not believe that the adoption of this Statement will have a significant impact on our financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure an Amendment of FASB Statement No. 123,” (“SFAS 148”) which was effective for fiscal years ending after December 15, 2002. SFAS 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”) to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The impact of the adoption of SFAS 148 is the addition of a significant accounting policy in Note 1 to our annual consolidated financial statements. In addition, the disclosures previously only included in our annual report on Form 10-K also will be reported in our quarterly reports on Form 10-Q beginning in 2003.

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34” (“FIN 45”). FIN 45 elaborates on the disclosures to be made by a guarantor about its obligations under certain guarantees that it has issued. This Interpretation also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and the

23

disclosure requirements are effective for financial statement periods ending after December 15, 2002. We do not believe that the adoption of FIN 45 will have a significant impact on our financial statements.

In November 2002, the FASB’s EITF finalized EITF Issue 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). EITF 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. It also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in an arrangement. To the extent that a deliverable in an arrangement is within the scope of other existing higher-level authoritative literature, EITF 00-21 does not apply. AMS must adopt the provisions of EITF 00-21 for new contracts entered into on or after July 1, 2003. We are presently analyzing the potential impact of applying these provisions to our future contracts, but do not believe that the adoption of EITF 00-21 will have a significant impact on our financial statements.

Outlook

We have a number of strategic imperatives for the coming year which include:

Scale. As our customers grow, they expect us to grow with them. They need to know that we have the depth of resources to deliver. We will achieve scale through a combination of organic growth and strategic acquisitions.

Open application architecture. This involves embracing open standards in our product design so that we can easily integrate off-the-shelf software in our solutions.

Partnerships. This means partnering at all levels – with customers, with our traditional competitors, and with independent software vendors and suppliers.

Annuity revenue streams. We are looking to increase our revenues from multi-year annuity revenue streams. This involves growing our business in managed services and process outsourcing. We can also create multi-year revenues through innovative benefits-funded contracting in both the public and private sector – a concept we pioneered in our State and Local Government and Education target market.

Growth. On balance, the outlook for information technology services appears to show potential for a modest uptick in the coming year. In order to capitalize on the opportunities, we must stay on strategy and continue to execute on our commitments to customers and investors.

ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in foreign currency exchange rates, interest rates and other marketable securities. We manage our exposure to these market risks through the limited use of derivative financial instruments coupled with other strategies. For purposes of specific risk analysis, we use sensitivity analysis to determine the effects that market risk exposures may have.

Foreign Currency Risk

We conduct our business in a wide variety of currencies and are therefore exposed to foreign currency risk in the ordinary course of business. Approximately 13.4% of our total revenues in 2002, 16.0% in 2001, and 15.3% in 2000 were derived from international clients. Our 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

24

some risk that profits will be affected by foreign currency exchange fluctuations. Our primary foreign currency exposures as of December 31, 2002 and 2001 included the Euro and British Pound. In a further effort to mitigate foreign currency exchange risk, we have established a notional cash pool with a European bank. This arrangement allows us to better utilize our cash resources among our subsidiaries, thereby mitigating foreign currency conversion risks.

In the past, AMS has employed limited hedging of intercompany transactions through derivative instruments (foreign currency swap contracts); however, as of December 31, 2002, we had no such outstanding derivative contracts. To perform the sensitivity analysis, we assess the risk of loss in fair values from the effect of a hypothetical ten percent change in the value of foreign currencies, assuming no change in interest rates. As of December 31, 2002 and 2001, the result of a uniform ten percent decrease in the values of foreign currency exchange rates against the U.S. dollar for intercompany exposures with all other variables held constant would result in a decrease in the fair value of our foreign currency-denominated operating revenues and expenses of $0.5 million and $1.8 million, respectively.

Interest Rate Risk

Our earnings are affected by changes in interest rates due to the impact those changes have on our interest income from cash and short-term investments and interest expense related to our deferred compensation liability or any borrowings. The interest rate risk associated with our investing activities at December 31, 2002 and 2001 is immaterial in relation to our consolidated financial position, results of operations and cash flows. We have not used derivatives instruments to alter the interest rate characteristics of our investment holdings, deferred compensation liability or borrowings.

Marketable Securities Risk

Our earnings are affected by changes in the market price of marketable securities in our deferred compensation assets. As of December 31, 2002, the effect of a hypothetical ten percent decrease in market price would result in a decrease in other income of $1.0 million. As of December 31, 2001, the effect of a hypothetical ten percent decrease in the market would result in a decrease in other income of $1.9 million. We have not used derivatives instruments to alter the portfolio characteristics of our marketable securities in our deferred compensation assets.

25

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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, 2002 and 2001, and the related consolidated income statements, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2002. 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 audits 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, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 7 to the financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

DELOITTE & TOUCHE LLP

McLean, Virginia
February 20, 2003

26

American Management Systems, Incorporated
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)

27

American Management Systems, Incorporated
CONSOLIDATED BALANCE SHEETS
(In thousands)

(continued)

28

American Management Systems, Incorporated
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

29

American Management Systems, Incorporated
Consolidated Statements of Changes in Stockholders’ Equity
(In thousands)

30

American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)