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)
Delaware (State or other jurisdiction of incorporation)		54-0856778 (I.R.S. Employer Identification Number)
	4050 Legato Road Fairfax, Virginia (Address of principal executive office)	22033                   (Zip code)

CONTENTS

PART I

ITEM 1.           BUSINESS

OVERVIEW

American Management Systems, Incorporated is a global business and IT consulting firm for governments, financial services, and communications industries. We use the terms “AMS,” “we,” “our,” and “us” to refer to American Management Systems, Incorporated and its subsidiaries. AMS delivers IT products and services, business consulting, outsourcing solutions, and systems integration expertise. The combination of intellectual property (IT ingenuity) and industry expertise (industry IQ) provides directional leadership for our customers and is our competitive differentiator in the marketplace. We apply our IT ingenuity and industry IQ to create transformational end-to-end solutions that deliver measurable results to our customers.

AMS was incorporated in the State of Delaware on February 2, 1970, and is traded on the Nasdaq National Market under the symbol AMSY. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements for our annual stockholders’ meeting, 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 Web site at www.ams.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

On March 10, 2004 we entered into a definitive merger agreement with CGI Group Inc. and CGI Virginia Corporation (collectively “CGI”), a large Canadian independent information technology and business process services firm, and an asset purchase agreement with Arlington-based CACI International Inc and certain of its affiliates (collectively “CACI”). Under the terms of the agreements, CGI commenced a cash tender offer to acquire all of the outstanding shares of AMS for $858 million, or $19.40 per share. CACI will purchase the assets of AMS’s U.S. Defense and Intelligence business for $415 million in cash subject to certain post-closing adjustments. These transactions have been unanimously approved by the board of directors of each of CGI, CACI and AMS and are subject to regulatory and other customary closing conditions. The merger and asset acquisition are expected to close during the second quarter of 2004.

Global Operations

In order to serve customers outside of the United States, AMS has undertaken international expansion by establishing subsidiaries or foreign branches. Exhibit 21 of this Form 10-K provides a listing of AMS’s worldwide subsidiaries. Revenues attributable to our international customers were $130.6 million in 2003, $132.6 million in 2002, and $189.6 million in 2001. Additional information related to revenues, net (loss) income, total assets, significant customers and long-lived assets is provided in the consolidated financial statements and in Note 19 of the financial statements appearing in Part II, Item 8 of this Form 10-K.

INDUSTRY GROUPS

AMS’s focus on specific industries enables us to offer tailored solutions that leverage in-depth domain knowledge and IT expertise to meet our customers’ business needs. For more than 30 years, AMS has been a committed partner in helping evolve the industries we serve. We operate as one segment and focus on customers in specific industries, referred to as our target markets. We have the following key target markets: Federal Government Agencies; State and Local Governments; Communications, Media and Entertainment; and Financial Services Institutions. We collectively refer to Federal Government Agencies and State and Local Governments as the Public Sector.

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Public Sector

AMS helps government customers create a true digital environment that delivers greater efficiency, enhanced citizen service, reduced costs, and improved accountability and compliance. AMS specializes in applying leading proprietary and partner software solutions for digital government services; enterprise resource planning; environmental and regulatory solutions; health, human services, and labor; homeland and enterprise security; and tax, revenue, and collections.

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Digital Government Services—AMS offers services to transform governments into next-generation enterprises through strategic consulting, business transformation, enterprise architecture, enterprise portal development, business intelligence, and data warehousing.

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Enterprise Resource Planning—AMS provides comprehensive, end-to-end services for revenue management, financial and budget performance, procurement and enterprise contract management, grants, human resources management and payroll, and enterprise integration. AMS-developed offerings in support of state and local governments include AMS Advantage® Financial, Procurement and HR. For Federal civilian and defense customers, AMS delivers its proprietary Momentum® Financial Management system, as well as Momentum Acquisitions. In addition, AMS also offers performance management and performance budgeting software solutions to federal, state and local government customers.

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Environmental and Regulatory Solutions—AMS offers solutions to streamline complex environmental processes in the areas of permitting, compliance, enforcement processes, and performance management. AMS’s proprietary software applications that support environmental and regulatory processes include TEMPO® and ProSteward™.

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Health, Human Services and Labor—AMS provides solutions that enable human services agencies, healthcare organizations and labor agencies to leverage technology investments for more cost-effective service delivery. Our solutions reduce costs, improve effectiveness and maximize federal funding opportunities to increase our customers’ available financial resources. AMS offers market-leading solutions in child welfare, Temporary Assistance for Needy Families (“TANF”), child support and case management. These solutions are based in part on public domain software.

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Homeland and Enterprise Security—AMS delivers a comprehensive roadmap for implementing a security policy, protecting and monitoring applications, and recovering from lost operations. In support of homeland security, AMS provides identity management, credential assurance and fraud detection.

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Tax, Revenue and Collections—AMS offers tax agencies a total tax system called revenue enterprise management. Our solutions enable government agencies to increase collections and improve customer service through innovative technology, and are proven in both the public and private sectors. AMS’s proprietary software applications employed in support of tax, revenue and collections include AMS Advantage Revenue, CACS® for Government, as well as Strata® for data analysis.

Communications, Media and Entertainment

We support our Communications, Media, and Entertainment customers to secure revenue, improve efficiency and increase customer loyalty. AMS specializes in applying leading proprietary and partner solutions for billing and operational support systems (“OSS”) integration, business intelligence and customer interaction, credit risk management and mobile/wireless data services.

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Billing and OSS Integration—AMS has extensive, hands-on experience delivering complex billing systems and OSS for communications providers around the globe. Our solutions span the entire billing/OSS spectrum and combine robust consulting and integration services with state-of-the-art software products and industry-recognized partner solutions to meet the unique needs of each customer. AMS proprietary offerings in support of billing and OSS Integration include: Quintessent®, Tapestry® and eINcent™.

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Business Intelligence and Customer Interaction—AMS offers expert consulting and powerful tools that help improve the customer experience and drive customer profitability. Our comprehensive solutions help our customers tailor retention initiatives, marketing offers, rate plans, and customer care policies to achieve measurable and sustained business benefits. AMS business intelligence and customer interaction solutions may, at times, incorporate our proprietary software, Strata.

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Credit Risk Management—AMS’s market-leading credit risk management solutions help our customers reduce bad debt, control operating expenses, and improve cash flow by aligning their business processes, technology enablers, and organizational structure to maximize profitability while increasing understanding of their customers’ portfolios across the entire credit life cycle. These solutions may include AMS’s proprietary software, CACS, which supports collections, and Strata, which supports decisioning.

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Mobile/Wireless Data Services—AMS offers customized mobile data solutions incorporating 2.5G and 3G technologies that support wireless operators developing new services to retain customers, improve margins and deliver results. These solutions may incorporate AMS proprietary software eINcent and Tapestry.

Financial Services Institutions

We consult with customers in the financial services industry to reduce costs, optimize operational processes, and extend competitive position in existing and new markets. AMS specializes in applying leading proprietary and partner solutions in the areas of consumer credit, customer relationship management, insurance and retirement, operational risk management, trade finance and cash management, and wealth management and financial planning.

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Credit Solutions—A leading provider of consumer banking and credit business solutions, AMS enhances credit processing environments so our customers can deliver faster service with more consistency, and tailor cost-effective strategies to valued customer segments. AMS solutions are built on extensive experience in the design, implementation, and change management of consulting and technology solutions that span across the entire credit life cycle. Proprietary software supporting credit solutions includes ACAPS® (originations), CACS (collections), ACLS® (servicing) and Strata (decisioning).

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Customer Relationship Management (“CRM”)—With our enterprise CRM solutions, AMS links the analytical with the operational to provide real-time advanced decisioning at each point of contact. AMS also designs a sustainable business strategy and infrastructure our customers can rely on for the future.

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Insurance and Retirement Services—From automating key business processes through our workflow expertise and solutions, to implementing our business process renewal methodology, AMS helps insurance and retirement services providers improve business performance and maximize returns on their technology investments.

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Operational Risk Management—From full-scale solutions—such as strategic study, gap analysis, general design and implementation—to smaller projects that apply cutting-edge risk concepts, AMS tailors its end-to-end operational risk framework to help our customers navigate the challenging and evolving regulatory landscape. AMS extends our partnership beyond project completion, providing assistance during the compliance approval process. These solutions may include AMS’s proprietary software, Strata, which supports decisioning.

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Trade Finance and Cash Management—AMS fully automates and integrates international trade services operations to help customers increase top-line revenues, service new markets and gain operating efficiencies. We integrate a hosted set of applications that maximize business performance through improved operational efficiencies and outstanding customer service. AMS’s two proprietary offerings for trade management include AMS Tradelinetm and Proponixsm.

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Wealth Management and Financial Planning—With AMS’s customer life-cycle methodology, we seamlessly integrate mission-critical customer-facing and backoffice capabilities so our customers can deliver strategic financial planning offerings and develop follow-up products and services tailored to meet customer needs.

CUSTOMERS

AMS Public Sector customers include U.S. defense, military, and civilian agencies and civilian government contractors; state and local governments; as well as many universities and school districts. Our Commercial Sector customers include the world’s leading communications companies (local exchange carriers, integrated communications providers, Internet service providers, cable companies, and wireless operators as well as content, media and entertainment companies) and global financial services institutions (banking, insurance, retail and capital investment and other financial firms).

Customers First

Customer satisfaction is our top priority. In fiscal year 2002, we implemented the Customers First program, which allows AMS customers to determine how our performance will be measured at the onset of an engagement. Throughout the engagement, AMS’s employees work with the customer to ensure the established criteria are being met.

This program is a competitive differentiator for AMS. In its second year, our customer survey found that we have a customer loyalty index of 77 percent, 33 percent higher than the industry norm. The loyalty index is compared to normative data for 200 companies in the business and IT consulting industry, provided by the National Business Research Institute.

EMPLOYEES

Our ability to produce results for our customers is heavily dependent on building a high-performance culture that attracts and retains high-quality employees. We are committed to the professional development of our employees through a variety of programs including AMS University, leadership development, and project management training. Voluntary turnover rates are stable. The annualized voluntary turnover rate for total staff in 2003 was 11.5%.

Since 2001, we have carried out targeted restructuring programs aimed at rebalancing and right-sizing our workforce while recruiting individuals with the skill sets necessary to meet our changing needs. As of February 26, 2004, we have approximately 6,500 employees worldwide. AMS’s employees are not represented by any labor union.

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STRATEGY AND EXECUTION

In 2002, we embarked on a new strategy that encompasses five strategic imperatives that are still relevant today to help us align and execute our business plan for measurable results:

1. Scale—Targeting large customers that award big contracts, and pursuing skill-based acquisitions;

2. Growth—Achieving profitable revenue growth and generating shareholder value;

3. Partnering—Building strategic partnerships for scale and access to untapped revenue streams;

4. Reduce dependency on closed architecture—Integrating both proprietary software and commercial off-the-shelf software to meet customer needs; and

5. Build and maintain annuity revenue streams—Capturing multi-year revenue streams that come from managed services (business process outsourcing and managed applications).

ACQUISITION OF VREDENBURG AND SALE OF OUR UTILITIES PRACTICE

In August 2003, we completed the acquisition of R.M. Vredenburg & Co. (“Vredenburg”), a leading provider of professional and technical services to the U.S. Department of Defense and U.S. intelligence communities. The purchase provided access to additional government contract vehicles and added strategic capabilities in critical infrastructure protection, sophisticated document management technologies and new program management expertise.

In December 2002, we completed the sale of our global utilities practice to Wipro, Ltd. The agreement included the transfer of customer contracts, intellectual property rights and accounts receivable. The sale allowed us to exit a non-core business and add to our capital base to focus on key areas of opportunity.

PARTNERSHIPS

We continually strive to identify and cultivate relationships that provide innovative solutions to our customers’ most pressing business issues. Our approach to partnering with other companies is to identify those companies that strategically extend our capabilities and have a reputation of producing results. These best-in-class technology firms include IBM, Oracle, BEA, Microsoft, FileNet, webMethods, Hewlett-Packard and Sun Microsystems.

INTELLECTUAL PROPERTY

In fiscal year 2003, we invested $64.9 million in software product development ($51.9 million of which was capitalized and $13.0 million was expensed as R&D). This investment was predominantly to refresh a core set of our proprietary products: AMS Advantage ERP for state and local government, Momentum® Enterprise Solution for federal agencies, Strata for decision management, CACS for collections and recovery, and ACAPS for enterprise originations. These applications are now web-enabled and written in open languages to more easily integrate with other leading software. Our expenditures for product development were $51.0 million in 2002 and $48.8 million in 2001, which included $24.8 million and $21.8 million of expensed R&D, respectively.

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Our proprietary products may be licensed as stand-alone applications, as elements of custom solutions, or integrated with a variety of other systems as part of an enterprise architecture. In addition to proprietary software, we have developed proprietary methodologies, techniques and practices.

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.

To leverage the investment in our intellectual property, reduce costs and improve efficiency, AMS plans to centralize all of our software engineering activities in 2004. We will utilize our own near-shore capabilities in Canada, offshore capabilities in Spain and a newly established development center in Poland. We believe this will provide AMS with a competitive advantage and flexibility to partner with selected offshore companies where appropriate.

While AMS’s various intellectual property rights are valuable and important to our success, we believe our business as a whole is not materially dependent on any particular patent, trademark or license.

COMPETITION

The business and IT consulting industry is highly competitive and rapidly evolving, with a number of companies that offer similar services to those we provide. We compete with companies that offer systems consulting and integration, business consulting, application software, outsourcing and general IT services. Some of our competitors include Accenture, IBM, EDS, ACS, BearingPoint and Computer Sciences Corporation.

We believe we have a strong market position with a large installed base of products and healthy customer relationships, leading domain expertise, and products that customers view as differentiated from our competition. However, some of our competitors may have greater technical, financial and marketing resources than we do. These competitors may be able to offer a broader portfolio of products and services; they may also be in a position to more quickly take advantage of emerging technologies, undertake more extensive marketing campaigns, adopt more aggressive pricing policies, and have more resources to hire and retain highly-skilled professionals.

CONTRACTS

A significant portion of our contracts are for large systems integration projects that often provide for the integration and customization of our 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 customer acceptance at the end of each phase. More often, these phases are negotiated and contracted at the same time.

AMS pioneered an innovative approach called benefits-funding for our state and city revenue or taxation customers to finance their projects. This type of arrangement is generally contracted based on a fixed price; however, the amounts due to us are payable from actual monetary benefits derived by the customer. Our experience in leading this type of pay-for-performance contracting is enabling us to target other industries as they begin to embrace this model.

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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 not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, 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 on as representing our estimates or views as of any subsequent date.

RISK FACTORS

Risks Related to Our Industry

The recent economic downturn has caused, and future economic downturns may cause, our revenues to decline.
Our revenues declined $25.1 million during fiscal year 2003. Although our quarterly results have indicated some strengthening in our markets, 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 reduced costs through targeted restructuring and aligned our workforce with changing market conditions and new business strategies. As a result of these efforts, AMS is right-sized against the scale of our 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 customers, which is affected by economic conditions, affects our results of operations. We cannot predict the impact that the recent global economic downturn will have on our future revenues, nor can we predict when economic conditions will improve. During an economic downturn, our customers and potential customers often cancel, reduce or defer existing contracts and delay entering into new engagements. In general, companies also decide to undertake fewer IT 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.

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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 customer 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 customer 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 IT 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 customers 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 customer 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. In addition, many of our Public Sector contracts require us to employ highly experienced personnel who have security clearances. Security clearances are sometimes difficult and time consuming to obtain. To attract and retain the number of employees we need to grow our business, we may have to increase our compensation levels or incur higher recruiting costs in the future. This would adversely affect our operating margins.

For 2003, our annual voluntary turnover rate for total staff was approximately 11.5%. If we were to experience the loss of a significant number of our professionals in the future, it could adversely affect our operating results, including our ability to obtain and successfully complete important customer engagements, effectively compete, or grow our business.

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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 39.3%, 34.8%, and 28.9% of our revenues in 2003, 2002 and 2001, 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 customer 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 customers, 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 customer expectations, or our reputation or relationships with one or more of our key customers, 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 customers, or the loss of one or more of these customers, would have a material adverse effect on our revenues, profitability and cash flow.

During 2003 and 2002, 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. From 2002 to 2003 we experienced a $25.1 million drop in consolidated revenues, largely due to lower revenues of $18.4 million 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:

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curtailment of the federal government’s use of consulting and technology services firms;

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a significant decline in spending by the federal government, in general, or by specific departments or agencies in particular;

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the adoption of new laws or regulations that affect companies that provide services to the federal government;

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delays in the payment of our invoices by government payment offices; and

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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.

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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 customer. 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 customers with short notice. Our customers typically retain us on a non-exclusive, engagement-by-engagement basis, rather than under exclusive long-term contracts. Generally, our customers 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 customer projects involve multiple engagements or phases, and there is a risk that a customer may choose not to retain us for additional phases of a project or that a customer 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 customer or the economy. 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 customers 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 customers with rights and remedies not typically found in commercial contracts. These rights and remedies allow government customers, 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 on 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 customer 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 customer 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.

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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:

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our customers’ perception of our ability to add value through our services;

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introduction of new services or products by us or our competitors;

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pricing policies of our competitors and other competitive factors; and

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general economic conditions.

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

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our ability to transition employees from completed projects to new engagements;

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our ability to forecast demand for our services and thereby maintain an appropriately sized workforce; and

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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.

We may face legal liabilities or damage to our professional reputation from claims made against our work.
We create, implement and maintain IT solutions that are often critical to the operations of our customers’ 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 10 countries around the world. Approximately 13.6% of our revenues in 2003, 13.4% in 2002 and 16.0% in 2001 were attributable to international activities. As a result, we are subject to the following risks:

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currency fluctuations;

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price controls or restrictions on exchange of foreign currency;

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the burdens of complying with a wide variety of national and local laws;

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differences in, and uncertainties arising from, local business culture and practices;

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multiple, and sometimes conflicting, laws and regulations, including tax laws;

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operating losses incurred in certain countries as we develop our international service delivery capabilities and the non-deductibility of those losses for tax purposes;

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the absence in some jurisdictions of effective laws to protect our intellectual property rights;

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restrictions on the movement of cash and other assets;

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restriction on the import and export of certain technologies;

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restrictions on the repatriation of earnings; and

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political, social and economic instability.

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

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Our services or solutions may infringe on 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 providing some services and offerings. We enter into licensing agreements with our customers for the rights to use intellectual property that include a commitment to indemnify the licensee against liability and damages arising from any third-party claims of patent, copyright, trademark or trade secret infringement. In some instances, the amount of these indemnity claims could be greater than the revenues we receive from the customer. 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, on 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

Our corporate headquarters is comprised of approximately one million square feet in Fairfax, Virginia. In addition, we have 56 offices in 10 countries around the world. We do not own any real property and lease approximately 1.8 million square feet of office space under long-term leases with varying expiration dates through 2012. We currently sublet approximately three hundred thousand square feet of that space with sublease expiration dates through 2011. Our European headquarters is in The Hague, The Netherlands. As part of our 2003 acquisition of Vredenburg detailed in Note 3 of the consolidated financial statements appearing in Part II, Item 8 of this Form 10-K, we obtained five additional office sites.

During 2003, 2002 and 2001, we consolidated excess facility space as part of the restructuring discussed in Note 14 of the consolidated financial statements appearing in Part II, Item 8 of this Form 10-K. The restructuring charges include costs to be incurred through 2008 related to facilities that are subleased, or are expected to be subleased, at rates below our costs. We believe the facilities we are retaining are suitable and adequate to meet our current needs.

In 2004, we will open a development facility in Krakow, Poland in order to move some of the development, maintenance and support functions for our commercial products to this new Krakow Development Center (“KDC”). The KDC, an AMS facility, will provide us with a competitive advantage through the use of offshore production.

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ITEM 3.           LEGAL PROCEEDINGS

Roger W. Mehle v. American Management Systems, Inc., No. 01-1544 (United States District Court for the District of Columbia), on appeal, Gary A. Amelio v. American Management Systems, Inc., No. 01-7197 (United States Court of Appeals for the District of Columbia Circuit), and American Management Systems, Inc. v. United States, No. 01-586 (United States Court of Federal Claims).

On June 20, 2003, American Management Systems, Incorporated (“AMS”), the Federal Retirement Thrift Investment Board (the “Thrift Board”) and the United States entered into a written settlement agreement (“Settlement Agreement”) resolving all outstanding litigation and claims among them relating to AMS’s work on the Thrift Board contract. All parties to the case - Gary A. Amelio, the current Executive Director of the Thrift Board, AMS, and the United States - - further agreed to dismiss and terminate all litigation and claims relating to the Thrift Board contract.

On June 25, 2003, Thrift Savings Plan participant Roger W. Mehle (the former Executive Director of the Thrift Board) filed in the United States Court of Appeals for the District of Columbia Circuit, as a non-party, a Motion for Leave to Intervene. Among other things, Mr. Mehle requested that the Court of Appeals issue its ruling in the case, notwithstanding the settlement that had been reached by all parties to the case.

On July 1, 2003, the parties exchanged the payments contemplated under the Settlement Agreement and filed Stipulations of Dismissal in the United States Court of Federal Claims (“CFC”) and the United States Court of Appeals for the District of Columbia Circuit. On July 2, 2003, the CFC entered final dismissal of the action which had been pending in that court. On July 8, 2003, with respect to the matter in the United States Court of Appeals for the District of Columbia Circuit, Appellant Gary A. Amelio, the United States, and AMS each filed separate Oppositions to Mr. Mehle’s Motion for Leave to Intervene. On July 15, 2003, Mr. Mehle filed his initial Reply to all three opposition briefs, followed on July 17, 2003 by an Amended/Corrected Reply. By order filed on August 11, 2003, the United States Court of Appeals for the District of Columbia Circuit denied Mr. Mehle’s Motion for Leave to Intervene and dismissed the case.

On September 24, 2003, Mr. Mehle filed in the United States Court of Appeals for the District of Columbia Circuit a petition seeking a panel rehearing (those three members of the Court who had originally considered the Motion for Leave to Intervene), and a rehearing en banc (all the members of the Court) of that Court’s prior panel decision denying his Motion for Leave to Intervene. By written orders dated October 17, 2003, the United States Court of Appeals for the District of Columbia Circuit denied Mr. Mehle’s requests for a panel rehearing, and for a rehearing en banc.

United States of America ex rel Randall L. Smith, et al. v. American Management Systems, Inc., CA No. C-1-02-326 (United States District Court for the Southern District of Ohio).

On September 22, 2003, AMS received notice of a federal whistleblower lawsuit which was filed by private relators. The lawsuit is pending in the United States District Court for the Southern District of Ohio (Western Division). The suit, which was originally filed on May 9, 2002, was recently unsealed following mandatory United States Department of Justice review of the allegations. The suit alleges that AMS invoiced the Ohio Department of Job and Family Services (“ODJFS”) for work performed on tasks unrelated to an ODJFS project that was the subject of a federal block grant and, as a result, received as payment from the State of Ohio federal monies for work that was not eligible for federal reimbursement. It further alleges that AMS utilized certain personnel who did not satisfy the requisite qualifications for assignment to the ODJFS project. The suit seeks damages and civil penalties. The United States Department of Justice, which is required to investigate and review all whistleblower actions of this nature, conducted its review in this case, and declined

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to intervene in the suit. On December 4, 2003, AMS filed a Motion to Dismiss the Complaint. That motion has been fully briefed and is pending before the Court.

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 2003.

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PART II

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

The common stock of American Management Systems, Incorporated, is traded on the Nasdaq National Market under the symbol AMSY. The following stock prices are the high and low sales prices of AMS common stock during the calendar quarters indicated.

The approximate number of stockholders of record of the Company’s common stock as of March 1, 2004 was 1,613.

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.

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ITEM 6.           SELECTED FINANCIAL DATA

The following selected consolidated financial data as of and for the years ended December 31, 2003, 2002, 2001, 2000 and 1999 have been derived from the consolidated audited financial statements. Certain prior period amounts have been reclassified to conform to the current period presentation. This selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included in this report. Our results of operations include the effect of the acquisition of Vredenburg made during 2003, as well as the sale of our global utilities practice to Wipro, Ltd. in 2002, as discussed in Notes 3 and 4, respectively, to the consolidated financial statements included in this report.

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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 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 IT consulting firm for governments, financial services, and communications industries. We have extensive long-term relationships with the world’s leading governments and companies. AMS specializes in enterprise resource planning, credit risk management, customer relationship management, and enterprise security. Through business consulting, systems integration and outsourcing, AMS delivers applications and services to create end-to-end solutions. We partner with customers of all sizes, integrating ideas and solutions to create value by improving efficiency, enhancing citizen or customer service, reducing costs, and improving accountability and compliance. We deliver our consulting and systems integration services through 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 customers operate.

We derive our revenues primarily from contracts for business and IT solutions. The economic environment and level of business activity from our customers affects our revenues. Due to the slowdown in the economy, political uncertainty and a weak IT market during 2003 and 2002, customers reduced or postponed their spending on IT and consulting services, slowing down the number of new contracts into which we entered.

Due to this economic slow-down, our year over year consolidated revenues have declined from fiscal years 2001 through 2003; however, we believe that this trend has stabilized and we are beginning to once again see revenue growth. During fiscal years 2003 and 2002, we acquired and developed a new sales organization. As of the end of 2003, we have a 100-person strong sales force, which has helped us grow revenues at a rate of 2% to 7% per quarter since the first quarter of 2003. We believe this growth will be sustained and improved through our participation in larger scale, longer-term contracts and building annuity revenue streams from Applications Management Outsourcing (“AMO”) and Business Process Outsourcing (“BPO”). As we enter 2004, we believe the worst period in our industry’s history is behind us and, while pricing pressure in our industry is still very evident, hourly rates are stabilizing.

To keep pace with the industry downturn over the past three years, we cut costs through targeted restructuring programs. While costs associated with these programs were significant, we believe such costs were necessary in order to rebalance our workforce. The 2001 restructuring was primarily directed at decreasing the overall size of our workforce. During 2002 and 2003, the restructuring was more targeted toward senior levels of management. As a result, as of the end of fiscal year 2003 our senior management group of vice presidents was half the size it was at the end of fiscal year 2001, and is right-sized against the scale of our business with broader spans of control and fewer layers to our organization. Overall our restructuring programs included the separation of approximately 2,400 people. During 2003, we recruited approximately 1,300 people with differing skill sets required for our changing needs.

In addition to our workforce realignment, during 2001, 2002 and 2003, we focused on restructuring other operational and strategic areas of the Company that have included:

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	•		a complete refresh of our core product portfolio, now all web-enabled, rewritten in open languages with open application programming interfaces (“API”);
	•		transactions to align our business with our core areas of focus including the sale of our utilities practice in fiscal year 2002 and purchase of the R.M. Vredenburg (“Vredenburg”) defense and intelligence business in 2003;
	•		retirement of all outstanding debt;
	•		write down to net realizable value of all marginal software assets, particularly Tapestry®;
	•		write down of excess facility space;
	•		resolution of the State of Mississippi and Thrift Board litigation; and
	•		establishment of a Chief Risk Officer position and risk management function.

Our cash position remains strong with approximately $62 million as of December 31, 2003. Key investments and initiatives in developing our sales and marketing culture, in achieving a complete refresh of our product portfolio, in rebalancing our workforce, and in funding the Vredenburg acquisition have all been achieved out of internal cash resources.

During 2003, one of our most important efforts was to conduct a top-to-bottom analysis of our business to further ensure that our business strategy is optimal, not just for the market in which we have been operating, but for the one we will face in the next two to five years. As a result of this analysis we are focusing our growth strategy for 2004 on the four key operating changes discussed below.

Merger with CGI Group Inc. and Asset Purchase by CACI International, Inc.
On March 10, 2004 we entered into a definitive merger agreement with CGI Group Inc. and CGI Virginia Corporation (collectively “CGI”), a large Canadian independent information technology and business process services firm, and an asset purchase agreement with Arlington-based CACI International Inc and certain of its affiliates (collectively “CACI”). Under the terms of the agreements, CGI commenced a cash tender offer to acquire all of the outstanding shares of AMS for $858 million, or $19.40 per share. CACI will purchase the assets of AMS’s U.S. Defense and Intelligence business for $415 million in cash subject to certain post-closing adjustments. The merger and asset acquisition are expected to close during the second quarter of 2004.

Consolidate Software Engineering Activities
We expect to continue to differentiate ourselves from other IT service providers through our proprietary software. In order to leverage the investment in our intellectual property, reduce costs and improve efficiency, we intend to bring together all of our software engineering activities into one single organization that supports all vertical sectors and service lines. This organization, which we anticipate being established during the first quarter of 2004, will utilize our own near shore capabilities in Canada, and offshore capabilities in Spain and Poland, supplemented when needed by contract relationships in India.

Third Party Integrators
We intend to further capitalize on our software assets and broaden the reach of our software product solutions by developing alliances with targeted third party integrators to install selected AMS proprietary software. We will also provide for much more extensive third party distribution of other companies’ software by AMS.

Managed Services
Finally, we intend to continue ramping up our AMO and BPO capabilities to seize the large and attractive opportunities in managed services. We expect to provide AMO of our own applications and, on a selected basis, those of others as we move from a design-build-install model to a design-build-operate model. Over the next 12 months we intend to more than double the scale of this business.

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PRESENTATION

Revenues
We derive our revenues primarily from contracts for business and IT 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. Therefore, 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 continually 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 these contracts 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 customers are structured in phases (e.g., base contract period plus option periods). Option periods for federal customers’ contracts are typically exercised on government appropriations and at the customers’ 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. As these federal customers only commit to one phase at a time, we recognize revenues 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 customer. Benefits-funded contracts are used solely in situations where the customer receives tangible and quantifiable monetary benefits directly from the new system and processes we implemented. These customers 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 on which revenue recognition is based.

Less than five 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 customer but maintenance is generally sold for a twelve-month period, with renewals occurring annually, based on 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 on 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.

Additionally, we enter into contracts with customers that do not include the sale or integration of software. These contracts include services such as general consulting or training and are typically performed on a time-and-materials or cost-reimbursable basis. When such contracts are performed on a fixed-price basis, we recognize revenue as earned when services are performed and are contractually billable.

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Some of our contracts relate to systems that we implement and host for customers. 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 comprise the following:

	•		Cost of Revenues includes direct expenses to provide products and services to our customers 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”) includes expenses not directly related to the delivery of products or services such as compensation for support personnel, 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 includes expenses incurred as part of the software development cycle that are not capitalized.
	•		Restructuring Charge includes expenses associated with employee severance and abandoned facilities.
	•		Software Asset Impairments include significant expenses associated with the write-down of certain software assets to 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.
	•		Contract Litigation Settlement Expense (Income) in 2003 includes costs, offset by insurance recovery income, associated with the settlement of litigation with the Federal Retirement Thrift Investment Board. In 2001, it included income, net of costs, due to an insurance recovery related to resolved litigation with the State of Mississippi.

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.

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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.

Loss on Equity Investments
Loss on equity investments reflects our share, during 2001, as a joint venture investor, in the operating results of Competix, Inc.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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 and estimates 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 and estimates 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 and other intangible assets, income taxes, the valuation of accounts receivable, restructuring cost estimates and variable compensation. We have discussed the application of these critical accounting policies and estimates with the Audit Committee of our Board of Directors.

Revenue Recognition
Essentially all 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. Sales to our customers are generally contracted 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. For the year ended December 31, 2003, approximately 43% of revenues were derived from fixed-price contracts.

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 customer. 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 customer 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 on which revenue recognition is based.

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 percent complete, revenues earned, and contract profitability. Therefore, these estimates are continually 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

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changes in estimates of costs required to complete an engagement, changes in staffing mix and changes in customer participation, as well as other factors.

Net Realizable Value of Software and Other Intangible Assets
We develop software for external sale and capitalize the associated software development costs once technological feasibility has been established. On a quarterly basis, we 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.

We also assess our long-lived intangible assets, which primarily consist of customer contracts and relationships associated with Vredenburg and Proponix, by a comparison of the carrying amount to the undiscounted cash flows expected to be generated by the assets. If estimated future undiscounted net cash flows are less than the carrying amount, the asset is considered impaired and expense is recorded at an amount required to reduce the carrying amount to fair value. In recording the intangible assets associated with Vredenburg and Proponix, we employed an independent third party to perform a valuation analysis.

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 worldwide, 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.

Valuation of Accounts Receivable
We regularly review accounts receivable to assess collectibility. We provide valuation reserves for bad debts based on specific identification of likely and probable losses and an analysis of historical experience. These valuation reserves are periodically re-evaluated and adjusted as more information about the ultimate collectibility of accounts receivable becomes available. Circumstances that could cause our valuation reserves to increase include changes in our customers’ liquidity and credit quality and the effectiveness of our collection efforts.

Restructuring Cost Estimates
In evaluating the costs associated with our restructuring programs, we use estimates related to the timing and amounts of anticipated subtenant rental payments associated with the restructuring plan. These estimates are based on our knowledge of the associated real estate market conditions where such facilities are located. We employ experts in the industry and rely on external experts in making such estimates.

Variable Compensation
Variable compensation is a significant discretionary expense that is highly dependent on management estimates and judgments, particularly at each interim reporting date. In arriving at the amount of expense to recognize, we make judgments and reasonable estimates 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. At December 31, 2003, we did not record an accrual for variable compensation. At December 31, 2002, we had recorded an accrual of $7.9 million, which was paid in 2003.

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HISTORICAL RESULTS OF OPERATIONS

The following table sets forth the unaudited percentage of revenues represented by items in our consolidated statements of operations for the periods presented. Certain amounts reported in previous years have been reclassified to conform to the 2003 presentation.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Revenues
Revenues for 2003 decreased $25.1 million, or 2.5%, compared to 2002. Revenues with U.S. customers declined 2.7% to $831.0 million, while revenues from international customers dropped 1.5% to $130.6 million. Revenues with international customers are primarily from work with customers in the Communications, Media and Entertainment and Financial Services Institutions target markets across Europe, Canada, Australia and the Pacific Rim. Business with international customers represented 13.6% and 13.4% of our total revenues in 2003 and 2002, respectively.

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The following table summarizes our revenues by target market (in millions) and the respective percentages of revenues:

Despite the overall decline in revenues from fiscal year 2002 to 2003, revenues in the Federal Government Agencies target market increased by 10.0% from $343.3 million to $377.8 million. The increase was primarily with defense and intelligence customers, including approximately $33.2 million of revenues attributable to Vredenburg, which was acquired effective August 1, 2003. The stability of our revenues from our Federal Government Agencies target market customers also reflected continued defense-related spending for several large-scale implementations of our federal financial management solution Momentum®.

Revenues from State and Local Governments declined $11.9 million, or 4.4%, from fiscal year 2002 to fiscal year 2003. This decrease was due to the economic conditions incurred by the state governments in their fiscal year 2003, which was July 1, 2002 to June 30, 2003. Based on steadily increasing revenues quarter over quarter during our 2003 fiscal year, we anticipate improved conditions in the state governments during 2004.

Revenues from Communications, Media and Entertainment customers decreased by $18.4 million, or 9.5%, in fiscal year 2003 from fiscal year 2002. Overall revenues from U.S. customers represented the majority of this decrease due to continued economic weakness in the telecommunications industry.

Revenues from customers in our Financial Services Institutions target market remained flat in fiscal year 2003 from fiscal year 2002. During fiscal year 2003 we felt the impact of significant merger activity in our financial services customer base and the continued caution in customer spending as impediments to significant growth in this market. Further, in 2003, AMS announced the development of a new comprehensive software offering in the originations area, for which we have received enthusiastic support from customers. However, this has slowed the purchases of our current originations offerings. We continued to take advantage of our market leading position with our proprietary Creditline products through upgrades, follow-on and cross-selling to existing customers, sales to new customers, and recurring maintenance revenues. Overall, our credit solutions offerings contributed over half of our 2003 Financial Services Institutions target market revenues

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with two newer focus areas, CRM and Proponix, also contributing significantly. The new Proponix offering is a managed services offering in the trade services area. We expect Proponix to bring an annuity revenue stream from this market.

Revenues from Other Corporate Clients declined $29.3 million, or 52.6% in fiscal year 2003 primarily due to the sale of our utilities practice in the fourth quarter of 2002.

Operating Expenses

Operating expenses in 2003 were approximately $1.0 billion, an increase of $59.7 million, or 6.3%, from 2002. During 2003 and 2002, we recorded significant charges for restructuring ($24.8 million in 2003 and $22.1 million in 2002) and software asset impairments ($9.6 million in 2003 and $19.6 million in 2002) and in 2003 we recorded a significant charge, $43.5 million, for a contract litigation settlement. In 2002, we recorded a significant gain, $19.9 million, on the sale of our utilities practice. Excluding these items, operating expenses as a percentage of revenues were 96.3% in 2003 and 93.5% in 2002 and operating margins were 3.7% in 2003 and 6.5% in 2002. We believe our presentation of operating profit margins excluding the above items is useful in evaluating our ongoing business. In both bidding for new contracts and performing existing contracts, management closely monitors operating profit margins (revenues received from contracts minus operating expenses excluding the above charges as a percentage of revenues). To management, this best presents the economic performance of the ongoing fundamental business of AMS. In computing operating profit margins for internal analysis, we exclude significant episodic costs, such as severance costs, which are not related to the staff, facilities and other costs that are required to perform the contracts from which revenues are received in the given period.

Cost of Revenues
Cost of revenues was $601.2 million in 2003, an increase of $19.2 million, or 3.3%, compared with 2002. Cost of revenues as a percentage of revenues increased from 59.0% in fiscal year 2002 to 62.5% in 2003. The overall increase in cost of revenues as a percentage of revenues is due to many factors primarily associated with certain customer projects. Margin declines were experienced with customers in several target markets including Federal Government Agencies, State and Local Governments and Financial Services Institutions.

The margin decline in the Federal Government Agencies target market primarily was related to a loss during 2003 of approximately $3.6 million, including the recognition of a forward loss reserve on one fixed-price project where we are developing and installing new technology as part of the customer engagement. We expect this technology to provide future benefit to AMS as we sell and install it for additional customers. The margin decline experienced with customers in our State and Local Governments target market primarily related to pricing pressure due to an overall economic slow-down in the economy. In addition, we incurred a higher level of costs during 2003 associated with delivery of new web-based technology to certain customers in the State and Local Governments target market.

The margin decline with customers in the Financial Services Institutions target market primarily was due to on-going work with several customers at slightly lower margins in 2003. The lower margins were due to a higher use of subcontractors as well as work with one customer associated with new software development that provides future value to AMS. In addition, we incurred start-up costs during 2003 associated with our Proponix managed services offering for processing trade letters of credit within our Financial Services Institutions customer base. The negative margin impact of this new offering is expected to decline as additional customers are added to our portfolio.

Finally, during 2002, revenues of approximately $6 million were recorded for which there were no concurrent period costs. These revenues included a recovery of unrecorded revenues from work performed as a

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subcontractor in prior years that was originally uncollectible due to termination of the prime contractor by the ultimate customer.

Selling, General and Administrative
SG&A expenses were $311.9 million in 2003, a decrease of $3.9 million, or 1.2%, compared with 2002 and roughly the same as a percentage of revenues for both 2002 and 2003. The decline primarily was attributable to reductions in unit management costs of approximately $10.2 million resulting from our restructuring activities and a decrease in variable compensation of $6.8 million. The decline was partially offset by increased commissions and business development costs of approximately $7.6 million which generally precede the revenues generated by the new business, increased recruiting expenses of $4.5 million and third-party consulting costs of $1.7 million.

Research and Development
Research and development expenses were $13.0 million in 2003, a decrease of $11.8 million, or 47.4% over 2002 and a decrease as a percentage of revenues from 2.5% in 2002 to 1.4% in 2003. This decrease mainly was due to the transition of certain product development costs from expensed to capitalized development based on the product lifecycle. These included our Momentum® product for our Federal Government Agencies target market, CACS® for the Communications, Media and Entertainment target market, AMS Advantage® for the State and Local Governments target market and other internal development projects. In addition, expenses associated with additional development for our customer care and billing software system, Tapestry®, declined during 2003.

Restructuring Charge
In a continuing effort to rebalance and match our workforce with market conditions and to account for associated excess space, we recorded a $24.8 million restructuring charge in 2003, representing 2.6% of revenues. The charge included $18.0 million for severance and severance-related costs. The severance costs primarily relate to a reduction in senior level staff and management positions. In total, 241 employees in the U.S. and Europe were included in the charge. The charge included $6.7 million for facilities related accruals, $3.3 million of which related to changes in estimates associated with our liability for the closure and consolidation of facilities, primarily attributable to the continuation of depressed real estate market conditions and the timing of anticipated subtenant rental agreements. Restructuring costs were $22.1 million for 2002 or 2.2% of revenues. The total charge included $17.0 million for severance and severance-related costs and $5.0 million for excess facility capacity.

Software Asset Impairments
Software Asset Impairments were $9.6 million in 2003 compared to $19.6 million in 2002. The $9.6 million charge for fiscal year 2003 represented the write-down of certain purchased and internally developed assets that were not expected to provide future value. The entire $19.6 million charge in 2002 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 asset’s net realizable value was less than its carrying value. The remaining book value of the Tapestry asset was $6.9 million as of December 31, 2003 and is expected to be recovered from existing customer commitments.

Contract Litigation Settlement
Of the net $43.5 million contract litigation settlement charge for fiscal year 2003, $45.5 million related to our agreement with the United States and the Federal Retirement Thrift Investment Board (the “Thrift Board”) to settle all outstanding litigation and claims from a contract dispute. The Thrift Board also agreed to a no-fault termination of the contract. Under the terms of the settlement agreement, the Thrift Board agreed to pay us $10.0 million for work performed under the contract, for which payment remained outstanding and the remaining $30.5 million contract receivable was written off. In addition, we agreed to pay the Thrift Board

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$15.0 million as a partial reimbursement of the $31.0 million we had previously received for work performed under the contract. This $45.5 million charge was partially offset by a $2 million insurance recovery received in the fourth quarter of 2003.

Interest Expense
Interest expense, net of interest income, increased $1.0 million from 2002 to 2003 primarily due to $1.5 million of interest income recorded in 2002 attributable to amended prior years’ Federal income tax returns claiming additional research and experimentation tax credits. In addition, we recorded $0.5 million more expense for deferred fees on our line of credit in 2003 than in 2002. These increases were offset by lower interest expense of $0.6 million in 2003 associated with our deferred compensation program.

Other Income
Other income increased $1.2 million in 2003 over 2002. This increase was due to the net effect of changes in the cash surrender value of company-owned life insurance and the related premium expense. In 2003, the increase in the cash surrender value was greater than the premium expense.

Income Taxes
Our effective company-wide income tax rate increased to 38.1% for 2003 from 33.0% for 2002. The increase was attributable to expected refunds recorded in 2002 on prior years’ Federal income tax returns as a result of additional research and experimentation tax credits. We estimate our effective tax rate for 2004 will be approximately 41%.

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. customers declined 14.0% to $854.1 million, while revenues from international customers dropped 30.0% to $132.6 million. Revenues with international customers are primarily composed 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 IT spending in those industries overall. Business with international customers represented 13.4% and 16.0% of our total revenues in 2002 and 2001, respectively.

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The following table summarizes our revenues by target market (in millions) and the respective percentages of revenues.

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. 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 solution Momentum. All other target markets declined from the same period of the prior year as customers reduced or deferred their spending on IT 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, decreasing $124.7 million, or 39.2%, from 2001 to 2002. Our Financial Services Institutions and State and Local Governments target markets represented $45.8 million and $21.3 million, respectively, of our revenues decline from 2001 to 2002. For 2002, the portion of our total revenues derived from our Federal Government Agencies and State and Local Governments 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 customers with whom we had performed work previously.

Operating Expenses
Operating expenses in 2002 were $944.2 million, a decrease of $207.3 million, or 18%, from 2001. As a percentage of revenues, operating expenses decreased from 97.3% in 2001 to 95.7% in 2002. During 2001 and 2002, we recorded 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.

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Cost of Revenues
Cost of revenues was $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 attributed to the slowdown in the global economy and IT spending in particular. As a percentage of revenues, cost of revenues was 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 collectibility of our receivables. The 2002 decrease in cost of revenues was consistent with the overall decline in revenues and was due in part to an overall reduction in variable compensation of $9.2 million compared to 2001. In 2001, cost of revenues included a $5.3 million loss reserve in connection with certain customer engagements while 2002 included none. These decreases partially were 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 in SG&A expenses primarily was 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 offset in part 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 mainly was 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 offset in part 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. A significant decline in spending in the Communications, Media and Entertainment target market indicated the asset’s net realizable value was less than its carrying value. 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.

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Gain on Sale of Utilities Practice
In 2002, we sold our global utilities practice for a net gain of $19.9 million. The divestiture 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.

Contract Litigation Settlement
Contract litigation settlement income was $41.0 million in 2001. This represented an insurance recovery received, net of costs, resulting from the Company’s resolution of its dispute with National Union Fire Insurance Company described in Note 18 of the consolidated financial statements in Part II, Item 8 of this Form 10-K.

Interest Expense
Interest expense, net of interest income, decreased $4.3 million, or 92.2%, 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. Net interest expense for 2002 included $1.5 million of interest income attributable to amended prior years’ Federal income tax returns claiming additional research and experimentation tax credits. The $1.5 million of interest income was offset by interest expense related to our deferred compensation program.

Other Income
Other income was insignificant 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 41.0% for 2001 to 33.0% 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.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2003, our capital resources were composed of $62.3 million of cash and cash equivalents and our $200 million bank credit facility, which was reduced by $0.3 million of outstanding letters of credit. Primarily as a result of the charges taken during the second quarter of 2003, our aggregate borrowings available under our credit facility are limited to approximately $159 million. We expect that, beyond the second quarter of 2004, full availability of the credit facility will be restored.

Cash Flows for the Twelve Months Ended December 31, 2003 and 2002

Cash provided by operating activities was $12.9 million for the twelve months ended December 31, 2003 compared with $106.2 million for the twelve months ended December 31, 2002. The $93.3 million decline in operating cash flows primarily was related to a decrease in collections from customers. This is evidenced by

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the cash outflow in accounts receivable of $24.4 million during the year ended December 31, 2003 as compared to the cash provided by accounts receivable of $41.6 million during 2002. This decrease in collections was partially attributable to a decline in revenues of $25.1 million for the year ended December 31, 2003 as compared with December 31, 2002 as well as an increase in the number of customers, predominantly in our State and Local Governments target market, which pay us between 30 and 90 days as they practice tighter cash management policies. At December 31, 2003, our days’ sales outstanding (“DSO”) was 91 days compared to DSO of 81 days at December 31, 2002. Also contributing to the decline in cash provided by operations was $15.0 million paid to the Thrift Board as a result of the settlement reached in June of 2003. This was partially offset by $10.0 million received from the Thrift Board as compensation for work performed under the contract and a $2.0 million receipt in the fourth quarter from one of our insurers for its portion of our coverage. In addition, we paid greater distributions in 2003 than in 2002 from our executive deferred compensation plan related to restructuring activities that took place in 2003.

These decreases in cash flows were partially offset by lower cash payments for the year ended December 31, 2003 as compared to 2002 for restructuring activities, income taxes due to the net loss in 2003, and more cash received in advance of revenues recognized primarily as a result of payments received from the California Department of Child Support Services.

Net cash used in investing activities for the twelve months ended December 31, 2003 increased $62.8 million over the comparable period in 2002 due to $44.9 million (net of cash acquired) used to acquire Vredenburg and $26.3 million more cash used in 2003 to purchase and develop our software than in 2002. This additional cash used in software development in 2003 primarily was related to upgrading and replatforming our core software offerings to maintain their marketability in web and java-based environments. These uses of cash were offset by $5.2 million more cash received during 2003 from the collapse of our company-owned life insurance policies to fund the deferred compensation distributions reported in operating cash flows.

Cash used in financing activities was $0.9 million for the twelve months ended December 31, 2003 compared to cash provided by financing activities of $5.2 million for the twelve months ended December 31, 2002. During the twelve months ended December 31, 2003, we paid $5.0 million for shares repurchased primarily on the open market under AMS’s stock repurchase program. We did not repurchase any shares on the open market during 2002. During 2003, we paid $2.7 million for debt acquired as part of the acquisition of Vredenburg. In addition, proceeds from common stock options exercised provided only $2.2 million for the twelve months ended December 31, 2003 whereas proceeds from common stock options exercised during the same period in 2002 were $3.7 million. Cash from the Employee Stock Purchase Plan was consistent between the years and provided $4.6 million in 2003 compared to $4.4 million in 2002.

Capital Resources and Requirements
Our cash position remains strong. During 2003, key investments and initiatives in developing the sales and marketing culture, in achieving a complete refresh of the product portfolio, in rebalancing the workforce, and in funding the Vredenburg acquisition all have been achieved out of internal cash resources. The demand on cash to fund our investment in capitalized software has peaked and will trend down during 2004.

Our ongoing capital needs depend on a variety of factors, including the extent to which we are able to fund the cash needs of our business from earnings. During 2002 and throughout 2003, we have been able to fund our capital expenditures, acquisition costs, and operating activities utilizing our cash generated from operations. Our ability to generate earnings is dependent on, but not limited to, the amount of revenues that we are able to generate from our customers, the amount of operating expenses required to provide our services, and the effect of exchange rate changes on our cash balances. To the extent that we generate insufficient cash flow from our operating activities, we may be required to utilize our bank credit facility as an alternative source of funding.

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With respect to our current capital plan, we anticipate expenditures on product development to be slightly lower in the first quarter of 2004 and to decrease substantially throughout the latter half of 2004, including the impact of a planned internal system replacement. We intend to hold capital expenditures for all of 2004 at approximately 5 percent of revenues. We plan to achieve this goal by curtailing our rate of investment in product upgrade initiatives, and by combining software development and support across AMS during the first half of 2004. We also plan to decrease the cost of development by using our new facility in Krakow, Poland.

Bank Credit Facility

In addition to our cash balance of $62.3 million at December 31, 2003, we have a $200 million unsecured revolving bank credit agreement with a group of lenders. This credit facility was increased effective September 26, 2003 by $40 million from its previous limit of $160 million. This credit facility is available for working capital borrowings, capital expenditures, acquisitions and other corporate purposes. 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 facility was replaced on November 13, 2002, with the new three-year unsecured revolving bank credit agreement. At December 31, 2003, no borrowings were outstanding under our $200 million bank credit agreement and availability was reduced by $0.3 million of outstanding letters of credit.

We 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 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.

Our $200 million revolving credit facility includes negative covenants, including, but not limited to, covenants limiting our ability to create or incur liens, make certain investments, incur certain indebtedness, undergo fundamental changes, make certain dispositions, make acquisitions not related to our lines of business, pay dividends, or repurchase stock in excess of specified thresholds. The credit agreement also contains certain affirmative covenants and financial covenants including a minimum consolidated net worth, a minimum consolidated fixed charge ratio and a maximum consolidated leverage ratio. Certain provisions of the credit agreement also restrict the amount of available borrowings based on the total EBITDA, as defined in the agreement, for the trailing four quarters. Based on the provisions of the agreement, the aggregate borrowings are limited to approximately $159 million. Our bank credit agreement expires on November 13, 2005. At December 31, 2003, we complied with all covenants included in the credit facilities.

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Contractual Obligations

As of December 31, 2003, we had the following obligations and commitments to make future payments:

(1)		Includes $26.2 million recorded as a restructuring liability as of December 31, 2003. See Note 18 in Item 8 of this filing for additional information.
(2)		Amount represents various purchase commitments at December 31, 2003 primarily for computer and other equipment.
(3)		Liability is for executive deferred compensation program. See Note 16 in Item 8 of this filing for additional information.
(4)		Amount represents Synergy purchase price payment. See Note 16 in Item 8 of this filing for additional information.
(5)		Amounts represent noncurrent portion of Vredenburg management retention agreements (1-3 year portion) and remainder primarily represents other lessee security deposits (more than 5 year portion). See Note 16 in Item 8 of this filing for additional information.

Off-Balance Sheet Arrangements

We enter into licensing arrangements with our customers for the rights to use intellectual property that include a commitment to indemnify the licensee against liability and damages arising from any third-party claims of patent, copyright, trademark or trade secret infringement. AMS cannot determine or predict the maximum amount of potential future payments under this type of indemnification because we would not have adequate information about the nature and scope of any such claim until a claim has been submitted to us. Third-party claims are subject to contest by AMS and dispute resolution procedures specified in the particular contract and payment by AMS under such indemnification clauses is generally conditional on the claim. AMS also is a party to agreements under which directors and certain executive officers of AMS would be indemnified for actions taken or omitted to be taken in connection with the performance of their duties as directors or officers, as applicable. We purchase insurance policies related to our directors’ and officers’ actions in order to mitigate this risk. As of December 31, 2003, we were not aware of any indemnification agreements that would require material payments.

Significant Customer Receivables

We enter into large, long-term contracts and maintain significant receivable balances with certain customers. At December 31, 2003 and 2002, we had three customer receivable balances which individually represented greater than 10% of our reported accounts receivable balance. These customers include departments and agencies of the U.S. Federal Government and two other state and local governments. These three customers’ balances, over several contracts, represented approximately 62.1% and 63.5% of accounts receivable at December 31, 2003 and 2002, respectively. At December 31, 2002, we had approximately $40.5 million outstanding, classified as a long-term contract receivable in Other Assets, under a predominantly cost-plus

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incentive fee contract with the Thrift Board. This balance was no longer outstanding as of December 31, 2003. See Part I, Item 3, Legal Proceedings of this Form 10K, for a discussion of the resolved litigation involving the Thrift Board.

NEW ACCOUNTING PRONOUNCEMENTS

In June 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). This Statement requires that costs associated with an exit or disposal activity be recognized when the liability is incurred rather than at the date of an entity’s commitment to an exit plan. Those costs include one-time employee termination benefits, lease termination costs and costs to consolidate facilities or relocate employees. This Statement was effective for exit or disposal activities initiated after December 31, 2002. AMS applied the provisions of SFAS 146 to activities initiated during 2003 included with our restructuring charge for the year ended December 31, 2003. The application of SFAS 146 did not represent a material change in the accounting for restructuring costs when compared to the charges taken during 2002 and 2001.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements were effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 did not have a material effect on our financial statements.

In November 2002, the Emerging Issues Task Force issued a final consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). In an arrangement with multiple deliverables, EITF 00-21 provides guidance on how the arrangement consideration should be measured, whether the arrangement should be divided into separate units of accounting and how the arrangement consideration should be allocated among the separate units of accounting. To the extent that a multiple-deliverable arrangement or deliverable(s) in a multiple-deliverable arrangement are within the scope of higher-level authoritative literature, EITF 00-21 does not apply. EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have a significant effect on our financial statements.

In January 2003, the FASB issued Interpretation No. 46 “Consolidation of Variable Interest Entities – an interpretation of Accounting Research Bulletin No. 51” (“FIN 46”). FIN 46 requires an enterprise to consolidate a variable interest entity (“VIE”) if it has a variable interest that will absorb a majority of the entity’s expected losses if they occur, receive a majority of the entity’s expected residual returns if they occur, or both. The provisions of FIN 46 are effective immediately for VIEs created after January 31, 2003, and to VIEs in which an enterprise obtains an interest after that date. FIN 46 is effective for the first reporting period ending after December 15, 2003. AMS does not currently have any VIEs. Consequently, the adoption of FIN 46 had no impact on our financial statements.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June

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30, 2003. The adoption of SFAS 149 did not have a material effect on our financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) and not as equity. This Statement was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective beginning July 1, 2003. The adoption of SFAS 150 did not have a material effect on our financial statements.

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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 several currencies and therefore are exposed to foreign currency risk in the ordinary course of business. Approximately 13.6% of our total revenues in 2003, 13.4% in 2002, and 16.0% in 2001 were derived from international customers. 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 some risk that profits will be affected by foreign currency exchange fluctuations. Our primary foreign currency exposures as of December 31, 2003 and 2002 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, 2003, 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 10% change in the value of foreign currencies, assuming no change in interest rates. As of December 31, 2003 and 2002, the result of a uniform 10% 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 $0.4 million and $0.5 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, 2003 and 2002 is immaterial in relation to our consolidated financial position, results of operations and cash flows. We have not used derivative 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 value of our company-owned life insurance. As of December 31, 2003, we owned some fixed-income policies for which market risk exposure was low. These policies were cancelled and the cash value was received in the first quarter of 2004. As of December 31, 2002, the effect of a hypothetical 10% decrease in the market would have resulted in a decrease in other income of $1.0 million. We have not used derivative instruments to alter the portfolio characteristics of our marketable securities in our company-owned life insurance policies.

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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, 2003 and 2002, and the related consolidated statements of operations, changes in stockholders’ equity, cash flows, and comprehensive (loss) income for each of the three years in the period ended December 31, 2003. 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, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

McLean, Virginia
March 10, 2004

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

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

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

40

American Management Systems, Incorporated
Consolidated Statements of Changes in Stockholders’ Equity
For the Years Ended December 31, 2001, 2002 and 2003
(In thousands)

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

American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)

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American Management Systems, Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001
(in thousands, except per share data)

NOTE 1 — NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

American Management Systems, Incorporated (“AMS” or the “Company”) is a global business and IT consulting firm for governments, financial services and communications industries. Founded in 1970, AMS has extensive long-term relationships with the world’s leading governments and companies. AMS specializes in enterprise resource planning, credit risk management, customer relationship management, and enterprise security. Through business consulting, systems integration and outsourcing, the Company delivers applications and services to create end-to-end solutions. AMS partners with customers of all sizes, integrating ideas and solutions to create value by improving efficiency, enhancing citizen or customer service, reducing costs, and improving accountability and compliance.

A.          Principles of Consolidation

The consolidated financial statements include the accounts of AMS and its wholly-owned subsidiaries. All significant intercompany accounts and transactions relating to these wholly-owned subsidiaries have been eliminated. The equity method of accounting is used for the Company’s investment in Competix, Inc. during 2001 (see Note 3). All other investments are accounted for under the cost method.

B.          Revenue Recognition

Revenues on time-and-materials contracts are recognized to the extent of billable rates times hours delivered plus expenses incurred. Revenues on cost-reimbursable contracts are recognized to the extent of costs incurred plus a proportionate amount of the fee earned. For fixed-price contracts, where we have the ability to produce reasonably dependable estimates regarding revenues and costs, revenues 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. The estimates utilized on these contracts are continually updated during the term of the contract and may result in the Company’s revision of recognized revenues and estimated costs in the period in which they are identified.

Large systems integration projects are generally either fixed-price or time-and-materials contracts that are structured in phases (design, development and implementation) for delivery and contract management purposes. These long-term production-type contracts generally include the delivery of software, integration and customization services, training and maintenance. In accordance with the American Institute of Certified Public Accountants’ (“AICPA”) Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition” (“SOP 97-2”), when these software licenses require significant production, modification, or customization, the entire arrangement is accounted for in accordance with Accounting Research Bulletin No. 45, “Long-Term Construction-Type Contracts,” using the relevant guidance in SOP No. 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”). Because the arrangement is accounted for under SOP 81-1, the entire contract value is recognized as revenues using the percentage-of-completion basis of accounting.

AMS’s benefits-funded contracts are similar to the Company’s other large systems integration fixed-price contracts, with the exception that the amounts due to the Company are payable from actual monetary benefits derived by the customer. Benefits-funded contracts are used solely in situations where the customer receives tangible and quantifiable monetary benefits directly from the new system and processes implemented by

44

American Management Systems, Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
For the Years Ended December 31, 2003, 2002 and 2001
(in thousands, except per share data)

AMS. For these contracts, AMS recognizes revenues only to the extent it can be predicted, with reasonable certainty, that the benefit stream will generate amounts sufficient to fund the value on which revenue recognition is based.

Typically, the Company bundles software licenses with services. When no significant production, modification or customization of the software is required, the Company allocates a portion of the contract value to each element of the contract based on its relative vendor specific objective evidence of fair value (“VSOE”). VSOE for software licenses is established based on standard price lists that are generally adhered to for all such software sales when the software is sold separately. To establish VSOE for services (such as training), the Company uses standard billing rates used when billing customers on a time-and-materials basis. VSOE for maintenance is generally established by the maintenance renewal rate in the contract. Generally, the Company is able to establish VSOE for all elements of the arrangement and bifurcate the contract value accordingly. In these circumstances, revenues are recognized on each element separately. Revenues on software license fees are recognized when a non-cancelable license agreement is in force, the software has been delivered, the license fee is fixed or determinable, and collection is deemed probable. In certain circumstances, the Company may not be able to establish VSOE for the software. In these situations, once the software has been delivered and the only undelivered element is services, the entire contract value is recognized over the service period. The Company is unable to establish VSOE for software it sells as part of a multiple-element arrangement when the software product has not yet been sold separately and a standard price list has not been established. In such circumstances, if VSOE can be established for the undelivered elements in the arrangement (which generally consist of maintenance, training, data conversion or other services), the Company uses the residual method, in accordance with SOP No. 97-2, to determine the value of the software to recognize. When VSOE cannot be established for the undelivered services, after the software has been delivered, the entire contract value is recognized over the service period.

The Company also enters into contracts with customers that do not include the sale or integration of software. These contracts include services such as general consulting or training and are typically performed on a time-and-materials or cost-reimbursable basis. When such contracts are performed on a fixed-price basis, the Company recognizes revenue as earned in accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” as services are performed and are contractually billable.

Some of the Company’s contracts relate to systems that the Company implements and hosts for its customers. Revenues are recognized on these contracts in accordance with the contractual terms on a straight-line or transaction-volume basis, as appropriate.

Maintenance and product support agreements generally provide for minor programming corrections, new releases and help-desk support. The terms of these agreements may vary with each customer but maintenance and product support are typically sold for a twelve-month period with renewals occurring annually based on renewal rates stated in the original contract. The Company generally invoices and requires the customer to pay in advance of the maintenance period. Prepaid maintenance is deferred and recognized ratably over the maintenance period.

Losses on contracts, if any, are recognized during the period in which the loss first becomes probable and reasonably estimable. Any projected loss recognized is based on the Company’s best estimates of a contract’s revenues and costs. Any contract losses recognized are periodically reviewed for accuracy as total cost to complete estimates are updated during the term of the contract.

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American Management Systems, Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
For the Years Ended December 31, 2003, 2002 and 2001
(in thousands, except per share data)

Revenues recognized in excess of billings are recorded as unbilled accounts receivable. Cash collections in excess of revenues recognized are recorded as deferred revenues until the revenue recognition criteria are met. Reimbursements, including those relating to travel, other out-of-pocket expenses, and any third-party costs, are included in revenues, and an equivalent amount of reimbursable expenses are included in cost of revenues.

The costs associated with cost-type federal government contracts are subject to audit and adjustment by the U.S. Government. In the opinion of management, no significant adjustments or disallowances of costs are anticipated beyond any such amounts provided for in the consolidated financial statements.

C.          Purchased and Developed Computer Software

AMS develops proprietary software products using either its own funds or on a jointly funded basis with other organizations. These software products are then licensed to customers either as stand-alone applications or as elements of custom-built systems. AMS capitalizes the costs incurred for development of software for external sale after technological feasibility has been established in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed” (“SFAS 86”). Costs incurred prior to the establishment of technological feasibility are charged to research and development expense. When the software is ready for general release to customers, capitalization ceases and such costs are amortized on a straight-line basis over the estimated economic life, which is generally three to five years. The amortization expense is included in cost of revenues. During 2001, as part of a joint-funding arrangement for certain software, the Company received funds from development partners to defray expenditures of $2,600. No funds from development partners were received in 2003 or 2002.

In accordance with SFAS 86, on a quarterly basis the Company performs net realizable value (“NRV”) analyses on each capitalized software product to ensure that the value of the product meets or exceeds the expected total amount to be capitalized on the development as well as to evaluate the economic life of the product. The NRV analyses consider the expected future sales pipeline and revenue projections associated with the products. When updating the NRV analyses, if the Company notes a change in the expected revenue stream demonstrating declining revenue trends, the Company will either accelerate the amortization or write-off the unamortized software development costs that exceed the expected NRV.

Additionally, AMS develops software for the Company’s internal use and capitalizes these software development costs incurred during the application development stage in accordance with AICPA SOP 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Costs incurred prior to and after this stage are charged to research and development expense. When the software is ready for its intended use, capitalization ceases and such costs are amortized on a straight-line basis over the estimated useful life, which is generally three to five years.

In addition to developing external sale and internal use software, the Company purchases off-the-shelf software for internal use. The Company capitalizes the purchase price and amortizes these costs on a straight-line basis over an estimated useful life of generally three to five years.

AMS expended $64,929 in 2003, $50,975 in 2002, and $48,813 in 2001 on product development, both capital and expensed, associated with owned proprietary software. AMS expended $2,654 in 2003, $2,013 in 2002 and $3,187 in 2001 related to purchased and developed software for internal use. During the first quarter of 2003, in conjunction with restructuring the ownership and operations of Proponix (Canada), Inc. and

46

American Management Systems, Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
For the Years Ended December 31, 2003, 2002 and 2001
(in thousands, except per share data)

Proponix (Australia) Pty. Limited (collectively, “Proponix”), the Company recorded a developed computer software asset of $16,140, of which $13,627 was non-cash. Additionally, the Company recorded a developed computer software asset of $2,948 during the third quarter of 2003 in conjunction with the acquisition of 100% of the outstanding common stock of R.M. Vredenburg & Co. (“Vredenburg”). No internal use software assets were recorded in conjunction with the Proponix or Vredenburg transactions.

AMS recorded total amortization expense on purchased and developed computer software of $33,160 in 2003, $37,114 in 2002, and $35,173 in 2001. The portion of this amortization expense relating to purchased and developed software for external sale, reflected in Cost of Revenues, was $28,854, $32,198 and $28,258 in 2003, 2002 and 2001, respectively. The remaining amortization expense, related to software purchased and developed for internal use is recorded in Selling, General and Administrative expenses. Unamortized costs of developed software were $120,328 and $81,051 at December 31, 2003 and 2002, respectively. Unamortized costs of purchased software were $1,086 and $9,746 at December 31, 2003 and 2002, respectively.

D.          Foreign Currency Hedging

From time to time, the Company has entered into foreign exchange contracts as a hedge against market fluctuations. Hedges are established in order to reduce the risk of market fluctuations associated with changes in exchange rates. Market gains and losses are recognized, and are offset by foreign exchange gains and losses on the related hedge transactions. No foreign exchange contracts were outstanding as of December 31, 2003.

E.          Foreign Currency Translation

The results of operations of foreign subsidiaries are translated into U.S. dollars at average monthly exchange rates throughout the year; assets and liabilities are translated at exchange rates prevailing as of the balance sheet date. The resulting translation adjustments, as well as gains and losses on intercompany transactions that are long-term in nature, are shown in the accumulated other comprehensive loss account, a separate component of stockholders’ equity.

F.          Cash and Cash Equivalents

Cash and cash equivalents consist of all cash balances and highly liquid investments with original maturities of three months or less.

G.          Concentrations of Credit Risk

Financial instruments, that potentially subject the Company to significant concentrations of credit risk, consist principally of cash investments and accounts receivable. AMS places its cash investments with highly-rated financial institutions and does not limit such investments to any one institution in order to minimize the concentration of the Company’s credit risk.

The Company performs ongoing evaluations of contract performance as well as evaluations of its customers’ financial condition to help ensure collections and to minimize losses. AMS provides valuation reserves for bad debts based on specific identification of likely and probable losses and an analysis of historical experience. These valuation reserves are re-evaluated periodically and adjusted as more information about the ultimate collectibility of accounts receivable becomes available. Circumstances that could cause AMS’s

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American Management Systems, Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
For the Years Ended December 31, 2003, 2002 and 2001
(in thousands, except per share data)

valuation reserves to change include changes in customers’ liquidity and credit quality and the effectiveness of the Company’s collection efforts.

The Company enters into large, long-term contracts and maintains significant receivable balances with certain customers. At December 31, 2003 and 2002, the Company had three receivable balances which individually represented greater than 10% of the reported accounts receivable balance. These customers include departments and agencies of the U.S. Federal Government and two other state and local governments. These three customers, over several contracts, represented approximately 62.1% and 63.5% of accounts receivable at December 31, 2003 and 2002, respectively.

H.          Impairment of Long-Lived Assets

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company recognizes an impairment loss when circumstances indicate that the carrying value of long-lived tangible and intangible assets with finite lives may not be recoverable. Recoverability of long-lived assets is assessed by a comparison of the carrying amount to the estimated future net cash flows. If estimated future undiscounted net cash flows are less than the carrying amount, the asset is considered impaired and expense is recorded at an amount required to reduce the carrying amount to fair value. Long-lived tangible and intangible assets primarily include property and equipment and intangible customer contracts and relationships associated with Vredenburg and Proponix. In addition, goodwill is no longer amortized but is subject to an annual impairment review in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets” (See Note 8).

48

American Management Systems, Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
For the Years Ended December 31, 2003, 2002 and 2001
(in thousands, except per share data)

I.          Stock-Based Compensation

At December 31, 2003, the Company accounts for its stock-based compensation plans, using the intrinsic value method in accordance with the recognition and measurement principles of the Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Accordingly, no stock option expense is reflected in net (loss) income (except in two cases where the terms of the original award were modified), as all options granted under those plans had an exercise price equal to the fair market value of the underlying common stock on the date of grant. Expense recorded for restricted stock plans as well as a description of all stock-based compensation plans is described in Note 11. The following table illustrates, in accordance with the provisions of SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” the effect on net (loss) income and (loss) earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

For disclosure purposes, the fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model. Under the Black-Scholes model, the total value of options granted in 2003, 2002, and 2001 was $11,974, $16,077, and $10,804, respectively. These options would be amortized on a pro-forma basis based on the vesting schedule specified in the option agreement. The fair value of the Company’s stock-based option awards to employees was estimated assuming no expected dividends and the following weighted-average assumptions:

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American Management Systems, Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
For the Years Ended December 31, 2003, 2002 and 2001
(in thousands, except per share data)

J.           Income Taxes

Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates for the year in which the differences are expected to reverse.

Deferred income taxes are provided for temporary differences in recognizing certain income, expense, and credit items for financial reporting purposes and tax reporting purposes. Such deferred income taxes primarily relate to the methods of accounting for revenues, capitalized software development costs and restricted stock, the timing of recognition of tax credit carryforwards, and the timing of deductibility of loss carryforwards, certain reserves and accruals for income tax purposes. A valuation allowance is recorded if it is “more likely than not” that some portion or all of a deferred tax asset will not be realized.

K.           Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Management’s estimates and assumptions are derived from and continually evaluated based on available information, judgment and experience. Estimates and assumptions which, in the opinion of management, are significant to the underlying amounts reported in the financial statements include, but are not limited to: forecasts of contract costs and progress towards completion used to determine revenue recognition under the percentage-of-completion method, restructuring charges, net realizable values of purchased and developed computer software and other intangible assets, variable compensation, the allowance for doubtful accounts and tax valuation allowances.

L.           New Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). This Statement requires that costs associated with an exit or disposal activity be recognized when the liability is incurred rather than at the date of an entity’s commitment to an exit plan. Those costs include one-time employee termination benefits, lease termination costs and costs to consolidate facilities or relocate employees. This Statement was effective for exit or disposal activities initiated after December 31, 2002. The Company applied the provisions of SFAS 146 to activities initiated during 2003 included with the Company’s restructuring charge for the year ended December 31, 2003. The application of SFAS 146 did not represent a material change in the accounting for restructuring costs when compared to the charges taken during 2002 and 2001.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements were effective for financial statements of interim or annual periods ending after December 15, 2002. See Note 18 for the Company’s disclosures regarding FIN 45. The adoption of FIN 45 did not have a material effect on the Company’s financial statements.

50

American Management Systems, Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
For the Years Ended December 31, 2003, 2002 and 2001
(in thousands, except per share data)

In November 2002, the Emerging Issues Task Force issued a final consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). In an arrangement with multiple deliverables, EITF 00-21 provides guidance on how the arrangement consideration should be measured, whether the arrangement should be divided into separate units of accounting and how the arrangement consideration should be allocated among the separate units of accounting. To the extent that a multiple-deliverable arrangement or
deliverable(s) in a multiple-deliverable arrangement are within the scope of higher-level authoritative literature, EITF 00-21 does not apply. EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have a significant effect on the Company’s financial statements.

In January 2003, the FASB issued Interpretation No. 46 “Consolidation of Variable Interest Entities — an interpretation of Accounting Research Bulletin No. 51” (“FIN 46”). FIN 46 requires an enterprise to consolidate a variable interest entity (“VIE”) if it has a variable interest that will absorb a majority of the entity’s expected losses if they occur, receive a majority of the entity’s expected residual returns if they occur, or both. The provisions of FIN 46 are effective immediately for VIEs created after January 31, 2003, and to VIEs in which an enterprise obtains an interest after that date. FIN 46 is effective for the first reporting period ending after December 15, 2003. The Company does not currently have any VIEs. Consequently, the adoption of FIN 46 had no impact on the Company’s financial statements.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS 149 did not have a material effect on the Company’s financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) and not as equity. This Statement was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective beginning July 1, 2003. The adoption of SFAS 150 did not have a material effect on AMS’s financial statements.

M.          Reclassifications

Certain amounts reported in previous years have been reclassified to conform to the 2003 presentation.

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American Management Systems, Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
For the Years Ended December 31, 2003, 2002 and 2001
(in thousands, except per share data)

NOTE 2 — SUBSEQUENT EVENT

On March 10, 2004 the Company entered into a definitive merger agreement with CGI Group Inc. and CGI Virginia Corporation (collectively “CGI”), a large Canadian independent information technology and business process services firm, and an asset purchase agreement with Arlington-based CACI International Inc and certain of its affiliates (collectively “CACI”). Under the terms of the agreements, CGI commenced a cash tender offer to acquire all of the outstanding shares of AMS for approximately $858,000, or $19.40 per share. CACI will purchase the assets of AMS’s U.S. Defense and Intelligence business for approximately $415,000 in cash subject to certain post-closing adjustments. These acquisitions have been unanimously approved by the board of directors of each of CGI, CACI and AMS and are subject to regulatory and other customary closing conditions. The merger and asset acquisition are expected to close during the second quarter of 2004.

NOTE 3 — ACQUISITIONS AND JOINT VENTURE

Vredenburg

On August 1, 2003, the Company acquired 100% of the outstanding common stock of Vredenburg, a leading provider of professional and technical services to the Department of Defense and U.S. Intelligence communities. The results of operations of Vredenburg have been included with the consolidated financial statements since the acquisition date. The acquisition adds critical infrastructure protection capabilities, sophisticated document management technologies, and new program management expertise to the Company’s offerings in financial management, acquisition and procurement, business intelligence, enterprise architecture, and technology consulting.

The aggregate purchase price, net of $585 in cash acquired, was $51,239 and included cash payments through December 31, 2003 of $44,947. Amounts remaining to be paid at December 31, 2003 consist of $4,000 of payments related to earn-out targets for which all contingencies have been resolved and full payment was made on January 30, 2004. Additionally, the Company guaranteed management retention payments of $4,300 of which $2,292 remained to be paid at December 31, 2003 over the next two years. The purchase price allocation has been prepared on a preliminary basis, and reasonable changes are expected as additional information becomes available.

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American Management Systems, Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
For the Years Ended December 31, 2003, 2002 and 2001
(in thousands, except per share data)

The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of the date of the acquisition based on an independent third-party valuation, and includes $4,000 earned subsequent to the acquisition for earn-out targets: