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

FORM 10-K

Commission File Number: 0-9233

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

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

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

Securities Registered Pursuant to Section 12(g) of the Act:
                                                       Common Stock, par value $0.01 per share

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X   No __

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement to be issued in conjunction with the registrant’s Annual Meeting of Stockholders to be held May 9, 2003 are incorporated by reference into Part III of this Form 10-K.

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CONTENTS

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PART I

ITEM 1.     BUSINESS

Overview

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

AMS serves clients worldwide. In order to serve clients outside of the United States, AMS has expanded internationally by establishing subsidiaries or foreign branches. Exhibit 21 of this Form 10-K provides a complete listing of all twenty-six active AMS subsidiaries (and branches). Revenues attributable to AMS’s international clients were approximately $132.6 million in 2002, $189.6 million in 2001 and $196.3 million in 2000. Additional financial information regarding revenues from international customers, long-lived assets, and deferred tax assets by geographic areas of operation is provided in Notes 18 and 11 of the consolidated financial statements appearing in Part II, Item 8 of this Form 10-K.

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

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

Federal Government Agencies

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

State and Local Governments and Education

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

Communications, Media and Entertainment

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

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

Financial Services Institutions

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

Other Corporate Clients

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

Employees

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

Patents, Trademarks and Licenses

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

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

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Contracts

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

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

Disclosures Regarding Forward-Looking Statements

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

RISK FACTORS

Risks Related to Our Industry

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

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

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

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

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

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

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

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

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

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

Risks Related to Our Business

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

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

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

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

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

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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 client. Revenues are recognized based on the percentage of costs incurred to date in relation to total estimated costs to be incurred over the duration of the respective contract. When making proposals for these types of engagements, we rely on our estimates of costs and timing for completing the projects. These estimates reflect our best judgment regarding the efficiencies of our methodologies and professionals as we plan to apply them to the projects. Any increased or unexpected costs or unanticipated delays in connection with the performance of fixed-price contracts, including delays caused by factors outside our control, could make these contracts less profitable or unprofitable.

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

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

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

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

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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:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ITEM 2.     PROPERTIES

AMS’s corporate headquarters are located in Fairfax, Virginia with 50 offices worldwide. European headquarters are in The Hague, The Netherlands and AMS has offices in 10 other foreign countries. The Company does not own any real property. Substantially all of the Company’s office space is leased under long-term leases with varying expiration dates. AMS currently has facilities in excess of its needs. During 2001 and 2002, the Company consolidated facilities as part of its restructuring plan as discussed in Note 12 of the consolidated financial statements appearing in Part II, Item 8 of this Form 10-K. The restructuring charge associated with this plan included costs to be incurred through 2006 related to facilities that are subleased, or expected to be subleased, at rates below the Company’s costs.

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ITEM 3.     LEGAL PROCEEDINGS

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

AMS moved to dismiss the lawsuit filed by Mr. Mehle. On November 30, 2001, the United States District Court for the District of Columbia issued an order granting AMS’s motion to dismiss Mr. Mehle’s lawsuit for lack of jurisdiction. Mr. Mehle appealed that order. AMS filed both procedural and dispositive motions with the Court of Appeals. On January 25, 2002, the U.S. Department of Justice filed a motion on behalf of the U.S. Government to intervene which has been granted, and a motion to dismiss Mr. Mehle’s appeal. Both the Government’s motion to dismiss the appeal and AMS’s motion to dismiss the appeal were opposed by Mr. Mehle and are pending. A motion by AMS, whose position was supported by the United States, to strike the appearance of private counsel representing Mr. Mehle, also was filed and was opposed by Mr. Mehle. That motion is also pending. In November 2002, Mr. Mehle resigned from his position as Executive Director of the Thrift Board. As a result, Mr. James Petrick, the Thrift Board’s current Acting-Executive Director, was substituted as the named appellant and the case is now captioned Petrick v. American Management Systems, Inc., No. 01-7197 (United States Court of Appeals for the District of Columbia Circuit). The Court of Appeals heard oral argument on March 7, 2003 and the case has been submitted for decision.

American Management Systems, Inc. v. United States, No. 01-586 (Fed. Cl.). AMS believes that the appropriate forum for resolving its dispute over the Thrift Board contract is in the United States Court of Federal Claims (“CFC”), a court of specialized jurisdiction that ordinarily entertains all disputes relating to U.S. government contracts. To that end, AMS filed suit in the CFC against the United States, which is the contracting party in the Thrift Board contract, seeking reversal of the Thrift Board’s decision terminating the contract for default and asking the court to convert the termination into a termination for convenience. The U.S. Department of Justice is defending the United States in this case. The United States moved to dismiss AMS’s Complaint for lack of jurisdiction, arguing that the Thrift Board is a non-appropriated fund instrumentality. AMS opposed the Government’s jurisdictional motion. By written opinion and order dated August 30, 2002, the CFC denied the United States’ motion to dismiss, concluding that jurisdiction did, in fact, exist. On September 12, 2002, the United States filed its Answer to AMS’s Complaint, thereby responding to AMS’s claims in the CFC. On November 1, 2002, the United States filed a motion seeking permission from the CFC to immediately appeal the CFC’s August 30, 2002 decision, and an order suspending further proceedings in the CFC pending the resolution of any such appeal. AMS opposed this request. On January 9, 2003, the CFC authorized the United States to seek immediate review from the U.S. Court of Appeals for the Federal Circuit (“the Federal Circuit”) and stayed further proceedings in the CFC pending final action by the Federal Circuit on the United States’ request for immediate review. The United States subsequently requested that the Federal Circuit grant immediate review. On February 26, 2003, by written order, the Federal Circuit denied the United States’ request for interlocutory appeal. Following the denial of its request for immediate appellate review, the

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

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

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

There were no matters submitted to a vote of security holders during the fourth quarter of 2002.

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PART II

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

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

The approximate number of stockholders of record of the Company’s common stock as of March 24, 2003 was 2,234.

The Company has never paid any cash dividends on its common stock and does not currently anticipate paying dividends in the foreseeable future. AMS’s current policy is to invest retained earnings in the operation and expansion of its business. Future dividends on the common stock of AMS, if any, will be at the discretion of its Board of Directors and will depend on the Company’s earnings, financial condition, capital requirements, credit facility covenants and other then-existing conditions.

ITEM 6.     SELECTED FINANCIAL DATA

Income Statement Data

Balance Sheet Data

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

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

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

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

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

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

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Presentation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Critical Accounting Policies

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

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

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

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

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

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

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

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

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Historical Results of Operations

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

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

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

As a result of the difficult economic and uncertain political environment, our revenues declined in 2002. With the exception of the Federal Government Agencies target m