1999-05-11_Def14a_0000950133-99-001356

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GENERAL

The enclosed Proxy is being solicited by the Board of Directors (the
“Board of Directors” or the “Board”) of AMERICAN MANAGEMENT SYSTEMS,
INCORPORATED (the “Company” or “AMS”) in connection with the annual meeting of
shareholders of the Company to be held May 21, 1999 (the “Annual Meeting”), or
any adjournment or adjournments thereof. The entire expense of solicitation of
proxies will be borne by the Company. Solicitation will be primarily by mail.
However, directors, executive officers, and employees of the Company may also
solicit by telephone or personal contact. The Company will reimburse brokers
and other persons holding shares in their names, or in the names of nominees,
for their expenses of sending proxy materials to beneficial owners and
obtaining their proxies. It is anticipated that the Proxy Statement and Proxy
first will be mailed to shareholders on or about April 21, 1999.

Any shareholder giving a Proxy by mail or via telephone has the
power to revoke it at any time before it is voted by giving written notice of
revocation to the Secretary of the Company or by delivering a proxy in
accordance with applicable law bearing a later date to the Secretary of the
Company. If you attend the Annual Meeting, you may, if you wish, revoke your
Proxy by voting in person. Proxies solicited herein will be voted, and if the
person solicited specifies in the Proxy a choice with respect to matters to be
acted upon, the shares will be voted in accordance with such specification. If
no choice is indicated, the Proxy will be voted “FOR” the election of the
nominees listed on pages 2 to 6 under the caption “Information Concerning
Nominees for Director”; “FOR” the approval of an amendment to the Company’s
Second Restated Certificate of Incorporation (the “Certificate of
Incorporation”) increasing the authorized number of shares of Common Stock,
$0.01 par value per share (the “Common Stock”); and “FOR” the approval of an
amended 1996 Amended Stock Option Plan F (“Plan F”).

VOTING PROCEDURE

As of March 29, 1999, there were outstanding 42,514,408 shares of
Common Stock. Each share of Common Stock is entitled to one vote at the Annual
Meeting. Only shareholders of record at the close of business on March 29,
1999, will be entitled to vote at the Annual Meeting.

Votes cast in person or by Proxy at the Annual Meeting, abstentions
and Broker Non-votes (as defined below) will be tabulated by the election
inspectors appointed for such Meeting and will be counted for purposes of
determining whether a quorum is present. Directors will be elected by the
affirmative vote of the holders of a plurality of the shares present (in person
or represented by Proxy) and voted on the election of directors at the Annual
Meeting. The proposal to approve an amendment to the Certificate of
Incorporation will be approved by the affirmative vote of the holders of a
majority of the outstanding shares of Common Stock. The proposal to approve an
amended Plan F, and any other matter submitted to a vote at the Annual Meeting,
will be approved by the affirmative vote of the holders of a majority of the
shares present (in person or represented by Proxy) and entitled to vote on each
such matter. The election inspectors will treat abstentions on a particular
matter as shares that are present and entitled to vote for purposes of
determining the approval of such matter. Abstentions, therefore, will have the
same effect as a vote against a particular matter. If a broker submits a Proxy
indicating that it does not have discretionary authority as to certain shares
to vote on a particular matter (a “Broker Non-vote”), those shares will not be
treated as present and entitled to vote for purposes of determining the
approval of such matter.

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ELECTION OF DIRECTORS

Philip M. Giuntini resigned as President and Director of the Company
on September 18, 1998. Upon Mr. Giuntini’s resignation, the directors voted to
reduce the number of directors constituting the Board from ten members to nine
members. Accordingly, nine directors are to be elected at the Annual Meeting,
each to hold office until the next annual meeting of shareholders of the
Company and until his or her successor is elected and qualified. The directors
will be elected by the affirmative vote of the holders of a plurality of the
shares present (in person or represented by Proxy) and voted on the election of
directors. Unless otherwise directed, it is the intention of the persons named
in the Proxy to vote such Proxy for the election of the nominees listed under
the caption “Information Concerning Nominees for Director” on pages 2 to 6.
All of the nominees are now directors of the Company. In the event that any
nominee should be unable to accept the office of director, which is not
anticipated, it is intended that the persons named in the Proxy will vote for
the election of such other person in the place of such nominee for the office
of director as the Board of Directors may recommend. Descriptive information
as to each nominee is set forth below under the caption “Information Concerning
Nominees for Director.”

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” ALL OF THE NOMINEES
DESCRIBED BELOW FOR ELECTION AS DIRECTORS (ITEM 1 ON THE PROXY).

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INFORMATION CONCERNING EXECUTIVE OFFICERS

Information concerning Paul A. Brands, Chairman and Chief Executive
Officer; Patrick W. Gross, Chairman of the Executive Committee of the Board of
Directors; and Frank A. Nicolai, Executive Vice President and Secretary, is set
forth above under the caption “Information Concerning Nominees for Director.”

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PRINCIPAL STOCKHOLDERS

As of March 29, 1999, no persons were known by the Company to
beneficially own 5% or more of the outstanding shares of Common Stock.
The following table sets forth, as of March 29, 1999, the number and
percentage of outstanding shares of Common Stock beneficially owned by (i) each
director, (ii) each executive officer, and (iii) all executive officers and
directors as a group. Unless otherwise noted below, each person named in the
table has sole voting and sole investment power with respect to each of the
shares beneficially owned by such person.

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(1) The amount of beneficial ownership includes stock options granted to
directors and executive officers which have vested and are or will
become exercisable within 60 days of March 29, 1999. Accordingly, Mr.
Altobello has 832 options vested and exercisable; Mr. Brands has
24,300 options vested and exercisable; Mr. Forese has 10,499 options
vested and exercisable; Dr. Forman has 12,150 options vested and
exercisable; Mr. Gross has 12,150 options vested and exercisable; Dr.
Leonard has 2,833 options vested and exercisable; Mr. Lewis has 5,249
options vested and exercisable; Mr. Malek has 1,166 options vested and
exercisable; Mr. Nicolai has 12,150 options vested and exercisable;
Dr. Schillereff has no options vested and exercisable; and Mr. Spoon
has 2,749 options vested and exercisable. All executive officers and
directors as a group (eleven persons) have beneficial ownership of
84,078 options vested and exercisable within 60 days of March 29,
1999.

(2) The percentages of Common Stock were calculated to include stock
options vested and exercisable for those individual directors and
executive officers who had such stock options. The number of shares of
Common Stock was calculated as of March 29, 1999.

(3) Indicates a director of the Company.

(4) Indicates an executive officer of the Company.

(5) The amount includes 64,875 shares beneficially owned by Mr. Gross’
wife. Mr. Gross disclaims beneficial ownership with respect to the
shares owned by his wife, who has the sole power to vote and dispose of
such shares. The amount also includes 362,310 shares jointly owned by
Mr. and Mrs. Gross, who share joint power to vote and dispose of such
shares. Lastly, the amount includes 55,350 shares each owned by two
trusts, totaling 110,700 shares, for the benefit of Mr. Gross’ son and
daughter, respectively, of which Mr. and Mrs. Gross are co-trustees.
Mr. and Mrs. Gross share joint power to vote and dispose of such
shares.

(6) The amount includes 64,124 shares beneficially owned by Ms. Nicolai
with respect to which she has sole voting and dispositive power. Mr.
Nicolai disclaims beneficial ownership with respect to the shares owned
by Ms. Nicolai.

(7) The amount includes 2,000 shares jointly owned by Mr. Spoon and his
spouse, who share joint power to vote and dispose of such shares.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), requires that the Company’s directors, executive officers, and
persons who own more than 10% of a registered class of the equity securities of
the Company (“reporting persons”) file with the Securities and Exchange
Commission (the “Commission”) initial reports of ownership, and reports of
changes in ownership, of shares of stock, and options to purchase such shares,
of the Company. Reporting persons are required by Commission rules to furnish
the Company with copies of all Section 16(a) reports they file.

Based solely upon a review of Section 16(a) reports furnished to the
Company for the fiscal year ended December 31, 1998 (the “1998 fiscal year”),
and representations by reporting persons that no other reports were required
for the 1998 fiscal year, all Section 16(a) reporting requirements were met,
except as follows. Mr. Frederic V. Malek failed to timely report on a Form 4 a
sale of shares of Common Stock in March 1998, and Dr. Dorothy Leonard failed to
timely report on a Form 4 a sale of shares of Common Stock in November 1998.
Each of these directors timely filed a Form 5 for the 1998 fiscal year to
report such transaction. In addition, Dr. Fred L. Forman failed to timely
report on a Form 4 a sale of shares of Common Stock in February 1998. This
transaction was recently reported on a Form 4.

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EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table summarizes the compensation paid or accrued by the
Company during the three fiscal years ended December 31, 1998, to the Company’s
executive officers.

(1) All amounts were awarded based on the achievement of annual performance
goals under multi-year incentive compensation plans.

(2) Each of these awards of shares of Common Stock is associated with
performance under individual incentive compensation plans and was made
by the appropriate Board committee pursuant to a shareholder-approved
stock option plan.

(3) Except as otherwise indicated, these amounts represent the Company’s
contribution to special individual retirement accounts pursuant to the
AMS Simplified Employee Pension/IRA Plan (the “IRA Plan”).

(4) This amount consists of $650,000, which was paid by the Company to Mr.
Giuntini in connection with his departure from the Company, and
$8,328, which represents the Company’s contribution under the IRA
Plan.

(5) This amount consists of $104,186 in foreign assignment related income
and $69,972 in foreign taxes paid by the Company in connection with
compensation paid to Dr. Forman for services performed for the Company
abroad.

(6) This amount represents foreign taxes paid by the Company in connection
with compensation paid to Dr. Forman for services performed for the
Company abroad.

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OPTION GRANTS IN FISCAL 1998

Shown below is information concerning stock option grants to the
Company’s executive officers who were granted options on Common Stock during
the Company’s 1998 fiscal year.

(1) Each option grant is associated with a performance-based individual
incentive compensation plan for 1998-1999 and was made by the
appropriate Board committee pursuant to a shareholder-approved stock
option plan. The options will become exercisable one day prior to the
indicated expiration date. In accordance with each incentive
compensation plan, the exercise date of an option award may be
accelerated to June 30 or August 31 of the year following the end of
the performance period covered by the plan if the Compensation
Committee determines that the executive successfully completed the
plan.

(2) Each option grant was awarded with an exercise price equal to the
market value of the Common Stock on the date of the grant.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES

Shown below is information with respect to exercises by the Company’s
executive officers during the Company’s 1998 fiscal year of options to purchase
shares of Common Stock pursuant to Plan F, and earlier stock option plans.
Also shown is information with respect to certain unexercised options to
purchase shares of Common Stock held by the Company’s executive officers as of
the end of the Company’s 1998 fiscal year.

(1) Based on the market value of the Common Stock on the date of exercise
(as measured by the closing bid price of the National Market of The
Nasdaq Stock Market), minus the option’s exercise price.

(2) Based on the market value of the Common Stock on the last trading day of
1998 (as measured by the closing bid price of $40.00 of the National
Market of The Nasdaq Stock Market), minus the option’s exercise price.

LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR

No long-term incentive plan awards were made to the Company’s
executive officers during the Company’s 1998 fiscal year.

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Notwithstanding anything to the contrary set forth in any of the
Company’s previous filings under the Securities Act of 1933, as amended, or the
Exchange Act that might incorporate future filings, including this Proxy
Statement, in whole or in part, the following report and Performance Graph
shall not be incorporated by reference into any such filings.

COMPENSATION COMMITTEE REPORT OF EXECUTIVE COMPENSATION

COMPOSITION AND RESPONSIBILITIES OF COMPENSATION COMMITTEE

The Compensation Committee of the Board of Directors is responsible
for developing and making recommendations to the Board of Directors with
respect to the Company’s compensation policies generally. It is composed
entirely of outside directors who have never served as officers of the Company
or its affiliates (the “Outside Directors”). The Compensation Committee
approves the compensation plans for the Company’s executive officers, including
the Chief Executive Officer (the “CEO”), and on an annual basis determines the
compensation to be paid to the executive officers. The Compensation Committee
is responsible for the granting and administration of stock options and
incentive compensation granted to the executive officers.

The Compensation Committee has furnished the following report for
fiscal 1998:

COMPENSATION OBJECTIVES AND PHILOSOPHY

The objectives of the Company’s executive compensation program are to
provide a level of compensation that will attract and retain executives capable
of achieving long-term success for the Company’s shareholders and to structure
their compensation packages such that a significant portion generally is tied
to the achievement of multi-year targets for pre-tax income.

EXECUTIVE OFFICER COMPENSATION

GENERAL. The Company’s executive compensation program consists of
three main components: (i) annual base salary, (ii) potential for an annual
cash bonus and awards of stock options based on Company pre-tax income, the
profit contribution of a particular business unit, individual performance, or
some combination of these factors, and (iii) the opportunity to earn long-term
cash and stock-based incentives which are intended to encourage the achievement
of superior results over time and to align executive officer and shareholder
interests. In addition to research and recommendations furnished by the
Company’s senior management, the Compensation Committee has relied, inter alia,
on information furnished through executive compensation surveys by a recognized
compensation consulting firm, and information known to various members of the
Board of Directors. The Compensation Committee compares salaries and other
elements of executive compensation with the compensation paid to executives in
technology and consulting firms which are actual competitors of the Company.
Few of these companies are in the Hambrecht & Quist Technology Stock Index, the
peer index chosen by the Company for comparison in the “Shareholder Return
Performance Graph” below, because their shares are not publicly traded. They
include, for example, the consulting divisions of certain Big 5 accounting
firms, other prominent consulting firms which are wholly-owned subsidiaries of
publicly-traded companies, and other software firms that are privately held.

The executive officers, including the CEO, are eligible for the same
benefits, including group health and life insurance and participation in the
IRA Plan, as are available generally to the Company’s professional staff,
except that the executive officers do not participate in the Company’s
Profit-Sharing Plan (the “Profit-Sharing Plan”), a stock award plan, or the
Company’s Employee Stock Purchase Plan. The Company does not provide material
perquisites to any of its executive officers.

ANNUAL BASE SALARY. The Compensation Committee determines the annual
base salary of each of the Company’s executive officers, including the CEO.
Changes in base salary are generally made effective on March 1. The same
principles are applied in setting the salaries of all executive officers to
ensure that salaries are competitively established. Salaries are determined by
considering the officer’s potential duties and responsibilities within the
Company and his or her business unit, and the officer’s potential impact on the
operations and profitability of the Company. Unlike with respect to the
Company’s incentive compensation arrangements, the

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Compensation Committee does not consider achievement of specific corporate
performance factors in establishing base salaries for its executive officers.
In general, it is the policy of the Company to set base salaries lower than
would be typical for comparable positions in similar firms, and to include more
compensation in incentive plans, particularly incentive compensation plans tied
to multi-year performance periods.

INCENTIVE COMPENSATION PLANS. Each executive officer of the Company
generally participates in incentive compensation plans of one to three years in
duration. These plans are similar to multi-year incentive plans in which other
members of the Company’s professional staff participate. Under such plans, the
officer is eligible for annual cash incentive awards, and cash awards which may
be made at the end of each plan if the Compensation Committee determines that
the officer has met the specified goals of the executive’s programs. Some plans
also contemplate awards of stock options under the Company’s
shareholder-approved stock option plans. Each executive officer has a plan
which details the executive officer’s goals, which are comprised of financial
performance, including targets for the Company’s pre-tax income. Each
executive officer also generally has an incentive compensation plan with
targets based on the achievement of various individual goals.

The annual cash awards under the incentive compensation plans and the
cash portion of the award for completion of an incentive compensation plan
generally are based on multiples of a percentage of the executive officer’s
salary for the relevant fiscal period. The number of stock options which may be
awarded is determined at the time the performance goals are established. Such
number of stock options is not determined by reference to any specific criteria
other than the Company’s historical practice of awarding stock options in
connection with incentive compensation plans for certain executive officers.
The exercise price of all options granted in connection with the incentive
compensation plans for the executive officers is the fair market value of the
shares on the date of grant of the option. Achievement of the specified
financial or individual goals for plan years earlier than the final plan year
in a multi-year plan entitles the executive to specified interim cash payments
and stock option grants, all of which are considered advances against the
multi-year incentive compensation amounts. Such interim cash payments are
significantly less than a ratable percentage of the projected incentive
compensation payable on successful completion of a multi-year plan. For
example, successful completion of the first year of a two-year plan typically
would entitle the executive to payment of 25% of target cash incentive
compensation. Stock options in connection with multi-year plans also are
granted according to a schedule specified in the plan, typically including a
small percentage of options granted at the time the plans are approved by the
Compensation Committee.

Fiscal 1998 was the first year of two-year compensation plans for Paul
A. Brands, Patrick W. Gross, Frank A. Nicolai, and Fred L. Forman. All of these
plans included the same pre-tax income target as a financial goal. In the
cases of Messrs. Nicolai and Forman, the incentive targets also included
individual goals based on their respective areas of responsibility, such as
achieving operational goals within budget, improving the Company’s
administrative processes, and expanding the Company’s Engagement Management
Framework program. All plans required that a minimum percentage of the
stated goal must be achieved before any portion of the related incentive
compensation share was payable. The plans also took into account projected
pre-tax income for the year following the performance year just ended in
determining whether awards are payable and the amounts thereof. Each plan also
included higher award multiples for performance which exceeded the targets by a
stated percentage.

In February 1999, the Compensation Committee determined that Messrs.
Brands, Gross, and Nicolai substantially met their financial goals relative to
fiscal year 1998 and that Dr. Forman had substantially met his non-financial
goals, and determined that each had earned the target payment of one incentive
share. These amounts are shown above in the Summary Compensation Table under
“Annual Compensation — Bonus.” The Compensation Committee in February 1999
also approved the interim stock option awards to Messrs. Brands, Gross,
Nicolai, and Forman contemplated by their approved incentive compensation plans
and based on achievement of the specified goals for fiscal 1998.

POLICY ON DEDUCTIBILITY OF COMPENSATION

Under Section 162(m) (“Section 162(m)”) of the Internal Revenue Code
of 1986, as amended (the “Internal Revenue Code”), the allowable deduction for
compensation paid or accrued with respect to persons who as of the end of the
year are employed as the chief executive officer and each of the four most
highly compensated executive officers of a publicly-held corporation is limited
to no more than $1 million per year for fiscal years beginning on or after
January 1, 1994. This limitation does not apply to compensation payable to the
Company’s current executive officers consisting of stock options issuable under
Plan F or earlier stock option plans, nor to compensation payable under certain
performance-based compensation plans approved by shareholders. The

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Compensation Committee has taken certain actions to minimize the adverse
effects of Section 162(m) on the after-tax income of the Company. In
particular, as recommended by the Compensation Committee, the 1996 Incentive
Compensation Plan for Executive Officers (the “IC Plan”) was presented to and
approved by the shareholders at the 1996 annual meeting of shareholders of the
Company. Grants to executive officers of incentive compensation based on
pre-tax income are generally expected to be covered by the IC Plan when such
coverage is consistent with the Compensation Committee’s goals. The IC Plan
significantly limits the Compensation Committee’s discretion regarding the
structure and amount of incentive compensation paid to an employee covered by
such Plan. Accordingly, not all incentive compensation payable to executive
officers is paid pursuant to the IC Plan. The Compensation Committee projects
that it is unlikely that deductions will be lost as a result of this practice.
The Compensation Committee will continue to monitor whether compensation that
is limited by Section 162(m) is likely to exceed the deduction limitations
under Section 162(m), and the Compensation Committee is expected to take
appropriate actions to reduce the likelihood of a loss of deductions.

CHIEF EXECUTIVE OFFICER COMPENSATION

The Chief Executive Officer’s annual base salary is established by the
Compensation Committee using the same criteria as discussed above for the
executive officers. Paul A. Brands, who has served as Chief Executive Officer
of the Company since September 1993, received an annual base salary of $350,000
for 1998, which represented an increase of 15% over his base salary for 1997.
The increase was not based on any specific corporate performance factors. Mr.
Brands’ incentive compensation payments are determined by the Compensation
Committee based on targets for the Company’s pre-tax income, collection of
accounts receivable, and certain other financial and non-financial goals. As
previously indicated, Mr. Brands met the financial target for his multi-year
plan in effect for 1998-1999. In connection therewith, a first interim award
of 12,000 options was granted by the Compensation Committee in February 1999.

At its February 1999 meeting, the Compensation Committee also decided
to increase Mr. Brands’ base salary to $400,000 as of March 1, 1999.

Frederic V. Malek (Chairman)
Daniel J. Altobello
James J. Forese
Dorothy Leonard
W. Walker Lewis
Alan G. Spoon

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SHAREHOLDER RETURN PERFORMANCE GRAPH

The following graph and table provide a comparison of the cumulative
total return on the Common Stock of the Company for the five-year period
beginning December 31, 1993, with returns on the Standard & Poor’s 500
Composite Index and the Computer Software Sector Index of the Hambrecht & Quist
Technology Stock Index. The graph and table assume that the value of the
investment in the Common Stock of the Company and each of the aforementioned
indices on December 31, 1993, was $100 and that all dividends were reinvested,
although the Company has never paid dividends on the Common Stock. The
historical stock price performance of the Common Stock of the Company shown
below is not necessarily indicative of future stock price performance.

[GRAPH]

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COMMITTEES AND COMPENSATION OF THE BOARD OF DIRECTORS

COMMITTEES AND MEETINGS

The Company has a standing Executive Committee, Stock Option/Award
Committee, Compensation Committee, and Audit Committee. The Company does not
have a standing Nominating Committee.

The Executive Committee is presently composed of three directors, all
of whom are executive officers of the Company: Patrick W. Gross (Committee
Chairman), Paul A. Brands, and Frank A. Nicolai. The Executive Committee
generally has the power to authorize all corporate actions that the Board of
Directors has the power to authorize, except as may be limited by law. The
Executive Committee met once during 1998.

The Stock Option/Award Committee is presently composed of three
directors, all of whom are executive officers of the Company: Paul A. Brands
(Committee Chairman), Patrick W. Gross, and Frank A. Nicolai. The Stock
Option/Award Committee administers the Company’s employee stock option plans,
except as noted below. These directors are eligible to receive options under
the plans, but options, if any, awarded to them are granted and administered by
the Compensation Committee. The Stock Option/Award Committee also administers
the Profit-Sharing Plan. Directors and executive officers are not eligible to
participate in the Profit-Sharing Plan. The Stock Option/Award Committee meets
as required and met once during 1998.

The Compensation Committee is presently composed of the six Outside
Directors: Frederic V. Malek (Committee Chairman), Daniel J. Altobello, James
J. Forese, Dorothy Leonard, W. Walker Lewis, and Alan G. Spoon. The
Compensation Committee is responsible for developing and making recommendations
to the Board of Directors with respect to the Company’s compensation policies
generally. The Compensation Committee approves the compensation plans for the
Company’s executive officers, including the Chief Executive Officer, and on an
annual basis determines the compensation to be paid to the executive officers.
The Compensation Committee alone is responsible for the granting and
administration of stock options granted to the executive officers and to the
Controller. In 1998, the Compensation Committee met three times.

The Audit Committee is presently composed of four Outside Directors:
James J. Forese (Committee Chairman), Daniel J. Altobello, Dorothy Leonard,
and Alan G. Spoon. This Committee has the responsibility for making
recommendations to the Board of Directors as to the independent accountants of
the Company; for reviewing with the independent accountants, upon completion of
their audit, the scope of their examination, any recommendations they may have
for improving internal accounting controls, management systems, or choice of
accounting principles, and other matters; and for reviewing generally the
accounting control procedures of the Company. In 1998, the Audit Committee met
three times.

The Board of Directors met five times during 1998. Except for one
meeting that was not attended by one director, all members attended all of the
meetings of the Board and Committees of the Board on which they serve.

COMPENSATION

Directors who also serve as executive officers of the Company are not
separately compensated for attending Board meetings. Outside Directors are
currently entitled to receive fees of $5,000 per Board meeting attended, plus
travel expenses, and such fees and expenses were, in fact, paid for all
meetings attended during fiscal 1998. In addition, Outside Directors were paid
a retainer of $5,000 per year during fiscal 1998. Under the Company’s Outside
Directors Stock-for-Fees Plan (the “Stock-for-Fees Plan”), which was approved
by shareholders in May 1995, Outside Directors can elect to have the annual
meeting fees and retainer, which would otherwise be paid to the Outside
Directors in cash, paid in the form of Common Stock. Alternatively, Outside
Directors can elect to defer receipt of the annual meeting fees and retainer
pursuant to the Company’s Outside Director Deferred Compensation Plan. Under
the terms of the Deferred Compensation Plan, Outside Directors making such an
election would be credited with earnings on amounts deferred at an interest
rate based on a corporate bond index and such interest rate would be increased
by 300 basis points if the Company achieved certain annual performance goals.
W. Walker Lewis elected to have his annual meeting fees for four of the Board
meetings he attended during 1998 paid in the form of Common Stock pursuant to
the Stock-for-Fees Plan.

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Outside Directors also receive automatic grants of stock options,
which vest over five years, pursuant to the Company’s stock option plans. The
number of shares subject to grant, and subject to outstanding options, are
adjusted when stock splits occur. The numbers of options reported below in
this paragraph are the numbers of the original grants and do not give effect to
the June 1992, October 1994, or January 1996 stock splits to the extent such
splits occurred after the date of grant. All options granted to Outside
Directors vest at the rate of 1/60th a month for each month the Outside
Director continues to serve as a director. Pursuant to a prior stock option
plan, each Outside Director in May 1988 was granted 5,000 options to purchase
shares of Common Stock. James J. Forese, who became a director in November
1989, was granted 5,000 options on November 10, 1989. Dorothy Leonard, who
became a director in September 1991, was granted 5,000 options on September 27,
1991. Under 1992 Amended and Restated Stock Option Plan E, as amended (“Plan
E”), each new Outside Director was automatically granted 5,000 options (such
number subject to adjustments for splits) upon first becoming a director, and
each Outside Director was automatically granted an additional 5,000 options
(such number subject to adjustments for splits), vesting over five years, when
any options previously granted have fully vested. Plan F, as currently in
effect, provides for the grant of the same amount of options to Outside
Directors. Pursuant to Plan E, Daniel J. Altobello was granted 7,500 options
on July 27, 1993 when he first became a director, and Frederic V. Malek was
granted 5,000 options in April 1993 because his options granted in 1988 had
fully vested. The grant to Mr. Malek was made subject to shareholder approval,
which was obtained in May 1993. In addition, under Plan E, Mr. Forese was
granted 7,500 options (after giving effect to the October 1994 stock split) in
November 1994 because his options granted in 1988 had fully vested, and W.
Walker Lewis was granted 5,000 options on December 1, 1995 when he became a
director. Dr. Leonard was granted 5,000 options under Plan E in August 1996
because her options granted in 1991 had fully vested, and Alan G. Spoon was
granted 5,000 options under Plan E in September 1996 when he became a director.
Mr. Malek was granted 5,000 options under Plan F in April 1998 because his
options granted in 1993 had fully vested. In addition, Mr. Altobello was
granted 5,000 options under Plan F in August 1998 because his options granted
in 1993 had fully vested.

The proposal to approve an amended Plan F would eliminate the
automatic, nondiscretionary stock option awards to Outside Directors. The
amended Plan F would permit the Compensation Committee to grant stock options
to Outside Directors on a discretionary basis. See “Proposal to Approve an
Amended 1996 Amended Stock Option Plan F,” below.

COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION

Frederic V. Malek, James J. Forese, Dorothy Leonard, Daniel J.
Altobello, W. Walker Lewis, and Alan G. Spoon served as members of the
Compensation Committee during fiscal 1998 and continue to serve as members.
Mr. Malek is Chairman of the Compensation Committee.

During 1998, there were no Compensation Committee interlocks, and
there was no insider participation in the executive compensation decisions of
the Company.

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PROPOSAL TO APPROVE AN AMENDMENT TO
THE CERTIFICATE OF INCORPORATION INCREASING THE AUTHORIZED
NUMBER OF SHARES OF COMMON STOCK

An amendment (the “Charter Amendment”) to Article Fourth of the
Certificate of Incorporation was adopted by the Board of Directors on February
26, 1999, subject to approval by the shareholders. The text of the Charter
Amendment is set forth in Exhibit A to this Proxy Statement and is incorporated
herein by reference, and the discussion herein is qualified in its entirety by
reference thereto. The Charter Amendment increases the authorized number of
shares of Common Stock from 100,000,000 shares to 200,000,000 shares.
Shareholders of the Common Stock are not entitled to preemptive rights.

The additional shares are likely to be used for stock splits which the
Company may authorize from time to time. The proposed increase in the
authorized number of shares is necessary to permit future stock splits. The
Company has split its stock six times since 1985, most recently in January
1996, when the Board of Directors authorized a 3-for-2 split. The cumulative
effect of these splits has multiplied one share at the beginning of 1985 into
20.25 shares currently. The additional shares proposed to be authorized could
also be used to satisfy stock options which may be granted under stock option
plans in the future or obligations under other stock-based compensation plans,
such as the Profit-Sharing Plan or the Stock-for-Fees Plan. Finally, it would
also be possible for the Company to issue the additional shares proposed to be
authorized as stock dividends or in connection with acquisitions, financings to
raise funds, or other actions to expand or enhance the Company’s business. At
this time, the Company does not contemplate any of these actions which would
require the use of unissued authorized shares, other than the satisfaction of
obligations under benefit plans and the possibility of future stock splits.
Conceivably, it may be possible for the issuance of additional shares to deter
potential takeover efforts if the additional shares were issued to persons who
are opposed to such efforts. However, the Company is not aware of any
potential takeover efforts and the proposed increase in the authorized number
of shares was unrelated to any such concern.

As of March 29, 1999, there were outstanding 42,514,408 shares of
Common Stock and 2,833,624 shares of Common Stock reserved for issuance upon
exercise of the options granted under the Company’s stock option plans. If the
Charter Amendment is approved by the shareholders, based on the number of
shares outstanding on March 29, 1999, there will be 157,485,592 shares of
authorized but unissued Common Stock. The issuance of additional authorized
shares pursuant to a stock split or stock dividend will not reduce the
percentage of the total number of outstanding shares held by any shareholder or
have a dilutive financial effect; the sale of any additional authorized shares
will proportionately reduce the percentage of the total number of outstanding
shares held by any shareholder, although such a sale will not have a dilutive
financial effect unless the additional shares are sold for less than the then
fair market value of the Common Stock. The Board of Directors does not
anticipate issuing additional shares of Common Stock for less than fair market
value except to the extent that the exercise price of employee stock options is
less at the time of the options’ exercise than the fair market value of the
Common Stock.

The additional shares of Common Stock to be authorized under the
Charter Amendment may be issued from time to time by the Board of Directors
without the necessity of further shareholder action.

Approval of the Charter Amendment will require the affirmative vote of
the holders of a majority of the outstanding shares of Common Stock. The Board
of Directors has unanimously adopted a resolution approving the Charter
Amendment and directed that it be submitted to the shareholders for their
consideration. The members of the Board of Directors and the Company’s
executive officers have advised the Company that they intend to vote all shares
in their control in favor of the Charter Amendment. In the event that the
Charter Amendment is not approved by the shareholders of the Company at the
Annual Meeting, the Board of Directors will reconsider it.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” APPROVAL OF THE
AMENDMENT TO THE CERTIFICATE OF INCORPORATION
INCREASING THE AUTHORIZED NUMBER OF SHARES OF COMMON STOCK
(ITEM 2 ON THE PROXY).

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22

PROPOSAL TO APPROVE AN AMENDED
1996 AMENDED STOCK OPTION PLAN F

INTRODUCTION AND SUMMARY DESCRIPTION OF PROPOSED AMENDMENTS

The Company’s 1996 Stock Option Plan F was adopted by the Board of
Directors on April 3, 1996, and was approved by the Company’s shareholders on
May 10, 1996. The Plan was amended in 1997, becoming 1996 Amended Stock Option
Plan F (i.e., Plan F). The Company’s shareholders now are being asked to
approve Plan F, as amended by amendments that were approved by the Board of
Directors effective as of March 3, 1999, subject to shareholder approval (the
“Amendments”).

The Amendments (i) increase the number of shares of Common Stock
authorized to be issued pursuant to stock options granted under Plan F from
3,800,000 shares to 5,800,000 shares, (ii) increase the maximum lifetime of
stock options from five years to ten years in the case of nonqualified stock
options (“NSOs”) and from eight years to ten years in the case of incentive
stock options (“ISOs”), (iii) provide for stock options to be granted by the
Compensation Committee to Outside Directors generally on a discretionary basis,
rather than on an automatic, nondiscretionary basis, (iv) clarify the
respective roles of the Board of Directors, the Stock Option/Award Committee,
and the Compensation Committee under Plan F, and (v) make technical changes to
conform more closely to regulations issued by the Commission under Section
16(b) of the Exchange Act and by the Internal Revenue Service under Section
162(m).

The Board of Directors believes that the Amendments will further the
purposes of Plan F, which are (i) to offer to those employees who contribute
materially to the successful operation of the Company additional incentive and
encouragement to remain in the employ of the Company by increasing their
personal participation in the Company through stock ownership, (ii) to provide
an alternative means of compensating key employees whose performances
contribute significantly to the success of the Company, and (iii) to attract
and retain directors who have not at any time been officers or employees of the
Company (i.e., Outside Directors) and to compensate the Outside Directors for
service to the Company.

The text of Plan F, as proposed to be amended (the “Proposed Plan”)
and incorporating the Amendments in italics, is set forth in Exhibit B to this
Proxy Statement, and the following description of Plan F is qualified by
reference to such text.

SUMMARY DESCRIPTION OF PLAN F

Plan F as currently in effect (the “Current Plan”) provides that
options to purchase Common Stock may be granted to any key employee (including
officers and directors) of the Company and its subsidiaries who meets minimum
salary and other requirements established by the Board of Directors. “Outside
Directors” also are eligible to receive options under the Current Plan. The
Current Plan defines “Outside Directors” generally as directors who have not at
any time been officers or employees of the Company. As of March 29, 1999,
2,138 key employees (i.e., five executive officers, 199 Vice Presidents, 532
Senior Principals, and 1,402 Principals, including persons in comparable
positions) and six Outside Directors were eligible to participate in the
Current Plan.

The Current Plan provides that it shall be administered by the Board
of Directors or the Stock Option/Award Committee, except as provided below.
The Stock Option/Award Committee currently performs this function. In
accordance with the provisions of the Current Plan, the Stock Option/Award
Committee has the authority to determine which employees shall be granted
options, whether the options are NSOs or ISOs, the times at which options are
granted, the exercise prices of options, the numbers of shares subject to
options, the times at which or the periods over which options vest, the times
at which options terminate, and whether the exercise price of an option will be
paid in cash or stock.

Under the Current Plan, a committee composed of at least two
“non-employee directors” (within the meaning of Rule 16b-3 promulgated under
Section 16 of the Exchange Act), who also are “outside directors” (within the
meaning of Section 162(m)), has the authority (i) to make awards to directors
of the Company who are not Outside Directors, to all persons who are “officers”
of the Company (within the meaning of Section 16) and to “covered employees”
(within the meaning of Section 162(m)) and (ii) to perform all other functions
of the Board of Directors or Stock Option/Award Committee with respect to
outstanding awards to any of such directors, officers,

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23

and covered employees. The Compensation Committee currently performs these
functions with respect to these individuals. Under the Proposed Plan, the
Compensation Committee would be referred to specifically throughout such Plan
as the committee responsible for performing these functions.

Under the Current Plan, options may be granted to key employees either
(i) on the basis of awards earned under the Company’s incentive compensation
programs for groups of key employees, or (ii) as the Board of Directors or the
appropriate Committee may determine. If options are granted in connection with
the Company’s incentive compensation programs, then performance bonuses and
options based thereon are earned based on the employee’s success in meeting
predetermined performance standards during one or more years (the “Performance
Period”). Such options are granted, if at all, at the time that the Company
determines that the employee has met or will meet the employee’s predetermined
performance standards for the Performance Period in question.

Under the Current Plan, the award of options to Outside Directors is
non-discretionary. NSOs for 5,000 shares are granted automatically to any new
Outside Director on the date of the Outside Director’s first election or
appointment to the Board of Directors, subject to vesting as provided in such
Plan. On the day after those stock options become fully vested (other than
vesting by reason of death or disability), each Outside Director receives an
additional grant of 5,000 shares. One sixtieth of the subsequent options vest
on the date of grant and thereafter are subject to vesting as provided in the
Current Plan. The Proposed Plan would provide that the award of stock options
to Outside Directors, and the terms of those options (including terms dealing
with vesting), generally would be subject to the discretion of the Compensation
Committee. However, as under the Current Plan, stock options granted to
Outside Directors would vest upon the termination of an Outside Director as a
member of the Board of Directors by reason of death or disability.

The Current Plan provides that options granted to all directors,
officers and ten percent shareholders (as defined for purposes of Section 16 of
the Exchange Act) are not exercisable for a period of at least six months from
the date of grant. The Proposed Plan would eliminate this requirement because
it no longer is required to comply with Rule 16b-3 under Section 16 of the
Exchange Act.

The Current Plan authorizes the issuance of options to purchase a
maximum of 3,800,000 shares, subject to adjustment for future capital changes.
Of this number, 1,661,067 shares remained available as of March 29, 1999 for
issuance pursuant to options granted thereunder. The Proposed Plan would
increase the number of shares authorized to be issued to 5,800,000.

Shares subject to options granted under the Current Plan that
terminate or expire unexercised are available for the grant of future options.
The number of shares that may be subject to options granted under the Current
Plan in any single calendar year for awards earned for one-year Performance
Periods may not exceed 200,000 shares, subject to possible adjustment for
capital changes. There is no annual limitation on options granted with respect
to awards earned for Performance Periods of more than one year. However, the
maximum number of shares that may be subject to options granted under the
Current Plan to any “covered employee” (as defined in Section 162(m)) during
the life of such Plan is 100,000 shares, subject to adjustment for future
capital changes.

Under the Current Plan, NSOs are exercisable only to the extent that
they are vested. For employees, the Board of Directors or the appropriate
Committee selects a vesting schedule over a period of up to five years or
provides for vesting upon the attainment of specified performance goals or
other events. Optionees who receive NSOs are entitled to exercise at any time,
or from time to time, all or any portion of a vested NSO. The exercise price
of all NSOs granted under the Current Plan, except those options granted in
connection with one-year incentive compensation plans, is the fair market value
of the Common Stock on the date of grant of the option. NSOs granted in
connection with one-year incentive compensation plans may be granted with
exercise prices other than the fair market value of the Common Stock on the
date of grant only if the exercise price is determined by a formula selected by
the Board (or the appropriate Committee) that is based on the fair market value
of the Common Stock, as of a date, or over a period, that is within three
months of the date of grant.

Under the Current Plan, ISOs also are exercisable only to the extent
that they are vested. ISOs vest over a period of up to seven years. Employees
who have been granted ISOs may exercise at any time, or from time to time, all
or any portion of a vested ISO. The exercise price of ISOs is determined by
the appropriate Committee and must be at least equal to the fair market value
of the Common Stock on the date the ISO is granted (except ISOs granted to ten
percent shareholders, in which case the price may not be less than 110% of fair
market value).

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24

Under the Current Plan, all NSOs expire no later than five years after
the date of grant, and all ISOs expire no later than eight years after the date
of grant. Under the Proposed Plan, NSOs and ISOs would expire no later than
ten years after the date of grant.

For purposes of the Current Plan, the fair market value of the Common
Stock is the closing bid price of the Common Stock as quoted in the National
Market of The Nasdaq Stock Market on the date of grant of the option, or, if
there is no trade on such date, on the most recent date on which the Common
Stock was traded. On March 29, 1999, the closing bid price of the Common Stock
was $34.25 per share.

Under the Current Plan, options granted to employees may be amended to
advance the date on which the option vests. The Proposed Plan would extend
this rule to options granted to Outside Directors. If an option is so amended,
the amendment also may provide that the shares that would not have been vested
under the original vesting schedule shall be subject to repurchase for a period
of time by the Company at the original exercise price upon termination of
employment of the employee for any reason. If the Company is merged,
consolidated, sold, liquidated, or dissolved, the Current Plan also provides
for the automatic acceleration of the vesting of options that would have vested
within one year of any such event.

An option is exercised by giving written notice to the Company,
specifying the full number of shares of Common Stock to be purchased and
tendering payment to the Company of the exercise price. Payment for shares
issued upon the exercise of an option may consist of cash or delivery of a
properly executed exercise notice, together with irrevocable instructions to a
broker to promptly deliver to the Company the number of sales or loan proceeds
required to pay the exercise price. Under the Current Plan, the Board of
Directors or the appropriate Committee also has the authority to permit an
optionee to pay the exercise price for shares using shares of the Common Stock
owned for at least six months, or a combination of cash and such
previously-owned stock.

An option is not transferable during the lifetime of the optionee,
other than by will, by the laws of descent and distribution, or pursuant to a
qualified domestic relations order (“QDRO”). Unless transferred under a QDRO,
an option is exercisable during the optionee’s lifetime only by the optionee.

Upon termination of an employee’s employment with the Company for any
reason other than resignation following completion of ten or more years of
continuous service, all options held by the employee that are not exercisable
on the date of such termination expire. If the Board of Directors or the
appropriate Committee determines that an employee has committed certain defined
acts of misconduct, such as embezzlement, fraud, dishonesty, breach of
fiduciary duty or deliberate disregard of the Company’s rules resulting in
loss, damage or injury to the Company, neither the employee nor his or her
estate is entitled to exercise any option whatsoever.

To the extent NSOs held by an employee are exercisable upon the
employee’s termination of employment, shares subject to NSOs held by the
employee may be purchased during the “exercise period,” after which the NSOs
expire and all rights granted under the agreement pursuant to which the options
were granted become null and void. The “exercise period” ends on the earlier
of (i) the date on which the NSOs expire by their terms and (ii) (a) except in
the case of death, disability, or resignation as an employee following
completion of ten or more years of continuous service as an employee, thirty
days after the date of the employee’s termination of employment, or (b) in the
case of death, disability, or resignation as an employee following completion
of ten or more years of continuous service, one year after the date of the
employee’s termination of employment.

Upon termination of an Outside Director as a member of the Board of
Directors for any reason other than resignation as an Outside Director
following completion of ten or more years of continuous service as an Outside
Director, death or disability, all options held by the Outside Director that
are not exercisable on the date of such termination expire. Upon the
termination of an Outside Director as a member of the Board of Directors for
the reason of resignation as an Outside Director following completion of at
least ten years of continuous service as an Outside Director, death or
disability, the “exercise period” for shares subject to an NSO held by the
Outside Director, his or her heirs, legatees, or legal representatives, as the
case may be, ends on the earlier of (i) the date on which the NSO expires by
its terms and (ii) the date one year after the date of termination of the
Outside Director’s service as a member of the Board of Directors.

All ISOs held by an employee will expire unless exercised by the
employee, his or her heirs, legatees, or legal representatives, as the case may
be, before the earlier of (i) the date on which the ISO expires by its terms
and (ii) (a) except in the case of death or disability, within thirty days
after the date employment is terminated and (b) in the case of death or
disability, within one year after the date of termination of employment.

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Under the Current Plan, the Board of Directors may, at any time, amend
such Plan or the terms of options granted under such Plan, except that, among
other things, no amendment may, without approval of the shareholders,
materially modify the terms of such Plan as to “covered employees” (within the
meaning of Section 162(m)). Consistent with Section 162(m), the Proposed Plan
would prohibit only modifications to the material terms of such Plan as to such
employees without shareholder approval.

TAX CONSEQUENCES

Information regarding the federal income tax consequences to the
Company and to optionees of options granted under Plan F follows. This
information is not intended to be exhaustive and is only intended to briefly
summarize the federal income tax statutes, regulations and currently available
agency interpretations thereof, and is intended to apply to Plan F as normally
operated. It is recommended that optionees consult their own professional tax
advisors for personal and specific advice about options.

An optionee has no tax consequences from the grant of an NSO. Upon
exercise of an NSO, the optionee has compensation income taxable at ordinary
income tax rates on the amount by which the fair market value of the shares
received as of the date of exercise exceeds the exercise price. The Company is
entitled to a deduction equal to the amount of compensation income to the
optionee as long as income taxes are withheld on the optionee’s compensation
income. Upon the sale of Common Stock acquired through the exercise of an NSO,
any difference between the amount realized and the fair market value of the
Common Stock as of the date of exercise will be capital gain or loss.

An employee is not taxed upon the grant of an ISO. Except for the
possible imposition of the alternative minimum tax, an optionee is not taxable
on the exercise of an ISO. Unlike the exercise of an NSO, the Company is not
entitled to a deduction with respect to an ISO unless the optionee engaged in a
“disqualifying disposition,” which is described below. Upon a sale of shares
acquired upon exercise of an ISO, the employee will recognize capital gain or
loss, as the case may be, equal to the difference between the amount realized
on the sale and the exercise price, provided the sale occurs at least two years
after the grant of the ISO and at least one year after the exercise of the ISO.
If these holding periods are not satisfied, the sale of shares acquired upon
exercise of an ISO is a “disqualifying disposition.” If the sale is a
disqualifying disposition, the excess of the fair market value of the shares on
the date the ISO was exercised over the exercise price is compensation income
taxable at ordinary income tax rates, and any excess of the sale price of the
shares over the fair market value of the shares on the date the ISO was
exercised would be capital gain. The Company would be entitled to a deduction
equal to the amount of compensation income taxable to the optionee. The excess
of the fair market value of the shares at the time of exercise over the
exercise price of the ISO increases the optionee’s alternative minimum taxable
income.

If an optionee who is subject to the “short-swing profit liability”
rules under Section 16(b) of the Exchange Act purchases shares of Common Stock
within six months before the optionee exercises an NSO or an ISO, the tax
consequences of exercising the option that normally occur on the option
exercise date may be delayed for up to six months. In such a case, unless the
optionee makes an election under Section 83(b) of the Internal Revenue Code to
avoid the delay, the tax consequences that normally occur on the exercise date
of an ISO or NSO will occur on the first date on which a sale of the shares of
Common Stock acquired upon exercise of the option would not subject the
optionee to liability under Section 16(b) of the Exchange Act.

NEW PLAN BENEFITS

The number of stock options that would have been granted during the
Company’s 1998 fiscal year to each of the following persons or groups had the
Proposed Plan been in effect would not differ from the number that was in fact
granted under the Current Plan, as set forth below.

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26

(1) The potential realizable value is calculated based on the term of the
option at its time of grant. It is calculated by assuming that the
stock price on the date of grant appreciates at the indicated annual
rate, compounded annually for the entire term of the option, and that
the option is exercised and the shares are sold on the last day of its
term for the appreciated stock price. Such values do not include
consideration of income tax consequences.

(2) This number represents options that were granted during the 1998
fiscal year pursuant to Plan F.

VOTE REQUIRED

The affirmative vote of the holders of a majority of the shares of
Common Stock present at the Annual Meeting or represented by Proxy and entitled
to vote to approve Plan F, as amended by the Amendments, is required for
approval of such Plan. The Board of Directors has unanimously adopted a
resolution approving Plan F, as amended by the Amendments, and directed that it
be submitted to the shareholders for their consideration. The members of the
Board of Directors and the Company’s executive officers have advised the
Company that they intend to vote all shares in their control in favor of Plan
F, as amended by the Amendments. In the event that Plan F, as amended by the
Amendments, is not approved by the shareholders of the Company at the Annual
Meeting, the Board of Directors will reconsider the Amendments; unless and
until the Board takes further action with respect to the Amendments, Plan F
will remain in effect in accordance with its terms.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” APPROVAL
OF AN AMENDED 1996 AMENDED STOCK OPTION PLAN F (ITEM 3 ON THE PROXY).

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INDEPENDENT PUBLIC ACCOUNTANTS

On July 31, 1998, at the Company’s regularly scheduled meetings of the
Board of Directors and the Audit Committee, the Company accepted the
resignation of PricewaterhouseCoopers LLP because of conflicts of interest
resulting from the July 1, 1998 merger of Price Waterhouse LLP and Coopers &
Lybrand LLP. The Company and Coopers & Lybrand LLP have long-standing business
relationships which both parties wish to continue. In view of the independence
requirements of the Commission regarding the independence of certifying public
accountants, the Company and PricewaterhouseCoopers LLP mutually determined
that it would be inappropriate for PricewaterhouseCoopers LLP to continue as
the Company’s accountants. Price Waterhouse LLP was the Company’s independent
certifying accountants for 28 years. As a result of these circumstances, the
Audit Committee and the Board of Directors thereupon appointed Deloitte &
Touche LLP as the Company’s independent certifying accountants for the fiscal
year ending December 31, 1998.

During the two fiscal years ended December 31, 1997 and December 31,
1996, the reports of PricewaterhouseCoopers LLP on the annual financial
statements have neither contained any adverse opinions or disclaimers of
opinions, nor have they been qualified or modified. During such two-year
period, and through July 31, 1998, there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers
LLP, would have caused PricewaterhouseCoopers LLP to make reference to the
subject matter of the disagreement in connection with its reports on the
financial statements for such years.

A representative from Deloitte & Touche LLP is expected to be present
at the Annual Meeting, will have an opportunity to make a statement should the
representative desire to do so, and is expected to be available to respond to
appropriate questions during such Meeting.

The Board of Directors has not yet appointed an accounting firm to
audit the accounts of the Company for the fiscal year ending December 31, 1999.
The Board of Directors, upon the recommendation of the Audit Committee, expects
to make such appointment at its regularly scheduled meeting in July 1999.

OTHER MATTERS

The Board of Directors does not know of any matters to be presented at
the Annual Meeting other than those stated above in this Proxy Statement. If
any other business should come before the Annual Meeting, including a vote to
adjourn such Meeting, the persons named in the enclosed Proxy will vote thereon
at the Meeting, or any adjournment thereof, as they determine to be in the best
interests of the Company.

PROPOSALS FOR 2000 ANNUAL MEETING OF SHAREHOLDERS

Under the rules of the Commission, the date by which proposals of
shareholders of the Company intended to be presented at the 2000 annual meeting
of shareholders must be received by the Company for inclusion in the proxy
statement and form of proxy to be distributed by the Board of Directors is
December 21, 1999. Shareholder proposals should be submitted to Frank A.
Nicolai, Secretary, American Management Systems, Incorporated, 4050 Legato
Road, Fairfax, Virginia 22033.

Under the Company’s By-laws (the “By-laws”), a stockholder must follow
certain procedures to nominate persons for election as directors or to propose
other business to be considered at an annual meeting of shareholders. These
procedures provide that shareholders desiring to make nominations for directors
and/or to bring a proper subject before a meeting must do so by notice timely
received by the Secretary of the Company. The Secretary of the Company
generally must receive notice of any such proposal not less than sixty days and
no more than ninety days prior to the anniversary of the preceding year’s
annual meeting of shareholders. In the case of proposals for the 2000 annual
meeting of shareholders, the Secretary of the Company generally must receive
notice of any such proposal no earlier than February 7, 2000, and no later than
March 9, 2000 (other than proposals intended to be included in the proxy
statement and form of proxy, which, as noted above, must be received by
December 21, 1999). Generally, such shareholder notice must set forth (a) as
to each nominee for director, all information relating to such nominee that is
required to be disclosed in solicitations or proxies for election of directors
under the proxy rules of the Commission; (b) as to any other business, a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest
in such business of such shareholder; and (c) as to the shareholder, (i) the
name and address of such shareholder, (ii)

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the number of shares of Common Stock which are owned beneficially and of record
by such shareholder, (iii) a representation that the shareholder is a holder of
record of Common Stock entitled to vote at such meeting and intends to appear
in person or by proxy at the meeting to propose such nomination or other
business, and (iv) a representation as to whether the shareholder intends, or
is part of a group which intends, to solicit proxies from other shareholders in
support of such nomination or other business. The chairman of the annual
meeting shall have the power to declare that any proposal not meeting these and
any other applicable requirements imposed by the By-laws shall be disregarded.
A copy of the By-laws may be obtained without charge on written request to
Frank A. Nicolai, Secretary, American Management Systems, Incorporated, 4050
Legato Road, Fairfax, Virginia 22033.

In addition, the form of proxy solicited by the Board of Directors in
connection with the 2000 annual meeting of shareholders will confer
discretionary authority to the named proxies to vote on any proposal, unless
with respect to a particular proposal the Secretary of the Company receives
notice of such matter no earlier than February 7, 2000, and no later than March
9, 2000, and such notice complies with the other requirements described in the
preceding paragraph.

ANNUAL REPORT

A copy of the 1998 Annual Report of the Company (which includes
condensed financial data and a letter to shareholders) accompanies this Proxy
Statement. Appendix 1 to this Proxy Statement, titled “1998 Financial Report,”
contains all of the financial information (including the Company’s audited
financial statements), and certain general information, previously published in
the Company’s Annual Report. Appendix 1 is incorporated herein by reference.
A copy of the Company’s 1998 Annual Report on Form 10-K may be obtained without
charge by writing to Frank A. Nicolai, Secretary, American Management Systems,
Incorporated, 4050 Legato Road, Fairfax, Virginia 22033.

BY ORDER OF THE BOARD OF DIRECTORS,

Frank A. Nicolai
Secretary

April 21, 1999
Fairfax, Virginia

SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND THE MEETING ARE REMINDED TO
DATE, SIGN, AND RETURN THE ENCLOSED PROXY IN THE POSTAGE-PAID ENVELOPE PROVIDED
OR CAST YOUR VOTES BY TELEPHONE AT 1-800-840-1208. INSTRUCTIONS REGARDING
TELEPHONE VOTING ARE INCLUDED ON THE PROXY.

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EXHIBIT A

AMERICAN MANAGEMENT SYSTEMS, INCORPORATED

SECOND RESTATED CERTIFICATE OF INCORPORATION

AMENDMENT

TO ARTICLE FOURTH

Section. 1. Authorized Shares. The total authorized capital
stock of the Corporation shall be 204,000,000 shares, consisting of 4,000,000
shares of Preferred Stock, par value $.10 per share (herein called the
“Preferred Stock”), and 200,000,000 shares of Common Stock, par value $0.01 per
share (herein called the “Common Stock”).

A-1
30

EXHIBIT B

AMERICAN MANAGEMENT SYSTEMS, INCORPORATED

1996 AMENDED STOCK OPTION PLAN F, AS AMENDED
AND IN EFFECT ON MARCH 29, 1999

(As Amended March 3, 1999,
Such Amendment Subject To Shareholder Approval)

I. PURPOSES

There are three purposes of the 1996 Amended Stock Option Plan F
(the “Plan”). The first is to offer to those employees who contribute materially
to the successful operation of AMERICAN MANAGEMENT SYSTEMS, INCORPORATED (the
“Corporation”) additional incentive and encouragement to remain in the employ of
the Corporation by increasing their personal participation in the Corporation
through stock ownership. The second purpose is to provide an alternative means
of compensating key employees whose performances contribute significantly to the
success of the Corporation. The third is to attract and retain directors who
have not at any time been officers or employees of the Corporation (“Outside
Directors”) and to compensate such Outside Directors for service to the
Corporation. The Plan provides a means whereby optionees may purchase shares of
the $0.01 par value common stock of the Corporation (the “Common Stock”)
pursuant to options. The options may be either one of two types, (1) “incentive
stock options” which will qualify as such under Section 422 of the Internal
Revenue Code of 1986, as amended (the “Code”), or under any applicable successor
statute, or (2) “nonqualified stock options,” that is, options which are not
intended to qualify as incentive stock options under Section 422 of the Code.

II. ADMINISTRATION

Except as otherwise provided in this Section II, the Plan shall
be implemented and administered by the Board of Directors of the Corporation
(the “Board”) or a Stock Option/Award Committee appointed by the Board and
composed of three or more directors of the Corporation.

The Stock Option/Award Committee may be delegated the authority
and discretion to adopt and revise such rules and regulations as it shall deem
necessary for the administration of the Plan, and to determine, consistent with
the provisions of the Plan, the employees to be granted options, whether such
options shall be nonqualified stock options or incentive stock options, the
times at which options shall be granted, the exercise price of the shares
subject to each option (subject to paragraph D of Section VI), the number of
shares subject to each option, the vesting schedule of options or whether the
options shall be immediately vested, the times when options shall terminate, and
whether the exercise price of options shall be paid in cash or stock. Acts of a
majority of the members of the Stock Option/Award Committee at a meeting at
which a quorum is present, or acts approved in writing by a majority of the
members of the Stock Option/Award Committee, shall be the valid acts of the
Stock Option/Award Committee. The Stock Option/Award Committee’s actions,
including any interpretation or construction of any provisions of the Plan or
any option granted hereunder, shall be final, conclusive and binding unless
otherwise determined by the Board at its next regularly scheduled meeting.

Notwithstanding any other provision of this Section II, or the
Plan or any documentation governing incentive compensation plans pursuant to
which officers may elect to receive options under this Plan, a committee
composed of at least two Non-Employee Directors, within the meaning of Rule
16b-3(b)(3) of the Securities and Exchange Commission who also are “outside
directors” within the meaning of Section 162(m) of the Code (the “Compensation
Committee”), shall have the authority (a) to make awards to directors of the
Corporation who are not Outside Directors, to all persons who are “officers” of
the Corporation as defined for purposes of Sections 16(a) and 16(b) of the
Securities Exchange Act of 1934, as amended (the “Act”), and to “covered
employees,” within the meaning of Section 162(m) of the Code, and (b) to perform
all other functions of the Board or Stock Option/Award Committee, as the case
may be, with respect to outstanding awards to any of such directors, officers,
and covered
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31

employees including without limitation amendments to this Plan or such
outstanding awards which affect such persons.

No member of the Board, the Stock Option/Award Committee or the
Compensation Committee, as the case may be, shall be liable for any action or
determination made in good faith with respect to the Plan or any option granted
under it.

III. ELIGIBILITY; PARTICIPATION; SPECIAL LIMITATIONS

All key employees (including officers and directors) of the
Corporation, or any corporation in which the Corporation owns stock possessing
more than 50 percent of the voting power (a “Subsidiary”), who meet minimum
salary and other requirements established by the Board, shall be eligible to
receive options under the Plan. All Outside Directors also shall be eligible to
receive options under the Plan. An employee who has been granted an option may
be granted an additional option or options or rights under the Plan if the
Board, the Stock Option/Award Committee or the Compensation Committee, as the
case may be, shall so determine. The granting of an option under the Plan shall
not affect any outstanding stock option previously granted to an employee under
the Plan or any other plan of the Corporation.

Nothing contained in the Plan, or in any option granted pursuant
to the Plan, shall (i) confer upon any employee the right to continued
employment, or shall interfere in any way with the right of the Corporation or a
Subsidiary to terminate the employment of such employee at any time or (ii)
confer upon any Outside Director the right to continued membership on the Board,
or shall interfere in any way with the right of the Corporation to terminate the
membership on the Board of such Outside Director.

In no event, however, shall an incentive stock option be granted
to any person who then owns (as that term is defined in Section 424 of the Code)
stock possessing more than 10% of the total combined voting power of all classes
of stock of the Corporation or of any of its Subsidiaries, unless the exercise
price as determined under paragraph D of Section VI hereof is equal to at least
110% of the fair market value of the stock subject to the incentive stock option
as of the date of grant and unless the term during which such incentive stock
option may be exercised does not exceed five years from the date of the grant
thereof. Options will not be treated as incentive stock options to the extent
that the aggregate fair market value (determined as of the date the option is
granted) of the Common Stock with respect to which options are exercisable for
the first time by an employee during any calendar year (under all incentive
stock option plans of the Corporation and its Subsidiaries) exceeds $100,000.

IV. BASIS OF GRANT

Options shall be granted to employees either (a) on the basis of
awards earned under the Corporation’s incentive compensation programs for groups
of key employees, as in effect from time to time, or (b) as the Board, the Stock
Option/Award Committee or the Compensation Committee, as the case may be, may
determine from time to time. If options are granted based on (a) hereof, then
performance bonuses and options based thereon shall be earned based on the
employee’s success in meeting predetermined performance standards during one or
more years (the “Performance Period”). Options shall be granted under (a)
hereof, if at all, at the time that the Corporation determines in its judgment
that the employee has met or will meet the employee’s predetermined performance
standards for the Performance Period.

Options shall be granted to Outside Directors as the Compensation
Committee may determine from time to time.

V. NUMBER OF SHARES AND OPTIONS

A. Shares of Stock Subject to the Plan. The number of shares
authorized to be issued pursuant to options granted under the Plan is 5,800,000
shares, subject to adjustment in accordance with the provisions of paragraph G
of Section VI hereof. Shares subject to options granted under the Plan may be
authorized and unissued shares or shares previously acquired or to be acquired
by the Corporation and held in treasury. Any shares subject to an option which
expires for any reason or is terminated unexercised as to such shares may again
be subject to an option granted under the Plan.

B. Maximum Number of Options. The number of shares which may be
subject to options granted under the Plan in any single calendar year for awards
earned for one-year Performance Periods shall not exceed 200,000 shares, subject
to adjustment in accordance with paragraph G of Section VI hereof. There shall
be no annual limitation on options granted with respect to awards earned for
Performance Periods of more than one year.

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Notwithstanding the foregoing, the maximum number of shares which may be subject
to options granted under the Plan to any “covered employee” for purposes of
Section 162(m) of the Code during the life of the Plan shall be 100,000 shares,
subject to adjustment in accordance with paragraph G of Section VI hereof.

VI. TERMS AND CONDITIONS OF OPTIONS

A. Option Agreement. Each option granted pursuant to the Plan
shall be evidenced by an agreement (“Option Agreement”) between the Corporation
and the optionee receiving the option. Option Agreements (which need not be
identical) shall state whether the option is an incentive stock option or a
nonqualified stock option, shall designate the number of shares and the exercise
price of the options to which they pertain, shall set forth the vesting schedule
of the options or state that the options are vested immediately. The Option
Agreements shall be in writing, dated as of the date the option is granted, and
shall be executed on behalf of the Corporation by such officers as the Board,
the Stock Option/Award Committee or the Compensation Committee, as the case may
be, shall authorize. Option Agreements generally shall be in such form and
contain such additional provisions as the Board, the Stock Option/Award
Committee or the Compensation Committee, as the case may be, shall prescribe,
but in no event shall they contain provisions inconsistent with the provisions
of the Plan.

B. Exercise of Options. Options are exercisable only to the
extent they are vested. Options granted to employees shall vest either
immediately or periodically pursuant to a schedule selected by the Board, the
Stock Option/Award Committee or the Compensation Committee, as the case may be,
at the same time the option is granted, except that the maximum vesting period
for nonqualified stock options shall be five (5) years and the maximum vesting
period for incentive stock options shall be seven (7) years. The Option
Agreement shall either state that the options are fully vested upon grant and
immediately exercisable in full or shall set forth the vesting schedule selected
by the Board, the Stock Option/Award Committee or the Compensation Committee, as
the case may be.

Options granted to Outside Directors shall vest either
immediately or periodically pursuant to a schedule selected by the Compensation
Committee at the same time the option is granted, provided that upon termination
of an Outside Director as a member of the Board of Directors by reason of death
or disability, all options held by such Outside Director shall vest fully as of
the date of termination.

Optionees may exercise at any time or from time to time all of
any portion of a vested option.

C. Repurchase Amendment. Options granted to employees or Outside
Directors may be amended to advance the date on which the option shall vest. If
an option is so amended, the amendment also may provide that the shares which
would not have been vested under the vesting schedule set forth in the Option
Agreement shall be subject to repurchase by the Corporation for a specified
period of time at the original exercise price if the employment of the optionee
is terminated for any reason prior to expiration of the repurchase period. The
amendment shall be evidenced by a written agreement (the “Repurchase Amendment”)
between the Corporation and the optionee, shall be executed on behalf of the
Corporation by such officers as the Board, the Stock Option/Award Committee or
the Compensation Committee, as the case may be, shall authorize, and shall be in
such form and contain such provisions as the Board, the Stock Option/Award
Committee or the Compensation Committee, as the case may be, shall prescribe.

D. Exercise Price.

1. Incentive Stock Options. The price at which incentive
stock options granted pursuant to the Plan may be exercised shall be determined
by the Board, the Stock Option/Award Committee or the Compensation Committee, as
the case may be, which price shall be at least equal to the fair market value of
the underlying Common Stock at the date at the options are granted. In the case
of incentive stock options granted to a person who owns, immediately after the
grant of such incentive stock option, stock possessing more than 10% of the
total combined voting power of all classes of stock of the Corporation or of any
of its Subsidiaries (as more fully set forth in Section III hereof), the
purchase price of the Common Stock covered by such incentive stock option shall
not be less than 110% of the fair market value of such stock on the date of
grant.

2. Nonqualified Stock Options. The price at which all
nonqualified stock options granted pursuant to the Plan may be exercised, except
those options granted on the basis of awards earned for one-year Performance
Periods under the Corporation’s incentive compensation programs, shall be the
fair market value of the Common Stock on the date of grant. The exercise price
of nonqualified stock options granted on the basis of awards earned for one-year
Performance Periods under the Corporation’s incentive compensation programs may
be other than the

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fair market value of the Common Stock on the date of grant only if the exercise
price is determined by a formula which is based on the fair market value of the
Common Stock, as of a date, or for a period, that is within three months of the
date of grant and which is selected by the Board, the Stock Option/Award
Committee or the Compensation Committee, as the case may be, in its sole
discretion, and determined by the Board, the Stock Option/Award Committee or the
Compensation Committee, as the case may be, in its sole discretion, to be in the
best interests of the Corporation and consistent with the intent of the
incentive compensation program. The exercise price as determined under any such
formula may be below fair market value of the Common Stock on the date of grant.
Notwithstanding the foregoing, the exercise price of any option granted to a
“covered employee” for purposes of Section 162(m) of the Code shall be the fair
market value of the Common Stock on the date of grant.

3. Fair Market Value. For purposes of the Plan the
term “fair market value” shall be defined as the closing bid price of the Common
Stock quoted over The Nasdaq Stock Market in the National Market on the date of
grant of the option or if there is no trade on such date, the closing bid price
on the last preceding date upon which such Common Stock was traded. In the event
that the Common Stock is not traded over The Nasdaq Stock Market, the term fair
market value shall be defined as the closing bid price of the Common Stock
published in the National Daily Stock Quotation Summary on the date of grant of
the option, or if there are no quotations published on such date, on the most
recent date upon which such Common Stock was quoted. In the event that the
Common Stock is listed upon an established stock exchange or exchanges, such
fair market value shall be deemed to be the highest closing price of the Common
Stock on such stock exchange or exchanges on the date the option is granted, or
if no sale of the Common Stock shall have been made on any exchange on that
date, then the next preceding day on which there was a sale of such stock.

4. Payment. Payment of the exercise price may be (i) in
cash, (ii) by delivery to the Corporation of (x) irrevocable instructions to
deliver to a broker the stock certificates representing the shares for which the
option is being exercised, and (y) irrevocable instructions to the broker to
sell such shares and promptly deliver to the Corporation the portion of the
proceeds equal to the exercise price, or in the sole discretion of the Board,
the Stock Option/Award Committee or the Compensation Committee, as the case may
be, (iii) by exchange of Common Stock of the Corporation, or (iv) partly in cash
and partly by exchange of such Common Stock, provided that for purposes of (iii)
and (iv) the value of such Common Stock shall be the fair market value on the
date of exercise, and further provided that such Common Stock shall have been
held by the optionee for a period of at least six (6) months prior to the date
of exercise.

The Board, the Stock Option/Award Committee or the Compensation
Committee, as the case may be, may permit deferred payment of all or any part of
the purchase price of the shares purchased pursuant to the Plan, provided the
par value of the shares must be paid in cash.

E. Suspension or Termination of Options. Subject to earlier
termination as provided below, all stock options shall expire, and all rights
granted under Option Agreements shall become null and void, on the date
specified in the Option Agreement, which date shall be no later than ten (10)
years after the stock options are granted.

Upon termination of an employee’s employment with the Corporation
or a Subsidiary for any reason other than resignation as an employee following
completion of ten (10) or more years of continuous service as an employee, or
upon termination of an Outside Director as a member of the Board for any reason
other than resignation as an Outside Director following completion of ten (10)
or more years of continuous service as an Outside Director, death or disability,
all options held by such employee or Outside Director which are not exercisable
on the date of such termination shall expire. To the extent nonqualified stock
options are exercisable on such date, shares subject to nonqualified stock
options held by an employee may be purchased during the “exercise period,” after
which the nonqualified stock options shall expire and all rights granted under
the Option Agreement shall become null and void. The “exercise period” for
shares subject to nonqualified stock options held by an employee, his heirs,
legatees or legal representatives, as the case may be, ends on the earlier of
(i) the date on which the nonqualified stock option expires by its terms, or
(ii) (A) except in the case of death, disability, or resignation as an employee
following completion of ten (10) or more years of continuous service as an
employee, thirty (30) days after the date of the employee’s termination of
employment, or (B) in the case of death, disability, or resignation as an
employee following completion of ten (10) or more year of continuous service,
one (1) year after the date of the employee’s termination of employment. Upon
termination of an Outside Director as a member of the Board for the reason of
resignation as an Outside Director following completion of at least ten (10)
years of continuous service as an Outside Director, death or disability, the
“exercise period” for shares subject to nonqualified stock options held

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34

by the Outside Director, his heirs, legatees, or legal representatives, as the
case may be, ends on the earlier of (i) the date on which the nonqualified stock
option expires by its terms, or (ii) the date one (1) year after the date of
termination of the Outside Director’s service as a member of the Board. In any
event, no nonqualified stock option may be exercised after the date on which the
nonqualified stock option expires by its terms.

To the extent incentive stock options are exercisable on the date
of termination, shares subject to incentive stock options may be purchased by
the employee, his heirs, legatees or legal representatives, as the case may be,
on the earlier of (i) the date on which the incentive stock option expires by
its terms or (ii) (A) except in the case of death or disability, within thirty
(30) days, or (B) in the case of death or disability, within one (1) year after
the date of termination of employment, after which the incentive stock options
shall expire and all rights under the Option Agreements shall become null and
void. In any event, no incentive stock option may be exercised after the date on
which the incentive stock option expires by its terms.

If the Director of Human Resources of the Corporation or his or
her designee reasonably believes an optionee other than an Outside Director has
committed an act of misconduct as described in this paragraph, the Director of
Human Resources may suspend the optionee’s rights to exercise any option pending
a determination by the Board. If the Board determines an optionee other than an
Outside Director has committed an act of embezzlement, fraud, dishonesty,
nonpayment of any obligation owed to the Corporation, breach of fiduciary duty
or deliberate disregard of Corporation rules resulting in loss, damage or injury
to the Corporation, or if an optionee makes an unauthorized disclosure of any
trade secret or confidential information, engages in any conduct constituting
unfair competition, induces any customer to breach a contract with an optionee
or induces any principal for whom the Corporation acts as agent to terminate
such agency relationship, neither the optionee nor his or her estate shall be
entitled to exercise any option whatsoever. In making such determination, the
Board shall act fairly and shall give the optionee an opportunity to appear and
present evidence on his or her behalf at a hearing before a committee of the
Board. For any optionee who is an “officer” for purposes of Section 16 of the
Act, the determination shall be made by the Board, the Stock Option/Award
Committee or the Compensation Committee, whichever is responsible for
administration of the Plan with respect to the optionee.

F. Non-Transferability of Options. Options pursuant to the Plan
are not transferable by the optionee otherwise than by will or the laws of
descent and distribution, or pursuant to a qualified domestic relations order as
defined by the Code, Title I of the Employee Retirement Income Security Act of
1974, as amended, or the rules thereunder. Except as permitted by the preceding
sentence, no option nor any right granted under an Option Agreement shall be
transferred, assigned, pledged, hypothecated or disposed of in any other way
(whether by operation of law or otherwise), or be subject to execution,
attachment or similar process, and each option shall be exercisable during the
optionee’s lifetime only by the optionee. Upon any attempt to transfer, assign,
pledge, hypothecate or otherwise dispose of such options or of such other rights
contrary to the provisions hereof, or to subject such options or such other
rights to execution, attachment or similar process, such options and such other
rights shall immediately terminate and become null and void.

G. Adjustment Provisions. Except as otherwise provided in this
paragraph G, in the event of changes in the Common Stock by reason of any stock
split, combination of shares, stock dividend, reclassification, merger,
consolidation, reorganization, recapitalization or similar adjustment, or by
reason of the dissolution or liquidation of the Corporation, appropriate
adjustments may be made in (i) the aggregate number of or class of shares
available under the Plan, and (ii) the number, class and exercise price of
shares remaining subject to all outstanding options. Whether any adjustment or
modification is to be made as a result of the occurrence of any of the events
specified in this section, and the extent thereof, shall be determined by the
Board, whose determination shall be binding and conclusive. Notwithstanding the
previous sentence, in the event of a stock split, stock dividend or other event
that is functionally equivalent to a stock split or stock dividend, (i) the
number of shares subject to then-outstanding options will be adjusted so that
upon exercise of the option, the holder of each option will be entitled to
receive the number of shares or other securities which the holder would have
been entitled to receive after the event had the option been exercised
immediately before the earlier of the date of the consummation of the event or
the record date of the event (the “event date”), (ii) the price of each share
subject to then-outstanding options will be adjusted proportionately so that the
aggregate purchase price for all then-outstanding options will be the same
immediately after the event date as before the event date, (iii) an appropriate
and proportionate adjustment will be made as of the event date in the maximum
number of shares that may be issued pursuant to options granted under the Plan,
(iv) any adjustment with respect to then-outstanding incentive stock options
will be made in a transaction that does not constitute a modification under
Section 424(h)(3) of the Code, and (v) any option to purchase fractional shares
resulting from an adjustment will be eliminated. Existence of the Plan or of
Option Agreements pursuant to the Plan

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35

shall in no way impair the right of the Corporation or its stockholders to make
or effect any adjustments, recapitalizations, reorganizations or other changes
in the Corporation’s capital structure or its business, or any merger,
consolidation, dissolution or liquidation of the Corporation, or any issue of
bonds, debentures, preferred or prior preference stock ahead of or affecting the
Common Stock of the Corporation, or any grant of options on its stock not
pursuant to the Plan.

VII. RIGHTS AS A SHAREHOLDER

Optionees shall not have any of the rights and privileges of
shareholders of the Corporation in respect of any of the shares subject to any
option granted pursuant to the Plan unless and until a certificate, if any,
representing such shares shall have been issued and delivered.

VIII. WITHHOLDING

To the extent required by applicable federal, state, local or
foreign law, an optionee shall make arrangements satisfactory to the Corporation
for the satisfaction of any withholding tax obligations that arise by reason of
an option exercise or the disposition of shares acquired upon exercise of an
incentive stock option. The Corporation shall not be required to issue shares
until such obligations are satisfied. The Board, the Stock Option/Award
Committee, or the Compensation Committee, as the case may be, may permit these
obligations to be satisfied by having the Corporation withhold a portion of the
shares of Common Stock that otherwise would be issued upon exercise of the
option, or to the extent permitted, by permitting the optionee to tender shares
owned by the optionee.

IX. RECEIPT OF PROSPECTUS

Upon the execution of an Option Agreement, each optionee
receiving options pursuant to the Plan shall be given a Prospectus, as filed by
the Corporation under the Securities Act of 1933, as amended, including any
exhibits thereto, describing the Plan. Each Option Agreement shall contain an
acknowledgment by the optionee that the requirements of this section have been
met.

X. SUCCESSORS

The provisions of the Plan shall be binding upon, and inure to
the benefit of, all successors of any optionee, including, without limitation,
his estate and the executors, administrators or trustees thereof, his heirs and
legatees, and any receiver, trustee in bankruptcy or representative of creditors
of such optionee.

XI. TERMINATION AND AMENDMENT OF THE PLAN

Subject to obtaining shareholder approval of this amended 1996
Amended Stock Option Plan F at the annual meeting of the shareholders on May 21,
1999, the Plan shall remain in effect until January 1, 2006, unless sooner
terminated as hereinafter provided. The Board shall have complete power and
authority at any time to terminate the Plan or to make such modification or
amendment thereof as it deems advisable and may from time to time suspend,
discontinue or abandon the Plan, provided that no such action by the Board shall
adversely affect any right or obligation with respect to any grant theretofore
made, and, further provided that without approval by vote of the shareholders,
the Board shall not adopt any amendment that would (i) materially modify the
requirements as to the exercise price of stock options, (ii) increase the number
of shares which may be issued under the Plan (except as provided in paragraph G
of Section VI hereof), (iii) materially modify the requirements as to
eligibility for participation in the Plan, or (iv) modify the material terms of
the Plan as to “covered employees” within the meaning of Section 162(m) of the
Code.

XII. INDEMNIFICATION OF COMMITTEE

In addition to such other rights of indemnification as they may
have as members of the Board, the Stock Option/Award Committee or the
Compensation Committee, as the case may be, the members of the Board, the Stock
Option/Award Committee or the Compensation Committee shall be indemnified by the
Corporation against the reasonable expenses, including attorneys’ fees actually
and necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan, Option Agreements or any option granted hereunder, and
against all amounts paid by them in settlement thereof (provided such settlement
is approved by legal counsel selected by the Corporation) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such member is liable for negligence or misconduct in the
performance of his duties; provided that

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within sixty (60) days after institution of any such action, suit or proceeding
a member shall in writing offer the Corporation the opportunity, at its own
expense, to defend the same.

XIII. MERGER OF THE CORPORATION

Unless the options issued pursuant to this Plan are assumed in a
transaction to which Section 424(a) of the Code applies, if the Corporation
shall (i) merge or consolidate with another corporation under circumstances
where the Corporation is not the surviving corporation, (ii) sell all, or
substantially all of its assets, or (iii) liquidate or dissolve, then each
option shall terminate on the date and immediately prior to the time such
merger, consolidation, sale, liquidation or dissolution becomes effective or is
consummated, provided that the holder of the option shall have the right
immediately prior to the effectiveness or consummation of such merger,
consolidation, sale, liquidation or dissolution, to exercise any or all of the
vested portion of the option, unless such option has otherwise expired or been
terminated pursuant to its terms or the terms hereof. In the event of such
merger, consolidation, sale, liquidation or dissolution, any portion of an
outstanding option which would have vested within one year after the date on
which such merger, consolidation, sale, liquidation or dissolution becomes
effective or is consummated shall vest immediately prior to the effectiveness or
consummation of such merger, consolidation, sale, liquidation or dissolution and
shall be part of the vested portion of the option which the holder of the option
may exercise.

XIV. APPROVAL OF PLAN; EFFECTIVE DATE

The Plan was adopted by the Board on April 3, 1996, and was
approved by the shareholders on May 10, 1996. The Plan was amended by the Board
on February 21, 1997, and the Plan, as amended, was approved by the shareholders
on May 9, 1997. The Plan was further amended by the Board on March 3, 1999,
subject to shareholder approval of the Plan, as amended, at the annual meeting
of shareholders on May 21, 1999.

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Appendix 1

AMERICAN MANAGEMENT SYSTEMS, INCORPORATED

1998 FINANCIAL REPORT

38

BUSINESS OF AMS

OVERVIEW

The business of American Management Systems, Incorporated and its
wholly-owned subsidiaries (“AMS” or the “Company”) is to partner with clients to
achieve breakthrough performance through the intelligent use of information
technology. AMS provides a full range of consulting services from strategic
business analysis to the full implementation of solutions that produce genuine
results, on time and within budget. AMS measures success based on the results
and business benefits achieved by its clients.

AMS is a trusted business partner for many of the largest and most
respected organizations in the markets in which it specializes. Each year,
approximately 85-90% of the Company’s business comes from clients it worked with
in previous years.

The Company, which operates as one segment, focuses on clients in
specific sectors which are referred to as target markets. Organizations in AMS’s
target markets — telecommunications firms; financial services institutions;
state and local governments and education organizations; federal government
agencies; and other corporate clients — have a crucial need to exploit the
potential benefits of information and systems integration technology. The
Company helps clients fulfill this need by continuing to build a professional
staff which is composed of experts in the necessary technical and functional
disciplines; managers who can lead large, complex systems integration projects;
and business and computer analysts who can devise creative solutions to complex
problems.

Another significant component of AMS’s business is the development of
proprietary software products, either with its own funds or on a jointly funded
basis with other organizations. These products are principally licensed as
elements of custom tailored systems and, to a lesser extent, as stand-alone
applications. The Company expended $77.4 million in 1998, $50.6 million in 1997,
and $30.4 million in 1996 for research and development associated with
proprietary software. The Company expensed in the accompanying consolidated
financial statements $35.4 million in 1998, $30.7 million in 1997, and $26.0
million in 1996 for research and development associated with proprietary
software. As a percentage of revenues, license and maintenance fee revenues were
less than 10% during each of the last three years.

During 1998, the Company formed a cross-target market practice that
will focus on delivering high-value, customer-facing Web solutions – including
eBill, eCare and eMarketing – tailored to clients in financial services,
telecommunications, government and utilities. These solutions will help firms
achieve greater cost savings, deliver improved customer service and leverage
cross-sell and up-sell opportunities in their markets. The new “eCustomer”
practice builds upon the Company’s existing, significant eCommerce client base.

In order to serve clients outside of the United States, AMS has
expanded internationally by establishing eighteen subsidiaries or foreign
branches. Exhibit 21 of this Form 10-K provides a complete listing of all active
AMS subsidiaries (and branches), showing name, year organized or acquired, and
place of incorporation. Revenues attributable to AMS’s non-US clients were
approximately $208.4 million in 1998, $248.6 million in 1997, and $278.3 million
in 1996. Additional information on revenues and assets attributable to AMS’s
geographic areas of operation is provided in Note 12 of the consolidated
financial statements appearing elsewhere in this financial report.

Founded in 1970, AMS services clients worldwide. AMS’s approximately
8,100 full-time employees serve clients from corporate headquarters in Fairfax,
Virginia and from 57 offices worldwide.

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TELECOMMUNICATIONS FIRMS

AMS markets systems consulting and integration services for order
processing, customer care, billing, accounts receivable, and collections, both
for local exchange and interexchange carriers and for cellular/wireless
telephone companies. Most of the Company’s work involves developing and
implementing customized capabilities using AMS’s application software products
as a foundation.

FINANCIAL SERVICES INSTITUTIONS

AMS provides information technology consulting and systems integration
services to money center banks, major regional banks, insurance companies, and
other large financial services firms. The Company specializes in corporate and
international banking, consumer credit management, customer value and global
risk management, bank management information systems, and retirement plan
systems.

STATE AND LOCAL GOVERNMENTS AND EDUCATION

AMS markets systems consulting and integration services, and
application software products, to state, county, and municipal governments for
financial management, tax and revenue management, human resources, social
services, public safety and transportation functions, and environmental systems.
The Company also markets services and application software products to
universities and colleges.

FEDERAL GOVERNMENT AGENCIES

The Company’s clients include civilian and defense agencies and
aerospace companies. Assignments require knowledge of agency programs and
management practices as well as expertise in computer systems integration.
Services provided by AMS include information technology, consulting, operations
and maintenance support, large scale systems integration and certain Year 2000
remediation. AMS’s work for defense agencies often involves specialized
expertise in engineering and logistics.

OTHER CORPORATE CLIENTS

The Company also solves information systems problems for the largest
firms in other industries, including health care organizations and firms in the
gas and electric utilities industry. AMS has systems integration and operations
projects with several large organizations and intends to pursue more. AMS
provides technical training and technical consulting services in software
technology for large-scale business systems.

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FINANCIAL STATEMENTS AND NOTES

American Management Systems, Incorporated

CONSOLIDATED STATEMENTS OF OPERATIONS

– —————-
See Accompanying Notes to Consolidated Financial Statements.

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American Management Systems, Incorporated

CONSOLIDATED BALANCE SHEETS

– —————-
See Accompanying Notes to Consolidated Financial Statements.

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American Management Systems, Incorporated

CONSOLIDATED BALANCE SHEETS

– —————-
See Accompanying Notes to Consolidated Financial Statements.

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American Management Systems, Incorporated

CONSOLIDATED STATEMENTS OF CASH FLOWS

– —————-
See Accompanying Notes to Consolidated Financial Statements.

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American Management Systems, Incorporated

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Year Ended December 31, 1998, 1997, and 1996 (In millions)

– —————-
See Accompanying Notes to Consolidated Financial Statements.

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American Management Systems, Incorporated
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

– —————-
See Accompanying Notes to Consolidated Financial Statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

The business of American Management Systems, Incorporated and its
wholly-owned subsidiaries (“AMS” or the “Company”) is to partner with clients to
achieve breakthrough performance through the intelligent use of information
technology. AMS is an international business and information technology
consulting firm that provides a full range of services: business re-engineering,
change management, systems integration, and systems development and
implementation. AMS is headquartered in Fairfax, Virginia, with 57 offices
worldwide. The Company which operates as one segment focuses on the following
primary target markets: telecommunications firms, financial services
institutions, state and local governments and education, federal government
agencies and other corporate clients.

A. Revenue Recognition

Revenues on fixed-price contracts are generally recorded using the
percentage of completion method based on the relationship of costs incurred to
the estimated total costs of the project. Revenues on cost reimbursable
contracts and time and material contracts are recorded as labor and other
expenses are incurred.

The Company recognizes revenues on the percentage of completion method
for contracts involving software license fees and the provision of significant
software modifications and customized services. For all other software license
contracts, revenues are recorded upon execution of the contract, provided that
all shipment obligations have been met, fees are fixed or determinable, and
collection is deemed probable. Revenues from software maintenance contracts are
recognized ratably over the maintenance period.

On benefit-funded contracts (contracts whereby the amounts due the
Company are payable based on actual benefits derived by the client), the Company
defers recognition of revenues until the point at which management can predict,
with reasonable certainty, that the benefit stream will generate amounts
sufficient to fund the contract. From that point forward, revenues are
recognized on a percentage of completion basis based on the relationship of
costs incurred to the estimated total costs of the project.

When adjustments in contract value or estimated costs are determined,
any changes from prior estimates are reflected in earnings in the current
period. Any anticipated losses on contracts in progress are charged to earnings
when identified. The costs associated with cost-plus government contracts are
subject to audit by the U.S. Government. In the opinion of management, no
significant adjustments or disallowances of costs are anticipated beyond those
provided for in the financial statements.

B. Software Development Costs

The Company develops proprietary software products using its own funds,
or on a jointly funded basis with other organizations, and records such
activities as research and development. These software products are then
licensed to customers, either as stand-alone applications, or as elements of
custom-built systems.

The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86 — “Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise Marketed” and for software
jointly developed in accordance with Statement of Position 97-2, “Software
Revenue Recognition”. For projects funded by the Company, significant
development costs incurred beyond the point of demonstrated technological
feasibility are capitalized and, after the product is available for general
release to customers, such costs are amortized on a straight-line basis over a
period of 3 to 5 years, or other such shorter period as might be required. For
projects

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where the Company has a funding partner, the capital asset is reduced by the
amount collected from the partner. The Company recorded $14.5 million of
amortization in 1998, $12.5 million of amortization in 1997, and $9.3 million of
amortization in 1996. Unamortized costs were $79.1 million, $51.9 million, and
$32.7 million at December 31, 1998, 1997, and 1996 respectively. In 1998, the
Company reduced the unamortized costs by $14.8 million representing collections
from funding partners. The Company evaluates the net realizable value of
capitalized software using the estimated, undiscounted, net-cash flows of the
underlying products.

The Company capitalizes costs incurred for the development or purchase
of internal use software in accordance with Statement of Position 98-1,
“Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use.” Once the product is substantially complete and ready for its
intended use, capitalized costs are amortized on a straight-line basis over the
estimated useful life of the software.

The Company expended $77.4 million in 1998, $50.6 million in 1997, and
$30.4 million in 1996 for research and development associated with proprietary
software. The Company expensed in the accompanying consolidated financial
statements $35.4 million in 1998, $30.7 million in 1997, and $26.0 million in
1996 for research and development associated with proprietary software.

C. Fixed Assets, Purchased Computer Software Licenses and Intangibles

Fixed assets and purchased computer software licenses are recorded at
cost. Furniture, fixtures, and equipment are depreciated over estimated useful
lives ranging from 3 to 10 years. Leasehold improvements are amortized ratably
over the lesser of the applicable lease term or the useful life of the
improvement. For financial statement purposes, depreciation is computed using
the straight-line method. Purchased software licenses are amortized over 2 to 5
years using the straight-line method. Intangibles are generally amortized over 5
to 15 years.

D. 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 revenue, capitalized software development
costs, restricted stock, and the timing of deductibility of 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.

E. Earnings Per Share

Basic EPS excludes dilution and is computed by dividing net income by
the weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
and is computed using the treasury stock method.

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F. Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The carrying
amount approximates fair value because of the short maturity of these
instruments.

G. Currency Translation

For operations outside the United States with functional currencies
other than the U.S. dollar, the Company translates income statement amounts at
the average monthly exchange rates throughout the year. The Company translates
assets and liabilities at exchange rates prevailing as of the Balance Sheet
date. The resulting translation adjustments and gains and losses on intercompany
transactions which are long term in nature are shown as a separate component of
Stockholders’ Equity.

H. Principles of Consolidation

The consolidated financial statements include the accounts of American
Management Systems, Incorporated and its wholly-owned subsidiaries. All
significant intercompany transactions have been eliminated. The Company’s
investments in companies in which it has the ability to exercise significant
influence over operating and financial policies are accounted for under the
equity method, with the remaining investments carried at cost.

I. Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Future actual results could be different due to these
estimates. Significant estimates inherent in the preparation of the accompanying
consolidated financial statements include: management’s forecasts of contract
costs and progress towards completion which are used to determine revenue
recognition under the percentage-of-completion method, management’s estimates of
allowances for doubtful accounts, tax valuation allowances, and management’s
estimates of the net realizable value of purchased and developed computer
software and intangible assets.

J. Foreign Currency Hedging

From time to time, the Company enters into foreign exchange contracts
as a hedge of intercompany balance sheet transactions. Market value gains and
losses are recognized, and the resulting credits or debits offset foreign
exchange gains or losses on those transactions. For 1997 and 1998, the Company
entered into such short-term contracts with de minimis values. No contracts are
outstanding as of December 31, 1998.

K. Reclassifications

Certain prior year information has been reclassified to conform with
the current year presentation.

L. Comprehensive Income

The Company’s principal components of comprehensive income are net
income and foreign currency translation adjustments.

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M. New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, entitled “Accounting for Derivative Instruments and Hedging
Activities.” This Statement requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company will be required to adopt this new
accounting standard by January 1, 2000. The Company does not anticipate early
adoption of this new standard. Due to the recent release and complexity of this
standard, the Company has not completed an assessment of the impact it will have
on its financial position or results of operations. The Company currently has no
material transactions, which would be impacted by this standard.

NOTE 2 — ACCOUNTS AND NOTES RECEIVABLE

The Company enters into large, long-term contracts and, as a result,
periodically maintains individually significant receivable balances with certain
major clients. At December 31, 1998, the nine largest individual receivable
balances totaled approximately $94.5 million. No other receivable exceeded $5
million.

Management believes that credit risk, with respect to the Company’s
receivables, is low due to the creditworthiness of its clients and the
diversification of its client base across different industries and geographies.
In addition, the Company is further diversified in that it enters into a range
of different types of contracts, such as fixed price, cost-plus, time and
material, and benefits funded contracts. The Company may also, from time to
time, work as a subcontractor on particular contracts. The Company performs
ongoing evaluations of contract performance as well as evaluations of the
client’s financial condition.

NOTE 3 — NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS

Effective January 9, 1998, the Company entered into a syndicated
five-year $120 million Multi-Currency Revolving Credit Agreement with
NationsBank (now Bank of America) and Wachovia Bank (the “1998 Agreement”) as
agents. A term loan (the “Term Loan”), which was funded by Wachovia Bank and
NationsBank on January 6, 1997 under a term loan agreement, remains outstanding
and is now governed by the 1998 Agreement.

The aggregate weighted average borrowings under all revolving credit
agreements was approximately $4.5 million in 1998, and $41.3 million in 1997, at
daily weighted average interest rates of approximately 4.9% in 1998 and 6.6% in
1997. The maximum borrowed under all agreements was $33.8 million in 1998 and
$63.1 million in 1997. At December 31, 1998 the Company had no amounts

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50

outstanding under its revolving credit facility and $28.0 million in term loans
compared to $1.8 million outstanding under its revolving credit facility and
$35.4 million in term loans at December 31, 1997.

The Company and most of its existing subsidiaries can borrow funds
under the 1998 Agreement in any of the approved currencies, subject to certain
minimum amounts per borrowing. Interest on such borrowings will generally range
from LIBOR plus 12.5 basis points to LIBOR plus 45 basis points, depending on
the ratio of total debt to earnings before interest, taxes, depreciation, and
amortization. The Company must also pay a facility fee ranging from 12.5 basis
points to 20 basis points of the total facility, based on the same performance
measure. Based on such measures at December 31, 1998, interest payments during
1999 will be based on LIBOR plus 12.5 basis points and the facility fee will be
12.5 basis points of the total facility.

The 1998 Agreement, and the Term Loan, contain certain covenants with
which the Company must comply. These include: (i) maintain at the end of each
fiscal quarter for the four fiscal quarters ending on such date a fixed charge
coverage ratio of not less than 2.25 to 1.0, as of December 31, 1997 and March
31, 1998, increasing to 2.5 to 1.0 for the quarter ending June 30, 1998 and
thereafter, (ii) maintain total debt to EBITDA ratio of no more than 3.0 to 1.0,
(iii) restrictions on using net worth to acquire other companies or transferring
assets to a subsidiary, and (iv) restrictions on declaring or paying cash
dividends in any one fiscal year in excess of twenty-five percent of its net
income for such year.

The following schedule summarizes the total outstanding notes; there
are no outstanding capitalized lease obligations. The carrying values
approximate the fair values.

Interest paid by the Company totaled $4.2 million in 1998, $5.8 million
in 1997, and $3.2 million in 1996.

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NOTE 4 — EQUITY SECURITIES

At December 31, 1997, the Company had a stock option plan, 1992 Amended
and Restated Stock Option Plan E, as amended (the “1992 Plan E”), under which
the Company was authorized to issue up to 3,375,000 shares of common stock as
incentive stock options (“ISOs”) or nonqualified stock options (“NSOs”). The
1992 Plan E, which was approved by the shareholders in May 1992, replaced Stock
Option Plan E (“Plan E”). At its February 1998 meeting, the Board terminated the
1992 Plan E. No grants have been made under this plan since 1996. On May 10,
1996, the shareholders approved a new stock option plan for the Company, Stock
Option Plan F (“Plan F”) under which an additional 3,800,000 shares of common
stock may be issued as ISOs or NSOs. On February 21, 1997, the Board adopted
certain amendments to Plan F resulting in the 1996 Amended Stock Option Plan F
(“Amended Plan F”) which was approved by the shareholders at the May 9, 1997
annual meeting.

Under all plans, the exercise price of an ISO granted is not less than
the fair market value of the common stock on the date of grant and for NSOs, the
exercise price is either the fair market value of the common stock on the date
of the grant or, when granted in connection with one-year performance periods
under the Company’s incentive compensation program, the exercise price may be
determined by a formula selected by the Board or appropriate Board committee
that is based on the fair market value of the common stock as of a date, or for
a period, that is within three months of the date of grant. In cases where the
average market value exceeds the exercise price on the date of grant, the
differential is recorded as compensation expense. Under all plans, options
expire up to eight years from the date of grant. Options granted are exercisable
immediately, in monthly installments, or at a future date, as determined by the
appropriate Board committee or as otherwise specified in the plan.

At December 31, 1998 there were 2,191,853 shares available for grant
under Amended Plan F. No options remain available for grant under any previous
stock option plan. The following table summarizes information with respect to
stock options outstanding at December 31, 1998.

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Additional information with respect to stock options awarded pursuant to such
plans is summarized in the following schedule.

The Company has chosen to continue to account for stock-based
compensation using the method prescribed in APB Opinion No. 25, “Accounting for
Stock Issued to Employees.” In 1996, the Company adopted, for disclosure
purposes only, Statement of Financial Accounting Standards No. 123, “Accounting
for Stock Based Compensation” (SFAS No. 123).

If the Company determined compensation cost for these plans in
accordance with SFAS No. 123, the Company’s pro-forma net income and earnings
per share for fiscal year 1998, 1997 and 1996 would have been decreased to the
pro-forma amounts indicated below:

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The SFAS No. 123 method of accounting does not apply to options granted
prior to January 1, 1995, and accordingly, the resulting pro-forma compensation
cost may not be representative of that to be expected in future years.

The Company has eight-year and five-year options. For disclosure
purposes, the fair value of each stock option grant is estimated on the date of
grant using the Black-Scholes option-pricing model. Under the Black-Scholes
model, the total value of the eight-year options granted in 1998, 1997 and 1996
was $2.8 million, $2.2 million and $1.8 million, respectively, which would be
amortized on a graded vesting schedule on a pro-forma basis over a seven-year
period. The weighted-average fair value of the eight-year stock options granted
in 1998, 1997 and 1996 was $12.37, $10.56 and $12.36, respectively. The total
value of the five-year stock options granted in 1998, 1997 and 1996 was $5.2
million, $5.5 million and $5.0 million, respectively. These would be amortized
ratably on a pro-forma basis over a five-year period (which varies between four
months and five years). The weighted-average fair value of the five-year stock
options granted in 1998, 1997 and 1996 was $10.18, $7.28 and $8.06,
respectively.

Additionally, the following assumptions were used for both the
eight-year and five-year stock options granted in 1998, 1997 and 1996
respectively.

At its February 1995 meeting, the Board authorized the Company to expend up
to $10 million to repurchase additional shares of its common stock, from time to
time, for its stock based benefit plans or for other corporate purposes. On
August 3, 1998 the Company announced that its Board had authorized the purchase,
from time to time, of up to 1 million shares of its common stock through open
market and negotiated purchases. The Company repurchased 723,520, 3,358, and
24,600 shares of its common stock during 1998, 1997, and 1996, respectively, for
a total of $21.8 million. In addition, the Company has begun funding stock
option exercises through the reissuance of previously acquired treasury shares.

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NOTE 5 — EARNINGS PER SHARE RECONCILIATION

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NOTE 6 — INCOME TAXES

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The net changes in total valuation allowance for the years ending
December 31, 1998, 1997, and 1996 were an increase of $0.6 million, $0.1
million, and a decrease of $2.4 million respectively. Certain of the Company’s
foreign subsidiaries have net operating losses, the majority of such losses
carry forward over an indefinite period.

The Company has not provided U.S. federal income and foreign withholding
taxes on $17.0 million of non-U.S. subsidiaries’ undistributed earnings as of
December 31, 1998, because such earnings are intended to be reinvested
indefinitely or have already been taxed at rates in excess of the U.S. federal
rate. If these earnings were distributed, foreign tax credits would become
available under current law to reduce or eliminate the resulting U.S. income tax
liability. Where excess cash has accumulated in the Company’s non-US
subsidiaries and it is advantageous for tax or foreign exchange reasons,
subsidiary earnings are remitted.

The Company paid income taxes of approximately $23.4 million, $14.9
million, and $14.3 million, in 1998, 1997, and 1996, respectively.

NOTE 7 — DEFERRED COMPENSATION PLAN

The Company has deferred compensation plans which were implemented in
late 1996, and permit eligible employees and directors to defer a specified
portion of their compensation. The deferred compensation earns a specified rate
of return. As of year end 1998 and 1997 the Company had accrued $17.3 million
and $10.4 million, respectively, for its obligations under these plans. The
Company expensed $1.4 million in 1998 and $0.6 million in 1997, related to the
earnings by the deferred compensation plan participants.

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To fund these plans, the Company purchases corporate-owned life
insurance contracts. Proceeds from the insurance policies are payable to the
Company upon the death of the insured. The cash surrender value of these
policies, included in “Other Assets”, was $16.6 million at December 31, 1998 and
$9.6 million at December 31, 1997. There were no outstanding loans at December
31, 1998 or December 31, 1997 on these policies.

NOTE 8 — EMPLOYEE PENSION PLAN

The Company has a simplified employee pension plan, which became
effective January 1, 1980. Contributions are based on the application of a
percentage specified by the Company to the qualified gross wages of eligible
employees. The Company makes annual contributions to the plan equal to the
amount accrued for pension expense. Total expense of the plan was $11.5 million
in 1998, $9.8 million in 1997, and $8.3 million in 1996.

NOTE 9 — JOINT VENTURE

In 1998, the Company established a joint venture with Bank of Montreal
to provide online loan application and decisioning services to small and
mid-size financial institutions via a new limited liability company, Competix
L.L.C. In 1998, the Company invested $3.6 million for its 50% interest in
Competix, which investment was reduced by $0.7 million related to the Company’s
share of the 1998 Competix loss due to the start up costs for this new company.

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NOTE 10 — COMMITMENTS AND CONTINGENCIES

The Company occupies production facilities and office space (real
property) and uses various equipment under operating lease agreements, expiring
at various dates through the year 2014.

The commitments under these agreements, as of December 31, 1998, are
summarized in the table below. Payments under the real property leases are
generally subject to escalation based upon increases in the Consumer Price
Index, operating expenses, and property taxes.

Gross Rentals and Maintenance Payments
————————————–

Operating lease expense for 1998, 1997, and 1996 was approximately
$45.1 million, $46.5 million and $34.1 million, respectively.

The Company has an extended leave program for certain employees that
provides for compensated leave of eight weeks after seven years of service. The
leave is not vested and can be taken only at the discretion of management.
Because of the extended period over which the leave accumulates and the highly
discretionary nature of the program, the amount of extended leave accumulated at
any period end which will ultimately be taken is indeterminable. Consequently,
the Company expenses such leave as it is taken.

The Company has entered into a bank guarantee due upon request for
performance under one of its contracts in Israel. At December 31, 1998, the
Company had $19.8 million outstanding under such bank guarantee.

AMS performs, at any point in time, under a variety of contracts for
many different clients. Situations can occasionally arise where factors may
result in the renegotiation of existing contracts. Additionally, certain
contracts may provide the client the right to suspend or terminate the
contracts. To the extent any contracts may provide the client with such rights,
the contracts generally provide for AMS to be compensated for work performed to
date and may include provisions for payment of certain termination costs.
However, business and other considerations may at times influence the ultimate
outcome of contract renegotiations, suspension and/or cancellation.

NOTE 11 — RELATED PARTY TRANSACTIONS

The Company incurred legal fees and reimbursable expenses payable to
Shaw, Pittman, Potts & Trowbridge, general counsel to the Company, totaling
approximately $5.0 million, $4.0 million, and $2.7 million, in 1998, 1997, and
1996, respectively. A member of the firm of Shaw, Pittman, Potts & Trowbridge is
the spouse of a former executive officer of the Company who resigned in November
1997.

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NOTE 12 — SEGMENT REPORTING AND SIGNIFICANT CUSTOMERS

The Company has adopted Statement of Financial Accounting Standards
No. 131 “Disclosures about Segments of an Enterprise and Related Information” as
required and comparative information for earlier years is presented below. The
Company engages in business activities in one operating segment which provides
information technology consulting services to large clients in targeted vertical
markets. The chief operating decision-maker is provided information about the
revenues generated in key client industries. The resources needed to deliver the
Company’s services are not separately reported by industry. The Company markets
its services worldwide, and its operations are grouped into two main geographic
areas according to the location of each of the Company’s subsidiaries. The
Company’s long-lived assets are located primarily in the United States. The two
groupings consist of United States locations and non-US locations. Pertinent
financial data is summarized below.

Revenues from AMS’s U.S. Companies include export sales to non-US
clients of $23.9 million in 1998, $58.5 million in 1997, and $111.3 million in
1996. As a result the Company’s total non-US client revenues, primarily in
Western Europe, were as follows:

Significant Customers:

Total revenues from the U.S. Government, comprising 109 clients in
1998, 93 clients in 1997, and 90 clients in 1996, were approximately $224.8
million in 1998, $171.5 million in 1997, and $113.0 million in 1996. No other
customer accounted for 10% or more of total revenues in 1998, 1997, or 1996.

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REPORT OF INDEPENDENT ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheet of American
Management Systems, Incorporated and subsidiaries (the “Company”) as of December
31, 1998, and the related statements of income, comprehensive income, changes in
stockholders’ equity, and cash flows for the year then ended. 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 audit.

We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides 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, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Washington, D.C.
February 17, 1999

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REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying consolidated financial statements
appearing on pages 3 to 22 of the 1998 Financial Report present fairly, in all
material respects, the financial position of American Management Systems,
Incorporated and its subsidiaries at December 31, 1997, and the results of their
operations and their cash flows for each of the two years in the period then
ended in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

PRICEWATERHOUSECOOPERS LLP

Washington, D.C.
February 18, 1998

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) contains certain forward-looking statements.
In addition, the Company or its representatives from time to time may make,
or may have made, certain forward-looking statements, orally or in writing,
including, without limitation, any such statements made in this MD&A, press
releases, or any such statements made, or to be made, in the MD&A contained
in other filings with the Securities and Exchange Commission. The Company
wishes to ensure that such forward-looking statements are accompanied by
meaningful cautionary statements so as to ensure, to the fullest extent
possible, the protections of the safe harbor established by section 27A of
the Securities Act of 1933, as amended and section 21E of the Securities
Exchange Act of 1934, as amended. Accordingly, such forward-looking
statements made by, or on behalf of, the Company are qualified in their
entirety by reference to, and are accompanied by, the discussion herein of
important factors that could cause the Company’s actual results to differ
materially from those projected in such forward-looking statements.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated the percentage of
total revenues of major items in the Consolidated Statements of Operations
and the percentage change in such items from period to period (see “Financial
Statements and Notes”). The effect of inflation and price changes on the
Company’s revenues, income from operations, and expenses, is generally
comparable to the general rate of inflation in the U.S. economy.

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RESULTS OF OPERATIONS (continued)

REVENUES

Revenues increased 21% and 7% during 1998 and 1997 compared to the
preceding year. Approximately 85-90% of each year’s revenues come from
clients for whom the Company performed services in prior years. Looking
ahead to 1999, the Company expects growth to continue at approximately the
same rates that were experienced in 1998, with approximately equal growth
rates in all target markets, except the Telecommunications Firms market which
is expected to grow at a slightly faster rate and the Federal Government
Agencies market which is expected to grow at a slightly slower rate.

As part of its growth strategy the Company has formed a cross-target
market practice that will focus on delivering high-value, customer-facing Web
solutions – including eBill, eCare and eMarketing – tailored to clients in
financial services, telecommunications, government and utilities. These
solutions will help firms achieve greater cost savings, deliver improved
customer service and leverage cross-sell and up-sell opportunities in their
markets. The new “eCustomer” practice builds upon the Company’s existing,
significant eCommerce client base.

Business with non-US clients decreased 16% to $208 million during 1998
and decreased 11% during 1997 to $249 million, as the Company has not fully
replaced the revenues from two large projects with European
telecommunications clients whose cancellations were announced in 1997. With
the exception of the Telecommunications Firms market, all other business with
non-US clients increased 16% during 1998 and 27% during 1997. Business with
non-US clients represents 20% and 28% of the Company’s total revenues for
1998 and 1997, respectively. During 1998, the Company increased its non-US
client base and expanded the number of services offered to these clients. In
Europe, the Company gained 14 new telecommunications clients, and increased
revenues from financial services clients by 27%, during 1998. In addition,
the Company opened a new office in Australia, where work on a large
telecommunications project is underway. During 1998, the Company also
expanded the number of non-US financial services, telecommunications and
government clients it serves. The Company believes that it is well
positioned to achieve substantial growth in non-US business going forward.
For the year 1999, the Company expects non-US business and European business
in particular, to show some growth over 1998, mainly in the
Telecommunications Firms and the Financial Services Institutions target
markets.

In the Telecommunications Firms market, a market that is characterized
by large projects with relatively few clients, revenues were flat in 1998
when compared to 1997, while there was a decrease of 16% comparing 1997 to
1996. The changes in revenues were principally due to the above-cited
cancellations and to the capitalization of a large-scale telecommunications
project. Importantly, revenue in this market increased in each quarter
during all of 1998, which reflects the Company’s continued success in
implementing its revised strategy in the telecommunications marketplace,
acquiring new clients, expanding service offerings and initiating several
systems integration engagements. Non-US revenues decreased 30% and 20%,
compared to the 1997 and 1996 periods. For the year 1999, the Company
anticipates revenue growth in this market to increase at rates slightly above
the Company’s overall revenue growth. The Company’s development of its next
generation of customer care and billing software, known as “Tapestry”, is
continuing to progress through a contract with a European client. As that
client is sharing part of the cost of development, collections from that
contract will not contribute to revenue growth in this market in 1999, but
instead will reduce capitalized software costs. There is significant market
interest in Tapestry. There remain risks in this market. Competition for
experienced staff is especially intense in the telecommunications field, and
staffing remains one of the Company’s critical challenges for the
Telecommunications Firms market. Additionally, the Company works in
countries other than Western Europe and North America and the delivery risks
in these other countries may be higher. Revenues in the

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Telecommunications Firms market in these countries are less than 3% of the
Company’s total revenues for 1998.

In the Financial Services Institutions target market, 1998 revenues
increased 7% over 1997, attributable principally to build-ups in business
with clients who started large projects in 1997, and start-up work on several
new contracts awarded during the first half of 1998. Comparing 1997 to 1996,
revenues in this market increased 16% as a result of new business in early
1997. Business with non-US clients, primarily European, account for
approximately 34% of the 1998 revenues in this market ($75 million).
Revenues in Europe increased 27% in 1998 compared to 1997. For 1999, the
Company expects demand in the market to remain strong, but faces staffing
constraints in this market as well. The Company anticipates revenue growth
in this market to increase at rates approximating the Company’s overall
revenue growth rate.

In the State and Local Governments and Education target market,
revenues increased 65% in 1998 and 22% in 1997. The increase for both
periods was driven by the rapid build-up of several large contracts with
state taxation departments looking to make substantial improvements in their
ability to collect delinquent taxes and several new engagements for financial
and revenue systems. The Company enjoys strong demand in this market. On
certain of the contracts with state taxation departments, the Company’s fees
are paid out of the benefits (increased collections) that the client
achieves. On benefit-funded contracts (contracts whereby the amounts due the
Company are payable based on actual benefits derived by the client), the
Company defers recognition of revenues until that point at which management
can predict, with reasonable certainty, that the benefit stream will generate
amounts sufficient to fund the contract. From that point forward, revenues
are recognized on a percentage of completion basis. Beginning in the second
quarter of 1998, the Company started work on several large multi-year
benefits-funded contracts. Material revenues from certain of those contracts
are not likely to be recognized until later periods. Revenues in the State
and Local Governments and Education market are expected to increase in 1999
at rates approximating the Company’s overall revenue growth rate.

Revenues in the Federal Government Agencies target market increased 28%
in 1998 and 39% in 1997. This increase was attributable predominantly to the
award in mid-1997 of a significant multi-year contract with the Department of
Defense for its Standard Procurement System (“SPS”), which accounted for 34%
of the 1998 revenue growth and 40% of the 1997 revenue growth. In addition,
there was increased business with existing clients and new business with both
defense and civilian agencies. In 1999, the Company expects revenues in this
target market to increase at rates slightly lower than the overall growth
rate of the Company. These revenue increases will continue to be driven
primarily by the SPS contract and by contracts with clients using the
Company’s federal financial systems.

Revenues from Other Corporate Clients increased 21% in 1998 and
decreased 4% in 1997. The 1998 increase is mainly attributable to increased
business with new clients in the electric and gas utilities market and the
health care market. For all of 1999, the Company expects revenue growth in
this market to increase at rates comparable to the Company’s overall revenue
growth rate.

EXPENSES

Client project expenses and other operating expenses together increased
17% during 1998, which was slightly lower than the growth rate in revenues.
These expenses include a $7 million provision for a potential future loss on
one of the Company’s contracts with an Israeli client in the
Telecommunications Firms target market. Comparing 1997 to 1996, client
project and other operating expenses increased 4%, which was slightly lower
than the growth rate in revenues. Looking to 1999, the Company anticipates
that these expenses will continue to increase, but at rates lower than
revenue increases. The Company expects to make significant expenditures
related to the development of the “Tapestry” software; however, a majority of
these expenditures will be capitalized.

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Corporate Expenses increased 33% and 2%, in 1998 and 1997,
respectively. Corporate expenses increased faster than the revenue growth
during 1998, due to the dedication of resources applied to the Year 2000
remediation of internal systems, increases in accruals for corporate level
performance-based incentive compensation, and profit-based compensation
accruals under the Company’s restricted stock program. The 1997 rate of
increase was offset in part by sharply reduced performance-based incentive
compensation accruals for the corporate officers and minimal profit-based
compensation accruals under the Company’s restricted stock program, both
owing to the material impact of the cancellation of the Telecommunication
contracts discussed earlier. For the year 1999, the Company expects these
expenses to grow in line with the Company’s revenue growth.

INCOME FROM OPERATIONS

Income from operations increased 66% in 1998 and 97% in 1997. The
Company’s profit margins have continued to improve due to an ongoing emphasis
on well-structured engagements and tightly managed delivery risk. In
addition, the Company is continuing to focus on controlling expenses. Income
from operations also increased in 1998, compared with 1997, as a result of
the capitalization of software expenses related to the development of the
Tapestry software. These software costs were expensed during 1997. For
1999, the Company will continue to manage growth and expects to continue
improving on the profit margins.

OTHER (INCOME) EXPENSE

Interest expense decreased 28% in 1998 and increased 81% in 1997,
compared to 1997 and 1996 respectively. The 1998 decrease is due to lower
amounts of short-term borrowings, as a result of significantly improved cash
flow from operations. The 1997 increase was due to significant increases in
short-term borrowings to finance accounts receivable, especially those of one
of its foreign subsidiaries and the addition of the $20 million Term Loan.
It is expected that interest expense in 1999 will approximate the 1998
amount. Other (income) expense decreased 10% during 1998, compared to 1997,
primarily because of a write-off of certain small investments and some
obsolete fixed assets. The improved cash flow has increased the Company’s
cash investment income, which partially offset the expense increase.

In 1998, the Company set up a joint venture with Bank of Montreal to
provide online loan application and decisioning services to small and
mid-size financial institutions via a new firm, Competix L.L.C. The Company
incurred a loss of $0.7 million in 1998 related to this joint venture, due to
the start up costs of this new company.

INCOME TAXES

The Company’s effective tax rate for 1998 was 40.7% compared to 39.3%
in 1997 and 40.8% in 1996. The Company expects that its effective tax rate in
1999 will be generally consistent with its historical rates.

FOREIGN CURRENCY EXCHANGE

Approximately 20% of the Company’s total revenues in 1998, 28% in 1997,
and 34% in 1996, were derived from non-US clients. The Company’s practice is
to negotiate contracts in the same currency in which the predominant expenses
are incurred, thereby mitigating the exposure to foreign currency exchange
fluctuations. It is not possible to accomplish this in all cases; thus,
there is some risk that profits will be affected by foreign currency exchange
fluctuations. However, the Company seeks to negotiate provisions in
contracts with non-US clients that allow pricing adjustments related to
currency fluctuations. In late 1997, the Company began to employ limited
hedging of intercompany balance sheet

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transactions through derivative instruments (foreign currency swap contracts).
As of December 31, 1998, the Company had no outstanding derivative contracts. In
addition, the Company has established a notional cash pool with a European bank.
This arrangement allows the Company to better utilize its cash resources among
all of the Company’s subsidiaries, without incurring foreign currency conversion
risks, thereby mitigating foreign currency exposure for these transactions. The
Company also actively manages the excess cash balances in the cash pool, which
will increase interest income on short-term investments.

LIQUIDITY AND CAPITAL RESOURCES

The Company provides for its operating cash requirements primarily
through funds generated from operations, and secondarily from bank borrowings
which provide for cash and currency management with respect to the short-term
impact of certain cyclical uses, such as annual payments of incentive
compensation as well as financing from time to time accounts receivable. At
December 31, 1998, the Company’s cash and cash equivalents totaled $119.3
million, significantly up from $49.6 million at the end of 1997. Cash
provided from operating activities for 1998 was $131.2 million compared to
$64.9 million in 1997. Cash provided from operating activities increased due
to significant improvements in the rate of collection of the Company’s
accounts receivable and from increases in accrued incentive compensation and
other accrued liabilities. In addition, the Company received $14.8 million
representing collections from funding partners on jointly funded software
development efforts. See Note 2 to the consolidated financial statements for
further discussion on accounts receivable.

During 1998, the Company invested over $55.4 million in fixed assets,
software purchases, and computer software development compared to $48.5
million in 1997. In 1998, the Company invested $3.6 million on the Competix
joint venture, which was reduced by $0.7 million related to the Company’s
share of the 1998 Competix loss. Total debt and revolving line-of-credit
borrowings decreased by $20 million over year-end 1997; revolving
line-of-credit borrowings were zero at December 31, 1998. The aggregate
weighted average short-term borrowings during 1998 were approximately $4.5
million, at a weighted average interest rate of 4.9%. During 1998, the
Company made approximately $7.5 million in installment payments of principal
on outstanding debt owed to banks; the Company also received proceeds of
approximately $20.9 million during the period from the exercise of stock
options and the tax benefits related thereto.

At December 31, 1998, the Company’s debt-equity ratio, as measured by
total liabilities divided by stockholders’ equity was 0.84, up from 0.77 at
December 31, 1997.

At its February 1995 meeting, the Board authorized the Company to
expend up to $10 million to repurchase additional shares of its common stock,
from time to time, for its stock based benefit plans or for other corporate
purposes. On August 3, 1998 the Company announced that its Board had
authorized the purchase, from time to time, of up to 1 million shares of its
common stock through open market and negotiated purchases. The Company
repurchased 723,520, 3,358, and 24,600 shares of its common stock during
1998, 1997, and 1996, respectively, for a total of $21.8 million. In
addition, the Company has begun funding stock option exercises through the
reissuance of previously acquired treasury shares. Furthermore, on March 3,
1999, the Company announced that its Board had authorized the purchase, from
time to time, of an additional 1 million shares. As of March 3, 1999, taking
into account the Company’s repurchases through December 31, 1998, the Company
was authorized to repurchase an additional 1.3 million shares.

The Company’s material unused source of liquidity at the end of 1998
consisted of approximately $120.0 million under the 1998 Agreement. The
Company believes that its liquidity needs can be met from the various sources
described above.

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The Company has entered into bank guarantees due upon request for
performance under one of its contracts in Israel. At December 31, 1998, the
Company had $19.8 million outstanding under such bank guarantees.

As part of its growth strategy, the Company intends to pursue
aggressively new opportunities to form strategic alliances and partnerships
and to make acquisitions. Effective February 19, 1999, the Company acquired
Budgeting Technology, Inc. (“BTI”), the leading provider of public sector
budgeting solutions. BTI, headquartered in Bethesda, Maryland, has pioneered
the market for governmental budgeting systems. As a result of the
acquisition, BTI’s Budget Reporting and Analysis Support System will become a
significant component of the Company’s suite of services and products to
support financial and human resource solutions.

YEAR 2000 ISSUES

Companies in the business of providing information technology services,
software products or custom-developed software, such as the Company, face
“Year 2000 compliance” issues in at least three critical areas: internal
information and communication technology systems, client software systems,
and embedded systems (products which are made with microprocessor (computer)
chips such as environmental systems, physical security systems and
elevators). “Year 2000 compliance” means the ability of hardware, software
and other processing capabilities to interpret and manipulate correctly all
date data up to and through the year 2000, including proper computation of
leap years. With respect to embedded systems, Year 2000 compliance means
that the occurrence of the Year 2000 will not cause the product in which the
microprocessor chip is embedded to fail to operate properly. Failure of
hardware, software and related capabilities used by the Company or, under
certain circumstances, furnished to clients, to be Year 2000 compliant could
have a material adverse impact on the Company.

Accordingly, the Company is focusing at the most senior levels on Year
2000 issues. The Audit Committee of the Board of Directors, in conjunction
with the Company’s Executive Vice President and Chief Administrative Officer,
the Company’s Internal Auditor and others, is monitoring the Company’s
analysis and status with respect to Year 2000 issues. Year 2000 program
managers have been designated throughout the Company to oversee Year 2000
efforts and provide periodic reports, on at least a quarterly basis, to the
senior management and the Internal Auditor of the Company. Incentive
compensation programs have been modified to include achievement of Year 2000
compliance objectives. Funds expended and to be expended on Year 2000
compliance have been allocated out of the Company’s normal operating budget.
The Company has not delayed any significant projects as a result of its
investment of resources on Year 2000 issues.

Early in 1997, the Company completed reviews of its major internal
application systems for Year 2000 compliance. The Company began a program of
testing and remediation for its application systems in 1997. The
company-wide application subsystems have now been remediated and have
successfully passed unit testing. A system integration test of the combined
functioning of company-wide application subsystems began, on schedule, on
March 1, 1999. This integration testing is expected to be completed, on
schedule, by mid-1999, for significant transactions required through early in
the year 2000. The integration testing is expected to be completed for other
significant year 2000 and 2001 transactions during the third quarter of
1999. In addition to the scheduled early completion date of testing, the
Company has also developed certain other contingency plans relating to these
internal systems. The Company has also developed and implemented a limited
incentive program to encourage certain experienced internal systems
programmers to remain with the Company through the summer of the Year 2000.

With respect to its company-wide hardware infrastructure, the Company
has obtained Year 2000 certifications from many of the outside vendors with
whom the Company contracts for the provision of

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utilities, goods and certain internal functionality. The Company is continuing
to work to obtain outstanding certifications from the remaining outside vendors
at this time. In addition to relying on certifications from outside vendors
where available, the Company is also engaged in a program of testing certain
subcomponents of and interfaces with the systems provided by the outside
vendors.

In addition, the Company is coordinating centrally its worldwide
efforts to achieve Year 2000 compliance of its internal hardware and
application systems that are not company-wide by mid-1999.

Total costs of achieving Year 2000 compliance in the Company’s internal
systems, which costs will be expensed as they are incurred, were $2.3 million
for 1998, and are estimated to be approximately $3.5 million for 1999, and
$0.5 million for 2000. For the past two years, approximately $3.0 million
has been expended by the Company on Year 2000 compliance in respect of its
internal systems.

With respect to its clients, the Company does not presently anticipate
material costs or risks allocable specifically to Year 2000 compliance
issues, but is continuing to assess the scope and status of such risks.
Client engagements for specific Year 2000 remediation work have not been a
strategic marketing focus. However, in many of the Company’s existing
engagements, Year 2000 replacement work is implicit, as the Company’s clients
are replacing systems for various business reasons. In addition, the Company
has accepted limited consulting engagements in which it advises clients on
the general structure of their own Year 2000 projects. The Company has
drafted these contracts to limit or exclude liability for Year 2000 related
claims and does not anticipate any special risks or costs attributable to
Year 2000 compliance issues in performing such projects.

With respect to contractual obligations to active clients (clients for
which the Company is still obligated to furnish products or services, such as
maintenance), the Company similarly does not anticipate in the aggregate
material costs or risks associated with Year 2000 compliance. Its contracts
with active clients primarily are either for recent or new software that is
Year 2000 compliant or for which a Year 2000 compliant upgrade is available,
or do not explicitly obligate the Company to furnish an updated release that
is Year 2000 compliant. Early in 1997, the Company began a program to test
its active software products (including upgrades, where applicable) and
assess their status relative to Year 2000 compliance. Based on the results
of this testing, the Company has been releasing new versions of many of its
software products that have been designed and tested for performance of the
functionality described in their applicable specifications up to and through
the Year 2000. It also has been communicating with its software product
clients regarding Year 2000 compliance of its products, and notifying the
clients of the status of their software and of the availability of updated
Year 2000 compliant releases for certain older software known to the Company
to be still in use by that client. The Company has already communicated such
information to nearly all of its product clients and is undertaking to
contact the remaining clients. The Company also has been reviewing various
custom software contracts to identify and resolve any potential Year 2000
problems with its custom software clients. The Company expects to continue
the ongoing processes of monitoring the status of Year 2000 compliance of the
Company-developed software in use by various clients.

The Company has historically avoided, and continues to avoid, accepting
contractual liability for failures of third-party software. Accordingly, the
Company does not anticipate any material Year 2000 risk in connection with
such third-party products. Nevertheless, in order to avoid any disruptions
in connection with third-party products, the Company is seeking Year 2000
certification from third-party vendors to the extent the Company uses, or
recommends the use of, third party products in its own customer products.

In the Company’s judgment, the most reasonably likely worst case
scenarios in connection with the Year 2000 are possible reductions in the
availability of new business, especially during the second half of 1999; and
the costs of resolving potential Year 2000 lawsuits by the Company’s
clients. The potential reductions in business may arise as some current and
prospective clients institute “code

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freezes” under which no new information technology development projects will be
authorized until after the Year 2000 changeover. Based on the Company’s existing
commitments through the Year 2000, the Company does not expect to be affected
materially by any such “code freezes.”

Additionally, although the ultimate outcome of any possible litigation
is uncertain, the Company does not believe that the ultimate amount of
liability, if any, from any such Year 2000 actions would have a material
effect on the Company.

Total costs of assessing the Year 2000 compliance of client systems and
of communicating with clients about the Year 2000, which costs will be
expensed as they are incurred, were $2.0 million for 1998, and are estimated
to be approximately $1.5 million for 1999, and $0.8 million for 2000. For
the past two years, $4.8 million has been expended by the Company on Year
2000 compliance in respect of client systems in order to expedite development
of Year 2000 compliant upgrades for noncompliant systems, to notify clients
of the Year 2000 compliance of their AMS products and to staff Year 2000
compliance efforts.

The majority of the embedded systems on which the Company relies in its
day to day operations are owned and managed by the lessors of the buildings
in which the Company’s offices are located, or by agents of such lessors.
The Company is in the process of sending letters to its lessors and, as
applicable, their agents requesting certifications of the Year 2000
compliance of the embedded systems. The Company has received responses from
more than half of its lessors indicating that the systems in the buildings
either already are, or are expected to be before the end of 1999, Year 2000
compliant. The Company will prioritize systems and develop necessary test
plans based on the further responses it continues to receive, or not to
receive, to its letters.

.

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ASSUMPTIONS UNDERLYING CERTAIN FORWARD-LOOKING
STATEMENTS AND
FACTORS THAT MAY AFFECT FUTURE RESULTS

In the next couple of years, the Company expects its managed growth in
revenues to be approximately comparable to that realized for 1998. The
continuing controlled growth in revenues should enable the Company to improve
its profit margins. These margins, improved in 1998, were reduced during
several previous years. Cancellations of two major projects and related
attrition rates which were higher than historical rates for the Company,
heavy investment in building up staff capacity and infrastructure, and the
stress of absorbing many new professional staff, all contributed to those
reduced margins.

The Company faces continuing risks in the area of project delivery and
staffing. AMS has established a reputation in the marketplace of being a
firm which delivers on time and in accordance with specifications regardless
of the complexity of the application and the technology. The Company’s
customers often have a great deal at stake in being able to meet market and
regulatory demands, and demand very ambitious delivery requirements. In
order to meet its contractual commitments, AMS must continue to recruit,
train, and assimilate successfully large numbers of entry-level and
experienced employees annually, as well as to provide sufficient senior
managerial experience on engagements, especially on large, complex projects.
Moreover, this staff must be re-deployed on projects globally. Staffing
projects in certain less industrialized countries can pose special risks and
challenges. The Company must also manage and seek to reduce rates of
attrition, which the Company expects will continue to be somewhat higher than
its pre-1997 historical norms in view of increased competition for its talent.

There is also the risk of successfully managing large projects and the
risk of a material impact on results because of the unanticipated delay,
suspension, renegotiation or cancellation of a large project. As was the
case in 1996-1997 when cancellations of two major projects occurred, any such
development in a project could result in a decline in revenues or profits,
the need to relocate staff, a potential dispute with a client regarding money
owed, and a diminution of AMS’s reputation. These risks are magnified in the
largest projects and markets simply because of their size. The Company’s
business is characterized by large contracts producing high percentages of
the Company’s revenues. For example, 35% of the Company’s total revenues in
1998 were derived from business with 17 clients.

Changing client requirements, such as scope changes, and delays in
client acceptance of interim project deliverables, are other examples of
risks of performing, especially in large complex projects. These risks
presently are perhaps the most significant for the Company, particularly in
light of two significant projects underway, one involving substantial
research and development expenditures (Tapestry), and the other an Israeli
client project. These risks are greater in certain geographic markets where
such projects are less common, for example outside Europe and the United
States.

The Company could also face delays by clients, or client suspensions or
cancellation of projects, because of client systems’ failures to be Year 2000
compliant. Many companies are expected to impose freezes on changes in code
programming after a specified date in 1999 in order to ensure their systems’
Year 2000 compliance by the end of the year 1999. Any such actions, if taken
by clients of the Company, could result in diversion of work, both pending
and new opportunities, and decreases in revenues and profit margins. Although
these risks exist potentially across the Company’s engagements, they may be
magnified in certain target markets, such as the Financial Services
Institutions market, given the need for Year 2000 compliance certainty in
those markets, such as financial services. See “YEAR 2000 ISSUES” section in
MD&A for additional information on Year 2000 compliance issues.

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Finally, there is the risk of revenues not being realized when
expected, such as in certain contracts in the State and Local Governments and
Education market. On certain large contracts, the Company’s fees are paid
out of the benefits (for example, increased revenues from tax collections)
that the client achieves. The Company typically defers recognition of such
revenues until management can predict, with reasonable certainty, that the
benefit stream will generate amounts sufficient to fund the contract. From
that point forward revenues are recognized on a percentage of completion
basis.

Events such as unanticipated declines in revenues or profits could in
turn result in immediate fluctuations in the trading price and volume of the
Company’s stock. Certain other risks, including, but not limited to, the
Company’s international scope of operations, are discussed elsewhere in this
Form 10-K. Increasingly, the Company conducts business in countries other
than Western Europe and North America. Contracts being performed in such
non-Western countries can have higher delivery risks for a variety of
reasons. Because the Company operates in a rapidly changing and highly
competitive market, additional risks not discussed in this Form 10-K may
emerge from time to time. The Company cannot predict such risks or assess
the impact, if any, such risks may have on its business. Consequently, the
Company’s various forward-looking statements, made, or to be made, should not
be relied upon as a prediction of actual results.

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FIVE-YEAR FINANCIAL SUMMARY

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FIVE-YEAR REVENUES BY TARGET MARKET

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SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following summary represents the results of operations for the two
years in the period ended December 31, 1998.

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

STOCK MARKET INFORMATION

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.

The approximate number of shareholders of record of the Company’s
common stock as of March 18, 1999 was 1,430.

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OTHER INFORMATION

TRANSFER AGENT AND REGISTRAR

ChaseMellon Shareholder Services, L.L.C.
Ridgefield Park, N.J.

INDEPENDENT ACCOUNTANTS

Deloitte & Touche LLP
Washington, D.C.

COUNSEL

Shaw Pittman Potts & Trowbridge
Washington, D.C.

STOCKHOLDER AND 10-K INFORMATION

Financial inquiries should be directed to Ronald L. Schillereff, Chief
Financial Officer, American Management Systems, Incorporated, 4050 Legato
Road, Fairfax, Virginia 22033. Telephone (703) 267-8000. A complimentary
copy of the Company’s Annual Report on Form 10-K filed with the Securities
and Exchange Commission will be provided upon written request.

ANNUAL MEETING

The annual shareholders meeting has been scheduled for May 21, 1999 in
Fairfax, Virginia, for stockholders of record on March 29, 1999.

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AMERICAN MANAGEMENT SYSTEMS, INCORPORATED

PROXY FOR ANNUAL MEETING OF SHAREHOLDERS — MAY 21, 1999
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS.

The undersigned hereby appoints Paul A. Brands, Patrick W. Gross, and
Frank A. Nicolai, and each of them, as proxies, with full power of substitution
in each, to vote all shares of the common stock of American Management Systems,
Incorporated (the “Company”), which the undersigned is entitled to vote at the
Annual Meeting of Shareholders of the Company to be held on May 21, 1999 at
10:00 A.M. local time, and at any adjournment thereof, on all matters set forth
in the Notice of Annual Meeting and Proxy Statement, dated April 21, 1999, a
copy of which has been received by the undersigned, as follows on the reverse
side.

THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS GIVEN,
WILL BE VOTED “FOR” EACH OF THE MATTERS STATED.

1. ELECTION OF DIRECTORS: GRANT AUTHORITY to vote for all nominees listed
to the right (except as marked to the contrary). [ ]

WITHHOLD AUTHORITY to vote for all nominees listed
to the right. [ ]

Paul A. Brands, Patrick W. Gross, Frank A. Nicolai,
Daniel J. Altobello, James J. Forese, Dorothy
Leonard, W. Walker Lewis, Frederic V. Malek, Alan G.
Spoon.

INSTRUCTION: To withhold authority to vote for any
individual nominee, write that nominee’s name in the
space provided below.

—————————————————-

2. APPROVAL OF AN AMENDMENT TO THE SECOND RESTATED CERTIFICATE OF INCORPORATION:

FOR [ ] AGAINST [ ] ABSTAIN [ ]

3. APPROVAL OF AN AMENDED 1996 AMENDED STOCK OPTION PLAN F:

FOR [ ] AGAINST [ ] ABSTAIN [ ]

4. GRANT AUTHORITY upon such other matters as may come before the meeting,
including the adjournment of the meeting, as they determine to be in the best
interests of the Company:

FOR [ ] AGAINST [ ] ABSTAIN [ ]

Dated: _________________________,1999

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—————————————-
Signature of Shareholder(s)

IMPORTANT: Please mark this Proxy, date and sign exactly as your name(s)
appear(s), and return in the enclosed envelope. If shares are held
jointly, signature need only include one name. Trustees and others
signing in a representative capacity should so indicate.
– ——————————————————————————–
/\ FOLD AND DETACH HERE /\

VOTE BY TELEPHONE
QUICK *** EASY *** IMMEDIATE

Your telephone vote authorizes the named proxies to vote your shares in the
same manner as if you marked, signed and returned your proxy card.

VOTE BY PHONE: CALL TOLL-FREE ON A TOUCH-TONE TELEPHONE 1-800-840-1208
ANYTIME. THERE IS NO CHARGE TO YOU FOR THIS CALL.

You will be asked to enter a CONTROL NUMBER located in the
lower right of this form.

– ——————————————————————————–
OPTION A: To vote as the Board of Directors recommends on ALL items,
press 1.
– ——————————————————————————–
– ——————————————————————————–
OPTION B: If you choose to vote on each item separately, press 0. You
will hear these instructions:

ITEM 1: To vote FOR ALL nominees, press 1: to WITHHOLD FOR
ALL nominees, press 9. To WITHHOLD FOR AN INDIVIDUAL
nominee, press 0 and listen to the instructions.

ITEM 2: To vote FOR, press 1; AGAINST, press 9; ABSTAIN
press 0.

ITEM 3: To vote FOR, press 1; AGAINST, press 9; ABSTAIN
press 0.

ITEM 4: To vote FOR, press 1; AGAINST, press 9; ABSTAIN
press 0.
– ——————————————————————————–
WHEN ASKED, YOU MUST CONFIRM YOUR VOTE BY PRESSING 1.

THANK YOU FOR VOTING

CALL * * TOLL-FREE * * ON A TOUCH-TONE TELEPHONE
1-800-840-1208 – ANYTIME
There is NO CHARGE to you for this call.

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