U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                           ---------------------------

                                    FORM 10-K


[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITES EXCHANGE ACT
    OF 1934 For The Fiscal Year Ended November 30, 1998.

                                       OR

[ ] TRANSITION  REPORT  PURSUANT  TO SECTION  13 OR 15 (d) OF THE  SECURITIES
    EXCHANGE  ACT OF 1934
       For The Transition Period From................ to .................

                         Commission file number 0-23438
                           ---------------------------
                       Effective Management Systems, Inc.
             (Exact name of registrant as specified in its charter)

        Wisconsin                                        39-1292200
(State or other jurisdiction                         (I.R.S. Employer 
of incorporation or organization)                    Identification No.)

    12000 West Park Place, Milwaukee, WI                    53224
  (Address of principal executive offices)               (Zip Code)

       Registrant's telephone number, including area code: (414) 359-9800
                           ---------------------------
          Securities registered pursuant to Section 12 (b) of the Act:

                                      None.

          Securities registered pursuant to Section 12 (g) of the Act:

             Title of Class                              Title of Class
      Common Stock $.01 Per Value              Warrants to Purchase Common Stock

                           ---------------------------

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

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

    The aggregate  market value of voting and  non-voting  common equity held by
non-affiliates of the registrant at February 1, 1999 was $3,753,972

    The number of common shares outstanding at February 1, 1999 was 4,118,486

                      DOCUMENTS INCORPORATED BY REFERENCE:

Effective  Management Systems,  Inc. Proxy Statement for the 1999 Annual Meeting
of Shareholders  (to be filed with the Securities and Exchange  Commission under
Regulation  14A within 120 days after the end of the  registrant's  fiscal  year
and, upon such filing, to be incorporated by reference into Part III).

<PAGE>

                       Effective Management Systems, Inc.


                                 Index to Annual
                               Report on Form 10-K
                            For the Fiscal Year Ended
                                November 30, 1998


Part I

   Item 1.         Business                                                    1
   Item 2.         Properties                                                 13
   Item 3.         Legal Proceedings                                          13
   Item 4.         Submission of Matters to a Vote of Security Holders        13



Part II

   Item   5.       Market for Common Equity and Related Stockholder Matters   14
   Item   6.       Selected Financial Data                                    17
   Item   7.       Management's Discussion and Analysis of Financial
                   Condition and Results of Operation (for the fiscal
                    years ended November 30, 1998, 1997, and 1996)            19
   Item 7A.        Quantitative and Qualitative Disclosures About Market 
                   Risk                                                       26
   Item   8.       Financial Statements and Supplementary Data                27
   Item   9.       Changes in and Disagreements with Accountants on 
                   Accounting and Financial Disclosure                        50
                                                                              



Part III

   Item 10.        Directors and Executive Officers of the Registrant         51
   Item 11.        Executive Compensation                                     51
   Item 12.        Security Ownership of Certain Beneficial Owners
                   and Management                                             51
   Item 13.        Certain Relationships and Related Transactions             51


Part IV

   Item 14.        Exhibits and Reports on Form 8-K                           51


   Signatures                                                                 52

<PAGE>


Part I

Item 1. Description of Business

Overview

We develop,  procure,  market and support integrated  manufacturing and business
management  software.  We design our Time Critical  Manufacturing(R)  ("TCM(R)")
software  with the  underlying  philosophy  that  time is a crucial  element  in
manufacturing,  and  that  reducing  time  in the  manufacturing  process  leads
directly to increased profits for the manufacturer.  TCM(R) software  integrates
technologies such as electronic data interchange,  imaging, bar-coding,  factory
automation,  engineering  system  integration,  distributed  numerical  control,
statistical  process  control  and  fourth  generation  language  tools with the
Company's proprietary algorithms for scheduling and production,  to optimize the
customer's  labor,  capital and  inventory  utilization.  The  software we offer
functions  on the  Windows NT, IBM AIX,  and HP-UX  operating  systems.  We also
provide services  support for our software  products and on a limited basis sell
computer hardware.

The  software  products  we offer  include:  TCM(R),  which is a  pre-integrated
enterprise resource planning, accounting and manufacturing execution system, and
FACTORYnet(R)  I/S,  which  is an  integrated  manufacturing  execution  system,
providing production management,  shop floor scheduling, and operations support.
We also offer the manufacturing software of the Baan Company ("Baan"),  which is
an enterprise  resource  planning and accounting  system that will ultimately be
combined with our manufacturing  execution system.  Our distributor  arrangement
with Baan was entered into in April 1998.

Our  software  products  are often  integrated  with a bar code data  collection
system or direct machine controls, and provide  up-to-the-minute  information to
track production and business  operations.  This facilitates  real-time decision
making and enables  employees  throughout an  organization to respond quickly to
marketplace demands and unanticipated events.

We  typically  focus our sales and  marketing  efforts on  discrete  ("discrete"
manufacturers   assemble  or   fabricate   parts  into   finished   products  as
distinguished  from "process"  manufacturers  which mix,  separate and otherwise
combine  or  control  ingredients  to create  finished  products)  manufacturing
plants.  We have licensed our software products to over 1,700 customer sites. We
distribute  our products in the United States  through eleven branch offices and
through seven joint ventures and independent distributors.

We were  incorporated in Wisconsin in 1978. We became a publicly held company as
a result of our initial  public  offering  which was completed in February 1994.
During 1995, we acquired  Intercim  Corporation  and the  remaining  interest in
Effective Management Systems of Illinois, Inc., a joint venture subsidiary,  and
in 1996, we acquired the remaining interest in Darwin Data Systems  Corporation,
another  joint  venture  subsidiary.  For further  details  regarding the Darwin
acquisition, see Note 2 of Notes to our Consolidated Financial Statements.

In  April  1998,  we  undertook  a  major  restructuring  plan  and  recorded  a
restructuring charge of approximately $6.8 million.  The restructuring  included
entering into the  distribution  agreement with Baan and various cost reductions
aimed  at  improving  our  financial   performance.   In  connection   with  the
restructuring,  we  also  closed  facilities  both  in  the  United  States  and
internationally  and  decreased  our  workforce,   particularly  in  development
marketing  and  administration.   For  additional   information   regarding  the
restructuring, see Notes 3 and 4 to our Consolidated Financial Statements.

Business Risk Factors

The risk factors set forth below are  applicable  to the Company.  Statements in
this  Annual  Report on Form 10-K  other than  statements  of  historical  fact,
including   statements   relating  to  our  expected  operations  and  financing
activities,  are  forward-looking  statements  that  involve  certain  risks and
uncertainties.  See "Special Note Regarding  Forward-Looking  Statements." These
risks and uncertainties include, but are not limited to, the following.

Financial Results for the Last Three Years

For the fiscal year ended  November 30, 1998, we had a net loss of  $10,590,000.
For the fiscal years ended November 30, 1997 and 1996, we had a net loss and net
income of $2,160,000 and $153,000, respectively.

<PAGE>


Financial Covenants and Limitations; Liquidity

Our credit  agreement  with our  primary  lender  contains  certain  restrictive
covenants,  including  covenants  relating to earnings before  interest,  taxes,
depreciation  and  amortization  ("EBITDA"),  tangible  net worth,  and  captial
expenditures. As a result of our recent financial performance and restructuring,
we have been  obligated  to obtain and have  obtained  covenant  relief from our
lender  relating  to the  EBITDA  and  tangible  net worth  covenants.  To raise
additional  capital,  we have also sold shares of perferred  stock.  Although we
have taken steps to improve our financial performance, no assurance can be given
that these steps will have the intended result.  In the event that our financial
performance does not improve or if we are unable to secure additional investment
capital or sell  assets to  bolster  our  financial  position,  we will  require
additional  covenant  relief.  In the  event  that such  covenant  relief is not
obtained,  it would  likely  have a material  adverse  effect on our  liquidity,
including our ability to fund continuing operations. Our current credit facility
contains  limits  on the  amount  we  may  borrow  based  on  the  level  of our
outstanding  accounts  receivable.   At  January  31,  1999,  we  had  borrowing
availability of $773,000 under our credit  agreement.  Based on recent financial
performance,  all of our debt has been  classified as  short-term  and our audit
report contains an explanatory paragraph for going concern uncertainty, pursuant
to which our  auditors  have  expressed  substantial  doubt as to our ability to
continue  as a going  concern.  Our  financial  situation  may also make it more
difficult for us to market our products to new and existing customers.

Success of Recent Restructuring

In April 1998, we effected a major  restructuring  and recorded a  restructuring
charge of approximately $6.8 million. The restructuring related to entering into
a new distribution  arrangement with Baan for manufacturing software and various
cost reductions aimed at improving our financial performance. In connection with
the  restructuring,   we  closed  facilities  both  in  the  United  States  and
internationally  and took actions to rationalize our workforce,  particularly in
the  development,  marketing and  administrative  areas.  Although we expect the
restructuring to impact our financial performance  positively,  no assurance can
be given  that the  restructuring  will be  successful  or that it will not have
unanticipated  effects,  such as the loss of  significant  customers  and/or key
employees.

Dependence on Principal Products

A significant portion of our revenue is derived from license fees for TCM(R) and
for  FACTRORYnet(R)  I/S and the sale of related support services.  Accordingly,
any event that could adversely  affect license fees for TCM(R) or  FACTORYnet(R)
I/S,  such as  significant  flaws  or  incompatibility,  negative  publicity  or
evaluation,  or obsolescence of the hardware platforms on which the systems run,
could have a material  adverse  effect on our results of  operation. 

Baan Relationship; Dependence on Third Party Software

We recently  entered into an  arrangement  pursuant to which we license  certain
software  products  from Baan to sell into a segment  of our  marketplace.  As a
result of this arrangement,  we have refocused our current TCM(R) product to the
lower end of the  mid-market  and will rely on the Baan  product to service  the
high end of the mid-market. There can be no assurance that we will be successful
in marketing the Baan product offering, that such offering will remain viable in
our  target  market or that  Baan  will  continue  such  relationship  after the
expiration of its initial term. In addition to the Baan relationship, internally
developed software products incorporate and use software technology and software
products developed by other third parties. There can be no assurance that all of
these  companies will remain in business or that their product lines will remain
viable.  If any of these  companies  fails to remain in  business or abandons or
fails to enhance a particular product line, we may need to seek other suppliers.
This could result in us having to significantly  alter our internally  developed
product  lines  which  could have a material  adverse  effect on our  results of
operations.  There also can be no assurance that our current  suppliers will not
significantly alter their pricing in a manner adverse to us.

<PAGE>

Dependence on Key Employees

Our success is dependent to a significant  extent on our executive  officers and
other key personnel (including technical and sales personnel),  the loss of whom
could have a material  adverse  effect on the company.  Our future  success will
depend in large part on our ability to attract and retain talented and qualified
employees.  Competition in the recruiting of  highly-qualified  personnel in the
management information systems industry is intense and there can be no assurance
that we can retain our key  employees  or that we can  attract,  assimilate  and
retain other  qualified  personnel in the future.  We have recently  experienced
attrition at rates higher than our historical experience. We have taken steps to
curtail the  attrition,  but we can give no  assurance  that these steps will be
successful or that further  attrition will not  materially  impact our financial
performance.

New Products and Technical Change

The  market  for our  products  (including  third-party  supplied  products)  is
characterized by rapid  technological  advances,  evolving  industry  standards,
changes in end-user  requirements  and  frequent new product  introductions  and
enhancements.  The  introduction of products  embodying new technologies and the
emergence of new industry  standards could render our existing  product offering
and products currently under development  obsolete and unmarketable.  Our future
success  will depend upon our  ability to enhance  our current  products  and to
develop and  introduce or obtain from  third-party  suppliers  new products that
keep  pace  with  technological  developments,   respond  to  evolving  end-user
requirements and achieve market  acceptance.  Any failure by us to anticipate or
respond adequately to technological  developments or end-user  requirements,  or
any  significant  delays in product  development,  acquisition or  introduction,
could result in a loss of competitiveness or revenues. There can be no assurance
that we will be successful in  developing,  acquiring and marketing new products
or  product  enhancements  on a  timely  basis  or that we will  not  experience
significant delays in the future,  which could have a material adverse effect on
our results of operation.

Intellectual Property and Property Rights

We regard our software  products as proprietary,  in that title to and ownership
of our  software  generally  reside  exclusively  with us. We attempt to protect
ownership of our software with a combination  of copyright,  trademark and trade
secret laws, employee and third-party disclosure agreements and other methods of
protection common in the industry. Despite these precautions, it may be possible
for unauthorized third parties to copy or  reverse-engineer  certain portions of
our  products or to obtain and use  information  that we regard as  proprietary.
Like many software  firms,  we presently have no patents.  We license the source
code for our software to some customers for  customization.  Although our source
code license contains confidentiality and nondisclosure provisions, there can be
no assurance that such customers will take adequate  precautions to protect such
code.  In  addition,  the laws of some  foreign  countries  do not  protect  our
proprietary rights to the same extent as do the laws of the United States. There
can be no assurance  that the  mechanisms we use to protect our software will be
adequate  or that  our  competitors  will  not  independently  develop  software
products that are substantially equivalent or superior to our software products.
Although  we  do  not  believe  that  our  products  infringe  on  the  existing
proprietary  rights of third  parties,  there  can be no  assurance  that  third
parties will not assert infringement claims against us.
<PAGE>

Variability of Quarterly Operating Results; Limited Backlog

Our  operating  results can vary  substantially  from  quarter to quarter due to
various  factors,  including,  among  others:  the size and  timing of  customer
orders; the buying patterns of manufacturers in our target market; delays in the
introduction  of  products  or product  enhancements  by us or by other
providers of hardware,  software and components  for the management  information
systems market; competition and pricing in the software industry; customer order
deferrals in  anticipation of new products;  market  acceptance of new products;
reduction in demand for existing products;  changes in operating  expenses;  and
general economic conditions.  We have historically  operated with little backlog
because  software  orders are  generally  shipped as orders are  received.  As a
result, product revenue in any quarter is dependent on orders booked and shipped
during that quarter.  A significant  portion of our operating expenses are based
on anticipated  revenue levels and are  relatively  fixed in nature.  If revenue
does not meet our  expectations in any given quarter,  operating  results may be
adversely affected.

Competition

The management information systems industry is intensely competitive and rapidly
changing. A number of companies offer products similar to the products we offer.
Some of our existing competitors,  as well as a number of potential competitors,
have larger  technical  staffs,  more  established and larger marketing and sale
organizations and significantly greater financial resources than the company and
its third-party suppliers.  There can be no assurance that such competitors will
not develop  products that are superior to the products we offer or that achieve
greater market  acceptance.  Our future success will depend,  in part,  upon our
ability to increase  software license fee revenues in our target markets.  There
can be no  assurance  that we will be able to compete  successfully  against our
competitors or that the competitive  pressures we face will not adversely affect
our financial performance.

Expansion Plans

We plan to expand our  business  within our  distribution  network in the United
States with the  objective of increasing  total net revenues and profits.  There
can be no  assurance,  however,  that the  efforts  and funds  directed  towards
enhancing our product  offering and expanding  within our  distribution  network
will result in revenue and profit growth.  Any future growth of the company will
also depend on, among other things,  our ability to gain market  acceptance  for
our product  offering in target  geographic areas and to monitor and control the
additional costs and expenses  associated with expansion.  We are also dependent
upon securing services at competitive rates from third-party  service providers.
No  assurance  can be given that we will be able to  successfully  manage  these
aspects of our business.

Control by Management

Our management  currently  holds  approximately  37% of the  outstanding  common
stock. As a result,  management personnel have a significant impact, if they act
together,  on the  election of  directors  and  shareholder  approval of various
corporate actions.


<PAGE>


Industry Background

In the early 1970's,  the Material  Requirements  Planning  ("MRP") approach was
developed to enable manufacturing companies,  with the aid of computers, to plan
and manage their  businesses more  efficiently by managing the flow of materials
at various stages of the manufacturing  process.  In the 1980's, this management
approach  evolved  into  Manufacturing   Resource  Planning  ("MRP  II"),  which
considers labor and equipment planning for the manufacturing  process as part of
an iterative materials planning approach. Concurrently with the evolution of MRP
II,  manufacturing  companies  (predominantly  in Japan)  developed a management
technique which emphasizes the supply of component parts to  "assembly-oriented"
manufacturing plants on a "just-in-time"  basis. This technique not only was the
first to  emphasize  "time" in its  orientation,  but also had  other  desirable
outcomes for manufacturers,  including  improved quality,  lower costs and lower
inventory levels.

In the 1990's,  new  management  approaches  for  manufacturing  companies  have
emerged  which  focus on "time" as the  critical  element  in the  manufacturing
process. In these management approaches, the manufacturer analyzes the component
of time  across  its  entire  organization  with  the  goal of  correlating  the
expenditure of time to the addition of value to the finished product or service.
Beyond the production focus of the "just-in-time" environment, this new approach
focuses on time in all areas of the operation from  engineering to manufacturing
and from customer order  processing to shipment.  This new approach differs from
MRP II in that it often  focuses on improving  business  operations  by treating
plant capacity and labor resources as the primary  scheduling items and treating
material  availability as a secondary  consideration in manufacturing  planning.
The new approach emphasizes "operations  decision-making" support in contrast to
the planning  emphasis of MRP II and more recently  developed  planning  systems
such as  Enterprise  Resource  Planning  ("ERP").  In  addition,  a category  of
information systems has been identified as Manufacturing Execution Systems which
complements  ERP  systems by making  available  real-time  information  from the
factory  floor  and  enhancing   production   performance  and   decision-making
associated with plant operations.  We believe that these Manufacturing Execution
Systems  represent  a  relatively  new  marketplace  with  substantial   benefit
potential  for   manufacturers.   We  believe  that  this  "time   emphasis"  in
manufacturing  management,   which  is  the  focus  of  our  TCM(R),  Baan,  and
FACTORYnet(R)  I/S products,  will be an essential  component of the  management
approach for many manufacturers in the future.

Consolidation in the manufacturing systems software industry resulted in the top
ten ERP software companies  garnering 82% of industry revenues in 1997 according
to  Plant  Wide  Research.  Five  of  these  top  ten  software  companies  have
historically  focused  on  providing  their  products  for  large  manufacturing
corporations.  This group is referred to as "Tier 1" ERP companies.  Each of the
Tier 1 companies  spends in excess of $100 million on research  and  development
annually.  Such  levels  of  expenditures  on R&D  present  a  challenge  to all
mid-sized  manufacturing  software  companies  like  us to  provide  competitive
products in the upper mid-market at affordable  costs.  The information  systems
technology  infrastructure  is different from prior eras in that Tier 1 products
today operate in the same technology  environment for large corporations as well
as  mid-sized  manufacturers.  As a result,  Tier 1  software  products  are now
practical  for  mid-sized  manufacturing  companies to purchase and use in their
business for the first time.

Strategy

Our objective is to become a leading  provider of integrated  business  software
systems for discrete  manufacturing  plants.  We have identified three strategic
initiatives to achieve this goal.

Focus on Time Critical Manufacturing. We believe that manufacturers are striving
to become more "time competitive," and that manufacturing software which focuses
solely on providing  information  for planning and on recording  information for
historical  analysis  will be  inadequate  to meet  the  needs  and  demands  of
manufacturers  in the years to come.  To be effective in the future,  we believe
that  manufacturing  software  will be  required to empower  individuals  at all
levels of an  organization  to make  immediate  decisions  regarding  production
processes and business activities.  Since 1988, we have focused our resources on
developing  software  to  assist  time-oriented  manufacturing  management.  Our
software facilitates  real-time  decision-making by employees,  enabling them to
change  processes  proactively  and react  quickly to  marketplace  demands  and
unanticipated events. With few exceptions, we believe that the limited number of
information  system  implementations  currently  in place which have this "time"
focus have been developed on an individual customized basis. We are not aware of
other major products  available in our target market for discrete  manufacturers
which offer both planning and execution  systems and have a strategy of focusing
on time.
<PAGE>

Commitment  to  Manufacturing   Execution  Systems.  We  believe  that  discrete
manufacturers  can  gain  significant   competitive  advantage  by  implementing
Manufacturing  Execution  Systems.  These  systems  bring  together the data and
information  from ERP  Systems,  Industrial  Control  Systems,  and  Engineering
Systems.

We offered our first Manufacturing  Execution System package in 1988 and believe
that it is  currently  a  leader  in this  software  segment.  Typical  business
functions included in a Manufacturing  Execution System are described below (see
- "Time Critical  Manufacturing - - Software Products").  Although the people in
an organization which use this software on a  minute-to-minute  and hour-to-hour
basis  are  the  factory  operations  personnel,   we  believe  that  the  value
manufacturers realize from implementing a Manufacturing Execution System extends
far beyond this realm.  We believe,  based on the  experience of our  customers,
that the major benefit of implementing a Manufacturing  Execution  System within
an organization is improved customer service and competitiveness.  These systems
allow an  organization  to reduce  non-value  added  elapsed time in the overall
business  process.  We  currently  offer  two  Manufacturing   Execution  System
products,  one which is  pre-integrated  with a total software  offering for the
entire  enterprise  (TCM(R))  and the second is  FACTORYnet(R)  I/S in which our
personnel  use  Manufacturing  Execution  System  software  to  "round  out" and
complete partial  manufacturing  execution system initiatives already undertaken
by the customer.

Management believes Manufacturing Execution Systems provide a significant market
opportunity for us and, correspondingly, has strategically committed the company
to enhancing  its  Manufacturing  Execution  System  offerings  and  marketplace
presence.
<PAGE>

Software Products

We  develop,  market  and  support  TCM(R)  application  software  for  discrete
manufacturing  companies.  We offer  licenses for these software  products:  (a)
TCM(R),  which is a full function business and ERP software system,  including a
pre-integrated  Manufacturing  Execution System providing production management,
shop floor scheduling and operations  support;  and (b) FACTORYnet(R) I/S, which
is a  Manufacturing  Execution  System that provides  production  personnel with
correct revisions of drawings,  specifications,  procedures, and instructions to
help them make a better product and make it right the first time.  Baan software
systems, which include ERP systems, Supply Chain Management systems, Sales Force
Automation systems and Advanced Business Modeling technology, are offered by our
company to upper and midmarket discrete  manufacturing  customers.  Our software
products are intended to provide a set of "tactical tools" which will enable the
customer to achieve its strategic  goals by correlating  the expenditure of time
to the addition of value to the finished product or service.

Our products are designed for discrete manufacturers, including both stand-alone
manufacturing plants and autonomous divisions of large corporations.  "Discrete"
manufacturers   assemble  or   fabricate   parts  into   finished   products  as
distinguished  from "process"  manufacturers  which mix,  separate and otherwise
combine  or  control  ingredients  to  create  finished  products.  Our focus on
discrete   manufacturers   includes  the  market   segments  of  repetitive  and
electronics  manufacturers  which some  people  identify  as  additional  market
segments.

Time Critical Manufacturing - - Software Products

Our software  provides  assistance for a broad range of tasks  identified in the
six categories set forth below. The TCM(R) product can include software from all
of  these  six  categories.  TCM(R)  and  FACTORYnet(R)  I/S  provide  different
capabilities  within the  Manufacturing  Execution  System and Decision  Support
Tools  categories  described  below.  We  anticipate  that  over  time  the  two
Manufacturing  Execution  System  product  offerings  will  evolve into a single
product  which is more  comprehensive  than either of the current  Manufacturing
Execution System offerings.
<PAGE>
<TABLE>
<CAPTION>

                   Time Critical Manufacturing Software Suites

I.       PLANNING
<S>      <C>                                      <C>                                         <C>
         Master Production Scheduling             Manufacturing Resource Planning II          Capacity Planning

II.      PRODUCT DATA MANGEMENT
         Product Configurator                     Engineering Change Control                  Standard Bills of Material
         Standard Routings                        Computer Aided Manufacturing ("CAM")        Document Library
         Item Master                              Computer Aided Design ("CAD")               Standard Cost Build Up

III.     SUPPLY CHAIN MANAGEMENT
         Customer Service                         Inventory Control                           Procurement
         Estimate/Quote                           Inventory Management                        Requisitions
         Customer Maintenance                     Distribution Management                     Vendor Maintenance
         Customer Order Processing                                                            Purchase Orders
         Shipping                                                                             Vendor Performance
         Liability & Warranty                                                                 Electronic Data Interchange
         Electronic Data Interchange ("EDI")

IV.      MANUFACTURING EXECUTION SYSTEM
         Shop Floor Management                    Job Cost
         Bar Code Factory Data Collection         Time & Attendance
         Plant & Equipment Maintenance            Shop Floor Scheduling
         "As Built History"                       Quality Management*
         Electronic Traveler                      Machine Interface
         Messaging & Alarms                       EMS Gateway
         Electronic Work Instructions
         Distributed Numerical Control ("DNC")

V.       FINANCE, ACCOUNTING, AND ADMINISTRATION
         Accounts Receivable                      General Ledger                              Fixed Assets*
         Accounts Payable                         Human Resources*
         Standard Cost                            Payroll*

VI.      DECISION SUPPORT TOOLS
         Executive Information System             Document Library
         Report Writer                            E-Mail
         Database                                 Internet
         Notification Services                    ODBC Access

VIII.    BAAN SOFTWARE PRODUCTS
         Capacity Requirements Planning           Project Network Planning
         Engineering Change Control               Repetitive Manufacturing
         Engineering Data Management                   
         Master Production Scheduling   
         Material Requirements Planning 
         Product Classification        
         Product Configuration          
         Production Control                
         Production Planning           
         Project Budgeting              
         Project Control                
         

</TABLE>

*These Products Are Provided Based On Third Party Sublicensing Alliances.

I.       Planning
The planning modules provide master production  scheduling capability integrated
with rough cut capacity planning to assist production  organizations in planning
materials  requirements and manufacturing  resource levels for the manufacturing
facility.

II.      Product Data Management ("PDM").
PDM modules allow for product definition and control of engineering  changes and
relationships  among  component  parts.  These modules  include  software  which
interfaces with industry popular CAD systems and CAM software.
<PAGE>

III.     Supply Chain Management
The Customer  Service  modules  provide  control over the customer  order cycle,
including  quotations,   order  entry,   acknowledgment  printing,  pick  ticket
printing, shipping and invoicing. These modules allow for flexible pricing table
and  multiple  order  types,  including  telephone  orders,  blanket  orders and
releases, over-the-counter orders and credit memos. We believe that our software
for  EDI,  which  facilitates   electronic  order  entry  and  advance  shipping
notification,  is particularly useful in meeting the needs of the automotive and
retail supply industries.

The Inventory  Management  modules  provide  engineering  data control and offer
inventory record keeping,  availability  projections and replenishment planning.
These  modules  provide  bin,  lot and  serial  number  control,  multi-location
support, cycle counting and physical inventory control.

The  Procurement  modules  provide  control of the purchasing  cycle,  including
authorized vendor price quotations,  purchase order entry and printing, receipts
entry and vendor performance  analysis.  These modules coordinate blanket orders
and releases,  one-time purchase orders, orders for non-productive materials and
electronic mail notification upon receipt.

IV.      Manufacturing Execution System
The  TCM(R)  and   FACTORYnet(R)   I/S  software   products   offer   integrated
Manufacturing  Execution Systems which (i) provide production  management,  shop
floor  scheduling,  distribution  of  "electronic  drawings"  as well as textual
information on factory floor  computer  workstations,  (ii) collect  information
from bar  coding  systems  and  (iii)  facilitate  the  establishment  of direct
connections  for  virtually  any NC/CNC  machine  tool and/or CAD  systems.  The
products  also include  quality  systems  integration  for SPC  analysis.  These
Manufacturing  Execution  Systems  may  operate  as  stand-alone  systems  or be
integrated  into existing  customer  systems,  and are  pre-integrated  with the
remainder of our software.

V.       Finance, Accounting and Administration
These modules  provide general  accounting and financial  assistance in tracking
and estimating  planned and actual  work-in-process  costs. Any information from
the finance and accounting database may be readily pulled into personal computer
spreadsheet  systems for further  analysis  and  reporting.  These  modules also
interface with third party human resource,  fixed assets,  and payroll  software
products sold by us.

VI.      Decision Support Tools
These software modules are a combination of internally developed and third party
software sold by us which facilitate data management,  analysis,  customization,
communication,  etc.,  with and between our software  and other  software in the
customer's computing environment.


Our software  modules may be licensed  individually  or in  combination to allow
companies with differing business needs and schedules to have flexibility in the
implementation  of the software  system.  Customers  generally  license  between
$30,000 and  $1,000,000  of software per plant,  with the total license fees per
plant based on the modules licensed and a per seat license fee.

VII.

Baan Software Products

In 1998,  EMS became a value-added  authorized  reseller of Bann  software.  EMS
looked to Baan, a leader in Dynamic Enterprise Modeling Software  Solutions,  to
expand our ability to deliver business value to our customers. This strategy has
been widely applauded by industry experts.

Not only does Baan IV Manufacturing  offer  outstanding  features,  all the Baan
applications are fully integrated to provide  consistency and visibility for all
activities  across  entire  operations.  All Baan software  applications  can be
configured to reflect  business  relationships  between the multiple sites.  The
result is that even  company  vendors  can gain access to the system to speed up
and secure communications  throughout the supply chain.  Further,  comprehensive
international  capabilities  make it  easy  for  companies  to  integrate  their
operations across international borders.



<PAGE>

Software Technology

We invest in a wide range of software  technologies which are important not only
for our end user  customer but also for our internal  software  development  and
distribution. In appropriate circumstances,  we have licensed software developed
by others and integrated various features of that software into our own software
products.  For example,  our software products  incorporate  imaging technology,
which  enables  the user to  store  and  interactively  display  images  such as
photographs  of  steps  in  a  particular   production   process,   diagrams  of
manufacturing sub-assemblies or motion video depicting the proper operation of a
machine. This imaging capability facilitates manufacturing and production set-up
and also assists users in satisfying ISO 9000  certification  criteria (a set of
international   quality  standards).   Our  products  also  include  EDI,  which
facilitates electronic order entry and advance shipping notification.

The Baan product line provides  midmarket  manufacturers  with  technology  that
utilizes  Baan's  proprietary   toolset  and  has  been  recognized  as  leading
technology for both Tier 1 and midmarket manufacturing software systems.

Customer Services

We offer comprehensive services for customers. Services provided by us include a
telephone  support program,  system  integration,  custom software  development,
implementation  consulting,  and formal classroom and on-site  training.  At the
customer's option, these services,  which are available for both of our software
products,  can be  provided  entirely  by us or may be  supplied  in part by the
customer or another third party such as a systems integrator or consulting firm.
These services,  which provide a recurring stream of revenue for us, are offered
on an unbundled basis for either an annual or a multi-year  subscription period.
All of  the  services  offered  by us  are  optional,  except  that  we  require
first-time  licensees  of our  software to  subscribe  for at least two years of
telephone  support.  We believe  that the  availability  of  effective  customer
services is critical for customer  satisfaction and to increase software license
fee revenues. We further believe that services can provide a continuing and more
predictable source of revenue as compared to software license feel revenues. For
the years ended November 30, 1998, 1997 and 1996,  services revenues  accounted
for 43.0%, 39.4% and 37.4% of our total net revenues, respectively.

The following is a brief description of the various services we provide:
<PAGE>

Telephone  Support  Program.  Our telephone  support program is a comprehensive,
fee-based program designed to help customers obtain the maximum benefit from our
business  management  software.  The telephone support program is handled out of
our Minnesota,  Illinois, and Wisconsin offices and is staffed by thirty trained
professionals.  The program includes, among other services,  answering technical
questions  regarding standard software,  and diagnosing and resolving  equipment
and software problems.

System Integration and Custom Software Development.  We offer system integration
and custom  software  development  services,  on a fee basis,  to meet  specific
customer  requirements and to integrate our software with a customer's  existing
computer system.  We have developed a Time Critical  Implementation  Methodology
("TCIM"),  which  is  a  proprietary   implementation  methodology  intended  to
facilitate integration and efficient  implementation of our products at customer
sites.  This  approach  is designed  to allow the  customer  to obtain  business
benefits  sooner  than with less  structured  methodologies.  Ongoing  technical
support is also available from us to all customers who elect to purchase  custom
software development services.

Implementation  Consulting.  We provide consulting services,  on a fee basis, to
assist  customers in  implementing  TCM or Baan software  systems using the TCIM
approach. These services include value-added  implementation  planning,  project
management and specialized customer training. We employ a full-time professional
services staff to provide these and other services.

Training.  We offer  customers a series of both  classroom and on-site  training
options. Training includes classroom and personal instruction at a number of our
locations or at the customer's plant site.  Standardized training is offered for
a fixed fee per class.

Hardware Products

We sell computer  hardware and data collection  equipment in order to facilitate
sales of our  software  products to  customers  requiring a complete  management
information  system.  We sell,  among other  hardware,  factory data  collection
equipment,  CAMates(R) (a small  specialized  computer allowing users to monitor
and collect data from production machines),  bar coding systems,  networking and
communication  equipment,  and occasionally server and client computer hardware.
The  factory  data  collection  and bar coding  hardware is  purchased  from the
original manufacturers and resold on a project basis. This equipment ranges from
fixed mount bar code scanners and printers to portable units and radio frequency
network units. We also offer our customers networking and communication hardware
and  server  and client  computing  hardware  which we 

purchase from original manufacturers,  including Intermec Corporation,  plus two
distributors,  Keylink  SystemsSM and Ingram Micro, Inc. During the past several
years, we have focused our efforts on generating an increasing percentage of our
net  revenues  from  software  license  fees,  which have a higher  margin  than
hardware revenues.

Markets and Customers

We target companies operating discrete manufacturing plants predominantly in the
Eastern half of the United  States.  These plants may be owned by privately held
companies  or  by  large,  multi-national  public  corporations.  Our  customers
include, among others, capital equipment  manufacturers,  job shops, high volume
manufacturers,   automotive  suppliers,  consumer  product  manufacturers,   and
aerospace equipment  manufacturers.  During each of the past three fiscal years,
no one customer has accounted for more than 10% of our total net revenues.
<PAGE>

Sales and Marketing

In the United  States and Canada,  we license our  products  and offer  services
through a direct  branch  office sales  force,  joint  ventures and  independent
distributors as reflected in the table below:
<TABLE>
<CAPTION>

<S>                            <C>                                      <C>  
  Branch Office Locations      Independent Distributor Territories      Joint Venture Location
  Austin, TX                   Miller Place, NY                         Cleveland, OH
  Boston, MA                   Menomonee, MI
  Chicago, IL                  Pittsburgh, PA
  Cincinnati, OH               Wausau, WI
  Detroit, MI                  West Des Moines, IA
  Houston, TX                  Brainerd, MN
  Los Angeles, CA
  Milwaukee, WI
  Minneapolis, MN
  Norwalk, CN
  Port St. Lucie, FL
  Rockford, IL
</TABLE>

We own 50% of the joint venture operating in Cleveland. We obtained our interest
in this  joint  venture  primarily  in  exchange  for  technical  knowledge  and
management  expertise.  We have no  obligation  to fund any  losses  that may be
incurred by the joint venture.

Our direct sales personnel are  compensated on a salary plus  commission  basis.
Our joint venture and independent  distributor agreements generally provide that
sales will be made by  authorized  resellers  from  offices  within a designated
territory.  The  agreements  obligate  us to license the  reseller at  specified
prices  and to  provide  training  to  each  reseller.  Resellers  are  normally
obligated  to sell a  specified  minimum  amount  of our  software  to keep  the
agreements in effect. We also maintain a staff of systems  consultants who offer
pre- and post-sales support to the sales and distribution network.

We  market  our  products  through  advertising   campaigns  in  national  trade
periodicals  and through  direct  mailings.  These efforts are  supplemented  by
listings in relevant directories and trade show and conference  appearances.  We
are also given leads regarding  potential customers by our hardware and services
vendors, existing customers and various accounting and consulting firms.

Sales  cycles  for our  products  vary  substantially  based  on the  degree  of
integration,  consulting  and  training  required  and also on the status of the
customer's  hardware  system  implementation.  A sales cycle is usually three to
twelve months from the time an initial sales presentation is made until the time
a signed license agreement is entered into with a customer.

Strategic Arrangements

A facet of our strategy is to establish  arrangements with suppliers of state of
the art information systems technology.  Over the last five years we have worked
to expand the number of our strategic relationships.

We have  distributor  relationships  with Keylink  SystemsSM,  a  subsidiary  of
Pioneer Standard Electronics, Inc. Company, and Ingram Micro, Inc., which supply
computers, associated peripherals and third party software. We have arrangements
with Intermec Corporation relating to bar code data collection systems which are
integrated on an "off-the-shelf" basis into our software products.  Our software
has been integrated with other bar coding systems on a customized basis. We also
have a relationship  with the Datamyte  Division of Rockwell  Automation for its
Quantum quality control software product line.
<PAGE>

In addition to our relationships with equipment providers, we have relationships
with numerous software product suppliers. These companies provide software which
we use within  TCM(R) and  FACTORYnet(R)  I/S software.  Synergex  International
Corporation  has  provided  us with the  Synergy  4GL  Applications  Development
Environment  since 1990.  We purchase EDI  software  from Supply Tech and Radley
Corporation.

We have a relationship  with Baan of the Netherlands by which we are licensed to
resell their software throughout the United States. We focus our efforts on Baan
sales in nineteen  states  within the Eastern half of the country.  These states
represent  over  50% of  the  midsized  discrete  manufacturing  markets  in the
country.  Our  relationship  with Baan was established in 1998. We are the first
midmarket ERP  organization  to establish such a relationship  with respect to a
Tier 1 manufacturing  software product. First sales of the Baan software product
occurred during our third quarter of fiscal 1998.

Our  relationship  with the equipment and software product  suppliers  described
above is basically that of a reseller of such suppliers'  products.  As such, we
are entitled to volume discounts on products which we purchase and are generally
entitled to the benefits of cooperative marketing programs.

Product Development

We believe we must  continue to enhance and  broaden  the  software  products we
offer to meet the constantly evolving needs of discrete manufacturers within our
target market.  We rely on both  interanlly  developed and exteranlly  developed
products to offer to our target market.  Prior to 1998, we relied exclusivley on
internal  development and development related to customized projects implemented
at field sites to extend, enhance and support our software products, and develop
and integrate new capabilities.

During the fiscal  years ended  November  30, 1996,  1997,  and 1998,  our total
software investment  (consisting of product development expenses and capitalized
software  development  costs) was $5.6  million,  $6.9 million and $6.2 million,
respectively.  Product  development  expenditures  which were  expensed  and not
capitalized  during those three fiscal years totaled $2.2 million,  $2.4 million
and $2.8 million, respectively.

Software  development  efforts  currently in progress include the development of
product  enhancements such as additional object orientation  features within our
products,   enhanced  client-server  network  operations  on  various  operating
systems,  extended  operation  on  various  relational  database  products,  and
enhanced functional capability.  There can be no assurance,  however, that these
development efforts will result in product  enhancements that we will be able to
market  successfully.  Certain  of these  enhancements  are  dependent  upon the
development  efforts of third party  suppliers over whom we have no control.  In
the event the  development  efforts of the third party  suppliers are delayed or
are unsuccessful, our software developments would be similarly delayed. Software
development is, however, an evolutionary  process and our management believes it
could eventually find other suppliers or, if unsuccessful in its search, that it
could successfully re-engineer existing products to fulfill its requirements.

Competition

The  manufacturing  software  industry  is  intensely  competitive  and  rapidly
changing. A number of companies offer products similar to our products.  Some of
our existing  competitors,  as well as a number of potential  competitors,  have
larger  technical  staffs,  more  established  and  larger  marketing  and sales
organizations and significantly greater financial resources than us.

<PAGE>

We believe that our employees' understanding of diverse manufacturing operations
and  processes  and the  potential  business  benefits of the TCM(R)  management
approach  to  such  operations   allow  us  to   differentiate   ourselves  from
competitors.  Other  competitive  factors include  software product features and
functions,  product  architecture,  the  ability  to  function  on a variety  of
operating systems, technical support and other related services, ease of product
integration with third party application  software,  price, and performance.  In
December 1997,  Gartner Group  identified  twenty-four  competitors in the North
American   mid-market   Enterprise   Resource   Planning   area   for   discrete
manufacturers.  Additionally,  that firm  identified  eight  competitors  in the
Manufacturing  Execution Systems market as of June 1997.  Although Gartner Group
identified  a  limited  number of  competitors  in its  Manufacturing  Execution
Systems  study,  we  generally  do  not  encounter  these   competitors  in  the
marketplace.  We believe  that our  primary  competition  for our  Manufacturing
Execution System products are customized software products developed by internal
data   processing   staffs  or  by  third  party  offerings  for  both  ERP  and
Manufacturing Execution System discrete manufacturers.

Intellectual Property

We have  registered or have applied for  registration  of our "EMS" and "TCM(R)"
trademarks for software  services and products with the United States Patent and
Trademark  Office and with the equivalent  offices of most foreign  countries in
which we currently do business.  Among others,  we have also received or applied
for  trademarks  for products  marketed  under the names  FACTORYnet(R)  I/S and
CAMate(R).

We regard our software products as proprietary in that title to and ownership of
our software reside exclusively with us. We attempt to protect our rights with a
combination of trademark,  copyright and employee and third-party  nondisclosure
agreements.  Despite  these  precautions,  it may be possible  for  unauthorized
parties to copy or reverse-engineer portions of our software products. While our
competitive position could conceivably be threatened by our inability to protect
our proprietary information,  we believe that copyright and trademark protection
are less  important  to our success than other  factors  such as the  knowledge,
ability and experience of our personnel,  name  recognition  and ongoing product
development and support.

Employees

As of November 30, 1998, we had 299 full-time employees, of whom 60 were engaged
in sales and marketing; 58 in product development;  140 in customer service; and
41 in management, finance and administration.  Our employees are not represented
by any collective  bargaining  organization and we have never experienced a work
stoppage. We consider our employee relations to be good.

Item 2. Properties

Our  corporate  headquarters  are located in Milwaukee,  Wisconsin,  in a leased
office consisting of approximately  42,000 square feet under a lease expiring on
November 30, 2003. We lease additional facilities domestically in Austin, Texas;
Boston, Massachusetts;  Chicago, Illinois;  Cincinnati, Ohio; Detroit, Michigan;
Hartford,   Connecticut;    Indianapolis,   Indiana;   Minneapolis,   Minnesota;
Philadelphia,  Pennsylvania; Port St. Lucie, Florida; Rockford, Illinois and San
Jose,  California.  See Note 8 of the Notes to Consolidated Financial Statements
for information regarding our total lease obligations.

Item 3.  Legal Proceedings

As of the date of this filing, neither we nor any of our subsidiaries is a party
to any legal proceedings, the adverse outcome of which, in management's opinion,
would have a material effect on our results of operations or financial position.
In  December  1998 a judgment  was  issued in a legal  proceeding  that  further
description resulted in our being ordered to pay $212,000.

Item 4.  Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the quarter ended
November 30, 1998.
<PAGE>
Part II
Item 5. Market for Common Equity and Related Stockholder Matters

Market for Common Stock

Our common  stock and common  stock  warrants  were  traded on The Nasdaq  Stock
Market for fiscal  1997 and  through  November 6, 1998 for the fiscal year ended
November 30, 1998 under the symbols EMSI and EMSIW, respectively.  Currently our
common stock and common stock warrants are traded on the OTC Bulletin Board.

The table below  represents  the high and low sales  prices (and for the periods
after  November 6, 1998,  the high and low bid prices) for our common  stock and
warrants for fiscal 1997 and 1998:

                           Common Stock                          Warrants

1998                    High         Low            High               Low
----


First Quarter       $  4 3/8      $  2 1/16      $  2               $  1 1/8
Second Quarter      $  5 7/8      $  3           $  1 5/8           $  1
Third Quarter       $  2 7/8      $  5 3/8       $  1 1/2           $  1/2
Fourth Quarter      $  3 3/4      $  1 7/8       $  1 1/8           $  3/8


1997                   High          Low            High               Low
----

First Quarter       $  7 3/4      $  5 1/2       $  3 3/16          $  2 1/2
Second Quarter      $  7 1/2      $  6 1/2       $  2 1/2           $  3/4
Third Quarter       $  6 1/8      $  4           $  11/2            $  1
Fourth Quarter      $  6 1/2      $  4           $  2               $  1 1/2

The foregoing quotations reflect  inter-dealer  prices,  without retail mark-up,
mark-downs or commissions, and may not represent actual transactions.

As of  February  1, 1999,  there were 416  shareholders  of record of our common
stock and 298 holders of record of the  warrants.  We have not  declared or paid
cash dividends on our common stock in the past,  and currently  intend to retain
any earnings for use in our business. Therefore, we do not anticipate paying any
cash  dividends in the  foreseeable  future.  Our credit  facility also contains
provisions limiting our ability to pay cash dividends.

Recent Sales of Unregistered Securities.

Series A Preferred Stock

On  August  28,  1998,  we  sold,  for an  aggregate  gross  purchase  price  of
$1,005,000,  1,005 shares of our Series A 8%  Convertible  Redeemable  Preferred
Stock,  par  value  $.01 per  share  (the  "Series  A  Preferred  Stock"),  in a
non-public offering exempt from the registration  requirements of the Securities
Act of 1933,  as amended (the  "Securities  Act"),  pursuant to Section 4(2) and
Rule 506 of Regulation D thereunder.  The Series A Preferred Stock was sold at a
price of $1,000 per share to  accredited  investors,  as such term is defined in
Rule 501(a) under the Securities Act. All shares of the Series A Preferred Stock
were subsequently exchanged for shares of the Series B 8% Convertible Redeemable
Preferred Stock, par value $.01 per share (the "Series B Preferred Stock"),  and
no shares of the Series A Preferred Stock remain outstanding.

<PAGE>



Series B Preferred Stock

       On October 27, 1998, we sold,  for an aggregare  gross  purchase price of
$780,000, 780 shares of Series B Preferred Stock in a non-public offering exempt
from  registration  pursuant to Section 4(2) of the Securities Act, and Rule 506
of Regulation D thereunder.  The Series B Preferred Stock was sold at a price of
$1,000 per share to accredited investors, as such term is defined in Rule 501(a)
under the Securities Act.

       In addition,  on October 27, 1998, as part of the  Company's  offering of
its Series B Preferred  Stock, we issued (i) certain warrants to purchase 28,714
shares of our common stock and (ii) certain  warrants to purchase  26,000 shares
of common stock. The warrants are immediately exercisable for a five year period
at a price of $3.60 per share,  subject to certain adjustment as provided in the
warrant  agreement.  The  warrants  were  issued in a  transaction  exempt  from
registration pursuant to Section 4(a) of the Securities Act.

       On October 30, 1998, we exchanged,  on a one-for-one  basis, 1,005 shares
of Series A Preferred  Stock for 1,005 shares of Series B Preferred  Stock in an
offering  exempt from  registration  pursuant to Section 4(2) of the Securtities
Act, and Rule 506 of Regulation  thereunder.  As of February 1, 1999, there were
43 shareholders of record of our Series B Preferred Stock.

The following are the terms of conversion of the Series B Preferred Stock:

Voluntary Conversion. Each share of the Series B Preferred Stock is convertible,
at the option of the holder,  into  shares of common  stock at any time prior to
the effective date of the forced  conversion or redemption at a conversion price
of $2.00 (the  "Conversion  Price"),  subject to  adjustment.  We will not issue
fractional  shares of common stock upon conversion of Series B Preferred  Stock,
but will pay a cash adjustment for any such fraction.

       Forced Conversion.  We have the right to force conversion of the Series B
Preferred  Stock into shares of common  stock at any time after  issuance of the
Series B Preferred Stock,  provided:  (i) that on the Forced  Conversion  Notice
Date and on the Forced Conversion Date (each as defined in the Restated Articles
of  Incorporation)  the common stock  issuable  upon  conversion of the Series B
Preferred  Stock has been  registered  pursuant to the  Securities  Act and such
registration  is then currently  effective;  and (ii) the average of the closing
bid price of the common  stock as listed on the NASDAQ,  NYSE,  AMEX or wherever
the common  stock  then  trades,  is at least one  hundred  seventy-five  (175%)
percent of the  conversion  price for twenty  (20) days  within any thirty  (30)
consecutive  trading  day period  ending no more than ten (10) days prior to the
Forced  Conversion Notice Date. Any notice of forced conversion must be given to
all holders no less than thirty (30) nor more than forty-five (45) days prior to
the Forced  Conversion  Date. On the Forced  Conversion Date, we will pay to all
registered  holders  of the  Series B  Preferred  Stock all  accrued  and unpaid
dividends through and including the Forced Conversion Date.
<PAGE>

                                                 

In the event that our Board of  Directors  approves a  transaction  whereby  the
holders of common stock would be paid a per share price equal to or in excess of
one  hundred  seventy-five  (175%)  percent of the  conversion  price (the "Sale
Event") and on the Forced  Conversion  Notice Date and on the Forced  Conversion
Date the condition set forth in subsection (i) above has been satisfied,  we can
require all holders of the Series B Preferred  Stock to convert  their shares of
the Series B Preferred  Stock into shares of common stock  immediately  prior to
the closing of the Sale Event. Notwithstanding anything to the contrary, holders
of the Series B Preferred  Stock shall not have the right to vote  together with
the holders of the common stock or as a separate class on whether to approve the
Sale Event  (although a holder of the Series B Preferred Stock that converts the
Series B Preferred  Stock into the common stock prior to the record date for the
shareholders'  meeting to vote on the Sale Event  would be entitled to vote such
shares of the  common  stock)  during  the one  hundred  fifty  (150) day period
following  the Forced  Conversion  Notice Date.  In the event that the foregoing
does not  eliminate  the  voting  rights of the  Series B  Preferred  Stock with
respect to a Sale Event, then the holders of such Series B Preferred Stock shall
be deemed to have granted to the President and Secretary of the company and each
of them  individually) an irrevocable  proxy for such one hundred fifty 150) day
period to vote the Series B Preferred  Stock for the approval of the Sale Event.
In the event that the Sale  Event  would  result in the  holders of the Series B
Preferred  Stock receiving  securities,  it is a condition to our right to force
conversion  resulting  from a Sales Event that the  securities to be received by
the holders of the Series B Preferred Stock are registered  under the Securities
Act and are freely transferable.

       Adjustment  to  Conversion  Price.  The shares of the Series B  Preferred
Stock provide for adjustment to the Conversion Price upon (i) any subdivision or
reverse  split of the  outstanding  shares of the common stock into a greater or
lesser number of shares of common stock;  (ii) any  declaration of a dividend or
other distribution by the Company upon the common stock payable in shares of the
common stock; or (iii) any capital  reorganization  or  reclassification  of the
capital  stock of the  Company.  If we through  either a private  placement or a
public offering (but other than pursuant to options granted under our directors'
and employee  stock option and stock  purchase plans or shares or options issued
in an acquisition or shares  issuable  pursuant to the exercise of the Warrants)
issue shares of common stock,  or options to purchase  common stock or rights to
subscribe for common stock or securities  convertible  into or exchangeable  for
common stock at a price (such price,  if other than cash,  as  determined by our
Board of  Directors)  less than the then market  price on the date of sale,  the
conversion  price then in effect shall  automatically  be reduced by multiplying
the then  Conversion  Price by a fraction,  the  numerator of which shall be the
number of shares of common stock outstanding immediately prior to such issuance,
sale or  distribution  plus the  number  of shares  of  common  stock  which the
aggregate consideration received or to be received by us for such issuance, sale
or  distribution  would  purchase  at  the  market  price  per  share,  and  the
denominator  of which shall be the number of shares of common stock  outstanding
immediately after giving effect to such issuance, sale or distribution.  We will
not issue  fractional  shares of common  stock upon  conversion  of the Series B
Preferred  Stock,  but will pay a cash  adjustment for any such fraction.  There
will be no  adjustment in the event that we pay a dividend in cash to holders of
common  stock;  provided,  however,  we will give the  holders  of the  Series B
Preferred  Stock  written  notice at least  thirty (30) days prior to our record
date for the cash dividend, that we intend to declare a cash dividend.

<PAGE>
<TABLE>
<CAPTION>

Item 6.
Selected Financial Data
(Dollars in thousands, except per share data)


                                                                                 Year ended November 30
                                                       ---------------------------------------------------------------------------
                                                               1994         1995(4)         1996           1997          1998
---------------------------------------------------------- -------------- ------------- -------------- ------------- --------------
STATEMENTS OF OPERATIONS DATA:

Net revenues:
<S>                                                        <C>            <C>           <C>            <C>           <C>     
Software license fees                                      $ 10,163       $ 11,534      $19,094        $21,752       $ 20,553
Services                                                   $  7,256       $ 10,962      $15,412        $16,781       $ 16,846
Hardware                                                   $  5,245       $  6,528      $ 6,751        $ 4,112       $  1,745
                                                           ============== ============= ============== ============= ==============
                                       Total net revenues  $ 22,664       $ 29,024      $41,257        $42,645       $ 39,144


Cost of products and services: 
Cost of third party software license fees                  $    797       $  1,419      $ 2,484        $ 3,065       $  4,717
Software development amortization                          $    515       $    879      $ 1,591        $ 2,535       $  2,243
Cost of services                                           $  4,467       $  7,884      $12,109        $14,000       $ 14,430
Cost of hardware                                           $  4,146       $  5,118      $ 4,979        $ 3,260       $  1,386
                                                           ============== ============= ============== ============= ==============
                          Total cost of products/services  $  9,925       $ 15,300      $21,163        $22,860       $ 22,776


========================================================== ============== ============= ============== ============= ==============
Gross Margin                                               $ 12,739       $ 13,724      $20,094        $19,785       $ 16,368
========================================================== ============== ============= ============== ============= ==============


Selling and marketing expenses                             $  7,407       $  9,479      $14,060        $15,957       $ 13,280
General and administrative expenses                        $  2,227       $  3,029      $ 3,416        $ 3,838       $  3,451
Software development expenses (1)                          $    752       $  1,086      $ 2,235        $ 2,391       $  2,804
Restructuring and other charges                               -----          -----        -----          -----       $  6,836
                                                           ============== ============= ============== ============= ==============
                                 Total Operating Expenses  $ 10,386        $13,594      $19,711        $22,186       $ 26,371


Operating income (loss)                                    $  2,353       $    130      $   383        $(2,401)      $ (10,003)
Other income (expense)                                     $    342       $     80      $  (118)       $  (377)      $    (587)
 

Income (loss) before income taxes                          $  2,695       $    210      $   265        $(2,778)      $ (10,590)
Income tax expense (benefit)                               $    975       $     79      $   112        $  (618)      $       0
                                                           ============== ============= ============== ============= ==============
Net income (loss)                                          $  1,720       $    131      $   153        $(2,160)      $ (10,590)


Basic and diluted net income (loss) per share              $   0.53       $   0.04      $  0.04        $ (0.53)      $   (2.59)
                                                           ============== ============= ============== ============= ==============

Weighted average common and common equivalent share            3,268          3,669        3,965          4,048           4,090
outstanding (2)

</TABLE>



<PAGE>

<TABLE>
<CAPTION>


Selected Financial Data


                                                                                     Year ended November 30
                                                        ---------------------------------------------------------------------------
                                                                1994         1995(4)         1996           1997          1998
-----------------------------------------------------------------------------------------------------------------------------------

Other Statistical Data:

<S>                                                         <C>            <C>           <C>            <C>           <C>     
Software investment (3)                                     $  1,857       $  3,407      $  5,607       $  6,862      $  6,200

Software investment as a percentage of software 
license                                                         18.3%          29.5%         29.4%          31.6%         30.2%


                                                                                     Year ended November 30
                                                        ---------------------------------------------------------------------------
                                                                1994         1995(4)         1996           1997          1998
-----------------------------------------------------------------------------------------------------------------------------------

Balance Sheet Data:

Working Capital (deficit)                                   $  4,749       $  4,677      $  4,396       $  1,785      $ (5,610) 
Capitalized software development
costs, net                                                  $  1,861       $  4,000      $  5,781       $  7,717      $  4,373
Total assets                                                $ 17,903       $ 24,332      $ 27,446       $ 28,797      $ 24,160


Long-term obligations                                       $    50        $     21      $  2,123       $  3,966      $    242
Stockholder's equity                                        $ 10,354       $ 14,177      $ 14,597       $ 12,573      $  3,632



(1.)Does not include capitalized software  development costs of $1,105,  $2,321,
    $3,372,  $4,471 and $3,396  recorded for the years ended  November 30, 1994,
    1995, 1996, 1997 and 1998, respectively.

(2.)Weighted  average common and common  equivalent  shares  outstanding for the
    periods shown include the effect of common stock equivalents, if dilutive.

(3.) Software investment consists of product development expense and capitalized
     software development costs.

(4.) Includes  results of Effective  Management  Systems of  Illinois,  Inc. and
     Intercim  Corporation  since being  acquired  effective  March 31, 1995 and
     September 6, 1995, respectively.

</TABLE>

<PAGE>




Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operation (for the fiscal years ended November 30, 1998, 1997, and 1996)


Overview

Effective  Management  Systems,  Inc.("EMS" or the "Company") recorded a loss of
approximately  $10.6  million  in fiscal  1998 as  compared  with a loss of $2.2
million in fiscal 1997. The decline in results of operations  related in part to
a major restructuring plan ("Restructuring") implemented in fiscal 1998 pursuant
to which the  Company  established  a  distribution  relationship  with the Baan
Company  and  incurred  the  associated   costs  of  transitioning  to  the  new
relationship. In the Restructuring, the Company refocused its TCM product to the
lower end of the mid  market,  added the Baan  product for the upper mid market,
and  continued  to offer the Intercim  Corporation  products in the Fortune 1000
market.  Management  expects  the  transition  in its  product  offerings  to be
completed in the first half of fiscal 1999.  As part of the  Restructuring,  the
Company incurred a restructuring charge of approximately $6.8 million.

The  Company  recorded a loss of  approximately  $2.2  million in fiscal 1997 as
compared  with net income of $153,000 in fiscal 1996.  The decline in results of
operations was due in part to the delayed introduction of version 6.0 of the TCM
software  product  as  well as  increased  service  costs  associated  with  the
implementation  of new products  and  technologies.  On November  26, 1997,  the
Company  released version 6.0 of its TCM product which completed the application
of a Windows  compliant  interface,  the lack of which had  negatively  impacted
software sales in the past.  Also in fiscal 1997,  the Company  initiated a cost
reduction program (the "1997 Cost Reduction") with the goal of reducing costs by
$2 million per annum.  The Company  also  announced a  realignment  of executive
management, which included the departure of two executives.

Although the goal of the Company is to return to profitability, no assurance can
be given that the various  measures  that the  Company  has taken will  actually
result in the  achievement of this  objective.  In addition,  as a result of the
fiscal 1997 and 1998  losses,  the Company has been  required to obtain  waivers
from its primary lender for covenant violations. In the event that the Company's
financial  performance does not improve or if it is unable to secure  additional
investment capital or sell assets to bolster its financial position, the Company
will require  additional  covenant relief in fiscal 1999. In the event that such
covenant  relief  cannot be obtained,  it would  likely have a material  adverse
effect  on the  Company's  liquidity,  including  its  ability  to fund  current
operations.  Although the Company did raise additional  equity capital in fiscal
1998  through  the sale of  preferred  stock,  the  Company's  ability to borrow
additional  funds under its exisiting  credit  facility  remains  limited.  As a
result of its financial situation, all of the Company's debt has been classified
as short-term and its audit report  contains an explanatory  paragraph for going
concern uncertainty.

The Company's  long term success is also dependent on its ability to attract and
retain a highly qualified sales,  development and service staff. The Company has
recently experienced  attrition at rates higher than its historical  experience.
The Company has taken steps to curtail the  attrition,  but no assurance  can be
given that these steps will be  successful  or that further  attrition  will not
materially impact the Company's financial performance.

Results of Operations
Total Revenue

Total revenue for fiscal 1998 decreased 8.2% to $39,144,000 from $42,645,000 for
fiscal 1997.  Total revenue for fiscal 1997 increased  3.4% to $42,645,000  from
$41,257,000 in fiscal 1996. The mix of software, services, and hardware revenues
was 52.5%, 43.0%, and 4.5%,  respectively,  in fiscal 1998 as compared to 51.0%,
39.4%,  and  9.6%,   respectively,   in  1997,  and  46.3%,  37.4%,  and  16.4%,
respectively,  in 1996.  The  growth  in  software  and  service  revenues  as a
percentage  of total  revenues  during these years was the result of a strategic
decision by the Company to focus its marketing and selling efforts on generating
an increased percentage of its revenues from higher margin software and services
as opposed to lower margin hardware sales.  International  revenues  represented
less than 10% of total revenues for all periods presented.
<PAGE>

Software License Fee Revenues

Software  license fee  revenues  are  customer  charges for the right to use the
Company's  software  products.  These revenues  decreased 5.5% to $20,553,000 in
fiscal 1998 from  $21,752,000 in fiscal 1997.  The decrease in software  license
fees was mainly  attributable  to: (1) the  attention  and efforts  spent in the
transition  to selling the new Baan  product  lines;  (2) reduced  revenues  and
corresponding returns from restructured operations ($2,000,000); and (3) reduced
revenues  due to a lower  number of sales  personnel  as a result of  attrition.
Sales of the Baan  products,  which began April 1998,  rose from $130,000 in the
third   quarter of fiscal  1998 to  $1,553,000  in the fourth  quarter of
fiscal 1998. As additional  sales  personnel  train in the Baan products,  sales
productivity temporarily decreases. The length of the sales cycle can range from
two to twelve  months  depending  on such factors as the size of the prospect or
the  complexity of the need of the prospect.  The Company is also in the process
of  building a  sufficient  level of  prospect  leads to  maintain  and  enhance
necessary  levels of sales  activity.  Management  expects that this decrease in
productivity  will gradually  improve during the next two fiscal quarters,  and,
thereafter,  return to historical levels. Exclusive of the territories closed in
connection with the Restructuring,  sales of the Company's TCM software products
declined  23.7% from fiscal 1997 to fiscal 1998 mainly due to prospect  concerns
about past  financial  performance.  Management  expects slower sales of its TCM
products to continue until the Company becomes profitable. Sales of the Intercim
software products  increased 27.5% from fiscal 1997 to fiscal 1998. The software
license  fee  revenues  increased  13.9% to  $21,752,000  in  fiscal  1997  from
$19,094,000 in fiscal 1996. The main reason for this increase was the additional
sales made to new customers during fiscal 1997.

Service Revenues

The Company  offers  both  mandatory  and  optional  services to its  customers.
Services  provided  include a telephone  support program,  systems  integration,
custom software development, implementation consulting, and formal classroom and
on-site training.  Service revenues increased to $16,846,000 in fiscal 1998 from
$16,781,000 in fiscal 1997. This increase was mainly the result of higher levels
of demand from customers  upgrading to newer versions of the Company's products,
an increase  in  maintenance  revenues,  combined  with a  reduction  in service
revenues due to a lower number of service personnel as a result of both the
Restructuring  and attrition,  along with a lower level of new TCM software unit
sales.  As the  Company  transitions  to include  the Baan  product,  management
expects service revenues to increase. Initial services will be provided by third
party providers,  but will be later supplied internally as additional  resources
are added.  Service  revenues  increased 8.9% to $16,781,000 in fiscal 1997 from
$15,412,000  in fiscal 1996.  This  increase was  primarily due to growth in the
customer base and normal price increases.

 Hardware Revenues

As an option,  the Company will sell computer  hardware  manufactured by others,
along with the Company's  software and  services.  Hardware  revenues  decreased
57.6% to  $1,745,000  in fiscal 1998 from  $4,112,000  in fiscal 1997.  Hardware
revenues  decreased 39.1% to $4,112,000 in fiscal 1997 from $6,751,000 in fiscal
1996.  These  decreases  were  mainly  due to  increased  sales of  software  on
platforms  for which the  Company  does not supply  hardware.  The  Company  has
decided to reduce its sales of  commodity  priced  hardware  products  and those
which  require  specific  expertise  beyond the scope of the  Company's  product
focus.  In turn,  the Company has developed  relationships  with various  system
integrators  which sell the  hardware  and provide  these  value-added  hardware
services.

Cost of Third-Party Software License Fees

Most of the Company's  system sales also include the sale of a report writer,  a
word processor,  and/or other software components provided by outside suppliers.
The integration of these products into the Company's software products generally
requires that the Company pay royalties to these suppliers.  Cost of third-party

<PAGE>


software  license fees increased to $4,717,000 in fiscal 1998 from $3,065,000 in
fiscal 1997 and from  $2,484,000  in fiscal  1996.  Since  third-party  software
products are generally sold in conjunction with the Company's software licenses,
the increases were historically  attributable to a rise in the level of sales of
the Company's  software as a result of new customer sales and existing  customer
upgrade  sales.  In  fiscal  1998,  $920,000  of the  increase  in the  cost  of
third-party  software license fees was attributable to the new relationship with
Baan under which the Company purchases software licenses for sales to end users.

Software Development Amortization

Software   development   amortization   represents  the   amortization  of  past
investments  made by the Company in product  development.  Software  development
amortization  increased  from  $1,591,000 in fiscal 1996 to $2,535,000 in fiscal
1997,  and decreased to  $2,243,000 in fiscal 1998.  The increase in 1997 mainly
reflected an increase in past capitalized  software development costs related to
improvements to the Company's software products. In the second quarter of fiscal
1998,  however,   the  Company  wrote-off  a  significant  portion  of  its  TCM
capitalized  software  in  conjunction  with  the  Restructuring,  which in turn
lowered the amount of software development amortization.

Cost of Services

Cost of services as a percentage of related revenues  increased to 85.7% in 1998
from 83.4% in 1997 and from 78.6% in 1996.  The main  reasons for the  increases
include increased costs related to warranty work, training costs associated with
new  personnel,  allocation of resources to assist in  developing  new products,
increased compensation for current employees, higher costs of out-sourced labor,
and  educational  costs  related to new  products and  technologies.  Management
expects the cost of services as a percentage of related revenues to increase for
the Baan  product  sales  in the  short  term  due to the  cost of  third  party
suppliers and the internal cost of training  employees in the new products.  The
1997 Cost Reduction  reduced fiscal 1997 cost of services by $264,000  through a
work force reduction and a decrease of indirect activities.

Cost of Hardware

Cost of hardware  as a  percentage  of related  revenues  increased  to 79.4% in
fiscal 1998 compared to 79.3% in fiscal 1997 and 73.8% in fiscal 1996.  The cost
of  hardware  as a  percentage  of related  revenue  varies with the size of the
system,  the  margin mix of items  comprising  the system  being  sold,  and the
competitive conditions of the customer sale. Additionally,  the cost of hardware
as a  percentage  of  hardware  revenues  can  vary  due  to the  proportion  of
lower-margin  sales (cost plus 11%) made to the  Company's  joint  ventures  and
affiliates,  which were $233,000, $534,000, and $1,264,000 in fiscal 1998, 1997,
and 1996, respectively.

Net Product Development Expenses

Product  development  expenses,  net  of  amounts  capitalized,  increased  from
$2,235,000  in fiscal 1996 to  $2,391,000  in fiscal 1997 and to  $2,804,000  in
fiscal 1998.  These increases were mainly the result of the Company's  strategic
initiative  to  increase  investment  in the  development  of  future  products,
including  the  incorporation  of various new  technologies  into the  Company's
software  products.  The  Restructuring  reduced  both new  product  development
expense and reduced the resulting level of software  capitalized.  The 1997 Cost
Reduction  lowered  new  product  development  expense by  $876,000  through the
reduction  of the use of  third-party  consultants  and a work force  reduction.
Total  development  expense  (defined as net  development  expense  plus amounts
capitalized)  decreased to $6,200,000  in fiscal 1998 from  $6,862,000 in fiscal
1997.  Total  development  expense  increased to  $6,862,000 in fiscal 1997 from
$5,607,000  in fiscal  1996.  These  expenses  expressed as a percent of related
software  revenues were 30.2%,  31.6%,  and 29.4% in fiscal 1998, 1997 and 1996,
respectively.
<PAGE>

Restructuring and Other Changes

In the second  quarter of fiscal  1998,  the  Company  recorded a  restructuring
charge of $6,836,000  related to entering into the new  distributor  arrangement
with Baan for  manufacturing  software,  and a  reduction  of costs  focused  on
improving the Company's financial performance.  Approximately  $6,824,000 of the
total  charge has been paid or  expensed as of November  30,  1998.  The Company
anticipates  the  remaining  amount of  approximately  $12,000 to be paid in the
first quarter of fiscal 1999. For additional  information on the  Restructuring,
see Note 3 of Notes to Consolidated Financial Statements.

Selling and Marketing Expenses

Selling and  marketing  expenses  decreased to  $13,280,000  in fiscal 1998 from
$15,957,000  in  fiscal  1997.   Selling  and  marketing  expenses  inreased  to
$15,957,000  in fiscal 1997 from  $14,060,000  in fiscal  1996.  The  operations
discontinued  in the  Restructuring  accounted for $1,691,000 of the decrease in
selling and  marketing  expenses in fiscal  1998.  As a percent of gross  margin
(total net  revenues  minus total costs of products and  services),  selling and
marketing  expense  increased from 80.7% to 81.1% between fiscal 1997 and fiscal
1998, and from 70.0% to 80.7% between fiscal 1996 and fiscal 1997, respectively.
The  increase  in selling  and  marketing  expense as a percent of gross  margin
between  fiscal  1998 and  fiscal  1997 was due to:  (1)  personnel  time  spent
building new pipelines for the new Baan  products;  (2) training costs for newly
hired sales  personnel;  (3) time spent  handling  the  concerns of  prospective
customers regarding the Company's negative operating results;  and (4) a general
reduction  of  marketing  activities  ($495,000).  The  increase  in selling and
marketing  expense as a percent of gross margin  between  fiscal 1997 and fiscal
1996 was due to: (1) lower margin due to higher  costs of software  license fees
(see above) and higher costs of services  (see above);  (2)  increased  expenses
from developing  international  markets ($134,000) and lower productivity of new
personnel;  and (3) time spent  handling the concerns of  prospective  customers
regarding the Company's  negative  operating  results for fiscal 1997.  The 1997
Cost Reduction lowered selling and marketing expense by $730,000 in fiscal 1997,
mainly  through a decrease  in  international  market  expansion,  a focusing of
market communications, and a work force reduction.

General and Administrative Expenses

For fiscal 1998, general and administrative expense decreased to $3,451,000 from
$3,838,000  in fiscal  1997.  General and  administrative  expense  increased to
$3,838,000 in fiscal 1997 from  $3,416,000 in fiscal 1996. As a percent of gross
margin (total net revenues  minus total costs of products and  services),  these
expenses  were  17.0%,   19.4%  and  21.1%  in  fiscal  1996,   1997  and  1998,
respectively.  The increases in general and administrative  expense as a percent
of gross margin from fiscal 1997 to fiscal 1998 was mainly due to an increase in
legal and professional fees related capital raising activities  ($294,000).  The
increase in general and administrative expense as a percent of gross margin from
fiscal 1996 to fiscal 1997 was mainly due to an  increase in the  provision  for
bad debts (2.5%).  The 1997 Cost Reduction  lowered  general and  administrative
expense by $303,000 in fiscal 1997 mainly through a work force reduction.

Other Income/Expense

Other  income/expense  resulted in  $587,000 of expense in fiscal 1998  compared
with  $377,000 of expense in fiscal 1997 and $118,000 of expense in fiscal 1996.
Equity income from  affiliates  was $109,000 in fiscal 1998 compared with a loss
of $25,000 in fiscal  1997 and  $25,000 in fiscal  1996.  Interest  expense  and
interest  income  were  $714,000  and  $51,000,  respectively,  in fiscal  1998;
$399,000 and $47,000,  respectively,  in fiscal 1997;  and $145,000 and $89,000,
respectively, in fiscal 1996. The increase in the levels of interest expense was
mainly  the  result  of  increased  borrowings  under  the  Company's  borrowing
facility. The Company anticipates that interest expense will continue to rise in
the short-term with continued  borrowings for operating and capital  expenditure
purposes.

Income Tax Expense

No income tax benefit  was  recorded  for the fiscal year of 1998  compared to a
benefit of $618,000  for the fiscal  year of 1997.  At November  30,  1998,  the
Company,  for  financial  reporting  purposes,  is  in a tax  loss  carryforward
position.  Generally accepted  accounting  principles  prohibit the Company from
recording a tax benefit under these circumstances.

<PAGE>

Liquidity and Capital Resources

Cash  provided by operations  was $311,000 in fiscal 1998,  $1,733,000 in fiscal
1997  and   $2,906,000  in  fiscal  1996.   Non-cash   expenditures,   including
restructuring,  depreciation  relating to capital  expenditures and amortization
associated with software product development, contributed to the cash provided.

Investment  activities  used cash of  $3,101,000  in fiscal  1998,  compared  to
$5,363,000 in fiscal 1997 and  $4,163,000  in fiscal 1996.  The cash was used to
fund capital  expenditures  of $170,000,  $1,177,000,  and  $1,424,000 in fiscal
1998,  1997,  and 1996,  respectively,  and to fund  investment  in  capitalized
software product development of $3,396,000, $4,471,000, and $3,372,000 in fiscal
1998,   1997,   and  1996,   respectively.   The   Company   sold   $505,000  of
available-for-sale    securities   in   fiscal   1997,    and    $1,247,000   of
available-for-sale securities in fiscal 1996, which funded, in part, the capital
expenditures and capitalized product development.

Financing  activities provided $2,797,000 of cash in fiscal 1998,  $2,778,000 of
cash in fiscal 1997, and $1,788,000 of cash in fiscal 1996. The cash provided in
fiscal 1998 mainly reflected both the equity contribution from a preferred stock
offerings and borrowings on the Company's credit facilities.  As of November 30,
1998, the Company,  based on the level of of eligible accounts receivables,  had
$2,448,000 of availability  under its $5,000,000  line of credit.  As of January
31, 1999, the Company had $773,000 of availability under its line of credit.

The Company's  credit  agreement  with  Foothill  Capital  Corporation  contains
certain restrictive  covenants relating to income (EBITDA),  tangible net worth,
and level of capital  expenditures.  On January 28, 1999, the Company obtained a
waiver from the lender as a result of its failure to meet the tangible net worth
and EBITDA covenants.  In order to meet financial covenants in the future and to
meet short term operational  needs,  the Company will need positive  operational
results in the short term. In the event that the Company's  performance does not
improve in the short term,  the Company will need to secure  additional  waivers
and/or  alternative  sources  of  financing  (which  could  include  the sale of
assets).  The  Company  is  continuing  its  review of  alternative  sources  of
financing  to deal  with  its  current  financial  status.  Although  management
believes that waivers and/or additional financing can be obtained, if needed, no
assurance  can be  given  that  waivers  or such  additional  financing  will be
available to the Company on acceptable  terms.  In the event that the Company is
unable to secure necessary waivers or additional financing, it would likely have
a material adverse effect on the Company's  liquidity,  including its ability to
fund continuing operations.

As a result of its current its current  financial  situation,  the  Company,  in
accordance with generally accepted accounting  principles,  has reclassified all
of its outstanding  debt under the credit facility as short-term debt. (See Note
8 to the Notes to Consolidated Financial Statements). All debt pertaining to the
credit  facility  having  cross-default  provisions  has  been  so  reclassified
regardless  of  whether  or  not  covenant   violations  have  occurred  or  are
anticipated.  The Company's report from its independent  accountants  contains a
going concern  explanatory  paragraph,  pursuant to which the auditors expressed
substantial doubt as to the Company's ability to continue as a going concern.

American Institute of Certified Public  Accountants  Statement of Position 97-2,
"Software Revenue  Recognition" (SOP 97-2), was issued in October 1997. SOP 97-2
is effective  for  transactions  entered into in fiscal  years  beginning  after
December 15, 1997. Therefore,  SOP 97-2 will effect transactions entered into by
the Company after December 1, 1998. SOP 97-2  addresses  various  aspects of the
recognition  of revenue on software  transactions  and  supersedes SOP 91-1, the
policy  previously  followed  by the  Company.  SOP 97-2  provides  guidance  on
software arrangements  consisting of multiple elements,  evidence of fair value,
delivery of elements, accounting for service elements, and software arrangements
requiring significant  production,  modification,  or customization of software.
The Company currently  believes that the impact SOP 97-2 will not be material in
regard to the Company's consolidated financial statements.

Market Risk

Due to the variable  rate paid on the revolver  portion of its credit  facility,
the Company is exposed to market risk from changes in interest rates. Generally,
if the base rate on the revolver  averaged 2% more in fiscal 1999 then in fiscal
1998, the Company's  interest expense would increase by approximattely  $80,000.
This amount is determined by considering the impact of the hypothetical interest
rate on the Company's  borrowing  cost, but does not consider the effects of the
reduced level of economic  activity that could exist in such an enviroment.  The
Company has not historically  used financial  instruments to hedge interest rate
exposure and does not use financial  instruments for trading purposes and is not
a party to any leveraged derivatives.

Year 2000 Compliance

The Company faces "Year 2000"  compliance  issues similar to other  companies in
the manufacturing software industry. The problem relates to software systems and
programs  that use only two digits , rather  than four  digits,  to  represent a
year.  This  does not allow  processing  of dates  beyond  the year 1999 and may

<PAGE>

result in incorrect  calculations,  reports or other information.  Additionally,
this may cause system  failures from processors that are embedded in a multitude
of devices.

To address the Year 2000 problem,  the Company established a corporate readiness
program which began in fiscal 1994 with the a detailed analysis of the Company's
software  products sold to its  customers.  The Company had  originally  started
addressing  the changes to the program  code of its  software  products for Year
2000 issues in 1985. The Company later, in 1998,  added the analysis of internal
systems and third party  suppliers of both software and any other goods that may
have Year 2000 problems.  The Company plans to complete its detailed  assessment
plan on or around  March of fiscal  1999.  A formal  review and  approval by the
Board of Directors is expected to occur immediately thereafter.

State of Readiness

Company's Products

The  Company's  current  products  have been  designed  and tested for Year 2000
compliance. However, due to the complexity of the software product, there can be
no absolute  assurance  that the  Company's  software  products  contain all the
necessary  date code changes.  The Company's  versions of the software  prior to
version 5.1.2 in 1994 are known to contain code that is not Year 2000 compliant.
In 1996, the Company notified customers of prior versions, and subsequently,  of
this  non-compliance  and  customers  were offered  upgrades and  implementation
assistance to migrate to a Year 2000 compliant version. The Company's agreements
with the customers  since 1992 do not expressly  obligate the Company to furnish
an updated  version of the software that is Year 2000  compliant.  The Company's
analysis of  contracts  prior to 1992  indicate an  immaterial  level of Company
obligation to furnish updated software.


Internal Systems

The  Company  is in the  process of  assessing  the Year 2000  readiness  of its
internal  computer  information  system  and  non-computer   systems,   such  as
telecommunications equipment, network equipment, etc., to determine whether such
systems are Year 2000 compliant.  Even though  substantial work has already been
completed,  a complete  detailed plan to address any assessed Year 2000 problems
should be  available on or around  March 1999.  The Company  expects to complete
deployment of Year 2000 corrections on or around September 1999.

Third Party Reseller and Key Suppliers

The Company  plans to assess the Year 2000  readiness of its  resellers  and key
suppliers  during the first and second  quarter of fiscal 1999.  With respect to
certain of its most significant resellers and suppliers, the Company has already
made inquiries to assess their readiness and has obtained published  information
indicating that they are in compliance.

Costs

The Company  estimates the  historical  costs to remediate Year 2000 issues have
totaled $968,000 and future costs to remediate will be approximately $500,000.

Risk

Failure to correct critical Year 2000 issues could cause a serious  interruption
in business  operations of the Company's  customers and/or its internal systems.
Such  interruptions  could have a material  impact on the  Company's  results of
operations, liquidity, and financial condition. The Company is taking actions to
minimize these issues,  but no assurance can be given that all potential  issues
can be eliminated.  Additionally,  the effects of potential litigation cannot be
estimated  and could also have a material  effect on the results of  operations.
Finally,  factors outside the Company's  control could also cause  disruption of
business activities which could materially affect the results of operations.

Contingency Plans

The  Company is in the  process of  evaluating  contingency  plans to handle the
controllable risks regarding Year 2000 compliance.  Certain of the risks such as
lengthy  power  outages or  communication  failures may not be  circumvented.  A
detailed  plan of  controllable  risks is  expected  be  available  on or around
September, 1999.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

IN ADDITION TO HISTORICAL INFORMATION,  THIS ANNUAL REPORT ON FORM 10-K CONTAINS
"FORWARD-LOOKING  STATEMENTS",  INCLUDING  INFORMATION REGARDING FUTURE ECONOMIC
PERFORMANCE AND PLANS AND OBJECTIVES OF MANAGEMENT.  STATEMENTS INCLUDED IN THIS
ANNUAL   REPORT  ON  FORM  10-K  THAT  ARE  NOT  OF  A  HISTORICAL   NATURE  ARE
FORWARD-LOOKING  STATEMENTS.  SUCH  FORWARD  LOOKING  STATEMENTS  ARE SUBJECT TO
CERTAIN  RISKS AND  UNCERTAINTIES  THAT  COULD  CAUSE  ACTUAL  RESULTS TO DIFFER
MATERIALLY  FROM  THOSE  REFLECTED  IN  THE  FORWARD-LOOKING   STATEMENTS.  SUCH
UNCERTAINTIES  AND RISKS INCLUDE,  BUT ARE NOT LIMITED TO, THE FACTORS DESCRIBED
IN THE SECTION CAPTIONED "BUSINESS RISK FACTORS" IN ITEM 1 OF THIS ANNUAL REPORT
ON FORM 10-K.

<PAGE>

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Reference is made to the  information in Item 7 under the caption  "Management's
Discussion and Analysis of Financial Condition and Results of Operation - Market
Risk", which information is incorporated herein by reference.

CONDENSED QUARTERLY RESULTS (UNAUDITED)
(In thousands, except per share data)


The following table sets forth certain unaudited condensed operating results for
each of the eight quarters in the two-year  period ended November 30, 1998. This
information  has  been  prepared  by EMS on the same  basis as the  Consolidated
Financial  Statements  appearing  elsewhere in this report and includes,  in the
opinion of management,  all  adjustments  (consisting  only of normal  recurring
adjustments)  necessary for a fair  presentation of the information when read in
conjunction  with  the  Consolidated  Financial  Statements  and  notes  thereto
included  elsewhere herein.  EMS's operating results for any one quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>

                                                Three Months Ended


                                Feb. 28 1997 May 31 1997 Aug. 31 1997    Nov. 30 Feb. 28 1998  May 31 1998  Aug. 31 1998   Nov. 30
                                                                          1997                                              1998
                                ============ =========== ============= ========= ============= ============ ============ ===========
Statements of
Operations Data:

Net Revenues:
<S>                             <C>          <C>         <C>           <C>       <C>           <C>          <C>          <C>     
Software license fees           $  4,211     $  5,317    $  4,963      $  7,261  $  5,335      $  4,372     $  3,866     $  6,980
Services                        $  4,246     $  4,020    $  4,095      $  4,420  $  4,239      $  4,532     $  3,977     $  4,098
Hardware                        $  1,018     $  1,045    $    624      $  1,425  $    672      $    444     $    339     $    290
                                ============ =========== ============= ========= ============= ============ ============ ===========
            Total Net Revenues  $  9,475     $ 10,382    $  9,682      $ 13,106  $ 10,246      $  9,348     $  8,182     $ 11,368
=============================== ============ =========== ============= ========= ============= ============ ============ ===========
      Cost of Products & Total
            Operating Expenses
                                $ 10,910     $ 10,957    $ 10,687      $ 12,492  $ 11,126      $ 17,048     $  9,110     $ 11,863
=============================== ============ =========== ============= ========= ============= ============ ============ ===========

Operating income (loss)         $ (1,435)    $   (575)   $ (1,005)     $    614 $    (880)     $   (7700)   $   (928)    $   (495)

Net income (loss)               $   (883)    $   (381)   $ (1,044)     $    148 $  (1,056)     $   (7873)   $  (1093)    $   (568)

------------------------------- ------------ ----------- ------------- --------- ------------- ------------ ------------ -----------
Basic diluted net income (loss)
 per share                      $  (0.22)    $  (0.09)   $  (0.26)     $   0.04  $   (.26)     $  (1.93)    $   (.27)  $     (.14)
------------------------------- ------------ ----------- ------------- --------- ------------- ------------ ------------ -----------

------------------------------- ------------ ----------- ------------- --------- ------------- ------------ ------------ -----------
Weighed average common and       
equivalent shares outstanding
                                   4,025        4,041       4,054         4,048     4,075         4,080        4,098        4,105
------------------------------- ------------ ----------- ------------- --------- ------------- ------------ ------------ -----------

</TABLE>

                                                       
<PAGE>

Item 8.  Financial Statements and Supplementary Data

                       Effective Management Systems, Inc.

                        Consolidated Financial Statements


                  Years ended November 30, 1998, 1997 and 1996




                                    Contents

Report of Ernst & Young LLP, Independent Auditors..............................1

Consolidated Financial Statements

Balance Sheets.................................................................2
Statements of Operations.......................................................4
Statements of Stockholders' Equity.............................................5
Statements of Cash Flows.......................................................7
Notes to Consolidated Financial Statements.....................................9







<PAGE>


                Report of Ernst & Young LLP, Independent Auditors

The Board of Directors and Stockholders
Effective Management Systems, Inc.

We have  audited  the  accompanying  consolidated  balance  sheets of  Effective
Management Systems,  Inc. (the Company) and subsidiaries as of November 30, 1998
and 1997, and the related consolidated  statements of operations,  stockholders'
equity and cash flows for each of the three years in the period  ended  November
30, 1998. Our audits also included the financial  statement  schedule  listed in
the Index at Item 14. These financial  statements are the  responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  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 audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the consolidated  financial  position of the
Company and  subsidiaries  at November 30, 1998 and 1997,  and the  consolidated
results of their  operations and their cash flows for each of the three years in
the period ended  November 30,  1998,  in  conformity  with  generally  accepted
accounting principles.

The accompanying  financial  statements have been prepared  assuming the Company
will continue as a going concern. As more fully described in Note 4, the Company
has incurred recurring losses and has a working capital deficiency. In addition,
the Company does not expect to be in  compliance  with certain  covenants of the
loan  agreement  with its lender  during  fiscal 1999,  thereby  requiring  that
waivers will need to be obtained from the lender in order for the debt not to be
considered  in  default.  These  conditions  raise  substantial  doubt about the
Company's ability to continue as a going concern.  Management's  plans in regard
to these matters are also  described in Note 4. The financial  statements do not
include  any   adjustments  to  reflect  the  possible  future  effects  on  the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.

/s/Ernst & Young

Milwaukee, Wisconsin
January 18, 1999


<PAGE>

<TABLE>
<CAPTION>


                       Effective Management Systems, Inc.

                           Consolidated Balance Sheets
                             (Dollars in Thousands)



                                                                             November 30
                                                                       1998              1997
                                                                 ------------------------------------
Assets
Current assets (Note 8):
<S>                                                                  <C>              <C>       
   Cash and cash equivalents                                         $       21       $       14
   Accounts receivable:
     Trade, less allowance for doubtful accounts of
       $506--1998; $462--1997                                            12,871           12,370
     Related parties                                                        426              604
                                                                 ------------------------------------
                                                                        13,297           12,974


   Refundable income taxes                                                    -              312
   Inventories                                                              275              280
   Prepaid expenses and other current assets                                225              146
                                                                 ------------------------------------
Total current assets                                                     13,818           13,726





Software development costs, net                                           4,373            7,717
Investments in and advances to unconsolidated joint ventures
                                                                            291              182
Equipment and leasehold improvements, net (Note 5)                        3,202            3,917
Intangible assets, net (Note 6)                                           2,129            2,444
Other assets                                                                347              811
                                                                 ------------------------------------
Total assets                                                         $   24,160          $28,797
                                                                 ====================================


<PAGE>

<CAPTION>

                                                                                                     
                                                                              November 30
                                                                         1998            1997
                                                                   ----------------------------------
Liabilities and stockholders' equity
 Current liabilities:
<S>                                                                     <C>           <C>       
   Accounts payable                                                     $ 3,662       $    2,272
   Accrued liabilities                                                    2,937            2,773
   Deferred revenue                                                       6,522            5,887
   Customer deposits                                                        113               63
   Current portion of long-term debt and capital lease
     obligations (Note 8)                                                 6,194              946
                                                                   -----------------------------------
Total current liabilities                                                19,428           11,941

Deferred revenue and other long-term liabilities                            858              317
Long-term capital lease obligations (Note 8)                                242            3,966

Commitments and contingencies (Note 8)

Stockholders' equity:
   Preferred stock, Series B, $.01 par value; authorized 
     3,000,000 shares; 1,785 issued and outstanding at 
     November 30, 1998                                                    1,411                -
                                                                           
   Common stock, $. 01 par value; authorized 20,000,000 
     shares; issued 4,106,377 and 4,067,310 shares; 
     outstanding 4,093,752 and 4,054,685  shares                             41               41
   Common stock warrants                                                    144                4
   Additional paid-in capital                                            11,426           11,328
   Retained earnings (accumulated deficit)                               (9,330)           1,260
   Cost of common stock in treasury (12,625 shares)                         (60)            (60)
                                                                   ----------------------------------
                                                                          3,632           12,573
                                                                   ----------------------------------
Total liabilities and stockholders' equity                              $24,160          $28,797
                                                                   ==================================
See accompanying notes.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>


                       Effective Management Systems, Inc.

                      Consolidated Statements of Operations
                    (In Thousands, except per share amounts)


                                                                            Year ended November 30
                                                                     1998          1997            1996
                                                              ----------------------------------------------
Net revenues:
<S>                                                             <C>               <C>            <C>    
   Software license fees                                        $   20,553        $21,752        $19,094
   Services                                                         16,846         16,781         15,412
   Hardware                                                          1,745          4,112          6,751
                                                              ----------------------------------------------
                                                                    39,144         42,645         41,257
Costs of products and services:
   Cost of third-party software license fees                         4,717          3,065          2,484
   Software development amortization                                 2,243          2,535          1,591
   Cost of services                                                 14,430         14,000         12,109
   Cost of hardware                                                  1,386          3,260          4,979
                                                              ----------------------------------------------
                                                                    22,776         22,860         21,163

Selling and marketing expenses                                      13,280         15,957         14,060
General and administrative expenses                                  3,451          3,838          3,416
Software development expenses                                        2,804          2,391          2,235
Restructuring and other charges                                      6,836              -              -
                                                              ----------------------------------------------
                                                                    49,147         45,046         40,874
                                                              ----------------------------------------------
Income (loss) from operations                                      (10,003)        (2,401)           383

Other income (expense):
   Equity in earnings (losses) of unconsolidated 
     joint ventures                                                    109            (25)            25
   Interest income                                                      51             47             89
   Interest expense                                                   (714)          (399)          (145)
   Other                                                               (33)             -            (87
                                                              ----------------------------------------------
                                                                      (587)          (377)          (118)
Income (loss) before income taxes                                  (10,590)        (2,778)           265
Income tax benefit (expense)                                             -            618           (112)
                                                              ----------------------------------------------
Net income (loss)                                               $  (10,590)     $  (2,160)    $      153
                                                              ==============================================

Net income (loss) per common share -
   Basic and diluted                                            $    (2.59)     $    (.53)    $      .04
                                                              ==============================================
</TABLE>

See accompanying notes.
<PAGE>

<TABLE>
<CAPTION>


                       Effective Management Systems, Inc.

                 Consolidated Statements of Stockholders' Equity
                             (Dollars in Thousands)





                                                                                                  
                                           Preferred Stock                Common Stock             Common
                                    ------------------------------------------------------------   Stock
                                         Shares         Amount        Shares         Amount      Warrants
                                    -------------------------------------------------------------------------

<S>                                      <C>         <C>              <C>              <C>          <C>
Balance, November 30, 1995                   -       $       -        3,922,281        $39          $   3
   Issuance of common stock:
     Acquisitions                            -               -           24,000          -              -
     Stock options                           -               -           35,000          1              -
     Employee stock purchase plan
                                             -               -           29,718          -              -
     Warrants                                -               -               19          -              -
   Issuance of additional common
     stock and warrants to
     complete Intercim
     transaction                             -               -                -          1              1
   Purchase of shares from
     dissenting former Intercim
     shareholder                             -               -                -          -              -
   Net income                                -               -                -          -              -
                                    -------------------------------------------------------------------------
Balance, November 30, 1996                   -               -        4,011,018         41              4
   Issuance of common stock:
     Stock options                           -               -           39,500          -              -
     Employee stock purchase plan
                                             -               -           26,792          -              -
   Purchase of common stock for
     treasury                                -               -          (10,000)         -              -
   Net loss                                  -               -                -          -              -
                                    -------------------------------------------------------------------------
Balance, November 30, 1997                   -               -        4,067,310         41              4
   Issuance of common stock:
     Stock options                           -               -           14,000          -              -
     Employee stock purchase plan
                                             -               -           25,067          -              -
   Issuance of preferred stock
     and warrants                        1,785           1,411                -          -            140
   Net loss                                  -               -                -          -              -
                                    -------------------------------------------------------------------------
Balance, November 30, 1998               1,785          $1,411        4,106,377        $41           $144
                                    =========================================================================

</TABLE>

<PAGE>



                                                                               
     Common
   Stock and                     Retained
    Warrants                     Earnings
     to be        Paid-In      (Accumulated       Treasury
     Issued       Capital        Deficit)           Stock         Total
----------------------------------------------------------------------------


   $ 211           $10,662       $   3,267         $  (5)        $ 14,177

       -               132               -             -              132
       -                60               -             -               61

       -               113               -             -              113
       -                 -               -             -                -



    (172)              170               -             -                -


     (39)                -               -             -              (39)
       -                 -             153             -              153
----------------------------------------------------------------------------
       -            11,137           3,420            (5)          14,597

       -                68               -             -               68

       -               123               -             -              123

       -                 -               -           (55)             (55)
       -                 -          (2,160)            -           (2,160)
----------------------------------------------------------------------------
       -            11,328           1,260           (60)          12,573

       -                32               -             -               32

       -                66               -             -               66

       -                 -               -             -            1,551
       -                 -         (10,590)            -          (10,590)
----------------------------------------------------------------------------
 $     -           $11,426       $  (9,330)         $(60)       $   3,632
============================================================================



See accompanying notes.
<PAGE>

<TABLE>
<CAPTION>


                       Effective Management Systems, Inc.

                      Consolidated Statements of Cash Flows
                             (Dollars in Thousands)



                                                                                                             
                                                                            Year ended November 30
                                                                        1998         1997          1996
                                                                    ----------------------------------------
Operating activities
<S>                                                                   <C>          <C>           <C>     
Net income (loss)                                                     $(10,590)    $(2,160)      $    153
Adjustments to reconcile net income (loss) to net cash 
   provided by operating activities:
     Depreciation                                                        1,315       1,234          1,037
     Amortization, other                                                   315         246            189
     Amortization of capitalized computer software development
       costs                                                             2,243       2,535          1,591
     Restructuring charge                                                6,042           -              -
     Equity in losses (earnings) of joint ventures                        (109)         25            (25)
     (Gain) loss on disposal of equipment and leasehold
       improvements                                                          3           -            (24)
     Deferred income taxes                                                   -        (385)           202
     Changes in operating assets and liabilities:
       Accounts receivable                                              (1,161)     (1,135)        (1,770)
       Inventories and other current assets                                228         100            341
       Accounts payable and other liabilities                            2,125       1,273          1,212
                                                                    ----------------------------------------
Total adjustments                                                       11,001       3,893          2,753
                                                                    ----------------------------------------
Net cash provided by operating activities                                  411       1,733          2,906

Investing activities
Acquisition of Darwin Data Systems, net of cash received of $19
                                                                             -           -            (51)
Additions to equipment and leasehold improvements                         (170)     (1,177)        (1,424)
Purchases of available-for-sale securities                                   -           -           (495)
Proceeds from sales of available-for-sale securities                         -         505          1,247
Proceeds from sale of equipment and leasehold improvements
                                                                             1           7             68
Increase in cash surrender value of life insurance                         (25)        (25)           (25)
Software development costs capitalized                                  (3,396)     (4,471)        (3,372)
Other assets                                                               489        (202)          (111)
                                                                    ----------------------------------------
Net cash used in investing activities                                   (3,101)     (5,363)        (4,163)

</TABLE>

<PAGE>

<TABLE>
<CAPTION>


                       Effective Management Systems, Inc.

                Consolidated Statements of Cash Flows (continued)
                             (Dollars in Thousands)



                                                                                                              
                                                                                Year ended November 30
                                                                            1998         1997         1996
                                                                        ---------------------------------------

Financing activities
<S>                                                                      <C>           <C>          <C>    
Proceeds from issuance of stock to employees                             $     98      $   191      $   174
Proceeds from issuance of preferred stock and warrants                      1,551            -            -
Proceeds from increase in debt                                              1,291        2,797        1,864
Payments on long-term debt and capital lease obligations                     (243)        (155)        (250)
Purchase of common stock for treasury                                           -          (55)           -
                                                                        ---------------------------------------
Net cash provided by financing activities                                   2,697        2,778        1,788
                                                                        ---------------------------------------
Net increase (decrease) in cash                                                 7         (852)         531
Cash:
   Beginning of year                                                           14          866          335
                                                                        ---------------------------------------
   End of year                                                           $     21     $     14     $    866
                                                                        =======================================

Supplemental cash flow information:
   Interest paid                                                         $   653      $    399     $    133
                                                                            
   Income taxes refunded, net of amounts paid                                   -         (172)        (464)
   Noncash transactions:
     Equipment recorded under capital lease obligations                       476           20          371
     Issuance of common stock and warrants for acquisitions
                                                                                -            -          132

</TABLE>

See accompanying notes.
<PAGE>



                       Effective Management Systems, Inc.

                   Notes to Consolidated Financial Statements

                                November 30, 1998
                (Dollars in thousands, except per share amounts)


                                                                             
1. Basis of Presentation and Significant Accounting Policies

Consolidation

The  accompanying  consolidated  financial  statements  include the  accounts of
Effective  Management  Systems,  Inc.  (the Company) and its  subsidiaries.  All
significant  intercompany  accounts and  transactions  have been  eliminated  in
consolidation.

Business and Concentration of Credit Risk

The Company develops,  sells and services computer software and related hardware
throughout  the  United  States  and  certain  foreign  countries  that meet the
Company's credit policies.  The Company performs periodic credit  evaluations of
its  customers'  financial  condition and  generally  follows a policy to obtain
deposits for sales to new customers.

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.
Actual results could differ from those estimates.

Revenue Recognition

Revenue is recognized in accordance  with the  provisions of AICPA  Statement of
Position (SOP) 91-1, "Software Revenue Recognition," as follows:

Software and Hardware Sales

Revenue is recognized when the product is delivered.

Professional Fees and Services

Revenue is recognized as time and material costs are incurred.





<PAGE>



                       Effective Management Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


1. Basis of Presentation and Significant Accounting Policies (continued)

Software Support Fees

Revenue  is  recognized  ratably  over the  terms of the  nonrefundable  support
contract.

Annual Upgrade Fees

Revenue is recognized  ratably over the  nonrefundable  annual upgrade  contract
period.

In October  1997,  the AICPA issued SOP 97-2,  "Software  Revenue  Recognition,"
which changes the requirements  for revenue  recognition and supersedes SOP 91-1
effective for transactions  that the Company will enter into beginning  December
1, 1998. The Company  intends to review the  provisions of its software  license
contracts and make the changes  necessary to have revenue  recognition  policies
meet the standards of the new SOP.

Inventory Valuation

Inventories are carried at the lower of cost or market with cost determined on a
first-in, first-out (FIFO) basis.

Software Development Costs

In  accordance  with  generally  accepted  accounting  principles,  the  Company
capitalizes  internal costs in developing  software products upon  determination
that  technological  feasibility has been  established for the product,  whereas
costs incurred  prior to the  establishment  of  technological  feasibility  are
charged to product  development  expense.  When the  product  is  available  for
general release to customers, capitalization ceases and such costs are amortized
on a product-by-product basis based on current and future revenue with an annual
minimum equal to the  straight-line  amortization  over the remaining  estimated
economic useful life of the product.

Capitalized  software  development  costs,  stated  at the  lower of cost or net
realizable  value,  were  $4,373  and  $7,717  at  November  30,  1998 and 1997,
respectively,  which is net of  accumulated  amortization  of $2,918 and $7,877,
respectively.



<PAGE>


                       Effective Management Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


1. Basis of Presentation and Significant Accounting Policies (continued)

Software Developed or Obtained for Internal Use

In March 1998, the AICPA issued SOP 98-1,  "Accounting for the Costs of Computer
Software  Developed or Obtained for Internal Use," which is effective for fiscal
years beginning after December 15, 1998. Under SOP 98-1,  companies are required
to capitalize certain qualified costs incurred to develop or obtain software for
internal  use.  The Company has adopted  this SOP in 1998 and the impact was not
material.

Investment in Unconsolidated Joint Ventures

Investments  in  unconsolidated  joint  ventures are accounted for on the equity
method wherein the Company's share of the joint ventures' net earnings or losses
is recorded as an adjustment to the investment.

Equipment and Leasehold Improvements

Equipment and leasehold  improvements  are recorded at cost and are  depreciated
using the straight-line  method for financial reporting purposes.  The estimated
useful lives used to calculate depreciation are as follows:

                                                          Years
                                                         --------

                 Leasehold improvements                      5
                 Furniture and fixtures                     10
                 Equipment                                   5

Assets under capital  leases are amortized on a  straight-line  basis over their
useful lives.

Intangible Assets

Intangible  assets are amortized  using the  straight-line  method for financial
reporting purposes over the following estimated lives:

                                                           Years
                                                         ----------

                 Customer list                               15
                 Goodwill                                  12 - 20
                 Other intangibles                          6 - 40



<PAGE>


                       Effective Management Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


1. Basis of Presentation and Significant Accounting Policies (continued)

Income Taxes

Deferred income taxes are provided for temporary  differences  between financial
reporting and income tax bases of assets and liabilities, and are measured using
the enacted tax rates and laws that will be in effect when the  differences  are
expected to reverse.

Net Income (Loss) Per Common Share

The following table sets forth the computation of basic and diluted earnings per
share.

                                                    Year ended December 31
                                                   1998     1997      1996
                                                  --------------------------

Denominator for basic and dilutive income (loss)
   per share - weighted average common shares
                                                   4,090    4,048     3,965
                                                  ==========================

For all years  presented,  basic and diluted are the same  because  common stock
equivalents are anti-dilutive.

Fair Value of Financial Instruments

The  Company's   financial   instruments   consist   primarily  of  cash,  trade
receivables, related-party receivables, trade payables and debt instruments. The
book values of cash,  trade  receivables,  related-party  receivables  and trade
payables are considered to be  representative  of their  respective fair values.
None of the Company's debt  instruments  that are outstanding as of November 30,
1998, have readily ascertainable market values; however, the carrying values are
considered to approximate their respective fair values. See Note 8 for the terms
and carrying values of the Company's various debt instruments.



<PAGE>


                       Effective Management Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


1. Basis of Presentation and Significant Accounting Policies (continued)

Stock Compensation

As is permitted under  Statement of Financial  Accounting  Standards  (SFAS) No.
123,  "Accounting  for  Stock-Based  Compensation,"  the  Company  accounts  for
employee stock compensation (e.g., stock options) in accordance with APB Opinion
No. 25 (APB 25),  "Accounting for Stock Issued to Employees."  Under APB 25, the
total  compensation  expense  recognized is equal to the difference  between the
award's  exercise price and the underlying  stock's market price (referred to as
"intrinsic  value") at the measurement  date,  which is the first date that both
the exercise price and number of shares to be issued is known.  See Note 10.

New Pronouncements

The Company  will be required  to adopt SFAS No. 130,  "Reporting  Comprehensive
Income," effective December 1, 1998. This statement requires that all items that
are  required to be  recognized  under  accounting  standards as  components  of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company does not have any
items that would create a difference between net income (loss) and comprehensive
income (loss).

SFAS  No.  131,  "Disclosures  about  Segments  of  an  Enterprise  and  Related
Information," is effective December 1, 1998. This Statement changes the way that
public business  enterprises  report  information  about  operating  segments in
annual financial  statements and requires that those enterprises report selected
information  about reportable  segments in interim  financial  reports issued to
shareholders.  Management has not completed its review of SFAS No. 131, but does
not  anticipate  that the  adoption of this  Statement  will have a  significant
effect on the Company's reported segments.

In June 1998, the Financial  Accounting  Standards  Board (FASB) issued SFAS No.
133,  "Accounting for Derivative  Instruments and Hedging  Activities," which is
required  to be adopted in years  beginning  after June 15,  1999.  Because  the
Company has not previously used derivatives, management does not anticipate that
the adoption of the new statement  will have a significant  effect on results of
operations or the financial position of the Company.



<PAGE>


                       Effective Management Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


2. Acquisition

Effective  April 15, 1996,  the Company  completed the purchase of the remaining
75% of Darwin Data Systems  (Darwin).  Consideration  for this  acquisition  was
$303, consisting of $101 in notes payable, 24,000 shares of the Company's common
stock valued at $132 and $70 of  acquisition  costs.  The  acquisition  has been
accounted for under the purchase method of accounting.  Accordingly,  the assets
and liabilities have been adjusted to their estimated fair values. The excess of
cost over the net assets acquired has been allocated to goodwill. The results of
operations for Darwin have been included in the Company's consolidated financial
statements  from  the  date of  acquisition.  Pro  forma  results  have not been
presented because the impact was not significant.

3. Restructuring and Other Charges

In the second  quarter of 1998,  the  Company  incurred a  restructuring  charge
aggregating $6,836 related to entering into a distribution  arrangement with the
Baan Company and cost  reductions  aimed at improving  the  Company's  financial
performance. The components of the restructuring charge are described below.

The restructuring  charge includes $553 relating to the closing of operations in
the West and  Southwest  regions  of the  United  States and $1,213 for the exit
costs and software  write-off related to international  operations.  The Company
established a relationship  with former  employees who purchased 80% of EMS Asia
Pacific, Inc., a former wholly owned subsidiary of the Company, to handle future
Asian international operations. The Company is a 20% partner in the venture, but
has no ongoing responsibilities to fund any future operations. EMS-Asia Pacific,
Inc. is responsible for future support, translation efforts and other activities
supporting  the Asian  marketplace.  In return for these  efforts,  the  Company
transferred all accounts receivable,  fixed assets and cash to EMS-Asia Pacific,
Inc.

In addition,  the charge  includes  $2,656 for both the write-off of capitalized
software pertaining to the large company market,  which software the Company now
obtains through its relationship  with Baan, and the write-off of other software
whose  future  value was  impaired  by  restructuring  actions.  The charge also
reflects costs of $1,841 associated with the write-off of capitalized  software,
the future value of which was impaired by restructuring actions and management's
assumptions regarding future technological  changes. Fair value was based on the
estimated future cash flows of the software.


<PAGE>


                       Effective Management Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


3. Restructuring and Other Charges (continued)

As part of the restructuring,  the Company also reduced certain of its operating
expenses  primarily in  development,  marketing  and  administration  though the
termination of employees and other operating expense  reductions  resulting in a
charge of $573.

Approximately  $6,042  of the  total  charge  did  not  result  in  future  cash
expenditures and all material restructuring actions were completed by the end of
the third quarter of 1998:

        Restructuring accrual at May 30, 1998                  $ 651
        Less payments                                           (639)
                                                          --------------
        Restructuring accrual at November 30, 1998            $   12
                                                          ==============

4. Liquidity and Management's Plans

The Company has experienced  significant losses in 1997 and 1998. As of November
30, 1998, current liabilities exceeded current assets by $5,610, principally due
to  classifying  amounts  due under the  Company's  debt  agreement  as  current
liabilities  due to covenant  violations  expected  in 1999.  In  addition,  the
Company has  limited  unused  availability  on its  existing  credit  lines.  If
operating results do not improve and/or alternative sources of financing are not
obtained,  the Company will have difficulties meeting its working capital needs,
including payment of its bank obligations.

In April 1998,  management  approved a major  restructuring  plan and recorded a
restructuring charge of approximately $6.8 million.  The restructuring  included
entering  into  a new  distribution  arrangement  with  Baan  for  manufacturing
software and various cost reductions aimed at improving the Company's  financial
performance. In connection with the restructuring, the Company closed facilities
both in the United  States and  internationally  and  decreased  its  workforce,
particularly in development,  marketing and administration.  Management believes
the Company's operating results will improve in fiscal 1999.  Management is also
pursuing additional financing sources or an amendment to its credit facilities.

Management  believes that improved  operating results and additional  sources of
financing or other strategic  transactions will generate sufficient cash flow to
fund its  operations  in fiscal 1999.  Management is actively  pursuing  several
financial alternatives to assist in the funding of its strategic  restructuring.
However,  there  are no  assurances  that  such  matters  will  be  successfully
consummated.



<PAGE>


                       Effective Management Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


5. Equipment and Leasehold Improvements

Equipment and leasehold improvements consisted of the following at November 30:
<TABLE>
<CAPTION>

                                                                        1998         1997
                                                                    ---------------------------

<S>                                                                    <C>          <C>     
Equipment and software                                                 $ 7,256      $  7,119
Furniture and fixtures                                                   1,315         1,346
Leasehold improvements                                                     468           478
Equipment under capital leases                                             874           416
                                                                    ---------------------------
                                                                         9,913         9,359
Less accumulated depreciation and amortization                          (6,711)       (5,442)
                                                                    ---------------------------
Equipment and leasehold improvements, net                              $ 3,202     $   3,917
                                                                    ===========================

6. Intangible Assets

Intangible assets consisted of the following at November 30:
                                                                       1998          1997
                                                                    ---------------------------

Goodwill                                                                $1,284        $1,445
Customer list                                                            1,400         1,400
Other                                                                      200           200
                                                                    ---------------------------
                                                                         2,884         3,045
Less accumulated amortization                                             (755)         (601)
                                                                    ---------------------------
Intangible assets, net                                                  $2,129        $2,444
                                                                    ===========================
</TABLE>

7. Affiliated Companies

Certain of the  Company's  stockholders  also own all of the common  stock of an
affiliated company, EMS Solutions,  Inc.  (Solutions),  which develops and sells
computer software and related hardware to the food vending and food distribution
industry.  The Company has provided  certain services to Solutions for which the
Company received fees of $1, $122 and $269 in 1998, 1997 and 1996, respectively,
that are  recorded  as an offset to  general  and  administrative  expense.  The
Company also sells computer hardware to Solutions that totaled $2, $331 and $851
in 1998,  1997 and 1996,  respectively.  Amounts due from  Solutions were $0 and
$404 at November 30, 1998 and 1997,  respectively.  Material  transactions  with
Solutions must be approved by a majority of the Company's external directors.


<PAGE>


                       Effective Management Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


7. Affiliated Companies (continued)

On July 1, 1997, Solutions moved to new facilities and no longer utilizes office
space or other  material  services of the  Company.  In  addition,  Solutions no
longer purchases computer hardware from the Company.

The Company owns a 50% interest in Total Management  Systems,  Inc. (TMS), which
sells computer software and related hardware  primarily in Ohio. The Company has
provided  certain  services  to TMS and has sold  computer  hardware to TMS that
totaled $779, $550 and $486 in 1998, 1997 and 1996, respectively.

8. Long-Term Debt and Lease Commitments

Long-term  debt and  capital  lease  obligations  consist  of the  following  at
November 30:

                                                           1998         1997
                                                      --------------------------

       Line of credit                                    $ 2,552      $3,762
       Notes payable                                       3,400         910
       Capital lease obligations                             484         240
                                                      --------------------------
                                                           6,436       4,912
       Less amounts due within one year                   (6,194)       (946)
                                                      --------------------------
                                                        $    242      $3,966
                                                      ==========================

On December 31,  1997,  the Company  entered into a loan and security  agreement
(Agreement)  with Foothill  Capital  Corporation  (Foothill),  which  included a
revolving line of credit facility (Revolver) providing for maximum borrowings of
$6,000 and a three-year  term note for $3,112.  The term note was originally due
in 36  monthly  payments  of $65 with the  remaining  balance of  principal  due
December 30, 2000. The Agreement  with Foothill was amended  October 6, 1998, to
increase  the term  loan by $777 and to reduce  the  maximum  borrowings  on the
Revolver to $5,000.  Borrowings  available  based on  collateral at November 30,
1998 were $2,448,000. The term loan, as increased, is due in monthly payments of
35 installments of $100 with the remaining  balance of principal due October 10,
2001.  Interest on the Revolver is payable monthly based on the bank's base rate
plus .75% (8.5% at November 30, 1998); the term note bears interest at 13.5% per
year.


<PAGE>


                       Effective Management Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


8. Long-Term Debt and Lease Commitments (continued)

Borrowings  under the Agreement are secured by  substantially  all assets of the
Company  (except  inventory  subject  to the lien of a vendor).  The  Company is
required  to pay a monthly  commitment  fee of .50% per annum on the  difference
between the commitment amount and balance outstanding under the Revolver in lieu
of a minimum monthly interest payment.  In addition,  the Agreement requires the
Company to maintain compliance with various covenants,  including minimum levels
of  tangible  net  worth and  adjusted  operating  income.  The  Company  was in
violation  of these  covenants  as of November  30,  1998.  Although the Company
obtained  waivers for the violations as of November 30, 1998, it is unlikely the
Company  will  maintain   compliance   with  the  covenants   throughout   1999.
Accordingly,  the balance of the Revolver and note payable have been  classified
as current obligations in the balance sheet.

The Company  leases  computer and other  equipment  under  capital  leases.  The
Company also leases office space,  automobiles and certain other equipment under
operating leases.

At November 30, 1998, future payments under capital and noncancellable operating
leases were as follows:
                                                     Capital      Operating
          Fiscal Year Ending                          Leases       Leases
                                                   --------------------------
             November 30

          1999                                         $293         $1,025
          2000                                          196            988
          2001                                           56            910
          2002                                            -            713
          2003                                            -            556
          Thereafter                                      -            294
                                                   --------------------------
          Total minimum lease obligations               545         $4,486
                                                                =============
          Amounts representing interest                 (61)
                                                   -------------
          Capital lease obligations                    $484
                                                   =============

Amortization  expense  relating to assets  under  capital  leases is included in
total depreciation expense for the period.

Total rent expense on all operating leases was approximately  $1,563, $1,663 and
$1,404 in 1998, 1997 and 1996, respectively.


<PAGE>


                       Effective Management Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


9. Stockholders' Equity

On August 28, 1998, the Company issued Series A preferred stock;  thereafter the
Company exchanged all Series A preferred stock for Series B preferred stock. The
Series B preferred  stock accrues  cumulative  dividends at an 8% rate per annum
(using a  liquidation  value of $1,000 per share),  and all dividends in arrears
must be paid prior to any payment of dividends on common  stock.  Dividends,  if
declared  by the  board  of  directors,  may be paid in cash or with  additional
shares of preferred stock at the Company's option.  The first quarterly dividend
payment date was January 2, 1999.  This  dividend  was paid through  issuance of
additional  shares of preferred  stock.  Commencing  with the  quarterly  period
beginning January 2, 2002, the annual dividend rate will increase each quarterly
period by 2% up to a maximum annual dividend rate of 18%. The Series B preferred
stock is  convertible to common stock at the preferred  stockholders'  option by
multiplying  $1,000 times the number of shares of Series B being  converted  and
dividing such product by the conversion price (currently the conversion price is
$2.00).  The Company may force  conversion of all Series B into shares of common
stock if the average of the  closing  bid price of the common  stock is at least
175% of the  conversion  price for 20 trading  days  within  any 30  consecutive
trading periods ending no more than 10 days prior to the forced conversion date.
The Series B preferred  stockholders  are entitled to vote (voting as one class,
with holders of common stock) on each matter submitted to a vote of stockholders
and shall have the number of votes that they would have had assuming  conversion
of the Series B into common stock.  There are 5,000 shares of Series B preferred
stock,  of which 1,785 shares are issued and  outstanding  and  3,000,000  total
preferred shares are authorized for issuance.

In connection  with the issuance of preferred  stock in 1998, the Company issued
54,714 common stock purchase  warrants at an initial exercise price of $3.60 per
share which expire in October 2003. As required by generally accepted accounting
principles,  the Company  calculated  the fair value of the  warrants  using the
Black-Scholes  option  pricing  model.  The  Company  recorded  the  warrants at
$140,000, with the offset being recorded as a reduction in the carrying value of
preferred stock.

As of November  30,  1995,  the Company  had 18,801  shares of common  stock and
18,801  warrants  with an  aggregate  value of $211  that  were to be  issued in
exchange  for common stock of former  Intercim  Corp.  (Intercim)  stockholders.
These amounts,  which were  classified as common stock and warrants to be issued
in stockholders' equity at November 30, 1996, were substantially issued in 1997.

In connection with the acquisition of Intercim,  the Company issued common stock
warrants.  Each warrant  entitles the holder,  at any time prior to September 6,
2005, to purchase one share of the Company's common stock at $6.75 per share.



<PAGE>


                       Effective Management Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


10. Stock Options and Employee Stock Purchase Plans

The Company  maintains  the 1986  Employees'  Stock  Option Plan (the 1986 Plan)
pursuant to which executive officers and other key employees of the Company have
received options to purchase shares of the Company's common stock. Options under
the 1986 Plan were granted at exercise  prices equal to the fair market value of
the common  stock on the date of grant.  Options to  purchase  an  aggregate  of
57,000  shares have  previously  been  granted and have been  exercised  or have
expired at November 30, 1998.  No  additional  options will be granted under the
1986 Plan.

The Company maintains the Effective  Management Systems,  Inc. 1993 Stock Option
Plan, as amended (the 1993 Plan).  The 1993 Plan, , provides for the granting of
both  incentive  stock options and  nonqualified  stock options to employees and
nonqualified stock options to nonemployee  independent  directors of the Company
covering up to a maximum of 750,025  shares.  Under the 1993 Plan,  the exercise
price of options  granted cannot be less than 100% of the fair market value of a
share of the Company's stock at the date of grant.

On September 6, 1996, in  conjunction  with the merger of Intercim,  the Company
adopted a new stock option  plan,  pursuant to which the Company  granted  stock
options to those holders who agreed to the  cancellation of their Intercim stock
options.

The  Company  has also  issued  nonqualified  stock  options  to  certain of its
executives and other nonemployee  directors.  These options have various vesting
schedules.

Information with respect to stock options granted under all plans is as follows:
<TABLE>
<CAPTION>

                                           Number        Exercise Price      Weighted Average
                                          of Shares         Per Share         Exercise Price
                                      ------------------------------------------------------------
<S>                                          <C>           <C>                    <C> 
Outstanding at November 30, 1995             830,428      $1.57- $8.00
   Granted                                   124,043       4.75 - 7.00
   Exercised                                 (35,000)         1.71
   Canceled or expired                       (14,569)      5.75 - 7.50
                                      ------------------------------------------------------------
Outstanding at November 30, 1996             904,902       1.71 - 7.50             $6.13
   Granted                                   109,938       4.63 - 6.75              5.73
   Exercised                                 (39,500)      1.57 - 1.71              1.71
   Canceled or expired                       (54,961)      4.75 - 7.50              6.63
                                      ------------------------------------------------------------
Outstanding at November 30, 1997             920,379       2.29 - 8.25              6.24
   Granted                                   400,811       2.13 - 4.13              2.28
   Exercised                                 (14,000)         2.29                  2.29
   Canceled or expired                      (188,234)      2.29 - 7.50              5.76
                                      ------------------------------------------------------------
Outstanding at November 30, 1998           1,118,956      $2.13 - $8.25            $4.95
                                      ============================================================
</TABLE>


<PAGE>


                       Effective Management Systems, Inc.

             Notes to Consolidated Financial Statements (continued)


10. Stock Options and Employee Stock Purchase Plans (continued)

As of November 30, 1998, the range of exercise prices on outstanding  options is
as follows:
<TABLE>
<CAPTION>

                                                  Number        Weighted Average     Number of Options
                                                of Options       Exercise Price         Exercisable
                                            ---------------------------------------------------------------
<S>                                                <C>                <C>                  <C>    
Price      range     $2.13     to     $3.30,
   weighted-average  contractual life of 9.9       364,374            $2.13                108,000
   years
Price      range     $3.31     to     $5.78,
   weighted-average   contractual   life  of       107,273            5.21                  13,342
   8.27 years
Price      range     $5.79     to     $8.25,
   weighted-average   contractual   life  of       647,309            6.49                 563,704
   6.19 years
</TABLE>


In  determining  the effect of SFAS No. 123, the  Black-Scholes  option  pricing
model  was used  with  the  following  weighted-average  assumptions  for  1998:
risk-free interest rates of 5.50%,  dividend yields of 0%, volatility factors of
the  expected  market  price  of  the  Company's  common  stock  of  .99,  and a
weighted-average expected life of the options of 6.42 years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options which have no vesting  restrictions  and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions  including the expected stock price volatility.  Because
the  Company's  employee  stock  options  have   characteristics   significantly
different from those of traded  options,  and because  changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its employee stock options.

The Company's pro forma information,  as if these options had been accounted for
in accordance with FASB Statement No. 123, follows:

                                                          1998         1997
                                                    --------------------------

     Pro forma net income (loss)                        $(11,068)     $(2,286)
     Pro forma earnings (loss) per share                   (2.71)        (.56)


<PAGE>

                       Effective Management Systems, Inc.

             Notes to Consolidated Financial Statements (continued)




10. Stock Options and Employee Stock Purchase Plans (continued)

In December 1993 and July 1998, respectively, the Board of Directors adopted the
1994  Employee  Stock  Purchase  Plan (1994  Stock  Purchase  Plan) and the 1998
Employee Stock Purchase Plan (1998 Stock Purchase Plan),  which permit employees
to purchase  shares of the  Company's  common  stock  during  six-month  periods
beginning  on June 1 and  December 1 of each year.  The  purchase  price of such
shares will be equal to the lesser of 85% of the fair market  value of the stock
at the beginning or end of each six-month  offering  period.  During fiscal 1998
and 1997, 25,067 and 26,792 shares, respectively,  were purchased under the 1994
Stock  Purchase  Plan.  The  maximum  cumulative  number of  shares  that may be
purchased under both Stock Purchase Plans is 200,240.

The Company has  reserved  2,324,634  shares of its common  stock for  potential
conversion  of common stock  warrants  and  issuance  under the stock option and
purchase plans described above.

11. Income Taxes


Income tax expense (credit) in the consolidated statement of operations consists
of the following:

                                                  Year ended November 30
                                            1998          1997           1996
                                        ----------------------------------------
      Current:
         Federal                        $        -        $(233)        $(170)
         State                                   -            -            80
                                        ----------------------------------------
                                                 -         (233)          (90)
      Deferred                               3,629          (56)          202
      Change in valuation allowance         (3,629)        (329)            -
                                        ----------------------------------------
                                        $        -        $(618)        $ 112
                                        ========================================



<PAGE>


                       Effective Management Systems, Inc.

             Notes to Consolidated Financial Statements (continued)



11. Income Taxes (continued)

The  reconciliation of income tax expense (benefit) computed at the U.S. federal
statutory rate to income tax expense (benefit) is:


                                                     Year ended November 30
                                                   1998       1997        1996
                                             -----------------------------------

Tax at U.S. statutory rate of 34%                $(3,617)     $(945)     $  90
State income taxes, net of federal benefit             -          -         14
Nondeductible items                                    -          -        112
Tax-exempt investment income                           -          -        (13)
General business credits                               -          -        (98)
Change in valuation allowance                      3,629        329          -
Other                                                (12)        (2)         7
                                             -----------------------------------
                                              $        -      $(618)      $112
                                             ===================================

The significant components of the deferred tax accounts recognized for financial
reporting purposes at November 30 were as follows:

                                                  1998              1997
                                            ------------------------------------
Deferred tax liabilities:
   Capitalized computer software costs           $ 1,706            $3,087
   Depreciation                                      336               342
   Other, net                                         25                16
                                            ------------------------------------
Total deferred tax liabilities                     2,067             3,445

Deferred tax assets:
   Net operating loss carryforwards                4,991             2,902
   Allowance for doubtful accounts                   216               185
   Deferred revenue                                  268               127
   Inventory                                          16                30
   General business credit carryforwards             464               442
   Other, net                                         70                88
                                            ------------------------------------
Total deferred tax assets                          6,025             3,774
Valuation allowance                               (3,958)             (329)
                                            ------------------------------------
Net deferred tax liabilities                  $        -         $       -
                                            ====================================


<PAGE>
                       Effective Management Systems, Inc.

             Notes to Consolidated Financial Statements (continued)




11. Income Taxes (continued)

At November  30,  1998,  the Company  had net federal and state  operating  loss
carryforwards   (NOLs)  of  approximately   $13.2  million  and  $13.6  million,
respectively,  available to offset future federal and state taxable income.  The
utilization  of  $2,730,000  of the NOLs is subject to an annual  limitation  of
approximately  $182,000 annually and expires in the year 2010. The carryforwards
resulted  from the Company's  acquisition  of Intercim in 1996 and net operating
losses. In addition,  the Company has general business credits totaling $464,000
which can be used to reduce federal taxable income through 2011.

In 1998 and 1997,  a valuation  allowance  equal to 100% of the net deferred tax
assets has been recognized  based on uncertainty  regarding  realization of such
assets.

12. Savings Plans

The  Company  has  defined   contribution   401(k)   savings  plans  that  cover
substantially  all employees meeting certain minimum  eligibility  requirements.
Participating  employees can elect to defer a portion of their  compensation and
contribute  it to the plan on a pretax basis.  The Company also matches  certain
amounts and/or provides additional discretionary contributions,  as defined. The
Company's  contributions to the plan were $480, $310 and $345 for 1998, 1997 and
1996, respectively.

13. Legal Proceedings

The  Company is a party to various  legal  proceedings  arising in the  ordinary
course of business.  The Company believes that the ultimate  resolution of these
matters  will not have a  material  adverse  effect on the  Company's  financial
condition or results of operations.



<PAGE>
<TABLE>
<CAPTION>


                  Schedule II Valuation and qualifying accounts

================================= ============== ============================================== =================== ================
          COL. A                     COL. B                       COL. C                              COL. D             COL. E
================================= ============== ============================================== =================== ================
                                                                  Additions
                                                ----------------------------------------------
                                                         (1)                    (2)
--------------------------------- -------------- ---------------------- ---------------------- ------------------- -----------------
        Description                 Balance at   Charged to costs and    Charged to other      Deductions-describe    Balance at end
                                   beginning of        expenses          accounts-describe                              of  period
                                      period
--------------------------------- -------------- ---------------------- ---------------------- ------------------- -----------------
<S>                                  <C>              <C>                       <C>                 <C>                  <C>     
Years ended November 30, 1998

--------------------------------- -------------- --------------------- ----------------------- ------------------- -----------------
Deducted from Asset Accounts:
Allowance for doubtful accounts      $462,000         $103,000                  0                   $59,000              $506,000
--------------------------------- -------------- --------------------- ----------------------- ------------------- -----------------

Years ended November 30, 1997

--------------------------------- -------------- --------------------- ----------------------- ------------------- -----------------
Deducted from Asset Accounts:
Allowance for doubtful accounts      $346,000         $120,000                  0                    $4,000              $462,000
--------------------------------- -------------- --------------------- ----------------------- ------------------- -----------------

Years ended November 30, 1996

--------------------------------- -------------- --------------------- ----------------------- ------------------- -----------------
Deducted from Asset Accounts:
Allowance for doubtful accounts      $312,000         $137,000                  0                  $103,000              $346,000
--------------------------------- -------------- --------------------- ----------------------- ------------------- -----------------

Years ended November 30, 1995

--------------------------------- -------------- --------------------- ----------------------- ------------------- -----------------
Deducted from Asset Accounts:
Allowance for doubtful accounts      $268,000          $79,000                  0                   $35,000              $312,000
--------------------------------- -------------- --------------------- ----------------------- ------------------- -----------------


</TABLE>

<PAGE>
Part II

Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure

Not Applicable




























<PAGE>

Item 10. Directors and Executive Officers of the Registrant

Pursuant  to  Instruction  G,  information  required  by  this  item  is  hereby
incorporated by reference from the Company's  definitive proxy statement for its
1999 annual meeting of shareholders  under the captions "Election of Directors",
"Executive  Officers" and  "Miscellaneous-Other  Matters".  The definitive proxy
statement will be filed with the Securities and Exchange  Commission  within 120
days after the end of the Company's fiscal year.

Item 11. Executive Compensation

Pursuant  to  Instruction  G,  information  required  by  this  item  is  hereby
incorporated by reference from the Company's  definitive proxy statement for its
1999   annual   meeting   of   shareholders   under   the   caption   "Board  of
Directors-Director   Compensation"  and  "Executive   Compensation";   provided,
however,  that  the  subsection  entitled  "Executive   Compensation-Report   on
Executive  Compensation"  shall  not be  deemed  to be  incorporated  herein  by
reference.  The definitive proxy statement will be filed with the Securities and
Exchange Commission within 120 days after the end of the Company's fiscal year.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Pursuant  to  Instruction  G,  information  required  by  this  item  is  hereby
incorporated by reference from the Company's  definitive proxy statement for its
1999 annual meeting of shareholders under the caption "Principal  Shareholders".
The  definitive  proxy  statement will be filed with the Securities and Exchange
Commission within 120 days after the end of the Company's fiscal year.

Item 13. Certain Relationships and Related Transactions

Pursuant  to  Instruction  G,  information  required  by  this  item  is  hereby
incorporated by reference from the Company's  definitive proxy statement for its
1999  annual  meeting  of   shareholders   under  the  caption   "Related  Party
Transactions".  The definitive proxy statement will be filed with the Securities
and  Exchange  Commission  with 120 days after the end of the  Company's  fiscal
year.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

1.  Exhibits
         Reference is made to the separate exhibit index contained on pages II-1
through II-5 hereof.
2.       Financial Statements and Financial Statement Schedules
         Reference is made to the separate index in Item 8 of this Annual Report
on Form 10-K with respect to the financial statements filed herewith.
3.  Reports on Form 8-K
         No Current  Reports on Form 8-K were filed during the fourth quarter of
the Company's fiscal year ended November 30, 1998.


<PAGE>
                                   SIGNATURES

         Pursuant to the  requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on February 28, 1999.

                                            EFFECTIVE MANAGEMENT SYSTEMS, INC.

                                            By: /s/Michael D. Dunham
                                                Michael D. Dunham
                                                President


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities indicated on February 28, 1999.


         Signature                                  Title


/s/Michael D. Dunham                       President and Director
Michael D. Dunham                         (Principal Executive Officer)



/s/Jeffrey J. Fossum                       Chief Financial Officer and Assistant
Jeffrey J. Fossum                          Treasurer (Principal Financial and
                                           Accounting Officer)

/s/Helmut M. Adam                          Director
Helmut M. Adam


/s/Thomas M. Dykstra                       Director
Thomas M. Dykstra



/s/Scott J. Mermel                         Director
Scott J. Mermel



/s/Robert E. Weisenberg                    Director
Robert E. Weisenberg

                
<PAGE>



                                  EXHIBIT INDEX

                       EFFECTIVE MANAGEMENT SYSTEMS, INC.

Exhibit Number      Exhibit

    2.1         Agreement  and Plan of Merger,  dated  February  17,  1995 among
                Effective  Management  Systems,  Inc., EMS Acquisition Corp. and
                Intercim  Corporation  [Incorporated by reference to Exhibit 2.1
                to Effective Management Systems,  Inc.'s Registration  Statement
                on Form S-4 (Registration No. 33-95338)].

    2.2         Amendment  No. 1 to  Agreement  and Plan of Merger  described in
                Exhibit 2.1, dated June 30, 1995  [Incorporated  by reference to
                Exhibit 2.2 to Effective Management Systems, Inc.'s Registration
                Statement on Form S-4 (Registration No. 33-95338)].


    2.3         Amendment  No. 2 to  Agreement  and Plan of Merger  described in
                Exhibit 2.1, dated July 31, 1995  [Incorporated  by reference to
                Exhibit 2.3 to Effective Management Systems, Inc.'s Registration
                Statement on Form S-4 (Registration No. 33-95338)].

    2.4         Agreement  of Merger,  dated  March 22,  1995,  among  Effective
                Management  Systems,   Inc.,  EMS  Illinois  Acquisition  Corp.,
                Effective  Management  Systems  of  Illinois,  Inc.,  Richard W.
                Grelck and Daniel E. Long  [Incorporated by reference to Exhibit
                2.2 to Effective Management Systems,  Inc.'s Quarterly Report on
                Form 10-QSB for the quarter ended February 28, 1995].

    3.1         Restated  Articles  of  Incorporation  of  Effective  Management
                Systems,  Inc., as amended [Incorporated by reference to Exhibit
                3.2  to  Effective   Management  Systems,   Inc.'s  Registration
                Statement on Form S-1 (Registration No. 333-68901)].  3.2 Bylaws
                of Effective Management Systems, Inc. [Incorporated by reference
                to  Exhibit  3.2  to  Effective   Management   Systems,   Inc.'s
                Registration   Statement   on  Form   SB-2   (Registration   No.
                33-73354)].

    4.1         Article 4 of the Restated Articles of Incorporation of Effective
                Management Systems,  Inc., as amended [Incorporated by reference
                to  Exhibit  4.1  to  Effective   Management   Systems,   Inc.'s
                Registration   Statement   on   Form   S-1   (Registration   No.
                333-68901)].

    4.2         Loan and  Security  Agreement  by and between  Foothill  Capital
                Corporation and Effective  Management Systems,  Inc.,  EMS-East,
                Inc. and Effective  Management Systems of Illinois,  Inc., dated
                December 31, 1997  [Incorporated by reference to Exhibit 4.14 to
                Effective  Management  Systems,  Inc.'s  Form  10-K for the year
                ended November 30, 1997].

    4.3         Waiver and First  Amendment to Loan Agreement  between  Foothill
                Capital  Corporation  and Effective  Management  Systems,  Inc.,
                EMS-East,  Inc. and  Effective  Management  Systems of Illinois,
                Inc.,  dated May 8, 1998  [Incorporated  by reference to Exhibit
                4.1 to Effective Management Systems,  Inc.'s Quarterly Report on
                Form 10-Q for the quarter ended May 31, 1998].

    4.4         Waiver to Loan Agreement  between Foothill  Capital  Corporation
                and Effective  Management  Systems,  Inc.,  EMS-East,  Inc., and
                Effective  Management Systems of Illinois,  Inc., dated July 13,
                1998  [Incorporated  by  reference  to Exhibit 4.2 to  Effective
                Management Systems, Inc.'s Quarterly Report on Form 10-Q for the
                quarter ended May 31, 1998].
<PAGE>

                                  EXHIBIT INDEX

                       EFFECTIVE MANAGEMENT SYSTEMS, INC.

Exhibit Number      Exhibit

    4.5         Waiver and Second  Amendment to Loan Agreement  between Foothill
                Capital  Corporation  and Effective  Management  Systems,  Inc.,
                EMS-East,  Inc., and Effective  Management  Systems of Illinois,
                Inc., dated August,  1988  [Incorporated by reference to Exhibit
                4.1 to Effective  Management System,  Inc.'s Quarterly Report on
                Form 10-Q for the quarter ended August 31, 1998].

    4.6         Third  Amendment  to Loan  Agreement  between  Foothill  Capital
                Corporation and Effective  Management Systems,  Inc.,  EMS-East,
                Inc., and Effective Management Systems of Illinois,  Inc., dated
                October 6, 1998  [Incorporated  by  reference  to Exhibit 4.2 to
                Effective  Management  System,  Inc.'s  Quarterly Report on Form
                10-Q for the quarter ended August 31, 1998].

    4.7         Waiver to Loan Agreement  between Foothill  Capital  Corporation
                and Effective  Management  Systems,  Inc.,  EMS-East,  Inc., and
                Effective  Management  Systems of Illinois,  Inc., dated January
                28, 1999.

    4.8         Warrant Agreement between Effective Management Systems, Inc. and
                American Stock Transfer & Trust Company, dated September 6, 1995
                [Incorporated   by   reference   to  Exhibit  4.2  to  Effective
                Management  Systems,  Inc.'s  Current  Report on Form 8-K, dated
                September 6, 1995].

    4.9         Form of Common Stock Warrant Issued in Connection  With the Sale
                of Effective Management Systems,  Inc.'s Series A 8% Convertible
                Redeemable Preferred Stock [Incorporated by reference to Exhibit
                4.7  to  Effective   Management  Systems,   Inc.'s  Registration
                Statement on Form S-1 (Registration No. 333-68901)].

    4.10        Form of Common Stock Warrant Issued in Connection  With the Sale
                of Effective Management Systems,  Inc.'s Series B 8% Convertible
                Redeemable Preferred Stock [Incorporated by reference to Exhibit
                4.8  to  Effective   Management  Systems,   Inc.'s  Registration
                Statement on Form S-1 (Registration No. 333-68901)].

    10.1        Business Agreement by and between Digital Equipment  Corporation
                and Effective  Management Systems,  Inc.,  effective February 8,
                1994  [Incorporated  by  reference  to Exhibit 10.1 to Effective
                Management Systems,  Inc.'s Registration  Statement on Form SB-2
                (Registration No. 33-73354)].

    10.2        Addendum to Business  Agreement by and between Digital Equipment
                Corporation and Effective  Management Systems,  Inc.,  effective
                February 8, 1994  [Incorporated  by reference to Exhibit 10.2 to
                Effective Management Systems,  Inc.'s Registration  Statement on
                Form SB-2 (Registration No. 33-73354)].

    10.3        Value  Added   Reseller   Agreement   by  and  between   Digital
                Information   Systems   Corporation  and  Effective   Management
                Systems,  Inc.,  effective  November  9, 1992  [Incorporated  by
                reference  to  Exhibit  10.3 to  Effective  Management  Systems,
                Inc.'s  Registration  Statement  on Form SB-2  registration  No.
                33-73354)].

    10.4        Domestic  Value  Added  Reseller   Agreement   between  Intermec
                Corporation and Effective Management Systems,  Inc., dated March
                4, 1991  [Incorporated by reference to Exhibit 10.4 to Effective
                Management Systems,  Inc.'s Registration  Statement on Form SB-2
                (Registration No. 33-73354)].

<PAGE>


                                  EXHIBIT INDEX

                       EFFECTIVE MANAGEMENT SYSTEMS, INC.

Exhibit Number      Exhibit


    10.5        Amendment  No. 1 to  Domestic  Value  Added  Reseller  Agreement
                between Intermec  Corporation and Effective  Management Systems,
                Inc.,  dated  October 29, 1991  [Incorporated  by  reference  to
                Exhibit   10.5   to   Effective   Management   Systems,   Inc.'s
                Registration   Statement   on  Form   SB-2   (Registration   No.
                33-73354)].

    10.6        Amendment  No. 2 to  Domestic  Value  Added  Reseller  Agreement
                between Intermec  Corporation and Effective  Management Systems,
                Inc., dated June 11, 1993  [Incorporated by reference to Exhibit
                10.6  to  Effective  Management  Systems,   Inc.'s  Registration
                Statement on Form SB-2 (Registration No. 33-73354)].

    10.7        Software  Supplier  Agreement,  dated  August  6,  1994,  by and
                between Effective  Management Systems,  Inc. and Hewlett Packard
                Company  [Incorporated by reference to Exhibit 10.7 to Effective
                Management Systems,  Inc.'s Annual Report on Form 10-KSB for the
                year ended November 30, 1994].

    10.8        Joint  Venture  Agreement,  dated  September  15,  1985,  by and
                between  Effective  Management  Systems,   Inc.  and  Joseph  H.
                Schlanser,   Aurinee  M.   Schansler   and  Barton  R.  Benjamin
                [Incorporated   by   reference  to  Exhibit  10.9  to  Effective
                Management Systems,  Inc.'s Registration  Statement on Form SB-2
                (Registration No. 33-73354)].

    10.9        International  Marketing  Agreement,  dated July 5, 1994, by and
                between   Effective   Management   Systems,   Inc.  and  Systems
                Technology Management Corporation  [Incorporated by reference to
                Exhibit  10.11 to Effective  Management  Systems,  Inc.'s Annual
                Report on Form 10-KSB for the year ended November 30, 1994].

    10.10       Lease by and between  Effective  Management  Systems,  Inc.  and
                Milwaukee   Park   Place   Limited   Partnership,   as   amended
                [Incorporated   by  reference  to  Exhibit  10.10  to  Effective
                Management Systems,  Inc.'s Registration  Statement on Form SB-2
                (Registration No. 33-73354)].

    10.11       Effective Management Systems,  Inc. 1986 Employee's Stock Option
                Plan  [Incorporated  by reference to Exhibit  10.11 to Effective
                Management Systems,  Inc.'s Registration  Statement on Form SB-2
                (Registration No. 33-73354)].

    10.12       Stock  Option  Agreement  by and  between  Helmut  M.  Adam  and
                Effective  Management  Systems,  Inc.,  dated  December 17, 1993
                [Incorporated   by  reference  to  Exhibit  10.13  to  Effective
                Management Systems,  Inc.'s Registration  Statement on Form SB-2
                (Registration No. 33-73354)].

    10.13       Stock  Option  Agreement  by and  between  Scott J.  Mermel  and
                Effective  Management  Systems,  Inc.,  dated  December 17, 1993
                [Incorporated   by  reference  to  Exhibit  10.14  to  Effective
                Management Systems,  Inc.'s Registration  Statement on Form SB-2
                (Registration No. 33-73354)].
<PAGE>

                                  EXHIBIT INDEX

                       EFFECTIVE MANAGEMENT SYSTEMS, INC.

Exhibit Number      Exhibit
 
    10.14       IBM Business Partner  Agreement between  International  Business
                Machines  Corporation and Effective  Management  Systems,  Inc.,
                dated March 3, 1995  [Incorporated  by reference to Exhibit 10.1
                to Effective Management Systems, Inc.'s Quarterly Report on Form
                10-QSB for the quarter ended February 28, 1995].

    10.15       Software  Reseller  Agreement  between  International   Business
                Machines  Corporation and Effective  Management  Systems,  Inc.,
                dated  September 6, 1995  [Incorporated  by reference to Exhibit
                10.18 to Effective  Management Systems,  Inc.'s Annual Report on
                Form 10-KSB for the year ended November 30, 1995].

    10.16       Distributor  Agreement with Pioneer Standard  Electronics,  Inc.
                [Incorporated   by   reference  to  Exhibit  10.1  to  Effective
                Management Systems, Inc.'s Quarterly Report on Form 10-Q for the
                quarter ended May 31, 1997].

    10.17       IBM Market  Development  Program  Agreement,  dated September 3,
                1997 [Incorporated by reference to Effective Management Systems,
                Inc.'s  Quarterly  Report  on Form  10-Q for the  quarter  ended
                August 31, 1997].

    10.18       Relationship  Agreement  with CIMX,  an Ohio  Limited  Liability
                Company and Effective  Management Systems,  Inc., dated December
                31,  1997   [Incorporated  by  reference  to  Exhibit  10.20  to
                Effective  Management  Systems,  Inc.'s  Form  10-K for the year
                ended November 30, 1997].

    10.19       Reseller  Agreement and Addendum  Number One by and between Baan
                Midmarket Solutions, LLC and Effective Management Systems, Inc.,
                dated April 9, 1998  [Incorporated  by reference to Exhibit 10.1
                to Effective Management Systems, Inc.'s Quarterly Report on Form
                10-Q for the quarter ended May 31, 1998].

    10.20       Distribution  Agreement  between  EMS Asia  Pacific  Limited and
                Effective   Management   Systems,   Inc.,  dated  May  29,  1988
                [Incorporated   by   reference  to  Exhibit  10.2  to  Effective
                Management Systems, Inc.'s Quarterly Report on Form 10-Q for the
                quarter ended May 31, 1998].

    10.21       Effective  Management  Systems,  Inc. 1993 Stock Option Plan, as
                amended  [Incorporated by reference to Exhibit 10.3 to Effective
                Management Systems, Inc.'s Quarterly Report on Form 10-Q for the
                quarter ended May 31, 1998].

    10.22       Preferred  Stock  Placement  Agreement,  dated  August 28,  1998
                between Effective Management Systems, Inc. and Taglich Brothers,
                D'Amadeo,  Wagner  &  Company,   Incorporated  [Incorporated  by
                reference  to  Exhibit  10.1 to  Effective  Management  Systems,
                Inc.'s  Quarterly  Report  on Form  10-Q for the  quarter  ended
                August  31,  1998]. 

    10.23       Loan Agreement by and between EMS Solutions,  Inc. and Effective
                Management Systems, Inc., dated January 1, 1998 [Incorporated by
                reference  to  Exhibit  10.2 to  Effective  Management  Systems,
                Inc.'s  Quarterly  Report on Form 10-Q for the quarter ended May
                31, 1998].

    10.24       Special  Compensation  and  Separation  Agreement by and between
                Jeffrey  J.  Fossum  and  Effective  Management  Systems,  Inc.,
                effective January 1, 1998  [Incorporated by reference to Exhibit
                10.3 to Effective Management Systems, Inc.'s Quarterly Report on
                Form 10-Q for the quarter ended May 31, 1998].
<PAGE>


                                  EXHIBIT INDEX

                       EFFECTIVE MANAGEMENT SYSTEMS, INC.

Exhibit Number      Exhibit

    10.25       Special  Compensation  and  Separation  Agreement by and between
                Wayne  T.  Wedell  and  Effective   Management  Systems,   Inc.,
                effective January 1, 1998  [Incorporated by reference to Exhibit
                10.4 to Effective Management Systems, Inc.'s Quarterly Report on
                Form 10-Q for the quarter ended May 31, 1998].

    10.26       Series B Preferred Stock Placement Agreement,  dated October 27,
                1998  between  Effective  Management  Systems,  Inc. and Taglich
                Brothers, D'Amadeo, Wagner & Company, Incorporated [Incorporated
                by reference to Exhibit 10.28 to Effective  Management  Systems,
                Inc.'s  Registration  Statement  on Form S-1  (Registration  No.
                333-68901)].

    10.27       Form  of  Series  B  Preferred  Stock  Purchase   Agreement  for
                Effective  Management  Systems,  Inc.'s Series B 8%  Convertible
                Redeemable Preferred Stock [Incorporated by reference to Exhibit
                10.29  to  Effective  Management  Systems,  Inc.'s  Registration
                Statement on Form S-1 (Registration No. 333-68901)].

    10.28       Form  of  Preferred  Stock  Purchase   Agreement  for  Effective
                Management  Systems,  Inc.'s Series A 8% Convertible  Redeemable
                Preferred Stock.

      21        List of  Subsidiaries  of  Effective  Management  Systems,  Inc.
                [Incorporated by reference to Exhibit 21 to Effective Management
                Systems,  Inc's Registration Statement on Form S-1 (Registration
                No. 333-68901)].

      23        Consent of Ernst & Young, LLP.
      27        Financial Data Schedule
      99        Proxy Statement for the 1999 Annual Meeting of Shareholders.

                Effective Management Systems, Inc. will file its Proxy Statement
                for  the  1999  Annual  Meeting  of  Shareholders,  pursuant  to
                Regulation  14A,  with the  Securities  and Exchange  Commission
                within 120 days after the end of its fiscal year;  except to the
                extent  incorporated  by reference,  the Proxy Statement for the
                1999 Annual  Meeting of  Shareholders  shall not be deemed to be
                filed as part of this Annual Report on Form 10-K.