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

                                    FORM 10-Q



[X]   QUARTERLY  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
      EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 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 of             (I.R.S. Employer Identification No.)
incorporation or organization) 

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

       Registrant's telephone number, including area code: (414) 359-9800


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 the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date.


            Class                         Outstanding as of August 31, 1998
----------------------------------     ----------------------------------------

 Common Stock, $.01 par value                       4,102,486

<PAGE>

                       EFFECTIVE MANAGEMENT SYSTEMS, INC.
                                    Form 10-Q
                                 August 31, 1998


                                      INDEX



PART 1 - FINANCIAL INFORMATION                                           PAGE

Item 1    Financial Statements

          Consolidated Balance Sheets at
          August 31, 1998 and November 30, 1997                             3

          Consolidated Statements of Operations - Three and Nine
          Months Ended August 31, 1998 and August 31, 1997                  5

          Consolidated Statements of Cash Flows - Nine                      6
          Months Ended August 31, 1998 and August 31, 1997

          Notes to Consolidated Financial Statements                        7


Item 2    Management's Discussion and Analysis of Financial
          Condition and Results of Operations                             10

Item 3    Quantitative and Qualitative Disclosures About Market Risk      17



PART II - OTHER INFORMATION

Item 2    Changes in Securities and Use of Proceeds                        18

Item 6    Exhibits and Reports on Form 8-K                                 19



SIGNATURES                                                                 20



                                     Page 2

<PAGE>


PART I Financial Information
Item 1 Financial Statements


EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands) (unaudited except for November 30, 1997 amounts)
------------------------------------------------------------------------------


ASSETS                                          31-Aug             30-Nov
                                                  1998               1997
==========================================================================

CURRENT ASSETS
   Cash                                             $8                $14
   Accounts Receivable:
     Trade, less allowance for
        doubtful accounts                        8,254             12,370
     Related Parties                               785                604

   Inventories                                     334                280
   Refundable Income Taxes                           0                312
   Deferred Income Taxes                             0                  0
   Prepaid Expenses and Other
      Current Assets                               338                146
                                     -------------------------------------

           TOTAL CURRENT ASSETS                  9,719             13,726

LONG TERM ASSETS
Computer Software, net                           3,917              7,717
Investments in and Advances to
  Unconsolidated Joint Ventures                    182                182
Equipment and Leasehold
  Improvements, net                              3,312              3,917
Intangible Assets, net                           2,269              2,444
Other Assets                                       284                811
                                     -------------------------------------

           TOTAL LONG TERM  ASSETS               9,964             15,071

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

TOTAL ASSETS                                   $19,683            $28,797

==========================================================================

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                     Page 3

<PAGE>

EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited except for November 30, 1997 amounts)
--------------------------------------------------------------------------------


LIABILITIES AND STOCKHOLDERS' EQUITY                        31-Aug        30-Nov
                                                             1998          1997
================================================================================

CURRENT LIABILITIES
   Accounts Payable                                        $2,301        $2,272
   Accrued Liabilities                                      1,881         2,773
   Deferred Revenues                                        5,810         5,887
   Customer Deposits                                          290            63
   Current portion of
     Long-term Obligations                                  1,012           946
                                                  ------------------------------

            TOTAL CURRENT LIABILITIES                      11,294        11,941

LONG TERM LIABILITIES
   Deferred Revenue and Other
     Long-term Liabilities                                    887           317
   Long-term Obligations                                    3,961         3,966
   Deferred Income Taxes                                        0             0
                                                  ------------------------------

            TOTAL LONG TERM LIABILITIES                     4,848         4,283

   Commitments and Contingencies                                0             0

STOCKHOLDERS'  EQUITY
   Preferred Stock, $.01 par value;
    authorized  3,000,000 shares, of 
    which 7,000 shares are designated as
    Series A 8% Convertible Redeemable
    Preferred Stock ("Series A"); 1005
    shares of Series A issued and 
    outstanding (liquidation 
    preference at $1,000 per share)                           826             0
   Common Stock,  $.01 par value; authorized
    20,000,000 shares; issued 4,102,486 and 
    4,067,408 shares; outstanding 4,089,861
    and 4,054,783 shares                                       41            41 
   Common Stock Warrants                                       77             4
   Additional  Paid- in Capital                            11,418        11,328
   Retained Earnings (Deficit)                             (8,761)        1,260
   Cost of Common Stock in Treasury(12,625
    shares)                                                   (60)          (60)
                                                  ------------------------------

            TOTAL STOCKHOLDERS' EQUITY                      3,541        12,573

                                                  ------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                $19,683       $28,797

================================================================================

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

                                     Page 4

<PAGE>

<TABLE>
EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data) (unaudited)
--------------------------------------------------

<CAPTION>
                                                 THREE MONTHS ENDED                    NINE MONTHS ENDED
                                             31-Aug             31-Aug              31-Aug               31-Aug
                                               1998               1997                1998                 1997


NET REVENUES:
<S>                                   <C>                <C>                   <C>                  <C>    
  Software license fees                      $3,866             $4,963             $13,573              $14,491
  Services                                    3,977              4,095              12,748               12,361
  Hardware                                      339                624               1,455                2,687
                                      -------------      -------------         -----------          -----------
        Total net revenues                    8,182              9,682              27,776               29,539

COST OF PRODUCTS AND SERVICES
  Software license fees                       1,059              1,321               4,163                3,983
  Services                                    3,581              3,387              10,175               10,584
  Hardware                                      232                468               1,112                2,074
                                      --------------     -------------         -----------          -----------
        Total cost of products and
          services                            4,872              5,176              15,450               16,641

Selling and marketing expenses                3,017              4,259              10,043               11,103
General and administrative expenses             624                631               2,837                2,993
Product development expenses                    597                621               2,118                1,817
Restructuring and Other Charges                   0                  0               6,836                    0
                                      -------------      -------------         -----------          -----------
        Total costs and operating
          expenses                            9,110             10,687              37,284               32,554
                                      -------------      -------------         -----------          -----------
LOSS FROM OPERATIONS                           (928)            (1,005)             (9,508)              (3,015)

Other (Income)/ Expense
  Equity in (earnings)/loss 
     of unconsolidated joint
     ventures                                     0                (55)                 (1)                 (57)
  Interest (income)                             (19)               (13)                (39)                 (41)
  Interest expense                              184                107                 521                  274
                                      -------------      -------------         -----------          -----------
                                                165                 39                 481                  176
                                      -------------      -------------         -----------          -----------
LOSS BEFORE INCOME TAXES                     (1,093)            (1,044)             (9,989)              (3,191)
Income tax (benefit) expense                      0                  0                  33                 (883)
                                      -------------      -------------         -----------          -----------
   NET LOSS                                 ($1,093)           ($1,044)           ($10,022)             ($2,308)
                                      =============      =============         ===========          ===========

Loss per share - basic and diluted           ($0.27)            ($0.26)             ($2.45)              ($0.57)
                                      =============      =============         ===========          =========== 

</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

<PAGE>

EFFECTIVE MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
-----------------------------------------------------------------------

                                                          NINE MONTHS ENDED
                                                         31-Aug        31-Aug
                                                          1998          1997
===============================================================================

OPERATING ACTIVITIES
    Net Loss                                             ($10,022)     ($2,308)
    Adjustments to reconcile net loss
      to net cash provided by (used in)
      operating activities:
      Depreciation and amortization                         1,044          862
      Amortization of capitalized
       computer software development costs                  2,277        2,077
      Equity in earnings of joint ventures                      -            -
      Goodwill Amortization                                   176          170
      Deferred income taxes                                     -            -
      Restructuring and Other Charges                       6,836
      Changes in operating assets and 
        liabilities:
          Accounts Receivable                               3,054        1,226
          Inventories and other current assets                (25)      (1,266)
          Accounts payable and other liabilities           (1,684)        (921)
                                                     --------------------------
    Total adjustments                                      11,678        2,148
                                                     --------------------------
    Net cash provided by(used in) in 
     operating activities                                   1,656         (160)

INVESTING ACTIVITIES
      Additions to equipment and 
        leasehold improvements                               (439)      (1,101)
      Proceeds from sale of securities                          -          504
      Software development costs capitalized               (2,800)      (3,207)
      Other                                                   527          (97)
                                                     --------------------------
    Net cash (used in) investing
      activities                                           (2,712)      (3,901)

FINANCING ACTIVITIES
      Proceeds on long-term debt and
        other notes payable                                    61        3,466
      Additional paid-in capital                               90            -
      Proceeds from sale of stock                             899          136
                                                     --------------------------
    Net cash provided by financing activities               1,050        3,602
                                                     --------------------------
    Net decrease in cash                                      ($6)       ($459)
Cash-beginning of period                                      $14         $866
                                                     ==========================
Cash-end of period                                             $8         $407
===============================================================================

   The accompanying notes are an integral part of these  consolidated  financial
statements.



                                     Page 6

<PAGE>

                       EFFECTIVE MANAGEMENT SYSTEMS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 August 31, 1998
                           (Unaudited) (In Thousands)

Note 1 - Basis of Presentation

         The accompanying  consolidated  interim financial  statements  included
herein have been prepared by Effective Management Systems, Inc. (the "Company"),
without an audit, in accordance with generally  accepted  accounting  principles
for interim  financial  information and pursuant to the rules and regulations of
the  Securities  and  Exchange  Commission.  Certain  information  and  footnote
disclosures  normally  included in financial  statements  prepared in accordance
with generally  accepted  accounting  principles  have been condensed or omitted
pursuant to such rules and  regulations,  although the Company believes that the
disclosures made are adequate to make the information presented not misleading.

         In the opinion of management,  the information  furnished for the three
and nine month  periods  ended August 31, 1998 and August 31, 1997  includes all
adjustments,  consisting  solely of normal recurring  accruals,  necessary for a
fair  presentation  of the financial  position and results of operations for the
interim periods.  The results of operations for the nine months ended August 31,
1998 are not necessarily  indicative of the results of operations to be expected
for the entire fiscal year ending  November 30, 1998.  It is suggested  that the
interim   financial   statements  be  read  in  conjunction   with  the  audited
consolidated  financial statements for the year ended November 30, 1997 included
in the  Company's  Annual  Report on Form 10-K  filed  with the  Securities  and
Exchange Commission.

Note 2 - Additional Financial Disclosure

Equipment and leasehold improvements consisted of the following:

                                          31-August-1998         30-Nov-1997

Gross                                         $9,798                  $9,359
Less:  Accumulated 
     Depreciation                           (  6,486 )              (  5,442 )
                                            --------                --------  
Net                                           $3,312                  $3,917

Allowance for doubtful accounts consisted of the following:

                                        31-August-1998            30-Nov-1997
Balance                                       $  547                  $  462

Provision for doubtful accounts consisted of the following:

                                           31-August-1998         30-Nov-1997
                                              $   82                  $  17


                                     Page 7

<PAGE>


Note 3 - Net Loss Per Share

In February 1997, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standards (SFAS) No. 128,  "Earnings Per Share." SFAS No.
128 replaced the  calculation  of primary and fully  diluted  earnings per share
with basic and diluted  earnings per share.  Unlike primary  earnings per share,
basic earnings per share excludes any dilutive  effects of options and warrants.
Earnings  per share  amounts  for all periods  have been  presented  and,  where
appropriate, restated to conform to SFAS No. 128 requirements.

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


                                                        Three Months Ended
                                                            August 31,
                                                        1998             1997
Denominator                                         
Denominator for basic earnings per share -          
  weighted average common shares                        4,098            4,054
Effect of dilutive securities - stock options       
  and warrants                                              0                0
Effect of dilutive securities - preferred stock             0                0
                                                     ----------     ------------
Denominator for diluted earnings per share -        
adjusted weighted average common shares                 4,098           4,054
                                                     ==========     ============
                                                

                                                            Nine Months Ended
                                                                August 31,
                                                         1998            1997
Denominator
Denominator for basic earnings per share -
         weighted average common shares                 4,084           4,038
Effect of dilutive securities - stock options
         and warrants                                       0               0
Effect of dilutive securities - preferred stock             0               0
                                                     ----------     ------------
Denominator for diluted earnings per share -
adjusted weighted average common shares                 4,084           4,038
                                                     ==========     ============


Note 4 - Restructuring and Other Charges

The company recorded charges for a restructuring in the second quarter of fiscal
1998  totaling  $6.8  million of which $6.6  million  was paid or expensed as of
August 31, 1998. The company  anticipates the remaining liability of $.2 million
to be paid in the fourth quarter of fiscal 1998,  which will be financed through
working capital.





                                     Page 8

<PAGE>

Note 5 - Preferred Stock

On August 28, 1998,  the Company  issued 1,005 shares of Series A 8% Convertible
Redeemable  Preferred  Stock  (the  "Series  A  Preferred  Stock").   Legal  and
investment banking fees of $101,000 were deducted from the total proceeds.

The Series A Preferred Stock accrues cumulative dividends at a 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, generally must be paid in cash.

The Series A Preferred  Stock is convertible  into common stock at the preferred
shareholders' option at the initial conversion price of $3.50 per share, subject
to adjustment,  with each share of Series A Preferred Stock valued at $1,000 for
purposes of conversion.  An adjustment to the  conversion  rate may be made upon
any  of  the  following  circumstances:  subdivision  or  reverse  split  of the
outstanding  shares of common stock into a greater or lesser number of shares of
common stock,  declaration  of a dividend or other  distribution  by the Company
upon the  common  stock  payable  in common  stock,  capital  reorganization  or
reclassification  of the  common  stock of the  Company,  and in  certain  other
instances.  The Company  may force  conversion  of the Series A Preferred  Stock
under certain conditions.

The holders of the Series A Preferred  Stock shall be entitled to vote and shall
receive  the number of votes they would have  assuming  full  conversion  of the
Series A Preferred Stock into common stock.

There are 7,000 shares of Series A Preferred Stock authorized for issuance, with
1,005 shares being issued and  outstanding.  The Company has 3,000,000 shares of
Preferred Stock  authorized for issuance.  Such shares may be issued in separate
series.  The Series A Preferred  Stock is currently the only series of Preferred
Stock authorized, issued and outstanding.

Note 6 - Warrants


During August 1998 the Company's investment banker earned the right to receive a
warrant as consideration  for the Preferred Stock issued.  The investment banker
has the right  through  August 2003 to purchase up to 10% of the total number of
shares of common stock issuable upon exercise of the Series A Preferred Stock at
an exercise price of $4.20 per share.

As required by SFAS No. 123,  "Accounting  for  Stock-Based  Compensation,"  the
Company calculated the fair value of the warrants using the Black Scholes option
pricing model with a risk-free interest rate of 5.0%;  dividend yield of 0%, and
an expected life of 5 years.  The Company  recorded $73,000 or $2.56 per warrant
as a reduction of proceeds on Series A Preferred Stock issued in August 1998.








                                     Page 9


<PAGE>


Item 2. Management's  Discussion and Analysis of Financial Condition and Results
of Operations


Overview

The  Company  recorded a  decrease  of 15.5% in net  revenues  and a net loss of
$1,093,000  for the third  quarter of fiscal  1998  compared  with a net loss of
$1,044,000  for the third  quarter of fiscal 1997.  The third  quarter of fiscal
1998 does not  reflect a tax  benefit  relating  to the loss since  because  the
Company is in a loss  carryforward  position for financial  reporting  purposes.
Software  revenues  were down 22.1% in the third quarter of fiscal 1998 compared
to the same  period in the prior  year.  Management  believes  this  decrease in
software  revenues was mainly the result of the  attention  and efforts spent in
the  transition  to adding the new Baan  product  line,  reduced  revenues  from
restructured operations (a reduction of $716,000 from the third quarter of 1997)
and reduced revenues due to lower levels of personnel  caused by attrition.  The
Company  recorded  a  decrease  in  net  revenues  of  6.0%  and a net  loss  of
$10,022,000 (including a $6,836,000  restructuring charge incurred in the second
quarter of 1998) for the first three  quarters of fiscal 1998,  compared  with a
net loss of $2,308,000 for the first three quarters of fiscal 1997.

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 goal. 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

Net Revenues

Net revenues were  $8,182,000 for the three months ended August 31, 1998,  which
was a decrease of 15.5% from the $9,682,000 for the same quarter in the previous
year. Net revenues were  $27,776,000  for the nine months ended August 31, 1998,
which was a decrease  of 6.0% from the  $29,539,000  for the same  period in the
previous  year.  The overall  decrease in revenues  for the three  months  ended
August 31, 1998 was  attributable  primarily to the  attention and efforts spent
planning and executing the  restructuring  plan.  The mix of revenues  comparing
software,  services  and hardware  revenues as a percentage  of net revenues was
47.3%,  48.6%, and 4.1%,  respectively,  in the third quarter of fiscal 1998, as
compared  with 51.3%,  42.3%,  and 6.4%,  respectively,  in the third quarter of
fiscal  1997.  The mix of revenues  comparing  software,  services  and hardware

                                       10
<PAGE>


revenues  as  a  percentage  of  net  revenues  was  48.9%,   45.9%,  and  5.2%,
respectively,  in the first three  quarters  of fiscal  1998,  as compared  with
49.1%,  41.9%,  and 9.0%,  respectively,  in the first three  quarters of fiscal
1997.  International  revenues represented less than 10% of net revenues for all
periods presented.

The Company's  operating revenues can vary substantially from quarter to quarter
based on the size and timing of customer  software orders and market  acceptance
of new products.  The Company has  historically  operated  with little  software
backlog because software orders are generally shipped as orders are received. As
a result, product revenue in any quarter is substantially  dependent on software
orders booked and shipped during that quarter.



Software License Fees

Software  license fees are customer  charges for the right to use the  Company's
software  products.  Software  license fees decreased 22.1% to $3,866,000 in the
third  quarter of fiscal  1998 from  $4,963,000  in the third  quarter of fiscal
1997.  The  decrease in software  license  fees was mainly  attributable  to the
attention  and efforts  spent in the  transition  to adding the new Baan product
lines,  reduced revenues from  restructured  operations(a  reduction of $664,000
from the third quarter of fiscal 1997), and reduced revenues due to lower levels
of sales personnel caused by attrition.  As additional sales personnel  continue
to 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  complexity  of the prospect  need.  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 mainly continue during the next fiscal
quarter,  and, thereafter,  productivity is expected to increase.  Management is
also actively  recruiting new sales talent  through  various  methods.  Software
license fees decreased 6.3% to $13,573,000 in the first three quarters of fiscal
1998 from  $14,491,000  in the first three quarters of fiscal 1997. The decrease
was mainly  attributable to the reasons mentioned above for the third quarter of
the 1998 fiscal year except that software  revenues rose in the first quarter of
fiscal 1998 due to the introduction of new products.


Service Revenues

The Company  offers a number of optional  services to its  customers,  including
such  services as a  telephone  support  program,  systems  integration,  custom
software  development,  implementation  consulting,  and  formal  classroom  and
on-site training.  Service revenues decreased to $3,977,000 for the three months
ended August 31, 1998,  as compared with  $4,095,000  for the same period of the
prior  year.  This  decrease  was mainly the result of a lower  level of service
personnel though  attrition.  Service revenues  increased to $12,748,000 for the
nine months ended August 31, 1998, as compared with


                                       11

<PAGE>

$12,361,000 for the same period of the prior year.  Management expects the level
of service demand to grow as the Company transitions to the addition of the Baan
product  line and  recognizes  the  incremental  revenues  associated  with that
transition.  The Company has  expanded its  recruiting  efforts and has begun to
hire additional service personnel.


Hardware Revenues

Hardware  revenues  decreased  45.7% to $339,000 in the third  quarter of fiscal
1998  compared  with  $624,000 for the  corresponding  period of 1997.  Hardware
revenues  decreased  45.9% to $1,455,000  in the first three  quarters of fiscal
1998 compared with $2,687,000 for the corresponding period of 1997. The decrease
was mainly due to increased sales of software on platforms for which the Company
does  not  supply  hardware  and the  discontinuation  of  hardware  sales to an
affiliate  of the  Company,  EMS  Solutions,  Inc.  (a  decrease  of $93,000 and
$334,000   from  the  third   quarter   and  first   three   quarters  of  1997,
respectively)(See  General and Administrative Expense below). Management expects
the trend of declining hardware sales to continue due to the increasing sales of
software licenses operating on the Microsoft Windows NT platform.  Hardware used
with the Microsoft  Windows NT platform is either generally  already in place at
the customer site or readily available from local suppliers who can also provide
local support.


Cost of Software License Fees

The cost of software  license fees as a percentage of related  revenue was 27.4%
for  the  third  quarter  of  fiscal  1998,  an  increase  from  26.6%  for  the
corresponding  period of 1997. The cost of software license fees as a percentage
of related  revenue was 30.7% for the first three  quarters of fiscal  1998,  an
increase  from  27.5% for the  corresponding  period of 1997.  Cost of  software
license fees is composed of both  amortization  of past  investment  in software
development  and the third party costs  associated  with the software  revenues.
Software  amortization is related to past investment in software development and
does not vary  consistently  with variations in software  revenues.  The Company
wrote off a substantial  portion of its past investment in software  development
in conjunction with its restructuring efforts in the quarter ended May 31, 1998.
(See the discussion under the caption  "Restructuring  and Other Charges" in the
section of the  Company's  Form 10-Q for the period  ended May 31,  1998  titled
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations".  Software  amortization  decreased $379,000 in the third quarter of
fiscal  1998 as  compared  to the same period of 1997 as a result of the amounts
written off of previously  capitalized  development costs in the  restructuring.
The cost of software  license fees is also dependent on the level of third party
costs  associated  with certain  software  revenues  and includes  such items as
purchased  licenses and other  components.  The third party costs includes costs
associated  with the new Baan product line revenues and vary directly with those
revenues.  The  remaining  increases  in the cost of software  license fees as a
percentage  of related  revenue  was due to these third party costs and to lower
levels of software revenue.

                                       12


<PAGE>


Cost of Services

The cost of services as a percentage of related  revenue  increased to 90.0% for
the three  months  ended  August 31,  1998 as  compared  with 82.7% for the same
quarter  in the  previous  year.  The  increase  was  mainly  due to  additional
compensation for current  personnel,  higher costs of outside sourced labor, and
additional warranty work associated with new versions of the Company's software.
The cost of services as a percentage of related  revenue  decreased to 79.8% for
the nine months ended August 31, 1998 as compared with 85.6% for the same period
in the  previous  year.  The  decrease  was  mainly due to  increased  levels of
customer billing  generated by existing  personnel less the factors listed above
for  performance  during  the third  quarter of fiscal  1998.  The  Company  has
experienced  increased  levels of service  business from its customer base and a
reduction in employees  through  attrition.  The current service backlog exceeds
current capacity and the Company  continues  efforts to hire additional  service
personnel.  Management  expects the cost of services as a percentage  of related
revenue to increase slightly with the additional  training costs associated with
the hiring of new personnel. The Company also continues to take further steps to
reduce the level of  customer  warranty  work by  enhancing  the  quality of its
software through improved internal processes.


Cost of Hardware

The cost of hardware as a percentage  of related  revenue  decreased to 68.4% in
the third quarter of fiscal 1998 from 75.0% in the third quarter of fiscal 1997.
The cost of hardware as a percentage  of related  revenue  decreased to 76.4% in
the first three  quarters of fiscal 1998 from 77.2% in the first three  quarters
of fiscal 1997.  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 pressure of the customer sale. The cost of hardware as
a  percentage  of  related  revenue  also  varies  with the amount of low margin
hardware sales to affiliates.  Hardware sales to affiliates  declined by $93,000
in the third quarter of fiscal 1998 compared to the third quarter of fiscal 1997
and declined by $334,000 in the first three  quarters of fiscal 1998 compared to
the first three quarters of fiscal 1997.


Selling and Marketing Expenses

Selling and marketing expenses decreased  $1,242,000,  or 29.2%, from $4,259,000
in the third quarter of fiscal 1997 to $3,017,000 in the third quarter of fiscal
1998.  Selling  and  marketing  expenses  decreased  $1,060,000,  or 9.6%,  from
$11,103,000  in the first three  quarters of fiscal 1997 to  $10,043,000  in the
first  three  quarters  of fiscal  1998.  This

                                       13

<PAGE>

decrease was mainly due to the  restructuring  resulting in reduced staffing and
closed locations,  and reduced marketing  expense.  The Company also experienced
lower compensation expense related to employee attrition.


General and Administrative Expenses

General and administrative  expenses decreased $7,000, or 1.1%, from $631,000 in
the third  quarter of fiscal  1997 to  $624,000  in the third  quarter of fiscal
1998. General and  administrative  expenses  decreased  $156,000,  or 5.2%, from
$2,993,000 in the first three quarters of fiscal 1997 to $2,837,000 in the first
three  quarters of fiscal  1998.  The  decrease  in general  and  administrative
expenses was mainly due to a reduction of expense related to the  restructuring.
As a percentage of net revenues,  general and administrative  expenses were 7.6%
and 6.5% in the third  quarter  of  fiscal  1998 and  1997,  respectively.  As a
percentage of net revenues,  general and administrative  expenses were 10.2% and
10.1% in the first three  quarters of fiscal  1998 and 1997,  respectively.  The
increase in general and administrative  expenses as a percentage of net revenues
was mainly  attributable  to the reduced level of revenues during the transition
to adding the Baan product line.



Product Development Expense

Product development expense decreased 3.9% from $621,000 in the third quarter of
fiscal 1997 to $597,000 in the third quarter of fiscal 1998. Product development
expense,  exclusive  of  reductions  for  capitalized  software,   decreased  by
$332,000,  and capitalized  software decreased by $308,000.  Product development
expense  increased  16.6% from  $1,817,000 in the first three quarters of fiscal
1997 to  $2,118,000  in the first  three  quarters of fiscal  1998.  The Company
capitalizes costs in accordance with Statement of Financial  Accounting Standard
(SFAS) No. 86. The Company capitalized  $737,000 of product development costs in
the third  quarter of fiscal 1998 compared to $1,045,000 in the third quarter of
fiscal 1997. The Company capitalized  $2,800,000 of product development costs in
the first  three  quarters of fiscal 1998  compared to  $3,207,000  in the first
three  quarters of fiscal 1997.  With the  completion  of two major  development
projects and with the cessation of  development  of software  products for large
customers which software is now supplied through the relationship with Baan, the
Company has reduced the level of investment in product development.


Restructuring and Other Charges

In the second  quarter of fiscal  1998,  the  Company  recorded a  restructuring
charge of $6,836,000 related to entering into a new distributor  arrangement for
manufacturing  software,  and a  reduction  of costs  focused on  improving  the
Company's financial

                                       14

<PAGE>

performance.  Approximately  $6,600,000  of the  total  charge  has been paid or
expensed as of August 31, 1998. The Company  anticipates the remaining liability
of approximately $200,000 to be paid in the fourth quarter of fiscal 1998, which
will be financed through working capital.


Other Income\Expense-Net

Other  income\expense-net was $39,000 of expense for the third quarter of fiscal
1997 compared to $165,000 of expense for the third quarter of fiscal 1998. Other
income\expense-net  was  $176,000  of expense  for the first  three  quarters of
fiscal 1997  compared  to  $481,000  of expense for the first three  quarters of
fiscal  1998.  The  increase in the level of expense was mainly the result of an
increase  in  interest  expense as a result of  increased  borrowings  under the
Company's borrowing facility.

Income Tax

No income tax benefit was recorded  for the third  quarter of fiscal 1998 or the
third  quarter of fiscal  1997.  A small tax  expense of $33,000  (for state and
local taxes) and no income tax benefit was recorded for the first three quarters
of fiscal 1998 compared to a benefit of $883,000 for the first three quarters of
fiscal 1997. At August 31, 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.


Liquidity and Capital Resources


At August 31, 1998, the Company had cash and marketable  securities  aggregating
$8,000.  During the first three quarters of fiscal 1998, the Company's operating
activities  provided  $1,656,000 of cash compared to using  $160,000 of cash for
the same period of the prior year.  This  decrease in the use of cash was mainly
attributable to the Company's  restructuring of its operations and the reduction
in accounts  receivable.  On September 29, 1998, the Company received payment in
full of $307,000 on a note from EMS  Solutions,  Inc. which was previously to be
paid over a six year term beginning January 1, 1998.

Investing  activities  used cash of  $2,712,000  in the first three  quarters of
fiscal 1998 compared to using  $3,901,000 of cash in the first three quarters of
fiscal 1997. The principal use of the cash in the first three quarters of fiscal
1998 was $2,800,000 for capitalized product  development.  The principal uses of
cash in the  first  three  quarters  of  fiscal  1997  included  $3,207,000  for
capitalized  product  development  and $1,101,000 for purchases of equipment and
furniture.

                                       15

<PAGE>

Financing  activities provided $1,050,000 of cash in the first three quarters of
fiscal  1998  compared  with  providing  $3,602,000  of cash in the first  three
quarters of fiscal 1997.  The cash provided in fiscal 1998 mainly  reflected the
equity contribution from the Company's preferred stock offering.  (See Note 5 to
the Consolidated Financial Statements) As of August 31, 1998, the Company, based
on the level of of eligible accounts receivables, had $1,828,000 of availability
under its then $6,000,000 line of credit.  As of September 30, 1998, the Company
had $569,000 of availability under its line of credit.

The Company's credit  agreement with Foothill Capital  Corporation also contains
certain restrictive  covenants relating to income (EBITDA),  tangible net worth,
and level of capital  expenditures.  On October 6, 1998, the Company amended its
loan facility to reset the tangible net worth and EBITDA  covenants to levels in
keeping with the  Company's  current  financial  position.  The  amendment  also
restructured  the loan  facility to increase  the term loan by $776,553  with an
amortization period of 36 months and to reduce the revolving line of credit to a
limit of  $5,000,000.  These  changes will  provide the Company with  additional
short-term working capital.  In order to meet financial covenants in the future,
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.  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 at current levels.


Year 2000

The  Company  utilizes a  combination  of its own  software  and  custom-written
systems for running its own operations. Based on its own evaluation, the Company
believes that it will incur no significant  costs  associated with ensuring year
2000 compliance of its internal  systems.  Since the release of version 5.1.2 of
the Company's  software  product,  the Company's  software product has been year
2000 compliant.

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

IN  ADDITION  TO  HISTORICAL  INFORMATION,  THIS  QUARTERLY  REPORT ON FORM 10-Q
CONTAINS  "FORWARD-LOOKING  STATEMENTS",  INCLUDING INFORMATION REGARDING FUTURE
ECONOMIC PERFORMANCE AND PLANS AND OBJECTIVES OF MANAGEMENT. STATEMENTS INCLUDED
IN THIS  QUARTERLY  REPORT ON FORM 10-Q 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


                                       16
<PAGE>

MATERIALLY  FROM  THOSE  REFLECTED  IN  THE  FORWARD-LOOKING   STATEMENTS.  SUCH
UNCERTAINTIES  AND RISKS  INCLUDE,  BUT ARE NOT LIMITED TO,  PRODUCT  DEMAND AND
MARKET  ACCEPTANCE  FOR THE COMPANY'S  AND THIRD PARTY  SUPPLIED  PRODUCTS;  THE
COMPANY'S  ABILITY  TO  SUCCESSFULLY   IMPLEMENT  ITS  RESTRUCTURING  PLAN;  THE
COMPANY'S ABILITY TO SUCCESSFULLY TRANSITION TO THE BAAN PRODUCT OFFERINGS;  THE
IMPACT OF  COMPETITIVE  PRODUCTS;  THE COMPANY'S  ABILITY TO MAINTAIN  EFFICIENT
MARKETING  AND  DISTRIBUTION  OPERATIONS  WITH RESPECT TO NEW  PRODUCTS;  FUTURE
ECONOMIC, COMPETITIVE AND MARKET CONDITIONS; THE COMPANY'S ABILITY TO RETAIN KEY
TECHNICAL  AND  MANAGEMENT  PERSONNEL;  THE  COMPANY'S  SUCCESS IN IMPROVING ITS
FINANCIAL PERFORMANCE;  TO THE EXTENT NECESSARY, THE COMPANY'S ABILITY TO SECURE
AMENDMENTS,  WAIVERS  AND/OR  REFINANCING  OR  EXTENSION  OF ITS LINE OF CREDIT;
TIMING OF PRODUCT  DEVELOPMENT;  PRODUCT  PRICING AND OTHER FACTORS  DETAILED IN
THIS QUARTERLY REPORT ON FORM 10-Q AND IN OTHER FILINGS MADE BY THE COMPANY WITH
THE SECURITIES AND EXCHANGE COMMISSION.


Item  3.  Quantitative and Qualitative Disclosure about Market Risk

                Not Applicable

                                       17

<PAGE>

Part II - Other Information

Item 2. Changes in Securities and Use of Proceeds

          (a)  None

          (b) On August 28, 1998 the Company sold and issued 1,005 shares of its
              Series A 8% Convertible  Redeemable Preferred Stock (the "Series A
              Preferred")  at a price of $1,000 per share,  for aggregate  gross
              proceeds of $1 million. Holders of Series A Preferred are entitled
              to receive an 8%  cumulative  dividend  ($80 per share) before any
              dividends may be paid on the Common  Stock.  Also, in the event of
              liquidation  of the  Company  holders  of Series A  Preferred  are
              entitled to receive $1,000 per share,  plus all accrued but unpaid
              dividends, before any payment can be made on the Common Stock.

          (c) On August 28,  1998,  the Company  sold and issued 1,005 shares of
              its Series A 8% Convertible  Redeemable Preferred Stock ("Series A
              Preferred") at a price of $1,000 per share. Series A Preferred was
              sold pursuant to a Preferred Stock Placement Agreement between the
              Company  and  Taglich  Brothers,   D'Amadeo,   Wagner  &  Company,
              Incorporated  ("Taglich")  in which Taglich agreed to use its best
              efforts to sell, on a private placement basis, up to $5,000,000 of
              Series A Preferred.  The 1,005  shares of Series A Preferred  were
              sold to  investors  qualifying  as  "accredited  investors"  under
              Regulation  D of the  Securities  Act of  1933,  as  amended  (the
              "Securities Act").

              The aggregate offering price was $1 million. For its services, the
              Company  paid  Taglich  8% of gross  proceeds  plus  five (5) year
              warrants  to purchase  shares of Common  Stock equal to 10% of the
              total number of shares of Common Stock  issuable  upon exercise of
              the  Series  A  Preferred  Stock  sold in the  Private  Placement.
              Exemption from  registration  for the sale is claimed  pursuant to
              Section 4 (2) and  Regulation  D under  the  Securities  Act.  The
              securities  were sold is a private  placement  only to "accredited
              investors" as defined in Regulation D.

              The Series A Preferred  is  convertible  into  Common  Stock at an
              initial  exercise price of $3.50 per share,  with the value of the
              Series A Preferred Stock pegged at $1,000 per share for conversion
              purposes.  The  exercise  price of $3.50 may be reduced in certain
              circumstances to prevent dilution.




                                     Page 18

<PAGE>


Item 6.   Exhibits and Reports on Form 8-K

          (a) Exhibits

                  3.1 Restated Articles of Incorporation

                  3.2 Articles of Amendment  relating to Series A 8% Convertible
                  Redeemable Preferred Stock

                  4.1 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 , 1998.

                  4.2 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.

                  10.1 Preferred Stock Placement  Agreement,  dated as of August
                  28,  1998  between  Effective  Management  Systems,  Inc.  and
                  Taglich Brothers, D'Amadeo, Wagner & Company, Incorporated

                  10.2 Loan  Agreement  by and between EMS  Solutions,  Inc. and
                  Effective Management Systems, Inc. dated January 1, 1998.

                  10.3  Special  Compensation  and  Separation  Agreement by and
                  between  Jeffrey J. Fossum and Effective  Management  Systems,
                  Inc. effective January 1, 1998.

                  10.4  Special  Compensation  and  Separation  Agreement by and
                  between Wayne T. Wedell and Effective Management Systems, Inc.
                  effective January 1, 1998.

                  27 Financial Data Schedule [EDGAR version only]



         (b)   Reports on Form 8-K

               None







                                     Page 19

<PAGE>


                                   SIGNATURES


Pursuant  to the  requirements  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.


                                            EFFECTIVE MANAGEMENT SYSTEMS, INC.




October 15, 1998                    By:  /s/ MICHAEL D. DUNHAM
                                         Michael D. Dunham
                                         President (principal executive officer)



                                    By:  /s/JEFFREY J. FOSSUM
                                         Jeffrey J. Fossum
                                         Chief Financial Officer and Assistant
                                         Treasurer (principal financial and 
                                         accounting officer)




                                     Page 20

<PAGE>
                                 EXHIBIT INDEX


EXHIBIT NO.         DESCRIPTION

      3.1   Restated Articles of Incorporation

      3.2   Articles of Amendment relating to Series A 8% Convertible Redeemable
            Preferred Stock

      4.1   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 , 1998.

      4.2   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.

      10.1  Preferred  Stock  Placement  Agreement,  dated as of August 28, 1998
            between  Effective  Management  Systems,  Inc. and Taglich Brothers,
            D'Amadeo, Wagner & Company, Incorporated

      10.2  Loan  Agreement by and between EMS  Solutions,  Inc.  and  Effective
            Management Systems, Inc. dated January 1, 1998.

      10.3  Special Compensation and Separation Agreement by and between Jeffrey
            J. Fossum and Effective  Management Systems,  Inc. effective January
            1, 1998.

      10.4  Special  Compensation and Separation  Agreement by and between Wayne
            T. Wedell and Effective  Management Systems,  Inc. effective January
            1, 1998.

      27    Financial Data Schedule [EDGAR version only]