Edgar Filing: STEWART & STEVENSON SERVICES INC

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )

Filed by the Registrant / /
Filed by a party other than the Registrant / /

Check the appropriate box:
/ / Preliminary Proxy Statement
/ / CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-12

STEWART & STEVENSON SERVICES, INC.
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(Name of Registrant as Specified In Its Charter)

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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

/X/ No fee required.

/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.

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pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
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/ / Fee paid previously with preliminary materials.

/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

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STEWART & STEVENSON SERVICES, INC.
2707 NORTH LOOP WEST
P.O. BOX 1637
HOUSTON, TEXAS 77251-1637

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 11, 2002

Dear Shareholder:

The Annual Meeting of Shareholders of Stewart & Stevenson Services, Inc.
(the "Company") will be held at 10:00 a.m. on Tuesday, June 11, 2002, in
the Doubletree Hotel, 2001 Post Oak Blvd., Houston, Texas, for the
following purposes:

1. Election of four directors to the Board of Directors.

2. Approval of the Amended and Restated 1996 Director Stock Plan.

3. Ratification of Ernst & Young LLP as the Company's independent
auditors for the fiscal year ending January 31, 2003.

Only record holders of our Common Stock at the close of business on April
24, 2002 will be entitled to vote at the meeting or any adjournment
thereof.

IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING. EVEN IF
YOU PLAN TO ATTEND, WE URGE YOU TO COMPLETE AND SIGN THE PROXY CARD AND
RETURN IT IN THE POSTAGE PAID ENVELOPE ENCLOSED IN THIS PACKAGE. The
giving of such proxy does not affect your right to vote in person if you
attend this meeting. The prompt return of your signed proxy will aid the
Company in reducing the expense of additional proxy solicitation.

BY ORDER OF THE BOARD OF DIRECTORS

/s/ CARL B. KING
CARL B. KING
MAY 3, 2002 SENIOR VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL

YOUR VOTE IS IMPORTANT. PLEASE DATE, SIGN AND PROMPTLY RETURN YOUR PROXY SO THAT
YOUR SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES. THE GIVING OF SUCH
PROXY DOES NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IN THE EVENT YOU ATTEND THE
MEETING. YOUR PROXY MAY BE REVOKED AT ANY TIME BEFORE IT IS VOTED.

STEWART & STEVENSON SERVICES, INC.
2707 NORTH LOOP WEST
P.O. BOX 1637
HOUSTON, TEXAS 77251-1637

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PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS
JUNE 11, 2002, AND ADJOURNMENTS

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

APPROXIMATE DATE PROXY MATERIAL FIRST SENT TO SHAREHOLDERS:
MAY 3, 2002

SOLICITATION, VOTING AND REVOCABILITY OF PROXIES

The proxy furnished herewith, for use only at the Annual Meeting of
Shareholders to be held at 10:00 a.m. on Tuesday, June 11, 2002, in the
Doubletree Hotel, 2001 Post Oak Blvd., Houston, Texas, and any and all
adjournments thereof, is solicited by the Board of Directors of Stewart &
Stevenson Services, Inc. (the "Company"). Such solicitation is being made by
mail and may also be made in person or by telephone by officers, directors and
regular employees of the Company, and arrangements may be made with brokerage
houses or other custodians, nominees and fiduciaries to send proxy material to
their principals. In addition, the Company has retained Morrow & Co., Inc., a
professional proxy solicitation firm, to assist in the solicitation of proxies.
The Company has agreed to reimburse Morrow & Co., Inc. for expenses incurred in
connection with the solicitation and to pay a solicitation fee of approximately
$4,000. The Company will pay all expenses incurred in this solicitation of
proxies.

As of the date of these proxy materials, the Board of Directors is aware
of the following matters that will be considered at the meeting:

1. The election of four directors to the Board of Directors of the
Company.

2. The approval of the Amended and Restated 1996 Director Stock Plan.

3. The ratification of Ernst & Young LLP as the Company's independent
auditors for the fiscal year ending January 31, 2003.

The presence of the holders of a majority of the issued and outstanding
shares of Common Stock entitled to vote, either in person or represented by
proxy, is necessary to constitute a quorum for the transaction of business at
the Annual Meeting. Proxies that withhold authority to vote for a nominee or
abstain from voting on any matter are counted for the purpose of determining
whether a quorum is present. Broker non-votes, which may occur when a broker or
nominee has not received timely voting instructions on certain proposals, are
not counted for the purpose of determining whether a quorum is present. If there
are not

sufficient shares represented at the meeting to constitute a quorum, the meeting
may be adjourned until a specified future date to allow the solicitation of
additional proxies.

Directors are elected by a plurality of the votes cast at the meeting. The
four nominees that receive the greatest number of votes will be elected even
though the number of votes received may be less than a majority of the shares
represented in person or by proxy at the meeting. Proxies that withhold
authority to vote for a nominee and broker non-votes will not prevent the
election of such nominee if other shareholders vote for such a nominee.

The approval of the Amended and Restated 1996 Director Stock Plan requires
the affirmative vote of a majority of the shares represented in person or by
proxy at the meeting. Proxies that abstain from voting on this proposal have the
same effect as a vote against this proposal. Broker non-votes will not have any
effect on this proposal.

The ratification of Ernst & Young LLP as the Company's independent
auditors requires the affirmative vote of a majority of the shares represented
in person or by proxy at the meeting. Proxies that abstain from voting on this
proposal have the same effect as a vote against this proposal. Broker non-votes
will not have any effect on this proposal.

Any shareholder executing a proxy retains the right to revoke it by
signing and delivering a proxy bearing a later date, by giving notice of
revocation in writing to the Secretary of the Company at any time prior to its
use, or by voting in person at the meeting. All properly executed proxies
received by the Company and not revoked will be voted at the meeting, or any
adjournment thereof, in accordance with the specifications of the shareholder.
IF NO INSTRUCTIONS ARE SPECIFIED ON THE PROXY, SHARES REPRESENTED THEREBY WILL
BE VOTED FOR THE ELECTION OF THE FOUR DIRECTOR NOMINEES DESCRIBED HEREIN, FOR
THE APPROVAL OF THE AMENDED AND RESTATED 1996 DIRECTOR STOCK PLAN AND FOR THE
RATIFICATION OF ERNST & YOUNG LLP AS THE COMPANY'S INDEPENDENT AUDITORS FOR THE
FISCAL YEAR ENDING JANUARY 31, 2003. PROXIES ALSO GRANT DISCRETIONARY AUTHORITY
AS TO MATTERS PRESENTED AT THE MEETING OF WHICH THE BOARD OF DIRECTORS HAD NO
NOTICE ON THE DATE HEREOF, APPROVAL OF THE MINUTES OF THE PRIOR ANNUAL MEETING
AND MATTERS INCIDENT TO THE CONDUCT OF THE MEETING.

VOTING SECURITIES AND OWNERSHIP THEREOF
BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

At the close of business on April 24, 2002, the record date for the 2002
Annual Meeting of Shareholders, the Company had outstanding 28,465,677 shares of
Common Stock, without par value. Each outstanding share of Common Stock is
entitled to one vote with respect to each of the four director positions, one
vote with respect to the approval of the Amended and Restated 1996 Director
Stock Plan and one vote with respect to the ratification of Ernst & Young LLP as
the Company's independent auditors for the fiscal year ending January 31, 2003.
Cumulative voting is not permitted under the Company's Third Restated Articles
of Incorporation. Shareholders of record at the close of business on April 24,
2002 are entitled to vote at, or execute proxies relating to, the 2002 Annual
Meeting of Shareholders.

The following table lists the beneficial ownership of shares of the
Company's Common Stock by (i) all persons and groups known by the Company to own
beneficially more than 5% of the outstanding shares of the Company's Common
Stock, (ii) each director and nominee, (iii) each person who held the office of
Chief Executive Officer during the last fiscal year and the four additional
highest compensated executive officers who were serving as executive officers on
January 31, 2002, and (iv) all directors and officers as a group. None of the
directors, nominees or officers of the Company owned any equity security issued
by the Company's subsidiaries other than director's qualifying shares.
Information with respect to officers, directors and their families is as of
February 28, 2002 and is based on the books and records of the Company and
information obtained from each individual. Information with respect to
institutional shareholders is based upon the Schedule 13D or Schedule 13G filed
by such shareholders with the Securities and Exchange Commission. Unless
otherwise stated, the business address of each individual or group is the same
as the address of the Company's principal executive office.

AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP
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SOLE SHARED SOLE SHARED TOTAL PERCENT
NAME OF VOTING VOTING INVESTMENT INVESTMENT BENEFICIAL OF
INDIVIDUAL OR GROUP POWER POWER POWER POWER OWNERSHIP CLASS
--------------------- ---------- ----------- ----------- ------------ ------------ -----------

5% OR GREATER SHAREHOLDERS

Barclays Global Fund Advisors
45 Fremont Street
San Francisco, CA 94105 ................. 1,846,566 -0- 1,900,936 -0- 1,900,936 6.7%

J. L. Kaplan Associates, L.L.C ..........
222 Berkeley Street, Suite 2010
Boston, MA 02116 ........................ 1,423,900 -0- 1,851,785 -0- 1,851,785 6.5%

Stevenson Voting Group (1)
c/o Donald E. Stevenson
P.O. Box 1637
Houston, TX 77251 ....................... 1,699,679 1,976 1,699,679 1,976 1,773,855 (2) 6.2%

FMR Corp. ...............................
82 Devonshire Street
Boston, MA 02109 ........................ 210,400 -0- 1,517,230 -0- 1,517,230 5.3%

DIRECTORS AND NOMINEES
Donald E. Stevenson ..................... 473,596 1,976 473,596 1,976 504,672 (3) 1.8%
Robert S. Sullivan ...................... 3,376 -0- 3,376 -0- 13,376 (4) *
Khleber V. Attwell ...................... 5,850 -0- 5,850 -0- 12,850 (5) *
Darvin M. Winick ........................ 3,287 -0- 3,287 -0- 9,287 (6) *
Howard Wolf ............................. 7,287 -0- 7,287 -0- 13,287 (6) *
Michael L. Grimes ....................... 21,390 -0- 21,390 -0- 98,640 (7) *
Monroe M. Luther ........................ 6,266 -0- 6,266 -0- 9,266 (8) *
Charles R. Ofner ........................ 1,266 -0- 1,266 -0- 4,266 (8) *
Max L. Lukens ........................... 4,342 -0- 4,342 -0- 7,342 (8) *
C. Jim Stewart III ...................... 13,890 7,250 19,190 1,950 59,365 (9) *

NON-DIRECTOR EXECUTIVE OFFICERS
John H. Doster .......................... 12,000 -0- 12,000 -0- 42,000 (10) *
Richard M. Wiater ....................... 5,000 -0- 5,000 -0- 8,500 (11) *
Carl B. King ............................ -0- -0- -0- -0- 5,000 (12) *
Wade F. Sperry .......................... -0- -0- -0- -0- 5,000 (12) *

ALL DIRECTORS AND EXECUTIVE
OFFICERS

(23 Persons) ............................ 564,240 16,476 572,840 5,876 827,911 (13) 2.9%

* Less than 1%
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(1) According to an amended Schedule 13D filed with the Securities and
Exchange Commission, Donald E. Stevenson, Keith T. Stevenson, the Donald
E. Stevenson Testamentary Trust (of which Donald E. Stevenson is trustee)
and the Estate of Madlin Stevenson (of which Donald E. Stevenson and Keith
T. Stevenson are co-executors) are parties to a voting agreement. The
voting agreement provides that the parties thereto will agree how to vote
all of the shares of Common Stock currently owned by those parties (and
any after acquired shares of Common Stock if the addition is approved by
the holders of a majority of the shares subject to the voting agreement at
that time) on any matter submitted by the Company to a shareholder vote.
If the parties to the voting agreement fail to unanimously agree how to
vote such shares, such parties agree to vote in accordance with the wishes
of Donald E. Stevenson. The voting agreement will terminate on January 31,
2010 unless earlier terminated by a majority vote of the shares subject to
the voting agreement. The shares of Common Stock described as beneficially
owned by Donald E. Stevenson are included in the Stevenson Voting Group.
(2) Includes options to purchase 72,200 shares of Common Stock.
(3) Includes options to purchase 29,100 shares of Common Stock.
(4) Includes options to purchase 10,000 shares of Common Stock.
(5) Includes options to purchase 7,000 shares of Common Stock.
(6) Includes options to purchase 6,000 shares of Common Stock.
(7) Includes options to purchase 77,250 shares of Common Stock.
(8) Includes options to purchase 3,000 shares of Common Stock.
(9) Includes options to purchase 38,225 shares of Common Stock.
(10) Includes options to purchase 30,000 shares of Common Stock.
(11) Includes options to purchase 3,500 shares of Common Stock.
(12) Includes options to purchase 5,000 shares of Common Stock.
(13) Includes options to purchase 249,275 shares of Common Stock.

ELECTION OF DIRECTORS

The Board of Directors of the Company consists of ten directors divided
into two classes of three members and one class of four members. At each Annual
Meeting of Shareholders one class is elected to hold office for a term of three
years. Members of the other classes continue to serve for the remainder of their
respective terms. In accordance with the Bylaws of the Company, a director must
retire as of the date of the Annual Meeting of Shareholders first occurring
following such director's 73rd birthday. The persons named below have been
nominated for election to the Board of Directors at the Annual Meeting to serve
as directors until 2005.

Each of the nominees currently serves as a director of the Company and has
consented to be named herein and to serve if elected. The Board of Directors
believes that each of the nominees will be willing and able to serve. If any
such person is unable to serve for good cause, or is unwilling to serve for any
reason, proxies will be voted for the election of another person selected by the
Corporate Governance Committee of the Board of Directors. THE BOARD OF DIRECTORS
RECOMMENDS THAT THE SHAREHOLDERS ELECT THE NOMINEES LISTED BELOW. UNLESS
OTHERWISE SPECIFIED, ALL PROPERLY EXECUTED PROXIES RECEIVED BY THE COMPANY WILL
BE VOTED AT THE ANNUAL MEETING OR ANY ADJOURNMENT THEREOF FOR THE ELECTION OF
THE FOUR PERSONS WHOSE NAMES ARE LISTED IN THE FOLLOWING TABLE AS NOMINEES FOR
DIRECTORS WHOSE TERM WILL EXPIRE IN 2005. PROXIES CANNOT BE VOTED FOR A GREATER
NUMBER OF PERSONS THAN THE NUMBER OF NOMINEES NAMED BELOW.

PERSONS NOMINATED FOR DIRECTOR WHOSE TERM WILL EXPIRE IN 2005

DIRECTOR
NAME AND PRINCIPAL OCCUPATION AGE SINCE
-------------------------------------------------------------------------------- ----- ----------

KHLEBER V. ATTWELL (1)(3)(4) ................................................... 71 1998

Management consulting (private practice). Previously, partner
with Ernst & Young LLP

C. JIM STEWART III ............................................................. 53 2001

Vice President of the Company

DARVIN M. WINICK, PH.D. (1)(3)(4) .............................................. 72 1999

President of Winick Consultants, Organizational Consultants
Director for Maxim Bank. Senior Research
Fellow at The University of Texas at Austin

HOWARD WOLF (2)(4) ............................................................. 67 1999

Senior Partner of the international law firm of
Fulbright & Jaworski LLP. Serves as a director of
Offshore Logistics, Inc. of Lafayette, Louisiana

THE FOLLOWING PERSONS HAVE BEEN PREVIOUSLY ELECTED AS DIRECTORS OF THE COMPANY
AND WILL CONTINUE TO SERVE AFTER THE ANNUAL MEETING.

DIRECTORS WHOSE TERM EXPIRES IN 2003

DIRECTOR
NAME AND PRINCIPAL OCCUPATION AGE SINCE
------------------------------------------------------------------------------ ----- ----------

MICHAEL L. GRIMES (1) ........................................................ 52 1999

President and Chief Executive Officer of the Company
Previously, President of Cooper Cameron Power Generation,
President of Cooper Energy Services,and General Manager
of various operations within the General Electric Company

MONROE M. LUTHER (2)(3) ...................................................... 61 2000

Chairman of Wind River Capital Company, Chairman of The
Prague Post, and Chairman of Bigger Than That
Productions. Founder and former Chief Executive Officer
of Eagle Management & Trust Company. Member of Advisory
Board of MCG Dulworth

CHARLES R. OFNER (2)(4) ...................................................... 56 2000

Private Investor. Previously, Senior Vice President of
R&B Falcon Corporation until its merger with Transocean
Sedco Forex, Inc. on January 31, 2001. Previously, Senior
Vice President of Reading & Bates Corporation

DIRECTORS WHOSE TERM EXPIRES IN 2004

DIRECTOR
NAME AND PRINCIPAL OCCUPATION AGE SINCE
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DONALD E. STEVENSON (1) ................................................................ 58 1975

Vice President of the Company

ROBERT S. SULLIVAN (1) ................................................................. 58 1992

Chairman of the Board of the Company. Dean, Kenan-Flagler Business School of
the University of North Carolina at Chapel Hill. Previously, Director of the
IC2 Institute, The University of Texas at Austin, Austin, Texas, and Dean of
the Graduate School of Industrial Administration, Carnegie Mellon University,
Pittsburgh, Pennsylvania

MAX L. LUKENS (2)(3) ................................................................... 53 2000

Business consultant and investor. Previously, Chairman of the Board,
President and Chief Executive Officer of Baker Hughes Incorporated

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(1) Member of Executive Committee.
(2) Member of Compensation and Management Development Committee.
(3) Member of Audit Committee.
(4) Member of Corporate Governance Committee.

Each nominee and current director has been employed for more than five
years either as shown in the foregoing table or in various executive capacities
with the Company. Mr. Khleber V. Attwell, Mr. Darvin M. Winick and Mr. Howard
Wolf were last elected as directors at the 1999 Annual Meeting.

MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors held seven meetings during the fiscal year ended
January 31, 2002 ("Fiscal 2001"). During Fiscal 2001, no director attended fewer
than 75% of the aggregate of (a) the total number of meetings of the Board of
Directors (held during the period for which he was a director) and (b) the total
number of meetings held by all committees of the Board of Directors on which he
served (during the periods that he served).

The Audit Committee of the Board of Directors consists of four independent
(as defined in Rule 4200(a)(15) of the National Association of Securities
Dealers' listing standards) non-employee directors. The Audit Committee reviews
with the Company's independent auditors the plan, scope and results of the
annual audit; reviews with the Company's independent auditors and internal
auditors the procedures for and results of internal auditing and controls; and
reviews with management the effectiveness of various operational policies and
controls. The Audit Committee recommends to the Board of Directors the
employment of independent auditors and considers, in general, the audit services
to be performed by such independent auditors and the possible effect on the
independence of the independent auditors from the performance of non-audit
services. The Board of Directors has adopted a written charter governing the
responsibilities of the Audit Committee, a copy of which is attached as Exhibit
A to these proxy materials. The Audit Committee held thirteen meetings during
Fiscal 2001.

The Compensation and Management Development Committee recommends the total
compensation payable by the Company to its executive officers, subject to
approval by those members of the Board of Directors that are not and never have
been an officer of the Company or its subsidiaries; grants options pursuant to
the option plans relating to officers and employees; conducts such
investigations and studies as it deems necessary; and considers management
succession and related matters. The Compensation and Management Development
Committee held three meetings during Fiscal 2001.

The Corporate Governance Committee selects nominees for the Board of
Directors of the Company. The Corporate Governance Committee considers nominees
submitted by

the members of the Board of Directors, the officers of the Company and the
Company's shareholders. Nominees for the Board of Directors may be submitted to
the Chairman of the Corporate Governance Committee at the Company's executive
offices for consideration by the Corporate Governance Committee. In addition,
the Corporate Governance Committee administers the principles and practices
established by the Board of Directors. The Corporate Governance Committee held
three meetings during Fiscal 2001.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company's Compensation and Management Development Committee (the
"Compensation Committee") consists of Messrs. Charles R. Ofner, Max L. Lukens,
Monroe M. Luther and Howard Wolf, all of whom are non-employee directors. None
of the Compensation Committee members has served as an officer of the Company,
and none of the Company's executive officers has served as a member of a
compensation committee or board of directors any other entity that has an
executive officer serving as a member of the Company's Board of Directors.

COMPENSATION OF DIRECTORS

During Fiscal 2001, directors whose principal occupation is other than
employment with the Company were compensated at the rate of $15,000 per year
plus $1,000 for each meeting of the Board of Directors and each committee
meeting attended in person and $500 for each meeting attended by telephone. Each
committee chairman received an annual fee of $4,000. The Chairman of the Board
received additional compensation in the amount of $18,000. The directors were
also reimbursed for any out-of-pocket expenses incurred to attend meetings. The
Company has a retirement plan for directors, but accrual of benefits thereunder
terminated after the 1997 Annual Meeting. Under such retirement plan,
non-employee directors, including those directors that are retired officers of
the Company, with 60 months of continuous service on the Board of Directors will
receive $1,000 per month for a period equivalent to service on the Board of
Directors up to a maximum of 120 months, commencing on the month following their
70th birthday or the date such director ceases to serve on the Board, whichever
is later.

During Fiscal 2001, each director who was not an officer or employee of
the Company participated in the 1996 Director Stock Plan (the "1996 Plan").
Under the 1996 Plan, such directors received, on the date of the Annual Meeting
in 2001, (i) the number of shares of the Company's Common Stock determined by
dividing (A) the sum of $15,000 by (B) the fair market value of a share of the
Company's Common Stock, and (ii) options to purchase 3,000 shares of the
Company's Common Stock. The options were granted at the closing price on the
date of grant and will become exercisable on the first anniversary of the grant.
All options granted under the 1996 Plan expire on the tenth anniversary of the
grant.

AMENDED AND RESTATED 1996 DIRECTOR STOCK PLAN

On April 9, 2002, the Board of Directors adopted the Stewart & Stevenson
Services, Inc. Amended and Restated 1996 Director Stock Plan (the "Amended and
Restated 1996 Plan"), subject to the approval thereof by the shareholders of the
Company. The Amended and Restated 1996 Plan was adopted primarily (i) because
most of the shares available for grant under the existing 1996 Director Stock
Plan had been granted, and (ii) to maintain market-rate benefits for our
non-employee directors and allow us to continue to attract high-quality
independent non-employee directors. The Amended and Restated 1996 Plan is
intended to encourage the ownership of the Company's Common Stock by the
independent directors of the Company and to provide an additional means for the
Company to attract and retain qualified persons to act as independent directors
of the Company. THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS APPROVE
THE AMENDED AND RESTATED 1996 PLAN. UNLESS OTHERWISE INDICATED, ALL PROPERLY
EXECUTED PROXIES RECEIVED BY THE COMPANY WILL BE VOTED FOR SUCH APPROVAL AT THE
ANNUAL MEETING OR ANY ADJOURNMENT THEREOF. The summary of the Amended and
Restated 1996 Plan set forth below is qualified in its entirety by reference to
the Amended and Restated 1996 Plan, a copy of which is included as Exhibit B to
these proxy materials.

ELIGIBILITY; DIRECTOR STOCK AWARDS; GRANT OF OPTIONS

Each director that is not an officer or employee of the Company or one of
its subsidiaries on the date of grant is eligible to participate in the Amended
and Restated 1996 Plan. On the date hereof, there are seven directors eligible
to participate in the Amended and Restated 1996 Plan.

On the date of each Annual Meeting of Shareholders, the Amended and
Restated 1996 Plan provides for the automatic award and issue to each eligible
director who is elected to serve as a director at, or whose term as director
continues after, such meeting, the number of shares of the Company's Common
Stock determined by dividing (i) the sum of $15,000 by (ii) the fair market
value of a share of the Company's Common Stock on the date of such meeting.

Also on the date of each Annual Meeting of Shareholders, the Amended and
Restated 1996 Plan provides for the automatic grant of an option to purchase
5,000 shares of the Company's Common Stock to each eligible director who is
elected to serve as a director at, or whose term as director continues after,
such meeting. The Board of Directors may, in its discretion by majority vote,
increase or decrease the number of shares subject to such automatic grant.
Additionally, the Amended and Restated 1996 Plan provides that the Board of
Directors may, from time to time in their discretion, grant one or more eligible
director(s) an additional option to purchase shares of the Company's Common
Stock.

DESCRIPTION OF OPTIONS

Options granted pursuant to the Amended and Restated 1996 Plan have an
exercise price equal to the last transaction price reported by the National
Association of Securities Dealers Automated Quotation, National Market System on
the date of grant, or if there is no transaction on the date of grant, on the
first preceding date on which there is a transaction in the Company's Common
Stock. The Company will not (i) decrease the exercise price of any option

after the date of grant or (ii) permit outstanding options to be surrendered to
the Company as consideration for the grant of new options with a lower exercise
price.

Such options vest and become exercisable on the first anniversary of the
grant and become fully vested and immediately exercisable if the recipient dies,
fails to stand for re-election or be re-elected, or retires after serving at
least 60 consecutive calendar months as a director of the Company. Options also
become fully vested and immediately exercisable if the Company merges,
consolidates or combines with another company and the Company is not the
surviving entity. All options granted pursuant to the Amended and Restated 1996
Plan terminate on the tenth anniversary of the date of grant or one year after
recipient ceases to be a director of the Company, whichever first occurs. The
exercise price under any option may be paid either in cash or by delivering
certificates representing shares of the Company's Common Stock having a market
value on the date of exercise equal to the exercise price.

FEDERAL INCOME TAX CONSEQUENCES

The options are not intended to qualify for any special tax treatment
under any provision of the Internal Revenue Code of 1986, as amended. The grant
of options under the Amended and Restated 1996 Plan will not result in taxable
income to the recipient or a deduction to the Company on the date of grant. The
recipient will be deemed to have received taxable income, and the Company will
be entitled to a deduction equal to the difference between the market price and
the exercise price at the time an option is exercised.

AMENDMENTS

The Board of Directors may amend, suspend or terminate the Amended and
Restated 1996 Plan at any time. However, no such amendment, suspension or
termination will affect any outstanding stock award or option without the
holder's consent.

The following table sets forth the estimated annual benefits that will be
received by each of the persons or groups set forth therein under the Amended
and Restated 1996 Plan if approved by the shareholders.

NEW PLAN BENEFITS
AMENDED AND RESTATED 1996 DIRECTOR STOCK PLAN

DOLLAR NUMBER OF
NAME AND POSITION VALUE ($) OPTIONS
----------------- ---------- -------

Non-Executive Director Group $105,000 35,000

SELECTION OF INDEPENDENT AUDITORS

The Board of Directors, upon recommendation of the Audit Committee, has
appointed Ernst & Young LLP as independent auditors of the Company for the
fiscal year ending January 31, 2003. Arthur Andersen LLP served as the Company's
independent auditors for the fiscal year ended January 31, 2002. THE BOARD OF
DIRECTORS RECOMMENDS THAT THE APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT
AUDITORS FOR THE COMPANY FOR THE FISCAL YEAR ENDING JANUARY 31, 2003 BE RATIFIED
BY THE SHAREHOLDERS. UNLESS OTHERWISE INDICATED, ALL PROPERLY EXECUTED PROXIES
RECEIVED BY THE COMPANY WILL BE VOTED FOR SUCH RATIFICATION AT THE ANNUAL
MEETING OR ANY ADJOURNMENT THEREOF. An adverse vote will be considered a
direction to the Audit Committee to select other independent auditors in the
following year.

On April 22, 2002, the Board of Directors, upon recommendation of the
Audit Committee, made a determination to no longer engage Arthur Andersen LLP
("Arthur Andersen") as its independent auditors and appointed Ernst & Young LLP
as the Company's independent auditors for the fiscal year ending January 31,
2003.

Arthur Andersen's reports on the Company's consolidated financial
statements for the fiscal years ended January 31, 2002 and 2001 did not contain
an adverse opinion or disclaimer of opinion, nor were they qualified or modified
as to uncertainty, audit scope or accounting principles.

During the fiscal years ended January 31, 2002 and 2001 and through the
date of the dismissal of Arthur Andersen, there were no disagreements with
Arthur Andersen on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure which, if not resolved to
Arthur Andersen's satisfaction, would have caused it to make reference to the
subject matter in connection with its report on the Company's consolidated
financial statements for such years; and there were no reportable events as
specified in Item 304(a)(1)(v) of Regulation S-K.

During the fiscal years ended January 31, 2002 and 2001 and through the
date of the dismissal of Arthur Andersen, the Company did not consult Ernst &
Young LLP with respect to the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's consolidated financial
statements, or any other matters or reportable events as set forth in Items
304(a)(2)(i) and (ii) of Regulation S-K. A representative of Ernst & Young LLP
will be present at the Annual Meeting to make a statement if such representative
desires and to respond to appropriate questions. A representative of Arthur
Andersen LLP has been invited to attend the Annual Meeting to make a statement
if such representative desires and to respond to appropriate questions.

AUDIT FEES

The aggregate fees billed for professional services rendered by Arthur
Andersen for the audit of the Company's financial statements for the fiscal year
ended January 31, 2002 and for the reviews of the financial statements included
in the Company's Quarterly Reports on Form 10-Q for that fiscal year were
approximately $745,000.

FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES

Arthur Andersen did not perform any financial information system design or
implementation work for the Company during the fiscal year ended January 31,
2002.

ALL OTHER FEES

The aggregate fees billed for all other professional services rendered by
Arthur Andersen for the fiscal year ended January 31, 2002 were approximately
$1,232,000. The Audit Committee considered whether, and has determined that, the
provision of these services was compatible with maintaining Arthur Andersen's
independence.

NOTWITHSTANDING ANY STATEMENT CONTAINED IN A PREVIOUS FILING BY THE COMPANY
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED, NEITHER THE PERFORMANCE GRAPH SET FORTH BELOW NOR THE REPORT
OF THE COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE OR THE REPORT OF THE
AUDIT COMMITTEE THAT FOLLOWS IS INCORPORATED BY REFERENCE INTO ANY SUCH FILING.

PERFORMANCE OF STEWART & STEVENSON COMMON STOCK

The following graph compares the cumulative total shareholder return on
the Company's Common Stock to the cumulative total shareholder return of the S&P
500 Industrial Machinery Index and the S&P Smallcap 600 Index for the Company's
last five fiscal years. The graph assumes that the value of an investment in the
Company's Common Stock and each index was $100 on January 31, 1997 and that all
dividends were reinvested.

[PERFORMANCE GRAPH]

YEAR ENDED JANUARY 31,

1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----

Stewart & Stevenson Services, Inc. 100 99 35 47 110 78
S&P Smallcap 600 Index 100 121 120 133 160 165
S&P 500 Industrial Machinery Index 100 129 126 128 145 154

REPORT OF THE COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE

TO THE SHAREHOLDERS OF STEWART & STEVENSON SERVICES, INC.

The Compensation and Management Development Committee of the Board of Directors
(the "Committee") consists of four independent, non-employee directors who have
no "interlocking" relationships as defined by the Securities and Exchange
Commission. The Committee reviews and recommends all salary arrangements and
other executive compensation for approval by the independent members of the
Board of Directors, approves the design of executive compensation programs,
administers such programs and assesses their effectiveness in supporting the
Company's compensation policies. The Committee also evaluates executive
performance and considers management succession and related matters. The
Committee is authorized to, and does, retain independent consultants to assist
in the design of compensation programs and assess their effectiveness.

The Committee is committed to implementing a compensation program that
encourages creation of shareholder value. To facilitate the achievement of the
Company's business strategies, the Committee adheres to the following
compensation policies:

To strengthen the relationship between pay and performance, executive's
annual and long-term compensation programs will include variable
compensation that is dependent upon the contribution of each executive to
the Company's performance.

To focus management on the achievement of both short-term performance
goals and the long-term interests of shareholders, a significant portion
of each executive's total compensation will consist of "at-risk"
compensation.

To enable the Company to attract, retain and encourage the development of
the best available executive personnel, competitive compensation
opportunities will be offered.

The Committee, with the assistance of its independent compensation consultants,
has evaluated the function of each executive position to determine the skill,
knowledge, and accountability required. Using this information, the Committee is
able to compare the compensation of each executive officer with a broad base of
compensation paid to others occupying positions with a similar relative job
content.

TOTAL COMPENSATION

The key elements of the Company's executive compensation program are base
salary, annual incentives and long-term incentives, each of which is addressed
separately below. In determining each component of compensation, the Committee
considers all elements of an executive's total compensation package and the
relationship of such executive's total compensation to the total compensation
paid to the executives with similar position content.

Mr. Michael L. Grimes served as President and Chief Executive Officer of the
Company during the twelve months ended January 31, 2002 ("Fiscal 2001"). Total
compensation paid to Mr. Grimes during Fiscal 2001 was below the median amount
paid to other executives with similar position content. Total compensation paid
to other executive officers of the Company was

generally consistent with the median total compensation paid to executives with
similar position content. However, relative competitiveness of compensation
varied significantly among individual executives largely due to historical
practice, changes in roles and responsibilities, and new hirings.

BASE SALARY

Base salary levels are targeted at the median levels of compensation for
executives with similar position content and targeted within a range of plus or
minus 20% of the median. The Committee reviews each executive's salary on an
annual basis. Increases to base salaries are driven primarily by changes in the
relative job content of the executive's position, the expected contributions of
the executive in the upcoming fiscal year, and changes in the competitive market
compensation practice. Individual performance, experience, past performance and
historical salary levels are also considered. In making its evaluation, the
Committee has not assigned particular weights to these factors.

Base salaries established by the Committee for Fiscal 2001 were generally within
the administrative range. Several officers' salaries were above the median for
positions with similar job content because of recent assignment to new positions
or decreases in content during prior periods. Mr. Grimes' base salary was below
the median base salary for positions with similar content.

ANNUAL INCENTIVES

The Company provides an annual bonus opportunity to executives. Annual bonuses
motivate executives to maximize short-term performance as a part of achieving
long-term goals.

At the beginning of Fiscal 2001, the Committee and the Company adopted a
Management Incentive Compensation Plan ("MICP") providing for cash bonus
opportunities for individual executive officers between 10% and 60% of their
base salary if certain individual and Company performance targets are met. In
determining the relative percentage of base salary for each individual
executive's bonus opportunity, the Committee considered the aggregate total
compensation paid by the Company to such person compared to amounts paid by
other companies to executives with similar position content. The performance
targets used in the MICP to determine whether all or part of an individual
executive's bonus opportunity is awarded, are based upon (i) the performance of
the Company compared to pre-established goals, (ii) the performance of a
particular cost center, profit center, or business function for which each
individual executive is responsible compared to pre-established goals, and (iii)
the commitment of the individual to ethical business practices. Approximately
70% of the target bonus for each executive officer is based on financial
measurements of the Company's and/or individual profit center performance and
the balance is based on non-financial goals and considerations.

Bonus payments approved by the Committee for Fiscal 2001 were calculated under
the terms of the MICP. In determining the criteria for Mr. Grimes' bonus
opportunity under the MICP, the Committee considered Mr. Grimes' measured
accomplishments as CEO, as well as the total compensation packages of senior
executives with similar responsibilities.

LONG-TERM INCENTIVES

In keeping with the Company's philosophy of providing a total compensation
package favoring "at-risk" components of pay, long-term incentives comprise a
significant portion of each executive's total compensation package. Long-term
incentives during Fiscal 2001 consisted exclusively of stock options pursuant to
the Stewart & Stevenson 1988 Nonstatutory Stock Option Plan. Stock options under
this plan are granted at an option price not less than the fair market value of
the Common Stock on the date of grant. Accordingly, stock options have a value
only if the stock price appreciates from the date the options are granted. The
design of these stock options focuses executives on the creation of shareholder
value over the long term and encourages equity ownership in the Company.

The size of award to each executive is affected by individual performance, the
individual's level of responsibility, and the desire of the Company to retain
the individual. As a result, the number of shares underlying stock option awards
varies from year to year and is dependent on the stock price on the date of
grant.

POLICY WITH RESPECT TO THE $1 MILLION DEDUCTION LIMIT

Section 162(m) of the Internal Revenue Code of 1986, as amended, generally
limits the corporate deduction for compensation paid to executive officer named
in the proxy to $1 million per year, unless certain requirements are met. The
Committee has carefully considered the impact of this provision on the Company's
incentive plans and has determined that Section 162(m) is currently inapplicable
because no named executive officer is expected to receive compensation, other
than performance-based compensation, in excess of $1 million in the foreseeable
future. The Committee believes it is in the Company's best interest to retain
some non-formula evaluation of individual performance when determining total
compensation payable to the Company's executive officers.

CONCLUSION

The Committee believes these executive compensation policies and programs serve
the interests of the shareholders and the Company effectively. The various pay
vehicles offered are appropriately balanced to provide increased motivation for
executives to contribute to the Company's overall future success, thereby
enhancing the value of the Company for the shareholders' benefit. The Committee
will continue to monitor the effectiveness of the Company's total compensation
program to meet the current needs of the Company.

Respectfully submitted,
THE COMPENSATION AND MANAGEMENT DEVELOPMENT
COMMITTEE

Charles R. Ofner - Chairman
Max L. Lukens
Howard Wolf
Monroe M. Luther

THE INFORMATION IN THE FOREGOING PARAGRAPHS SHALL NOT BE DEEMED TO BE SOLICITING
MATERIAL, OR BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION OR SUBJECT TO
REGULATION 14A OR 14C OR TO LIABILITIES OF SECTION 18 OF THE SECURITIES EXCHANGE
ACT OF 1934, NOR SHALL IT BE DEEMED TO BE INCORPORATED BY REFERENCE INTO ANY
FILING UNDER THE SECURITIES ACT OF 1933 OR SECURITIES EXCHANGE ACT OF 1934,
EXCEPT TO THE EXTENT THE COMPANY SPECIFICALLY INCORPORATES THESE PARAGRAPHS BY
REFERENCE.

REPORT OF THE AUDIT COMMITTEE

TO THE SHAREHOLDERS OF STEWART & STEVENSON SERVICES, INC.

The Audit Committee of the Board of Directors (the "Audit Committee") has:

1. Reviewed and discussed the audited financial statements for the fiscal
year ended January 31, 2002 with the management of the Company;

2. Discussed with the Company's Independent Auditors the matters required to
be discussed by Statement of Accounting Standards No. 61, as the same was
in effect on the date of the Company's financial statements; and

3. Received the written disclosures and the letter from the Company's
Independent Auditors required by Independence Standards Board Standard No.
1 (INDEPENDENCE STANDARDS BOARD STANDARD NO. 1, INDEPENDENCE DISCUSSIONS
WITH AUDIT COMMITTEES), as the same was in effect on the date of the
Company's financial statements, and has discussed with the Independent
Auditors their independence.

4. Received representations from Arthur Andersen LLP ("Andersen") that the
audit of the Company's financial statements was subject to Andersen's
quality control system for the U.S. accounting and auditing practice to
provide reasonable assurance that the engagement was conducted in
compliance with professional standards and that there was appropriate
continuity of Andersen personnel working on audits, availability of
national office consultation, and availability of personnel at foreign
affiliates of Andersen to conduct the relevant portions of the audit.

Based on the foregoing materials and discussions, the Audit Committee
recommended to the Board of Directors that the audited financial statements for
the fiscal year ended January 31, 2002 be included in the Company's Annual
Report on Form 10-K.

Respectfully submitted,
THE AUDIT COMMITTEE

Khleber V. Attwell - Chairman
Darvin M. Winick
Monroe M. Luther
Max L. Lukens

EXECUTIVE OFFICERS

The names, ages and positions of all the executive officers of the Company
as of January 31, 2002 are listed below. Except as noted below, each officer was
last elected as an executive officer at the meeting of directors immediately
following the 2001 Annual Meeting of Shareholders. The term of each executive
officer will expire at the meeting of directors following the 2002 Annual
Meeting of Shareholders. There exist no arrangements or understandings between
any officer and any other person pursuant to which the officer was elected.

OFFICER
NAME AGE POSITION SINCE
------------------------------ ----- -------------------------------------------------- -------

Michael L. Grimes............. 52 President and Chief Executive Officer 1999
John H. Doster (1)............ 60 Senior Vice President and Chief Financial Officer 1998
Carl B. King.................. 59 Senior Vice President, Secretary and General Counsel 2001
Richard M. Wiater............. 66 Senior Vice President 1999
Wade F. Sperry................ 54 Senior Vice President 2001
T. Michael Andrews............ 61 Vice President 1982
Donald E. Stevenson........... 58 Vice President 1984
C. Jim Stewart III............ 53 Vice President 1988
Ralston P. Cole............... 64 Vice President 1998
David R. Stewart.............. 51 Treasurer 1998
Ralph T. Tierno III........... 46 Vice President 1999
Stephen A. Hines.............. 53 Vice President 2000
James C. Farris............... 49 Vice President 2000
John E. Keating (2)........... 62 Vice President 2000
Peter J. DeFronzo............. 59 Vice President 2001
Caldwell Phillip Joy.......... 43 Vice President 2002
John B. Simmons............... 49 Controller and Chief Accounting Officer 2001

(1) Mr. John H. Doster announced his intention to resign from the offices
of Senior Vice President and Chief Financial Officer effective in
May, 2002.

(2) Mr. John E. Keating resigned from the office of Vice President in April,
2002.

Except as follows, each of the officers listed above has been employed by
the Company in an executive capacity for more than five years.

Mr. Grimes was elected as President and Chief Executive Officer of the
Company in April 1999. He previously served as President of Cooper Cameron Power
Generation from 1998 to 1999, President of Cooper Energy Services from 1996 to
1998, and General Manager of various operations within the General Electric
Company from 1973 to 1996.

Mr. Doster was elected as Chief Financial Officer of the Company in July
1998. He previously served as Senior Vice President and Chief Financial Officer
of Battelle Memorial Institute from 1992 to 1997.

Mr. King was elected as Senior Vice President, Secretary and General
Counsel of the Company in 2001. He previously served as Senior Vice President
and General Counsel of Seagull Energy Corporation from 1998 to 1999, and Senior
Vice President and General Counsel of PanEnergy Corporation from 1990 to 1997.

Mr. Wiater is Senior Vice President of the Company and has served in that
capacity since June 1999. He previously was a personal investor and advisor to
several small businesses from 1995 to 1998 after retiring from the General
Electric Company.

Mr. Sperry was elected as Senior Vice President of the Company in 2001. He
previously served as Vice President, Fossil Operations, of Florida Power
Corporation from 1997 to 2000, and Region Manager of Apparatus Service for the
General Electric Company.

Mr. Cole was elected as a Vice President of the Company in 1998. He
previously served as the Gulf Coast Regional Manager of the Company's Power
Products Division from 1995 to 1998.

Mr. David Stewart was elected as Treasurer of the Company in 1998. He
previously served the Company as Director of Investor Relations and continues to
serve in that position.

Mr. Tierno was elected as a Vice President of the Company in 1999. He
previously served as President of Clarostat Sensors & Controls Inc., a division
of Invensys PLC, from March 1998 to September 1999. He previously served as Vice
President - General Manager of various divisions of Schlumberger, Ltd.

Mr. Hines was elected as a Vice President of the Company in 2000. He
previously served the Company as Corporate Human Resources Manager.

Mr. Farris was elected as a Vice President of the Company in 2000. He
previously served as the Company's Dallas Division Manager in the Power Products
Division.

Mr. Keating was elected as a Vice President of the Company in 2000. He
previously served as President of Worldwide Sales of Tug Manufacturing
Corporation for more than the last five years.

Mr. DeFronzo was elected as a Vice President of the Company in 2001. He
previously served as General Manager of Supply Chain Management for Cooper
Energy Services from 1998 to 2001 and Product General Manager of the
Distribution Transformer Businesses for the General Electric Company from 1992
to 1997.

Mr. Joy was elected as a Vice President of the Company in 2002. He
previously served as President of Trilectron Industries for more than the last
five years.

Mr. Simmons was elected as Controller and Chief Accounting Officer of the
Company in 2001. He previously served as Vice President and Chief Financial
Officer of Cooper Energy Services from 1997 to 2000, and Chief Financial Officer
of Production Operators, Inc. from 1996 to 1997.

C. Jim Stewart III and David R. Stewart are brothers, and T. Michael
Andrews is a first cousin of Mr. Donald E. Stevenson. These persons and other
members of the Stewart family and the Stevenson family could be deemed "control
persons" with respect to the Company as such term is defined in the rules and
regulations of the Securities and Exchange Commission.

EXECUTIVE COMPENSATION

The following Summary Compensation Table shows the aggregate compensation
paid or accrued by the Company during each of the last three fiscal years to or
for (i) any individual that held the office of Chief Executive Officer during
Fiscal 2001 and (ii) each of the other four highest compensated executive
officers.

SUMMARY OF COMPENSATION

LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------ -------------------

OTHER ALL
ANNUAL OTHER
NAME AND FISCAL COMPEN- OPTIONS LTIP COMPEN-
PRINCIPAL POSITION YEAR (1) SALARY BONUS SATION GRANTED PAYOUT SATION(4)
-------------------- --------- -------- ------- -------- -------- ------ -----------------

Michael L. Grimes.............. 2001 $ 387,308 $ 198,000 (3) 70,000 -0- $4,981 (5)
President and Chief 2000 319,231 207,237 (3) 125,000 -0- 5,072 (5)
Executive Officer 1999 236,015 250,000 (2) (3) 100,000 -0- 4,733 (5)

John H. Doster................. 2001 310,577 87,000 (3) 20,000 -0- 4,525 (6)
Senior Vice President and 2000 274,423 134,000 (3) 40,000 -0- 4,913 (6)
Chief Financial Officer 1999 260,000 125,000 (3) 40,000 -0- 3,947 (6)

Richard M. Wiater.............. 2001 265,000 274,900 (3) 20,000 -0- 4,336 (7)
Senior Vice President 2000 234,615 171,080 (3) 30,000 -0- 4,257 (7)
1999 108,173 125,000 (3) -0- -0- 2,250 (7)

Carl B. King................... 2001 266,539 118,500 (3) 20,000 -0- 3,232
Senior Vice President, 2000 N/A N/A (3) N/A -0- N/A
Secretary and General 1999 N/A N/A (3) N/A -0- N/A (8)
Counsel

Wade F. Sperry................. 2001 250,000 94,282 (3) -0- -0- 2,411
Senior Vice President 2000 N/A N/A (3) 20,000 -0- N/A
1999 N/A N/A (3) N/A -0- N/A (9)

(1) The Company's fiscal year ends on January 31.

(2) Mr. Grimes' bonus compensation in Fiscal 1999 consisted of (i) a signing
bonus in the amount of $100,000 paid in April 1999, and (iii) a merit
bonus in the amount of $150,000 for the fiscal year ended January 31,
2000.

(3) The total amount of all perquisites and other personal benefits,
securities or property paid or accrued by the Company is less than the
lesser of (i) $50,000 or (ii) 10% of the total of annual salary and bonus.
There have been no amounts paid or accrued with respect to above-market or
preferential earnings on restricted stock, options, SARs or deferred
compensation or with respect to earnings on long-term incentive plans or
tax reimbursements.

(4) Unless otherwise indicated, All Other Compensation consists of the dollar
value of insurance premiums for term life insurance policies for the
benefit of the named executive.

(5) For each of the fiscal years ended January 31, 2002, 2001 and 2000,
respectively, Other Compensation for Mr. Grimes consists of term life
insurance premiums of $970, $1,135 and $579, and contributions by the
Company to a defined contribution pension plan of $4,011, $3,937 and
$4,154.

(6) For each of the fiscal years ended January 31, 2002, 2001 and 2000,
respectively, Other Compensation for Mr. Doster consists of term life
insurance premiums of $787, $976 and $662, and contributions by the
Company to a defined contribution pension plan of $3,738, $3,937 and
$3,285.

(7) For each of the fiscal years ended January 31, 2002, 2001 and 2000,
respectively, Other Compensation for Mr. Wiater consists of term life
insurance premiums of $449 and $57 (Fiscal 2001 and 2000), and
contributions by the Company to a defined contribution pension plan of
$3,887, $4,200 and $2,250.

(8) For the fiscal year ended January 31, 2002, Other Compensation for Mr.
King consists of term life insurance premiums of $669 and contributions by
the Company to a defined contribution pension plan of $2,538.

(9) For the fiscal year ended January 31, 2002, Other Compensation for Mr.
Sperry consists of term life insurance premiums of $680 and contributions
by the Company to a defined contribution pension plan of $1,736.

GRANTS AND EXERCISES OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS

The Company has three stock option plans. The 1988 Nonstatutory Stock
Option Plan (as amended and restated effective as of June 10, 1997) (the "1988
Plan") authorizes the grant of options to employees, including officers, to
purchase an aggregate of up to 1,500,000 shares of Common Stock and provides
that limited stock appreciation rights may be granted in connection with such
options. The 1993 Nonofficer Stock Option Plan (the "1993 Plan") authorizes the
grant of options to employees other than officers of the Company to purchase an
aggregate of up to 818,625 shares of Common Stock. Stock appreciation rights may
not be granted under the 1993 Plan. The Amended and Restated 1996 Director Stock
Plan amended and restated the 1996 Director Stock Plan, was adopted by the Board
on April 9, 2002 and is subject to shareholder approval as provided herein (the
"Amended and Restated 1996 Plan"). The Amended and Restated 1996 Plan authorizes
the grant of options to directors other than officers or employees of the
Company.

The recipients and terms of options granted pursuant to the 1988 Plan and
the 1993 Plan are determined by the Compensation and Management Development
Committee of the Board of Directors, none of whom are employees of the Company
or eligible for any benefits under such plans. Prior to its amendment and
restatement, the Amended and Restated 1996 Plan provided for an automatic grant
of an option to purchase 3,000 shares of the Company's Common Stock on the date
of each Annual Meeting of Shareholders to each eligible director who was elected
to serve as a director at, or whose term as a director continued after, such
meeting. Subject to shareholder approval as provided herein, the Amended and
Restated 1996 Plan will provide for an automatic grant of an option to purchase
5,000 shares of the Company's Common Stock.

During Fiscal 2001, the Company granted options to purchase an aggregate
of (i) 208,000 shares of Common Stock under the 1988 Plan, (ii) 155,000 shares
of Common Stock under the 1993 Plan and (iii) 21,000 shares of Common Stock
under the 1996 Plan. No limited stock appreciation rights were granted under the
1988 Plan during Fiscal 2001 or during any previous fiscal year. The following
tables set forth information as to options under the Company's stock option
plans granted to or exercised by the individuals described in the Summary
Compensation Table during 2001 and the value of all outstanding options owned as
of January 31, 2002 by the individuals named in the Summary Compensation Table.

OPTION GRANTS DURING FISCAL 2001

POTENTIAL REALIZABLE VALUE AT ASSUMED
ANNUAL RATES OF STOCK PRICE
INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM
---------------------------------------------------------- -------------------------------------

% OF TOTAL EXERCISE
OPTIONS PRICE
OPTIONS GRANTED TO PER EXPIRATION
NAME GRANTED (1) EMPLOYEES SHARE (2) DATE 5% 10%
------ ----------- ------------- ----------- ----------- ----------- -------------

Michael L. Grimes.......... 70,000 19.3 $20.25 03/22/2011 $891,458 $2,259,130
John H. Doster............. 20,000 5.5 $20.25 03/22/2011 254,702 645,466
Richard M. Wiater.......... 20,000 5.5 $20.25 03/22/2011 254,702 645,466
Carl B. King............... 20,000 5.5 $26.61 02/08/2011 334,698 848,190
Wade F. Sperry............. -0- 0.0 N/A N/A N/A N/A

(1) All options become exercisable in four 25% cumulative annual installments
commencing March 22, 2002, except those granted to Mr. King, which become
exercisable in four 25% cumulative annual installments commencing February
8, 2002.
(2) All options are exercisable at the prices shown. The prices shown are not
less than the closing market price on the date of grant.
(3) All options expire ten years after the date of grant.

OPTION EXERCISES DURING FISCAL 2001
AND YEAR-END VALUES

NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT MONEY OPTIONS AT
JANUARY 31, 2002 JANUARY 31, 2002
------------------------------ ------------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------- ------------- ---------- ------------- --------------- ------------ ---------------

Michael L. Grimes........... 4,000 $ 52,415 77,250 213,750 $ 643,357 $ 1,173,826
John H. Doster.............. -0- N/A 30,000 70,000 219,375 378,125
Richard M. Wiater........... 4,000 102,510 3,500 42,500 27,781 178,594
Carl B. King................ -0- N/A -0- 20,000 0 0
Wade F. Sperry.............. -0- N/A 5,000 15,000 0 0

RETIREMENT PLANS

The Company has a defined benefit pension plan (the "Pension Plan") under
which benefits are determined primarily by average final base salary and years
of service. The Pension Plan covers substantially all of its full-time
employees, including officers, and, subject to certain limitations described
below, bases pension benefits on 1.5% of (a) the employee's highest consecutive
five-year average base salary out of the last ten years or (b) $200,000 (and
thereafter subject to adjustment for increases in the cost of living), whichever
is lower, times the employee's years of credited service. The Internal Revenue
Code of 1986, as amended, limits benefits that may be paid under the Pension
Plan to $160,000 per year in 2002, offset by a compensation of Social Security
benefits.

The Company has a Supplemental Executive Retirement Plan (the "SERP")
under which certain key executives will receive retirement benefits in addition
to those provided under the Pension Plan. The Compensation and Management
Development Committee determines which executive officers are eligible for
benefits under the SERP. Supplemental benefits are based upon the average final
compensation and years of service without regard to the limitations imposed by
the Internal Revenue Code of 1986, as amended, and using the total of base
salary and bonus to compute final average compensation. Benefits under the SERP
are limited to an amount such that the aggregate of all retirement benefits paid
under the Pension Plan and the SERP will not exceed 75% of the executive's
highest consecutive five-year average salary, not including bonus payments.

The following table sets forth the estimated annual benefits payable upon
retirement to persons in specified compensation and years-of-service
classification pursuant to the Stewart & Stevenson Employee Pension Plan and the
Stewart & Stevenson Supplemental Executive Retirement Plan.

ESTIMATED ANNUAL RETIREMENT BENEFIT (1)
YEARS OF SERVICE

FINAL AVERAGE COMPENSATION 20 25 30 35 40 45
-------------------------- ------ ------ ------- ------ ------ -------

$100,000........................... $ 24,438 $ 30,548 $ 36,657 $ 43,230 $ 50,730 $ 58,230

200,000........................... 54,438 68,048 81,657 95,730 110,730 125,730

300,000........................... 84,438 105,548 126,657 148,230 170,730 193,230

400,000........................... 114,438 143,048 171,657 200,730 230,730 260,730

500,000........................... 144,438 180,548 216,657 253,230 290,730 328,230

600,000........................... 174,438 218,048 261,657 305,730 350,730 395,730

700,000........................... 204,438 255,548 306,657 358,230 410,730 463,230

800,000........................... 234,438 293,048 351,657 410,730 470,730 530,730

900,000........................... 264,438 330,548 396,657 463,230 530,730 598,230

1,000,000........................... 294,438 368,048 441,657 515,730 590,730 665,730

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

The Stewart & Stevenson Pension Plan provides benefits based on compensation
less than or equal to the maximum amount under Internal Revenue Code of 1986, as
amended (the "IRC") Section 401(a)(17). Qualified plan benefits are limited by
IRC Section 4115. Benefits that exceed these limits are provided through a
non-qualified plan to eligible SERP participants.

(1) Computation of estimated annual retirement benefit based on a straight-line
annuity for the life of the employee, net of base Social Security benefits under
the Social Security law currently in effect, assuming the employee retires in
2001 at age 65.

The five-year average compensation of each executive officer listed in the
Summary of Compensation Table differs from the present salary and bonus in such
table as a result of changes in the rate of pay during the average period. The
following table sets forth the years of credited service, five-year average
compensation and consecutive five-year average base salary for each of the
individuals listed in the Summary of Compensation Table.

YEARS OF AVERAGE TOTAL AVERAGE
NAME SERVICE COMPENSATION BASE SALARY
----------------------------------- ----------- ---------------- ---------------

Michael L. Grimes.................. 3 N/A N/A
John H. Doster..................... 4 N/A N/A
Richard M. Wiater.................. 3 N/A N/A
Carl B. King....................... 1 N/A N/A
Wade F. Sperry..................... 1 N/A N/A

TRANSACTIONS WITH MANAGEMENT AND CERTAIN BUSINESS RELATIONSHIPS

Mr. Howard Wolf is a partner in the international law firm of Fulbright &
Jaworski L.L.P., which provides legal services to the Company.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers, directors and persons who own more than 10% of a registered
class of the Company's equity securities to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Officers,
directors and greater than 10% stockholders are required by the regulation to
furnish the Company with copies of all Section 16(a) reports they file.

Based solely upon a review of such reports received by it, or written
representations from certain reporting persons that no Form 5 reports were
required for those persons, the Company believes that, during fiscal 2001, all
filing obligations applicable to the reporting persons were complied with except
that: Mr. Charles R. Ofner did not timely file a Form 4 due in July 2001 (a Form
4 was filed in August 2001).

FORM 10-K FOR FISCAL 2001

THE COMPANY WILL PROVIDE WITHOUT CHARGE TO ANY SHAREHOLDER ENTITLED TO VOTE AT
THE ANNUAL MEETING A COPY OF ITS MOST RECENT ANNUAL REPORT ON FORM 10-K UPON
RECEIPT OF A REQUEST THEREFOR. SUCH REQUESTS SHOULD BE DIRECTED TO:

CARL B. KING
SENIOR VICE PRESIDENT, SECRETARY & GENERAL COUNSEL
P.O. BOX 1637
HOUSTON, TEXAS 77251-1637
(713) 868-7700

SHAREHOLDER PROPOSALS FOR THE 2003 ANNUAL MEETING

Shareholders may submit proposals for the 2003 Annual Meeting by sending
such proposals to the attention of the Corporate Secretary at the Company's
principal executive offices, 2707 North Loop West, P.O. Box 1637, Houston, Texas
77251-1637. In order to be considered for inclusion in the proxy statement and
form of proxy for the 2003 Annual Meeting, such proposals must be received by
the Company on or before January 3, 2003.

By Order of the Board of Directors,

/s/ CARL B. KING
Carl B. King
Senior Vice President, Secretary and
General Counsel

Dated: May 3, 2002
Houston, Texas

EXHIBIT A

STEWART & STEVENSON SERVICES, INC.

AUDIT COMMITTEE

CHARTER

RESPONSIBILITIES

The Audit Committee (the "Committee") of the Board of Directors (the "Board") of
Stewart & Stevenson Services, Inc. (the "Company) consists of directors who are
independent of the management of the Company and free to exercise independent
judgment. The Committee provides assistance to the Board in fulfilling the
Board's oversight of the Company's accounting and system of internal controls,
the quality and integrity of the Company's financial reports and the
independence and performance of the Company's independent auditor.

In the exercise of its oversight, it is not the duty of the Committee to plan or
conduct audits or to determine that the Company's financial statements fairly
present the Company's financial position and results of operation and are in
accordance with generally accepted accounting principles. Management is
responsible for the Company's internal controls, quality of financial and
accounting judgments and financial reporting process. The independent auditor is
responsible to perform an independent audit of the Company's consolidated
financial statements in accordance with generally accepted auditing standards
and to issue a report thereon. Nothing contained in this charter is intended to
alter or impair the right of the members of the Committee to rely, in
discharging their oversight role, on the records of the Company and on other
information presented to the Committee, the Board or Company by its officers or
employees or by outside experts such as the independent auditor. Nor is it the
duty of the Committee to investigate or resolve disagreements, if any, between
management and the independent auditors.

The Committee is responsible for receipt from the independent auditor of a
formal written statement delineating all relationships between the independent
auditor and the Company, consistent with Independence Standards Board Standard
No. 1. The Committee shall discuss with the independent auditor with respect to
any disclosed relationships or services that, in the view of the Committee, may
impact the objectivity and independence of the independent auditor. If the
Committee determines that further inquiry is advisable, the Committee shall
recommend that the Board take any appropriate action in response to the
independent auditor's independence.

On behalf of the Board, the Committee:

A. Assures that open communications exist between the directors,
independent auditors, internal auditors and the financial management of
the Company and recommends to the Board changes in policies, practices,
or organization to improve the Company's financial management, controls
or reporting.

A-1

B. Reviews and evaluates the independent auditor and, if necessary,
recommend that the Board replace the independent auditor. The Committee
shall recommend to the Board the nomination of the independent auditor
for stockholder approval at any meeting of stockholders. The
independent auditor shall be ultimately accountable to the Committee
and the Board in connection with the audit of the Company's annual
financial statement and related services.

1. Prior to the annual audit, the Committee meets with the independent
auditor and financial management to review the scope and cost of
the audit and the procedures to be used and, at the conclusion of
the audit, reviews all reports, statements, comments and
recommendations of the independent auditors. The Committee shall
discuss with the independent auditor the matters required to be
discussed by Statement on Auditing Standards No. 61 relating to the
conduct of the annual audit.

2. Prior to release, the Committee reviews the financial statements to
be contained in the annual report to shareholders, all reports to
regulatory bodies and releases to the investment community to
determine that the disclosures and content of the reports are
satisfactory in the opinion of the independent auditor and legal
counsel.

3. Prior to the filing of the Form 10-Q, the independent auditor shall
review with the Committee the interim financial statements to be
included in any Form 10-Q of the Company using professional
standards and procedures for conducting such reviews, as
established by generally accepted auditing standards as modified or
supplemented by the Securities and Exchange Commission and in
accordance with Statement on Auditing Standards 71. The Committee
shall discuss with management and the independent auditor the
results of the quarterly review including such matters as
significant adjustments, management judgments, accounting
estimates, significant new accounting policies and disagreements
with management.

4. At least annually the Committee reviews with financial management
and the independent auditors, the adequacy and effectiveness of
accounting practices and internal controls of the Company, the
scope and effectiveness of internal audit activities and the
compliance of the Company with laws and regulatory requirements.

C. Reviews with financial management the annual internal audit plan,
determines that the independence and authority of the internal auditors
are adequate and meets with the internal auditors to review their
findings and recommendations.

D. Reviews its own charter and reports the results of that review and any
recommendations to the Board.

E. Prepares and approves an Audit Committee Report to be included in the
Company's proxy statement as required by Item 306 of Regulations S-K of
the Securities and Exchange Commission.

A-2

ORGANIZATION

A. The Committee shall consist of not less than three directors who are
qualified and independent. Members of the Committee shall be financially
literate or become financially literate within a reasonable period of time
after appointment to the Committee. At least one member of the Committee
must have accounting or related financial management expertise. Committee
members are independent if they meet the independence requirements of The
Nasdaq Stock Market, Inc.

B. At least four meetings (quarterly) are held annually. These quarterly
meetings are to be scheduled to review quarterly financial results and to
review the quarterly reports prior to release.

C. The members of the Committee shall be elected by the Board at the meeting
of the Board following each annual meeting of stockholders and shall serve
until their successors shall be duly elected and qualified or until their
earlier resignation or removal. The Board shall appoint the Chair who sets
the date of four regular meetings, calls special meetings as required,
maintains meeting records and reports to the Board on all Committee
activities.

D. The Committee may investigate any matter within the scope of its
responsibilities, may retain independent counsel or professional services,
if necessary, to discharge its duties and may meet independently with
members of management, independent or internal auditors or others to
obtain information.

A-3

EXHIBIT B

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

STEWART & STEVENSON SERVICES, INC.

AMENDED AND RESTATED
1996 DIRECTOR STOCK PLAN

APRIL 8, 2002

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

B-1

TABLE OF CONTENTS

PAGE

ARTICLE I. PURPOSE..........................................................1

ARTICLE II. ELIGIBILITY.....................................................1

ARTICLE III. STOCK SUBJECT TO THE PLAN......................................1

ARTICLE IV. DIRECTOR STOCK AWARDS...........................................1

ARTICLE V. TERMS, CONDITIONS AND FORM OF OPTIONS............................1
SECTION 5.1 NON-STATUTORY STOCK OPTIONS.............................2
SECTION 5.2 OPTION GRANT DATES......................................2
SECTION 5.3 TRANSFERABILITY.........................................2
SECTION 5.4 VESTING AND TERM OF OPTION..............................2
SECTION 5.5 CHANGE OF CONTROL.......................................2
SECTION 5.6 MANNER OF EXERCISE......................................3
SECTION 5.7 TERMINATION OF DIRECTORSHIP.............................3

ARTICLE VI. OPTION PRICE....................................................4

ARTICLE VII. VALUATION OF STOCK.............................................4

ARTICLE VIII. NO RIGHT TO CONTINUE AS A DIRECTOR............................4

ARTICLE IX. ADJUSTMENT TO STOCK.............................................4

ARTICLE X. EFFECTIVE DATE...................................................4

ARTICLE XI. AMENDMENT OF THE PLAN...........................................5

ARTICLE XII. USE OF PROCEEDS................................................5

ARTICLE XIII. COMPLIANCE WITH APPLICABLE LAWS...............................5

ARTICLE XIV. GOVERNING LAW..................................................5

ARTICLE XV. SUCCESSORS......................................................5

B-2

STEWART & STEVENSON SERVICES, INC.
AMENDED AND RESTATED 1996 DIRECTOR STOCK PLAN

ARTICLE I. PURPOSE

The purpose of this Amended and Restated 1996 Director Stock Plan (the
"Plan") of Stewart & Stevenson Services, Inc. (the "Company") is to encourage
ownership in the Company by outside directors of the Company whose continued
services are considered essential to the Company's continued progress, to
provide them with a further incentive to continue as directors of the Company,
and to increase the value of the Company.

ARTICLE II. ELIGIBILITY

Each director of the Company is eligible to participate in the Plan,
unless he or she is an officer or employee of the Company or any subsidiary of
the Company ("Eligible Director").

ARTICLE III. STOCK SUBJECT TO THE PLAN

The total number of the Company's authorized but unissued shares of common
stock, without par value, ("Stock") with respect to which Director Stock Awards
and options may be granted shall not exceed in the aggregate 350,000 shares. The
class and aggregate number of shares of Stock that may be subject to Director
Stock Awards and options granted under the Plan shall be subject to adjustment
in accordance with Article IX. In connection with the issuance of shares of
Stock under the Plan, the Company may utilize treasury shares or authorized but
unissued shares. If any Director Stock Award or option under the Plan shall
expire or terminate for any reason without having been exercised in full or if
any Director Stock Award or option shall be forfeited, the shares subject to the
unexercised or forfeited portion of such award or option shall again be
available for purposes of the Plan.

ARTICLE IV. DIRECTOR STOCK AWARDS

On the date of each annual meeting of the Company's shareholders ("Annual
Meeting") after the Effective Date (within the meaning of Article X), the
Company will, without cost to the grantee and without the exercise of the
discretion of any person or persons, award and issue to each Eligible Director
who is elected to serve a term as a director at each such meeting and to each
Eligible Director who is serving as a director for a term that continues after
such meeting, that number of shares of Stock (rounded down to the nearest whole
share) determined by dividing (i) the sum of $15,000 by (ii) the fair market
value (as determined in Article VII) of a share of Stock on the date of such
meeting. If an Eligible Director is elected or appointed to serve a term as a
director on a date other than the date of the Company's Annual Meeting and has
not otherwise received a Director Stock Award for such year, the Company will,
without cost to the grantee and without the exercise of the discretion of any
person or persons, award and issue to such Eligible Director a prorated Director
Stock Award equal to the product of (X) the quotient of $15,000 divided by the
fair market value (as determined in Article VII) of a share of Stock on the date
of such election or appointment, multiplied by (Y) the quotient of the number of
days remaining until the Company's next Annual Meeting divided by 365 days. With
respect to each Director Stock Award, the Eligible Director shall pay to the
Company all amounts, if any, that the Company is required to collect and remit
to the Internal Revenue Service or any other taxing authority as a result of
such award.

B-3

ARTICLE V. TERMS, CONDITIONS AND FORM OF OPTIONS

Each option granted under this Plan shall be evidenced by a written
agreement that shall be subject to the following terms and conditions:

SECTION 5.1 NON-STATUTORY STOCK OPTIONS. All options granted under the
Plan shall be nonstatutory options, not entitled to special tax treatment under
Section 422 of the Internal Revenue Code of 1986, as amended to date and as may
be further amended from time to time (the "Code").

SECTION 5.2 OPTION GRANT DATES. On the date of each Annual Meeting after
the Effective Date of the Plan, the Company will, without cost to the grantee
and without the exercise of the discretion of any person or persons, grant to
each Eligible Director who is elected to serve a term as a director at such
meeting and to each Eligible Director who is serving as a director for a term
that continues after such meeting, an option to acquire 5,000 shares of Stock at
an exercise price determined in accordance with Article VI and subject to
adjustment under Article IX; PROVIDED, that the Board of Directors may, in its
discretion by majority vote, increase or decrease the number of shares subject
to the aforementioned option. If an Eligible Director is elected or appointed to
serve a term as a director on a date other than the date of the Company's Annual
Meeting and has not otherwise received an option to acquire shares of Stock for
such year, the Company will, without cost to the grantee and without the
exercise of the discretion of any person or persons, on the date of such
election or appointment, grant to such Eligible Director an option to acquire
5,000 shares of Stock at an exercise price determined in accordance with Article
VI and subject to adjustment under Article IX; PROVIDED, that the Board of
Directors may, in its discretion by majority vote, increase or decrease the
number of shares subject to such option.

Furthermore, the Board of Directors of the Company may, from time to time,
deem it appropriate and may provide certain Eligible Directors with additional
options to acquire Stock at an exercise price determined in accordance with
Article VI and subject to adjustment under Article IX.

SECTION 5.3 TRANSFERABILITY. Each option granted under the Plan by its
terms shall not be transferable by the grantee otherwise than by will or by the
laws of descent and distribution or pursuant to a domestic relations order as
defined by the Code or Title I of the Employee Retirement Income Security Act,
or the rules thereunder.

SECTION 5.4 VESTING AND TERM OF OPTION. Options become exercisable on the
first anniversary date after the date upon which the options were granted. When
an option becomes exercisable, the shares may be purchased at any time, or from
time to time, in whole or in part, until the option term expires; provided,
however, that any option granted pursuant to the Plan shall become exercisable
in full upon the death of the grantee, the failure of such grantee to stand for
re-election or be re-elected, or the retirement of such grantee after serving at
least 60 consecutive months on the Board of Directors. Unless terminated earlier
in accordance with the terms of the Plan, each option shall terminate upon the
expiration of ten years after such option was granted.

SECTION 5.5 CHANGE OF CONTROL. In the case of any merger, exchange of
shares, consolidation or combination of the Company (other than a transaction in
which the holders of Stock immediately prior to the consummation thereof own 50%
or more of the voting securities eligible to vote for the election of directors
of the surviving entity immediately after the consummation of such transaction)
all options theretofore granted and not fully exercisable shall become
exercisable on the date that is 30 days prior to the record or effective date of
such merger, exchange of shares, consolidation or combination.

If a tender offer or exchange offer for the Stock (other than such an
offer by the Company) is commenced or if the Company shall set a record date to
approve an agreement providing for a sale or other disposition of all or
substantially all of the assets of the Company, all options theretofore granted
and not fully exercisable shall become exercisable in full upon the commencement
of such tender offer

B-4

or 30 days prior to such record date and shall remain so exercisable for a
period of 60 days following such date after which they shall revert to being
exercisable in accordance with their terms.

If any tender offer, exchange offer, or sale or other disposition of all
or substantially all of the assets of the Company results in any grantee ceasing
to be a director of the Company, then all options theretofore granted and not
fully exercisable shall automatically become exercisable in full upon the
termination of such person as a director.

SECTION 5.6 MANNER OF EXERCISE. Options may be exercised only by written
notice to the Company, which notice must specify the date the stock option is to
be exercised (such date must be on or after the date of the notice) and the
number of shares of Stock covered by the exercise, accompanied by payment of the
full option price of the shares covered by the options being exercised and
payment of all amounts, if any, that the Company is required to collect and
remit to the Internal Revenue Service or any other taxing authority as a result
of such exercise. Such payment shall be made in one or a combination of the
following alternative forms:

(i) cash (including check, bank draft or money order);

(ii) certificates, duly endorsed or accompanied by appropriate transfer
instruments, representing shares of Stock previously acquired and standing
in the name of the grantee, with an aggregate fair market value on the
date of exercise that is equal to or less than the option price of the
shares covered by the options being exercised hereunder; or

(iii) by delivering a properly executed exercise notice together with
irrevocable instructions to a broker to deliver promptly to the Company
the total option price in cash.

If the grantee desires that the shares of Stock be registered in his or
her name and that of another as joint tenants with rights of survivorship, he or
she should so state in the notice. In no case may fewer than 100 of such shares
be purchased at any one time, except to purchase a residue of fewer than 100
shares. An option may not be exercised for a fractional share.

SECTION 5.7 TERMINATION OF DIRECTORSHIP. All rights of a grantee in an
option, to the extent that such rights have not been exercised, shall lapse and
be forfeited one year after the termination of his or her services as a director
of the Company or, if earlier, on the original expiration date of the option. In
the case of retirement, whether by reason of disability or age, such grantee's
option may be exercised within the period set forth in the preceding sentence by
such grantee or his or her legal representative. In the case of death, such
grantee's option may be exercised within the period set forth in the preceding
sentence by the personal representative of the grantee's estate or by the person
or persons to whom the option is transferred pursuant to the grantee's will or
in accordance with the laws of descent and distribution.

ARTICLE VI. OPTION PRICE

The option price per share for the shares covered by each option shall be
the fair market value (as determined in Article VII) of one share of Stock as of
the date of grant of the option; PROVIDED, that the Board of Directors may, in
its discretion by majority vote, set the option price per share for the shares
covered by each option in excess of the fair market value of one share of Stock
as of the date of grant of the option.

B-5

ARTICLE VII. VALUATION OF STOCK

For all valuation purposes under the Plan, the fair market value of a
share of Stock shall be the last reported sale price as of the close of trading
activity on the day for which such fair market value is to be determined, as
reported on the Nasdaq National Market system, or any similar system then in
use, or the principal securities exchange on which the Stock is listed on such
date. If there is no trade on such day, then the last trade price on the next
preceding day for which there does exist such a trade shall be determinative of
fair market value.

ARTICLE VIII. NO RIGHT TO CONTINUE AS A DIRECTOR

Neither the Plan nor the granting of a Director Stock Award or an option
nor any other action taken pursuant to the Plan shall constitute or be evidence
of any agreement or understanding, express or implied, that the Company will
retain a director for any period of time or at any particular rate of
compensation.

ARTICLE IX. ADJUSTMENT TO STOCK

In the event any change is made to the Stock subject to the Plan or
subject to any outstanding option granted under the Plan (whether by reason of
merger, exchange of shares, consolidation, reorganization, recapitalization,
stock dividend, stock split, combination of shares, exchange of shares, change
in corporate structure or otherwise), then appropriate adjustments shall be made
to the number of shares and option price per share of Stock subject to
outstanding options. The grant of Stock or options under the Plan shall not
affect the right of the Company to adjust, reclassify, reorganize or otherwise
change its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.

ARTICLE X. EFFECTIVE DATE

The Plan originally became effective on June 10, 1997, the date of the
first Annual Meeting after the adoption of the Plan by the Board of Directors of
the Company (the "Effective Date").

ARTICLE XI. AMENDMENT OF THE PLAN

The Board of Directors of the Company may suspend or discontinue the Plan
or revise or amend it in any respect whatsoever; provided that no such amendment
shall adversely affect a grantee's rights under any Director Stock Award
previously issued or option previously granted without the grantee's consent.

ARTICLE XII. USE OF PROCEEDS

The cash proceeds received by the Company from the issuance of shares
pursuant to options under the Plan shall be used for general corporate purposes.

ARTICLE XIII. COMPLIANCE WITH APPLICABLE LAWS

All transactions pursuant to terms of the Plan, including, without
limitation, grants of Stock and grants and vesting of options, shall only be
effective at such time as counsel to the Company shall have determined that such
transaction will not violate federal or state securities or other laws or
regulations.

ARTICLE XIV. GOVERNING LAW

The Plan and all determinations made and actions taken pursuant hereto
shall be governed by the laws of the State of Texas and construed accordingly.

ARTICLE XV. SUCCESSORS

The Plan shall be binding upon the successors and assigns of the
Company.

B-6

APPENDIX

STEWART & STEVENSON SERVICES, INC. ANNUAL MEETING OF SHAREHOLDERS
2707 NORTH LOOP WEST TO BE HELD JUNE 11, 2002
P.O. BOX 1637
HOUSTON, TEXAS 77251-1637

Dear Shareholder:

1. Election of four directors to the Board of Directors.

2. Approval of the Amended and Restated 1996 Director Stock Plan.

3. Ratification of Ernst & Young LLP as the Company's independent
auditors for the fiscal year ending January 31, 2003.

Only record holders of our Common Stock at the close of business on April
24, 2002 will be entitled to vote at the meeting or any adjournment
thereof.

IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING. EVEN IF
YOU PLAN TO ATTEND, WE URGE YOU TO COMPLETE AND SIGN THE PROXY CARD BELOW,
DETACH IT FROM THIS LETTER AND RETURN IT IN THE POSTAGE PAID ENVELOPE
ENCLOSED IN THIS PACKAGE. The giving of such proxy does not affect your
right to vote in person if you attend this meeting. The prompt return of
your signed proxy will aid the Company in reducing the expense of
additional proxy solicitation.

BY ORDER OF THE BOARD OF DIRECTORS

/s/ CARL B. KING
CARL B. KING
MAY 3, 2002 SENIOR VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL

DETACH PROXY CARD HERE

STEWART & STEVENSON SERVICES, INC.
ANNUAL MEETING OF SHAREHOLDERS - JUNE 11, 2002
COMMON STOCK PROXY

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned hereby appoints Carl B. King and Rita M. Schaulat, and
each of them, the attorneys and proxies of the undersigned (each with power to
act without the other and with power of substitution) to vote, as designated on
the reverse side, all shares of Common Stock, without par value, of Stewart &
Stevenson Services, Inc. which the undersigned may be entitled to vote at the
Annual Meeting of Shareholders to be held at the Doubletree Hotel, 2001 Post Oak
Blvd., Houston, Texas at 10:00 a.m. on Tuesday, the 11th day of June, 2002 and
any adjournments thereof, upon all matters which may properly come before said
Annual Meeting.

THIS PROXY SHALL BE VOTED IN ACCORDANCE WITH THE INSTRUCTIONS MARKED ON
THE REVERSE SIDE HEREOF. IF NO CHOICE IS MARKED, THE UNDERSIGNED GRANTS THE
PROXIES DISCRETIONARY AUTHORITY WITH RESPECT TO THE ELECTION OF DIRECTORS,
PROPOSAL 2 AND PROPOSAL 3. UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED
FOR THE ELECTION OF ALL NOMINEES LISTED ON THE REVERSE SIDE, FOR PROPOSAL 2 AND
FOR PROPOSAL 3.

Any proxy heretofore given by the undersigned with respect to such stock
is hereby revoked. Receipt of the Notice of the Annual Meeting, Proxy Statement
and Annual Report to Shareholders is hereby acknowledged.

(Please sign and date proxy on reverse side and return in enclosed envelope)

STEWART & STEVENSON SERVICES, INC.
P.O. BOX 11285
NEW YORK, NY 10203-0285

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE FOLLOWING NOMINEES AND "FOR"
ITEMS 2 AND 3.

1. Election of Directors FOR all nominees WITHHOLD AUTHORITY to vote EXCEPTIONS [ ]
listed below [ ] for all nominees listed below [ ]

Nominees: Khleber V. Attwell, C. Jim Stewart III, Darvin M. Winick, PH.D, Howard Wolf

(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, MARK THE "EXCEPTIONS" BOX AND WRITE THAT
NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.)

*Exceptions _____________________________________________________________________________________________________________

2. Approval of Amended and Restated 1996 Director In their discretion the Proxies are authorized to vote
Stock Plan. upon such other matters as may properly come before the
meeting or any adjournment or postponement thereof.

FOR [ ] AGAINST [ ] ABSTAIN [ ]

3. Approval of Ernst & Young LLP as independent
auditors of the Company.

FOR [ ] AGAINST [ ] ABSTAIN [ ]

The signature on this Proxy should correspond exactly with
shareholder's name as printed to the left. In the case of joint
tenancies, co-executors or co-trustees, both should sign. Persons
signing as Attorney, Executor, Administrator, Trustee or Guardian
should give their full title.

Date Share Owner sign here Co-Owner sign here

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