|SECURITIES
AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549


FORM 10-Q


(MARK ONE)
|----------------------------------------------------------------------------------

|[X] |  | QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- |  | ---------------------------------------------------------------------------------------

|For the
quarterly period ended June 30, 2000


OR
|-------------------------------------------------

|[_] |  | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- |  | ----------------------------------------------------------------------------------------

|For the transition
period from ______________ to _______________


Commission
file number 000-21735


CREDIT MANAGEMENT
SOLUTIONS, INC.(Exact name of registrant as specified in its charter)
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Delaware
(State or other jurisdiction ofincorporation or organization)135 National Business Parkway, Annapolis Junction, MD(Address of principal executive offices) | 52-1549401
(I.R.S. EmployerIdentification No.)20701(Zip Code)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------

|Registrants telephone number,
including area code (301) 362-6000


FORMER
NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT.


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


Indicate
the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date: 7,822,081 shares of the Companys
Common Stock, $.01 par value, were outstanding as of August 4, 2000.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|CREDIT MANAGEMENT
SOLUTIONS, INC.Index to June 30, 2000 Form 10-Q
|-----------------------------------------------------------------

|        |  | Page                                                                                                                                                                                 
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |  | Part I  Financial Information                                                                                                                                                       
|       
|Item 1. |  | Financial Statements                                                                                                                                                                 
|       
|        |  | Consolidated Balance Sheets  June 30, 2000 (unaudited) and December 31, 1999                                                                                                        
|       
|        |  | Consolidated Statements of Operations Three Months Ended
          June 30,2000 (unaudited) and 1999 (unaudited) and Six Months Ended June 30, 2000 (unaudited) and 1999 (unaudited)
|       
|        |  | Consolidated Statements of Cash Flows  Six Months EndedJune 30, 2000 (unaudited) and 1999 (unaudited)                                                                               
|       
|        |  | Notes to Consolidated Financial Statements                                                                                                                                           
|       
|Item 2. |  | Managements Discussion and Analysis of Financial Condition
          and Results of Operations                                                                                      
|       
|        |  | Part II  Other Information                                                                                                                                                          
|       
|Item 1. |  | Legal Proceedings                                                                                                                                                                    
|       
|Item 2. |  | Changes in Securities                                                                                                                                                                
|       
|Item 3. |  | Defaults upon Senior Securities                                                                                                                                                      
|       
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                                                                                                                  
|       
|Item 5. |  | Other Information                                                                                                                                                                    
|       
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                                                                                                     
|       
|        |  | Signatures                                                                                                                                                                           
|       

|Item I.   
FINANCIAL STATEMENTS



Credit
Management Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
|-----------------------------------------------------------------------------------------------------------------

|                                                                | June 30,2000 | December 31,1999
|--------------------------------------------------------------- | ------------ | ----------------
|
|Assets                                                          |              |                 
|Current assets:                                                 |             
|Cash and cash equivalents                                       |              | $   2,054,014   
|Investments available-for-sale                                  |              | 1,954,210       
|Accounts receivable, net of allowance of $192,602 and           |             
|$311,583 in 2000 and 1999, respectively                         |              | 6,769,529       
|Costs and estimated earnings in excess of                       |             
|billings on uncompleted contracts                               |              | 54,755          
|Prepaid expenses and other current assets                       |              | 416,249         
|                                                               
|Total current assets                                            |              | 11,248,757      
|Property and equipment:                                         |             
|Computer equipment and software                                 |              | 5,687,289       
|Office furniture and equipment                                  |              | 1,223,036       
|Leasehold improvements                                          |              | 2,775,460       
|                                                               
|                                                                |              | 9,685,785       
|Accumulated depreciation and amortization                       |              | (3,817,928      
|                                                               
|                                                                |              | 5,867,857       
|Software development costs, net of accumulated amortization     |              | 2,823,987       
|Other non current assets                                        |              | 36,800          
|                                                               
|Total assets                                                    |              | $ 19,977,401    
|                                                               
|                                                                |             
|Liabilities and Shareholders Equity                            |             
|Current liabilities:                                            |             
|Accounts payable                                                |              | $   2,417,595   
|Accrued payroll and related expenses                            |              | 852,777         
|Billings in excess of costs and estimated                       |             
|earnings on uncompleted contracts                               |              | 595,626         
|Deferred revenue                                                |              | 2,767,004       
|Current portion of deferred tenant allowance                    |              | 144,866         
|Short-term borrowings                                           |              | 798,000         
|Current portion of long-term debt and capital lease obligations |              | 2,887           
|                                                               
|Total current liabilities                                       |              | 7,578,755       
|                                                               
|Deferred tenant allowance, less current portion                 |              | 1,068,385       
|                                                               
|Total liabilities                                               |              | 8,647,140       
|Shareholders equity:                                           |             
|Preferred stock, $.01 par value; 1,000,000 shares authorized;   |             
|no shares issued or outstanding                                 |              |                
|Common stock, $.01 par value; 40,000,000 shares authorized;     |             
|7,820,988 and 7,689,570 shares issued and outstanding at        |             
|June 30, 2000 and December 31, 1999, respectively               |              | 78,210          
|Additional paid-in capital                                      |              | 27,758,287      
|Accumulated deficit                                             |              | (16,506,236     
|                                                               
|Total shareholders equity                                      |              | 11,330,261      
|                                                               
|Total liabilities and shareholders equity                      |              | $ 19,977,401    
|                                                               

|THE ACCOMPANYING NOTES
ARE AN INTEGRAL PART OF THESEFINANCIAL STATEMENTS.
|-------------------------------------------------------------------------

|CREDIT
MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARIESCONSOLIDATED
STATEMENTS OF OPERATIONS
|---------------------------------------------------------------------------------------

|                                                   | Three Months EndedJune 30, | Six Months EndedJune 30,
|-------------------------------------------------- | -------------------------- | ------------------------
|
|
|Revenues:                                          |                            |                         
|License and software development fees              |                            | $ 3,229,165             
|Maintenance fees                                   |                            | 1,637,464               
|Computer hardware sales                            |                            | 116,592                 
|Service bureau revenues                            |                            | 1,661,982               
|                                                  
|                                                   |                            | 6,645,203               
|                                                  
|                                                  
|Costs of revenues:                                 |                           
|Cost of license and software development fees      |                            | 2,037,913               
|Cost of maintenance fees                           |                            | 430,990                 
|Cost of computer hardware sales                    |                            | 199,542                 
|Cost of service bureau                             |                            | 1,162,372               
|                                                  
|                                                   |                            | 3,830,817               
|                                                  
|Gross profit                                       |                            | 2,814,386               
|                                                  
|Other Operating Expenses:                          |                           
|Selling, general and administrative expenses       |                            | 2,948,208               
|Research and development costs                     |                            | 306,138                 
|                                                  
|                                                   |                            | 3,254,346               
|                                                  
|Loss from operations                               |                            | (439,960                
|                                                  
|Other income (expense):                            |                           
|Interest expense                                   |                            | (24,853                 
|Interest income                                    |                            | 69,198                  
|                                                  
|                                                  
|                                                   |                            | 44,345                  
|                                                  
|Net income (loss)                                  |                            | $  (395,615             
|                                                  
|                                                  
|Basic and diluted earnings (loss) per common share |                            | $        (0.05          
|                                                  
|Weighted average shares used in computation        |                            | 7,820,524               
|                                                  

|THE ACCOMPANYING NOTES
ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
|--------------------------------------------------------------------------

|CREDIT MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
|--------------------------------------------------------------------------------------

|                                                                                                         | Six Months Ended June 30,
|-------------------------------------------------------------------------------------------------------- | -------------------------
|
|                                                                                                         | (unaudited)              
|Operating activities:                                                                                    |                          
|Net loss                                                                                                 |                          
|Adjustments:                                                                                             |                          
|Depreciation                                                                                             |                          
|Amortization of software development costs                                                               |                          
|Amortization of deferred tenant allowance                                                                |                          
|Loss on disposal of property and equipment                                                               |                          
|Other lease obligations                                                                                  |                          
|                                                                                                        
|Changes in operating assets and liabilities:                                                             |                          
|Accounts receivable, net                                                                                 |                          
|Prepaid expenses and other current assets                                                                |                          
|Accounts payable                                                                                         |                          
|Accrued payroll and related expenses                                                                     |                          
|Net billings in excess of costs and estimated gross profit on uncompleted
                     contracts |                          
|Deferred revenue                                                                                         |                          
|                                                                                                        
|Net cash used in operating activities                                                                    |                          
|                                                                                                        
|Investing activities:                                                                                    |                          
|Purchase of investments available-for-sale                                                               |                          
|Sale of investments available-for-sale                                                                   |                          
|Proceeds from sale of property and equipment                                                             |                          
|Purchase of property and equipment                                                                       |                          
|Capitalized software development costs                                                                   |                          
|Increase in other assets                                                                                 |                          
|                                                                                                        
|Net cash (used in) provided by investing activities                                                      |                          
|                                                                                                        
|Financing activities:                                                                                    |                          
|Payments under capital lease obligations                                                                 |                          
|Proceeds from credit line                                                                                |                          
|Proceeds from issuance of common stock and exercise of stock options                                     |                          
|                                                                                                        
|Net cash provided by financing activities                                                                |                          
|                                                                                                        
|                                                                                                        
|Net change in cash and cash equivalents                                                                  |                          
|                                                                                                        
|                                                                                                        
|Cash and cash equivalents at beginning of period                                                         |                          
|                                                                                                        
|                                                                                                        
|Cash and cash equivalents at end of period                                                               |                          
|                                                                                                        

|THE ACCOMPANYING NOTES
ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
|--------------------------------------------------------------------------

|CREDIT
MANAGEMENT SOLUTIONS, INC. AND SUBSIDIARYNOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1.   BASIS
OF PRESENTATION


The accompanying unaudited
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six months ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2000. For further information, refer to the consolidated financial statements
and footnotes thereof included in the Companys annual report on Form 10-K,
for the year ended December 31, 1999. Certain amounts in the 1999 consolidated
financial statements have been reclassified to conform to the 2000 presentation.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 2.   COST
AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS


Uncompleted contracts
consist of the following components:
|---------------------------------------------------------------------------------------------------------------------------

|                            | BALANCE SHEET CAPTION
|--------------------------- | ---------------------
|
|December 31, 1999:          |                      
|Cost and estimated earnings |                      
|Billings                    |                      
|                           
|                            |                      
|                           
|June 30, 2000:              |                      
|Cost and estimated earnings |                      
|Billings                    |                      
|                           
|                            |                      
|                           

|All receivables on
contracts in progress are expected to be collected within twelve months.



NOTE 3.  
SEGMENT REPORTING



Segment
Reporting


The Company manages its
business by focusing on distinct products and services. Previously the Company
was organized into three distinct business lines; Credit Decisioning Systems,
e-Commerce and Service Bureau Alliances. In February 2000, the Company formed
two new wholly-owned subsidiaries; Credit Online Inc. and CMSI Systems Inc. and
reorganized its three business lines into these new subsidiaries.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                      | Three months ended June 30, 2000
|--------------------- | --------------------------------
|
|Revenues              |                                 
|Segment profit (loss) |                                 
|                     
|
|
|Revenues              |                                 
|Segment profit (loss) |                                 
|                     

|A reconciliation of segment
profit for all segments to net income (loss) before income taxes is as follows:
|-----------------------------------------------------------------------------------------------------------

|                                                           | Three months ended June 30,
|---------------------------------------------------------- | ---------------------------
|
|Total segment profit                                       |                            
|Unallocated corporate, general and administrative expenses |                            
|Depreciation and amortization                              |                            
|Net interest income                                        |                            
|                                                          
|Net income (loss)                                          |                            
|                                                          

---

|                      | Six months ended June 30, 2000
|--------------------- | ------------------------------
|
|Revenues              |                               
|Segment profit (loss) |                               
|                     
|
|
|Revenues              |                               
|Segment profit (loss) |                               
|                     

|A reconciliation of segment profit
for all segments to net income (loss) before income taxes is as follows:
|-----------------------------------------------------------------------------------------------------------

|                                                           | Six months ended June 30,
|---------------------------------------------------------- | -------------------------
|
|Total segment profit                                       |                          
|Unallocated corporate, general and administrative expenses |                          
|Depreciation and amortization                              |                          
|Net interest income                                        |                          
|                                                          
|Net Loss                                                   |                          
|                                                          

|Substantially all of the
revenues and assets or the Companys reportable segments are attributed to
or located in the United States.




ITEM 2. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The following discussion
and analysis provides information which management believes is relevant to an
assessment and understanding of the Companys interim results of operations
and financial condition. This discussion should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of
Operations included in the Companys Annual Report on Form 10-K for the
year ended December 31, 1999. This report contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Investors are cautioned that such statements are
only predictions and that actual events or results may differ materially. In
evaluating such statements, investors should carefully consider the various
factors identified in this Report which could cause actual results to differ
materially from those indicated by such forward-looking statements, including
the matters set forth in Certain Factors That May Affect Future
Results, Financial Condition and the Market Price of Securities.



OVERVIEW


The Company was
incorporated in 1987 to commercialize an automated credit processing system
developed by James R. DeFrancesco, the Companys co-founder, and Scott L.
Freiman, the Companys President, Chief Executive Officer and co-founder
while they were employed by American Financial Corporation (AFC), an
automobile finance servicing company owned by Mr. DeFrancesco. AFC was acquired
in October 1987 by Perpetual Savings Bank, FSB. Mr. DeFrancesco and Mr. Freiman
retained ownership of AFCs credit processing software which formed the
basis for CreditRevue. CreditRevue was initially released in 1988. Since its
initial release, the Company has continually enhanced CreditRevue in response to
the needs of its customers. CreditConnection became commercially available in
July 1996. The Dun & Bradstreet OneScore product was commercially released
in October 1997. The CreditRevue Service Bureau was introduced in January 1998.
The Companys original strategy was to enter into marketing alliances with
established service bureau providers whereby such providers would re-market
CreditRevue Service Bureau to their clients on a transaction fee basis. The
Company is changing its strategy to focus on an application service provider
(ASP) or other service bureau model built around its eValuate product and
an enhanced CreditRevue product offering. New licenses for the original
CreditRevue Service Bureau are no longer being offered. Dun & Bradstreet
Portfolio Monitoring was introduced in June 1998 and the CreditOnline network,
was announced in February 1999. In March 1999, the Company announced
Credit the introduction of CreditRevue Maestro, an automated analysis engine for evaluating and decisioning
consumer and small business credit applications. During 1999, the CreditRevue
Maestro product was renamed eValuate. The Company currently expects eValuate to
be released in the third quarter of 2000.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In
February 2000, the Company announced the formation of two new wholly-owned subsidiaries:
Credit Online, Inc. and CMSI Systems, Inc. Credit Online, Inc., focusing on the Companys
e-commerce strategy, intends to expand and enrich the Companys offerings in online lending for
the automotive industry. Credit Online, Inc. also may leverage investments made in
infrastructure to expand into additional vertical markets in the business-to-business
Internet credit arena. CMSI Systems, Inc. intends to  continue to provide the Companys line of
licensed credit management software solutions, including CreditRevue.


License fees for
CreditRevue are recognized based on a percentage-of-completion method, measured
generally on a cost-incurred basis. The Company typically charges a
nonrefundable fee of 25% of the preliminary estimate of the total license fee to
develop an analysis of the customers credit operations and a plan for the
configuration and implementation of CreditRevue according to the customers
requirements. Costs consist primarily of direct labor, temporary contract labor
and office space. Contracts in progress are reviewed periodically, and revenues
and earnings are adjusted based on revisions in contract value and estimated
time to completion. The Company recognizes revenue for maintenance fees pro rata
over the term of the related agreement, which is generally one year. Maintenance
fees received in advance of revenue recognition are included in deferred
revenue. In addition, as a convenience to its customers, the Company offers
third-party computer hardware through various reseller arrangements. However,
neither third-party hardware nor third-party software sales are a focus of the
Companys overall marketing strategy. For the six months ended June 30,
2000, revenues from third-party hardware and software sales accounted for 1.0%
and 1.8% of total revenues, respectively. Revenues from resales of third-party
computer hardware and software are recognized at the time of shipment and
installation.


Certain of the
Companys products and services, including CreditConnection, CreditRevue
Service Bureau and Dun & Bradstreets OneScore and the CreditOnline
network are charged on a per transaction basis. As a result, the Company
anticipates that transaction-based revenue will represent an increasing
proportion of the Companys revenue. The Companys sales and marketing
efforts will no longer be exclusively targeted at generating license-based
revenue but will be increasingly focused on generating transaction-based revenue
from prospective customers. The Companys anticipated future growth is
based, in large part, on the success of these products and services and the
transition to a transaction-based revenue stream. Accordingly, the failure by
the Company to generate demand for the CreditConnection service, Dun &
Bradstreets OneScore, Dun & Bradstreets Portfolio Monitoring,
CreditOnline network, eValuate, the occurrence of any significant technological
problems, such as a system failure incurred prior to the implementation of a
back-up computer system, any inadequacy of the Companys business
interruption insurance to cover costs associated with system failure or business
interruptions, or the failure of the Company to successfully manage the
transition to a transaction-based revenue stream would have a material adverse
effect on the Companys business, results of operations and financial
condition.


Since 1987, the Company has
continually invested in the development and introduction of new products,
services and enhancements to its software. Research and development expenditures
are expensed as incurred. Certain software development costs are capitalized
subsequent to the establishment of technological feasibility in accordance with
Statement of Financial Accounting Standards No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Based
on the Companys current research and development process, technological
feasibility is established upon completion of a working model. The Company
intends to continue to expend substantial resources on developing new products
and services and enhancements to its software to incorporate technological
developments and satisfy evolving customer needs.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|As of June 30, 2000, the
Company had 20 employees in its sales and marketing organization. The Company
intends to hire additional sales and marketing personnel in the future to help
the Company expand its market presence. Competition for such personnel is
intense, and there can be no assurance that the Company can retain its existing
sales personnel or that it can attract, assimilate or retain additional highly
qualified sales persons in the future. If the Company is unable to hire such
personnel on a timely basis, the Companys business, results of operations
and financial condition could be materially and adversely affected.



RESULTS OF
OPERATIONS


Total Revenues.
Total revenues increased 8.2% from $6.1 million in the three months ended June
30, 1999 to $6.6 million in the three months ended June 30, 2000. The primary
factors affecting revenue growth in the quarter relate to increases in
maintenance and service bureau revenues. The Companys revenues are derived
from four sources: license and software development fees, maintenance fees,
computer hardware sales and service bureau revenues.


Total revenues decreased
3.5% from $12.3 million in the six months ended June 30, 1999 to $11.8 million
in the six months ended June 30, 1999. Year to year revenue performance was
affected by lower revenues in the first quarter due in large part to delays in
buying decisions resulting from Year 2000.


License and Software
Development Fees. CreditRevue accounted for virtually all of the
Companys license and software development fee revenue through June 30,
2000. License and software development fees decreased 14.1% from $3.8 million in
the three months ended June 30, 1999 to $3.2 million in the three months ended
June 30, 2000. The decrease in license and software development fee revenue
through June 30, 2000 was the result of longer related spending than expected sales cycles for
the CreditRevue product during the last half of 1999, due in part to Year 2000 related spending
freezes implemented by many of the Companys prospective customers. The slower sales cycle
resulted in fewer new license contracts and lower license revenues.
Compared to the first quarter of 2000, license and software development fees
increased 24.2% from $2.6 million to $3.2 million.


License and software
development fees decreased 20.3% from $7.3 million for the six months ended June
30, 1999 to $5.8 million for the six months ended June 30, 2000, primarily due to Year 2000 related spending freezes implemented by many of the Companys
prospective customers.


Maintenance Fees.
Maintenance fees include fees from software maintenance agreements. Maintenance
fees increased 14.5% from $1.4 million in the three months ended June 30, 1999
to $1.6 million in the three months ended June 30, 2000. The growth in these
revenues during the periods presented was the result of increased maintenance
fees associated with the increased number of licenses of CreditRevue outstanding
during such periods. New system implementations coupled with increases of
professional services license enhancements resulted in increased base licenses
subject to maintenance fees.


Maintenance fees increased
19.2% from $2.6 million for the six months ended June 30, 1999 to $3.1 million
for the six months ended June 30, 2000. In addition to a growing installed base
of CreditRevue systems, maintenance agreements include annual increases for
increases in the Consumer Price Index (CPI). The Company increased its standard maintenance
fees to 18% from 15% of the license fee for CreditRevue systems installed after 1998.
Maintenance fees related to third party software are included in this category
and with the increased number of installed CreditRevue systems, maintenance on
the required third party software is also increasing. The increased system base,
increases in the consumer price index and increases to annual maintenance fees, all contributed to this growth in
maintenance fee revenue on a year to year basis.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Computer Hardware
Sales. Computer hardware sales revenues decreased 58.7% from $0.3 million in
the three months ended June 30, 1999 to $0.1 million in the three months ended
June 30, 2000. Computer hardware sales revenue consists of revenues received
from resales of third-party hardware in connection with the license and
installation of the Companys software. The fluctuation in such revenues
during these periods is the result of customer purchase preferences for computer
hardware systems. In certain instances, CreditRevue customers have volume
discount arrangements with hardware resellers making them eligible for discounts
greater than those offered by the Company.


Computer hardware sales for
the six months ended June 30, 2000 decreased 84.4% to $0.2 million as compared
to $1.1 million for the six months ended June 30, 1999. Because  hardware sales
typically occur in conjunction with the sale and implementation of new
CreditRevue systems, the higher number of CreditRevue sales during the
first six months of 1999 had a direct impact on the higher level of hardware
sales during that period.


Service Bureau Fees.
Service Bureau revenues originate from several sources including:
CreditConnection transaction and interface fees, Credit Online network fees, Dun
& Bradstreet OneScore and Portfolio Management transaction and
implementation fees and CreditRevue Service Bureau. Total service bureau
revenues increased 148.4% from $0.7 million for the quarter ended June 30, 1999,
as compared to $1.7 million for the quarter ended June 30, 2000. The
CreditConnection service and Credit Online network generated $0.9 million of
revenue in the quarter ended June 30, 2000 compared to $0.4 million for the
period ended June 30, 1999, an increase of 202.5%. Revenue increases are the
result of increases in the number of dealers and lenders enrolled in the
CreditConnection service and the resulting growth in transaction volume. At June 30,
2000 there were approximately 340 dealers enrolled in the service compared
to approximately 170 dealers at June 30, 1999.


Dun & Bradstreet
OneScore was commercially released in the fourth quarter of 1997. Portfolio
Monitoring and CreditRevue Service Bureau were commercially released in the
first quarter of 1999. These products account for an aggregate
revenue of $0.8 million in the quarter ended June 30, 2000, which represents
an increase of 336.8% compared to the $0.2 million recorded in the quarter ended
June 30, 1999. The increase in 2000 over 1999 relates to one-time revenues of
approximately $0.6 million associated with the winding down of the CreditRevue
Service Bureau business.


Service bureau revenues
increased 112.9% from $1.3 million for the six months ended June 30, 1999 to
$2.7 million for the six months ended June 30, 2000. Of the total $2.7 million
in 2000, CreditConnectionrelated revenues accounted for $1.7 million, up
214.8% from the $0.8 million reported for the first six months of 1999. The
growth in CreditConnection® revenue related to the increased number of
dealers and lenders active on the system at June 30, 2000. The balance of
service bureau fees for the first six months of 2000, totaling $0.9 million,
represent revenues related to the CreditRevue® service bureau and the Dun
& Bradstreet OneScore and Portfolio monitoring services. These other service
bureau revenues increased 200.4% from $0.5 million to $0.9 million for the six
months ended June 30, 1999 and 2000, respectively. Approximately $0.6 million of
the increase in other service bureau revenues is attributable to one-time
revenues associated with the winding-down of the CreditRevue Service Bureau
business.


Cost of License and
Software Development Fees. Cost of license and software development fees
consists primarily of salaries and benefits for in-house programmers, the cost of
temporary contract labor and costs for office space. Cost of license and
software development fees increased 7.3% from $1.9 million in the three months
ended June 30, 1999 to $2.0 million in the three months ended June 30, 2000. As
a percentage of license fee and software development revenue, cost of license
and software development fees were 50.5% and 63.1% in the three months ended
June 30, 1999 and 2000, respectively. The increase in cost of license and
software fees as a percentage of license and software development fees relates
to the fluctuation in the Companys quarterly revenues and the costs
associated with in-house programmers and temporary contract labor. Revenue
fluctuations result in corresponding fluctuations in the extent to which the
Company employs temporary contractors and may also result in increases or
decreases in-house programmer staffing as revenues increase or decrease. The net
increase in costs of $0.1 million is the result of increased costs associated
with temporary contractors.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The cost of license and
software development fees decreased 4.9% from $3.6 million for the six months
ended June 30, 1999 to $3.4 million for the six months ended June 30, 2000. As a
percentage of license and software development revenue, the cost of license and
software development fees were 49.3% and 58.8% for the six months ended June 30,
1999 and 2000, respectively. The use of temporary contractors is primarily
responsible for the increase in costs as a percentage of revenue. In order to help
ensure that required skills and knowledge are available to implement new systems, the
Company retains a core pool of skilled programmers and analysts with expertise
in implementing CreditRevue® systems. In periods of rapid revenue growth the
employee pool is supplemented with temporary contractors. The costs of temporary
contractors exceeds the cost of permanent employees and in those instances where
temporary contractors must be employed to meet project deadlines, costs as a
percent of revenue will increase.


Costs of Maintenance
Fees. Cost of maintenance fees consists primarily of personnel and related
costs for customer maintenance and support. Cost of maintenance fees increased
43.4% from $0.3 million in the three months ended June 30, 1999 to $0.4 million
in the three months ended June 30, 2000. As a percentage of maintenance fee
revenue, cost of maintenance fees was 21.0% and 26.3% in the three months ended
June 30, 1999 and 2000, respectively. The dollar increase in the cost of
maintenance fees reflects increased costs associated with maintenance for third
party software for which the Company is a reseller. As the number of CreditRevue
systems in use increases, the base of installed third party software is likewise
increasing. Compared to second quarter 1999, there were a greater number of
third party software systems under contract. The costs associated with maintenance for these third party software products resulted in increased costs of
maintenance for the current year.


Cost of maintenance fees
increased 26.2% from $0.6 million for the six months ended June 30, 1999 to $0.7
million for the six months ended June 30, 2000. This increase in costs related
directly to the increase in revenues and the increase in third party software
maintenance costs. Cost of maintenance as a percentage of maintenance revenues
were 21.8% and 23.1% for the six months ended June 30, 1999 and 2000,
respectively.


Cost of Computer
Hardware Sales. Cost of computer hardware sales consists of the
Companys cost of computer hardware resold to the Companys customers
that are licensing CreditRevue and salaries and benefits for systems
integration employees. Cost of computer hardware sales decreased 54.0% from $0.4
million in the three months ended June 30, 1999 to $0.2 million in the three
months ended June 30, 2000. As a percentage of computer hardware sales revenue,
cost of computer hardware sales was 153.7% and 171.7% in the three months ended
June 30, 1999 and 2000, respectively. The increase in the cost of computer
hardware sales as a percent of revenue is the result of decreased hardware
margins resulting from decreased hardware sales, while fixed expenses, primarily
personnel-related in nature, remained relatively constant during the same
period.


Cost of computer hardware
sales decreased 76.7% from $1.2 million for the six months ended June 30, 1999
to $0.2 million for the six months ended June 30, 2000. As a percentage of
hardware revenues, costs were 114.9% and 171.3% for the six months ended June 30,
1999 and 2000, respectively. During the period that costs decreased 76.7%,
corresponding revenues decreased 84.4%. Costs of computer hardware sales exceeded associated revenues because
the Company has certain fixed costs for salaries and benefits for the systems
integration staff required to support hardware sales activities.


Cost of Service Bureau
Revenues. Cost of service bureau fees consists primarily of personnel costs
associated with the operation and support of the service bureau. Other costs of
service bureau revenues include equipment rental expenses, communications
network costs from third parties and hardware and software passthrough
expenses. Service bureau costs increased 66.2% from $0.7 million for the three
months ended June 30, 1999 to $1.2 million for the three months ended June 30,
2000. Cost of service bureau revenues as a percent of
service bureau revenues were 104.6% and 69.9% for the three months ended June
30, 1999 and 2000, respectively. While service bureau costs increased 66.2%, corresponding service bureau
revenues increased 148.4%.
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|Cost of service bureau
revenues increased 52.5% from $1.4 million for the six months ended June 30 1999
to $2.2 million for the six months ended June 30, 2000. As a percentage of
revenues, costs of service bureau were 112.4% and 80.5% for the six months ended
June 30, 1999 and 2000, respectively. While costs increased 52.5%, corresponding
revenues increased 112.9%. The increase in costs relates to increased labor
costs related to one-time software deliveries for the CreditRevue service bureau
and fees associated with alliance partner revenue sharing arrangements for the
Credit Connection service.


Selling, General and
Administrative Expenses. Selling, general and administrative expenses
increased 15.8% from $2.5 million in the three months ended June 30, 1999 to
$2.9 million in the three months ended June 30, 2000. Of this $0.4 million
increase, approximately $0.3 million related to office rental expense. During
1999 the Company successfully subleased previously abandoned office space for
which approximately $0.3 of loss reserves had been established in 1998. The reversal of
these loss reserves in 1999 is responsible for the increase when comparing 2000
to 1999. Approximately $0.1 million of the increase in selling, general and
administrative expenses relates to non-salary based administrative expenses,
consisting primarily of advertising and repairs and maintenance expenses.


Selling general and
administrative expenses increased 2.1% from $5.5 million for the six months
ended June 30, 1999 to $5.6 million for the six months ended June 30, 2000. As a
percentage of total revenues, selling, general and administrative expenses were
44.9% and 47.6% for the six months ended June 30, 1999 and 2000, respectively.
The increase in selling, general and administrative expenses of $0.1 million on
a period to period basis relates to the reversal in 1999 of loss reserves on
office space abandoned in 1998 of approximately $0.3 million. Excluding the
reversal of the loss reserve, selling, general and administrative expenses on a
year-to-year basis would reflect a decrease of approximately $0.2 million,
resulting primarily from reduced labor related expenses.


Research and Development
Costs. Research and development costs consist primarily of salaries and
benefits for in-house programmers. These costs remained constant at $0.3 million
during the three months ended June 30, 2000 as compared to the three months
ended June 30, 1999. Overall research and development staffing at June 30, 2000 was 26 compared
to 35 at June 30, 1999. The Company is continuing to capitalize certain
development costs associated with the eValuate product until commercial release,
which is expected to occur in the third quarter of 2000. During the three months
ended June 30, 2000, approximately $0.5 million of expenses related to the
development of eValuate were capitalized which compares to approximately $0.4
million which was capitalized during the second quarter of 1999. See Note 1 to
Notes to Consolidated Financial Statements in the Companys Annual Report
on Form 10-K for the year ended December 31, 1999.


Research and development
costs decreased 20.6% from $0.7 million for the six months ended June 30, 1999
to $0.5 million for the six months ended June 30, 2000. This decrease is
attributable primarily to slightly higher levels of capitalized software
development expenses during 2000.


Interest Income
(Expense). For the three months ended June 30, 2000, net interest income was
approximately $44,000 compared to approximately $120,000 for the same period in
1999. The decline in net interest income is the result of lower average cash balances
during the respective periods, and increased
interest expense resulting from increased borrowings against the Companys
working capital line of credit.


Net interest income
decreased 48.1% from $0.2 million for the six-month period ended June 30, 1999
to $0.1 million for the six months ended June 30, 1999. Lower average invested
cash balances and increased average outstanding borrowings against the
Companys working capital line of credit are responsible for the decline in
net interest income.
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|LIQUIDITY AND
CAPITAL RESOURCES


The Company has primarily funded its
working capital needs, operating losses and investments in property and
equipment from the net proceeds from the Companys initial public offering
completed in December 1996. During the six months ended June 30, 1999, the
Company consumed net cash in operating activities of $3.2 million. During the
six months ended June 30, 2000, the Company consumed $0.3 million of cash in
 . The improvement in cash flow from operations results
primarily from decreases in working capital investments. The working capital
components effecting the greatest change during the quarter were accounts
payable and accrued expenses, which consumed $2.3 million less in 2000, and net billings in excess of
costs and estimated gross profit on uncompleted contracts, which reflected a net
improvement of $1.0 million in 2000 compared to 1999.


The Companys cash
used in investing activities consists principally of investments in property and
equipment and capitalized software expenses. During the six months ended June
30, 1999 and 2000, the Company invested a total of $0.3 and $0.5 million in
property and equipment, respectively. These investments were directly
attributable to the Companys growth in operations. The Company does not
have any material commitments for the purchase of property and equipment at June
30, 2000. During the six months ended June 30, 1999 and 2000, the Company
invested a total of $1.1 and $0.9 million in capitalized software expenses, respectively.


The Company has
historically relied principally on its bank line of credit and proceeds from its
initial public offering completed in December 1996 for its financing needs. The
Company received $22.6 million of net proceeds from its initial public offering.
The Company maintains a secured bank line of credit in the amount of $1.5
million, of which the balance outstanding at June 30, 2000 was approximately
$0.8 million. The line of credit bears interest at the banks prime rate
per annum (9.5% at June 30, 2000). Further, the banks line of credit
requires the banks written consent prior to, among other things,  the
payment of cash dividends,  the Companys engagement in a substantially
different business activity, or the purchase by the Company of any
interest in another enterprise or entity.


The Company currently
anticipates that its available cash resources, expected cash flows from
operations, and its bank line of credit will be sufficient to meet its presently
anticipated working capital, capital expenditure and debt repayment requirements
through 2001.



Impact of Year
2000.



The Year 2000 issue is a
result of computer programs which store or process date-related information
using only two digits to represent the year. These programs may not be able to
properly distinguish between a year in the 1900s and a year in the
2000s. Failure of these programs to distinguish between the two centuries
could cause the programs to yield erroneous results or even to fail.


The Company recognizes the
significance of the year 2000 issue and has implemented a formal year 2000
program to minimize the impact of the year 2000 on the Company and its customers.


As of June 30, 2000, the
analysis, remediation, testing and implementation had been substantially
completed for (i) the Companys customers credit decisions systems,
(ii) the software and systems comprising the Companys e-commerce systems,
(iii) the Companys service bureau customers systems, and (iv) the
Companys internal products and systems. The Company has not experienced
any material disruption to its business associated with the Year 2000 issue. To
the Companys knowledge, none of the Companys customers has
experienced any material disruption to its business which has been associated
with the Year 2000 issue in connection with the Companys products.
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|For the Year 2000 and
beyond, the Company continues to code according to its Year 2000 coding
standards. In addition, because system clocks are now in the Year 2000, all
testing necessarily includes testing of dates in the Year 2000.


CERTAIN FACTORS
THAT MAY AFFECT FUTURE RESULTS, FINANCIAL CONDITION AND THE MARKET PRICE OF SECURITIES.


Uncertainty of Future
Results of Operations; Fluctuations in Quarterly Results of Operations.
Prior growth rates in the Companys revenue and net income should not be
considered indicative of future results of operations. Future results of
operations will depend upon many factors, including market acceptance of
 the Companys  CreditConnection service, the demand for the Companys licensed software products and related services, the successful
distribution and implementation of the Companys products and services, the
successful transition from predominantly license fee-based revenue to
predominantly transaction fee-based revenue, the timing of new product and
service development and introductions and software enhancements by the Company
or its competitors, the level of product, service and price competition, the
length of the Companys sales cycle, the size and timing of individual
transactions, the delay or deferral of customer implementations, the
Companys success in expanding its customer support organization, direct
sales force and indirect distribution channels, the nature and timing of
significant marketing programs, the mix of products and services sold, the
timing of new hires, the ability of the Company to timely develop and
successfully market new products and services and control costs, competitive
conditions in the industry and general economic conditions. In addition, the
decision to implement the Companys products or services typically involves
a significant commitment of customer resources and is subject to the budget
cycles of the Companys customers. Licenses of CreditRevue generally
reflect a relatively high amount of revenue per order. The loss or delay of
individual orders, therefore, would have a significant impact on the
Companys revenue and quarterly results of operations. The timing of
revenue is difficult to predict because of the length and variability of the
Companys sales cycle, which has ranged to date from two to 18 months from
initial customer contact to the execution of a license agreement. In addition,
since a substantial portion of the Companys revenue is recognized on a
percentage-of-completion basis, the timing of revenue recognition for its
licenses may be materially and adversely affected by delays or deferrals of
customer implementations. Such delays or deferrals may also increase expenses
associated with such implementations which would materially and adversely affect
related operating margins. The Companys operating expenses are based in
part on planned product and service introductions and anticipated revenue trends
and, because a high percentage of these expenses are relatively fixed, a delay
in the recognition of revenue from a limited number of transactions could cause
significant variations in operating results from quarter-to-quarter and could
result in operating losses. To the extent such expenses precede, or are not
subsequently followed by, increased revenues, the Companys results of
operations would be materially and adversely affected. As a result of these and
other factors, revenues for any quarter are subject to significant variation,
and the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. There can be no assurance that the Company
will be profitable in any future quarter or that such fluctuations in results of
operations will not result in volatility in the price of the Companys
Common Stock. Due to all of the foregoing factors, it is likely that in some
future quarter the Companys results of operations will be below the
expectations of public market analysts and investors. In such event, the market
price of the Companys Common Stock will be materially and adversely
affected.


Dependence on
CreditRevue Product Line. License fees, maintenance fees and third-party
computer hardware sales associated with licenses and installations of
CreditRevue accounted for the majority of the Companys revenues through
June 30, 2000. Although the Company has introduced its CreditConnection service,
the Company expects that revenues generated from licenses and installations of
CreditRevue will continue to account for a significant portion of the
Companys revenues for the foreseeable future. The life cycles of the
Companys products and services are difficult to predict due to the effect
of new product and service introductions or software enhancements by the Company
or its competitors, market acceptance of new and enhanced versions of the
Companys products and services, and competition in the Companys
marketplace. A decline in the demand for CreditRevue, whether as a result of
competition, technological change, price reductions or otherwise, would have a
material adverse effect on the Companys business, results of operations
and financial condition.
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|Lengthy Sales and
Implementation Cycle. The licensing of the Companys software products
and services is often an enterprise-wide decision by prospective customers and
generally requires the Company to provide a significant level of education to
prospective customers regarding the use and benefits of the Companys
products and services. In addition, the implementation of the Companys
software products involves a significant commitment of resources by prospective
customers and is commonly accompanied by substantial reengineering efforts and a
review of the customers credit analysis, decisioning and funding
processes. The cost to the customer of the Companys products and services
is typically only a portion of the related hardware, software, development,
training and integration costs associated with implementing a large-scale
automated credit origination information system. For these and other reasons,
the period between initial customer contact and the implementation of the
Companys products is often lengthy (ranging from between two and 18
months) and is subject to a number of significant delays over which the Company
has little or no control. The Companys implementation cycle could be
lengthened by increases in the size and complexity of its license transactions
and by delays or deferrals in its customers implementation of appropriate
interfaces and networking capabilities. Delays in the sale or implementation of
a limited number of license transactions could have a material adverse effect on
the Companys business, results of operations and financial condition and
cause the Companys results of operations to vary significantly from
quarter to quarter.


Market Acceptance of
CreditOnline and CreditConnection; Transition to Transaction-Based Revenue.
The Companys CreditConnection service was commercially introduced in 1996,
the Companys CreditOnline network was introduced in February 1999, and
the Companys CreditRevue Service Bureau service was commercially
introduced in January 1998. The CreditConnection service, CreditOnline network
and CreditRevue Service Bureau product (which may be introduced in new ASP or
other formats, based on the eValuate and CreditRevue software in development) are
projected to account for a significant portion of the Companys revenues in
the future. As a result, demand and market acceptance for these services are
subject to a high level of uncertainty, and the Company will be heavily
dependent on their market acceptance. There can be no assurance that these
products and services will be commercially successful. The failure of the
Company to generate demand for the CreditConnection service, CreditOnline
network or CreditRevue Service Bureau product, or the occurrence of any
significant technological problems with such products or services, would have a
material adverse effect on the Companys business, results of operations
and financial condition. Historically, virtually all of the Companys
revenues have been derived from license fees, maintenance fees and hardware
sales associated with licenses and installations of CreditRevue. Under the terms
of its license agreements, a majority of the Companys revenues are
realized during the configuration and installation of CreditRevue. However, the
Company anticipates that a significant portion of the Companys future
revenues will be derived from per-usage transaction-based fees and subscription
fees charged to credit originators and financial institutions for transactions
originated through the CreditConnection service, CreditOnline network and
CreditRevue Service Bureau product. There can be no assurance that the Company
will successfully manage the transition of a significant portion of its revenues
from license-based revenue to transaction-based revenue. The failure of the
Company to successfully manage the transition to a transaction-based revenue
stream would have a material adverse effect on the Companys business,
results of operations and financial condition.


Reliance on Certain
Relationships. The Company has established relationships with a number of
companies that it believes are important to its sales, marketing and support
activities, as well as to its product, service and software development efforts.
The Company has relationships with automated scorecard companies, hardware
vendors and credit bureaus. There can be no assurance that these companies, most
of which have significantly greater financial and marketing resources than the
Company, will not develop or market products and services which will compete
with the Companys products and services in the future. Furthermore, since
many of these relationships are informal in nature, they are terminable by
either party at will. Other relationships are terminable by either party after a
relatively short notice period. There can be no assurance that these companies
will not otherwise discontinue their relationships with or support of the
Company. The failure by the Company to maintain its existing relationships or to
establish new relationships in the future, because of a divergence of interests,
acquisition of one or more of these third parties or other reasons, could have a
material adverse effect on the Companys business, results of operations
and financial condition.
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|In addition, the Company
has formed strategic alliances with Automatic Data Processing (ADP) and
Universal Computer Systems (UCS) for remarketing CreditConnection and with Dun
& Bradstreet for the marketing of OneScore. There can be no assurance that
these relationships will be successful. Moreover, there can be no assurance that
these companies will actively remarket CreditConnection or OneScore. The failure
by the Company to leverage and maintain its existing relationships ADP, UCS and
Dun & Bradstreet, or to establish new relationships in the future, because
of a divergence of interests, acquisition of one or more of these third parties
or other reasons, could have a material adverse effect on the Companys
business, results of operations and financial condition.


Dependence on Large
License Fee Contracts and Customer Concentration. A relatively small number
of customers have accounted for a significant percentage of the Companys
revenues. License fees for CreditRevue are based on a percentage-of-completion
method on a cost-incurred basis with the final installment being paid in full
upon acceptance of the Companys software. The Company receives continuing
revenues on CreditRevue from annual maintenance agreements which commence upon
acceptance of the software by the customer. Maintenance agreements are renewable
annually by the customer, and the license agreements are generally co-terminous
with the maintenance agreements. Although the Company has experienced a high
degree of customer loyalty, the Company cannot predict how many maintenance
agreements will be renewed or the number of years of renewal. Revenues generated
by the Companys 10 largest customers accounted for 55.1% and 55.4% of
total revenues in 1999 and 1998, respectively. None of the Companys
customers individually accounted for 10% or more of total revenues in 1999 and
one customer accounted for 10% of revenues in 1998. The Company expects that a
limited number of customers will continue to account for a significant
percentage of revenue for the foreseeable future. The loss of any major customer
or any reduction or delay in orders by any such customer, delay or deferral in
configurations or enhancements by such customers or the failure of the Company
to successfully market its products or services to new customers, could have a
material adverse effect on the Companys business, results of operations
and financial condition.


Dependence on Consumer
Retail Lending Industry; Cyclical Nature of Consumer Lending. The
Companys business is currently concentrated in the consumer lending
industry and is expected to be so concentrated for the foreseeable future,
thereby making the Company susceptible to a downturn in the consumer lending
industry. For example, a decrease in consumer lending could result in a smaller
overall market for the Companys products and services. Furthermore, banks
in the United States are continuing to consolidate, decreasing the overall
potential number of customers for the Companys products and services. In
addition, demand for consumer loans has been historically cyclical, in large
part based on general economic conditions and cycles in overall consumer
indebtedness levels. Changes in general economic conditions that adversely
affect the demand for consumer loans, the willingness of financial institutions
to provide funds for such loans, changes in interest rates and the overall
consumer indebtedness level, as well as other factors affecting the consumer
lending industry, could have a material adverse effect on the Companys
business, results of operations and financial condition.


Management of Changing
Business. The Company has experienced significant changes in its business,
such as a reduction in the Companys staff and an expansion in the Companys customer base and the
development of new products, services and enhancements to its software. Such
changes have placed and may continue to place a significant strain upon the
Companys management, systems and resources. As of June 30, 2000, the
Company had 181 employees down from 191 employees at June 30, 1999. The
Companys ability to compete effectively and to manage future changes will
require the Company to continue to improve its financial and management
controls, reporting systems and procedures and budgeting and forecasting
capabilities on a timely basis and expand its sales and marketing work force,
and train and manage its employee work force. There can be no assurance that the
Company will be able to manage such changes successfully. The Companys
failure to do so could have a material adverse effect upon the Companys
business, results of operations and financial condition.
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|Dependence on Key
Personnel. The Companys future performance depends in significant part
upon the continued service of its key technical, sales and senior management
personnel, particularly, Scott L. Freiman, President and Chief Executive
Officer. The Company has obtained for key-person life insurance on the life of
Mr. Freiman. The loss of the services of one or more of the Companys
executive officers could have a material adverse effect on the Companys
business, results of operations and financial condition. The Company retains its
key employees through the use of equity incentive programs, including stock
option plans, employee stock purchase plans, and competitive compensation
packages. In addition to entering into an employment agreement with Mr. Freiman,
the Company entered into employment agreements with Mr. Miles Grody, the
Companys Senior Vice President and President and Chief Executive Officer
of the Companys CMSI Systems subsidiary, Mr. Howard Tischler, the
Companys Senior Vice President and President and Chief Executive Officer
of the Companys Credit Online subsidiary and Mr. Robert Vollono, the
Companys Senior Vice President and Chief Financial Officer . The
Companys future success also depends on its continuing ability to attract
and retain highly qualified technical, customer support, sales and managerial
personnel. In particular, the Company has encountered difficulties in hiring
sufficient numbers of programmers and technical personnel. Competition for
qualified personnel is intense, and there can be no assurance that the Company
will be able to retain its key technical, sales and managerial employees or that
it can attract, assimilate or retain other highly qualified technical, sales and
managerial personnel in the future.


Rapid Technological
Change; Risk Associated with New Products, Services or Enhancements. The
credit processing software products and services industry in which the Company
competes is characterized by rapid technological change, frequent introductions
of new products and services, changes in customer demands and evolving industry
standards. The introduction or announcement of new products, services or
enhancements by the Company or one or more of its competitors embodying new
technologies or changes in industry standards or customer requirements could
render the Companys existing products or services obsolete or
unmarketable. Accordingly, the life cycles of the Companys products are
difficult to estimate. The Companys future results of operations will
depend, in part, upon its ability to enhance its products and services and to
develop and introduce new products and services on a timely and cost-effective
basis that will keep pace with technological developments and evolving industry
standards, as well as address the increasingly sophisticated needs of the
Companys customers. There can be no assurance that these new products and
services will gain market acceptance or that the Company will be successful in
developing and marketing new products or services that respond to technological
change, evolving industry standards and changing customer requirements, that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these products or
services, or that its new products or services will adequately meet the
requirements of the marketplace and achieve any significant degree of market
acceptance. In addition, a majority of the Companys current products
operate in the UNIX operating system. Although the Companys software is
designed to work with other operating environments, a requirement to port to a
different operating system could be costly and time consuming and could have a
material adverse effect on the Companys business, results of operations
and financial condition. Failure of the Company to develop and introduce, for
technological or other reasons, new products and services in a timely and
cost-effective manner could have a material adverse effect on the Companys
business, results of operations and financial condition. Furthermore, the
introduction or announcement of new product or service offerings or enhancements
by the Company or the Companys competitors may cause customers to defer or
forgo purchases of the Companys products or services, which could have a
material adverse effect on the Companys business, results of operations
and financial condition.


System Interruption and
Security Risks; Potential Liability; Possible Lack of Adequate Insurance; and
System Inadequacy. The Companys operations are dependent, in part, on
its ability to protect its system from interruption by damage from fire,
earthquake, power loss, telecommunication failure, unauthorized entry or other
events beyond the Companys control. The Companys computer equipment
constituting its central computer system, including its processing operations,
is located at a single site. The Company is currently in the process of
acquiring and implementing a back-up, off-site processing system capable of
fully supporting its operations in the event of system failure. The Company
relocated operations to new leased facilities in Annapolis Junction, MD in late
1998. The new facilities, which include a state of the art data center, is
primary production center for the Companys data processing needs. Prior to
full implementation of the back up facility, the Companys operations are
subject to substantial risks, including temporary interruptions resulting from
damage caused by any one or more of the foregoing factors or due to other causes
including computer viruses, hackers or similar disruptive problems. While the
Company maintains $1.6 million of property insurance coverage, business
interruption insurance coverage, $2.0 million of errors and omissions insurance
coverage and $10.0 million of umbrella insurance coverage, such insurance may
not be adequate to compensate the Company for all losses that may occur or to
provide for costs associated with system failure or business interruption. Any
damage or failure that causes interruptions in the Companys operations
could have a material adverse effect on the Companys business, results of
operations and financial condition.
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|Persistent problems
continue to affect public and private data networks. For example, in a
number of networks, hackers have bypassed firewalls and have appropriated
confidential information. Such computer break-ins and other disruptions may
jeopardize the security of information stored in and transmitted through the
computer systems of the parties utilizing the Companys services, which may
result in significant liability to the Company and also may deter potential
customers from using the Companys services. In addition, while the Company
attempts to be careful with respect to the employees it hires and maintain
controls through software design and security systems to prevent unauthorized
employee access, it is possible that, despite such safeguards, an employee of
the Company could obtain access, which would also expose the Company to a risk
of loss or litigation and possible liability to users. The Company attempts to
limit its liability to customers, including liability arising from the failure
of the security features contained in the Companys system and services,
through contractual provisions. However, there can be no assurance that such
limitations will be enforceable. There can be no guarantee that the growth of
the Companys customer base will not strain or exceed the capacity of its
computer and telecommunications systems and lead to degradations in performance
or system failure. Any damage, failure or delay that causes interruptions in the
Companys operations could have a material adverse effect on the
Companys business, results of operations and financial condition.


Risk of Defects,
Development Delays and Lack of Market Acceptance. Software products and
services as sophisticated as those offered by the Company often encounter
development delays and may contain defects or failures when introduced or when
new versions are released. The Company has in the past and may in the future
experience delays in the development of software and has discovered, and may in
the future discover, software defects in certain of its products. Such delays
and defects may result in lost revenues during the time corrective measures are
being taken. Although the Company has not experienced material adverse effects
resulting from any such defects to date, there can be no assurance that, despite
testing by the Company, errors will not be found in its existing software in
future releases or enhancements, or that the Company will not experience
development delays, resulting in delays in the commercial release of new
products and services, the loss of market share or the failure to achieve market
acceptance. Any such occurrence could have a material adverse effect upon the
Companys business, results of operations and financial condition.


Future Capital Needs;
Uncertainty of Additional Financing. The Company currently anticipates that
its available cash resources combined with anticipated funds from operations
will be sufficient to meet its presently anticipated working capital and capital
expenditure requirements through 2001. Thereafter, the
Company may need to raise additional funds.


The Company may need to
raise additional funds sooner in order to fund more rapid expansion, to develop
new or enhanced products and services, to respond to competitive pressures or to
acquire complementary businesses or technologies. If additional funds are raised
through the issuance of equity securities, the percentage ownership of the
stockholders of the Company will be reduced, stockholders may experience
additional dilution, or such equity securities may have rights, preferences or
privileges senior to those of the holders of the Companys Common Stock.
There can be no assurance that additional financing will be available when
needed on terms favorable to the Company or at all. If adequate funds are not
available or are not available on acceptable terms, the Company may be unable to
develop or enhance its products and services, take advantage of future
opportunities or respond to competitive pressures, which could have a material
adverse effect on the Companys business, results of operations and
financial condition.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Government Regulation
and Uncertainties of Future Regulation. The Companys current and
prospective customers, which consist of state and federally chartered banks,
saving and loan associations, credit unions, consumer finance companies and
other consumer lenders, as well as customers in the industries that the Company
may target in the future, operate in markets that are subject to extensive and
complex federal and state regulations. While the Company is not itself directly
subject to such regulations, the Companys products and services must be
designed to work within the extensive and evolving regulatory constraints in
which its customers operate. These constraints include federal and state
truth-in-lending disclosure rules, state usury laws, the Equal Credit
Opportunity Act, the Fair Credit Reporting Act and the Community Reinvestment
Act. Furthermore, some consumer groups have expressed concern regarding the
privacy and security of automated credit processing, the use of automated credit
scoring tools in credit underwriting, and whether electronic lending is a
desirable technological development in light of the current level of consumer
debt. The failure by the Companys products and services to support
customers compliance with current regulations and to address changes in
customers regulatory environment, or to adapt to such changes in an
efficient and cost-effective manner, could have a material adverse effect on the
Companys business, results of operations and financial condition.


Control by Existing
Stockholders. Assuming no exercise of outstanding options, James R.
DeFrancesco, the Companys co-founder and Scott L. Freiman, the
Companys President and Chief Executive Officer collectively beneficially
own approximately 55% of the outstanding shares of Common Stock. As a result,
these stockholders will be able to exercise control over matters requiring
stockholder approval, including the election of directors, and the approval of
mergers, consolidations and sales of all or substantially all of the assets of
the Company. This may prevent or discourage tender offers for the Companys
Common Stock unless the terms are approved by such stockholders.


Possible Volatility of
Stock Price. The trading price of the Companys Common Stock could be
subject to significant fluctuations in response to variations in quarterly
operating results, the gain or loss of significant orders, changes in earning
estimates by analysts, announcements of technological innovations or new
products by the Company or its competitors, general conditions in the consumer
lending and software industries, credit processing software and services and
other events or factors. In addition, the stock market in general has
experienced extreme price and volume fluctuations which have affected the market
price for many companies in industries similar or related to that of the Company
and which have been unrelated to the operating performance of these companies.
These market fluctuations may adversely affect the market price of the
Companys Common Stock.


Effect of Certain
Charter Provisions; Anti-takeover Effects of Certificate of Incorporation,
Bylaws and Delaware Law. The Companys Board of Directors has the
authority to issue up to 1,000,000 shares of Preferred Stock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights of those shares without any further vote or action by the stockholders.
The Preferred Stock could be issued with voting, liquidation, dividend and other
rights superior to those of the Common Stock. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by the rights of
the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock of the
Company. Further, certain provisions of the Companys Certificate of
Incorporation, including provisions that create a classified Board of Directors,
and certain provisions of the Companys Bylaws and of Delaware law could
delay or make more difficult a merger, tender offer or proxy contest involving
the Company.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PART II
 OTHER INFORMATION



ITEM 1.   LEGAL
PROCEEDINGS


The
Company is not a party to any material legal proceedings.



ITEM 2.  
CHANGES IN SECURITIES


None.



ITEM 3.  
DEFAULTS UPON SENIOR SECURITIES


None.



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

|(a) |  | The
Companys Annual Meeting of Stockholders was held on June 29, 2000.
|--- |  | -----------------------------------------------------------------------

|(b) |  | Not
applicable
|--- |  | --------------

|(c) |  | Motions
before stockholders
|--- |  | ---------------------------

| | (1) |  | Election
of One Director
| | --- |  | ------------------------

|Name              | Votes For | Votes Against | Non Votes | Abstentions
|----------------- | --------- | ------------- | --------- | -----------
|Robert P. Vollono |           | 7,455,014     |           | 64,182     

| | (2) |  | Approval
and Adoption of Amendment to the Companys 1997 Stock Incentive Plan
| | --- |  | -----------------------------------------------------------------------------

| | Votes For | Votes Against | Non Votes | Abstentions
| | --------- | ------------- | --------- | -----------
| |           | 7,360,775     |           | 148,067    

| | (3) |  | Ratification
of Ernst & Young, LLP as Auditors
| | --- |  | ----------------------------------------------

| | Votes For | Votes Against | Non Votes | Abstentions
| | --------- | ------------- | --------- | -----------
| |           | 7,506,298     |           | 2,100      

|ITEM 5.   OTHER
INFORMATION


None.



ITEM 6.  
EXHIBITS AND REPORTS ON FORM 8-K


(a)
EXHIBITS.
|-------------------------------------------------------------------------------------------------

| |  |       
| |  | ------
| |  | 3.1   
|
| |  | 3.2   
|
| |  | 4.1   
|
| |  | 4.2   
|
| |  | 10.1  
|
| |  | 10.2  
|
| |  | 10.3  
|
| |  | 10.4  
|
| |  | 10.5  
|
| |  | 10.6  
|
| |  | 10.7  
|
| |  | 10.8.1
| |  |       
|
| |  | 10.8.2
| |  |       
|
| |  | 10.8.3
|
| |  | 10.8.4
|
| |  | 10.8.5
| |  |       
|
| |  | 10.8.6
|
| |  | 10.9  
| |  |       
|
| |  | 10.10 
| |  |       
|
| |  | 10.11 
|
| |  | 10.12 
|
| |  | 10.13 
|
| |  | 10.14 
|
| |  | 10.15 
|
| |  | 10.16 
|
| |  | 10.17 
|
| |  | 10.18 
|
| |  | 10.19 
|
| |  | 27    
|

|(b)
REPORTS ON FORM 8-K.


No
reports on Form 8-K were filed during the quarter for which this report is
filed.
|---------------------------------------------------------------------------------------------------------------

|* | Incorporated by reference to the Exhibits filed with the Companys Registration Statement
on Form S-1, File NO. 333-14007.
|- | --------------------------------------------------------------------------------------------------------------------------

|** | Incorporated by reference to the Companys 1997 Proxy Statement, file no. 000-21735
|-- | -----------------------------------------------------------------------------------

|SIGNATURES


Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Date: August 14, 2000 | CREDIT MANAGEMENT SOLUTIONS, INC.        
                    (Registrant)By: /s/ Scott L. Freiman
Scott L. FreimanPresident, Chief Executive Officerand Director(Principal Executive Officer)
| | --------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Date: August 14, 2000 | By: /s/ Robert P. Vollono
Robert P. VollonoSenior Vice President, Treasurer, ChiefFinancial Officer and Director (PrincipalFinancial and Accounting Officer)