SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-Q



X     Quarterly  Report  Pursuant  to  Section  13 or  15(d)  of the  Securities
      Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998

                                       OR

      Transition  Report  Pursuant  to  Section  13 or 15(d)  of the  Securities
      Exchange Act of 1934 For the transition period from ____________ to
      ________________

                          Commission File No: 00-113959

                                CPS SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)

                TEXAS                                      75-1607857
    (STATE OR OTHER JURISDICTION OF      (I.R.S. EMPLOYER IDENTIFICATION NO.)
    INCORPORATION OR ORGANIZATION)

                            3400 CARLISLE, SUITE 500
                               DALLAS, TEXAS 75204
                                 (214) 855-5277

    (Address, including zip code, and telephone number, including area code,
                  of Registrant's principal executive offices)


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

                                          Yes         X          No
                                                   --------              -------

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

                  CLASS                     OUTSTANDING AS OF  NOVEMBER 11, 1998
                  -----                     ---------------------------------
             Common stock
         Par value $.01 per share                      6,734,928


                                        1
<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                        CPS SYSTEMS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
                      CONDENSED CONSOLIDATED BALANCE SHEETS

                             (AMOUNTS IN THOUSANDS)

                                                                    As of                  As of
ASSETS                                                            09/30/98                12/31/97
CURRENT ASSETS                                                   (unaudited)
<S>                                                           <C>                      <C> 
     Cash                                                                $1,561                   $327
     Accounts receivable                                                 $4,133                 $1,718
     Deferred income tax                                                   $913                   $160
     Inventory                                                             $150                   $161
     Refundable income taxes                                               $200                    $75
     Prepaid expense and other current assets                              $738                   $134
     Deferred offering costs                                                 $0                   $367
                                                              ------------------      -----------------
                 Total current assets:                                   $7,695                 $2,942
PROPERTY AND EQUIPMENT                                                     $760                   $536
SOFTWARE DEVELOPMENT COST                                                $3,164                   $938
OTHER ASSETS
     Costs in excess of net assets acquired                              $1,693                 $1,905
     Debt issue costs                                                       $99                   $160
     Other assets                                                           $16                    $18
                                                              ------------------      -----------------
                                                                         $1,808                 $2,083
                                                              ------------------      -----------------
                                                                        $13,428                 $6,499
                                                              ==================      =================
LIABILITIES  AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
     Current portion of long term debt                                       $0                   $731
     Accounts payable                                                      $692                   $683
     Accrued salaries, wages and payroll taxes                               $0                    $12
     Accrued offering costs                                                  $0                   $243
     Accrued income tax payable                                             $37                     $0
     Other accrued expenses                                                $318                   $230
     Customer deposits and unearned revenue                              $4,887                 $1,533
                                                              ------------------      -----------------
                 Total current liabilities:                              $5,934                 $3,432
OTHER LIABILITIES
     Long-term debt                                                      $2,014                 $2,014
     Deferred income taxes                                                 $317                   $317
     Notes payable-shareholders                                              $0                   $123
     Unearned revenue                                                       $47                    $47   
     Other liabilities                                                      $56                    $47
                                                              ------------------      -----------------
                 Total long term debt:                                   $2,434                 $2,548
                                                              ------------------      -----------------
                 Total Liabilities:                                      $8,368                 $5,980
PUT WARRANTS                                                                 $0                   $242
COMMITMENTS AND CONTINGENCIES                                                $0                     $0
SHAREHOLDERS' EQUITY
     Preferred stock, $.01 par value; authorized
        10,000,000 shares, none issued and outstanding                       $0                     $0
     Common stock, $.01 par value, 50,000,000 shares
        authorized; issued  and outstanding,  6,732,502
        and 3,904,736 shares                                                $67                    $39
     Additional paid-in capital                                          $6,946                   $961
     Accumulated deficit                                                 (1,953)                  (723)
                                                              ------------------      -----------------
                 Total Shareholders' Equity:                             $5,060                   $277
                                                              ------------------      -----------------
                                                                        $13,428                 $6,499
                                                              ==================      =================
</TABLE>

The accompanying notes are an integral part of these statements.

                                        2

<PAGE>
                        CPS SYSTEMS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)




                                                                  THREE MONTHS ENDED SEPT 30,         NINE MONTHS ENDED SEPT 30,
                                                                  1998                 1997            1998                1997
                                                                  -----------------------------     -------------------------------
Revenue
<S>                                                               <C>                <C>             <C>               <C>   
           License fees                                                 $327               $430            $927              $1,795
           Recurring maintenance and service fees                     $1,136               $976          $3,265              $2,887
           Product sales                                                $642               $651          $2,041              $2,299
           Other service fees                                           $356               $257            $908                $738
                                                                  -----------------------------     -------------------------------
                                                                      $2,461             $2,314          $7,141              $7,719

Cost of Revenue
           Product sales                                                $476               $380          $1,609              $1,616
           Purchased software                                           $309               $132            $684                $414
           Distribution                                                  $10                $16             $17                 $56
                                                                  -----------------------------     -------------------------------
                                                                        $795               $528          $2,310              $2,086

                                                                  -----------------------------     -------------------------------
                Gross profit                                          $1,666             $1,786          $4,831              $5,633

Operating Expenses:
           Support and customer service                               $1,018               $899          $2,940              $2,358
           Selling and marketing                                        $593               $293          $1,631                $702
           Research and development                                       $7               $407            $273              $1,136
           General and administrative                                   $492               $263          $1,260                $793
           Amortization of intangible goodwill &
             non-compete agreements                                      $70                $84            $211                $265
                                                                  -----------------------------     -------------------------------
                                                                      $2,180             $1,946          $6,315              $5,254

                Earnings(loss) from operations                         ($514)             ($160)        ($1,484)               $379 
                                                                  -----------------------------     -------------------------------
Interest and financing costs                                             $54                $43            $387                $275
                                                                  -----------------------------     -------------------------------
                Earnings(loss) before income taxes                     ($568)             ($203)        ($1,871)               $104

Income tax expense(benefit)                                            ($191)              ($87)          ($643)                $87
                                                                  -----------------------------     -------------------------------
                Net earnings(loss)                                     ($377)             ($116)        ($1,228)                $17
                                                                  =============================     ===============================


Net earnings(loss) per common share
     Basic and Diluted                                                ($0.06)            ($0.03)         ($0.21)              $0.00

Weighted average shares used in computing net
earnings per common share:
     Basic and Diluted                                                 6,733              3,905           5,790               3,905

</TABLE>
The accompanying notes are an integral part of these statements.


                                        3

<PAGE>
                        CPS SYSTEMS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                  (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)


                                                                                NINE MONTHS ENDED SEPT 30,
                                                                                   1998            1997
                                                                              --------------------------------
<S>                                                                           <C>                <C> 
Cash flows from operating activities:
     Net income                                                                       $(1,229)           $ 17
     Adjustments to reconcile net income(loss) to net cash:
        Depreciation and amortization                                                     555             559
        Adjustment to put warrants                                                        125             (90)
        Loss on disposal of property and equipment                                          1               0
        Accrued interest to shareholders                                                    2               0
        Changes in assets and liabilities, net of business acquired:                        0
            Accounts receivable                                                        (2,415)           (217)
            Refundable income taxes                                                      (125)              0
            Inventories                                                                    12              31
            Deferred income tax expense                                                  (912)             14
            Prepaid expenses and other current assets                                    (556)            (66)
            Accounts payable                                                             (151)             58
            Accrued expenses                                                              347             (24)
            Customer deposits and unearned revenue                                      3,354             188
            Income taxes payable                                                           37            (129)
            Other liabilities                                                               9              21
                                                                              --------------------------------
                          Net cash (used)provided by operating activities               ($946)           $361

Cash Flows from investing activities:
     Purchase of property and equipment                                                  (416)           (216)
     Software development costs                                                        (2,318)           (186)
     Other receivables                                                                                      4
                                                                              --------------------------------
                          Net cash used by investing activities                       ($2,734)          ($399)

Cash flows from financing activities:
     Principal payment on long-term debt                                                 (855)           (216)
     Proceeds from public offering, net of offering cost                                5,768               0
                                                                              --------------------------------
                          Net cash provided(used) by financing activities              $4,913           ($216)

Net increase(decrease) in cash                                                          1,234            (254)
Cash at beginning of period                                                               327             592
                                                                              --------------------------------
Cash at end of period                                                                  $1,561            $338
                                                                              ================================

Supplementary Cash Flow Disclosure:
     Interest and financing costs paid                                                    198             337
     Income taxes paid, net                                                               200             202

</TABLE>

The accompanying notes are an integral part of these statements.


                                        4

<PAGE>

                        CPS SYSTEMS, INC. AND SUBSIDIARY
                 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                           SEPTEMBER 30, 1998 AND 1997

        (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


NOTE A - BASIS OF PRESENTATION

The interim condensed  consolidated  financial  statements  included herein have
been  prepared  by the  Company  without  audit.  These  statements  reflect all
adjustments which are, in the opinion of management, necessary to present fairly
the  consolidated   financial  position  as  of  September  30,  1998,  and  the
consolidated  results of  operation  for the three  months and nine months ended
September  30, 1998 and 1997.  All such  adjustments  are of a normal  recurring
nature.  Certain  information  and  footnote  disclosures  normally  included in
financial  statements  prepared in accordance with generally accepted accounting
principles  have been  condensed  or  omitted.  The  Company  believes  that the
disclosures are adequate to make the information presented not misleading. It is
suggested  that these  consolidated  financial  statements  and notes be read in
conjunction with the audited consolidated financial statements and notes for the
year ended December 31, 1997,  included in the Company's Form SB-2  Registration
Statement(File  No.  333-39173)  filed in  conformance  with  SOP 97-2  with the
Securities and Exchange Commission, effective March 25, 1998.

NOTE B - REVENUE RECOGNITION

The company  licenses  its  software  products.  Pursuant to AICPA  Statement of
Position 97-2,  "Software  Revenue  Recognition",  revenue from software license
fees is  recognized  when an  agreement  has been  executed,  software  has been
delivered and installed,  all significant  contractual obligations have been met
and  collection of the related  receivable is probable.  Post contract  customer
support  revenue,   consisting  of  continuing  maintenance  and  service  fees,
including  that bundled with initial  license fees,  is deferred and  recognized
ratably over the contractual  periods the services are provided.  Product sales,
consisting  primarily of computer hardware,  are recognized upon delivery of the
product.

NOTE C - INITIAL PUBLIC OFFERING

On  March  30,  1998 the  Company  successfully  completed  its  initial  public
offering(IPO)  of common stock.  The Company issued  1,900,000  shares of common
stock in connection  with its IPO at $4.00 per share,  which upon payment of all
offering costs resulted in net proceeds of approximately $5,767, net of issuance
costs of approximately  $1,833. In April 1998, the underwriters  exercised their
option  to  purchase  285,000   additional  shares  of  common  stock  to  cover
over-allotments.  All of the over-allotment  shares were sold by certain selling
shareholders,  resulting  in no  proceeds  to the  company.  However the Company
incurred additional issuance cost of $148,000. Net proceeds net of issuance cost
are $5,619.

In connection  with the IPO, all of the Company's  outstanding put warrants were
converted  into common stock.  The exercise of the put warrants  resulted in the
issuance of 927,766  common shares and proceeds to the Company of  approximately
$2.4.  Upon  exercise  of the put  warrants,  their  recorded  value of $367 was
reclassified to paid in capital.

NOTE D - SENIOR TERM LOAN AND REVOLVING LINE OF CREDIT

In April  1998,  the  Company  repaid  its  senior  term loan in full  utilizing
proceeds  from the IPO.  The  balance of the senior term loan at the time of the
repayment,   including  principal,   interest  and  repayment   penalties,   was
approximately $761. Upon repayment of the senior term loan, the Company's $1,000
revolving line of credit with the same  financial  institution  was  terminated.
There were no borrowings outstanding under the revolving line of credit.


                                        5

<PAGE>
                        CPS SYSTEMS, INC. AND SUBSIDIARY
                               SEPTEMBER 30, 1998


NOTE E - STOCK OPTIONS

Upon the  completion  of the IPO, the Company  granted  335,000 stock options to
officers and employees at an exercise  price equal to the IPO price of $4.00 per
share  pursuant  to the 1997  Equity  Participation  Plan ("the  Plan").  Of the
original 335,000 share options  granted,  27,500 lapsed pursuant to the terms of
the Plan. These options vest over a period of 3 years and expire in March 2008.

The  Company's  stock option plan is  accounted  for under the  intrinsic  value
method in which compensation  expense is recognized for the amount, if any, that
the fair value of the underlying  common stock exceeds the exercise price at the
date of grant.  Accordingly,  no compensation expense was recorded in connection
with the aforementioned options.




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


This  section  of the  Report  contains  forward-looking  statements  within the
meaning of Section  21E of the  Securities  Exchange  Act of 1934,  as  amended.
Discussion   containing  such   forward-looking   statements  may  be  found  in
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations  under the captions  "Comparison of Three Months Ended  September 30,
1998 and  September 30, 1997,"  "Comparison  of Nine Months Ended  September 30,
1998 and  September  30, 1997" and  "Liquidity  and Capital  Resources."  Actual
results for future periods could differ  materially from those discussed in this
section as a result of the various risks and  uncertainties  discussed herein. A
comprehensive  summary  of such  risks  and  uncertainties  can be  found in the
Company's  registration  statement on Form S-1 (File No.  333-39173),  which was
declared  effective  on March 25,  1998.  All dollar  amounts are  expressed  in
thousands,  except per share amounts.  The financial  results  expressed in this
Item 2 are unaudited.







                                        6

<PAGE>
                        CPS SYSTEMS, INC. AND SUBSIDIARY

                               SEPTEMBER 30, 1998


RESULTS OF OPERATIONS

The following  table sets forth,  for the periods  indicated,  the percentage of
total revenues represented by certain revenue, expense and income items:

<TABLE>
<CAPTION>
                                                                 THREE MONTHS ENDED SEPT 30,          NINE MONTHS ENDED SEPT 30,
                                                               1998                 1997               1998                1997
                                                            ----------             ---------         ----------           --------- 
<S>                                                         <C>                   <C>                <C>                 <C>  
Revenue
           License fees                                           13.3%                 18.6%              13.0%               23.3%
           Recurring maintenance and service fees                 46.2%                 42.2%              45.7%               37.4%
           Product sales                                          26.1%                 28.1%              28.6%               29.7%
           Other service fees                                     14.5%                 11.1%              12.7%                9.6%
                                                            ----------             ---------         ----------           --------- 
                Total Revenue                                    100.0%                100.0%             100.0%              100.0%
                                                            ----------             ---------         ----------           --------- 

Cost of Revenue
           Product sales                                          19.3%                 16.4%              22.5%               20.9%
           Purchased software.                                    12.6%                  5.7%               9.6%                5.4%
           Distribution                                            0.4%                  0.7%               0.2%                0.7%
                                                            ----------             ---------         ----------           --------- 
                Total Cost of Sales                               32.3%                 22.8%              32.3%               27.0%
                                                            ----------             ---------         ----------           --------- 

                Gross profit                                      67.7%                 77.2%              67.7%               72.9%

Operating Expenses:
           Support and customer service                           41.4%                 38.9%              41.2%               30.5%
           Selling and marketing                                  24.1%                 12.7%              22.8%                9.1%
           Research and development                                0.3%                 17.6%               3.8%               14.7%
           General and administrative                             20.0%                 11.4%              17.6%               10.3%
           Amortization of intangible goodwill &
             non-compete agreements                                2.8%                  3.6%               3.0%                3.4%
                                                            ----------             ---------         ----------           --------- 

                 Total Operating Expense                          88.6%                 84.2%              88.4%               68.0%
                                                            ----------             ---------         ----------           --------- 

                 Earnings(loss) from operations                  (20.9%)                (7.0%)            (20.7%)               4.9%

Interest and financing costs                                       2.2%                  1.9%               5.4%                3.6%
                                                            ----------             ---------         ----------           --------- 
                 Earnings(loss) before income taxes              (23.1%)                (8.9%)            (26.1%)               1.3%

Income tax expense(benefit)                                       (7.8%)                (3.8%)             (9.0%)               1.1%
                                                            ----------             ---------         ----------           --------- 
                 Net earnings(loss)                              (15.3%)                (5.1%)            (17.1%)               0.2%
                                                            ----------             ---------         ----------           --------- 

</TABLE>




                                        7

<PAGE>
                        CPS SYSTEMS, INC. AND SUBSIDIARY

                               SEPTEMBER 30, 1998

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997


REVENUE

The Company's  revenue includes revenue of license fees,  recurring  maintenance
and service fees, product sales, and other service fees.

The Company's  total revenue was $2,461 for the three months ended September 30,
1998  compared to $2,314 for the three  months  ended  September  30,  1997,  an
increase of $147 or 6.4%.  This  increase  was  primarily  due to an increase in
remittance  processing  ("RPS")  hardware and software sales.  This increase was
partially  offset by a decrease in sales for property  appraisal and  assessment
systems ("CAMA") and integrated voice response systems ("IVR") sales.

License  Fees.  The  Company's  revenue from license fees was $327 for the three
months  September 30, 1998 compared to $430 for the three months ended September
30, 1997,  a decrease of $103 or 24.0%.  The  decrease  was  primarily  due to a
decrease in new  customer  IVR,  CAMA and  property  tax billing and  collection
systems ("Collection")  installations.  This decrease was partially offset by an
increase in remittance processing software sales.

Recurring  Maintenance  and Service Fees.  The Company's  revenue from recurring
fees was $1,136 for the three months ended  September  30, 1998 compared to $976
for the three months ended September 30, 1997, an increase of $160 or 16.4%. The
increase was primarily  attributable  to the  realization  of recurring  revenue
associated  with Collection  license fee sales of a prior period.  The recurring
revenue  attributable to the  maintenance  and service  contracts are recognized
upon the effective date of the  maintenance and service  contracts  (which could
become  effective  up  to  12  months  following   execution  of  the  licensing
agreement.).

Product  Sales.  Revenue from product  sales was $642 for the three months ended
September  30, 1998  compared to $651 for the three months ended  September  30,
1997, a decrease of $9 or 1.4%.  This decrease is primarily due to a decrease in
sales of hardware for Collection, CAMA and IVR systems. This decrease was offset
by an increase in RPS hardware sales.

 Other  Service  Fees.  Revenue  from other  service fees was $356 for the three
months  ended  September  30, 1998  compared to $257 for the three  months ended
September 30, 1997, a increase of $99 or 38.5%.  This increase was primarily due
to increased installation sales RPS systems.


COST OF REVENUE

The Company's cost of revenue  includes the cost of hardware  product sales, the
cost of  purchased  software,  amortization  of  software  development  cost and
distribution costs.

The total cost of revenue was $795 for the three months ended September 30, 1998
compared to $528 for the three months ended  September  30, 1997, an increase of
$267 or 50.6%.  This yielded a gross profit margin of 67.7% for the three months
ended  September  30, 1998  compared to a gross  profit  margin of 77.2% for the
three months ended  September  30, 1997.  This  decrease in gross profit  margin
resulted  from an increase in purchased  software from 5.7% of total revenue for
the three  months  ended  September  30, 1997 to 12.6% of total  revenue for the
three months ended September 30, 1998.

                                        8

<PAGE>
                        CPS SYSTEMS, INC. AND SUBSIDIARY

                               SEPTEMBER 30, 1998


Product  Sales.  The cost of product sales was $476, or  approximately  74.1% of
product sales,  for the three months ended  September 30, 1998 compared to $380,
or  approximately  58.4% of product sales,  for the three months ended September
30, 1997, an increase of $96 or 25.3%.  This increase was primarily due to costs
associated with an increase in higher RPS hardware sales and partially offset by
a decrease in Collection, CAMA and IVR hardware sales. The increase in cost as a
percentage of product sales was due to RPS hardware  comprising a larger portion
of total hardware sales. RPS hardware  generally has a higher cost of sales than
other hardware products.

Purchased Software.  Cost of software includes purchased software as well as the
amortization of capitalized software development costs. The cost of software was
$309,  or  approximately  94.5% of  license  fees,  for the three  months  ended
September 30, 1998 compared to $132, or approximately 30.7% of license fees, for
the three months ended  September 30, 1997, an increase of $177 or 134.1%.  This
increase was largely due to the installation of RPS third-party  software sales.
The  Company is a  preferred  reseller of  Rpxpress  software.  Amortization  of
software  development cost was $33 for the three months ended September 30, 1998
and $35 for the three months ended September 30, 1997.

 Distribution.  The costs  associated with  distribution  were $10 for the three
months  ended  September  30, 1998  compared to $16 for the three  months  ended
September  30, 1997, a decrease of $6 or 37.5%.  This decrease was due primarily
decreased Collection, CAMA and IVR hardware shipments.


OPERATING EXPENSES

The Company's operating expenses includes support and customer service,  selling
and  marketing,  research  and  development,  general  and  administrative,  and
amortization of intangible goodwill & non-compete agreements.

Support and Customer  Service.  Expenses related to support and customer service
were $1,018 for the three months ended  September  30, 1998 compared to $899 for
the three months ended  September 30, 1997,  an increase of $119 or 13.2%.  This
increase  resulted  primarily from an increase in salaries and hiring to enhance
customer service and support future growth. In addition,  outsourcing costs rose
to accommodate  expansion into new markets and build  infrastructure  for growth
expected from Year 2000 sales.

 Selling and Marketing.  The Company's selling and marketing  expenses were $593
for the three months  ended  September  30, 1998  compared to $293 for the three
months ended  September 30, 1997,  an increase of $300 or 102.4%.  This increase
was due to an increase in the numbers of sales personnel and expenses related to
covering new markets such as California,  Illinois,  Nevada,  Georgia,  Ohio and
Tennessee. In addition,  sales commission expenses rose as a result of increased
sales of RPS systems.

 Research and  Development.  Research and  development  expenses were $7 for the
three  months  ended  September  30, 1998  compared to $407 for the three months
ended  September  30,  1997,  a decrease of $400 or 98.3%.  These  expenses  are
comprised  primarily of salaries as well as amounts paid to outside  consultants
to supplement continuing product enhancement efforts. The decrease resulted from
the  capitalization of research and development cost associated with new product
development.

General and  Administrative.  General and administrative  expenses were $492 for
the three months ended  September 30, 1998 compared to $263 for the three months
ended  September  30,  1997,  an increase of $229 or 87.1%.  This  increase  was
primarily  due to an increase in travel and  insurance  activity  created by the
IPO, as well as, expenses associated

                                        9

<PAGE>
                        CPS SYSTEMS, INC. AND SUBSIDIARY

                               SEPTEMBER 30, 1998

with  additional  General and  Administrative  staffing.  To a lesser extent the
increase is associated with increased employee benefits.

Amortization  of Goodwill and  Non-compete  Agreements.  The Company  incurred a
non-cash  expense  related to the 1994  acquisition  of the Company by a private
investor group of $70 for the three months ended  September 30, 1998 compared to
$84 for the three months ended  September 30, 1997, a decrease of  approximately
$14 or 16.7%. The decrease in amortization is primarily due to the completion in
December 1997 of the non-compete agreement amortization.


EARNINGS FROM OPERATIONS

Loss from operation was $514, or (20.9%) of revenue,  for the three months ended
September 30, 1998,  compared to a loss of $160,  or (7.0%) of revenue,  for the
three months ended September 30, 1997. This decrease in earnings from operations
of $354 was primarily due to the increase of purchased software cost to 12.6% of
total revenue for the three months ended  September 30, 1998 compared to 5.7% of
total revenue for the three months ended  September  30, 1997,  and increases of
operating  expenses for support and customer  service and selling and marketing.
This loss was  partially  offset by the  reduction in research  and  development
expenses from 17.6% of total revenue for the 3 months ended  September 30, 1997,
to .3% for the three months ended September 30, 1998.


NON-OPERATING EXPENSES

Interest and Financing Costs.  The Company's  interest expense for its long term
debt was $54 for the three months ended  September  30, 1998 compared to $43 for
the three months ended  September  30, 1997,  an increase of $11 or 25.6%.  This
increase was primarily attributed to an adjustment of decreased interest expense
for the put  warrants  during the three months ended  September  30, 1997.  This
increase  was  partially  offset  by  interest  income on  investments  from the
remaining proceeds of the IPO for the three months ended September 30, 1998.

Income Tax Expense.  The Company's provision for income taxes was $(191) for the
three months  ended  September  30, 1998  compared to $(87) for the three months
ended  September  30, 1997, a decrease of $104 or 119.5%.  This  increase in tax
benefit was attributable to decreased earnings from operations.


COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997


REVENUE

The Company's  revenue includes revenue of license fees,  recurring  maintenance
and service fees, product sales, and other service fees.

The Company's  total revenue was $7,141 for the nine months ended  September 30,
1998 compared to $7,719 for the nine months ended September 30, 1997, a decrease
of $578 or 7.5%.  This decrease was primarily due to a decrease in CAMA hardware
and software sales and to a lesser extent a decrease in Collection  hardware and
software sales. The decrease was partially offset by an increase in RPS hardware
and software sales.

License  Fees.  The  Company's  revenue  from license fees was $927 for the nine
months September 30, 1998 compared to $1,795 for the nine months ended September
30, 1997,  a decrease of $868 or 48.4%.  The  decrease  was  primarily  due to a
decrease in new customer  Collection and CAMA  installations.  This decrease was
partially offset by an increase in RPS software installations.

                                       10

<PAGE>
                        CPS SYSTEMS, INC. AND SUBSIDIARY

                               SEPTEMBER 30, 1998


Recurring  Maintenance  and Service Fees.  The Company's  revenue from recurring
fees was $3,265 for the nine months ended  September 30, 1998 compared to $2,887
for the nine months ended September 30, 1997, an increase of $378 or 13.1%.  The
increase was primarily  attributable  to the  realization  of recurring  revenue
associated with  Collection  license fee sales of a prior period and to a lesser
extent IVR  maintenance  contracts.  The recurring  revenue  attributable to the
maintenance and service  contracts are recognized upon the effective date of the
maintenance and service  contracts (which could become effective up to 12 months
following  execution  of the  licensing  agreement.)  During  this same  period,
hardware  maintenance  declined due to hardware  manufacturers  offering  longer
extended  warranties,  declining costs of hardware and the Company's belief that
some customers no longer view hardware  maintenance  as a mission  critical need
for all components.

Product  Sales.  Revenue from product sales was $2,041 for the nine months ended
September  30, 1998  compared to $2,299 for the nine months ended  September 30,
1997, a decrease of 258 or 11.2%.  This  decrease is primarily due to a decrease
in sales  of  hardware  for  Collection  and CAMA  systems.  This  decrease  was
partially offset to by an increase in RPS hardware sales.

Other Service Fees. Revenue from other service fees was $908 for the nine months
ended  September 30, 1998  compared to $738 for the nine months ended  September
30,  1997,  a increase of $170 or 23.0%.  This  increase  was  primarily  due to
increased RPS installation sales.

COST OF REVENUE

The Company's cost of revenue  includes the cost of hardware  product sales, the
cost of  purchased  software,  amortization  of  software  development  cost and
distribution costs.

The total cost of revenue was $2,310 for the nine  months  ended  September  30,
1998  compared  to $2,086 for the nine  months  ended  September  30,  1997,  an
increase of $224 or 10.7%.  This yielded a gross profit  margin of 67.7% for the
nine months ended  September 30, 1998 compared to a gross profit margin of 72.9%
for the nine months  ended  September  30, 1997.  This  decrease in gross profit
margin  resulted  primarily  from an increase in the cost of purchased  software
from 5.4% of total revenue for the nine months ended  September 30, 1997 to 9.6%
of total revenue for the nine months ended September 30, 1998.

Product Sales. The cost of product sales was $1,609,  or approximately  78.8% of
product sales,  for the nine months ended September 30, 1998 compared to $1,616,
or approximately 70.3% of product sales, for the nine months ended September 30,
1997,  a  decrease  of $7 or 0.4%.  This  decrease  was  primarily  due to costs
associated  with a decrease in sales of hardware  for  Collection,  CAMA and IVR
systems.  This decrease was partially  offset by an increase to cost  associated
with higher RPS hardware sales.  The increase in cost as a percentage of product
sales was due to RPS  hardware  comprising  a larger  portion of total  hardware
sales.  RPS hardware  generally  has a higher cost of sales than other  hardware
products.

Purchased Software.  Cost of software includes purchased software as well as the
amortization of capitalized software development costs. The cost of software was
$684,  or  approximately  73.8%  of  license  fees,  for the nine  months  ended
September 30, 1998 compared to $414, or approximately 23.1% of license fees, for
the nine months ended  September  30, 1997,  an increase of $270 or 65.2%.  This
increase was largely due to the installation of RPS third-party  software sales.
The  Company is a  preferred  reseller of  Rpxpress  software.  Amortization  of
software  development cost was $100 for the nine months ended September 30, 1998
and $107 for the nine months ended September 30, 1997.


                                       11

<PAGE>
                        CPS SYSTEMS, INC. AND SUBSIDIARY

                               SEPTEMBER 30, 1998


Distribution.  The  costs  associated  with  distribution  were $17 for the nine
months  ended  September  30, 1998  compared  to $56 for the nine  months  ended
September 30, 1997, a decrease of $39 or 69.6%.  This decrease was due primarily
to a large Collection and CAMA hardware shipment in June 1997.


OPERATING EXPENSES

The Company's operating expenses includes support and customer service,  selling
and  marketing,  research  and  development,  general  and  administrative,  and
amortization of intangible goodwill & non-compete agreements.

Support and Customer  Service.  Expenses related to support and customer service
were $2,940 for the nine months ended  September 30, 1998 compared to $2,358 for
the nine month ended  September  30,  1997,  an increase of $582 or 24.7%.  This
increase  resulted  primarily from an increase in salaries and hiring to enhance
customer service and support future CPS growth.  In addition,  outsourcing costs
rose to  accommodate  expansion  into new markets and build  infrastructure  for
growth expected from Year 2000 sales.

Selling and Marketing.  The Company's selling and marketing expenses were $1,631
for the nine  months  ended  September  30,  1998  compared to $702 for the nine
months ended  September 30, 1997,  an increase of $929 or 132.3%.  This increase
was due to an increase in the numbers of sales personnel and expenses related to
covering new markets such as California,  Illinois,  Nevada,  Georgia,  Ohio and
Tennessee. In addition,  sales commission expenses rose as a result of increased
sales of RPS.

Research and  Development.  Research and development  expenses were $273 for the
nine months  ended  September  30,  1998  compared to $1,136 for the nine months
ended  September  30,  1997,  a decrease of $863 or 76.0%.  These  expenses  are
comprised  primarily of salaries as well as amounts paid to outside  consultants
to supplement continuing product enhancement efforts. The decrease resulted from
the  capitalization of research and development cost associated with new product
development.

General and Administrative.  General and administrative expenses were $1,260 for
the nine months ended  September  30, 1998  compared to $793 for the nine months
ended  September  30,  1997,  an increase of $467 or 58.9%.  This  increase  was
primarily  due to an  increase in legal fees and travel and  insurance  activity
created by the IPO, as well as, expenses  associated with additional General and
Administrative  staffing.  To a lesser  extent the increase is  associated  with
increased employee benefits.

Amortization  of Goodwill and  Non-compete  Agreements.  The Company  incurred a
non-cash  expense  related to the 1994  acquisition  of the Company by a private
investor group of $211 for the nine months ended  September 30, 1998 compared to
$265 for the nine months ended  September 30, 1997, a decrease of  approximately
$54 or 20.4%. The decrease in amortization is primarily due to the completion in
December 1997 of the non-compete agreement amortization.


EARNINGS FROM OPERATIONS

Loss from  operation  was $1,484 or (20.7%) of revenue for the nine months ended
September  30,  1998,  compared to $379,  or 4.9% of revenue for the nine months
ended  September 30, 1997.  This decrease in earnings from  operations of $1,863
was  primarily  due to the  decrease  of license  fee  revenue to 13.0% of total
revenue for the nine months ended  September 30, 1998 compared to 23.3% of total
revenue for the nine months  ended  September  30,  1997,  and by the  increased
operating  expenses for support and customer  service and selling and marketing.
The decrease in earnings was

                                       12

<PAGE>
                        CPS SYSTEMS, INC. AND SUBSIDIARY

                               SEPTEMBER 30, 1998


partially  offset by the  reduction in research and  development  expenses  from
14.7% of total revenue for the nine months ended  September 30, 1997 to 3.8% for
the nine months ended September 30, 1998.


NON-OPERATING EXPENSES

Interest and Financing Costs.  The Company's  interest expense for its long term
debt was $387 for the nine months ended  September 30, 1998 compared to $275 for
the nine months ended  September  30, 1997,  an increase of $112 or 40.7%.  This
increase was primarily  attributed to an increase in the put warrant  adjustment
and to a lesser extent the  prepayment  and success fee on the senior term loan.
This  increase was  partially  offset by a decrease  attributed to the Company's
repayment  of the senior  term loan,  interest  income on  investments  from the
remaining proceeds of the Initial Public Offering.

Income Tax Expense.  The Company's provision for income taxes was $(643) for the
nine months ended  September  30, 1998 compared to $87 for the nine months ended
September 30, 1997, an decrease of $730 or 839.1%.  This increase in tax benefit
was attributable to decreased earnings from operations. The income tax provision
is higher than income  taxes  determined  by applying the  applicable  statutory
rates  for  the  nine  months  ended   September  30,  1998   primarily  due  to
non-deductible   amortization  of  goodwill  and   non-deductible   put  warrant
adjustments.


LIQUIDITY AND CAPITAL RESOURCES


On March 30, 1998 CPS SYSTEMS, INC. successfully  completed its IPO. The Company
sold  1,900,000  shares of common  stock for  $5,767  net of  issuance  costs of
$1,833. Subsequent to March 31, 1998, the underwriters exercised their option to
purchase  285,000  additional  shares  of  common  stock  from  certain  selling
shareholders to cover  over-allotments.  Certain selling  shareholders  received
$1,140 from the transaction and the Company incurred  additional  issuance costs
of $148.  The Company has  invested  the net  proceeds of the IPO in  short-term
investment grade interest-bearing securities.

The Company's  operating  activities used cash of $946 and provided cash of $361
during  the nine  months  ended  September  30,  1998 and  September  30,  1997,
respectively.  The Company's use of cash during the nine months ended  September
30, 1998 was  primarily  attributable  to  increases in accounts  receivable  of
$2,415,  deferred income taxes of $912, prepaid expenses of $556 and net loss of
$1,229.  These decreases to cash were partially  offset by increases to non-cash
depreciation  and amortization of $555,  accrued  expenses  increase of $347 and
customer deposits,  and unearned revenue increase of $3,354, for the nine months
ended September 30, 1998.

The Company  used cash of $2,734 and $398 for  investing  activities  during the
nine months ended  September  30, 1998 and  September  30,  1997,  respectively.
Investing  activities have consisted  principally of the acquisition of property
and equipment and capitalized  software development cost. The increase of $2,336
was primarily  attributable  to increases in  capitalized  software  development
cost.  In  addition,  the Company  made  significant  investments  in  upgrading
internal systems.

The Company's financing activities provided cash of $4,913 and used cash of $216
during  the nine  months  ended  September  30,  1998 and  September  30,  1997,
respectively. In March 1998, the Company raised aggregate net proceeds of $5,767
from the sale of 1,900,000 share of common stock through its IPO. Additional IPO
expenditures in the

                                       13

<PAGE>
                        CPS SYSTEMS, INC. AND SUBSIDIARY

                               SEPTEMBER 30, 1998


second quarter of 1998 decreased aggregate net proceeds to $5,619. In April 1998
the Company paid $761 to retire the outstanding  principal  amount of its senior
term loan including  interest and prepayment fees to FINOVA CAPITAL  CORPORATION
and repaid $128 in loans from  shareholders.  Also,  the  Company  paid $148 for
over-allotment issuance costs.

The Company  believes its cash balances and cash generated from  operations will
satisfy the Company's working capital and capital  expenditure  requirements for
at least the next 12  months.  In the  longer  term,  the  Company  may  require
additional sources of liquidity to fund future growth. Such sources of liquidity
may include additional equity offerings or debt financing.  In the normal course
of business,  the Company  evaluates  acquisitions  of businesses,  products and
technologies  that  complement  the  Company's  business.  The  Company  has not
executed any agreements with respect to any such transaction.



ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None



                           PART II - OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

The Company is involved in several legal actions arising in the normal course of
business.  While it is not possible to determine  with  certainty the outcome of
these  matters,  in the opinion of management  the eventual  resolution of these
claims and  actions  will not have a material  adverse  effect on the  Company's
financial position or operating results.


ITEM 2.  CHANGES IN SECURITIES

Use of Proceeds from  Registered  Securities.  Pursuant to Rule 463 of the Rules
and  Regulations  of the  Securities  Act of 1933,  as  amended,  the Company is
furnishing the use of proceeds from its IPO.

The Company's  Form SB-2,  Registration  Statement  Under the  Securities Act of
1933,  Registration No. 333-39173,  was declared  effective by oral order of the
Securities  and  Exchange  Commission  on March 25, 1998 (the "IPO  Registration
Statement").


(v) From March 25, 1998 through  September 30, 1998,  the effective  date of the
IPO  Registration  Statement to the end of the reporting  period,  the amount of
expenses incurred for the account of the Company in connection with the issuance
and distribution of the Shares is, based upon reasonable estimate, as follows:

Underwriting discounts and commissions              $    874,000
Finders fees                                                   0 
Expenses paid to or for Underwriters                     262,000
Other expenses                                           845,000
                                                    ------------
TOTAL EXPENSES                                      $ 1,981,000


                                       14

<PAGE>
                        CPS SYSTEMS, INC. AND SUBSIDIARY

                               SEPTEMBER 30, 1998


Underwriting,  discounts and commissions include $114,000, incurred on behalf of
the selling shareholders upon exercise of the over-allotment option on April 14,
1998.  Expenses  paid to or for the  underwriters  include  additional  expenses
totaling approximately $34 incurred on behalf of the selling shareholders,  upon
exercise of the  over-allotment  option.  None of the  expenses of the  Offering
constituted  direct or  indirect  payments  to  directors,  officers  or general
partners,  or  associates  thereof,  persons  owning 10% or more of any class of
securities or any affiliates of the Company.

(vi)  The net  proceeds  to the  Company  of the  Offering  pursuant  to the IPO
Registration Statement, after the expenses listed in (v) above, is $5,619,000.

(vii) From March 25, 1998 through  September  30, 1998,  the Company has applied
the following  amounts of its net proceeds from the Offering pursuant to the IPO
Registration Statement:

Construction of plant, building and facilities              $         0
Purchase and installation of machinery and equipment                  0
Purchases of real estate                                              0
Acquisitions of other business(es)                                    0
Repayment of indebtedness                                       855,000
Working capital                                                 885,000
Temporary investments (as specified below)                    1,561,000
Other uses of at least $100,000 (as specified below)          2,318,000

None of the uses  constituted  direct  or  indirect  payments  to the  Company's
directors,  officers or general partners, or associates thereof,  persons owning
10% or more of any class of  securities or any  affiliates  of the Company.  The
temporary  investments  consist of money  market  accounts  available on a daily
basis.  Other  uses of at  least  $100,000  reflects  research  and  development
expenses.


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None


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

None


ITEM 5.  OTHER INFORMATION

The Company's  common stock is listed on the American  Stock  Exchange under the
symbol "SYS". Trading in the stock began on March 25, 1998.

Pursuant to the 1997 Equity Participation Plan (the "Plan"), the Company has the
authority to issue up to 600,000 shares (the "Options") of the Company's  common
stock, par value $.01 per share (the "Common Stock").  These Options vest over a
period of three years from the date of the grant and expire in March  2008.  The
Board of  Directors  granted to certain  officer  and  directors  of the Company
Options to purchase 335,000 shares of Common Stock at an exercise price of $4.00
per share (the initial public  offering  price).  Of the original  335,000 share
options  granted,  27,500  lapsed  pursuant to the terms of the Plan.  The grant
became  effective upon the  consummation of the initial public offering on March
30, 1998.




                                                              15
                        CPS SYSTEMS, INC. AND SUBSIDIARY

                               SEPTEMBER 30, 1998


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

No exhibits and reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1998.

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





Date:  November 11, 1998


                                -----------------------------------------------
                                Paul E. Kana
                                CHAIRMAN OF THE BOARD OF DIRECTORS,
                                CHIEF EXECUTIVE OFFICER
                                AND DIRECTOR (PRINCIPAL EXECUTIVE OFFICER)



                                -----------------------------------------------
                                Kevin L. Figge
                                VICE PRESIDENT, CHIEF FINANCIAL OFFICER
                                (PRINCIPAL FINANCIAL OFFICER)




                                       16