SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                  FORM 10-Q/A2



X     Quarterly  Report  Pursuant  to  Section  13 or  15(d)  of the  Securities
      Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998

                                       OR

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

                          Commission File 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                   No       X
                                                   --------              -------

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  MAY 07, 1998
                  -----                     ---------------------------------
             Common stock
         Par value $.01 per share                      6,732,502



                                        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
                                                                03/31/98                12/31/97
                                                               (unaudited)
<S>                                                         <C>                      <C> 
ASSETS  
CURRENT ASSETS 
     Cash                                                              $6,218                   $327
     Accounts receivable                                               $1,963                 $1,718
     Deferred income tax                                                 $508                   $160
     Inventory                                                           $393                   $161
     Refundable income taxes                                               $0                    $75
     Prepaid expense and other current assets                            $320                   $134
     Deferred offering costs                                               $0                   $367
                                                            ------------------      -----------------
                 Total current assets:                                 $9,402                 $2,942
PROPERTY AND EQUIPMENT                                                   $578                   $536
SOFTWARE DEVELOPMENT COST                                              $1,439                   $938
OTHER ASSETS
     Costs in excess of net assets acquired                            $1,834                 $1,905
     Debt issue costs                                                    $140                   $160
     Other assets                                                         $18                    $18
                                                            ------------------      -----------------
                                                                       $1,992                 $2,083
                                                            ------------------      -----------------
                                                                      $13,411                 $6,499
                                                            ==================      =================
LIABILITIES  AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
     Current portion of long term debt                                   $707                   $731
     Accounts payable                                                    $784                   $683
     Accrued salaries, wages and payroll taxes                            $12                    $12
     Accrued offering costs                                              $352                   $243
     Accrued income tax payable                                           $97                     $0
     Other accrued expenses                                              $317                   $230
     Customer deposits and unearned revenue                            $2,463                 $1,533
                                                            ------------------      -----------------
                 Total current liabilities:                            $4,731                 $3,432
OTHER LIABILITIES
     Long-term debt                                                    $2,014                 $2,014
     Deferred income taxes                                               $317                   $317
     Notes payable-shareholders                                          $125                   $123
     Unearned revenue                                                     $48                    $47
     Other liabilities                                                    $48                    $47
                                                            ------------------      -----------------
                 Total long term debt:                                 $2,552                 $2,548
                                                            ------------------      -----------------
                 Total Liabilities:                                    $7,283                 $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                                        $7,259                   $961
     Accumulated deficit                                               (1,198)                  (723)
                                                            ------------------      -----------------
                 Total Shareholders' Equity:                           $6,128                   $277
                                                            ------------------      -----------------
                                                                      $13,411                 $6,499
                                                            ==================      =================
</TABLE>

The accompanying notes are an integral part of these balance sheets.


                                        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 MARCH 31,
                                                                  1998                       1997
                                                              -----------                ----------
<S>                                                           <C>                        <C> 
Revenue
           License fees                                              $198                      $190
           Recurring maintenance and service fees                  $1,076                      $955
           Product sales                                             $643                      $501
           Other service fees                                        $281                      $146
                                                              -----------                ----------
                                                                   $2,198                    $1,792

Cost of Revenue
           Product Sales                                             $499                      $363
           Purchased software                                        $147                       $93
           Distribution                                                $4                        $3
                                                              -----------                ----------
                                                                     $650                      $459

                Gross profit                                       $1,548                    $1,333
                                                              -----------                ----------

Operating Expenses
           Support and customer service                              $934                      $732
           Selling and marketing                                     $471                      $145
           Research and development                                  $102                      $353
           General and administrative                                $459                      $301
           Amortization of intangible goodwill &
             non-compete agreements                                   $71                       $90
                                                              -----------                ----------
                                                                   $2,037                    $1,621

                Earnings(loss) from operations                      ($489)                    ($288)
                                                              -----------                ---------- 

Interest and financing costs                                         $245                      $116
                                                              -----------                ----------
                Earnings(loss) before income taxes                  ($734)                    ($404)

Income tax expense(benefit)                                         ($260)                    ($125)
                                                              -----------                ---------- 
                Net Earnings(loss)                                  ($474)                    ($279)
                                                              -----------                ---------- 


Net earnings(loss) per common share
     Basic and Diluted                                             ($0.11)                   ($0.07)
Weighted average shares used in computing net
earnings(loss) per common share:
     Basic and Diluted                                              4,140                     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)
                                                                              THREE MONTHS ENDED MARCH 31,
                                                                                  1998            1997
                                                                             --------------------------------


Cash flows from operating activities:
<S>                                                                          <C>               <C>    
     Net income(loss)                                                                 $ (476)         $ (279)
     Adjustments to reconcile net income(loss) to net cash:
        Depreciation and amortization                                                    178             185
        Adjustment to put warrants                                                       125              (5)
        Loss on disposal of property and equipment                                         1               0
        Accrued interest to shareholders                                                   2               0
        Changes in assets and liabilities, net of business acquired:
            Accounts receivable                                                         (245)            237
            Refundable income taxes                                                       75            (148)
            Inventories                                                                 (232)            (25)
            Deferred income tax expense                                                 (508)              0
            Prepaid expenses and other current assets                                    (31)             (8)
            Accounts payable                                                             (59)             90
            Accrued expenses                                                             253             (46)
            Customer deposits and unearned revenue                                       931             (24)
            Income taxes payable                                                          97            (177)
            Other liabilities                                                              1               7
                                                                             --------------------------------
                          Net cash provided(used) by operating activities               $111           ($193)

Cash Flows from investing activities:
     Purchase of property and equipment                                                  (94)            (55)
     Software development costs                                                         (537)            (60)
                                                                             --------------------------------
                          Net cash used by investing activities                        ($631)          ($115)

Cash flows from financing activities:
     Principal payment on long-term debt                                                 (23)            (72)
     Proceeds from public offering, net of offering cost                               6,434               0
                                                                             --------------------------------
                          Net cash provided(used) by financing activities             $6,411            ($72)

Net increase(decrease) in cash                                                         5,891            (380)
Cash at beginning of period                                                              327             592
                                                                             --------------------------------
Cash at end of period                                                                 $6,218            $212

Supplementary Cash Flow Disclosure:
     Interest and financing costs paid                                                    92              93
     Income taxes (refunded) paid, net                                                     0             198


</TABLE>

Non-cash investing and financing activities:

     During the quarter ended March 31, 1998,  offering costs of $225 related to
the IPO were accrued and charged against the gross proceeds of the IPO.


The accompanying notes are an integral part of these statements.

                                        4

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

                             MARCH 31, 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 March 31, 1998, and the consolidated
results of  operation  and cash flows for the three  months ended March 31, 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 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.

The accompanying  financial  statements  represent a restatement of the previous
financial  statements  for the quarter  ending  March 31, 1998.  These  previous
financial  statements  recognized  revenue for  initial  software  license  fees
ratably over the period during which contracted  customer  development was being
performed.

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, which upon payment of all offering costs, will
result  in net  proceeds  of  approximately  $5,900,  net of  issuance  costs of
approximately  $1,700.  In April,  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.

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.

                                        5
<PAGE>
                        CPS SYSTEMS, INC. AND SUBSIDIARY
                                 MARCH 31, 1998


NOTE D- SENIOR TERM LOAN AND REVOLVING LINE OF CREDIT

In April 1998, the Company repaid it 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.

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.



                                        6

<PAGE>
                        CPS SYSTEMS, INC. AND SUBSIDIARY

                                 MARCH 31, 1998


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 March 31, 1998
and March 31, 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.


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 MARCH 31,
                                                                1998                    1997
                                                                ----                    ----
Revenue
<S>                                                         <C>                     <C>  
           License fees                                             9.0%                    10.6%
           Recurring maintenance and service fees                  49.0%                    53.3%
           Product sales                                           29.2%                    28.0%
           Other service fees                                      12.8%                     8.1%
                                                            -----------             ------------ 
                Total Revenue:                                    100.0%                   100.0%
                                                            -----------             ------------ 

Cost of Revenue
           Product Sales                                           22.7%                    20.3%
           Purchased software.                                      6.7%                     5.2%
           Distribution                                             0.2%                     0.2%
                                                            -----------             ------------ 
                Total Cost of Sales:                               29.6%                    25.6%
                                                            -----------             ------------ 

                Gross profit:                                      70.4%                    74.4%

Operating Expenses:
           Support and customer service                            42.5%                    40.8%
           Selling and marketing                                   21.4%                     8.1%
           Research and development                                 4.6%                    19.7%
           General and administrative                              20.9%                    16.8%
           Amortization of intangible Goodwill & Non-Compete        3.2%                     5.0%
                                                            -----------             ------------ 

                 Total Operating Expense:                          92.6%                    90.5%
                                                            -----------             ------------ 

                Earnings(loss) from operations                    (22.2%)                  (16.1%)

Interest and financing costs                                       11.1%                     6.5%
                                                            -----------             ------------ 
                Earnings(loss) before income taxes                (33.3%)                  (22.5%)

Income tax expense(benefit)                                       (11.8%)                   (7.0%)
                                                            ------------            -------------  
                Net Earnings(loss)                                (21.5%)                  (15.6%)
                                                            ------------            ------------  
</TABLE>


                                        7

<PAGE>
                        CPS SYSTEMS, INC. AND SUBSIDIARY

                                 MARCH 31, 1998

COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 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 $2,198 for the three months ended March 31, 1998
compared to $1,792 for the three  months  ended March 31,  1997,  an increase of
$406 or 22.7%.  This  increase was  primarily due to an increase in property tax
billing and  collection  systems  ("Collection")  installations  and to a lesser
extent, remittance processing ("RPS") hardware and software sales.

 License Fees.  The  Company's  revenue from license fees was $198 for the three
months  March 31,  1998  compared to $190 for the three  months  ended March 31,
1997,  an increase of $8 or 4.2%.  The increase was primarily due to an increase
in  installations  of RPS  hardware and  software  and to a lesser  extent,  new
customer Collection installations.

 Recurring  Maintenance  and Service Fees. The Company's  revenue from recurring
fees was $1,076  million for the three months  ended March 31, 1998  compared to
$955 for the three months  ended March 31,  1997,  an increase of $121 or 12.7%.
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).  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 $643 for the three months ended
March 31, 1998  compared to $501 for the three months  ended March 31, 1997,  an
increase of $142 or 28.3%.  This increase is primarily due to an increase in RPS
sales and, to a lesser extent,  sales of hardware for Collection systems and our
hardware parts and repair group("System Engineering").

 Other  Service  Fees.  Revenue  from other  service fees was $281 for the three
months  ended March 31, 1998  compared to $146 for the three  months ended March
31,  1997,  an increase of $135 or 92.5%.  This  increase was  primarily  due to
increased RPS  installation  sales,  and to a lesser  extent,  integrated  voice
response ("IVR") support 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 $650 for the three  months  ended  March 31, 1998
compared to $459 for the three months ended March 31, 1997,  an increase of $191
or 41.6%. This yielded a gross profit margin of 70.4% for the three months ended
March 31, 1998  compared to a gross profit  margin of 74.4% for the three months
ended March 31, 1997.  This  decrease in gross profit  margin  resulted  from an
increase in purchased  software  from 5.2% of total revenue for the three months
ended March 31, 1997 to 6.7% of total  revenue for the three  months ended March
31, 1998 and an increase in product  sales cost from 20.3% of total  revenue for
the three  months ended March 31, 1997 to 22.7% for the three months ended March
31, 1998.

                                        8

<PAGE>
                        CPS SYSTEMS, INC. AND SUBSIDIARY

                                 MARCH 31, 1998


Product  Sales.  The cost of product sales was $499, or  approximately  77.6% of
product  sales,  for the three  months  ended March 31,  1998  compared to $363,
approximately 72.5% of product sales, for the three months ended March 31, 1997,
an  increase  of $136  or  37.5%.  This  increase  was  primarily  due to  costs
associated  with an increase  in RPS  hardware  sales and,  to a lesser  extent,
hardware sales associated with Collections and Systems Engineering  systems. 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  as  well  as the
amortization of capitalized software development costs. The cost of software was
$147, or  approximately  74.2% of license fees, for the three months ended March
31, 1998 compared to $93, or approximately  48.9% of license fees, for the three
months  ended March 31,  1997,  an increase of $54 or 58.1%.  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 March 31, 1998 and $36 for
the three months ended March 31, 1997.

 Distribution.  The costs  associated  with  distribution  were $4 for the three
months ended March 31, 1998  compared to $3 for the three months ended March 31,
1997, an increase of $1 or 33.3%.  This  increase was due to increased  sales of
RPS.

The total cost of revenue  was $650 for the three  months  ended  March 31, 1998
compared to $459 for the three months ended March 31, 1997,  an increase of $191
or 41.6%. This yielded a gross profit margin of 70.4% for the three months ended
March 31, 1998  compared to a gross profit  margin of 74.4% for the three months
ended March 31, 1997.  This  decrease in gross profit  margin  resulted  from an
increase in cost of product sales and purchased software.


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 $934 for the three  months  ended March 31,  1998  compared to $732 for the
three months ended March 31, 1997,  an increase of $202 or 27.6%.  This increase
resulted 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 $471
for the three months ended March 31, 1998  compared to $145 for the three months
ended March 31, 1997, an increase of $326 or 224.8%. 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 and Ohio. In addition,
sales commission expenses rose as a result of increased sales of RPS.

 Research and Development.  Research and development  expenses were $102 for the
three  months  ended March 31, 1998  compared to $353 for the three months ended
March 31,  1997,  a decrease  of $251 or 71.1%.  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.

                                        9

<PAGE>
                        CPS SYSTEMS, INC. AND SUBSIDIARY

                                 MARCH 31, 1998


General and  Administrative.  General and administrative  expenses were $459 for
the three  months  ended  March 31, 1998  compared to $301 for the three  months
ended March 31, 1997, an increase of $158 or 52.5%.  This increase was primarily
due to a  increase  in legal  expenses  related  to  claims  arising  out of the
Company's operations in the normal course of business.

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 $71 for the three months ended March 31, 1998 compared to $90
for the three months ended March 31,  1997, a decrease of  approximately  $19 or
21.1%.  The decrease in  amortization  is  primarily  due to the  completion  in
December 1997 of the non-compete agreement amortization.


EARNINGS FROM OPERATIONS

Net loss from  operations  was $489,  for the three months ended March 31, 1998,
compared to a net loss from  operations of $288 for the three months ended March
31, 1997. This decrease in earnings from operations of $201 was primarily due to
the increase of selling and marketing expenses to 21.4% of total revenue for the
three  months  ended  March 31, 1998  compared to 8.1% of total  revenue for the
three  months  ended  March 31,  1997,  and to a lesser  extent the  increase of
general  and  administrative  expenses  to 20.9% of total  revenue for the three
months  ended March 31, 1998  compared to 16.8% for the three months ended March
31, 1997, and was partially  offset by the reduction in research and development
expenses  from 19.7% of total  revenue to 4.6% for the three  months ended March
31, 1998.

NON-OPERATING EXPENSES

Interest and Financing Costs. The Company's  interest expense for its long term
debt was $245 for the three months ended March 31, 1998 compared to $116 for the
three months ended March 31, 1997,  an increase of $129 or 111%.  This  increase
was primarily  attributed to a increase in the put warrant  adjustment.  The put
warrant  adjustment is primarily based on the operating  earnings of the Company
for the previous twelve month period.

Provisions for Income Taxes. The Company's provision for income taxes was $(260)
for the three  months  ended  March 31,  1998  compared  to $(125) for the three
months ended March 31, 1997, an increase of $(135). This increase in tax benefit
was attributable primarily to decreased earnings from operations. The income tax
provision is higher than income  taxes  determined  by applying  the  applicable
statutory  rates  primarily due to  non-deductible  amortization of goodwill and
non-deductible put warrant adjustments.

LIQUIDITY AND CAPITAL RESOURCES


On March 25, 1998 CPS SYSTEMS,  INC.  successfully  completed its initial public
offering of common stock.  The Company sold 1,900,000 shares of common stock for
$6,434  net of  issuance  costs of $1,265.  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 in short-term investment grade interest-bearing securities.

The  Company's  operating  activities  provided  cash of $111 and cash  usage of
$(193)  during  the  three  months  ended  March 31,  1998 and  March 31,  1997,
respectively. The

                                       10

<PAGE>
                        CPS SYSTEMS, INC. AND SUBSIDIARY

                                 MARCH 31, 1998


Company's use of cash during the three months ended March 31, 1998 was primarily
attributable  to increases in deferred income tax expense of $508, a decrease in
net earnings of $476 and to a lesser extent increases in accounts  receivable of
$245 and  inventories of $232.  These decreases to cash were offset by increases
in customer  deposits and unearned  revenue of $931, plus non-cash  depreciation
and  amortization  of $178,  accrued  expenses  increase  of $253,  put  warrant
adjustment of $125, for the three months ended March 31, 1998.

The Company used cash of $631 and $115 for investing activities during the three
months  ended  March  31,  1998 and  March  31,  1997,  respectively.  Investing
activities  have  consisted  principally  of the  acquisition  of  property  and
equipment and capitalized  software  development  cost. The increase of $516 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 $6,411 for the three months
ended  March 31, 1998 and a cash usage of $72 for the three  months  ended March
31, 1997.  In March 1998,  the Company  raised  aggregate net proceeds of $6,434
from the sale of  1,900,000  share of common  stock  through its initial  public
offering.  Subsequent  to March 31,  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,  $128 in loans from shareholders
to the Company and $148 for over-allotment issuance cost.

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 CPS
Systems, Inc. (the "Company") is furnishing the use of proceeds from its initial
public offering in its first periodic report after effectiveness.

                                       11

<PAGE>
                        CPS SYSTEMS, INC. AND SUBSIDIARY

                                 MARCH 31, 1998

                  (1) 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").

                  (2)      The  offering  pursuant  to the IPO  Registration  
Statement commenced on March 25, 1998 (the "Offering").

                  (4) (i) The Offering continued uninterrupted  thereafter until
          the  sale of all  securities  registered  under  the IPO  Registration
          Statement.

                      (ii)     The managing  underwriters of  the Offering were 
Cruttenden Roth Incorporated and Josephthal & Co. Inc.

                      (iii)    The title of the only  class of  securities  
registered is the common stock, par value $0.01 per share.


                      (iv) The following information for the account of the
Company is provided:

                       Aggregate Price                         Aggregate Price
Amount                of Offering Amount                     of Offering Amount 
Registered               Registered          Amount Sold        Sold to Date   
--------------------------------------------------------------------------------

1,900,000                $7,600,000           1,900,000          $7,600,000

The amount of securities registered by the Company is hereinafter referred to as
the "Shares."

                  The  following  information  for the  account  of the  Selling
Shareholders is also provided:

                                 Aggregate Price            Aggregate Price
                                  of Offering                of Offering 
Selling                  Amount      Amount                     Amount
Shareholder            Registered  Registered   Amount Sold  Sold to Date
--------------------------------------------------------------------------
Sidney H. Cordier ....   85,660     $342,640       85,660     $342,640
Brian R. Wilson ......   85,660      342,640       85,660      342,640
G. Dean Booth, Jr ....   18,288       73,152       18,288       73,152
Hanifen Imhoff
 Mezzanine Fund, LP ..   63,472      253,888       63,472      253,888
John K. Percival .....   21,280       85,120       21,280       85,120
Robert J. Newcorn ....   10,640       42,560       10,640       42,560

All of the proceeds from the Offering of the shares by the Selling  Shareholders
were part of the  over-allotment  option exercised on April 14, 1998 and are for
the benefit of the Selling Shareholders only.  Accordingly,  the aggregate price
of the Offering  amount sold by the selling  shareholders is not included in the
net proceeds to the Company of the Offering.

                    (v)  From  March  25,  1998  through  March  31,  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                 $      760,000
Finders fees                                                        0
Expenses paid to or for Underwriters                          228,000
Other expenses                                                801,500
                                                         ------------
TOTAL EXPENSES                                              1,789,500

                                       12

<PAGE>
                        CPS SYSTEMS, INC. AND SUBSIDIARY

                                 MARCH 31, 1998


Additional expenses totaling approximately  $150,000,  incurred on behalf of the
Selling  Shareholders  upon exercise of the  over-allotment  option on April 14,
1998, are not reflected herein. 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 $5,810,500.

               (vii) From March 25, 1998 through March 31, 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                                               0
Working capital                                                         0
Temporary investments (as specified below)                      5,270,000
Other uses of at least $100,000 (as specified below)          $   540,500

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

                                       13
<PAGE>
                        CPS SYSTEMS, INC. AND SUBSIDIARY

                                 MARCH 31, 1998


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.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

No exhibits and reports on Form 8-K were filed by CPS SYSTEMS,  INC.  during the
quarter ended March 31, 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)






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