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 JUNE 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  AUGUST 10, 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, EXCEPT PER SHARE AMOUNTS)

                                                                      As of                  As of
                                                                    06/30/98               12/31/97
                                                                   (unaudited)
<S>                                                        <C>                      <C> 
ASSETS
CURRENT ASSETS  
     Cash                                                            $3,302                   $327
     Accounts receivable                                             $2,220                 $1,718
     Deferred income tax                                               $160                   $160
     Inventory                                                         $267                   $161
     Refundable income taxes                                             $0                    $75
     Prepaid expense and other current assets                        $1,871                   $134
     Deferred offering costs                                             $0                   $367
                                                           -----------------      -----------------
                 Total current assets:                               $7,820                 $2,942
PROPERTY AND EQUIPMENT                                                 $657                   $536
SOFTWARE DEVELOPMENT COST                                            $2,055                   $938
OTHER ASSETS
     Costs in excess of net assets acquired                          $1,764                 $1,905
     Debt issue costs                                                  $119                   $160
     Other assets                                                       $15                    $18
                                                           -----------------      -----------------
                                                                     $1,898                 $2,083
                                                           -----------------      -----------------
                                                                    $12,430                 $6,499
                                                           =================      =================
LIABILITIES  AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
     Current portion of long term debt                                   $0                   $731
     Accounts payable                                                  $245                   $683
     Accrued salaries, wages and payroll taxes                           $0                    $12
     Accrued offering costs                                            $100                   $243
     Accrued income tax payable                                        $238                     $0
     Other accrued expenses                                            $869                   $230
     Unearned revenue, current portion                               $1,609                 $1,533
                                                           -----------------      -----------------
                 Total current liabilities:                          $3,061                 $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                                                  $52                    $47
                                                           -----------------      -----------------
                 Total long term debt:                               $2,430                 $2,548
                                                           -----------------      -----------------
                 Total Liabilities:                                  $5,491                 $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                                      $6,944                   $961
     Accumulated deficit                                               -$73                  -$723
                                                           -----------------      -----------------
                                                           -----------------      -----------------
                 Total Shareholders' Equity:                         $6,939                   $277
                                                           -----------------      -----------------
                                                                    $12,430                 $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 JUNE 30,        SIX MONTHS ENDED JUNE 30,
                                                         1998                 1997            1998             1997
                                                         ----                 ----            ----             ----
<S>                                                     <C>                 <C>             <C>              <C>   
Revenue
           License fees                                 $1,959              $1,175          $3,176           $1,365
           Recurring maintenance and service fees       $1,053                $956          $2,128           $1,911
           Product sales                                  $756              $1,147          $1,399           $1,648
           Other service fees                             $271                $335            $552             $481
                                                        --------------------------          -----------------------
                                                        $4,039              $3,613          $7,255           $5,405

Cost of Revenue
           Product sales                                  $634                $873          $1,133           $1,236
           Purchased software                             $228                $189            $375             $282
           Distribution                                     $3                 $37              $7              $40
                                                        --------------------------          -----------------------   
                                                          $865              $1,099          $1,515           $1,558

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

                Gross profit                            $3,174              $2,514          $5,740           $3,847

Operating Expenses:
           Support and customer service                 $1,022                $727          $1,969           $1,459
           Selling and marketing                          $615                $264          $1,099             $409
           Research and development                       $164                $376            $266             $729
           General and administrative                     $309                $229            $768             $530
           Amortization of intangible goodwill &
             non-compete agreements                        $70                 $91            $141             $181
                                                        --------------------------          -----------------------
                                                        $2,180              $1,687          $4,243           $3,308

                Earnings from operations                  $994                $827          $1,497             $539
                                                        --------------------------          -----------------------

Interest and financing costs                               $88                $116            $333             $232
                                                        --------------------------          -----------------------
                Earnings before income taxes              $906                $711          $1,164             $307

Income tax expense                                        $389                $299            $514             $174
                                                        --------------------------          -----------------------
                Net earnings                              $517                $412            $650             $133
                                                        ==========================          =======================


Net earnings per common share
     Basic                                               $0.08               $0.11           $0.10            $0.03
     Diluted                                             $0.08               $0.09           $0.12            $0.03
Weighted average shares used in computing net
earnings per common share:
     Basic                                               6,733               3,905           6,733            3,905
     Diluted                                             6,849               4,833           5,487            4,833
</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)


                                                                          SIX MONTHS ENDED JUNE 30,
                                                                               1998        1997
                                                                          -------------------------
<S>                                                                         <C>        <C>    
Cash flows from operating activities:
     Net income .........................................................   $   650    $   133
     Adjustments to reconcile net income(loss) to net cash:
        Deferred income tax expense .....................................         0          5
        Depreciation and amortization ...................................       368        373
        Adjustment to put warrants ......................................       125        (10)
        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 .........................................      (502)       (82)
            Refundable income taxes .....................................        75          0
            Inventories .................................................      (105)       (83)
            Prepaid expenses and other current assets ...................    (1,740)        (1)
            Accounts payable ............................................      (598)       264
            Accrued expenses ............................................       793        (63)
            Unearned revenue ............................................        76       (145)
            Income taxes payable ........................................       238        (35)
            Other liabilities ...........................................         4         14
                                                                             ------    -------
                          Net cash (used)provided by operating activities   ($  613)   $   369

Cash Flows from investing activities:
     Purchase of property and equipment .................................      (249)      (119)
     Software development costs .........................................    (1,175)      (105)
     Other receivables ..................................................         0       (124)
                                                                             ------     ------
                          Net cash used by investing activities .........   ($1,424)   ($  348)

Cash flows from financing activities:
     Principal payment on long-term debt ................................      (855)      (166)
     Proceeds from public offering, net of offering cost ................     5,867          0
                                                                            -------     ------
                          Net cash provided(used) by financing activities   $ 5,012    ($  166)

Net increase(decrease) in cash ..........................................     2,975       (145)
Cash at beginning of period .............................................       327        592
                                                                            -------    ------
                                                             
Cash at end of period ...................................................   $ 3,302    $   447
                                                                            =======    =======

Supplementary Cash Flow Disclosure:
     Interest and financing costs paid ..................................       165        189
     Income taxes paid, net .............................................       201        205
</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

                             JUNE 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 June 30, 1998, and the consolidated
results of operation for the three months and six months ended June 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 with the Securities and Exchange  Commission,  effective March
25, 1998.

NOTE B  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 C- 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.

NOTE D- STOCK OPTIONS

Upon the  completion  of the IPO, the Company  granted  307,500 stock options to
officers and employees at an exercise  price equal to the IPO price of $4.00 per
share. 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.

                                        5
<PAGE>

                        CPS SYSTEMS, INC. AND SUBSIDIARY
                                  JUNE 30, 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 June 30, 1998
and June 30,  1997,  "Comparison  of Six Months Ended June 30, 1998 and June 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.


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 JUNE 30,          SIX MONTHS ENDED JUNE 30,
                                                            1998             1997               1998             1997
                                                           ------           ------             ------           ------
<S>                                                       <C>              <C>                <C>              <C>  
Revenue
           License fees                                     48.5%            32.5%              43.8%            25.3%
           Recurring maintenance and service fees           26.1%            26.5%              29.3%            35.4%
           Product sales                                    18.7%            31.7%              19.3%            30.5%
           Other service fees                                6.7%             9.3%               7.6%             8.9%
                                                             ---              ---                ---              --- 
                Total Revenue                              100.0%           100.0%             100.0%           100.0%
                                                           -----            -----              -----            ----- 

Cost of Revenue
           Product sales                                    15.7%            24.2%              15.6%            22.9%
           Purchased software.                               5.6%             5.2%               5.2%             5.2%
           Distribution                                      0.1%             1.0%               0.1%             0.7%
                                                             ---              ---                ---              --- 
                Total Cost of Sales                         21.4%            30.4%              20.9%            28.8%
                                                            ----             ----               ----             ---- 

                Gross profit                                78.6%            69.6%              79.1%            71.2%

Operating Expenses:
           Support and customer service                     25.3%            20.1%              27.1%            27.0%
           Selling and marketing                            15.2%             7.3%              15.1%             7.6%
           Research and development                          4.1%            10.4%               3.7%            13.5%
           General and administrative                        7.7%             6.3%              10.6%             9.8%
           Amortization of intangible goodwill &
             non-compete agreements                          1.7%             2.5%               1.9%             3.3%
                                                             ---              ---                ---              --- 

                 Total Operating Expense                    54.0%            46.7%              58.5%            61.2%
                                                            ----             ----               ----             ---- 

                 Earnings from operations                   24.6%            22.9%              20.6%            10.0%

Interest and financing costs                                 2.2%             3.2%               4.6%             4.3%
                                                             ---              ---                ---              --- 
                 Earnings (loss) before income taxes        22.4%            19.7%              16.0%             5.7%

Income tax expense (benefit)                                 9.6%             8.3%               7.1%             3.2%
                                                             ---              ---                ---              --- 
                 Net earnings (LOSS)                        12.8%            11.4%               9.0%             2.5%
                                                            ----             ----                ---              --- 
 
</TABLE>
                                        6

<PAGE>
                        CPS SYSTEMS, INC. AND SUBSIDIARY

                                  June 30, 1998

COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 AND JUNE 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 $4,039 for the three months ended June 30, 1998
compared to $3,613 for the three months ended June 30, 1997, an increase of $426
or 11.8%.  This  increase was  primarily due to an increase in license fee sales
for property appraisal and assessment systems (CAMA) and remittance processing
(RPS) hardware and software sales.

License Fees.  The Company's  revenue from license fees was $1,959 for the three
months June 30,  1998  compared  to $1,175 for the three  months  ended June 30,
1997,  an  increase  of $784 or 66.7%.  The  increase  was  primarily  due to an
increase  in  new  customer  CAMA   installations   and  to  a  lesser   extent,
installations of RPS software.

Recurring  Maintenance  and Service Fees.  The Company's  revenue from recurring
fees was $1,053 for the three  months  ended June 30, 1998  compared to $956 for
the three months ended June 30, 1997, an increase of $97 or 10.1%.  The increase
was primarily  attributable to the realization of recurring  revenue  associated
with  property tax billing and  collection  systems  (Collection)  license fee
sales of a prior period and to a lesser extent integrated voice response (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 $756 for the three months ended
June 30, 1998  compared to $1,147 for the three  months  ended June 30,  1997, a
decrease of $391 or 34.1%. This decrease is primarily due to a decrease in sales
of hardware for Collection and CAMA systems.  This decrease was partially offset
by an increase in RPS hardware sales.

Other  Service  Fees.  Revenue  from other  service  fees was $271 for the three
months ended June 30, 1998  compared to $335 for the three months ended June 30,
1997, a decrease of $64 or 19.1%.  This  decrease was primarily due to decreased
installation   sales  of  our  hardware   parts  and  repair   group   (Systems
Engineering) and to a lesser extent, Collections service 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 $865 for the three  months  ended June 30,  1998
compared to $1,099 for the three  months ended June 30, 1997, a decrease of $234
or 21.3%. This yielded a gross profit margin of 78.6% for the three months ended
June 30, 1998  compared to a gross  profit  margin of 69.6% for the three months
ended June 30, 1997.  This  increase in gross  profit  margin  resulted  from an
increase in license fees and recurring  maintenance  from 59.0% of total revenue
for the three months ended June 30, 1997 to 74.6% of total revenue for the three
months ended June 30, 1998. License fees and recurring  maintenance have a lower
cost of revenue than the Company's other major source of revenue (i.e.,  product
sales.)

                                       7
<PAGE>

                        CPS SYSTEMS, INC. AND SUBSIDIARY

                                  JUNE 30, 1998

 
Product  Sales.  The cost of product sales was $634, or  approximately  83.9% of
product  sales,  for the three months ended June 30, 1998  compared to $873,  or
approximately  76.1% of product sales, for the three months ended June 30, 1997,
a decrease of $239 or 27.4%. This decrease was primarily due to costs associated
with a decrease in sales of  hardware  for  Collection  and CAMA  systems.  This
decrease was partially  offset by an increase in 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
$228, or  approximately  11.6% of license fees,  for the three months ended June
30, 1998 compared to $189, or approximately 16.1% of license fees, for the three
months  ended June 30,  1997,  an increase of $39 or 20.6%.  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 $34 for the three  months  ended June 30, 1998 and $36 for
the three months ended June 30, 1997.

Distribution.  The  costs  associated  with  distribution  were $3 for the three
months  ended June 30, 1998  compared to $37 for the three months ended June 30,
1997, a decrease of $34 or 91.9%.  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 $1,022 for the three  months  ended June 30, 1998  compared to $727 for the
three months ended June 30, 1997,  an increase of $295 or 40.6%.  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 $615
for the three months  ended June 30, 1998  compared to $264 for the three months
ended June 30, 1997, an increase of $351 or 133.0%.  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,
Collection and Cama systems.

Research and  Development.  Research and development  expenses were $164 for the
three  months  ended June 30, 1998  compared to $376 for the three  months ended
June 30,  1997,  a  decrease  of $212 or 56.4%.  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 $309 for
the three months ended June 30, 1998 compared to $229 for the three months ended
June 30, 1997, an increase of $80 or 34.9%. This increase was primarily due to a
increase  in travel  and  insurance  activity  created  by the IPO,  as well as,
expenses associated

 
                                        8

<PAGE>

                        CPS SYSTEMS, INC. AND SUBSIDIARY

                                  JUNE 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 June 30, 1998  compared to $91
for the three months ended June 30,  1997,  a decrease of  approximately  $21 or
23.1%.  The decrease in  amortization  is  primarily  due to the  completion  in
December 1997 of the non-compete agreement amortization.


EARNINGS FROM OPERATIONS

Earnings from  operation  were $994,  or 24.6% of revenue,  for the three months
ended June 30, 1998, compared to $827, or 22.9% of revenue, for the three months
ended June 30,  1997.  This  increase in earnings  from  operations  of $167 was
primarily  due to the increase of license fee revenue to 48.5% of total  revenue
for the three months ended June 30, 1998  compared to 32.5% of total revenue for
the three  months  ended  June 30,  1997,  and the  reduction  in  research  and
development expenses from 10.4% of total revenue for the 3 months ended June 30,
1997, to 4.1% for the three months ended June 30, 1998. The increase in earnings
was partially  offset by increased  operating  expenses for support and customer
Service and selling and marketing.


NON-OPERATING EXPENSES

Interest and Financing Costs.  The Company's  interest expense for its long term
debt was $88 for the three months  ended June 30, 1998  compared to $116 for the
three months ended June 30, 1997, a decrease of $28 or 24.1%.  This decrease was
primarily  attributed to the repayment of the senior term  loan(FINOVA  CAPITIAL
CORPORATION) and interest income on investments  from the remaining  proceeds of
the IPO. To a lesser  extent the decrease was  attributed  to  completion of the
non-compete amortization effective December 31, 1997. The decrease was partially
offset by a prepayment penalty and success fee on the senior term loan of $65.

Income Tax Expense.  The  Company's  provision for income taxes was $389 for the
three  months  ended June 30, 1998  compared to $299 for the three  months ended
June 30, 1997, an increase of $90 or 30.1%.  This increase was  attributable  to
increased earnings from operations.



COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 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 $7,255 for the six months ended June 30, 1998
compared to $5,405 for the six months ended June 30, 1997, an increase of $1,850
or 34.2%.  This increase was primarily due to an increase in Collection and CAMA
license  fee  sales and to a lesser  extent  an  increase  in RPS  hardware  and
software sales.

License  Fees.  The  Company's  revenue from license fees was $3,176 for the six
months June 30, 1998  compared to $1,365 for the six months ended June 30, 1997,
an increase of $1,811 or 132.7%.  The increase was  primarily due to an increase
in new  customer  Collection  and CAMA  installations  and to a  lesser  extent,
installations of RPS software.

                                        9
<PAGE>

                        CPS SYSTEMS, INC. AND SUBSIDIARY

                                  JUNE 30, 1998


Recurring  Maintenance  and Service Fees.  The Company's  revenue from recurring
fees was $2,128 for the six months  ended June 30,  1998  compared to $1,911 for
the six months ended June 30, 1997,  an increase of $217 or 11.4%.  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 $1,399 for the six months ended
June 30,  1998  compared  to $1,648 for the six months  ended June 30,  1997,  a
decrease of 249 or 15.1%.  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 $552 for the six months
ended June 30, 1998  compared to $481 for the six months  ended June 30, 1997, a
increase of $71 or 14.8%.  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  $1,515  for the six months  ended June 30,  1998
compared to $1,558 for the six months  ended June 30, 1997, a decrease of $43 or
2.8%.  This yielded a gross profit margin of 79.1% for the six months ended June
30, 1998  compared to a gross  profit  margin of 71.2% for the six months  ended
June 30, 1997. This increase in gross profit margin resulted from an increase in
license fees and recurring  maintenance  from 60.6% of total revenue for the six
months  ended June 30, 1997 to 73.1% of total  revenue for the six months  ended
June 30,  1998.  License  fees and  recurring  maintenance  have a lower cost of
revenue than the Company's other major source of revenue (i.e., product sales.)
 
Product Sales. The cost of product sales was $1,133,  or approximately  81.0% of
product  sales,  for the six months ended June 30, 1998  compared to $1,236,  or
approximately  75.0% of product sales, for the six months ended June 30, 1997, a
decrease of $103 or 8.3%.  This decrease was  primarily due to costs  associated
with a decrease in sales of  hardware  for  Collection  and CAMA  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
$375, or approximately  11.8% of license fees, for the six months ended June 30,
1998  compared to $282,  or  approximately  20.6% of license  fees,  for the six
months  ended June 30,  1997,  an increase of $93 or 33.0%.  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 $67 for the six months ended June 30, 1998 and $72 for the
six months ended June 30, 1997.


                                       10


<PAGE>

                        CPS SYSTEMS, INC. AND SUBSIDIARY

                                  JUNE 30, 1998


Distribution.  The costs associated with distribution were $7 for the six months
ended June 30, 1998  compared to $40 for the six months  ended June 30,  1997, a
decrease of $33 or 82.5%.  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 $1,969 for the six months  ended June 30,  1998  compared to $1,459 for the
six month  ended June 30,  1997,  an increase  of $510 or 35.0%.  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 $1,099
for the six months ended June 30, 1998 compared to $409 for the six months ended
June 30,  1997,  an  increase  of $690 or 168.7%.  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,
Collection and Cama systems.

Research and  Development.  Research and development  expenses were $266 for the
six months  ended June 30, 1998  compared to $729 for the six months  ended June
30, 1997, a decrease of $463 or 63.5%. 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 $768 for
the six months  ended June 30, 1998  compared  to $530 for the six months  ended
June 30, 1997, an increase of $238 or 44.9%.  This increase was primarily due to
a 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 an 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 $141 for the six months ended June 30, 1998  compared to $181
for the six months  ended June 30,  1997,  a decrease  of  approximately  $40 or
22.1%.  The decrease in  amortization  is  primarily  due to the  completion  in
December 1997 of the non-compete agreement amortization.
 

EARNINGS FROM OPERATIONS

Earnings from  operation  were $1,497,  or 20.6% of revenue,  for the six months
ended June 30, 1998,  compared to $539, or 10.0% of revenue,  for the six months
ended June 30,  1997.  This  increase in earnings  from  operations  of $958 was
primarily  due to the increase of license fee revenue to 43.8% of total  revenue
for the six months  ended June 30, 1998  compared to 25.3% of total  revenue for
the  six  months  ended  June  30,  1997,  and the  reduction  in  research  and
development  expenses  from 13.5% of total revenue for the six months ended June
30,  1997 to 3.7% for the six  months  ended  June 30,  1998.  The  increase  in
earnings was partially  offset by increased  operating  expenses for support and
customer service and selling and marketing.

                                       11

<PAGE>

                        CPS SYSTEMS, INC. AND SUBSIDIARY

                                  JUNE 30, 1998


NON-OPERATING EXPENSES

Interest and Financing Costs.  The Company's  interest expense for its long term
debt was $333 for the six months  ended June 30,  1998  compared to $232 for the
six months ended June 30, 1997, an increase of $101 or 43.5%.  This increase was
primarily attributed to a 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 and to a lesser extent completion of the non-compete
amortization effective December 31, 1997.

Income Tax Expense.  The  Company's  provision for income taxes was $514 for the
six months  ended June 30, 1998  compared to $174 for the six months  ended June
30,  1997,  an increase of $340 or 195.4%.  This  increase was  attributable  to
increased  earnings  from  operations.  The income tax  provision is higher than
income taxes  determined by applying the applicable  statutory rates for the six
months  ended June 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 $613 and provided cash of $369
during the six months ended June 30, 1998 and June 30, 1997,  respectively.  The
Company's  use of cash during the six months  ended June 30, 1998 was  primarily
attributable to increases in accounts  receivable of $502,  inventories of $105,
prepaid  expenses of $1,740,  and a decrease in accounts  payable of $598. These
decreases  to cash was  partially  offset by net  income  of $650 plus  non-cash
depreciation  and amortization of $368,  accrued expenses  increase of $793, put
warrant  adjustment of $125 and income tax payable increase of $238, for the six
months ended June 30, 1998.

The Company used cash of $1,424 and $348 for investing activities during the six
months ended June 30, 1998 and June 30, 1997, respectively. Investing activities
have  consisted  principally  of the  acquisition  of property and equipment and
capitalized  software  development  cost.  The increase of $1,076 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 $5,012 and used cash of $166
during the six months  ended June 30, 1998 and June 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 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.


                                       12


<PAGE>

                        CPS SYSTEMS, INC. AND SUBSIDIARY

                                  JUNE 30, 1998


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 June 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

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


                                       13
<PAGE>
                        CPS SYSTEMS, INC. AND SUBSIDIARY

                                  JUNE 30, 1998


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  June 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                                                   287,000
Temporary investments (as specified below)                      3,302,000
Other uses of at least $100,000 (as specified below)            1,175,000

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 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  officers and directors of the Company  Options to
purchase  307,500 shares of Common Stock at an exercise price of $4.00 per share
(the IPO price).  The grant became effective upon the consummation of the IPO on
March 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 June 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.

                                       14
<PAGE>

                        CPS SYSTEMS, INC. AND SUBSIDIARY

                                  JUNE 30, 1998






Date:  August 10, 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)








                                       15