CPS SYSTEMS INC
SB-2/A, 1998-03-20
COMPUTER INTEGRATED SYSTEMS DESIGN
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<PAGE>
 
    
 As filed with the Securities and Exchange Commission on March 20, 1998.     
                                                     Registration No. 333-39173
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
                      SECURITIES AND EXCHANGE COMMISSION
 
                            WASHINGTON, D.C. 20549
 
                                ---------------
                                
                             AMENDMENT NO. 5     
 
                                      TO
 
                                   FORM SB-2
                            REGISTRATION STATEMENT
 
                                     UNDER
 
                          THE SECURITIES ACT OF 1933
 
                                ---------------
                               CPS SYSTEMS, INC.
          (NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
         TEXAS                      7379                    75-1607857
    (STATE OR OTHER          (PRIMARY STANDARD           (I.R.S EMPLOYER
    JURISDICTION OF              INDUSTRIAL           IDENTIFICATION NUMBER)
    INCORPORATION OR        CLASSIFICATION CODE
     ORGANIZATION)                NUMBER)
                                 3400 CARLISLE
                                   SUITE 500
                              DALLAS, TEXAS 75204
                                (214) 855-5277
             (ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE
                   OFFICES AND PRINCIPAL PLACE OF BUSINESS)
 
                                 PAUL E. KANA
                            CHIEF EXECUTIVE OFFICER
                             C/O CPS SYSTEMS, INC.
                                 3400 CARLISLE
                                   SUITE 500
                              DALLAS, TEXAS 75204
                                (214) 855-5277
           (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
 
                                  COPIES TO:
         EDWARD H. BROWN, ESQ.                 MICHAEL J. ERICKSON, ESQ.
         CHESTER J. HOSCH, ESQ.                  LAURA A. BERTIN, ESQ.
    SCHREEDER, WHEELER & FLINT, LLP           SUMMIT LAW GROUP, P.L.L.C.
       1600 THE CANDLER BUILDING              1505 WESTLAKE AVENUE NORTH
       127 PEACHTREE STREET, N.E.                      SUITE 300
         ATLANTA, GEORGIA 30303                SEATTLE, WASHINGTON 98109
             (404) 681-3450                         (206) 281-9881

  APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
 
                                ---------------
  If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
  If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
  If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
 
  THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
 
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<PAGE>
 
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A         +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE   +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD, NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT        +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR   +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE      +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE    +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF  +
+ANY SUCH STATE.                                                               +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
 
                   Subject to Completion Dated March 19, 1998
 
                                1,900,000 SHARES
 
                   [LOGO OF CPS SYSTEMS, INC. APPEARS HERE]

                                  COMMON STOCK
 
  CPS Systems, Inc. ("CPS" or the "Company") hereby offers 1,900,000 shares of
its common stock (the "Common Stock"). Prior to this offering, there has been
no public market for the Common Stock. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering price.
The initial public offering price is $   per share. The Common Stock will be
quoted on the American Stock Exchange under the symbol "SYS" effective upon the
closing of this offering.
 
                                  -----------
 
            THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
                 SEE "RISK FACTORS" BEGINNING ON PAGE 6 HEREOF.
 
                                  -----------
 
 THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
 EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
 AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
 ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
 A CRIMINAL OFFENSE.
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S>                                <C>                 <C>                 <C>
                                                          UNDERWRITING
                                          PRICE           DISCOUNTS AND        PROCEEDS TO
                                        TO PUBLIC        COMMISSIONS(1)        COMPANY(2)
- ------------------------------------------------------------------------------------------
Per share.......................      $                   $                   $
- ------------------------------------------------------------------------------------------
Total(3)........................     $                   $                   $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Excludes a non-accountable expense allowance payable to Cruttenden Roth
    Incorporated and Josephthal & Co. Inc., representatives of the Underwriters
    (the "Representatives", and the value of warrants to purchase up to 190,000
    shares of Common Stock at an exercise price of 165% of the public offering
    price to be issued to the Representatives (the "Representatives' Warrant").
    The Company and the selling shareholders have agreed to indemnify the
    Underwriters against certain liabilities, including liabilities under the
    Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting offering expenses, including the non-accountable expense
    allowance in the amount of $313,500 ($360,525 if the Underwriters' over-
    allotment option is exercised in full), estimated at $910,000, payable by
    the Company.
(3) Certain shareholders have granted to the Underwriters a 45-day option to
    purchase up to 285,000 additional shares of Common Stock on the same terms
    and conditions as set forth above, solely to cover over-allotments, if any.
    If such option is exercised in full, the total Price to Public,
    Underwriting Discounts and Commissions and Proceeds to the Selling
    Shareholders will be $  , $   and $  , respectively. See "Underwriting."
 
  The shares of Common Stock are offered by the several Underwriters, when, as
and if delivered to and accepted by the Underwriters and subject to various
prior conditions, including their right to withdraw, cancel or modify such
offer and to reject orders in whole or in part. It is expected that delivery of
share certificates will be made against payment therefor at the offices of
Cruttenden Roth Incorporated in Irvine, California, or through the facilities
of The Depository Trust Company on or about     , 1998.
 
 
                                  -----------
 
Cruttenden Roth                                            Josephthal & Co. Inc.
   Incorporated
 
                THE DATE OF THIS PROSPECTUS IS          , 1998.
<PAGE>
 
 [Map showing the locations of the Company's customer installations and of the
             Company's personnel and sales offices appears here.]
 
  CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
 
  The Company intends to furnish annual reports to shareholders containing
audited financial statements and make available quarterly reports and such
other periodic reports as it may determine to be appropriate or as may be
required by law.
 
                                       2
<PAGE>
 
                               PROSPECTUS SUMMARY
 
  The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and Financial Statements,
including the Notes thereto, appearing elsewhere in this Prospectus. Except as
otherwise indicated, the information in this Prospectus (a) assumes that the
over-allotment option granted to the Underwriters has not been exercised and
(b) gives effect to the exercise of outstanding warrants to purchase an
aggregate of 927,766 shares of common stock, exercisable at a per share price
of $0.0026, which warrants will be exercisable on the earlier of December 31,
1999, or completion of an initial public offering. See "Underwriting."
Investors should carefully consider the information set forth under the heading
"Risk Factors."
 
                                  THE COMPANY
 
  CPS develops, markets, implements and supports fully integrated software
applications designed specifically for public sector organizations, including
states, counties, townships, city governments and other municipal agencies. The
Company's products address the following functional areas: (i) property tax
appraisal and assessment, (ii) property tax billing and collection, (iii) city
and municipal systems and (iv) remittance processing systems. Currently, the
Company's public sector software applications are installed in six states
(Colorado, Florida, North Carolina, New Mexico, Oklahoma and Texas),
representing more than 250 customers. The majority of its customers are county
governments with taxable parcel counts over 10,000 or cities with populations
between 5,000 and 35,000. The Company's focus on the public sector allows it to
design solutions that address the needs of these organizations.
 
  The Company has identified three significant growth opportunities in the
public sector marketplace. First, CPS intends to geographically expand its core
product business to address the following functional areas: property tax
appraisal and assessment, property tax billing and collection and city and
municipal systems. This opportunity represents a key segment of the Company's
business strategy due to the growing recurring revenue streams generated by
license agreements entered into by customers of the Company's core business.
Second, the Company plans to leverage its 17 years of public sector experience
to capitalize on the opportunity created by the Year 2000 ("Y2K") problem. The
Y2K problem results from the inability of certain computer systems to properly
interpret dates for the year 2000 and beyond. For example, unless Y2K
compliance is completed in certain systems, public sector organizations cannot
properly (i) appraise, bill and collect property taxes, a principal revenue
source, (ii) record fines and deeds resulting from property sales, and (iii)
maintain and retain accurate law enforcement records. In addressing the Y2K
problem, public sector entities are faced with the prospect of competing with
the private sector for recruiting, hiring and retaining top data processing
talent, despite possessing limited ability to match competitive salaries for
attracting new hires or retaining existing staff. Although the Company began
integrating Y2K solutions and applications into its core products in 1995, the
Company believes the opportunity to leverage Y2K applications into additional
sales has only recently materialized. Third, CPS intends to leverage the
interoperability of the Company's core products to manage information flow
between departments as organizations shift from mainframe computers to
client/server systems.
 
  The public sector marketplace is composed of state, county and city
governments, other municipal agencies and publicly owned utilities. This market
comprises over 3,000 counties and over 19,000 municipalities in the United
States. According to one industry source, state and local government agencies
spent approximately $34.5 billion on information technology and related
products in 1996. This total includes approximately $5.0 billion for software,
$6.7 billion for external services, $7.4 billion for hardware and $15.4 billion
for internal services (e.g., in-house management information systems
departments). Management estimates the remaining $1.9 billion was spent on the
software in the Company's core product areas. While the private sector is
taking steps to address the Y2K problem, the Company believes many public
sector organizations lack the resources to achieve a timely solution due to
budgetary and other constraints. One industry source estimates that the overall
cost of solving the Y2K problem worldwide will be in the range of $300 billion
to $600 billion. CPS believes the Y2K problem will cause many public sector
organizations
 
                                       3
<PAGE>
 
to explore further the possibility of migrating all or portions of their legacy
systems to Y2K compliant client/server systems. As computing technology evolves
and information processing requirements expand, medium to large public sector
organizations are seeking to preserve the investment in their existing systems
by integrating or replacing mainframe computers with modern distributed
computer processing architectures, such as client/server systems.
 
  CPS currently markets 41 applications to public sector organizations,
offering customers the following: (i) compliance with periodically changing
legislation, (ii) simplification of data entry, (iii) extensive security
features, (iv) flexible report configuration and (v) open system technology.
CPS has developed a proprietary tool that converts client data into a Y2K
compliant format that can be run by CPS applications which are Y2K compliant.
Management believes this tool offers a significant competitive advantage in
marketing software applications. The Company's application software products
are designed to be readily adaptable to meet a customer's initial needs and to
offer sufficient flexibility to respond to a customer's specific system
refinements and ongoing changes. The Company's tiered software architecture
enables CPS to utilize multiple platforms and effectively integrate new
technologies with existing software.
 
  The Company views the Y2K market as an opportunity to become one of the
leaders in providing public sector solutions on a national basis. To accomplish
this, CPS plans to expand geographically the size of its direct sales and
marketing force and concurrently hire additional technical support and systems
personnel. Expansion benefits include the execution of additional long-term
service agreements, generating recurring revenue from continuing monthly
maintenance and service fees, typically at a rate equal to approximately 32% of
the software license fee. The Company believes that the public sector
marketplace is highly fragmented with many small, closely-held companies and
views acquisitions as a means of acquiring technology and application
expertise, broadening its customer base and expanding geographically. To
support its growth, the Company has entered into an alliance with an external
software developer and intends to enter into additional strategic alliances
with other external software developers and Y2K service providers enabling the
Company to provide the necessary technical resources in a timely manner. The
Company believes a substantial opportunity exists to sell additional products
to current customers who have only one installed CPS product. Moreover, CPS
believes its customer base offers considerable leverage to new business since
references from existing customers often result in future sales opportunities.
 
  The Company was incorporated under the laws of the state of Texas in July
1978. The Company's executive offices are located at 3400 Carlisle, Suite 500,
Dallas, Texas 75204, and its telephone number is (214) 855-5277.
 
                                  THE OFFERING
 
Common Stock offered by the         
Company...........................  1,900,000
 
Common Stock to be outstanding
 after this offering..............  6,732,502(1)
 
Use of Proceeds...................  Repayment of certain indebtedness, working
                                    capital, research and development,
                                    potential acquisitions, certain investments
                                    and other general corporate purposes. See
                                    "Use of Proceeds."
 
Proposed American Stock Exchange    
Symbol............................  SYS
- --------
(1) Does not give effect to (i) 335,000 shares of Common Stock reserved for
    issuance upon exercise of outstanding options under the Company's 1997
    Equity Participation Plan with a per share exercise price equal to the
    initial offering price, (ii) 265,000 shares of Common Stock reserved for
    issuance upon exercise of options reserved for future grant under the
    Company's 1997 Equity Participation Plan, (iii) 100,000 shares of Common
    Stock reserved under the Company's Employee Stock Purchase Plan and (iv)
    190,000 shares (218,500 shares if the Underwriters' over-allotment option
    is exercised in full) of Common Stock issuable upon exercise of the
    Representatives' Warrant at an exercise price of $   per share. See
    "Management--Employee Equity Plans," "Description of Capital Stock--
    Warrants" and "Underwriting."
 
                                       4
<PAGE>
 
 
                             SUMMARY FINANCIAL DATA
 
                 (amounts in thousands, except per share data)
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED
                                                                DECEMBER 31,
                                                               ---------------
                                                                1997     1996
                                                               -------  ------
<S>                                                            <C>      <C>
STATEMENT OF OPERATIONS DATA:
 Total revenue...............................................  $10,478  $8,363
 Gross profit................................................    7,306   6,496
 Operating expenses..........................................    7,158   5,758
 Earnings from operations....................................      148     738
 Net loss....................................................     (247)   (246)
Net loss per common share(1)
 Basic.......................................................  $ (0.06) $(0.06)
 Diluted.....................................................  $ (0.07) $(0.06)
Weighted average shares used in computing net loss per common
 share(1)
 Basic.......................................................    3,905   3,905
 Diluted.....................................................    4,833   3,905
</TABLE>
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31, 1997
                                                        ------------------------
                                                        ACTUAL  AS ADJUSTED/(2)/
                                                        ------  ----------------
<S>                                                     <C>     <C>
BALANCE SHEET DATA:
 Cash.................................................. $  327       $
 Working capital (deficit).............................   (489)
 Total assets..........................................  6,499
 Long-term debt, net of current portion................  2,137
 Shareholders' equity..................................    277
</TABLE>
- --------
(1) Does not give effect to (i) 335,000 shares of Common Stock reserved for
    issuance upon exercise of outstanding options under the Company's 1997
    Equity Participation Plan with a per share exercise price equal to the
    initial offering price, (ii) 265,000 shares of Common Stock reserved for
    issuance upon exercise of options reserved for future grant under the
    Company's 1997 Equity Participation Plan, (iii) 100,000 shares of Common
    Stock reserved under the Company's Employee Stock Purchase Plan and (iv)
    190,000 shares (218,500 shares if the Underwriters' over-allotment option
    is exercised in full) of Common Stock issuable upon exercise of the
    Representatives' Warrant at an exercise price of $   per share. See
    "Management--Employee Equity Plans," "Description of Capital Stock--
    Warrants" and "Underwriting."
(2) Adjusted to give effect to the sale by the Company of 1,900,000 shares of
    Common Stock offered hereby at the public offering price of $   per share
    and the application of the estimated net proceeds therefrom. See "Use of
    Proceeds."
 
                                ----------------
 
  The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Certain statements in this
Prospectus that are not historical fact constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Discussions containing such forward-looking statements may be found in the
material set forth under "Summary," "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business,"
as well as within this Prospectus generally. In addition, when used in this
Prospectus, the words "believes," "anticipates," "expects" and similar
expressions are intended to identify forward-looking statements. Such
statements are subject to a number of risks and uncertainties. Actual results
could differ materially from those projected in the forward-looking statements
as a result of the risk factors set forth in this Prospectus and the matters
set forth in this Prospectus generally. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking
statements that may be made to reflect any future events or circumstances.
 
                                       5
<PAGE>
 
                                 RISK FACTORS
 
  In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the
Company and its business before purchasing any of the Common Stock offered
hereby.
 
RISKS ASSOCIATED WITH PUBLIC SECTOR MARKET
 
  A substantial portion of the Company's revenue to date has been attributable
to sales of software and services to state, county and city governments and
other municipal agencies. The Company expects that sales to such public sector
customers will account for substantially all of the Company's revenue in the
future. Virtually all of these public sector organizations have existing
information processing systems. Accordingly, in order to continue to increase
its sales to this market, the Company must persuade these organizations to
replace or upgrade existing information processing systems. Change to an
organization's information system is a costly, time consuming and
operationally disruptive process for the customer. Conversion to a new
information processing system must typically be done without any disruption of
service and, accordingly, the Company's potential customers perceive a high
degree of risk in connection with the adoption of a new system. In addition,
the purchase of the Company's products involves a significant commitment of
capital, with attendant delays frequently associated with large capital
expenditures by an organization. For these and other reasons, the sales cycle
associated with the purchase of the Company's products is typically lengthy
and subject to a number of significant risks, including customers' budgetary
constraints and internal acceptance reviews, over which the Company has little
or no control. There can be no assurance that potential customers for the
Company's products in the public sector market will continue to make
information processing system replacement decisions at rates necessary to
maintain demand for the Company's products and sustain market growth or that
the Company's products will be accepted by public sector organizations that
consider replacing their current information processing systems. A significant
reduction in demand or acceptance of the Company's products could have a
material adverse effect on the Company's business, financial condition and
operating results.
 
UNCERTAINTY OF DEMAND FOR YEAR 2000 SOLUTIONS
 
  The Company anticipates focusing a significant portion of its marketing and
sales efforts on products and solutions addressing the Y2K problem. The
Company's current plans involve developing solutions for existing and
potential customers based upon modifications to the Company's existing
software product lines. Although the Company believes that the market for Y2K
solutions will grow significantly as the year 2000 approaches, there can be no
assurance that the market will develop to the extent anticipated by the
Company. Moreover, the Company's efforts are directed at addressing the Y2K
problem within the framework of its traditional software products.
Consequently, the Company's market for its Y2K solution products is limited to
existing and potential public sector customers of the Company's existing
software products. In addition, the Company's customers may seek alternative
solutions for the Y2K problem. Many customers may attempt to resolve the
problem internally rather than purchase products and solutions from the
Company or may seek to solve the Y2K problem by retaining consultants or other
competitors who may address the Y2K problem through enterprise solutions
covering the customer's entire computer system. Due to these factors,
development of a market for the Company's Y2K solution is uncertain and
unpredictable. Furthermore, the demand for Y2K products and solutions is
likely to diminish after the year 2000. The failure of the market to increase,
or to increase more slowly than anticipated, could have a material adverse
effect on the Company's business, financial condition and operating results.
See "Business--Industry Overview."
 
COMPETITION
 
  The market in which the Company competes is highly fragmented, with a large
number of competitors that vary in size, primary computer platforms and
overall product scope. Within its traditional public sector markets, the
Company competes from time to time with (i) custom software and services
providers (such as
 
                                       6
<PAGE>
 
Andersen Consulting, KPMG Peat Marwick and Oracle Corporation), (ii) companies
which focus on selected segments of the public sector market (including
Systems & Computer Technology Corporation, Manatron, Inc., H.T.E., Inc.,
American Management Systems Incorporated and BRC Holdings, Inc.) and (iii) a
significant number of smaller private companies. The Company also competes
with in-house management information services staff. In addition, within the
market for its Y2K solution products, the Company anticipates that it will
compete with companies who focus upon overall enterprise solutions to the Y2K
problem. Many of the Company's competitors are more established, benefit from
greater name recognition and have substantially greater resources than the
Company. Moreover, the Company could face additional competition as other
established and emerging companies enter the public sector software
application market and/or the Y2K market and new products and technologies are
introduced. Increased competition could result in price reductions, fewer
customer orders, reduced gross margins and loss of market share, any of which
could have a material adverse effect on the Company's business, financial
condition and operating results. In addition, current and potential
competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties, thereby increasing the
ability of their products to address the needs of the Company's prospective
customers. Accordingly, it is possible that new competitors or alliances among
current and new competitors may emerge and rapidly gain significant market
share. There can be no assurance that the Company will be able to compete
successfully against current and future competitors, and the failure to do so
would have a material adverse effect upon the Company's business, financial
condition and operating results. See "Business--Competition."
 
MANAGEMENT OF GROWTH
 
  The Company has recently experienced a period of significant expansion in
the number of its employees, the scope of its operating and financial systems
and the geographic area of its operations, and anticipates that growth may
continue in the future. To accommodate future growth, if any, the Company must
continue to implement and improve information systems, procedures and controls
and hire and train management, technical and sales personnel. The Company
believes there is significant competition for software development
professionals with the skills and expertise necessary to perform services
offered by the Company. Although the Company invests, and plans to continue
investing, significant resources in retaining and expanding its management,
technical and sales force, the Company may experience difficulty in recruiting
and retaining capable personnel. There can be no assurance that the Company
will be able to expand successfully its management, technical or sales
personnel or that any such expansion will increase revenue. Failure by the
Company to implement and improve the Company's operational, financial and
management systems or maintain and expand personnel could have a material
adverse effect on the Company's business, financial condition and operating
results. See "Risk Factors--Dependence on Key Personnel" and "Business--
Employees."
 
POTENTIAL FLUCTUATIONS OF OPERATING RESULTS; FUTURE OPERATING RESULTS
UNCERTAINTY
 
  The Company's revenue and operating results are subject to fluctuations
resulting from a variety of factors, including the effect of budgeting and
purchasing practices of its customers, the length of customer evaluation
processes for the Company's solutions, the timing of customer system
conversions, announcements of new products by the Company or its competitors
and the Company's sales practices. In addition, since a significant portion of
the Company's operating expenses is fixed, the Company may not be able to
adjust or reduce spending in response to sales shortfalls or delays. Many of
these factors are not within the Company's control. These factors can cause
significant variations in operating results from quarter to quarter, which may
also adversely affect and cause volatility in the market price of the
Company's common stock. The Company believes that quarter to quarter
comparisons of its financial results are not necessarily meaningful and should
not be relied upon as an indication of future quarterly performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results of Operations."
 
 
                                       7
<PAGE>
 
ABILITY TO RESPOND TO TECHNOLOGICAL CHANGE
 
  The Company's future success will depend significantly upon its ability to
enhance its current products, develop or acquire and market new products which
keep pace with technological developments, evolving industry standards and
legislative amendments and respond to changes in customer needs. There can be
no assurance that the Company will be successful in developing or acquiring
product enhancements or new products to address changing technologies and
customer requirements, or that its competitors will not develop products that
are superior to the Company's products or achieve greater market acceptance
than the Company's products. Failure by the Company to respond to
technological change or the development of superior products by its
competitors could have a material adverse effect on the Company's business,
financial condition and operating results. See "Business--Growth Strategy."
 
DEPENDENCE ON KEY PERSONNEL
 
  The Company's continued success will depend upon the availability and
performance of its senior management team, particularly Paul E. Kana, Chairman
and Chief Executive Officer, and James K. Hoofard, Jr., President and Chief
Operating Officer, each of whom possess unique and extensive industry
knowledge and experience. While the Company currently maintains key-man life
insurance policies on Paul E. Kana and James K. Hoofard, Jr., the loss of
either man could have a material adverse effect on the Company's business,
financial condition and operating results. See "Management--Directors,
Executive Officers and Key Employees" and "--Executive Compensation."
 
PROPRIETARY RIGHTS AND RISKS OF INFRINGEMENT
 
  The Company regards certain features of its internal operations, software
and documentation as confidential and proprietary, and relies on a combination
of contract and trade secret laws and other measures to protect its
proprietary intellectual property. Despite these precautions, it may be
possible for unauthorized parties to copy the Company's software or reverse
engineer or otherwise obtain and use information the Company regards as
proprietary. The Company has no patents and, under existing copyright laws,
has only limited protection. In addition, certain provisions of the license
agreements entered into by the Company, including provisions against
unauthorized use, transfer and disclosure, may be unenforceable under the laws
of certain jurisdictions. There can be no assurance that the steps taken by
the Company to protect its proprietary rights will be adequate to deter
misappropriation of its technology or independent development by others of
technologies that are substantially equivalent or superior to the Company's
technology. Any such misappropriation or development could have a material
adverse effect on the Company's business, financial condition and operating
results. As the number of competitors providing similar products increases,
overlapping methodologies used in such products will become more likely.
Although the Company's methodology has never been the subject of an
infringement claim, there can be no assurance that third parties will not
assert infringement claims against the Company in the future, that assertion
of such claims will not result in litigation or that the Company would prevail
in such litigation or be able to obtain a license for the use of any infringed
intellectual property from a third party on commercially reasonable terms.
Litigation, regardless of its outcome, could result in substantial cost to the
Company and divert resources and management from the Company's operations. Any
infringement claim or litigation against the Company could, have a material
adverse effect on the Company's business, financial condition and operating
results. See "Business--Intellectual Property, Proprietary Rights and
Licenses."
 
POTENTIAL PRODUCT LIABILITY AND RISK OF SOFTWARE DEFECTS
 
  The Company markets to its customers complex, mission-critical applications.
Any failure in a customer's system could result in a claim for damages,
regardless of the Company's responsibility for such failure. The Company has
never been involved in product liability litigation, and the Company's license
agreements with its customers typically contain provisions designed to limit
the Company's exposure to potential product liability claims. However, there
can be no assurance that the limitation of liability provisions contained in
the
 
                                       8
<PAGE>
 
Company's license agreements would be enforceable or would otherwise protect
the Company from liability for damages. The Company currently carries general
liability insurance protecting against product liability claims. There can be
no assurance that such insurance will continue to be available, or available
at a cost acceptable to Company, or that the policy's limits will be
sufficient to satisfy any judgment or claim. The successful assertion of one
or more large claims against the Company that exceed available insurance
coverage or changes in the Company's insurance policies, including premium
increases or the imposition of a large deductible or co-insurance requirements
could have a material adverse effect on the Company's business, financial
condition and operating results. Furthermore, litigation, regardless of its
outcome, could result in substantial cost to the Company and divert
management's attention from the Company's operations, which could have a
material adverse effect on the Company's business, financial condition and
operating results.
 
  Software products as complex as those developed by the Company may contain
errors or defects, particularly when first introduced or when new versions or
enhancements are released. Errors, bugs or viruses could result in loss or
delay of market acceptance, a failure in a client's system or complete loss of
client data. Although the Company has not experienced material adverse effects
resulting from any such defects or errors to date, there can be no assurance
that defects and errors will not be found after commencement of product
shipments. Any such defects could have a material adverse effect upon the
Company's business, financial condition and operating results. See "Business--
Research and Development."
 
ACQUISITION RISK
 
  As part of its growth strategy, the Company intends to evaluate the
acquisition of other companies, assets or product lines that would complement
or expand its existing business in attractive geographic or service markets or
that would broaden its customer relationships. Although the Company
periodically considers possible acquisitions, no specific acquisitions are
being negotiated. In addition, although the Company conducts due diligence
reviews of potential acquisition candidates, the Company may not be able to
identify all material liabilities or risks related to potential acquisition
candidates. There can be no assurance that the Company will be able to locate
and acquire any business, retain key personnel and customers of an acquired
business or integrate any acquired business successfully. Additionally, there
can be no assurance that financing for any acquisition, if necessary, will be
available on acceptable terms, if at all, or that the Company will be able to
accomplish its strategic objectives in connection with any acquisition. See
"Business--Growth Strategy."
 
DEPENDENCE ON KEY SUPPLIERS AND RELATIONSHIPS
 
  The Company purchases certain key components of its products from limited
source suppliers. Establishing relationships with additional or replacement
suppliers for any of the components used in the Company's products, if
required, could involve significant additional costs. The Company is not a
party to any long-term agreements with any of these suppliers. The Company
believes no significant obstacles to replacing these suppliers exist. However,
the inability of any of the Company's suppliers to provide functional
components on a timely basis, or the inability of the Company to locate
qualified alternative suppliers or coding programmers on acceptable terms,
could have a material adverse effect on the Company's business, financial
condition and operating results. The Company may also need to establish
additional alliances and relationships in order to keep pace with evolutions
in technology and enhance its service offerings, and there can be no assurance
such additional alliances will be established. See "Business--Growth Strategy"
and "--Sales and Marketing."
 
NO PRIOR PUBLIC MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
 
  Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained after this offering. The initial public offering price
has been determined through negotiations between the Company and the
Representatives of the Underwriters based on several factors and may not be
indicative of the market price of the Common Stock after this offering. The
market price of the shares of Common Stock is likely to be highly volatile and
may be significantly affected by factors such as actual or anticipated
fluctuations in the Company's operating results,
 
                                       9
<PAGE>
 
announcements of technological innovations, new products or new contracts by
the Company or its competitors, developments with respect to patents,
copyrights or proprietary rights, conditions and trends in the software and
other technology industries, adoption of new accounting standards affecting
the software industry, changes in financial estimates by securities analysts,
general market conditions and other factors. In addition, the stock market has
from time to time experienced significant price and volume fluctuations that
have particularly affected the market prices for the common stock of
technology companies. These broad market fluctuations may adversely affect the
market price of the Common Stock.
 
CONTROL BY PRINCIPAL SHAREHOLDERS, OFFICERS AND DIRECTORS
 
  Upon completion of this offering, the six existing directors, executive
officers and principal shareholders of the Company and their affiliates will
beneficially own approximately 68% of the outstanding Common Stock (64% if the
over-allotment option is exercised in full). As a result, these shareholders
will be able to exercise control over all matters requiring shareholder
approval, including the election of directors and approval of significant
corporate transactions. Such concentration of ownership may have the effect of
delaying or preventing a change in control of the Company. In addition, each
of the Company's current shareholders has pledged his shares to secure certain
of the Company's outstanding indebtedness. The Company believes that operating
revenue and reserves will be sufficient to pay such indebtedness. However,
there can be no assurance that the Company will be able to repay such
indebtedness and failure to do so could result in a change of control of the
Company and/or have a material adverse effect on the Company's business,
financial condition and operating results. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Principal Shareholders."
 
BROAD MANAGEMENT DISCRETION AS TO USE OF PROCEEDS
 
  The principal purposes of this offering are to retire certain indebtedness,
obtain additional working capital, fund expanding research and development
efforts, create a public market for the Company's Common Stock and facilitate
the Company's future access to public equity markets. The Company expects to
use most of the net proceeds of this offering for working capital, research
and development, possible acquisitions and general corporate purposes.
Accordingly, the Company's management will retain broad discretion as to the
allocation of a substantial portion of the net proceeds from this offering.
Pending such uses, the Company intends to invest the net proceeds in short-
term, investment-grade, interest-bearing securities. See "Use of Proceeds."
 
RISK OF LOW-PRICED STOCKS
 
  The Company has applied to have its Common Stock listed on the American
Stock Exchange effective upon the closing of this offering. In order to be
listed on the American Stock Exchange, a company must meet certain financial
maintenance criteria. Although the Company's Common Stock has been approved
for listing (subject to the completion of this offering) the Company currently
does not meet these criteria. There can be no assurance that the Company will
continue to be allowed to be listed on the American Stock Exchange and/or that
it will meet these criteria in the future. Failure to meet these maintenance
criteria in the future and/or the delisting of the Common Stock from the
American Stock Exchange could result in the Common Stock being traded on the
over-the-counter market, in which case investors may find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of, the
Common Stock. If the Company's Common Stock was delisted from the American
Stock Exchange, and the trading price of the Common Stock were less than $5.00
per share, the Common Stock might be considered "penny stock" and trading in
the Common Stock might be subject to the requirements of certain rules under
the Securities Exchange Act of 1934. These rules could adversely affect the
ability and willingness of broker-dealers to sell the Common Stock, which
could reduce the liquidity of the Common Stock and have a material adverse
effect on the trading market for the Common Stock.
 
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS; POSSIBLE ADVERSE EFFECT
ON FUTURE MARKET PRICES
 
  Sales of a substantial number of shares of Common Stock in the public market
following this offering could adversely affect the market price of the Common
Stock. Upon completion of this offering, the Company
 
                                      10
<PAGE>
 
will have outstanding 6,732,502 shares of Common Stock, of which the 1,900,000
shares sold in this offering (2,185,000 shares if the Underwriters' over-
allotment option is exercised in full) will be freely tradeable. Approximately
4,832,502 (4,547,502 if the Underwriters' over-allotment option is exercised
in full) of the remaining shares are subject to agreements with the
Underwriters under which such shares may not be offered, sold or otherwise
disposed of for a period of one year after the date of this Prospectus without
the prior written consent of Cruttenden Roth, but will thereafter be eligible
for sale pursuant to Rule 144 of the Securities Act. Cruttenden Roth has no
present intention to release the locked-up shares prior to expiration of the
one-year period. The holders of 927,766 shares of Common Stock (832,374 if the
Underwriters' over-allotment option is exercised in full) are entitled to
include their shares of Common Stock in the registration, subject to the
ability of the underwriters to limit the number of shares included in the
registration to not more than 10% of the offering with respect to such shares.
By exercising their rights, such holders could cause additional shares to be
sold in the public market. Sales pursuant to Rule 144 or other exemptions from
registration, or pursuant to registration rights, may have an adverse effect
on the market price for the common stock and could impair the Company's
ability to raise capital through an offering of its equity securities. See
"Shares Eligible for Future Sale," "Underwriting" and "Description of Capital
Stock--Registration Rights of Certain Holders."
 
DILUTION
 
  Investors purchasing shares of Common Stock in this offering will incur
immediate and substantial dilution in the net tangible book value of the
Common Stock from the initial public offering price and will incur additional
dilution upon the exercise of stock options and warrants. See "Dilution."
 
NO CASH DIVIDENDS
 
  The Company intends to retain any future earnings for its business and does
not anticipate paying any cash dividends in the foreseeable future. See
"Dividend Policy."
 
EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS; ANTITAKEOVER EFFECTS
 
  Certain provisions of the Company's Articles of Incorporation, as amended
(the "Restated Articles"), may deter or frustrate a takeover attempt of the
Company that a shareholder might consider in his best interest. The Company's
Restated Articles or Bylaws, among other things, provide that (i) the annual
meeting of shareholders shall be held on such date and at such time fixed from
time to time by the Board of Directors, provided that there shall be an annual
meeting held every calendar year, (ii) any special meeting of the shareholders
may be called only by the Chairman of the Board, President or upon the
affirmative vote of at least a majority of the members of the Board of
Directors, or upon the written demand of the holders of not less than 50% of
the votes entitled to be cast at a special meeting, (iii) an advance notice
procedure must be followed for nomination of directors and for other
shareholder proposals to be considered at annual shareholders' meetings and
(iv) the Company's Board of Directors be divided into three classes, each of
which serves for different three-year periods, and for which shareholders have
no cumulative voting rights. In addition, the Company will be authorized to
issue additional shares of Common Stock and up to 10 million shares of
preferred stock in one or more series, having terms fixed by the Board of
Directors without shareholder approval, including voting, dividend or
liquidation rights that could be greater than or senior to the rights of
holders of Common Stock. Shareholders will have no preemptive rights with
respect to any additional common stock or preferred stock. Issuance of
additional shares of Common Stock or new shares of preferred stock could also
be used as an antitakeover device. Except as set forth herein, the Company has
no current intentions or plans to issue additional Common Stock or issue
preferred stock. See "Description of Capital Stock."
 
 
                                      11
<PAGE>
 
                                USE OF PROCEEDS
 
  The net proceeds to the Company from the sale of the 1,900,000 shares of
Common Stock offered by the Company at the public offering price of $   per
share are estimated to be $8.3 million after deducting the estimated
underwriting discounts and commissions and other estimated offering expenses
payable by the Company (assuming the over-allotment option granted to the
Underwriters by certain selling shareholders is exercised). The Company will
not receive any proceeds from any shares sold by the selling shareholders in
the event the over-allotment option is exercised, but will incur additional
expenses of approximately $200,000 in the event such option is exercised in
full. The Company intends to use the net proceeds from this offering for the
following specific purposes in order of priority:
 
<TABLE>
<CAPTION>
                                                    IN DOLLARS   AS A PERCENTAGE
                                                   (APPROXIMATE) OF NET PROCEEDS
                                                   ------------- ---------------
<S>                                                <C>           <C>
Repayment of indebtedness(1)......................  $1,000,000        12.05%
Working capital...................................   2,100,000        25.30%
Research and development..........................   2,400,000        28.92%
Acquisitions and investments(2)...................   2,400,000        28.92%
General corporate purposes........................     400,000         4.81%
                                                    ----------       ------
Total.............................................  $8,300,000       100.00%
                                                    ==========       ======
</TABLE>
- --------
(1) As of December 31, 1997 the outstanding principal amount under the
    Company's senior term loan with FINOVA Capital Corporation ("FINOVA") was
    approximately $874,000, including certain prepayment fees, bearing
    interest at prime plus 2 1/2% and maturing December 30, 1998, and the
    loans from shareholders to the Company's subsidiary, CDP Systems, Inc.,
    amounted to approximately $126,000, including interest bearing interest at
    8% and maturing July 1, 2000. See "Risk Factors--Acquisition Risk,"
    "Management's Discussion and Analysis of Financial Condition and Results
    of Operations--Liquidity and Capital Resources" and "Certain
    Transactions."
(2) The Company expects to use approximately $2.4 million from net proceeds
    for possible acquisitions or investments in products, technologies or
    businesses that broaden or enhance the Company's current product or
    service offerings, working capital and for general corporate purposes.
 
  There are no current agreements or understandings with respect to any
acquisitions, investments or other transactions. Pending the uses described
above, the Company intends to invest the remaining net proceeds in short-term,
investment grade, interest-bearing securities.
 
                                DIVIDEND POLICY
 
  The Company has never declared or paid cash dividends on its Common Stock.
The Company intends to retain earnings, if any, for use in its business and to
support growth and does not anticipate paying cash dividends on its Common
Stock in the foreseeable future. The Company's credit facilities currently
place certain restrictions on the Company's ability to declare and pay
dividends.
 
                                      12
<PAGE>
 
                                   DILUTION
 
  The net tangible book value of the Company as of December 31, 1997 was
approximately ($.79) per share of Common Stock. Net tangible book value per
share of the Common Stock is equal to the book value of the Company's total
tangible assets less the book value of its total liabilities, divided by the
total number of shares of Common Stock outstanding as of December 31, 1997.
After giving effect to the sale by CPS of the 1,900,000 shares of Common Stock
offered hereby, assuming the over-allotment option granted to the Underwriters
by the selling shareholders is exercised in full and the exercise of the put
warrants, and after deducting the underwriting discount and the estimated
offering expenses payable by CPS, the pro forma net tangible book value of CPS
at December 31, 1997 would have been $         , or $.   per share. This
represents an immediate increase in the net tangible book value of $     per
share to existing holders of Common Stock and an immediate dilution of $
per share to the persons purchasing shares of Common Stock at the assumed
public offering price. The following table illustrates this per share
dilution:
 
<TABLE>
<S>                                                                  <C>     <C>
Public offering price...............................................         $
 Net tangible book value before the offering........................  ($.79)
 Increase attributable to new investors.............................
                                                                     ------
Pro forma net tangible book value after the offering................
                                                                             ---
Dilution to new investors (  %).....................................         $
                                                                             ===
</TABLE>
 
  The following table compares, as of December 31, 1997, the number of shares
of Common Stock purchased from CPS by its existing shareholders prior to this
offering and to be purchased by new investors in this offering, the total
consideration paid or to be paid to CPS and the average price per share paid
or to be paid to the Company by the Company's existing shareholders and by new
investors purchasing shares in this offering, assuming no exercise of the
Underwriters' over-allotment option:
 
<TABLE>
<CAPTION>
                             SHARES PURCHASED  TOTAL CONSIDERATION      AVERAGE
                             ----------------- ------------------------  PRICE
                              NUMBER   PERCENT   AMOUNT      PERCENT   PER SHARE
                             --------- ------- ------------- -------------------
<S>                          <C>       <C>     <C>           <C>       <C>
Existing shareholders....... 4,832,502    72%  $   1,002,376         %   $.21
New investors............... 1,900,000    28                             $
                             ---------   ---   -------------   ------
  Total..................... 6,732,502   100%  $                  100%
                             =========   ===   =============   ======
</TABLE>
 
  The foregoing table assumes exercise of outstanding options or warrants. In
October 1997, CPS granted options to purchase 335,000 shares of Common Stock
under the Stock Option Plan. In addition, CPS will issue to the
Representatives, effective upon consummation of this offering, the
Representatives' Warrant. See "Management--Employee Equity Plans," "Principal
Shareholders" and "Underwriting."
 
                                      13
<PAGE>
 
                                CAPITALIZATION
 
  The following table sets forth the historical capitalization of the Company
as of December 31, 1997 on an actual and as adjusted basis. The information
set forth in the table below should be read in conjunction with the Company's
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
See "Use of Proceeds."
 
<TABLE>
<CAPTION>
                                                            DECEMBER 31, 1997
                                                            -------------------
                                                               (AMOUNTS IN
                                                                THOUSANDS)
                                                                        AS
                                                            ACTUAL  ADJUSTED(2)
                                                            ------  -----------
<S>                                                         <C>     <C>
Cash and cash equivalents.................................. $  327    $
                                                            ======    ======
SHORT-TERM DEBT:
Current portion of long-term debt..........................    731       -0-
                                                            ------    ------
LONG-TERM DEBT:
Senior subordinated note...................................  2,014     2,014
Shareholder loans..........................................    123       -0-
Other debt(3)..............................................    242       -0-
                                                            ------    ------
 Total long-term debt...................................... $2,379    $2,014
                                                            ------    ------
SHAREHOLDERS' EQUITY:
Common stock and paid-in capital
$.01 par value, 50,000 shares authorized;
3,905 shares issued and outstanding; 6,733 shares issued
and outstanding,
as adjusted(1).............................................  1,000
Accumulated deficit........................................   (723)     (861)
                                                            ------    ------
Total shareholders' equity................................. $  277    $
                                                            ------    ------
Total capitalization....................................... $3,387    $
                                                            ======    ======
</TABLE>
- --------
(1) Does not give effect to (i) 335,000 shares of Common Stock reserved for
    issuance upon exercise of outstanding options under the Company's 1997
    Equity Participation Plan with a per share exercise price equal to the
    initial offering price, (ii) 265,000 shares of Common Stock reserved for
    issuance upon exercise of options reserved for future grant under the
    Company's 1997 Equity Participation Plan and (iii) 100,000 shares of
    Common Stock reserved under the Company's Employee Stock Purchase Plan.
    See "Management--Employee Equity Plans," "Description of Capital Stock--
    Warrants" and "Underwriting."
(2) Reflects the issuance and sale by the Company of 1,900,000 shares of the
    Common Stock offered hereby and the application of a portion of the net
    proceeds therefrom to repay certain indebtedness, after deducting the
    underwriting discount and estimated offering expenses. Assumes the over-
    allotment option granted to the Underwriters by the selling shareholders
    is exercised in full.
(3) Represents recorded amount of put warrants as of December 31, 1997.
    Warrant holders have agreed to exercise all warrants upon the effective
    date of the Company's initial public offering.
 
                                      14
<PAGE>
 
                            SELECTED FINANCIAL DATA
 
  The selected financial data set forth below for the years ended December 31,
1997 and 1996 and as of December 30, 1997 are derived from the Company's
audited Consolidated Financial Statements, which appear elsewhere in this
Prospectus. The selected financial data as of December 31, 1996 are derived
from the Company's audited financial statements which are not included in this
Prospectus. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements, including the
Notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
                                                         YEAR ENDED
                                                        DECEMBER 31,
                                                       ---------------
                                                        1997     1996
                                                       -------  ------
                                                       (AMOUNTS IN THOUSANDS
                                                       EXCEPT PER SHARE DATA)
<S>                                                    <C>      <C>     
STATEMENT OF OPERATIONS DATA:
 Revenue:
  License fees........................................ $ 2,178  $1,635
  Recurring maintenance and service fees..............   3,910   3,851
  Product sales.......................................   3,421   2,052
  Other service fees..................................     969     825
                                                       -------  ------
   Total revenue......................................  10,478   8,363
                                                       -------  ------
 Cost of revenue:
  Product sales.......................................   2,529   1,465
  Software............................................     576     391
  Distribution........................................      67      11
                                                       -------  ------
   Total cost of revenue..............................   3,172   1,867
                                                       -------  ------
 Gross profit.........................................   7,306   6,496
 Operating expenses:
  Support and customer service........................   3,278   2,743
  Selling.............................................     966     772
  Research and development............................   1,508     866
  General and administrative..........................   1,048   1,030
  Amortization of goodwill and non-compete agreements.     358     347
                                                       -------  ------
                                                         7,158   5,758
                                                       -------  ------
 Earnings from operations.............................     148     738
 Interest and financing costs.........................     420     819
                                                       -------  ------
 Loss before income taxes.............................    (272)    (81)
 Income tax expense (benefit).........................     (25)    165
                                                       -------  ------
 Net loss............................................. $  (247) $ (246)
                                                       =======  ======
 Net loss per common share(1)
  Basic............................................... $ (0.06) $(0.06)
  Diluted............................................. $ (0.07) $(0.06)
 Weighted average shares used in computing net loss
  per common share(1):
  Basic...............................................   3,905   3,905
  Diluted.............................................   4,833   3,905
<CAPTION>
                                                        DECEMBER 31,
                                                       ---------------
                                                        1997     1996
                                                       -------  ------
<S>                                                    <C>      <C>     
BALANCE SHEET DATA:
 Cash................................................. $   327  $  592
 Working capital (deficit)............................    (489)    303
 Total assets.........................................   6,499   6,134
 Long-term debt, net of current portion...............   2,137   2,741
 Shareholders' equity.................................     277     524
</TABLE>
- --------
(1) Does not give effect to (i) 335,000 shares of Common Stock reserved for
    issuance upon exercise of outstanding options under the Company's 1997
    Equity Participation Plan with a per share exercise price equal to the
    initial offering price, (ii) 265,000 shares of Common Stock reserved for
    issuance upon exercise of options reserved for future grant under the
    Company's 1997 Equity Participation Plan, (iii) 100,000 shares of Common
    Stock reserved under the Company's Employee Stock Purchase Plan and
    (iv) 190,000 shares (218,500 shares if the Underwriters' over-allotment
    option is exercised in full) of Common Stock issuable upon exercise of the
    Representatives' Warrant at an exercise price of $   per share. See
    "Management--Employee Equity Plans," "Description of Capital Stock--
    Warrants" and "Underwriting."
 
                                      15
<PAGE>
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
 
  The Company offers fully integrated, Y2K compliant, software solutions
designed to automate and integrate the operations of public sector
organizations. CPS serves the public sector market through three core product
groups: property tax appraisal and assessment, property tax billing and
collection and city and municipal systems. The Company provides its software
applications to customers in public sector markets under license agreements
and service contracts generally ranging from one to five years with automatic
renewals thereafter. The Company also markets to the private sector its
remittance processing systems ("RPS") solutions and related network and
communications products. The Company derives its revenue from four principal
sources: software license fees; recurring monthly maintenance and service
fees; hardware and product sales; and recurring monthly hardware maintenance
fees. Revenue from software licenses is generated from the initial contracts
that grant customers the right to use the Company's software products. Revenue
from recurring monthly service fees is generated from the continued use of the
Company's software products. Revenue from hardware and product sales includes
sales of computers, data collection equipment, peripherals, RPS solutions and
related network and communications products purchased from third parties and
sold by the Company to its customers. Maintenance and other revenue includes
revenue associated with hardware maintenance and support services.
 
  License fees charged to end users are fixed, with the amount of the fee
based upon the number of accounts processed, hardware configuration, number of
users and applications licensed. License fees are recognized when the related
license 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. Revenue from maintenance and
service agreements are deferred and recognized ratably over the contractual
periods the services are provided. Service contracts are required to be in
effect during the entire license term. Hardware revenue is recognized upon
shipment.
 
  The Company capitalizes software development costs associated with the
development of products. At December 31, 1997, capitalized software
development costs totaled approximately $938,000. These costs relate primarily
to the development of new products and major enhancements to existing products
to accommodate new markets or platforms using existing technologies and
programming methods. These capitalized costs are amortized on a straight line
basis over a 72-120 month period, commencing when each product is available to
the market. The useful lives of the capitalized software development costs are
based on management's expectations of the minimum life cycle of each product.
 
  At December 31, 1997 goodwill and other intangible assets totaled
approximately $1,905,000 and $160,000, respectively. The goodwill arose
primarily in connection with the 1994 Acquisition (as defined below) of the
Company. The useful life of the goodwill was based on management's estimate of
the minimum period of time that the goodwill acquired by the Company would be
of benefit to its operations. The useful lives of the other intangible assets,
consisting of debt issue costs were based on the terms of the related
agreements. The Company also had $366,000 of deferred offering costs at
December 31, 1997, which will be charged against the gross proceeds of this
offering.
 
  Management periodically evaluates the realizability of its capitalized
software development costs, goodwill and other intangible assets in light of
current technology, as it relates to the Company's products, and the current
environment of its industry and markets. Management believes that no material
impairment of software development costs, goodwill and other intangible assets
existed as of December 31, 1997.
 
  Management has addressed the Y2K issue as it affects the Company's internal
computer programs and believes that its significant internal computer programs
and systems are currently Y2K compliant.
 
                                      16
<PAGE>
 
RESULTS OF OPERATIONS
 
  Certain of the Company's operating data for fiscal years 1997 and 1996 are
set forth below as percentages of total revenue:
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED
                                                               DECEMBER 31,
                                                               ---------------
                                                                1997     1996
                                                               ------   ------
<S>                                                            <C>      <C>
STATEMENT OF OPERATIONS DATA:
 Revenue:
  License fees................................................   20.8%    19.6%
  Recurring maintenance and service fees......................   37.3     46.0
  Product sales...............................................   32.6     24.5
  Other service fees..........................................    9.3      9.9
                                                               ------   ------
    Total revenue.............................................  100.0    100.0
                                                               ------   ------
 Cost of revenue:
  Product sales...............................................   24.1     17.5
  Software....................................................    5.5      4.7
  Distribution................................................    0.7      0.1
                                                               ------   ------
    Total cost of revenue.....................................   30.3     22.3
                                                               ------   ------
 Gross profit.................................................   69.7     77.7
 Operating expenses:
  Support and customer service................................   31.3     32.8
  Selling.....................................................    9.2      9.2
  Research and development....................................   14.4     10.4
  General and administrative..................................   10.0     12.3
  Amortization of goodwill and non-compete agreements.........    3.4      4.2
                                                               ------   ------
    Operating expenses........................................   68.3     68.9
                                                               ------   ------
Earnings from operations......................................    1.4      8.8
Interest and financing costs..................................    4.0      9.7
                                                               ------   ------
Loss before income taxes......................................   (2.6)    (0.9)
Income tax expense (benefit)..................................   (0.2)     2.0
                                                               ------   ------
Net loss......................................................   (2.4)%   (2.9)%
                                                               ======   ======
</TABLE>
 
                                       17
<PAGE>
 
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
 
 REVENUE
 
  The Company's total revenue was $10.5 million for the year ended December
31, 1997, compared to $8.4 million for the year ended December 31, 1996, an
increase of $2.1 million, or 25.0%. This increase was primarily due to an
increase in computer-assisted mass appraisal ("CAMA") installation, RPS
hardware and software sales and $400,000 of revenue related to CDP integrated
voice response systems.
 
  License fees. The Company's revenue from license fees was $2.2 million for
the year ended December 31, 1997, compared to $1.6 million for the year ended
December 31, 1996, an increase of $600,000, or 37.5%. This increase was
primarily due to an increase in new customer CAMA installations and, to a
lesser extent, installations of RPS software and CDP integrated voice response
systems. The Company sold 224 licenses at fees ranging from less than $10,000
to $200,000 per license during year ended December 31, 1997. The Company sold
219 licenses at fees ranging from less than $10,000 to $500,000 during year
ended December 31, 1996. Revenue from each license fee varies depending upon
the number of accounts processed, hardware configuration, number of users and
applications licensed.
 
  Recurring Maintenance and Service Fees. The Company's revenue from recurring
fees was $3.9 million for the year ended December 31, 1997 compared to $3.9
million for the year ended December 31, 1996. Although there was an increase
in license fees during the period, the recurring revenue attributable to the
maintenance and service contracts remained constant because revenue associated
with such sales is not realized until the effective date of the maintenance
and service contracts (which could become effective up to three to 12 months
following execution of the licensing agreement). During this same period,
recurring software and service fees increased while the recurring revenue
associated with 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 $3.4 million year for the year
ended December 31, 1997 compared to $2.1 million for the year ended December
31, 1996, an increase of $1.3 million, or 61.9%. This increase was primarily
due to an increase in RPS sales and, to a lesser extent, installations of
CAMA, sales of hardware for property tax billing and collection systems and
CDP integrated voice response systems.
 
  Other Service Fees. Revenue from other service fees was $1.0 million for the
year ended December 31, 1997 compared to $800,000 for the year ended December
31, 1996, an increase of $200,000, or 25.0%. This increase was primarily due
to increased RPS software and hardware sales, CAMA installations and, starting
in 1997, cabling installations to improve client site infrastructure.
 
 COST OF REVENUE
 
  The Company's cost of revenue includes the cost of hardware product sales,
the cost of software and distribution costs.
 
  Product Sales. The cost of product sales was $2.5 million, or approximately
73.5% of product sales, for the year ended December 31, 1997 compared to $1.5
million, or approximately 71.4% of product sales for the year ended December
31, 1996, an increase of $1.0 million, or 66.7%. This increase was primarily
due to costs associated with an increase in RPS hardware sales and, to a
lesser extent, hardware sales associated with CAMA installations. 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.
 
  Software. Cost of software includes purchased software as well as the
amortization of capitalized software development costs. The cost of software
was $600,000, or approximately 27.3% of license fees, for
 
                                      18
<PAGE>
 
the year ended December 31, 1997 compared to $400,000, or approximately 25.0%
of license fees, for the year ended December 31, 1996, an increase of
$200,000, or 50.0%. This increase was largely due to the cost of purchased
software associated with the Cleveland County, Oklahoma installation.
 
  Distribution. The costs associated with distribution were $70,000 for the
year ended December 31, 1997 compared to $10,000 for the year ended December
31, 1996, an increase of $60,000, or 600%. This increase was due to increased
sales of RPS and cabling installation work performed as a result of new CAMA
installations.
 
  The total cost of revenue was $3.2 million for the year ended December 31,
1997 compared to $1.9 million for the year ended December 31, 1996, an
increase of $1.3 million, or 68.4%. This yielded a gross profit margin of
69.7% for the year ended December 31, 1997 compared to a gross profit margin
of 77.7% for the year ended December 31, 1996. This decrease in gross profit
margin resulted from an increase in product sales from 24.5% of total revenue
in 1996 to 32.6% of total revenue in 1997. Product sales have a higher cost of
revenue associated with them than the Company's other sources of revenue.
 
 OPERATING EXPENSES
 
  Support and Customer Service. Expenses related to support and customer
service were $3.3 million for the year ended December 31, 1997 compared to
$2.7 million for the year ended December 31, 1996, an increase of $600,000, or
22.2%. This increase resulted from an increase in personnel costs related to
enhancing customer service and supporting future growth expected for Y2K
sales.
 
  Selling. The Company's selling expenses were $1.0 million for the year ended
December 31, 1997 compared to $800,000 for the year ended December 31, 1996,
an increase of $200,000, or 25.0%. This increase was due to an increase in the
number of sales personnel and expenses related to covering new markets such as
California, Nevada and Ohio. In addition, sales commission expenses rose as a
result of increased sales of RPS and CAMA.
 
  Research and Development. Research and development expenses were $1.5
million, or 14.4% of revenue, for the year ended December 31, 1997 compared to
$900,000, or 10.4% of revenue, for the year ended December 31, 1996, an
increase of $600,000, or 66.7%. These expenses are comprised primarily of
salaries and a portion of the Company's overhead as well as amounts paid to
outside consultants to supplement product development efforts. The increase
resulted from the initiation of development for new database technology.
 
  General and Administrative. General and administrative expenses were $1.0
million for the year ended December 31, 1997 compared to $1.0 million for the
year ended December 31, 1996.
 
  Amortization of Goodwill and Non-Compete Agreements. The Company incurred a
non-cash expense for amortization of goodwill and non-compete agreements
related to the 1994 Acquisition (as defined below) of $350,000 for the year
ended December 31, 1997 compared to $350,000 for the year ended December 31,
1996.
 
 EARNINGS FROM OPERATIONS
 
  Earnings from operations were $100,000, or 1.4% of revenue, for the year
ended December 31, 1997 compared to $700,000, or 8.8% of revenue, for the year
ended December 31, 1996. This decline in earnings from operations of $600,000
was primarily due to the increase in research and development expenses to
14.4% of revenue for the year ended December 31, 1997 compared to 10.4% of
revenue for the year ended December 31, 1996, and the reduction in the gross
profit margin from 77.7% in 1996 to 69.7% in 1997. In each period, earnings
from operations include non-cash expenses related to amortization of goodwill
and non-compete agreements of $350,000 incurred in connection with the 1994
Acquisition (as defined below).
 
                                      19
<PAGE>
 
 NON-OPERATING EXPENSES
 
  Interest and Financing Costs. The Company's interest expense on its long-
term debt was $400,000 for the year ended December 31, 1997 compared to
$800,000 for the year ended December 31, 1996, a decrease of $400,000, or
50.0%. This decrease was primarily attributable to a decrease in the put
warrant adjustment from an expense of $300,000 for the year ended December 31,
1996 to a benefit of $100,000 for the year ended December 31, 1997. The put
warrant adjustment is primarily based on the operating earnings of the Company
for the previous twelve month period, which decreased from 1996 to 1997.
 
  Provision for Income Taxes. The Company had an income tax benefit of $30,000
for the year ended December 31, 1997, compared to an income tax expense of
$200,000 for the year ended December 31, 1996, a decrease of $230,000. The
decrease was primarily attributable 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.
 
 QUARTERLY RESULTS OF OPERATIONS
 
  The following tables set forth a summary of the Company's unaudited
quarterly operating results for each of the eight quarters in the period ended
December 31, 1997. This information has been derived from unaudited interim
financial statements that, in the opinion of management, have been prepared on
a basis consistent with the Consolidated Financial Statements contained
elsewhere in this Prospectus and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of such
information when read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto. The operating results for any quarter are not
necessarily indicative of results for any future period. See "Risk Factors--
Potential Fluctuations of Operating Results; Future Operating Results
Uncertainty."
 
                                      20
<PAGE>
 
<TABLE>
<CAPTION>
                                                       QUARTER ENDED
                         ------------------------------------------------------------------------------
                         MAR. 31,  JUNE 30, SEPT. 30, DEC. 31,  MAR. 31,  JUNE. 30, SEPT. 30,  DEC. 31,
                           1996      1996     1996      1996      1997      1997      1997       1997
                         --------  -------- --------- --------  --------  --------- ---------  --------
                                                   (DOLLARS IN THOUSANDS)
<S>                      <C>       <C>      <C>       <C>       <C>       <C>       <C>        <C>
Revenue:
 License fees...........  $  123    $  729   $  584    $  199    $  190    $1,175    $  430     $  383
 Recurring maintenance
  and service fees......     969       959      944       979       955       956       976      1,023
 Product sales..........     360       618      593       481       501     1,147       651      1,122
 Other service fees.....      68       168      241       348       146       335       257        231
                          ------    ------   ------    ------    ------    ------    ------     ------
   Total revenue........   1,520     2,474    2,362     2,007     1,792     3,613     2,314      2,759
                          ------    ------   ------    ------    ------    ------    ------     ------
Cost of revenue:
 Product sales..........     238       465      445       317       363       873       380        913
 Software...............      54        85      111       141        93       189       132        162
 Distribution...........       1         4        3         3         3        37        16         11
                          ------    ------   ------    ------    ------    ------    ------     ------
   Total cost of
    revenue.............     293       554      559       461       459     1,099       528      1,086
                          ------    ------   ------    ------    ------    ------    ------     ------
Gross profit............   1,227     1,920    1,803     1,546     1,333     2,514     1,786      1,673
Operating expenses:
 Support and customer
  service...............     587       714      678       764       732       727       899        920
 Selling................     165       214      205       188       145       264       293        264
 Research and
  development...........     137       200      217       312       353       376       407        372
 General and
  administrative........     251       252      254       273       301       229       263        255
 Amortization of
  goodwill and non-
  compete agreements....      90        89       90        78        90        91        84         93
                          ------    ------   ------    ------    ------    ------    ------     ------
   Total operating
    expenses............   1,230     1,469    1,444     1,615     1,621     1,687     1,946      1,904
                          ------    ------   ------    ------    ------    ------    ------     ------
Earnings (loss) from
 operations.............      (3)      451      359       (69)     (288)      827      (160)      (231)
Interest and financing
 costs..................     208       207      203       201       116       116        43        145
                          ------    ------   ------    ------    ------    ------    ------     ------
Earnings (loss) before
 income taxes...........    (211)      244      156      (270)     (404)      711      (203)      (376)
Income tax expense
 (benefit)..............     (31)      142      108       (54)     (125)      299       (87)      (112)
                          ------    ------   ------    ------    ------    ------    ------     ------
Net earnings (loss).....  $ (180)   $  102   $   48    $ (216)   $ (279)   $  412    $ (116)    $ (264)
                          ======    ======   ======    ======    ======    ======    ======     ======
<CAPTION>
                                                       QUARTER ENDED
                         ------------------------------------------------------------------------------
                         MAR. 31,  JUNE 30, SEPT. 30, DEC. 31,  MAR. 31,  JUNE 30,  SEPT. 30,  DEC. 31,
                           1996      1996     1996      1996      1997      1997      1997       1997
                         --------  -------- --------- --------  --------  --------- ---------  --------
<S>                      <C>       <C>      <C>       <C>       <C>       <C>       <C>        <C>
Revenue:
 License fees...........     8.1%     29.4%    24.7%      9.9%     10.6%     32.5%     18.6%      13.9%
 Recurring maintenance
  and service fees......    63.8      38.8     40.0      48.8      53.3      26.5      42.2       37.1
 Product sales..........    23.7      25.0     25.1      24.0      28.0      31.7      28.1       40.7
 Other service fees.....     4.4       6.8     10.2      17.3       8.1       9.3      11.1        8.3
                          ------    ------   ------    ------    ------    ------    ------     ------
   Total revenue........   100.0     100.0    100.0     100.0     100.0     100.0     100.0      100.0
                          ------    ------   ------    ------    ------    ------    ------     ------
Cost of revenue:
 Product sales..........    15.6      18.8     18.9      15.8      20.2      24.2      16.4       33.1
 Software...............     3.6       3.4      4.7       7.0       5.2       5.2       5.7        5.9
 Distribution...........     0.1       0.2      0.1       0.2       0.2       1.0       0.7        0.4
                          ------    ------   ------    ------    ------    ------    ------     ------
   Total cost of
    revenue.............    19.3      22.4     23.7      23.0      25.6      30.4      22.8       39.4
                          ------    ------   ------    ------    ------    ------    ------     ------
Gross profit............    80.7      77.6     76.3      77.0      74.4      69.6      77.2       60.6
Operating expenses:
 Support and customer
  service...............    38.6      28.9     28.7      38.1      40.9      20.1      38.8       33.3
 Selling................    10.9       8.6      8.7       9.3       8.1       7.3      12.7        9.6
 Research and
  development...........     9.0       8.1      9.2      15.5      19.7      10.4      17.6       13.5
 General and
  administrative........    16.5      10.2     10.7      13.6      16.8       6.4      11.4        9.2
 Amortization of
  goodwill and non-
  compete agreements....     5.9       3.6      3.8       3.9       5.0       2.5       3.6        3.4
                          ------    ------   ------    ------    ------    ------    ------     ------
   Total operating
    expenses............    80.9      59.4     61.1      80.4      90.5      46.7      84.1       69.0
                          ------    ------   ------    ------    ------    ------    ------     ------
Earnings (loss) from
 operations.............    (0.2)     18.2     15.2      (3.4)    (16.1)     22.9      (6.9)      (8.4)
Interest and financing
 costs..................    13.7       8.4      8.6      10.0       6.5       3.2       1.9        5.3
                          ------    ------   ------    ------    ------    ------    ------     ------
Earnings (loss) before
 income taxes...........   (13.9)      9.8      6.6     (13.4)    (22.6)     19.7      (8.8)     (13.7)
Income tax expense
 (benefit)..............    (2.1)      5.7      4.6      (2.7)     (7.0)      8.3      (3.8)      (4.1)
                          ------    ------   ------    ------    ------    ------    ------     ------
Net earnings (loss).....   (11.8)%     4.1%     2.0%    (10.7)%   (15.6)%    11.4%     (5.0)%     (9.6)%
                          ======    ======   ======    ======    ======    ======    ======     ======
</TABLE>
 
                                       21
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES
 
  A private investor group acquired the Company on December 30, 1994 for
approximately $4.6 million (including a non-compete payment of $250,000) in a
leveraged transaction (the "1994 Acquisition"). The 1994 Acquisition was
financed with funding provided by certain of the Company's officers and
directors in the form of equity capital as well as with a $1.5 million senior
term loan due December 1998 provided by FINOVA and a $2.1 million senior
subordinated note due in two equal installments in December 1999 and December
2000, with 12% interest paid quarterly, provided by Hanifen Imhoff Mezzanine
Fund, L.P. ("Hanifen"). Each of FINOVA and Hanifen hold a security interest in
substantially all of the Company's assets and the Company's currently
outstanding Common Stock. Moreover, each loan agreement contains certain
restrictive covenants relating to debt coverage and liquidity ratios, payment
of cash dividends and other matters. The Company intends to retire the
outstanding balance of the FINOVA senior term loan with proceeds from this
offering, as well as certain shareholder indebtedness in the amount of
$126,000, including accrued interest. Management believes the Hanifen note can
be retired with cash generated from operations. However, management intends to
seek alternative financing with more favorable terms to replace the Hanifen
note. There can be no assurance that the Company will be able to obtain such
alternative financing on acceptable terms. In addition, in connection with the
1994 Acquisition, FINOVA agreed to provide a $1.0 million revolving credit
facility (the "Revolver") for working capital and general corporate purposes.
Subsequent to the closing of the 1994 Acquisition, the Company has funded its
business solely with the cash generated from operations and therefore to date
has not utilized the Revolver. See "Use of Proceeds" and "Risk Factors--
Control by Principal Shareholders, Officers and Directors."
 
  The Company's cash balances were $330,000 and $590,000 as of December 31,
1997 and 1996, respectively. In 1997 and 1996, the Company generated cash from
operating activities of $570,000 and $550,000, respectively. Cash used in
investing activities, which includes capital expenditures and capitalized
software development costs, totaled $540,000 and $250,000 in fiscal 1997 and
1996, respectively. The increase of $290,000 was primarily due to the increase
in capitalized software development costs and an increase in investments of
tooling and related software. Net cash used in financing activities was
$300,000 and $100,000 in fiscal 1997 and 1996, respectively. Included in
financing activities for the year ended December 31, 1996 is a reimbursement
of $170,000 from the seller's escrow entered into in connection with the 1994
Acquisition.
 
  The Company believes that the proceeds of this offering when combined with
its cash balances and cash generated from operations, will satisfy the
Company's working capital, business development and capital expenditures 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 financings. In the
normal course of business, the Company evaluates acquisitions of businesses,
products and technologies that complement the Company's business. The Company
has no present commitments or agreements with respect of any such transaction.
There can be no assurance, however, that the Company will have sufficient
working capital to satisfy all of the anticipated needs for the next 12
months. Increased costs or expenses, acquisition prospects and opportunities
for growth or expansion may increase the demand for working capital thereby
making an additional infusion of capital necessary. See "Risk Factors--
Acquisition Risk."
 
ACCOUNTING PRONOUNCEMENTS
 
  The Financial Accounting Standards Board (FASB) has issued the following
Statements of Financial Accounting Standards (SFAS):
 
  SFAS 130, Reporting Comprehensive Income, which is effective for fiscal
years beginning after December 15, 1997. SFAS 130 requires companies to
include details about comprehensive income that arise during a reporting
period. Comprehensive income includes revenue, expenses, gains and losses that
bypass the income statement and are reported directly in a separate component
of equity.
 
 
                                      22
<PAGE>
 
  SFAS 131, Disclosures About Segments of an Enterprise and Related
Information, which is effective for financial statements for periods beginning
after December 15, 1997. SFAS 131 requires companies to report information
about an entity's different types of business activities and the different
economic environments in which it operates, referred to as operating segments.
 
  Additionally, the AICPA Accounting Standards Executive Committee has issued
Statement of Position (SOP) 97-2, Software Revenue Recognition, which is
effective for fiscal years beginning after December 15, 1997. SOP 97-2
modifies the criteria for determining recognition of revenue and allocation of
the contract fee for contracts containing multiple elements, such as software
products, rights to upgrades and other services.
 
  Management does not expect the adoption of these Statements of Financial
Accounting Standards and SOP 97-2, referred to above, to have a material
impact on the Company's results of operations or financial condition.
 
                                      23
<PAGE>
 
                                   BUSINESS
 
INTRODUCTION
 
  CPS develops, markets, implements and supports fully integrated software
applications designed specifically for public sector organizations, including
states, counties, townships, city governments and other municipal agencies.
The Company's products address the following functional areas: (i) property
tax appraisal and assessment, (ii) property tax billing and collection, (iii)
city and municipal systems and (iv) remittance processing systems. Currently,
the Company's public sector software applications are installed in six states
(Colorado, Florida, North Carolina, New Mexico, Oklahoma and Texas),
representing more than 250 customers. The majority of its customers are county
governments with taxable parcel counts over 10,000 or cities with populations
between 5,000 and 35,000. The Company's focus on the public sector allows it
to design solutions that address the needs of these organizations. The Company
has identified three significant growth opportunities in the public sector
marketplace as described below.
 
  Expand Core Public Sector Business. The Company intends to geographically
expand its core product business to address the following functional areas:
property tax appraisal and assessment; property tax billing and collection;
and city and municipal systems. Recently, this core business has been growing
rapidly due, in the Company's judgment, to the ability of the Company's
software to improve delivery of service, reduce costs, enhance revenue
collection, operate successfully within budget constraints, comply with
rapidly changing local, state and federal regulations and improve management
economics. This opportunity represents a key segment of the Company's business
strategy due to the growing recurring revenue streams generated by license
agreements entered into by customers of the Company's core business.
 
  Provide Y2K Solutions. The Company plans to leverage its 17 years of public
sector experience to capitalize on the opportunity to provide Y2K-compliant
software applications to public sector organizations. The Y2K problem results
from the traditional use of two-digit date fields to perform computations and
decision-making functions. For example, a program using a two-digit date field
may misinterpret "00" as the year 1900 rather than the year 2000. The Company
believes this problem has been magnified in the public sector due to the
substantially greater allocation of resources to the higher-paying private
sector. In addressing the Y2K problem, public sector entities are faced with
the prospect of competing with the private sector for recruiting, hiring and
retaining top data processing talent, despite possessing limited ability to
match competitive salaries for attracting new hires or retaining existing
staff. As a result, the Company believes many public sector organizations are
seeking cost-effective, non-labor intensive solutions such as those offered by
CPS.
 
  Leverage Client/Server-Based Products. The Company intends to leverage the
interoperability of the Company's core products to manage information flow
between departments as organizations shift from mainframe computers to
client/server systems. When local governments began to use computerized
operations in the 1970s and 1980s, management systems were originally based on
mainframe computers and later based on minicomputers. These legacy systems
typically were developed on a customized basis using proprietary and often in-
house operating systems and database software. The Company believes many
public sector organizations currently are faced with a pressing need to
integrate mission critical functions and databases by replacing standalone
applications and customized, out-dated software with integrated software
applications similar to those offered by CPS.
 
INDUSTRY OVERVIEW
 
 PUBLIC SECTOR MARKETPLACE
 
  The public sector marketplace is composed of state, county and city
governments, other municipal agencies and publicly owned utilities. The
Company estimates the local government market comprises over 3,000 counties
and over 19,000 municipalities in the United States, not including school
districts, townships
 
                                      24
<PAGE>
 
and special government districts. According to one industry source, state and
local government agencies spent approximately $34.5 billion on information
technology and related products in 1996. This total included approximately
$5.0 billion for software, $6.7 billion for external services, $7.4 billion
for hardware and $15.4 billion on internal services (e.g., in-house management
information systems departments).
 
  Of the $5.0 billion in 1996 software expenditures, approximately $3.1
billion was spent on law enforcement, child welfare, education and emergency
services. Management estimates the remaining $1.9 billion was spent on
software in the four areas CPS markets applications: property tax appraisals
and assessments, property tax billing and collection, city and municipal
systems and remittance processing systems. As local jurisdictions experience
increasing pressure to provide more services without raising taxes, management
believes state legislatures will raise needed revenue by amending tax laws.
However, these same legislatures cannot, in the Company's view, appropriate
sufficient resources to modify existing information systems. Thus, the public
sector is faced with the dilemma of responding to frequent legislative change
during a period of budget cuts.
 
 YEAR 2000 OPPORTUNITY
 
  The Y2K problem relates to the highly publicized inability of many existing
computer legacy systems to accurately process information involving the year
2000 and beyond. For example, unless Y2K compliance is completed in certain
systems, public sector organizations cannot properly (i) appraise, bill and
collect property taxes, a principal revenue source, (ii) record fines and
deeds resulting from property sales and (iii) maintain and retain accurate law
enforcement records. Date-dependent programs are commonly found in legacy
software applications used in many critical business operations, including
those used by public sector organizations. Management has observed that the
public awareness and recognition of the Y2K crisis is rapidly increasing as
the millennium approaches.
 
  While the business community is taking steps to address the Y2K problem, the
Company believes many public sector organizations lack the resources to
achieve a timely solution due to budgetary and other constraints. One industry
source estimates that the overall cost of solving the Y2K problem worldwide
will be in the range of $300 billion to $600 billion. As a result of the
significant resources required to resolve an enterprise-wide Y2K problem, many
public sector organizations may adopt temporary or partial solutions. The
failure by public sector organizations to install permanent Y2K solutions is
expected by management to provide opportunities for CPS to provide Y2K
solutions for years after the year 2000.
 
 DELIVERY OF CLIENT/SERVER TECHNOLOGY
 
  As computing technology evolves and information processing requirements
expand, medium to large public sector organizations are seeking to preserve
the investment in their existing systems by integrating or replacing mainframe
computers with modern distributed computer processing architectures, such as
client/server systems. Distributed computing refers to computer transactions
that may take place among different types of computers at one or more
locations, thereby permitting enterprise-wide information exchanges to occur
that otherwise might not be possible. In a client/server environment, a mid-
range computer serves as the network's hub or server. The server is connected
to possibly hundreds of desktop personal computers or workstations known as
"clients" throughout an organization. The Company believes the client/server
approach has several benefits over mainframe-based systems, including user
friendliness, flexibility in creating new applications in response to changes
in an organization's informational requirements such as tax code changes,
accessibility of enterprise-wide data from a variety of databases, and the
ability to present data in different formats. Moreover, client/server
architectures are becoming more cost effective as a result of technological
advances in personal computers, networking, disk storage, operating systems
and tiered software applications. As the public sector marketplace
increasingly recognizes the benefits of client/server technology, the Company
believes that there will be an increased demand for software and services that
assist such organizations in making this transition.
 
                                      25
<PAGE>
 
THE CPS SOLUTION
 
 PUBLIC SECTOR MARKETPLACE
 
  Extensive Public Sector Experience. The Company's products are the result of
more than 17 years of focusing on the public sector. CPS software is designed
to help organizations streamline and automate administrative intensive
processes such as property tax billing and collection, property tax appraisal
and assessment and improve timeliness and quality of services. Each product
was developed specifically for the public sector, addressing specific needs at
an attractive price.
 
  Integrated Solution and Depth of Functionality. CPS currently markets 41
applications, which provide feature-rich systems for property tax appraisal
and assessment, property tax billing and collection, as well as city and
municipal systems. The Company's software applications are designed to offer
customers the following: (i) simplification of data entry, (ii) compliance
with periodically changing legislation, (iii) extensive security features,
(iv) flexible report configuration and (v) open system technology. The
Company's products operate as stand-alone applications or as integrated suites
which provide users with a consistent graphical user interface ("GUI") and the
ability to easily access data and share information between different
departments. The Company's applications are based upon proven technologies and
are designed to function in mission critical environments.
 
  Cost Effective Implementation Technology. The Company employs a highly
responsive implementation and planning process, offering rapid product
deployment and easy migration among its product lines. The Company minimizes
the productivity interruption that typically results from the introduction of
new technology, thereby enabling organizations to realize the associated
benefits more quickly.
 
 YEAR 2000 OPPORTUNITY
 
  Y2K Solutions and Applications. The CPS solution methodology incorporates
the following process: (i) complete assessment of the customer's information
systems using a proprietary technique to identify critical software components
and related Y2K compliance, (ii) demonstrate the benefits of the Company's Y2K
software applications, (iii) implement consulting and programming services to
convert the non-Y2K data, (iv) install the Company's Y2K software application
and (v) commence user training.
 
  Proprietary Software Conversion Tool. The most important element of the Y2K
solution methodology is the conversion of the non-Y2K compliant data into Y2K
compliance. CPS has developed a proprietary tool that converts data into a
form that can be run by CPS applications. Management believes this tool offers
a significant competitive advantage in marketing its software applications
because the time to conversion and compliance is much shorter than a tedious
legacy conversion of data and source code.
 
  Elimination Rather Than Correction of Legacy Code. The Company believes that
the principal issues facing all Y2K solution providers are finding the hidden
date codes embedded within legacy systems and locating any original lost
source codes. The CPS solution overcomes these obstacles through the following
process: (i) applying field expansion to the year field, (ii) running the
newly-converted Y2K-compliant database on the Company's software, thereby
eliminating the possibility of lost source codes and (iii) replacing the
legacy source code with the Company's Y2K compliant application, thus
eliminating the costly and time-consuming process of searching the legacy
system for hidden date codes. CPS believes the Y2K problem will cause many
public sector organizations to explore further the possibility of migrating
all or portions of their legacy systems to Y2K compliant client/server
systems.
 
 DELIVERY OF CLIENT/SERVER TECHNOLOGY
 
  Adaptability/Flexibility/Scalability. The Company's application software
products are designed to be readily adaptable to meet a customer's initial
needs and to offer sufficient flexibility to respond to a customer's
 
                                      26
<PAGE>
 
specific system refinements and ongoing changes once the system is fully in
service. The scalability of the Company's software applications and the
customer's ability to migrate within the Company's product family allow state
and local governments to increase operating levels and expand application
functionality. In addition, the Company offers several application programming
interfaces intended to enable customers to develop customized reporting and
satisfy unique requirements.
 
  Multi-Platform Tiered Software Architecture. The Company's tiered software
architecture separates the application logic from the GUI and database. This
feature enables the Company to utilize multiple platforms and effectively
integrate new technologies with existing software. The tiered architecture
also allows customers to protect their investments in information systems
while positioning them to adopt new object-based solutions, high performance
servers and database management systems with no loss of functionality.
 
  Centralized System Administration. System administration is simplified in
the Company's software applications, thereby simplifying system management,
reducing the need for in-house system administrators and programmers and
mitigating the need for third-party services. The Company's software
applications incorporate extensive security features designed to protect data
from unauthorized retrieval or modification. Simplified menus and data access
can be tailored to meet each organization's requirements.
 
GROWTH STRATEGY
 
  The Company's growth strategy with respect to serving the public sector
marketplace providing Y2K solutions and capitalizing on the shift to
client/server-based systems includes the following elements:
 
  Augment Recurring Revenue Base. The Company's customers typically enter into
long-term service agreements which generate recurring revenue from continuing
monthly maintenance and service fees, typically at a rate equal to
approximately 32% of the software license fee. Recurring monthly maintenance
and service fees represented approximately 37% of the Company's revenues in
fiscal 1997. Customers benefit from continually updated software and service
in response to technological and legislative changes. In addition, long-term
agreements serve as competitive barriers to entry in the Company's markets.
The Company believes that its service, support and singular knowledge of its
customers' hardware and software requirements ensure continued service and
support revenues. See "Product Description."
 
  Leverage the Y2K Opportunity. The Company views the Y2K market as an
opportunity to become one of the leaders in providing public sector solutions
on a national basis. The Company's history in servicing the public sector
coupled with the need for timely Y2K solutions creates a significant growth
opportunity for the Company. The Company believes the Y2K opportunity will
allow it to establish an installed base of large public sector accounts
nationwide.
 
  Expand Geographic Initiatives. The Company intends to increase its
penetration of the public sector market by expanding the distribution of its
products into new and existing geographic markets. Currently, the Company has
installations in six states and is actively pursuing new business
opportunities in additional states, including Kentucky, Montana, Ohio and
California. To accomplish this expansion, the Company plans to actively
increase the size of its direct sales and marketing force and concurrently,
hire additional technical, support and systems personnel. In addition, the
Company intends to continue to build collaborative relationships with
customers in order to develop new applications and assist customers in keeping
pace with technology and in maintaining compliance with changing governmental
regulations. The Company intends to leverage its installed customer base in
order to enhance its ability to capture additional statewide accounts, as
exemplified by the Company's market penetration in the state of Florida. Since
entering the Florida market in 1988, the Company has completed 25 county
installations out of a total of 67 counties in the state.
 
  Pursue Strategic Acquisitions. The Company views acquisitions as a means of
acquiring technology and application expertise, broadening its customer base
and expanding geographically. The Company believes that the public sector
marketplace is highly fragmented with many small, closely-held companies. The
Company believes its strong management team, the ability to leverage its core
technologies and expertise, proven
 
                                      27
<PAGE>
 
marketing programs and strategies, as well as access to capital, should
provide the Company with a competitive advantage and position it to capitalize
on acquisition and integration opportunities which may become available over
the next several years. Its only corporate acquisition to date has been the
acquisition of its subsidiary CDP Systems, Inc. in July 1997. See "Risk
Factors--Acquisition Risk" and "Certain Transactions."
 
  Leverage Software Development Relationship. In 1995, the Company entered
into an agreement with a subsidiary of Mastek, Ltd. ("Mastek"), an offshore
provider of economical programming services, to provide coding services. All
work is communicated to Mastek's Bombay, India office. Due to the difference
in time zones, the Company can send Mastek a new specification or design and
generally obtain the development code by the next business day. The Company
believes this relationship provides several competitive advantages. First, the
Company can respond rapidly to state and local regulatory changes through
prompt software modifications and updates. Second, the costs of recruitment,
hiring and traditional employee overhead expenses are minimized (if not
completely eliminated). Third, by utilizing a varying number of offshore
programming and development individuals, the Company minimizes its need to
employ increasingly sought-after and highly qualified technical personnel,
particularly as such programming relates to Y2K activities.
 
  Capitalize on Public Sector Expertise. The Company intends to capitalize on
its public sector knowledge and experience to enhance sales in existing
markets and new markets. For the past 17 years, the Company has focused
exclusively on the public sector marketplace, resulting in the development of
core expertise. The Company believes its customer base offers considerable
leverage to new business since references from existing customers often result
in future sales opportunities.
 
  Maximize Integrated Solutions to Become Sole Source Provider. The Company
believes a substantial opportunity exists to sell additional products to
current customers who have only one installed CPS product. For example, a
customer using the Company's property tax appraisal and assessment system
offers a direct-sales opportunity for the Company's property tax billing and
collection system since both systems share a common database and processes.
 
  Leverage Relationships With Y2K Tool and Service Providers. CPS plans to
leverage relationships with leading Y2K tool and service providers. In certain
circumstances, CPS solutions may be unavailable to some public sector
organizations who have already committed to in-house remedial measures. These
public sector organizations can be referred to a Y2K tool and service provider
partner of CPS for a fee. CPS will then use corresponding referrals from these
Y2K tool and service providers of public sector organizations who desire a
replacement application.
 
PRODUCT DESCRIPTION
 
  CPS offers fully integrated, Y2K compliant software solutions designed to
automate and integrate the operations of county governments with taxable
parcel counts over 10,000 or cities with populations between 5,000 and 35,000.
The Company has designed its products based upon the philosophy that complete
application integration is essential for the effective sharing of information
across an organization.
 
  CPS seeks to be an innovative leader in each market served and set the
standard through high perceived value. This perception results in premium
pricing for its application software and related services which serves to
strengthen the Company's market position. Upon contract signing, customers pay
a license fee and a recurring maintenance and service fee equal to a rate of
approximately 32% (depending upon a variety of factors) of the software
license fee, which compares favorably with the Company's estimate of the
industry average of 12-20%. The Company can often command such a premium in
most markets it serves because the Company's products are designed to offer:
(i) the ability to maintain legislative compliance, (ii) a strong service and
support organization with a single point of contact, (iii) fully-integrated,
proven and feature-rich software applications, and (iv) a complete system
solution. Pricing for most applications is generally transaction based
 
                                      28
<PAGE>
 
on a parcel count which allows the larger, more affluent governmental units to
bear a proportionately higher cost in a way that is readily justifiable. The
Company also provides RPS hardware and software to regulated utilities and
commercial markets to meet the needs of public and private sector
organizations with high speed processing of check payments. Currently, the
Company has RPS solutions installed in 12 states with applications in such
areas as utility payments, subscription payments and county property tax
collections. The Company also offers Windows NT-based integrated voice
response and document imaging systems.
 
  The Company's technological strategy is to continue to offer applications
that run across the most popular operating systems. Currently, supported
systems include UNIX, AIX and Microsoft NT. The Company's products are
supported on databases including Oracle, Informix, Microsoft SQL Server and C-
ISAM.
 
  The following table sets forth a summary description of certain of the
Company's products.
 
<TABLE>
<CAPTION>
                                    CAMA
                            COMPUTER ASSISTED MASS                   TAX MANAGER                          CITY MANAGER
                                 APPRAISAL                   TAX BILLING AND COLLECTIONS              MUNICIPAL SOLUTIONS
                      --------------------------------- -------------------------------------- ----------------------------------
<S>                   <C>                               <C>                                    <C>
PRODUCT POSITIONING:  Exceeding 100,000 taxable parcels Exceeding 100,000 taxable parcels      Population up to 35,000
SOLUTIONS:            Software and Y2K tools/services   Software and Y2K tools/services        Software and Y2K tools/services
PRODUCTS/FEATURES:    CAMA System                       Tax Manager                            General Ledger
                      --------------------------------- -------------------------------------- ----------------------------------
                      -- Appeals tracking               -- Integrated current/delinquent taxes -- Flexible chart of accounts
                      -- Real time valuation            -- Unlimited paid and audit history    -- Integrated budgeting
                      -- Valuations by all methods      -- Comprehensive distribution of taxes -- Financial reporting
                      -- Sketching/Field automation
                      -- Integrated real and personal
                        systems
                                                        Occupational License                   Utility Billing
                                                                                               ----------------------------------
                                                                                               -- Multiple services tracked
                                                        Tourism Tax                            -- Hand held meter reading
                                                                                               -- Extensive billing parameters
                                                        Game and Fish Licensing                -- Cycle billing
                                                        Vessel Registration                    Accounts Payable
                                                                                               ----------------------------------
                                                                                               -- Unlimited vendor history
                                                        Non-Ad Valorem Assessment System       -- Integrated with purchase orders
                                                                                               -- Allows for one time vendors
<CAPTION>
                                RPS
                       REMITTANCE PROCESSING
                      -----------------------
<S>                   <C>
PRODUCT POSITIONING:  50,000 peak items
                      per day or less
SOLUTIONS:            Various services
PRODUCTS/FEATURES:
                      Integrators for various
                      software systems
                      designed for the NCR
                      7780
</TABLE>
 
PROPERTY TAX APPRAISAL AND ASSESSMENT SYSTEMS
 
  The Company's CAMA system, designed and written using computer-aided
software engineering tools, is a fully integrated suite of programs with
applications for mass property tax appraisal, assessment administration
(appeals processing, statistical analysis of property values and sketching of
property and buildings), integrated imaging and GIS/911 interfacing and is
designed to meet the needs of county property appraisers and/or tax assessors.
The CAMA system adheres to IAAO standards and provides a powerful set of tools
to establish an equitable, defensible set of property values for a variety of
property types including residential, agricultural, multi-family, commercial,
industrial, business, personal and household goods.
 
  The CPS CAMA system incorporates regression and feedback methodologies to
produce direct market values and market adjusting techniques which are
available for costing out location and depreciation. The system also provides
the user with the ability to: (i) specify which valuation appraisal method
(cost, market or income) will be used as the default valuation for each type
of property, (ii) maintain a comprehensive history file on each parcel,
including transactions affecting it, which can be displayed or printed upon
request and (iii) maintain sales data and descriptive information on each
parcel at the time of sale, thereby generating a "snapshot" vital in market
valuation and appraisal analyses.
 
  Representative current licensees and users of the CPS CAMA system product
include Martin County (Florida), Union County (North Carolina) and Canadian
County (Oklahoma). The license fee for a typical client currently ranges from
approximately $225,000 to $1,800,000, depending on hardware configurations,
number of users and applications licensed.
 
                                      29
<PAGE>
 
PROPERTY TAX BILLING AND COLLECTION SYSTEMS
 
  Designed to meet the needs of county tax collectors and/or treasurers, the
Company's property tax billing and collection product (the "Tax Manager")
provides public sector organizations with a comprehensive integrated property
tax billing and collection reporting system designed to improve and streamline
revenue tracking, processing and payment collection. The Tax Manager provides
multiple terminal cash drawer, payment processing and validation capability
and eliminates redundant data entry. The product is designed to handle a full
range of services including posting, recording, universal cashiering,
reconciliation, cash control, auditing, distribution of funds, report
generation and interfacing to various high speed remittance processors.
 
  The Tax Manager encompasses the following property tax billing and
collection applications: (i) current ad valorem tax system, (ii) installment
processing, (iii) mortgage processing, (iv) non ad valorem assessments, (v)
distribution systems, (vi) splits and corrections, (vii) advertising, (viii)
current tax roll billing, (ix) personal property system, (x) tax sale (real
estate, non ad valorem assessments), (xi) delinquent tax and assessment
system, (xii) tax deed processing, (xiii) boat licensing system and (xiv)
hunting and fishing licensing systems.
 
  Representative current licensees and users of the Tax Manager product
include the Florida counties of Broward (Fort Lauderdale), Okaloosa (Fort
Walton Beach/Destin) and Volusia (Daytona Beach). The license fee for a
typical client currently ranges from approximately $225,000 to $1,800,000,
depending on hardware configurations, number of users and applications
licensed.
 
CITY AND MUNICIPAL SYSTEMS
 
  The Company's city and municipal systems products provide key operating and
financial management functions for public city and municipal governments. The
Company's City Manager ("City Manager") and Financial Manager ("Financial
Manager") are both state-of-the-art libraries of software applications which
can be completely integrated with each other. CPS provides its users with
customization capabilities and updated applications which are the result of
changes mandated by state and local legislatures.
 
  The City Manager and Financial Manager have been designed to serve the needs
of governmental financial officers and human resource managers in public
sector organizations by providing the following benefits: (i) serve as an
integrated financial reporting system designed to monitor organizational
goals, (ii) comply with all Governmental Accounting, Auditing, and Financial
Reporting and state standards, (iii) streamline reporting requirements, and
(iv) eliminate redundant data entry and minimizes record management. Both the
City Manager and the Financial Manager are integrated with the following
applications: (i) general ledger, (ii) payroll, (iii) purchase order, (iv)
inventory management, (v) accounts payable, (vi) account receivable, (vii)
fixed asset management and (viii) investment management.
 
  Representative current licensees and users of the City Manager and Financial
Manager products include the City of Port Lavaca (Texas), City of Cedar Hill
(Texas) and City of Altus (Oklahoma). The license fee for a typical sale
currently ranges from approximately $25,000 to $150,000, depending on hardware
configurations, number of users and applications licensed.
 
REMITTANCE PROCESSING SYSTEMS
 
  The Company also provides remittance processing hardware and software to
regulated utilities and commercial markets to meet the needs of public and
private sector organizations for high speed processing of check payments with
applications in such areas as utility payments, subscription payments and
county property tax collections. Currently, the Company has RPS installations
in 12 states (Arizona, California, Florida, Kansas, New York, Georgia,
Massachusetts, Minnesota, Utah, Oregon, Idaho and Texas) and has completed
21 installations since commencing RPS activities in June 1995. Representative
installations in the public sector market include San Bernardino County, Texas
Department of Public Safety, Georgia Department of Revenue and Tax and
Hillsborough County, Florida. In the private sector, representative
installations include
 
                                      30
<PAGE>
 
Guidepost, Feature Films, Palm Coast Data, Snapping Shoals Utility and Eugene
Electric and Water Board. A typical RPS sale currently ranges from
approximately $50,000 to $650,000, depending on hardware configuration and
software conversion.
 
CPS PROPRIETARY Y2K CONVERSION PROCESS
 
  CPS utilizes a unique, step-by-step process by which the client's legacy
data is removed, re-engineered with compliant date fields and then loaded into
an industry standard relational database of the client's choosing. Prior to
entering into a contract, CPS analyzes the data formats, sources and types in
anticipation of using the Company's Y2K tools. Immediately after the contract
process is complete, both on-site and in the Company's conversion centers, CPS
begins the process of extracting the raw data, analyzing it field by field,
mapping to the CPS database layout by application and testing the system
through use of the Company's Y2K compliant application software.
 
  The Company believes that the primary advantage of the CPS approach is that
the time to conversion and compliance is much shorter than a tedious legacy
conversion of data and source code. In addition, the Company's Y2K compliant
application will be offering the client a multi-tiered client/server approach
allowing for extensive data mining using standard structured query language
("SQL") tools.
 
        [CHART OF CPS PROPRIETARY Y2K CONVERSION PROCESS APPEARS HERE]
 
  As shown above, the Y2K conversion process involves numerous steps to
interrogate the legacy data, inventory all date fields and create a data
dictionary map for use in the Company's Y2K compliant software.
 
                                      31
<PAGE>
 
Each date field is expanded, tested for proper validation, formatted to the
proper Y2K compliant format of the target database and then loaded for
testing. All date fields are converted in this process. By making the legacy
source code obsolete and eventually discarding it, the unique CPS solution
ensures that no non-Y2K compliant processes inherent in the legacy code
survive the conversion process. In addition, this solution eliminates the
problems of hidden date codes and lost source code.
 
CPS TIERED SOFTWARE ARCHITECTURE
 
  The Company's tiered software architecture separates the application logic
from the GUI and the database, thereby enabling the Company's products to
operate on any Windows NT, UNIX or any UNIX derivative platform including IBM
(AIX), NCR (UNIX), Hewlett-Packard (HP-UX) and Sun Microsystems (Solaris). The
Company offers customers CPS GUI, internet browser and character-based
interface. Furthermore, the applications can be implemented on multiple
platforms with no loss of functionality. The Company's applications operate on
systems running databases such as Oracle, Informix, Microsoft SQL Server and
C-ISAM. The Company's tiered software architecture does not require the
application code to be reconfigured to enable the applications to operate on
different platforms, databases or operating systems. The tiered architecture
permits customers to protect their investment in the Company's system while
enabling them to adapt to emerging operating systems, servers and databases.
 
                      CPS TIERED APPLICATION ARCHITECTURE

                             [Chart appears here]
 
                                      32
<PAGE>
 
SALES AND MARKETING
 
  The Company sells its products in the United States through a direct sales
force. As of February 28, 1998, the Company had 19 employees in its sales and
marketing organization. The Company employs a variety of business development
and marketing techniques to communicate directly with current and prospective
customers. These techniques include exhibiting at trade shows, holding
seminars for clients and prospective clients on technology and industry issues
and marketing through targeted mail campaigns.
 
  The Company believes in establishing a strong local presence in order to
effectively address the needs of local governments and establish long-term
relationships. For that reason, CPS has established regional offices in
Dallas, Texas; Tampa, Florida; and Tulsa, Oklahoma. The Company also operates
customer service and sales offices in San Antonio, Houston, Abilene and
Wichita Falls, Texas. Additionally, CPS maintains sales and software
development personnel in Los Angeles and San Francisco, California; Boston,
Massachusetts; Atlanta, Georgia; and Tallahassee, Florida.
 
  The Company's sales and marketing strategy focuses on building and
maintaining strong relationships with businesses that the Company believes
play a role in the successful marketing of its software products. These
providers include software and hardware vendors and technology consulting
firms, some of which are active in the selection and implementation of
information systems for organizations that comprise the Company's principal
customer base.
 
  In connection with the sales and marketing of software application products,
the Company has established direct and indirect value-added re-seller
arrangements pursuant to standard re-seller agreements with IBM, NCR and
Compaq Computer for the sale of hardware and related products. In turn, the
sales force of these manufacturers work closely with the Company's sales and
marketing personnel in an effort to promote sales of the Company's products
and services in conjunction with hardware sales by such manufacturer.
 
  A sales cycle is the period between the confirmation of interest and the
consummation of the sale. Historically, the sales cycle for the Company ranges
from nine to 18 months on average. Since public sector entities are subject to
and bound by budgets formally approved by the appropriate governing board, the
length of the sales cycle depends on (i) when the entity becomes a prospect,
(ii) the size of the appropriation and (iii) the availability of budgeted
funds for the purchase of a new system. In the future, management has
experienced and expects to continue to experience a trend towards a shorter
sales cycle. Entities who are experiencing a dilemma due to a Y2K problem are
accelerating their purchasing requirements. Moreover, CPS employs creative
software financing techniques that shorten the sales cycle.
 
RESEARCH AND DEVELOPMENT
 
  The Company's research and development activities are focused on the
enhancement of its existing products and the introduction of new products. The
Company outsources certain product development and enhancement activities to
independent contractors. CPS continually updates its products for amendments
to the various tax laws and regulations. Research and development expenses
were $1.5 million for the year ended December 31, 1997, compared to $870,000
for the year ended December 31, 1996. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation."
 
  The Company believes it has a strong competitive advantage in the areas of
cost containment and time to market with key technology for its clients
resulting from its offshore out-sourcing programming services. Costs of
recruitment, hiring and traditional employee overhead expenses are minimized
or eliminated. By utilizing a team of offshore developers, the size of which
can be modified upon request, the Company can maintain a level of development
resources to match existing market needs. The Company is presently obtaining
these programming services through a non-exclusive agreement with Mastek,
cancellable upon 30 days' written notice. However, management believes
commercially competitive replacement services are available through other
offshore programming service providers.
 
 
                                      33
<PAGE>
 
  The Company plans to continue to enhance its applications to suit the
evolving needs of the public sector market. In particular, the Company intends
to develop additional functionality on existing application modules and to
create new modules. Additionally, the Company seeks to improve and expand its
object development environment, with two fundamental objectives: (i) continued
user empowerment with an emphasis on ease-of-use and (ii) increased
flexibility to modify base products in order to suit specific customer
requirements. The Company plans to continue to add new products and services,
both through internal development and potential acquisitions, to leverage the
Company's core technologies and expertise.
 
COMPETITION
 
  The market in which the Company competes is highly fragmented, with a large
number of competitors that vary in size, primary computer platforms and
overall product scope. Within its traditional public-sector markets, the
Company competes from time to time with (i) custom software and services
providers (such as Andersen Consulting, KPMG Peat Marwick and Oracle
Corporation), (ii) companies which focus on selected segments of the public
sector market (including Systems & Computer Technology Corporation, Manatron,
Inc., H.T.E., Inc., American Management Systems, Incorporated and BRC
Holdings, Inc.), and (iii) a significant number of smaller private companies.
The Company also competes with in-house management information services staff.
In addition, within the market for its Y2K solution products, the Company
anticipates that it will compete with companies who focus upon overall
enterprise solutions to the Y2K problem. Many of the Company's competitors are
more established, benefit from greater name recognition and have substantially
greater resources than the Company. Moreover, the Company could face
additional competition as other established and emerging companies enter the
public sector software application market and/or the Y2K market and new
products and technologies are introduced. Increased competition could result
in price reductions, fewer customer orders, reduced gross margins and loss of
market share, any of which could materially adversely affect the Company's
business, financial condition and operating results. In addition, current and
potential competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third-parties, thereby increasing the
ability of their products to address the needs of the Company's prospective
customers. Accordingly, it is possible that new competitors or alliances among
current and new competitors may emerge and rapidly gain significant market
share.
 
  CPS believes it can differentiate its own products and services from these
current and future competitors, focusing on the Company's functionality,
product flexibility, ease of implementation and adaptability to customer needs
without custom programming, enterprise product breadth, individual product
features, service reputation and price. The Company believes that many of its
competitors lack these essential qualities because they do not focus
exclusively on the public sector market or offer fully-integrated software
applications. However, there can be no assurance that the Company will be able
to compete successfully against current and future competitors, and the
failure to do so could have a material adverse effect upon the Company's
business, financial condition and operating results. See "Risk Factors--
Competition."
 
  The following table sets forth a representative list of the Company's
competitors.
 
<TABLE>
<CAPTION>
         CAMA
COMPUTER ASSISTED MASS          TAX MANAGER                 CITY MANAGER                  RPS
       APPRAISAL        TAX BILLING AND COLLECTIONS     MUNICIPAL SOLUTIONS      REMITTANCE PROCESSING
- ----------------------  --------------------------- ---------------------------- ---------------------
<S>                     <C>                         <C>                          <C>
Cole Layer Trumble      ASIX, Inc.                  H.T.E., Inc.                 Wassau Financial
                                                                                  Systems, Inc.*
American Management     BRC Holdings, Inc.          Interactive Computer Designs J & B Software, Inc.
 Systems, Incorporated                               d/b/a INCODE
Sigma Systems                                       New World Systems
 Technology, Inc.                                    Corporation
Kb Systems, Inc.                                    Pentamation
BRC Holdings, Inc.
</TABLE>
- --------
* Currently serves as a supplier to the Company
 
                                      34
<PAGE>
 
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND LICENSES
 
  The Company regards certain features of its internal operations, software
and documentation as confidential and proprietary, and relies on a combination
of contract and trade secret laws and other measures to protect its
proprietary intellectual property. Despite these precautions, it may be
possible for unauthorized parties to copy the Company's software or reverse
engineer or otherwise obtain and use information the Company regards as
proprietary. The Company has no patents and, under existing copyright laws,
has only limited protection. In addition, certain provisions of the license
agreements entered into by the Company, including provisions against
unauthorized use, transfer and disclosure, may be unenforceable under the laws
of certain jurisdictions. There can be no assurance that the steps taken by
the Company to protect its proprietary rights will be adequate to deter
misappropriation of its technology or independent development by others of
technologies that are substantially equivalent or superior to the Company's
technology. Any such misappropriation or development could have a material
adverse effect on the Company's business, financial condition and operating
results. As the number of competitors providing similar products increases,
overlapping methodologies used in such products will become more likely.
Although the Company's methodology has never been the subject of an
infringement claim, there can be no assurance that third parties will not
assert infringement claims against the Company in the future, that assertion
of such claims will not result in litigation or that the Company would prevail
in such litigation or be able to obtain a license for the use of any infringed
intellectual property from a third party on commercially reasonable terms.
Litigation, regardless of its outcome, could result in substantial cost to the
Company and divert resources and management from the Company's operations. Any
infringement claim or litigation against the Company could, have a material
adverse effect on the Company's business, financial condition and operating
results. See "Risk Factors--Proprietary Rights and Risks of Infringement."
 
CUSTOMERS
 
  The following table sets forth a representative list of the Company's
customers.
 
<TABLE>
<CAPTION>
                               CAMA                       TAX MANAGER            CITY MANAGER                  RPS
CLIENT LOCATION  COMPUTER ASSISTED MASS APPRAISAL TAX BILLING AND COLLECTIONS MUNICIPAL SOLUTIONS     REMITTANCE PROCESSING
- ---------------  -------------------------------- --------------------------- ------------------- -----------------------------
<S>              <C>                              <C>                         <C>                 <C>
California       Sacramento County                  Sacramento County                             San Bernardino County
                                                                                                  San Diego County
Colorado                                            Douglas County            City of Alamosa
                                                    Adams County
Florida          Martin County Appraiser            Broward County                                Sarasota County Tax Collector
                                                    Charlotte County                              Hillsborough County Tax
                                                    Sarasota County                               Collector
New Mexico                                                                    City of Artesia
North Carolina   Union County
Oklahoma         Canadian County Assessor           Rogers County Treasurer   City of Altus
                                                                              City of El Reno
Texas            Cooke County Appraisal District                              City of Port Lavaca City of Arlington
                                                                              City of Cedar Hill  Texas Department of Public
                                                                                                  Safety
</TABLE>
 
EMPLOYEES
 
  As of February 28, 1998, the Company had 95 full-time and 5 part-time
employees. This total includes 19 people in sales and marketing, 22 in
research and development, 42 in customer support and field services and 17 in
general administration. None of the Company's employees is represented by a
labor union or is subject to a collective bargaining agreement. The Company
believes its relations with its employees are good.
 
                                      35
<PAGE>
 
DESCRIPTION OF PROPERTIES
 
  The Company maintains its headquarters in Dallas, Texas where it leases from
a non-affiliated party an aggregate of approximately 14,250 square feet under
a lease expiring in April 2000. The lease requires annual rental payments of
$182,811 ($12.83 per sq ft per year) in 1998, $194,682 ($13.66 per sq ft per
year) in 1999 and $66,477 ($14.00 per sq ft per year) in 2000 through the
lease termination date. General and administrative, marketing, product
development and customer support and service operations are located in this
space. The Company also leases from a non-affiliated party an aggregate of
approximately 7,800 square feet of office space in various other locations
throughout the United States for sales and service offices. These leases
typically have terms of one year or less with an average per square foot
rental of $9.44, and on standard commercial terms. CPS believes its facilities
are in good condition and adequate for present needs.
 
LEGAL PROCEEDINGS
 
  From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. The Company is
not a party to any legal proceedings, the adverse outcome of which,
individually or in the aggregate, would have a material adverse effect on the
Company's results of operations or financial position.
 
                                      36
<PAGE>
 
                                  MANAGEMENT
 
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
 
  The following table sets forth certain information concerning the directors,
executive officers and key employees of the Company.
 
<TABLE>
<CAPTION>
      NAME                     AGE POSITION
      ----                     --- --------
      <S>                      <C> <C>
      Paul E. Kana............ 64  Chairman and Chief Executive Officer
      James K. Hoofard, Jr. .. 38  Director, President and Chief Operating Officer
      Kevin L. Figge.......... 40  Chief Financial Officer
      Michael P. Brown........ 47  Vice President
      John C. Thomas.......... 51  Vice President
      Bobby C. Dow............ 38  Vice President
      Lisa D. Hargiss......... 36  Vice President
      Randy A. Sellers........ 35  Vice President
      G. Dean Booth, Jr. ..... 58  Director and Secretary
      Sidney H. Cordier....... 53  Director
      Brian R. Wilson......... 46  Director
</TABLE>
 
  PAUL E. KANA has served as Chairman of the Board of Directors and Chief
Executive Officer of the Company since December 1994. From 1988 to 1994, Mr.
Kana served as President, Chief Executive Officer and a member of the Board of
Directors of Delaware-based MR Data Management, Inc. ("MR"), a wholly-owned
subsidiary of MR Data Management Group PLC ("MR Data Management"), which
engages in data transcription and document image-processing. In 1988, MR
acquired Computer Microfilm Corporation ("CMC"), a publicly-held company
founded by Mr. Kana in 1968. CMC engages in digital image processing,
conversion of computer output to microfilm and CD-ROM, computer processing,
high volume laser printing services and micro-publishing. Mr. Kana is a
graduate of Columbia University of New York with a Bachelor of Science in
Engineering.
 
  JAMES K. HOOFARD, JR. has served as a Director, President and Chief
Operating Officer of CPS since December 1994. From 1991 to 1994, Mr. Hoofard
served as Vice President of Marketing and Sales, and was responsible for the
Property Tax Billing and Collection group. He joined the Company as a
Programmer/Analyst in May 1982 and moved into the marketing and sales area in
September 1987, focusing on developing the Florida market. From 1982 to 1987,
he served as a Revenue Analyst, Software Product Manager, and as a Product
Manager for the Florida Tax Manager product. Mr. Hoofard is a graduate of the
University of Texas at Arlington with a Bachelor of Business Administration in
Systems Analysis.
 
  KEVIN L. FIGGE has served as Chief Financial Officer since October 1997. Mr.
Figge's responsibilities since December 1994 have been encompassed within the
Administrative Services group which is comprised of the Accounting and the
Finance Department, as well as the Personnel and Corporate Services
Department. He joined the Company in July 1992 as Controller and was made an
officer of the Company in December 1994. Prior to joining CPS, Mr. Figge
served as Controller of Aarberg Printing Inks, Inc. and was an Accounting
Manager with the Army and Air Force Exchange Service. Mr. Figge graduated with
a Bachelor of Science degree in Business Administration from the University of
Maryland and also obtained a Bachelor of Science degree in Accounting from the
same university. Mr. Figge is a certified public accountant.
 
  MICHAEL P. BROWN has served as Vice President--Conversions since October
1996. From June 1995 to October 1996, Mr. Brown was responsible for the
Property Tax Appraisal and Assessment group. He served as Vice President of
Special Projects from 1993 to 1995 with responsibility for the development of
Property Tax Billing and Collection. Prior thereto, Mr. Brown was the Vice
President of the City and Municipal group primarily in Florida. Mr. Brown
joined CPS in November 1980. He is a graduate of Louisiana Tech University
with a Bachelor of Science degree in Computer Science.
 
                                      37
<PAGE>
 
  JOHN C. THOMAS has served as Vice President--Sales since June 1997. Mr.
Thomas was previously employed by Kb Systems, Inc., a Florida-based developer
of property tax appraisal and assessment software ("Kb Systems"), where he
served in various corporate management and marketing positions, focusing on
the areas of administration, CAMA and Property Tax Billing and Collection
software. Prior to joining Kb Systems in 1989, Mr. Thomas authored the Thomas
Sales Prospecting and Territory Management Directory, which was published by
the American Management Association. Prior thereto, he served as Vice
President of Sales of Citicorp Information Services, a division of Citibank,
N.A. and as Regional Sales Manager of Interactive Data Corporation, a wholly-
owned subsidiary of Chase Manhattan Corporation. Mr. Thomas earned a Bachelor
of Science degree in Industrial Management from Wayne State University.
 
  LISA D. HARGISS has served as Vice President--Long Term Client Care since
September 1995. She joined the Company in August 1987 as a Client Support
Representative, becoming an integral part of the design team for the Florida
Property Tax Billing and Collection product and the CAMA product. Ms. Hargiss
obtained a Bachelor of Science degree in Computer Science from Texas A&M
University at Commerce.
 
  RANDY A. SELLERS has served as Vice President--Implementation since November
1996. Prior to joining CPS in March 1994, Mr. Sellers served two years as MIS
director and four years in technical support with DacEasy, Inc., a provider of
accounting software. Mr. Sellers received a Bachelor of Science degree in
Management Science and Computer Systems from Oklahoma State University.
 
  BOBBY C. DOW has served as Vice President--Product Development since October
1996. Mr. Dow was responsible for the Municipal group for one year prior to
joining the Product Development group. Mr. Dow, who joined the Company in 1983
as a programmer/analyst, has been part of the original development team that
designed and produced the City group product and has also devoted considerable
developmental efforts to the Tax Collection product. Mr. Dow is a graduate of
Southeastern Oklahoma State University with a Bachelor of Science degree in
Computer Science.
 
  G. DEAN BOOTH, JR. has served as a Director and the Secretary of CPS since
December 1994. Mr. Booth is a partner at the law firm of Schreeder, Wheeler &
Flint, LLP of Atlanta, Georgia. Prior to joining Schreeder, Wheeler & Flint in
March 1996, he was the founder and managing partner of Booth, Wade and
Campbell from 1990. He currently serves as Honorary Chairman and Member of the
Executive Council for the International Bar Association, Trustee and Secretary
for the Institute for Political Economy, and Chairman of the Bar Council,
United States District Court, Northern District of Georgia.
 
  SIDNEY H. CORDIER has served as a Director of the Company since December
1994. From January 1994 to present, Mr. Cordier has served as Chairman of the
Board of Directors of Cedardata PLC, a publicly-held U.K. company listed on
the London Stock Exchange, specializing in commercial and financial accounting
systems software ("Cedardata"). From 1984 to 1993, Mr. Cordier was Chief
Executive Officer of MR Data Management.
 
  BRIAN R. WILSON has served as a Director of CPS since December 1994. From
1993 to the present, Mr. Wilson has been a management consultant, advising
companies on restructurings and serving as a manager of a private investment
trust, and in May 1996, was appointed a director of Cedardata. From 1987 to
1993 Mr. Wilson served as Finance Director and a member of the Board of
Directors of MR Data Management where his responsibilities included mergers
and acquisitions, cash management, pensions, insurance, certain legal matters
and investor relations. Prior to joining MR Data Management in 1987,
Mr. Wilson was the Chief Financial Officer for European Properties with the
Pension Fund Property Unit Trust in the United Kingdom.
 
  The Company's Board of Directors is divided into three classes, with two
classes composed of two directors and one class with one director. The classes
serve staggered three-year terms. G. Dean Booth, Jr.'s term as Director shall
expire as of the 1998 annual meeting, Brian P. Wilson's and Sidney H.
Cordier's terms shall expire as of the 1999 annual meeting, and James K.
Hoofard, Jr.'s and Paul E. Kana's terms shall expire
 
                                      38
<PAGE>
 
at the 2000 annual meeting. The Company's executive officers are appointed by
and serve at the discretion of the Board of Directors. No family relationships
exists between any directors or executive officers of CPS.
 
COMMITTEES OF THE BOARD OF DIRECTORS
 
  The Board maintains an Audit Committee and Compensation Committee. The Audit
Committee is responsible for reviewing the results and scope of audits and
other services provided by the Company's independent auditors. The Audit
Committee is comprised of Messrs. Booth, Kana and Wilson. The Compensation
Committee is comprised of Messrs. Booth, Wilson and Kana. The Compensation
Committee makes recommendations concerning the salaries and incentive
compensation of employees and consultants to the Company, and will oversee and
administer the Company's stock option plans.
 
EXECUTIVE COMPENSATION
 
  The following table sets forth the compensation paid by the Company to its
Chief Executive Officer and the four next most highly compensated executive
officers of the Company (collectively, the "Named Executive Officers") for
services rendered during the fiscal years ended December 31, 1997 and December
31, 1996.
 
                          SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                            LONG-TERM COMPENSATION
                                                          --------------------------
                               ANNUAL COMPENSATION              AWARDS       PAYOUTS
                         -------------------------------- ------------------ -------
                                                          RESTRICTED
NAME AND                                     OTHER ANNUAL   STOCK    OPTION/  LTIP      OTHER
PRINCIPAL POSITION       YEAR  SALARY  BONUS COMPENSATION   AWARDS    SARS   PAYOUTS COMPENSATION
- ------------------       ---- -------- ----- ------------ ---------- ------- ------- ------------
<S>                      <C>  <C>      <C>   <C>          <C>        <C>     <C>     <C>
Paul E. Kana............ 1997 $110,000   --       --          --        --      --        --
 Chairman and Chief      1996  110,000   --       --          --        --      --        --
 Executive Officer
James K. Hoofard, Jr.... 1997 $125,000   --       --          --        --      --        --
 Director, President and 1996  125,000   --       --          --        --      --        --
 Chief
 Operating Officer
</TABLE>
 
EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
 
  Messrs. Kana and Hoofard entered into employment agreements with the Company
on December 30, 1997. These agreements are for a two-year term and
automatically renew for another two-year period absent termination by the
Company or the employee. The employment agreements provide for an annual
salary of not less than $150,000 per year for Mr. Hoofard and $110,000 per
year for Mr. Kana, with annual performance bonuses to be determined by the
Compensation Committee in connection with achievement of performance criteria
to be determined. In addition, each of Messrs. Kana and Hoofard shall receive
severance payments equal to base compensation at the most recent annual amount
(including performance bonus) for two years if employment is terminated by the
Company without cause or if such employee resigns with "good cause" (i.e., in
the event of any material alteration, reduction or dimmunition in duties or
responsibilities, or following a merger or change in control of the Company).
 
COVENANTS NOT TO COMPETE
 
  Messrs. Kana and Hoofard have agreed to devote substantially full time to
the business of the Company and not engage in any competitive businesses. In
particular, they will not manage, consult or participate in
 
                                      39
<PAGE>
 
any software business (other than an ownership 5% or less), unless the
independent directors of the Company determine such investment is in the best
interests of the Company.
 
COMPENSATION OF DIRECTORS
 
  All directors are reimbursed for their usual and customary expenses incurred
in attending all Board and committee meetings. CPS currently pays directors
who are not also employees (Messrs. Cordier, Wilson and Booth) $650 per day of
service as it relates to attending such meetings. Directors who are also
employees of the Company receive no remuneration for serving as directors.
 
BONUS PLAN
 
  The Company has adopted bonus programs for employees, including executive
officers, whereby bonus payments are made based on achievement of individual
performance and consolidated corporate operating results. Business unit
performance also will be a factor in determining compensation awards with
respect to key employees who are not executive officers. The specified
qualitative and quantitative criteria employed by the Board of Directors of
the Company in determining bonus awards will vary for each individual and from
year to year.
 
401(K) SAVINGS PLAN
 
  The Company sponsors a deferred savings plan (the "401(k) Plan") qualified
under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as
amended (the "Code"). All employees over the age of 21 who have completed one
year of service with the Company are eligible to participate in the 401(k)
Plan. Eligible employees may contribute to the 401(k) Plan up to 15% of their
salary subject to an annual maximum established under the Code. Presently, the
Company does not match employee contributions to the 401(k) Plan.
 
EMPLOYEE EQUITY PLANS
 
  1997 Equity Participation Plan. The Company has established an equity
participation plan (the "1997 Equity Participation Plan") to enable executive
officers, other key employees, independent directors and consultants of CPS to
participate in the ownership of the Company. The 1997 Equity Participation
Plan is designed to attract and retain executive officers, other key
employees, independent directors and consultants of the Company and to provide
incentives to such persons to maximize the Company's performance. The 1997
Equity Participation Plan provides for the award to executive officers, other
key employees, independent directors and consultants of the Company of a broad
variety of stock-based compensation alternatives such as nonqualified stock
options, incentive stock options, restricted stock and performance awards and
provides for the grant to executive officers, other key employees, independent
directors and consultants of nonqualified stock options. Awards under the 1997
Equity Participation Plan may provide participants with rights to acquire
shares of Common Stock.
 
  The 1997 Equity Participation Plan is administered by the Compensation
Committee, which is authorized to select from among the eligible participants
the individuals to whom options, restricted stock purchase rights and
performance awards are to be granted and to determine the number of shares to
be subject thereto and the terms and conditions thereof. The members of the
Compensation Committee who are not affiliated with the Company will select
from among the eligible participants the individuals to whom nonqualified
stock options are to be granted, except as set forth below, and will determine
the number of shares to be subject thereto and the terms and conditions
thereof. The Compensation Committee is also authorized to adopt, amend and
rescind rules relating to the administration of the 1997 Equity Participation
Plan.
 
  Nonqualified stock options will provide for the right to purchase Common
Stock at a specified price which may be less than fair market value on the
date of grant (but not less than par value), and usually will
 
                                      40
<PAGE>
 
become exercisable in installments after the grant date. Nonqualified stock
options may be granted for any reasonable term.
 
  Incentive stock options will be designed to comply with the provisions of
the Code and will be subject to restrictions contained in the Code, including
exercise prices equal to at least 100% of fair market value of Common Stock on
the grant date and a ten year restriction on their term, but may be
subsequently modified to disqualify them from treatment as an incentive stock
option.
 
  Restricted stock may be sold to participants at various prices (but not
below par value) and made subject to such restrictions as may be determined by
the Compensation Committee. Restricted stock, typically, may be repurchased by
the Company at the original purchase price if the conditions or restrictions
are not met. In general, restricted stock may not be sold, or otherwise
transferred or hypothecated, until restrictions are removed or expire.
Purchasers of restricted stock, unlike recipients of options, will have voting
rights and will receive dividends prior to the time when the restrictions
lapse.
 
  Performance awards may be granted by the Compensation Committee on an
individual or group basis. Generally, these awards will be based upon specific
agreements and may be paid in cash or in Common Stock or in a combination of
cash and Common Stock. Performance awards may include "phantom" stock awards
that provide for payments based upon increases in the price of the Common
Stock over a predetermined period. Performance awards may also include bonuses
which may be granted by the Compensation Committee on an individual or group
basis and which may be payable in cash or in Common Stock or in a combination
of cash and Common Stock.
 
  There are 600,000 shares of Common Stock reserved for issuance pursuant to
the 1997 Equity Participation Plan, of which options to purchase 335,000
shares have been granted to certain directors, officers and employees to be
effective upon the closing of this offering, with an exercise price equal to
the initial public offering price.
 
  Employee Stock Purchase Plan. The Company has established the CPS Systems,
Inc. Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") to
assist employees of the Company in acquiring a stock ownership interest in CPS
and to encourage them to remain in the employment of the Company. The Employee
Stock Purchase Plan permits employees to purchase shares of Common Stock
through payroll deductions at a price equal to 85% of fair market value. A
total of 100,000 shares of Common Stock are reserved for issuance pursuant to
the Employee Stock Purchase Plan. Each employee is limited to purchasing
Common Stock having an aggregate market value of $25,000 in any calendar year.
 
CERTAIN TRANSACTIONS
 
  G. Dean Booth, Jr., a director of the Company, is a partner in the law firm
of Schreeder, Wheeler & Flint, LLP of Atlanta, Georgia ("SWF") and was
formerly a partner at Booth, Owens & Jospin, LLP ("BOJ"). SWF has acted as
counsel to the Company and has been retained by the Company to assist in the
preparation of this offering. During fiscal 1997, legal fees incurred by the
Company to SWF totaled $289,000. During fiscal 1996, SWF was paid
approximately $28,000 in legal fees and expenses, and BOJ was paid
approximately $7,000 in legal fees and expenses. The Company did not make any
payments to SWF in fiscal 1995, but paid approximately $27,500 in legal fees
and expenses to BOJ. It is anticipated SWF's fees from services in the
preparation of this offering will total approximately $120,000.
 
  In May 1997, the Company's shareholders formed Thor Concepts, Inc., a
Georgia corporation ("Thor"), for the sole purpose of acquiring CDP Systems,
Inc., a Florida corporation ("CDP"), for nominal consideration. In addition,
the Company's shareholders advanced approximately $123,000 to CDP to cover CDP
expenses (the "CDP Loans"). Effective July 1997, the Company purchased the
shares of CDP from Thor in exchange for nominal consideration and assumption
of the CDP Loans. As of December 31, 1997, there was approximately $126,000 in
principal and accrued interest outstanding under the CDP Loans. See "Use of
Proceeds."
 
                                      41
<PAGE>
 
                            PRINCIPAL SHAREHOLDERS
 
  The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of February 28, 1998, and as adjusted to
reflect the sale of the shares of the Common Stock offered hereby, by (i) each
of the directors of CPS, (ii) each of the Named Executive Officers, (iii) each
person or entity known to CPS to own beneficially more than 5% of the
Company's Common Stock and (iv) all directors and executive officers as a
group. To the Company's knowledge, none of these entities has a relationship
with any Underwriters of this offering or their respective affiliates. Except
as otherwise indicated below, each person or entity named in the table has
sole voting and investment power (or shares such power with his or her spouse)
with respect to his or her Common Stock shown as beneficially owned by each.
 
<TABLE>
<CAPTION>
                                SHARES BENEFICIALLY        BENEFICIAL OWNERSHIP
                                       OWNED                    AFTER THE
NAME AND ADDRESS OF           PRIOR TO THE OFFERING(1)         OFFERING(1)
DIRECTOR, OFFICER AND         -------------------------------------------------
OTHER PRINCIPAL SHAREHOLDER     NUMBER        PERCENTAGE    NUMBER   PERCENTAGE
- ---------------------------   -------------- ----------------------- ----------
<S>                           <C>            <C>           <C>       <C>
Paul E. Kana.................      1,139,402         23.6% 1,139,402    16.9%
 3400 Carlisle, Suite 500
 Dallas, Texas 75204
Sidney H. Cordier(2).........      1,139,402         23.6% 1,139,402    16.9%
 Weybourne
 10 Wray Park Road
 Reigate Surrey
 RH2 2 ODD
 United Kingdom
Brian R. Wilson(2)...........      1,139,402         23.6% 1,139,402    16.9%
 Drymen House
 Horn Lane
 East Hendren, Near Wantage,
 Oxon OX128LD United Kingdom
G. Dean Booth, Jr.(2)........        243,265          5.0%   243,265     3.6%
 Schreeder, Wheeler & Flint
  LLP
 1600 The Candler Building
 127 Peachtree Street, N.E.
 Atlanta, Georgia 30303
James K. Hoofard, Jr.........        182,449          3.8%   182,449     2.7%
 3400 Carlisle, Suite 500
 Dallas, Texas 75204
Hanifen Imhoff Mezzanine
 Fund, L.P.(2)(3)............        724,719         15.0%   724,719    10.8%
 1125 17th Street, Suite 1600
 Denver, Colorado 80202
All directors and executive
 officers as a group(2)
 (5 persons).................      3,843,920         79.5% 3,843,920    57.1%
</TABLE>
- --------
(1) The number of shares beneficially owned by each shareholder is determined
    under rules and regulations promulgated by the Securities and Exchange
    Commission, and the information is not necessarily indicative of
    beneficial ownership for any other purpose. Under such rules, beneficial
    ownership includes any shares as to which the individual has sole or
    shared voting power or investment power, as well as any shares which the
    individual has the right to acquire within 60 days of the date of this
    Prospectus through the exercise of any stock option, warrant or other
    right. The inclusion herein of such shares, however, does not constitute
    an admission that the named shareholder is a direct or indirect beneficial
    owner of such shares.
(2) Does not assume the sale of any shares of Common Stock. See "Selling
    Shareholders."
(3) The Hanifen Imhoff Mezzanine Fund, L.P. is a Small Business Investment
    Company licensed under the Small Business Investment Act of 1958, as
    amended. Its focus is $1.0 million to $3.0 million subordinated debt
    investments in later stage manufacturing, distribution and service
    companies. No director, officer or other principal shareholder of the
    Company is affiliated with the Hanifen Imhoff Mezzanine Fund, L.P.
 
                                      42
<PAGE>
 
                             SELLING SHAREHOLDERS
 
  In the event that the Underwriter's over-allotment option is exercised in
full, the following shareholders (the "Selling Shareholders") will sell the
number of shares indicated below:
 
<TABLE>
<CAPTION>
                             BENEFICIAL                     BENEFICIAL      PERCENTAGE
                           OWNERSHIP PRIOR    NUMBER OF   OWNERSHIP AFTER OWNERSHIP AFTER
                          TO OVER-ALLOTMENT    SHARES     OVER-ALLOTMENT  OVER-ALLOTMENT
NAME                          EXERCISE      BEING OFFERED    EXERCISE        EXERCISE
- ----                      ----------------- ------------- --------------- ---------------
<S>                       <C>               <C>           <C>             <C>
Sidney H. Cordier.......      1,139,402        85,660        1,053,742         15.7%
Brian R. Wilson.........      1,139,402        85,660        1,053,742         15.7%
G. Dean Booth Jr........        243,265        18,288          224,977          3.3%
Hanifen Imhoff Mezzanine
 Fund, L.P..............        724,719        63,472          661,247          9.8%
John K. Percival........        103,476        21,280           82,196          1.2%
Robert J. Newcorn.......         30,457        10,640           19,817            *
</TABLE>
- --------
* Less than 1%.
 
In the event that the Underwriter elects to exercise less than its full over-
allotment option, the number of shares being offered by the Selling
Shareholders will be reduced proportionately.
 
                         DESCRIPTION OF CAPITAL STOCK
 
GENERAL
 
  The Company's authorized capital stock consists of (i) 50 million shares of
Common Stock, par value $.01 per share, (ii) 10 million shares of preferred
stock, par value $.01 per share. As of the date of this Prospectus an
aggregate of 4,832,502 shares of Common Stock were outstanding and held by
nine Shareholders (assuming the exercise by four holders of warrants to
purchase 927,766 shares of Common Stock). No shares of preferred stock have
been issued or are outstanding.
 
COMMON STOCK
 
  The holders of Common Stock are entitled to one vote per share for each
share held of record on all matters submitted to a vote of shareholders.
Subject to preferential rights with respect to any series of preferred stock
which may issued, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors on the Common Stock out
of funds legally available therefor (subject to the terms and conditions
contained in the Company's existing credit agreements with its lenders), and
in the event of a liquidation, dissolution or winding-up of the affairs of the
Company, are entitled to share equally and ratably in all remaining assets and
funds of the Company. The holders of Common Stock have no preemptive rights,
cumulative voting rights, or rights to convert shares of Common Stock into any
other securities and are not subject to future calls or assessments by the
Company. All outstanding shares of Common Stock are fully paid and non-
assessable.
 
PREFERRED STOCK
 
  The Board of Directors is authorized, subject to limitations prescribed by
law, without shareholder approval, to issue such shares of preferred stock in
one or more series. Each series of preferred stock shall have such rights,
preferences, privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences,
as shall be determined by the Board of Directors. No shares are issued and
outstanding as of the date hereof, and the Company has no present plans to
issue any of the preferred stock in the foreseeable future. The issuance of
the preferred stock, while providing desirable flexibility for corporate
acquisitions and other corporate purposes, could make it more difficult for
 
                                      43
<PAGE>
 
third-parties to acquire, or discourage third-parties from acquiring, a
majority of the outstanding voting stock of the Company. See "Risk Factors--
Effect of Certain Charter and Bylaw Provisions; Antitakeover Effects."
 
WARRANTS
 
  As of December 31, 1997, CPS had four outstanding warrants to purchase an
aggregate of 927,766 shares of the Common Stock at an exercise price of $.0026
per share. These warrants become exercisable upon the earlier of December 30,
1999 or the completion of an initial public offering and expire on December
29, 2004. The warrant holders have agreed to exercise all warrants upon the
effective date of this offering.
 
REGISTRATION RIGHTS OF CERTAIN HOLDERS
 
  Upon the completion of this offering, the holders of 927,766 shares of
Common Stock (the "Registrable Securities") or their transferees are entitled
to certain rights with respect to the registration of such shares under the
Securities Act. These rights are provided under the terms of an agreement
between the Company and the holders of the Registrable Securities. If the
Company registers any of its Common Stock either for its own account or for
the account of other security holders, the holders of Registrable Securities
are entitled to include their shares of Common Stock in the registration,
subject to the ability of the underwriters to limit the number of shares
included in the registration to not more than 10% of the offering. All
registration expenses must be borne by the Company; provided, however, that
all underwriting discounts and selling commissions applicable to the sale of
shares in connection with any registration shall be borne by the holders of
the securities registered pro rata on the basis of the number of shares of
such securities being registered.
 
REPRESENTATIVES' WARRANT
 
  For a description of the warrant to be sold to the Representatives in
connection with this offering, see "Underwriting."
 
CERTAIN STATUTORY AND CHARTER PROVISIONS REGARDING LIMITATIONS OF LIABILITIES
OF DIRECTORS
 
  As permitted by the Texas Business Corporation Act, the Company's Restated
Articles of Incorporation (the "Restated Articles") include a provision that
eliminates the personal liability of its directors with respect to any acts or
omissions in the performance of his duties to the full extent permitted by
law. The Texas Business Corporation Act provides that Directors will not be
liable in the discharge of any duty if they relied in good faith and with
ordinary care on information, opinions, reports, or statements, including
financial statements and other financial data, that were prepared or presented
by (i) one or more officers or employees of the Corporation, (ii) a committee
of the Board of Directors of which the Director is not a member, or (iii)
anyone the Director reasonably believed to have professional or expert
knowledge.
 
  The Company's Restated Articles further provide that, if the Texas Business
Corporation Act is amended to authorize the elimination or limitation of
director liability which is greater than therein provided, then the liability
of a director of the Company will be eliminated or limited to the fullest
extent permitted by such law, as so amended.
 
  Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
 
                                      44
<PAGE>
 
CERTAIN CHARTER AND BYLAW PROVISIONS REGARDING CHANGE OF CONTROL
 
  Certain provisions of the Company's Restated Articles may deter or frustrate
a takeover attempt of the Company that a shareholder might consider in his
best interest. The Company's Restated Articles or Bylaws, among other things,
provide that (i) the annual meeting of shareholders shall be held on such date
and at such time fixed from time to time by the Board of Directors, provided
that there shall be an annual meeting held every calendar year, (ii) any
special meeting of the shareholders may be called only by the Chairman of the
Board, President or upon the affirmative vote of at least a majority of the
members of the Board of Directors, or upon the written demand of the holders
of not less than 50% of the votes entitled to be cast at a special meeting,
(iii) an advance notice procedure must be followed for nomination of directors
and for other shareholder proposals to be considered at annual shareholders'
meetings, and (iv) the Company's Board of Directors be divided into three
classes, each of which serves for different three-year periods, and for which
shareholders have no cumulative voting rights. In addition, the Company will
be authorized to issue additional shares of Common Stock and up to ten million
shares of preferred stock in one or more series, having terms fixed by the
Board of Directors without shareholder approval, including voting, dividend or
liquidation rights that could be greater than or senior to the rights of
holders of Common Stock. Shareholders will have no preemptive rights with
respect to any additional common stock or preferred stock. Issuance of
additional shares of Common Stock or new shares of preferred stock could also
be used as an antitakeover device. Except as set forth herein, the Company has
no current intentions or plans to issue additional Common Stock or issue
Preferred Stock.
 
TRANSFER AGENT AND REGISTRAR
 
  The transfer agent and registrar for the Company's securities is American
Securities Transfer and Trust, Inc.
 
                                      45
<PAGE>
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
  Upon completion of this offering there will be 6,732,502 shares of Common
Stock outstanding. Immediately following the completion of this offering, a
total of 1,900,000 shares of Common Stock (2,185,000 shares if the
Underwriters' over-allotment is exercised in full) will be freely tradeable
without restriction. An additional 4,832,502 (4,547,502 if the Underwriters'
over-allotment option is exercised in full) shares of Common Stock may be sold
subject to the limitations of Rule 144 under the Securities Act, following
expiration of a lock-up agreements executed by the Company's directors,
executive officers, certain key employees and certain other shareholders,
which expire one year after the date of this Prospectus. Cruttenden Roth has
no present intention to release the locked-up shares prior to expiration of
the one-year period.
 
  In general, under Rule 144 a person (or persons whose shares are aggregated)
who has beneficially owned restricted shares for at least one year, including
any persons who may be deemed to be an affiliate of the Company, is entitled
to sell, within any three-month period, a number of shares that does not
exceed the greater of 1% of the total number of then-outstanding shares of
Common Stock or the average weekly trading volume in the Common Stock as
reported by the American Stock Exchange during the four calendar weeks
preceding such sale. Sales pursuant to Rule 144 also are subject to certain
other requirements relating to the manner of sale, notice and availability of
current public information about the Company.
 
  Affiliates may publicly sell shares not constituting restricted securities
under Rule 144 in accordance with the foregoing volume limitations and other
restrictions but without regard to the one-year holding period. Under Rule
144(k), a person who is not deemed to have been an affiliate of the Company at
any time during the 90 days immediately preceding a sale by such person, and
who has beneficially owned restricted shares for at least two years, is
entitled to sell such shares under Rule 144 without regard to any of the
limitations described above.
 
                                      46
<PAGE>
 
                                 UNDERWRITING
 
  Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom Cruttenden Roth
Incorporated and Josephthal & Co. Inc. are acting as Representative, have
severally agreed to purchase from the Company and the Company has agreed to
sell to the Underwriters, the respective number of shares of Common Stock set
forth opposite each Underwriter's name below:
 
<TABLE>
<CAPTION>
                                                                       NUMBER
     UNDERWRITERS                                                     OF SHARES
     ------------                                                     ---------
     <S>                                                              <C>
     Cruttenden Roth Incorporated....................................
     Josephthal & Co. Inc. ..........................................
                                                                      ---------
       Total......................................................... 1,900,000
</TABLE>
 
  The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to certain conditions precedent, including
the absence of any material adverse change in the Company's business and the
receipt of certain certificates, opinions and letters from the Company's
counsel and independent public accountants. The nature of the Underwriters'
obligation is such that they are committed to purchase and pay for all the
shares of Common Stock if any are purchased.
 
  The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock directly to the public on the
terms set forth on the cover page of this Prospectus. The Underwriters may
allow selected dealers, a concession of not more than $       per share, and
the Underwriters may allow, and such selected dealers may reallow, a
concession of not more than $    per share to other dealers. After the initial
public offering of the shares, the public offering price and other selling
terms may be changed by the Representatives. No change in such terms shall
change the amount of proceeds to be received by the Company as set forth on
the cover page of this Prospectus.
 
  The selling shareholders have granted an option to the Underwriters,
exercisable for a period of 45 days after the date of this Prospectus, to
purchase up to an additional 285,000 shares of Common Stock at the same price
per share as the initial shares to be purchased by the Underwriters to cover
over-allotments, if any. To the extent that the Underwriters exercise this
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares of Common Stock in
approximately the same proportion as set forth in the above table.
 
  The Representatives have advised the Company that they do not expect any
sales of the shares of Common Stock offered hereby to be made to discretionary
accounts controlled by the Underwriters.
 
  The Company has agreed to issue to the Representatives at the closing of
this offering five-year warrants (the "Representatives' Warrants") to purchase
up to 10% of the number of shares of Common Stock sold in this offering
(excluding any shares sold in the event the over-allotment option is
exercised) at an exercise price per share equal to 165% of the initial per
share public offering price. The Representatives' Warrants are exercisable for
a period of four years beginning one year from the date of this Prospectus and
contain standard net-issuance provisions. The holders of the Representatives'
Warrants will have no voting, dividend or other
 
                                      47
<PAGE>
 
shareholder rights until the Representatives' Warrants are exercised. The
terms of the Representatives' Warrants were established as the result of
negotiations between the Company and the Representatives. If the
Representatives' Warrants are exercised, the Representatives may realize
additional compensation. By their terms, the Representatives' Warrants will be
restricted from sale, transfer, assignment or hypothecation, except to persons
that are officers of the Representatives. The number of shares covered by the
Representatives' Warrants and the exercise price thereof are subject to
adjustment in certain events to prevent dilution. In addition, the Company has
granted certain rights to the holders of the Representatives' Warrants to
register the Representatives' Warrants and the Common Stock underlying the
Representatives' Warrants under the Securities Act, all of which are being
registered as part of this offering.
 
  The Company has agreed to pay the Representatives a non-accountable expense
allowance equal to 3.0% of the aggregate Price to Public (including with
respect to shares of Common Stock underlying the over-allotment option, if and
to the extent it is exercised) set forth on the front cover of this
Prospectus. The Representatives' expenses in excess of the non-accountable
expense allowance, including their legal expenses, will be borne by the
Representatives.
 
  The Company, its officers, directors and warrant holders have entered into
lock-up agreements with the Representatives which provide that they will not
offer, sell or otherwise dispose of any of the Company's Common Stock for a
period of 365 days after the commencement of the offering without the prior
written consent of Cruttenden Roth. Cruttenden Roth has no present intention
to release the locked-up shares prior to expiration of the one-year period.
See "Shares Eligible for Future Sale."
 
  Prior to this offering, there has been no established trading market for the
Common Stock. Consequently, the initial public offering price for the Common
Stock offered hereby has been determined by negotiation between the Company
and the Representatives. Among the factors considered in such negotiations
were the preliminary demand for the Common Stock, the prevailing market and
economic conditions, the Company's results of operations, estimates of the
business potential and prospects of the Company, the present state of the
Company's business operations, an assessment of the Company's management, the
consideration of these factors in relation to the market valuation of
comparable companies in related businesses, the current condition of the
markets in which the Company operates, and other factors deemed relevant.
There can be no assurance that an active trading market will develop for the
Common Stock or that the Common Stock will trade in the public market
subsequent to this offering at or above the initial public offering price.
 
  The Underwriting Agreement provides that the Company and the selling
shareholders will indemnify the Underwriters and their controlling persons
against certain liabilities under the Securities Act or will contribute to
payments the Underwriters and their controlling persons may be required to
make in respect thereof.
 
                                 LEGAL MATTERS
 
  The law firm of Schreeder, Wheeler & Flint, LLP, Atlanta, Georgia, has acted
as counsel to the Company in connection with this offering and will render an
opinion as to the legality of the shares of Common Stock being offered hereby.
See "Certain Transactions." Summit Law Group, P.L.L.C., Seattle, Washington,
has acted as counsel to the Underwriters in connection with certain legal
matters relating to this offering.
 
 
                                      48
<PAGE>
 
                                    EXPERTS
 
  The Company's financial statements as of December 31, 1997, and for each of
the two years in the period ended December 31, 1997 included in this
Prospectus have been so included in reliance on the report of Grant Thornton
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting.
 
                             AVAILABLE INFORMATION
 
  The Company has not previously been subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, accordingly, has not filed reports and other information with the
Securities and Exchange Commission (the "Commission"). The Company has filed
with the Commission a registration statement (the "Registration Statement")
with respect to the shares of Common Stock offered hereby. This Prospectus,
which constitutes part of the Registration Statement, does not contain all of
the information contained in the Registration Statement and the exhibits
thereto. For further information with respect to the Company and the shares of
Common Stock offered hereby, reference is made to the Registration Statement,
including the exhibits thereto, which may be examined without charge at, and
copies of all or part of which may be obtained at prescribed rates from, the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its regional offices located at 7 World
Trade Center, 13th Floor, New York, New York 10048, and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Electronic filings made through the Electronic Data Gathering and Retrieval
system are publicly available through the Commission's website at
"http://www.sec.gov". Statements contained in this Prospectus as to the
contents of any contract or any other document are not necessarily complete
and, in each instance, reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each statement
being qualified in all respects by such reference.
 
                                      49
<PAGE>
 
                               CPS SYSTEMS, INC.
 
                   Index to Consolidated Financial Statements
 
<TABLE>
<S>                                                                          <C>
Report of Independent Certified Public Accountants.......................... F-2
Consolidated Balance Sheet.................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Shareholders' Equity............................. F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
 
                                      F-1
<PAGE>
 
              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
 
To the Board of Directors
CPS Systems, Inc.
 
  We have audited the accompanying consolidated balance sheet of CPS Systems,
Inc. and Subsidiary as of December 31, 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
two years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CPS Systems,
Inc. and Subsidiary as of December 31, 1997, and the consolidated results of
its operations and its cash flows for each of the two years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
                                                
                                             /s/ Grant Thornton LLP     
 
Atlanta, Georgia
February 19, 1998
 
                                      F-2
<PAGE>
 
                        CPS SYSTEMS, INC. AND SUBSIDIARY
 
                           CONSOLIDATED BALANCE SHEET
 
                               DECEMBER 31, 1997
 
<TABLE>
<S>                                                                 <C>
ASSETS
CURRENT ASSETS
  Cash............................................................. $  327,375
  Accounts receivable, less allowance for doubtful accounts of
   $62,000.........................................................  1,719,246
  Deferred income taxes............................................    160,000
  Inventories......................................................    160,582
  Refundable income taxes..........................................     74,673
  Prepaid expenses and other current assets........................    134,321
  Deferred offering costs..........................................    366,515
                                                                    ----------
    Total current assets...........................................  2,942,712
PROPERTY AND EQUIPMENT.............................................    536,163
SOFTWARE DEVELOPMENT COSTS.........................................    937,847
OTHER ASSETS
  Costs in excess of net assets acquired...........................  1,904,592
  Debt issue costs.................................................    160,132
  Other assets.....................................................     17,948
                                                                    ----------
                                                                     2,082,672
                                                                    ----------
                                                                    $6,499,394
                                                                    ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Current portion of long term debt................................ $  730,736
  Accounts payable.................................................    683,107
  Accrued salaries, wages and payroll taxes........................     12,000
  Accrued offering costs...........................................    243,467
  Other accrued expenses...........................................    230,125
  Unearned revenue, current portion................................  1,532,611
                                                                    ----------
    Total current liabilities......................................  3,432,046
OTHER LIABILITIES
  Long-term debt...................................................  2,014,000
  Deferred income taxes............................................    317,000
  Notes payable--shareholders......................................    122,996
  Unearned revenue.................................................     47,325
  Other liabilities................................................     47,025
                                                                    ----------
                                                                     2,548,346
                                                                    ----------
    Total liabilities..............................................  5,980,392
PUT WARRANTS.......................................................    241,746
COMMITMENTS AND CONTINGENCIES......................................        --
SHAREHOLDERS' EQUITY
  Preferred stock, $.01 par value; authorized 10,000,000 shares,
   none issued and outstanding.....................................        --
  Common stock, $.01 par value, 50,000,000 shares authorized;
   3,904,736 shares issued.........................................     39,047
  Additional paid-in capital.......................................    960,953
  Accumulated deficit..............................................   (722,744)
                                                                    ----------
    Total shareholders' equity.....................................    277,256
                                                                    ----------
                                                                    $6,499,394
                                                                    ==========
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                      F-3
<PAGE>
 
                        CPS SYSTEMS, INC. AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
                            YEARS ENDED DECEMBER 31,
 
<TABLE>
<CAPTION>
                                                          1997         1996
                                                       -----------  ----------
<S>                                                    <C>          <C>
Revenue
  License fees........................................ $ 2,178,237  $1,634,835
  Recurring maintenance and service fees..............   3,909,869   3,851,308
  Product sales.......................................   3,420,413   2,052,148
  Other service fees..................................     969,043     824,486
                                                       -----------  ----------
                                                        10,477,562   8,362,777
                                                       -----------  ----------
Cost of revenue
  Product sales.......................................   2,528,823   1,464,664
  Software............................................     575,815     390,830
  Distribution........................................      67,186      11,115
                                                       -----------  ----------
                                                         3,171,824   1,866,609
                                                       -----------  ----------
    Gross profit......................................   7,305,738   6,496,168
Operating expenses
  Support and customer service........................   3,277,581   2,743,217
  Selling.............................................     965,996     771,470
  Research and development............................   1,508,026     866,366
  General and administrative..........................   1,048,181   1,030,277
  Amortization of goodwill and non-compete agreements.     358,266     346,586
                                                       -----------  ----------
                                                         7,158,050   5,757,916
                                                       -----------  ----------
    Earnings from operations..........................     147,688     738,252
Interest and financing costs..........................     419,219     819,125
                                                       -----------  ----------
    Loss before income taxes..........................    (271,531)    (80,873)
Income tax expense (benefit)..........................     (25,000)    165,200
                                                       -----------  ----------
    NET LOSS.......................................... $  (246,531) $ (246,073)
                                                       ===========  ==========
Basic net loss per common share....................... $      (.06) $     (.06)
                                                       ===========  ==========
Diluted net loss per common share..................... $      (.07) $     (.06)
                                                       ===========  ==========
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                      F-4
<PAGE>
 
                        CPS SYSTEMS, INC. AND SUBSIDIARY
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
                     YEARS ENDED DECEMBER 31, 1997 AND 1996
 
<TABLE>
<CAPTION>
                           COMMON STOCK
                         ----------------- ADDITIONAL
                          NUMBER     PAR    PAID IN   ACCUMULATED
                         OF SHARES  VALUE   CAPITAL     DEFICIT     TOTAL
                         --------- ------- ---------- ----------- ---------
<S>                      <C>       <C>     <C>        <C>         <C>
Balance, December 31,
 1995................... 3,904,736 $39,047  $960,953   $(230,140) $ 769,860
Net loss for the year...               --        --     (246,073)  (246,073)
                         --------- -------  --------   ---------  ---------
Balance, December 31,
 1996................... 3,904,736  39,047   960,953    (476,213)   523,787
Net loss for the year...       --      --        --     (246,531)  (246,531)
                         --------- -------  --------   ---------  ---------
Balance, December 31,
 1997................... 3,904,736 $39,047  $960,953   $(722,744) $ 277,256
                         ========= =======  ========   =========  =========
</TABLE>
 
 
 
        The accompanying notes are an integral part of these statements.
 
                                      F-5
<PAGE>
 
                        CPS SYSTEMS, INC. AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                            YEARS ENDED DECEMBER 31,
 
<TABLE>
<CAPTION>
                                                            1997       1996
                                                          ---------  ---------
<S>                                                       <C>        <C>
Cash flows from operating activities:
  Net loss............................................... $(246,531) $(246,073)
  Adjustments to reconcile net loss to net cash provided
   by operating activities:
    Deferred income tax (benefit) expense................    19,000    (16,000)
    Depreciation and amortization........................   753,085    702,318
    Adjustment to put warrants...........................   (83,055)   271,632
    Loss on disposal of property and equipment...........       --         820
    Change in assets and liabilities, net of business
     acquired:
      Accounts receivable................................  (180,560)  (612,648)
      Refundable income taxes............................   (74,673)   118,134
      Inventories........................................   (44,406)   (58,552)
      Prepaid expenses and other current assets..........   (30,136)     9,480
      Other assets.......................................     3,000        963
      Accounts payable...................................   152,940     70,476
      Accrued expenses...................................    36,810    116,488
      Unearned revenue...................................   448,977     (8,210)
      Income taxes payable...............................  (176,904)   176,904
      Other liabilities..................................    (7,685)    27,354
                                                          ---------  ---------
        Net cash provided by operating activities........   569,862    553,086
                                                          ---------  ---------
Cash flows from investing activities:
  Purchase of property and equipment.....................  (260,823)  (209,450)
  Software development costs.............................  (280,548)   (41,016)
  Cash acquired in CDP acquisition.......................     3,547        --
  Proceeds from sale of property and equipment...........       --       1,299
                                                          ---------  ---------
        Net cash used by investing activities............  (537,824)  (249,167)
                                                          ---------  ---------
Cash flows from financing activities:
  Principal payments on long-term debt...................  (296,309)  (262,644)
  Proceeds from notes payable--shareholders..............   122,996        --
  Offering costs paid....................................  (123,048)       --
  Other receivable.......................................       --     165,000
                                                          ---------  ---------
        Net cash used by financing activities............  (296,361)   (97,644)
                                                          ---------  ---------
Net increase (decrease) in cash..........................  (264,323)   206,275
Cash at beginning of period..............................   591,698    385,423
                                                          ---------  ---------
Cash at end of period.................................... $ 327,375  $ 591,698
                                                          =========  =========
Supplementary Cash Flow Disclosure:
  Interest and financing costs paid...................... $ 393,000  $ 432,048
  Income taxes (refunded) paid, net...................... $ 208,000  $(113,839)
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                      F-6
<PAGE>
 
                        
                     CPS SYSTEMS, INC. AND SUBSIDIARY     
                   
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     
                               
                            DECEMBER 31, 1997     
   
NOTE A--DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
               
1. BUSINESS     
   
  CPS Systems, Inc. and its wholly-owned Subsidiary, CDP Systems, Inc. (the
Company), engage primarily in developing, marketing, licensing and supporting
proprietary software and selling hardware and related products to
appraisal/assessment districts, tax collection agencies, municipalities and
law enforcement agencies located primarily in Texas, Oklahoma and Florida.
       
2. PRINCIPLES OF CONSOLIDATION     
   
  The consolidated financial statements include the accounts of CPS Systems,
Inc. and its wholly-owned subsidiary, CDP Systems, Inc. All significant
intercompany transactions and balances have been eliminated.     
   
3. REVENUE RECOGNITION     
   
  The Company licenses its software products. 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.     
   
  Other fees are recognized as the services are provided and consist primarily
of training, conversion, customization and installation.     
   
4. INVENTORIES     
   
  Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.     
   
5. PROPERTY AND EQUIPMENT     
   
  Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Accelerated methods are utilized for income tax purposes.     
   
6. SOFTWARE DEVELOPMENT COSTS     
   
  In accordance with SFAS No. 86, all software development costs are charged
to expense as incurred until technological feasibility has been established
for the product. Software development costs incurred after technological
feasibility has been established are capitalized and amortized, commencing
with product release, on a straight line basis over a period of six to ten
years. Amortization of software development costs was approximately $142,000
and $116,000 during the years ended December 31, 1997 and 1996, respectively,
and is included in software cost of revenue in the accompanying consolidated
statements of operations. Software development costs are stated net of
accumulated amortization of approximately $362,000 at December 31, 1997.     
 
 
                                      F-7
<PAGE>
 
                       CPS SYSTEMS, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
7. COSTS IN EXCESS OF NET ASSETS ACQUIRED
 
  The excess acquisition cost over the fair value of net assets acquired
(goodwill) of CPS Systems, Inc. is amortized on a straight line basis over a
ten year period. Goodwill arising from the acquisition of CDP Systems is
amortized on a straight-line basis over a three year period. Accumulated
amortization of goodwill was approximately $805,000 at December 31, 1997.
Amortization of costs in excess of net assets acquired charged to operations
was approximately $275,000 and $265,000 in 1997 and 1996, respectively.
 
  The remaining balance of goodwill at December 31, 1997 consists of
$1,854,717 and $49,875 attributable to CPS and CDP, respectively.
 
8. DEBT ISSUE COSTS
 
  Costs incurred in connection with obtaining financing have been capitalized
and are amortized on a straight-line basis over the term of the loan
agreements, which range from four to six years. Debt issue costs are stated
net of accumulated amortization of approximately $245,000 at December 31,
1997. Amortization of debt issue costs charged to operations was approximately
$82,000 annually in 1997 and 1996 and is included in interest and financing
costs in the accompanying consolidated statements of operations.
 
9. NON-COMPETE AGREEMENTS
 
  Cost of non-compete agreements were capitalized and amortized on a straight
line basis over the three year term of the agreements. Non-compete agreements
were fully amortized at December 31, 1997. Amortization of non-compete
agreements charged to operations was approximately $83,000 annually in 1997
and 1996.
 
10. INCOME TAXES
 
  The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates applied to taxable income. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. A valuation allowance is provided for
deferred tax assets when it is more likely than not that the asset will not be
realized.
 
11. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
 
  In preparing financial statements in conformity with General Accepted
Accounting Principles ("GAAP"), management is required to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
12. LONG-LIVED ASSETS
 
  Management periodically evaluates the realizability of its property and
equipment, software development costs and intangible assets in light of
current technology, as it may relate to the Company's products, and the
current environment of its industry and markets. Management believes that no
impairment of property and equipment, software development costs and
intangible assets exists at December 31, 1997.
 
                                      F-8
<PAGE>
 
                       CPS SYSTEMS, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
13. DEFERRED OFFERING COSTS
 
  Deferred offering costs represent costs incurred directly in connection with
the Company's initial public offering and will be charged against the gross
proceeds of the offering. If the offering is not completed, the deferred
offering costs will be charged to operations in the period in which the
offering is abandoned.
 
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
  The Company's financial instruments include cash, cash equivalents and long-
term debt. The carrying value of cash and cash equivalents approximates fair
value due to the relatively short period to maturity of the instruments. The
carrying value of the Company's long-term obligations approximates fair value
based upon borrowing rates currently available to the Company for borrowings
with comparable maturities.
 
15. EARNINGS PER SHARE
 
  The Company adopted Statement of Financial Accounting Standards No. 128
(SFAS 128), Earnings Per Share, in the fourth quarter of 1997. Basic net
earnings per common share is based upon the weighted average number of common
shares outstanding. Diluted net earnings per common share is based upon the
weighted average number of common shares outstanding plus dilative potential
common shares, including warrants outstanding during the period. All
comparative earnings per share data for prior periods presented have been
restated.
 
NOTE B--ACQUISITION OF CDP SYSTEMS, INC.
 
  On July 1, 1997, the Company acquired all the outstanding common stock of
CDP Systems, Inc. from Thor Concepts, Inc. (Thor) for $10 cash and the
assumption of approximately $138,000 of liabilities. Thor, which is owned by
the identical shareholders as CPS, acquired the common stock of CDP in June
1997 from the former CDP shareholders under substantially identical terms and
amounts. CDP develops automated voice response software.
 
  The acquisition of CDP has been accounted for as a purchase. Accordingly,
the purchase price was allocated to assets and liabilities based on their
estimated fair value, at the date of acquisition. Results of operations of CDP
have been included in the consolidated financial statements from the date of
acquisition. The excess purchase price over the fair value of the net assets
acquired of approximately $60,000 is being amortized on a straight-line basis
over three years. The results of operations of CDP prior to July 1, 1997 were
not material.
 
NOTE C--PROPERTY AND EQUIPMENT
 
  Property and equipment consisted of the following at December 31, 1997:
 
<TABLE>
<CAPTION>
                                                                     ESTIMATED
                                                                   SERVICE LIVES
                                                                   -------------
   <S>                                                    <C>      <C>
   Computer equipment and purchased software............. $747,233     5 years
   Furniture and fixtures................................  186,008   5-7 years
   Vehicles..............................................   43,000     3 years
   Leasehold improvements................................   17,194     4 years
                                                          --------
                                                           993,435
   Accumulated depreciation..............................  457,272
                                                          --------
                                                          $536,163
                                                          ========
</TABLE>
 
 
                                      F-9
<PAGE>
 
                       CPS SYSTEMS, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  Depreciation of property and equipment charged to operations was $171,052
and $151,839 for the years ended December 31, 1997 and 1996, respectively.
 
NOTE D--LONG-TERM DEBT AND REVOLVING LINE OF CREDIT
 
LONG-TERM DEBT
 
  Long-term debt consisted of the following at December 31, 1997:
 
<TABLE>
   <S>                                                               <C>
   Senior term loan. Requires monthly payments of $32,614 including
    interest at prime plus 2.5% (effective rate of 10.25% at
    December 31, 1997). All outstanding principal and interest due
    December 1998................................................... $  730,736
   Subordinated note. Interest payable quarterly, principal payable
    in two installments in December 1999 and December 2000..........  2,014,000
                                                                     ----------
                                                                      2,744,736
   Less current portion.............................................    730,736
                                                                     ----------
                                                                     $2,014,000
                                                                     ==========
</TABLE>
 
  In accordance with the subordination and intercreditor agreement, the
Company can make no payments on the subordinated note until all indebtedness
under the senior term loan and revolving line of credit has been repaid, with
the exception of interest payments required under the subordinated note. Each
loan is collateralized by substantially all assets of the Company.
 
  Each loan agreement contains covenants which, among other things, restrict
the payment of dividends and the level of capital expenditures, and require
the Company to maintain certain minimum financial ratios. The Company was in
compliance with these covenants at December 31, 1997.
 
  The senior term loan requires the payment of a monthly maintenance fee of
$4,167 through December 1998. The lender may also require additional principal
payments not to exceed fifty percent of the Company's annual excess cash
flows, as defined.
 
  In connection with the issuance of the subordinated note, CPS issued a put
warrant to purchase 724,719 shares of the Company's common stock for
approximately $.0026 per share to the note holder. Interest on this note is
payable at a stated rate of 12%. Giving effect to the issuance of the
warrants, and the put feature adjustment attributable to the warrants (see
Note G), the imputed interest rate on this note was 10.0% and 23.8% for the
years ended December 31, 1997 and 1996, respectively.
 
  Maturities of long-term debt are as follows:
 
<TABLE>
   <S>                                                              <C>
   Year ending December 31,
   1998............................................................ $  730,736
   1999............................................................    975,725
   2000............................................................  1,038,275
                                                                    ----------
                                                                    $2,744,736
                                                                    ==========
</TABLE>
 
REVOLVING LINE OF CREDIT
 
  The Company executed a revolving line of credit agreement with the senior
lender which provides for maximum borrowings of $1,000,000. Borrowings are
restricted to 70% of eligible accounts receivable. Interest is payable monthly
at the prime rate plus 2%. The agreement is collateralized by substantially
all assets of the Company. The provisions of the agreement contain covenants
identical to those of the senior term loan. No amounts were outstanding under
this revolving line of credit at December 31, 1997.
 
                                     F-10
<PAGE>
 
                       CPS SYSTEMS, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTES PAYABLE--SHAREHOLDERS
 
  The Company has notes payable to shareholders in the amount of $122,996
which are payable in full in September 2000. Interest is payable at maturity
at 8% per annum. Interest expense of approximately $2,500 was recorded on
these notes in 1997. No amounts were due under notes payable to shareholders
at December 31, 1996.
 
NOTE E--INCOME TAXES
 
  The income tax provision consisted of the following:
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED
                                                               DECEMBER 31,
                                                             ------------------
                                                               1997      1996
                                                             --------  --------
   <S>                                                       <C>       <C>
   Current expense (benefit)................................ $(44,000) $181,200
   Deferred expense (benefit)...............................   19,000   (16,000)
                                                             --------  --------
                                                             $(25,000) $165,200
                                                             ========  ========
</TABLE>
 
  At December 31, 1997 the Company's temporary differences result in a
deferred income tax liability, summarized as follows:
 
<TABLE>
   <S>                                                                 <C>
   Deferred tax liabilities:
     Capitalized software costs....................................... $356,000
     Depreciation.....................................................   36,000
                                                                       --------
       Gross deferred tax liability...................................  392,000
                                                                       --------
   Deferred tax assets:
     Unearned revenue.................................................  121,000
     Amortization of intangible assets................................   75,000
     Accruals and allowances..........................................   39,000
                                                                       --------
                                                                        235,000
                                                                       --------
       Net deferred tax liability..................................... $157,000
                                                                       ========
</TABLE>
 
  The net deferred tax liability is classified in the accompanying balance
sheet as follows:
 
<TABLE>
   <S>                                                               <C>
   Current deferred tax asset....................................... $(160,000)
   Long-term deferred tax liability.................................   317,000
                                                                     ---------
   Net deferred tax liability....................................... $ 157,000
                                                                     =========
</TABLE>
 
  The provision for income taxes differs from the amount of income tax
determined by applying the applicable federal rates due to the following:
 
<TABLE>
<CAPTION>
                                                              1997      1996
                                                            --------  --------
   <S>                                                      <C>       <C>
   Tax benefit at applicable federal rate of 34%........... $(92,300) $(27,500)
   State tax expense (benefit), net........................   (2,000)   14,500
   Non deductible amortization of goodwill.................  104,500    90,100
   Non deductible (non taxable) warrant accretion..........  (31,500)   92,400
   Other non deductible items..............................   13,300    15,200
   Tax credits.............................................  (17,000)  (19,500)
                                                            --------  --------
                                                            $(25,000) $165,200
                                                            ========  ========
</TABLE>
 
 
                                     F-11
<PAGE>
 
                       CPS SYSTEMS, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE F--COMMITMENTS AND CONTINGENCIES
 
LEASE COMMITMENTS
 
  The Company has entered into noncancelable operating lease agreements for
office space which expire at various dates through March 2001. Approximate
minimum future payments under noncancelable leases with initial or remaining
terms in excess of one year at September 30, are due as follows:
 
<TABLE>
   <S>                                                                <C>
   Year ending December 31,
   1998.............................................................. $230,000
   1999..............................................................  210,000
   2000..............................................................   80,000
   2001..............................................................    2,000
                                                                      --------
                                                                      $522,000
                                                                      ========
</TABLE>
 
  Rental expense for the years ended December 31, 1997 and 1996 was
approximately $300,000 and $260,000, respectively.
 
CONTINGENCIES
 
  A former employee filed a civil action in the United States District Court
for the Middle District of Florida asserting claims under federal and state
Equal Opportunity Employment Laws. In January 1998, a jury found, and judgment
was entered, in favor in the Company and against the former employee. The
Court may award attorneys' fees of the former employee to be paid by the
Company. Management believes such action, if taken, would be without merit and
would appeal such action if necessary. The ultimate outcome of this
uncertainty cannot be determined at this time. Accordingly, no provision for
any liabilities that may result based on the ultimate outcome of this
uncertainty has been made.
 
NOTE G--WARRANTS
 
  The Company issued warrants for the purchase of 724,719 shares of common
stock in connection with the subordinated note. Additionally, warrants for the
purchase of 203,047 shares of common stock were issued in connection with
costs of obtaining financing. All warrants issued entitle the holders to
purchase common stock at an exercise price of approximately $.0026 per share
and expire in December 2004. The terms of the warrant also entitle the holders
to require the Company to purchase the warrant for cash on or after December
31, 1999, or upon an initial public offering of the Company's common stock if
earlier, for a price as defined in the warrant agreements.
 
  Upon issuance, the Company recorded the put warrants at their value as
estimated by management of $110,000. The Company is adjusting the put warrants
to the highest redemption price of the put warrants (the put feature
adjustment) in accordance with the warrant agreement, which is a formula based
on operating earnings, as defined, for the preceding twelve months,
outstanding indebtedness and cash balances. The put feature adjustments are
accrued over the period from the date of issuance to the earliest put date of
the warrants. The put feature adjustments resulted in a benefit of $83,055 in
1997 and a charge to earnings of $271,632 in 1996. Such put feature
adjustments are classified as interest and financing costs in the accompanying
statements of operations.
 
  All warrant holders executed agreements to exercise all warrants into common
stock upon the closing of the initial public offering of the Company's common
stock.
 
 
                                     F-12
<PAGE>
 
                       CPS SYSTEMS, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE H--EARNINGS PER SHARE
 
  Basic net earnings per common share and diluted net earnings per common
share were computed as follows:
 
<TABLE>
<CAPTION>
                                                YEAR ENDED DECEMBER 31, 1997
                                             -----------------------------------
                                              EARNINGS      SHARES     PER SHARE
                                             (NUMERATOR) (DENOMINATOR)  AMOUNT
                                             ----------- ------------- ---------
   <S>                                       <C>         <C>           <C>
   Net loss.................................  $(246,531)
                                              =========
     Basic net loss per common share........   (246,931)   3,904,736    $(0.06)
                                                                        ======
   Effect of dilutive securities
     Put warrants...........................    (83,055)     927,766
                                              ---------    ---------
     Diluted net loss per common share......  $(329,986)   4,832,502    $(0.07)
                                              =========    =========    ======
<CAPTION>
                                                YEAR ENDED DECEMBER 31, 1996
                                             -----------------------------------
                                              EARNINGS      SHARES     PER SHARE
                                             (NUMERATOR) (DENOMINATOR)  AMOUNT
                                             ----------- ------------- ---------
   <S>                                       <C>         <C>           <C>
   Net loss.................................  $(246,073)
                                              =========
     Basic net loss per common share........  $(246,073)   3,904,736    $(0.06)
                                                                        ======
   Effect of dilutive securities............        --           --
                                              ---------    ---------
     Diluted net loss per common share......  $(246,073)   3,904,736    $(0.06)
                                              =========    =========    ======
</TABLE>
 
NOTE I--RETIREMENT PLAN
 
  The Company has a retirement savings plan covering substantially all of its
employees. The Company matches employee contributions at a rate determined
annually by the Board of Directors. No Company contributions were made for the
years ended December 31, 1997 and 1996.
 
NOTE J--NEW ACCOUNTING PRONOUNCEMENTS
 
  The Financial Accounting Standards Board (FASB) has issued the following
Statements of Financial Accounting Standards (SFAS):
 
  SFAS 130, Reporting Comprehensive Income, which is effective for fiscal
years beginning after December 15, 1997. SFAS 130 requires companies to
include details about comprehensive income that arise during a reporting
period. Comprehensive income includes revenue, expenses, gains and losses that
bypass the income statement and are reported directly in a separate component
of equity.
 
  SFAS 131, Disclosures about Segments of an Enterprise and Related
Information, which is effective for financial statements for periods beginning
after December 15, 1997. SFAS 131 requires companies to report information
about an entity's different types of business activities and the different
economic environments in which it operates, referred to as operating segments.
 
  Additionally, the AICPA Accounting Standards Executive Committee has issued
Statement of Position (SOP) 97-2, Software Revenue Recognition, which is
effective for fiscal years beginning after December 15, 1997. SOP 97-2
modifies the criteria for determining recognition of revenue and allocation of
the contract fee for contracts containing multiple elements, such as software
products, rights to upgrades and other services.
 
                                     F-13
<PAGE>
 
                       CPS SYSTEMS, INC. AND SUBSIDIARY
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Management does not expect the adoption of the Statements of Financial
Accounting Standards and SOP 97-2, referred to above, to have a material
impact on the Company's results of operations or financial condition.
 
NOTE K--SHAREHOLDERS' EQUITY
 
  A stock split of 390 to 1 was approved and became effective in October 1997.
Additionally, the articles of incorporation were amended to authorize
50,000,000 common shares and 10,000,000 preferred shares. The board can issue
such shares of preferred stock in one or more series which will have rights,
preferences, privileges and restrictions as determined by the board of
directors. All per share amounts and references to common and preferred stock
have been retroactively restated.
 
  The Company adopted the 1997 Equity Participation Plan and Employee Stock
Purchase Plan (the Plans) in October 1997. The Plans provide for the issuance
of stock options and other performance awards as may be approved by the board
of directors. 335,000 stock options were issued under this plan, pending the
successful closing of the Company's initial public offering, with an exercise
price equal to the offering per share price of the Company's common stock
offered in its initial public offering.
 
NOTE L--RELATED PARTIES
 
  Legal fees incurred to a law firm in which a director and shareholder of the
Company is a partner were approximately $289,000 and $35,000 in 1997 and 1996,
respectively.
 
                                     F-14
<PAGE>
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
  NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UN-
DER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CON-
TAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
 
                                  -----------
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Prospectus Summary........................................................    3
Risk Factors..............................................................    6
Use of Proceeds...........................................................   12
Dividend Policy...........................................................   12
Dilution..................................................................   13
Capitalization............................................................   14
Selected Financial Data...................................................   15
Management's Discussion and Analysis of Financial Condition and Results of
 Operations...............................................................   16
Business .................................................................   24
Management................................................................   37
Certain Transactions......................................................   41
Principal Shareholders....................................................   42
Selling Shareholders......................................................   43
Description of Capital Stock..............................................   43
Shares Eligible for Future Sale...........................................   46
Underwriting..............................................................   47
Legal Matters.............................................................   48
Experts...................................................................   49
Available Information.....................................................   49
Index to Consolidated Financial Statements................................  F-1
</TABLE>
 
                                  -----------
 
  UNTIL       , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
                                1,900,000 SHARES
 
 
                   [LOGO OS CPS SYSTEMS, INC. APPEARS HERE]
 
                                  COMMON STOCK
 
                               ----------------
 
                                   PROSPECTUS
 
                               ----------------
 
 
                                Cruttenden Roth
                                  Incorporated
 
                             Josephthal & Co. Inc.
 
 
                                        , 1998
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
 
                                    PART II
 
                    INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
  The Registrant's Restated Articles of Incorporation ("Restated Articles")
contains a provision that requires the Registrant to indemnify its directors,
officers, agents and employees to the extent permitted under Texas law. The
Registrant's Restated Articles provide that the Registrant shall indemnify its
directors, officers, employees and other agents to the fullest extent
permitted by law. The Registrant believes that indemnification under its
Restated Articles covers at least negligence and gross negligence on the part
of the indemnified parties. The Registrant's Restated Articles also require it
to maintain insurance, to the extent reasonably available and at its expense,
to protect any person entitled to indemnity thereunder against any liability
for which indemnification would be provided thereunder, whether or not the
Registrant has the power to indemnify such person against such liability under
Texas law.
 
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
  The following table sets forth the costs and expenses, other than the
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of the Common Stock being registered:
 
<TABLE>
<S>                                                                    <C>
Securities and Exchange Commission Registration Fee................... $  4,392
National Association of Securities Dealers, Inc. Filing Fee...........    1,949
Amex Filing Fee.......................................................   30,000
Non-accountable expense allowance * ..................................  313,500
Blue Sky Fees and Expenses * .........................................   65,000
Legal Fees and Expenses *.............................................  270,000
Accounting Fees and Expenses *........................................  110,000
Printing and Engraving Expenses *.....................................  110,000
Transfer Agent Fee *..................................................    3,000
Miscellaneous Expenses *..............................................    2,159
                                                                       --------
Total................................................................. $910,000
                                                                       ========
</TABLE>
- --------
* Estimated for the purpose of this filing.
 
  In the event the Underwriters' over-allotment option is exercised in full,
an additional $47,025 in non-accountable expenses will be payable by the
Registrant.
 
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
 
  None.
 
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(A) EXHIBITS
 
<TABLE>   
<CAPTION>
   NO.    DESCRIPTION
   ---    -----------
 <C>      <S>
   1.1*** Form of Underwriting Agreement
   1.2*** Form of Warrant Agreement
   3.1    Restated Articles of Incorporation and all amendments thereto
   3.2    Bylaws
   4.1    Form of Common Stock Certificate
          See Exhibits 3.1 and 3.2 for provisions in the Certificate of
          Incorporation and Amended and Restated Bylaws of the Company defining
   4.2    the rights of the holders of Common Stock
</TABLE>    
 
                                     II-1
<PAGE>
 
<TABLE>
<CAPTION>
  NO.   DESCRIPTION
  ---   -----------
 <C>    <S>
   5.1  Opinion of Schreeder, Wheeler & Flint, LLP regarding legality
  10.1  Warrant to Purchase Shares of Common Stock issued on December 29, 1994
        by the Company to Hanifen Imhoff Mezzanine Fund, L.P. granting the
        right to purchase from the Company 724,719 shares of the Company's
        Common Stock
  10.2  Warrant to Purchase Shares of Common Stock issued on December 29, 1994
        by the Company to John K. Percival granting the right to purchase from
        the Company 103,476 shares of the Company's Common Stock
  10.3  Warrant to Purchase Shares of Common Stock issued on December 29, 1994
        by the Company to Samuel E. Hudgins granting the right to purchase from
        the Company 69,114 shares of the Company's Common Stock
  10.4  Warrant to Purchase Shares of Common Stock issued on December 29, 1994
        by the Company to Robert J. Newcorn granting the right to purchase from
        the Company 30,457 shares of the Company's Common Stock
  10.5  401(k) Retirement Plan
  10.6  1997 Equity Participation Plan
  10.7  CPS Systems, Inc. Employee Stock Purchase Plan
  10.8  Standard Office Building Lease Agreement between Aetna Life Insurance
        Company and CPS Business Systems, Inc., dated February 13, 1990, as
        amended by Amendment No. 1 between Dallas Metro Real Estate Fund I,
        Aetna Life Insurance Company and CPS Systems, Inc. dated January 31,
        1995
  10.9  Term Loan Agreement dated as of December 29, 1994 between CPS
        Acquisition Corp. and Greyhound Financial Corporation**
  10.10 Term Loan Promissory Note dated December 29, 1994 in the amount of
        $1,500,000
  10.11 Guaranty and Subordination Agreement (Term Loan) dated December 29,
        1994 between CPS Systems, Inc. and Greyhound Financial Corporation**
  10.12 Form of Stock Pledge and Security Agreement (with Irrevocable Proxy)
        dated December 29, 1994 between each of the Company's Shareholders and
        Greyhound Financial Corporation**
  10.13 Assignment of contract dated December 29, 1994 between CPS Acquisition
        Corp. and Greyhound Financial Corporation**
  10.14 Stock Pledge and Security Agreement (with Irrevocable Proxy) dated
        December 29, 1994 between CPS Acquisition Corp. and Greyhound Financial
        Corporation**
  10.15 Assumption Agreement dated December 29, 1994 between CPS Systems, Inc.
        and Greyhound Financial Corporation**
  10.16 Revolver Loan and Security Agreement dated December 29, 1994 between
        CPS Systems, Inc. and Greyhound Financial Corporation**
  10.17 Revolver Loan Promissory Note dated December 29, 1994 in the amount of
        $1,000,000
  10.18 Assignment of Contracts, Intangibles, Licenses and Permits dated
        December 29, 1994 between CPS Systems, Inc. and Greyhound Financial
        Corporation**
  10.19 Guaranty and Subordination Agreement (Revolver Loan) dated December 29,
        1994 by CPS Acquisition Corp. in favor of Greyhound Financial
        Corporation**
  10.20 Subordination and Intercreditor Agreement dated December 29, 1994 among
        Greyhound Financial Corporation, Hanifen Imhoff Mezzanine Fund, L.P.,
        CPS Acquisition Corp. and CPS Systems, Inc.**
  10.21 CPS Acquisition Corp. and CPS Systems, Inc. Note Agreement dated as of
        December 29, 1994 for $2,100,000 12% Senior Subordinated Secured Note
        Due December 31, 2000
  10.22 Security Agreement (general) dated December 29, 1994 between CPS
        Systems, Inc. and Hanifen Imhoff Mezzanine Fund, L.P.
  10.23 Security Agreement (Stock) dated December 29, 1994 from Paul E. Kana to
        and for the benefit of Hanifen Imhoff Mezzanine Fund, L.P.
  10.24 Agreement for Ongoing Maintenance & Enhancement of Software Products
        entered between CPS Systems, Inc. and Majesco Software, Inc. dated
        January 1997
</TABLE>
 
                                      II-2
<PAGE>
 
<TABLE>   
<CAPTION>
  NO.      DESCRIPTION                                                          
  ---      -----------                                                          
 <C>       <S>                                                                  
 10.25     Value Added Reseller Agreement by and between CPS Systems, Inc.      
           and NCR Corporation dated June 13, 1996 
 10.26     Industry Remarketer Affiliate Document of Understanding by and 
           between IBM Corporation and CPS Systems, Inc. dated September 12, 
           1996       
 10.27     Form of Lock-Up Agreement                                            
 10.28     Employment Agreement for James K. Hoofard                            
 10.29     Employment Agreement for Paul E. Kana                                
 21.1      List of Subsidiaries                                                 
 23.1***   Consent of Independent Auditors                                      
 23.2      Consent of Schreeder, Wheeler and Flint, LLP (see Exhibit 5.1)       
 24.1      Power of Attorney (see page II-IV)                                   
 27.1      Financial Data Schedules   
</TABLE>    
- --------
  * Filed herewith.
 ** Greyhound Financial Corporation changed its name to FINOVA Capital
    Corporation.
*** Amends previously filed Exhibit.
 
(B) FINANCIAL STATEMENT SCHEDULES
 
  Report of Independent Auditors on Financial Statement Schedules
 
ITEM 28. UNDERTAKINGS
 
  The small business issuer will provide to the underwriters at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
 
  Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
 
  In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
 
  For determining any liability under the Securities Act, the information
omitted from the form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the small business issuer under Rule 424(b)(1), or 497(h) under the
Securities Act will be treated as part of this Registration Statement as of
the time the Commission declares it effective.
 
  For determining any liability under the Securities Act, each post-effective
amendment that contains a form of prospectus will be treated as a new
Registration Statement for the securities offered in the Registration
Statement, and the offering of the securities at that time will be treated as
the initial bona fide offering of those securities.
 
                                     II-3
<PAGE>
 
                                  SIGNATURES
   
  In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has authorized this
Amendment No. 5 to the Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Dallas, State of
Texas, on March 20, 1998.     
 
                                          CPS SYSTEMS, INC.
 
                                          By:        /s/ Paul E. Kana
                                             ----------------------------------
                                                       Paul E. Kana,
                                                Chairman and Chief Executive
                                                          Officer
   
  Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 5 to the Registration Statement has been signed by the following
persons in the capacities indicated below on March 20, 1998.     
 
             SIGNATURES                        TITLE
 
         /s/ Paul E. Kanna             Chairman of the
- -------------------------------------   Board and Chief
            PAUL E. KANNA               Executive Officer
                                        (Principal
                                        Executive Officer)
 
        /*/ Kevin L. Figge             Chief Financial
- -------------------------------------   Officer (Principal
           KEVIN L. FIGGE               Financial Officer)
 
     /s/ James K. Hoffard, Jr.         Director, President
- -------------------------------------   and Chief Operating
        JAMES K. HOFFARD, JR.           Officer
 
         /*/ G. Dean Booth             Director and
- -------------------------------------   Secretary
            G. DEAN BOOTH
 
       /*/ Sidney H. Cordier           Director
- -------------------------------------
          SIDNEY H. CORDIER
 
        /*/ Brian R. Wilson            Director
- -------------------------------------
           BRIAN R. WILSON
 
                                     II-4
<PAGE>
 
              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
                                  ON SCHEDULE
 
Board of Directors
CPS Systems, Inc.
 
  In connection with our audits of the consolidated financial statements of
CPS Systems, Inc. and Subsidiary and referred to in our report dated February
19, 1998, which is included in the Prospectus constituting Part I of this
Registration Statement, we have also audited Schedule II of CPS Systems, Inc.
and Subsidiary for the years ended December 31, 1997 and 1996. In our opinion,
this schedule presents fairly, in all material respects, the information
required to be set forth therein.
                                                
                                             /s/ Grant Thornton LLP     
 
Atlanta, Georgia
February 19, 1998
<PAGE>
 
                        CPS SYSTEMS, INC. AND SUBSIDIARY
 
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
            COLUMN A               COLUMN B   COLUMN C    COLUMN D    COLUMN E
            --------              ---------- ---------- ------------ ----------
                                             ADDITIONS
                                  BALANCE AT CHARGED TO              BALANCE AT
                                  BEGINNING  COSTS AND   DEDUCTIONS    END OF
           DESCRIPTION            OF PERIOD   EXPENSES  DESCRIBE (1)   PERIOD
           -----------            ---------- ---------- ------------ ----------
<S>                               <C>        <C>        <C>          <C>
Year ended December 31, 1997
 Allowance for doubtful accounts
  receivable.....................  $27,000    $37,000     $ 2,000     $62,000
Year ended December 31, 1996
 Allowance for doubtful accounts
  receivable.....................  $40,000    $   --      $13,000     $27,000
</TABLE>
- --------
(1) Bad debt write off.
<PAGE>
 
                                 EXHIBIT INDEX
 
<TABLE>   
<CAPTION>
   NO.   DESCRIPTION
   ---   -----------
 <C>     <S>
  1.1*** Form of Underwriting Agreement
  1.2*** Form of Warrant Agreement
  3.1    Restated Articles of Incorporation and all amendments thereto
  3.2    Bylaws
  4.1    Form of Common Stock Certificate
  4.2    See Exhibits 3.1 and 3.2 for provisions in the Certificate of
         Incorporation and Amended and Restated Bylaws of the Company defining
         the rights of the holders of Common Stock
  5.1    Opinion of Schreeder, Wheeler & Flint, LLP regarding legality
 10.1    Warrant to Purchase Shares of Common Stock issued on December 29, 1994
         by the Company to Hanifen Imhoff Mezzanine Fund, L.P. granting the
         right to purchase from the Company 724,719 shares of the Company's
         Common Stock
 10.2    Warrant to Purchase Shares of Common Stock issued on December 29, 1994
         by the Company to John K. Percival granting the right to purchase from
         the Company 103,476 shares of the Company's Common Stock
 10.3    Warrant to Purchase Shares of Common Stock issued on December 29, 1994
         by the Company to Samuel E. Hudgins granting the right to purchase
         from the Company 69,114 shares of the Company's Common Stock
 10.4    Warrant to Purchase Shares of Common Stock issued on December 29, 1994
         by the Company to Robert J. Newcorn granting the right to purchase
         from the Company 30,457 shares of the Company's Common Stock
 10.5    401(k) Retirement Plan
 10.6    1997 Equity Participation Plan
 10.7    CPS Systems, Inc. Employee Stock Purchase Plan
 10.8    Standard Office Building Lease Agreement between Aetna Life Insurance
         Company and CPS Business Systems, Inc., dated February 13, 1990, as
         amended by Amendment No. 1 between Dallas Metro Real Estate Fund I,
         Aetna Life Insurance Company and CPS Systems, Inc. dated January 31,
         1995
 10.9    Term Loan Agreement dated as of December 29, 1994 between CPS
         Acquisition Corp. and Greyhound Financial Corporation**
 10.10   Term Loan Promissory Note dated December 29, 1994 in the amount of
         $1,500,000
 10.11   Guaranty and Subordination Agreement (Term Loan) dated December 29,
         1994 between CPS Systems, Inc. and Greyhound Financial Corporation**
 10.12   Form of Stock Pledge and Security Agreement (with Irrevocable Proxy)
         dated December 29, 1994 between each of the Company's Shareholders and
         Greyhound Financial Corporation**
 10.13   Assignment of contract dated December 29, 1994 between CPS Acquisition
         Corp. and Greyhound Financial Corporation**
 10.14   Stock Pledge and Security Agreement (with Irrevocable Proxy) dated
         December 29, 1994 between CPS Acquisition Corp. and Greyhound
         Financial Corporation**
 10.15   Assumption Agreement dated December 29, 1994 between CPS Systems, Inc.
         and Greyhound Financial Corporation**
 10.16   Revolver Loan and Security Agreement dated December 29, 1994 between
         CPS Systems, Inc. and Greyhound Financial Corporation**
 10.17   Revolver Loan Promissory Note dated December 29, 1994 in the amount of
         $1,000,000
 10.18   Assignment of Contracts, Intangibles, Licenses and Permits dated
         December 29, 1994 between CPS Systems, Inc. and Greyhound Financial
         Corporation**
 10.19   Guaranty and Subordination Agreement (Revolver Loan) dated December
         29, 1994 by CPS Acquisition Corp. in favor of Greyhound Financial
         Corporation**
</TABLE>    
<PAGE>
 
<TABLE>   
<CAPTION>
  NO.     DESCRIPTION
  ---     -----------
 <C>      <S>
 10.20    Subordination and Intercreditor Agreement dated December 29, 1994 among
          Greyhound Financial Corporation, Hanifen Imhoff Mezzanine Fund, L.P.,
          CPS Acquisition Corp. and CPS Systems, Inc.**
 10.21    CPS Acquisition Corp. and CPS Systems, Inc. Note Agreement dated as of
          December 29, 1994 for $2,100,000 12% Senior Subordinated Secured Note
          Due December 31, 2000
 10.22    Security Agreement (general) dated December 29, 1994 between CPS
          Systems, Inc. and Hanifen Imhoff Mezzanine Fund, L.P.
 10.23    Security Agreement (Stock) dated December 29, 1994 from Paul E. Kana to
          and for the benefit of Hanifen Imhoff Mezzanine Fund, L.P.
 10.24    Agreement for Ongoing Maintenance & Enhancement of Software Products
          entered between CPS Systems, Inc. and Majesco Software, Inc. dated
          January 1997
 10.25    Value Added Reseller Agreement by and between CPS Systems, Inc. and NCR
          Corporation dated June 13, 1996
 10.26    Industry Remarketer Affiliate Document of Understanding by and between
          IBM Corporation and CPS Systems, Inc. dated September 12, 1996
 10.27    Form of Lock-Up Agreement
 10.28    Employment Agreement for James K. Hoofard
 10.29    Employment Agreement for Paul E. Kana
 21.1     List of Subsidiaries
 23.1***  Consent of Independent Auditors
 23.2     Consent of Schreeder, Wheeler and Flint, LLP (see Exhibit 5.1)
 24.1     Power of Attorney (see pages II-IV)
 27.1     Financial Data Schedules
</TABLE>    
- --------
  * Filed herewith.
 ** Greyhound Financial Corporation changed its name to FINOVA Capital
    Corporation.
*** Amends previously filed Exhibit.

<PAGE>
 
                                                                     EXHIBIT 1.1

                               1,900,000 SHARES/1/

                               CPS SYSTEMS, INC.

                                 COMMON STOCK

                            UNDERWRITING AGREEMENT
                            ----------------------

                                                            ____________, 1998


CRUTTENDEN ROTH INCORPORATED
JOSEPHTHAL & CO. INC.
As Representatives of the several Underwriters
18301 Von Karman, Suite 100
Irvine, California 92612

Ladies and Gentlemen:

     CPS Systems, Inc., a Texas corporation (the "Company"), addresses you as
the Representatives of each of the persons, firms and corporations listed in
Schedule A hereto (herein collectively called the "Underwriters") and hereby
confirms its agreement with the several Underwriters as follows:

     1.   Description of Shares.  The Company proposes to issue and sell
1,900,000 shares of its authorized and unissued Common Stock, $.01 par value per
share  (the "Firm Shares"), to the several Underwriters.  In addition, certain
shareholders of the Company listed on Schedule B hereto (the "Selling
Shareholders") propose to grant to the Underwriters an option to purchase up to
285,000 additional shares of the Company's Common Stock (the "Option Shares"),
as provided in Section 5 hereof.  The Company also proposes to sell to you,
individually and not in your capacity as Representatives, warrants (the
"Representatives' Warrants") to purchase up to 190,000 shares of Common Stock of
the Company (the "Representatives' Warrant Stock"), which sale will be
consummated in accordance with the terms and conditions of the Representatives'
Warrant Agreement (the "Representatives' Warrant Agreement"), the form of which
is filed as an exhibit to the Registration Statement described below.  As used
in this Agreement, the term "Shares" shall include the Firm Shares and the
Option Shares.  All shares of Common Stock of the Company to be outstanding
after giving effect to the sales contemplated hereby, including the sale of the
Shares, are hereinafter referred to as "Common Stock."  Unless the context
otherwise requires, references herein to the "Company" include CPS Systems, Inc.
together with its subsidiaries described in the Prospectus (hereinafter
defined).

- -------------------
/1/ Plus an option to purchase up to 285,000 additional shares from certain 
    selling shareholders to cover over-allotments, if any.

                                       1
<PAGE>
 
     2.   Representations, Warranties and Agreements of the Company.

          The Company represents and warrants to and agrees with each
Underwriter and each Selling Shareholder that:

               (a)  A registration statement on Form SB-2 (File No. 333-39173)
     with respect to the Shares, the Representatives' Warrants and the
     Representatives' Warrant Stock, including a prospectus subject to
     completion, has been prepared by the Company in conformity with the
     requirements of the Securities Act of 1933, as amended (the "Act"), and the
     applicable rules and regulations (the "Rules and Regulations") of the
     Securities and Exchange Commission (the "Commission") under the Act and has
     been filed with the Commission; such amendments to such registration
     statement and such amended prospectuses subject to completion as may have
     been required prior to the date hereof have been similarly prepared and
     filed with the Commission; and the Company will file such additional
     amendments to such registration statement and such amended prospectuses
     subject to completion as may hereafter be required. Copies of such
     registration statement and amendments and of each related prospectus
     subject to completion (the "Preliminary Prospectuses") have been delivered
     to you.

               If the registration statement relating to the Shares has been
     declared effective under the Act by the Commission, the Company will
     prepare and promptly file with the Commission the information previously
     omitted from the registration statement pursuant to Rule 430A(a) of the
     Rules and Regulations pursuant to subparagraph (1) or (4) of Rule 424(b) of
     the Rules and Regulations or as part of a post-effective amendment to the
     registration statement (including a final form of prospectus). If the
     registration statement relating to the Shares has not been declared
     effective under the Act by the Commission, the Company will prepare and
     promptly file an amendment to the registration statement, including a final
     form of prospectus. The term "Registration Statement" as used in this
     Agreement shall mean such registration statement, including financial
     statements, schedules and exhibits, in the form in which it became or
     becomes, as the case may be, effective (including, if the Company omitted
     information from the registration statement pursuant to Rule 430A(a) of the
     Rules and Regulations, the information deemed to be a part of the
     registration statement at the time it became effective pursuant to Rule
     430A(b) of the Rules and Regulations) and, in the event of any amendment
     thereto after the effective date of such registration statement, shall also
     mean (from and after the effectiveness of such amendment) such registration
     statement as so amended. The term "Prospectus" as used in this Agreement
     shall mean the prospectus relating to the Shares as included in such
     Registration Statement at the time it becomes effective (including, if the
     Company omitted information from the Registration Statement pursuant to
     Rule 430A(a) of the Rules and Regulations, the information deemed to be a
     part of the Registration Statement at the time it became effective pursuant
     to Rule 430A(b) of the Rules and Regulations), except that if any revised
     prospectus shall be provided to the Underwriters by the Company for use in
     connection with the offering of the Shares that differs from the prospectus
     on file with the Commission at the time the Registration Statement became
     or becomes, as the case may be, effective (whether or not such revised
     prospectus is required to be filed with the Commission pursuant to Rule
     424(b)(3) of the Rules and Regulations), the term "Prospectus" shall

                                       2
<PAGE>
 
     refer to such revised prospectus from and after the time it is first
     provided to the Underwriters for such use.

               (b)  The Commission has not issued any order preventing or
     suspending the use of any Preliminary Prospectus or instituted proceedings
     for that purpose, and each such Preliminary Prospectus, at the time of
     filing thereof, has conformed in all material respects to the requirements
     of the Act and the Rules and Regulations and, as of its date, has not
     included any untrue statement of a material fact or omitted to state a
     material fact necessary to make the statements therein, in the light of the
     circumstances under which they were made, not misleading; and at the time
     the Registration Statement became or becomes, as the case may be, effective
     and at all times subsequent thereto up to and on the Closing Date
     (hereinafter defined) and on any later date on which Option Shares are to
     be purchased, (i) the Registration Statement and the Prospectus, and any
     amendments or supplements thereto, contained and will contain all material
     information required to be included therein by the Act and the Rules and
     Regulations and will in all material respects conform to the requirements
     of the Act and the Rules and Regulations, (ii) the Registration Statement,
     and any amendments or supplements thereto, did not and will not include any
     untrue statement of a material fact or omit to state a material fact
     required to be stated therein or necessary to make the statements therein
     not misleading, and (iii) the Prospectus, and any amendments or supplements
     thereto, did not and will not include any untrue statement of a material
     fact or omit to state a material fact necessary to make the statements
     therein, in the light of the circumstances under which they were made, not
     misleading; provided, however, that none of the representations and
     warranties contained in this subparagraph (b) shall apply to information
     contained in or omitted from the Registration Statement or Prospectus, or
     any amendment or supplement thereto, in reliance upon, and in conformity
     with, written information relating to any Underwriter furnished to the
     Company by such Underwriter specifically for use in the preparation
     thereof.

               (c)  The Company does not own or control, directly or indirectly,
     any corporation, association or other entity other than the subsidiaries
     listed in Exhibit 21 of the Registration Statement. The Company and each of
     its subsidiaries has been duly incorporated and is validly existing as a
     corporation in good standing under the laws of the jurisdiction of its
     incorporation with full power and authority (corporate and other) to own,
     lease and operate its properties and conduct its business as described in
     the Prospectus; the Company and each of its subsidiaries is duly qualified
     to do business as a foreign corporation and is in good standing in each
     jurisdiction in which the ownership or leasing of its properties or the
     conduct of its business requires such qualification, except where the
     failure to be so qualified or be in good standing would not have a material
     adverse effect on the condition (financial or otherwise), earnings,
     operations or business of the Company taken as a whole; no proceeding has
     been instituted in any such jurisdiction, revoking, limiting or curtailing,
     or seeking to revoke, limit or curtail, such power and authority or
     qualification; the Company is in possession of and operating in compliance
     with all authorizations, licenses, certificates, consents, orders and
     permits from state, federal and other regulatory authorities that are
     material to the conduct of its business, all of which are valid and in full
     force and effect; the Company is not in material violation of its charter
     or bylaws or in default in the performance or observance of any material
     obligation, agreement, covenant or condition

                                       3
<PAGE>
 
     contained in any material bond, debenture, note or other evidence of
     indebtedness, or in any material lease, contract, indenture, mortgage, deed
     of trust, loan agreement, joint venture or other agreement or instrument to
     which the Company is a party or by which it or its properties or assets may
     be bound; and the Company is not in violation of any law, order, rule,
     regulation, writ, injunction, judgment or decree of any court, government
     or governmental agency or body, domestic or foreign, having jurisdiction
     over the Company or over its properties or assets.

               (d)  The Company has full legal right, power and authority to
     enter into this Agreement and the Representatives' Warrant Agreement and to
     perform the transactions contemplated hereby and thereby. Each of this
     Agreement and the Representatives' Warrant Agreement has been duly
     authorized, executed and delivered by the Company and is a valid and
     binding agreement on the part of the Company, enforceable in accordance
     with its terms, except as rights to indemnification under this Agreement or
     the Representatives' Warrant Agreement may be limited by applicable law and
     except as the enforcement may be limited by applicable bankruptcy,
     insolvency, reorganization, moratorium or other similar laws relating to or
     affecting creditors' rights generally or by general equitable principles;
     the performance of this Agreement and the Representatives' Warrant
     Agreement and the consummation of the transactions herein or therein
     contemplated will not violate any provisions of the charter, bylaws or
     other organizational document of the Company and will not result in a
     breach or violation of any of the terms and provisions of, or constitute,
     either by itself or upon notice or the passage of time or both, a default
     under any bond, debenture, note or other evidence of indebtedness, or under
     any lease, contract, indenture, mortgage, deed of trust, loan agreement,
     joint venture or other agreement or instrument to which the Company is a
     party or by which its properties or assets may be bound, or any law, order,
     rule, regulation, writ, injunction, judgment or decree of any court,
     government or governmental agency or body, domestic or foreign, having
     jurisdiction over the Company or over its properties or assets. No consent,
     approval, authorization or order of or qualification with any court,
     government or governmental agency or body, domestic or foreign, having
     jurisdiction over the Company or over its properties or assets is required
     for the execution and delivery of this Agreement or the Representatives'
     Warrant Agreement and the consummation by the Company of the transactions
     herein and therein contemplated, except such as may be required under the
     Act or under state or other securities or Blue Sky laws, all of which
     requirements have been satisfied in all material respects.

               (e)  There is not any pending or, to the best of the Company's
     knowledge, threatened action, suit, claim or proceeding against the
     Company, or any of its officers or any of its properties, assets or rights
     before any court, government or governmental agency or body, domestic or
     foreign, having jurisdiction over the Company or over its officers or
     properties or otherwise that (i) is reasonably likely to result in any
     material adverse change in the condition (financial or otherwise),
     earnings, operations, business or business prospects of the Company or
     might materially and adversely affect its properties, assets or rights,
     (ii) might prevent consummation of the transactions contemplated hereby or
     (iii) is required to be disclosed in the Registration Statement or
     Prospectus and is not so disclosed; and there are no agreements, contracts,
     leases or documents of the Company of a character required to be described
     or referred to in the Registration Statement or Prospectus or to be filed
     as an exhibit to the Registration Statement

                                       4
<PAGE>
 
     by the Act or the Rules and Regulations or by the Securities Exchange Act
     of 1934 (the "Exchange Act") or the rules and regulations of the Commission
     thereunder that have not been accurately described in all material respects
     in the Registration Statement or Prospectus or filed as exhibits to the
     Registration Statement.

               (f)  All outstanding shares of capital stock of the Company have
     been duly authorized and validly issued and are fully paid and
     nonassessable, have been issued in compliance with all federal and state
     securities laws, were not issued in violation of or subject to any
     preemptive rights or other rights to subscribe for or purchase securities,
     and the authorized and outstanding capital stock of the Company is as set
     forth in the Prospectus under the caption "Capitalization" and conforms to
     the statements relating thereto contained in the Registration Statement and
     the Prospectus (and such statements correctly state the substance of the
     instruments defining the capitalization of the Company); the Firm Shares
     and the Option Shares have been duly authorized for issuance and sale to
     the Underwriters pursuant to this Agreement and, when issued and delivered
     by the Company against payment therefor in accordance with the terms of
     this Agreement, will be duly and validly issued and fully paid and
     nonassessable, and will be sold free and clear of any pledge, lien,
     security interest, encumbrance, claim or equitable interest; and no
     preemptive right, co-sale right, registration right, right of first refusal
     or other similar right of shareholders exists with respect to any of the
     Firm Shares or Option Shares or the issuance and sale thereof other than
     those that will automatically expire upon the consummation of the
     transactions contemplated on the Closing Date. No further approval or
     authorization of any shareholder, the Board of Directors of the Company or
     others is required for the issuance and sale or transfer of the Shares
     except as may be required under the Act, the Rules and Regulations or under
     state or other securities or Blue Sky laws. Except as disclosed in or
     contemplated by the Prospectus and the financial statements of the Company,
     and the related notes thereto, included in the Prospectus, the Company has
     no outstanding options to purchase, or any preemptive rights or other
     rights to subscribe for or to purchase, any securities or obligations
     convertible into, or any contracts or commitments to issue or sell, shares
     of its capital stock or any such options, rights, convertible securities or
     obligations. The description of the Company's stock option, stock bonus and
     other stock plans or arrangements, and the options or other rights granted
     and exercised thereunder, set forth in the Prospectus accurately and fairly
     presents the information required to be shown with respect to such plans,
     arrangements, options and rights under the Act and the Rules and
     Regulations.

               (g)  Grant Thornton LLP, which has expressed its opinion with
     respect to the financial statements of the Company filed with the
     Commission as a part of the Registration Statement, which are included in
     the Prospectus, are independent accountants within the meaning of the Act
     and the Rules and Regulations. The audited financial statements of the
     Company, together with the related schedules and notes, and the unaudited
     financial information, included in the Registration Statement and
     Prospectus, fairly present the financial position and the results of
     operations of the Company at the respective dates and for the respective
     periods to which they apply. Such financial statements of the Company,
     together with the related schedules and notes, filed with the Commission as
     part of the Registration Statement, have been prepared in accordance with
     generally accepted accounting principles consistently applied throughout
     the
                                       5
<PAGE>
 
     periods as certified by Grant Thornton LLP. The selected and summary
     financial and statistical data included in the Registration Statement
     present fairly the information shown therein and have been compiled on a
     basis consistent with the audited financial statements presented therein.
     No other financial statements or schedules are required to be included in
     the Registration Statement.

               (h)  Subsequent to the respective dates as of which information
     is given in the Registration Statement and Prospectus, except as
     specifically disclosed or contemplated therein, there has not been (i) any
     material adverse change in the condition (financial or otherwise),
     earnings, operations or business of the Company, (ii) incurred by the
     Company any transaction that is material to the Company, (iii) any
     obligation, direct or contingent incurred by the Company that is material
     to the Company, (iv) any change in the capital stock or outstanding
     indebtedness of the Company that is material to the Company, (v) any
     dividend or distribution of any kind declared, paid or made on the capital
     stock of the Company, or (vi) any loss or damage (whether or not insured)
     to the property of the Company which has a material adverse effect on the
     condition (financial or otherwise), earnings, operations or business of the
     Company.

               (i)  Except as set forth in the Registration Statement and
     Prospectus, (i) the Company has good and marketable title to all properties
     and assets described in the Registration Statement and Prospectus as owned
     by it, free and clear of any pledge, lien, security interest, encumbrance,
     claim or equitable interest, other than such as would not have a material
     adverse effect on the condition (financial or otherwise), earnings,
     operations or business of the Company, (ii) the agreements to which the
     Company is a party described in the Registration Statement are valid
     agreements, enforceable by the Company, except as the enforcement thereof
     may be limited by applicable bankruptcy, insolvency, reorganization,
     moratorium or other similar laws relating to or affecting creditors' rights
     generally or by general equitable principles and, to the best of the
     Company's knowledge, the other contracting party or parties thereto are not
     in material breach or material default under any of such agreements, and
     (iii) the Company has valid and enforceable leases for all properties
     described in the Registration Statement and Prospectus as leased by it,
     except as the enforcement thereof may be limited by applicable bankruptcy,
     insolvency, reorganization, moratorium or other similar laws relating to or
     affecting creditors' rights generally or by general equitable principles.
     Except as set forth in the Registration Statement and Prospectus, the
     Company owns or leases all such properties as are necessary to its
     operations as now conducted and as described in the Registration Statement
     and the Prospectus.

               (j)  The Company has timely filed all federal, state, local and
     foreign tax returns required to be filed by it and has paid all taxes shown
     thereon as due, and there is no tax deficiency that has been or, to the
     best of the Company's knowledge, is reasonably likely to be asserted
     against the Company, which might have a material adverse effect on the
     condition (financial or otherwise), earnings, operations or business of the
     Company, and all tax liabilities are adequately provided for on the books
     of the Company.

               (k)  The Company maintains insurance with insurers of recognized
     financial responsibility of the types and in the amounts generally deemed
     adequate for its business including, but not limited to, insurance covering
     real and personal property owned or

                                       6
<PAGE>
 
     leased by the Company against theft, damage, destruction, acts of vandalism
     and all other risks customarily insured against, all of which insurance is
     in full force and effect; the Company has not been refused any insurance
     coverage sought or applied for; and the Company does not have any reason to
     believe that it will not be able to renew its existing insurance coverage
     as and when such coverage expires or to obtain similar coverage from
     similar insurers as may be necessary to continue its business at a cost
     that would not materially and adversely affect the condition (financial or
     otherwise), earnings, operations or business of the Company.

               (l)  To the best of Company's knowledge, no labor disturbance by
     the employees of the Company exists or is imminent. No collective
     bargaining agreement exists with any of the Company's employees and, to the
     best of the Company's knowledge, no such agreement is imminent.

               (m)  Except as disclosed in or specifically contemplated by the
     Prospectus, the Company owns or possesses adequate rights to use all patent
     rights, trade secrets, mask works, know-how, trademarks, copyrights,
     licenses, service marks and trade names that are necessary to conduct its
     businesses as described in the Registration Statement and Prospectus; the
     Company has not received any notice of, and has no knowledge of, any
     infringement of or conflict with asserted rights of the Company by others
     with respect to any patent rights, trade secrets, mask works, know-how,
     trademarks, copyrights, licenses, service marks or trade names; and the
     Company has not received any notice of, and has no knowledge of, any
     infringement of or conflict with asserted rights of others with respect to
     any patent rights, trade secrets, mask works, know-how, trademarks,
     copyrights, licenses, service marks or trade names which, singly or in the
     aggregate, in the event of an unfavorable decision, ruling or finding,
     would have a material adverse effect on the condition (financial or
     otherwise), earnings, operations, business or business prospects of the
     Company.

               (n)  The Common Stock is registered pursuant to Section 12(g) of
     the Exchange Act and is approved for quotation on the American Stock
     Exchange, and the Company has taken no action designed to, or likely to
     have the effect of, terminating the registration of the Common Stock under
     the Exchange Act or delisting the Common Stock from the American Stock
     Exchange, nor has the Company received any notification that the Commission
     or the National Association of Securities Dealers, Inc. ("NASD") is
     contemplating terminating such registration or listing.

               (o)  The Company has been advised concerning the Investment
     Company Act of 1940, as amended (the "1940 Act"), and the rules and
     regulations thereunder, and has in the past conducted, and intends in the
     future to conduct, its affairs in such a manner as to ensure that it will
     not become an "investment company" or a company "controlled" by an
     "investment company" within the meaning of the 1940 Act and such rules and
     regulations.

               (p)  The Company has not distributed and will not distribute
     prior to the later of (i) the Closing Date, or any date on which Option
     Shares are to be purchased, as the case may be, and (ii) completion of the
     distribution of the Shares, any offering material in

                                       7
<PAGE>
 
     connection with the offering and sale of the Shares other than any
     Preliminary Prospectuses, the Prospectus, the Registration Statement and
     other materials, if any, permitted by the Act

               (q)  The Company has not at any time during the last five (5)
     years (i) made any unlawful contribution to any candidate for foreign
     office or failed to disclose fully any contribution in violation of law, or
     (ii) made any payment to any federal or state governmental officer or
     official, or other person charged with similar public or quasi-public
     duties, other than payments required or permitted by the laws of the United
     States or any jurisdiction thereof.

               (r)  The Company has not taken and will not take, directly or
     indirectly, any action designed to or that might reasonably be expected to
     cause or result in stabilization in violation of law or manipulation of the
     price of the Common Stock to facilitate the sale or resale of the Shares.

               (s)  Each officer, director and director-nominee of the Company
     and each beneficial owner of the Company's Common Stock has agreed in
     writing that such person will not without the prior written consent of
     Cruttenden Roth Incorporated, for a period of 365 days from the date that
     the Registration Statement is declared effective by the Commission (the
     "Lock-up Period"), (which consent may be withheld in its sole discretion),
     directly or indirectly, sell, offer, contract or grant any option to sell
     (including without limitation, any short sale), pledge, transfer, establish
     an open "put equivalent position" within the meaning of Rule 16a-1(h) under
     the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
     otherwise dispose of any shares of Common Stock, options or warrants to
     acquire shares of Common Stock, or securities exchangeable or exercisable
     for or convertible into shares of Common Stock currently or hereafter owned
     either of record or beneficially (as defined in Rule 13d-3 under the
     Exchange Act) by such person (collectively, "Securities") or publicly
     announce the undersigned's intention to do any of the foregoing.
     Furthermore, such person will also agree and consent to the entry of stop
     transfer instructions with the Company's transfer agent against the
     transfer of the Securities held by such person except in compliance with
     this restriction. The Company has provided to counsel for the Underwriters
     a complete and accurate list of all shareholders of the Company and the
     number and type of securities held by each shareholder. The Company has
     provided to counsel for the Underwriters true, accurate and complete copies
     of all of the agreements pursuant to which its officers, directors,
     director-nominees and shareholders have agreed to such restrictions (the
     "Lock-up Agreements"). The Company hereby represents and warrants that it
     will not release any of its officers, directors or director-nominees or
     other shareholders from any Lock-up Agreements currently existing or
     hereafter effected without the prior written consent of Cruttenden Roth
     Incorporated.

               (t)  Except as set forth in the Registration Statement and
     Prospectus, (i) the Company is in material compliance with all rules, laws
     and regulations relating to the use, treatment, storage and disposal of
     toxic substances and protection of health or the environment
     ("Environmental Laws") that are applicable to its business, (ii) the
     Company has received no notice from any governmental authority or third
     party of an asserted claim under

                                       8
<PAGE>
 
     Environmental Laws, which claim is required to be disclosed in the
     Registration Statement and the Prospectus, (iii) to its best knowledge, the
     Company is not likely to be required to make future material capital
     expenditures to comply with Environmental Laws and (iv) no property which
     is owned, leased or occupied by the Company has been designated as a
     Superfund site pursuant to the Comprehensive Response, Compensation, and
     Liability Act of 1980, as amended (42 U.S.C. (S) 9601, et seq.), or
     otherwise designated as a contaminated site under applicable state or local
     law.

               (u)  The Company maintains a system of internal accounting
     controls sufficient to provide reasonable assurances that (i) transactions
     are executed in accordance with management's general or specific
     authorizations, (ii) transactions are recorded as necessary to permit
     preparation of financial statements in conformity with generally accepted
     accounting principles and to maintain accountability for assets, including
     without limitation cash receipts, (iii) access to assets is permitted only
     in accordance with management's general or specific authorization, and (iv)
     the recorded accountability for assets is compared with existing assets at
     reasonable intervals and appropriate action is taken with respect to any
     differences.

               (v)  There are no outstanding loans, advances (except normal
     advances for business expenses in the ordinary course of business) or
     guarantees of indebtedness by the Company to or for the benefit of any of
     the officers, directors or director-nominees of the Company or any of the
     members of the families of any of them, except as disclosed in the
     Registration Statement and the Prospectus.

               (w)  The Representatives' Warrants have been duly and validly
     authorized by the Company and upon delivery to you in accordance with the
     Representatives' Warrant Agreement will be duly issued and legal, valid and
     binding obligations of the Company.

               (x)  The Representatives' Warrant Stock has been duly authorized
     and reserved for issuance upon the exercise of the Representatives'
     Warrants and when issued upon payment of the exercise price therefor will
     be validly issued, fully paid and nonassessable shares of Common Stock of
     the Company.

     3.   Representations, Warranties and Covenants of the Selling Shareholders.

          Each of the Selling Shareholders severally, and not jointly,
represents and warrants to, and agrees with, the several Underwriters that:

               (a)  Such Selling Shareholder has, and on the Closing Date and on
     any later date on which the Option Shares are to be purchased will have,
     good and marketable title to the Shares proposed to be sold by such Selling
     Shareholder hereunder on such closing date and full right, power and
     authority to enter into this Agreement and to sell, assign, transfer and
     deliver such Option Shares hereunder, free and clear of all voting trust
     arrangements, liens, encumbrances, equities, security interests,
     restrictions and claims whatsoever, other than pursuant to this Agreement
     and the Shareholders' Agreement (as defined below); and upon delivery of
     and payment for such Shares hereunder, the Underwriters will acquire good
     and marketable title thereto, free and

                                       9
<PAGE>
 
     clear of all liens, encumbrances, equities, claims, restrictions, security
     interests, voting trusts or other defects of title whatsoever.

               (b)  Such Selling Shareholder has executed and delivered a Power
     of Attorney and caused to be executed and delivered on his behalf a Custody
     Agreement (hereinafter collectively referred to as the "Shareholders'
     Agreement") and in connection herewith such Selling Shareholder further
     represents, warrants and agrees that such Selling Shareholder has deposited
     in custody, under the Shareholders' Agreement, with the agent named therein
     (the "Agent") as custodian, certificates in negotiable form for the Shares
     or warrants to purchase the Shares to be sold hereunder by such Selling
     Shareholder, for the purpose of further delivery pursuant to this
     Agreement. Such Selling Shareholder agrees that the Shares or warrants to
     purchase the Shares to be sold by such Selling Shareholder on deposit with
     the Agent are subject to the interests of the Company and the Underwriters,
     that the arrangements made for such custody are to that extent irrevocable,
     and that the obligations of such Selling Shareholder hereunder shall not be
     terminated, except as provided in this Agreement or in the Shareholders'
     Agreement, by any act of such Selling Shareholder, by operation of law, by
     the death or incapacity of such Selling Shareholder or by the occurrence of
     any other event. If the Selling Shareholder should die or become
     incapacitated, or if any other event should occur, before the delivery of
     the Shares hereunder, the documents evidencing Shares or warrants to
     purchase the Shares then on deposit with the Agent shall be delivered by
     the Agent in accordance with the terms and conditions of this Agreement and
     the Shareholders' Agreement as if such death, incapacity or other event had
     not occurred, regardless of whether or not the Agent shall have received
     notice thereof. This Agreement and the Shareholders' Agreement have been
     duly executed and delivered by or on behalf of such Selling Shareholder and
     the form of such Shareholders' Agreement has been delivered to you.

               (c)  The performance of this Agreement and the Shareholders'
     Agreement and the consummation of the transactions contemplated hereby and
     thereby will not result in a breach or violation by such Selling
     Shareholder of any of the terms or provisions of, or constitute a default
     by such Selling Shareholder under, any indenture, mortgage, deed of trust,
     trust (constructive or other), loan agreement, lease, franchise, license or
     other agreement or instrument to which such Selling Shareholder is a party
     or by which such Selling Shareholder or any of its properties is bound, any
     statute, or any judgment, decree, order, rule or regulation of any court or
     governmental agency or body applicable to such Selling Shareholder or any
     of its properties, other than breaches or violations which do not adversely
     affect such Selling Shareholder's ability to perform under this Agreement
     or the Shareholders' Agreement.

               (d)  Such Selling Shareholder has not taken and will not take,
     directly or indirectly, any action designed to or which has constituted or
     which might reasonably be expected to cause or result in stabilization or
     manipulation of the price of any security of the Company to facilitate the
     sale or resale of the Shares, except usual and customary market maker and
     brokerage transactions up to two business days prior to the offering
     contemplated hereby in each case in accordance with applicable Commission
     regulations.

                                       10
<PAGE>
 
               (e)  To the extent that any statements or omissions made in the
     Registration Statement, any Preliminary Prospectus, the Prospectus or any
     amendment or supplement thereto, are made in reliance upon and in
     conformity with written information furnished to the Company by such
     Selling Shareholder specifically for use therein, such Preliminary
     Prospectus and the Registration Statement did, and the Prospectus and any
     further amendments or supplements to the Registration Statement and the
     Prospectus will, when they become effective or are filed with the
     Commission, as the case may be, not contain any untrue statement of
     material fact or omit any material fact required to be stated therein or
     necessary to make the statements therein not misleading in light of the
     circumstances under which they were made.

               (f)  To the best of its knowledge, such Selling Shareholder is
     not aware that any of the representations and warranties set forth in
     Section 2 above is untrue or inaccurate in any material respect.

     4.   Representation, Warranties and Agreements of the Underwriters. The
information set forth in the last paragraph on the front cover page (insofar as
such information relates to the Underwriters), in the first paragraph on page 2,
concerning stabilization and over-allotment by the Underwriters, and in third
and eighth paragraphs under the caption "Underwriting" in any Preliminary
Prospectus and in the final form of Prospectus filed pursuant to Rule 424(b)
constitutes the only information furnished by the Underwriters to the Company
for inclusion in any Preliminary Prospectus, the Prospectus or the Registration
Statement, and you, on behalf of the respective Underwriters, represent and
warrant to the Company that the statements made therein do not include any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.

     5.   Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $_____ per share, the
respective number of Firm Shares as hereinafter set forth. The obligation of
each Underwriter to the Company shall be to purchase from the Company that
number of Firm Shares which is set forth opposite the name of such Underwriter
in Schedule A hereto (subject to adjustment as provided in Section 11).

          Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 5 shall be made against
payment of the purchase price therefor by the several Underwriters by certified
or official bank check or checks drawn in next-day funds, payable to the order
of the Company (and the Company agrees not to deposit any such check in the bank
on which it is drawn until the day following the date of its delivery to the
Company) at the offices of the Representatives or such other place as may be
agreed upon among the Representatives and the Company, at 7:00 A.M., California
time, on the third (3rd) full business day following the first day that Shares
are traded (or at such time and date to which payment and delivery shall have
been postponed pursuant to Section 11 hereof), such time and date of payment and
delivery being herein called the "Closing Date." The certificates for the Firm
Shares to be so

                                       11
<PAGE>
 
delivered will be made available to you at such office or such other location as
you may reasonably request for checking at least one (1) full business day prior
to the Closing Date and will be in such names and denominations as you may
request, such request to be made at least two (2) full business days prior to
the Closing Date. If the Representatives so elect, delivery of the Firm Shares
may be made by credit through full fast transfer to the accounts at The
Depository Trust Company designated by the Representatives.

          It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.

          On the basis of the representations, warranties and agreements herein
contained, but subject to the terms and conditions herein set forth, the Selling
Shareholders hereby grant to the several Underwriters, for the purpose of
covering over-allotments in connection with the distribution and sale of the
Firm Shares only, a nontransferable option to purchase, in the respective
amounts set forth on the Schedule B, up to an aggregate of 285,000 Option Shares
at the purchase price per share for the Firm Shares set forth in this Section 5.
Such option may be exercised by the Representatives on behalf of the several
Underwriters on one or more occasions in whole or in part during the forty-five
(45) day period after the date on which the Firm Shares are initially offered to
the public, by giving written notice to the Company and the Agent. The number of
Option Shares to be purchased by each Underwriter upon the exercise of such
option shall be the same proportion of the total number of Option Shares to be
purchased as the number of Firm Shares purchased by such Underwriter (set forth
in Schedule A hereto) bears to the total number of Firm Shares purchased by the
several Underwriters (set forth in Schedule A hereto), adjusted by the
Representatives in such manner as to avoid fractional shares.

          Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 5 shall be made against payment of the purchase price
therefor by the several Underwriters by certified or official bank check or
checks drawn in next-day funds, payable to the order of the Agent (and the Agent
agrees not to deposit any such check in the bank on which it is drawn until the
day following the date of its delivery). Such delivery and payment shall take
place at the offices of the Representatives, or at such other place as may be
agreed upon by the Representatives and the Agent (i) on the Closing Date, if
written notice of the exercise of such option is received by the Agent at least
three (3) full business days prior to the Closing Date, or (ii) on a date which
shall not be later than the fifth (5th) full business day following the date the
Agent receives written notice of the exercise of such option, if such notice is
received by the Agent less than three (3) full business days prior to the
Closing Date.

          To the extent that the option is not exercised for the entire 285,000
Option Shares, the number of Option Shares to be sold by each Selling
Shareholder shall be that number

                                       12
<PAGE>
 
which bears the same relationship to the aggregate number of Option Shares being
purchased as the maximum number of Option Shares being sold by each Selling
Shareholder bears to 285,000.

          The certificates for the Option Shares to be so delivered will be made
available to you at such office or such other location as you may reasonably
request for inspection at least two (2) full business days prior to the date of
payment and delivery and will be in such names and denominations as you may
request, such request to be made at least three (3) full business days prior to
such date of payment and delivery.  If the Representatives so elect, delivery of
the Option Shares may be made by credit through full fast transfer to the
accounts at The Depository Trust Company designated by the Representatives.

          It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased by such Underwriter
or Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder.

          Upon exercise of any option provided for in this Section 5, the
obligations of the several Underwriters to purchase such Option Shares will be
subject (as of the date hereof and as of the date of payment and delivery for
such Option Shares) to the accuracy of and compliance with the representations,
warranties and agreements of the Company herein, to the accuracy of the
statements of the Company and officers of the Company made pursuant to the
provisions hereof, to the performance by the Company of its obligations
hereunder, and to the condition that all proceedings taken at or prior to the
payment date in connection with the sale and transfer of such Option Shares
shall be reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, and you shall have been furnished with all such
documents, certificates and opinions as you may reasonably request in order to
evidence the accuracy and completeness of any of the representations, warranties
or statements, the performance of any of the covenants or agreements of the
Company or the compliance with any of the conditions herein contained in each
case in all material respects.

          After the Registration Statement becomes effective, the several
Underwriters intend to make an initial public offering (as such term is
described in Section 13 hereof) of the Firm Shares at an initial public offering
price of $_____ per share. After the initial public offering, the several
Underwriters may, in their discretion, vary the public offering price.

     6.   Further Agreements of the Company. The Company agrees with the several
Underwriters that:

               (a)  The Company will use best efforts to cause the Registration
     Statement and any amendment thereof, if not effective at the time and date
     that this Agreement is executed and delivered by the parties hereto, to
     become effective as promptly as possible; it will notify you, promptly
     after it shall receive notice thereof, of the time when the Registration

                                       13
<PAGE>
 
     Statement or any subsequent amendment to the Registration Statement has
     become effective or any supplement to the Prospectus has been filed; if the
     Company omitted information from the Registration Statement at the time it
     was originally declared effective in reliance upon Rule 430A(a) of the
     Rules and Regulations, the Company will provide evidence satisfactory to
     you that the Prospectus contains such information and has been filed,
     within the time period prescribed, with the Commission pursuant to
     subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations or as
     part of a post-effective amendment to such Registration Statement as
     originally declared effective which is declared effective by the
     Commission; if for any reason the filing of the final form of Prospectus is
     required under Rule 424(b)(3) of the Rules and Regulations, it will provide
     evidence satisfactory to you that the Prospectus contains such information
     and has been filed with the Commission within the time period prescribed;
     it will notify you promptly of any request by the Commission for the
     amending or supplementing of the Registration Statement or the Prospectus
     or for additional information; promptly upon your request, it will prepare
     and file with the Commission any amendments or supplements to the
     Registration Statement or Prospectus which, in the opinion of counsel for
     the several Underwriters ("Underwriters' Counsel"), may be necessary or
     advisable in connection with the distribution of the Shares by the
     Underwriters; it will promptly prepare and file with the Commission, and
     promptly notify you of the filing of, any amendments or supplements to the
     Registration Statement or Prospectus which may be necessary to correct any
     statements or omissions, if, at any time when a prospectus relating to the
     Shares is required to be delivered under the Act, any event shall have
     occurred as a result of which the Prospectus or any other prospectus
     relating to the Shares as then in effect would include any untrue statement
     of a material fact or omit to state a material fact necessary to make the
     statements therein, in the light of the circumstances under which they were
     made, not misleading; in case any Underwriter is required to deliver a
     prospectus nine (9) months or more after the effective date of the
     Registration Statement in connection with the sale of the Shares, it will
     prepare promptly upon request, but at the expense of such Underwriter, such
     amendment or amendments to the Registration Statement and such prospectus
     or prospectuses as may be necessary to permit compliance with the
     requirements of Section 10(a)(3) of the Act; and it will file no amendment
     or supplement to the Registration Statement or Prospectus which shall not
     previously have been submitted to you a reasonable time prior to the
     proposed filing thereof or to which you shall reasonably object in writing,
     subject, however, to compliance with the Act and the Rules and Regulations
     and the rules and regulations of the Commission thereunder and the
     provisions of this Agreement.

               (b)  The Company will advise you promptly after it shall received
     notice or obtained knowledge of the issuance of any stop order by the
     Commission suspending the effectiveness of the Registration Statement or of
     the initiation or threat of any proceeding for that purpose; and it will
     promptly use its best efforts to prevent the issuance of any stop order or
     to obtain its withdrawal at the earliest possible moment if such stop order
     should be issued.

              (c)  The Company will use reasonable efforts to qualify the Shares
     for offering and sale under the securities laws of such jurisdictions as
     you may designate and to continue such qualifications in effect for so long
     as may be required for purposes of the

                                       14
<PAGE>
 
     distribution of the Shares, except that the Company shall not be required
     in connection therewith or as a condition thereof to qualify as a foreign
     corporation or to execute a general consent to service of process in any
     jurisdiction in which it is not otherwise required to be so qualified or to
     so execute a general consent to service of process. In each jurisdiction in
     which the Shares shall have been qualified as above provided, the Company
     will make and file such statements and reports in each year as are or may
     be reasonably required by the laws of such jurisdiction.

               (d)  The Company will furnish to you, as soon as available,
     copies of the Registration Statement (three of which will be signed and
     which will include all exhibits), each Preliminary Prospectus, the
     Prospectus and any amendments or supplements to such documents, including
     any prospectus prepared to permit compliance with Section 10(a)(3) of the
     Act (three of which will include all exhibits) all in such quantities as
     you may from time to time reasonably request.

               (e)  The Company will make generally available to its
     shareholders as soon as practicable, but in any event not later than the
     forty-fifth (45th) day following the end of the fiscal quarter first
     occurring after the first anniversary of the effective date of the
     Registration Statement, an earnings statement (which will be in reasonable
     detail but need not be audited) complying with the provisions of Section
     11(a) of the Act and covering a twelve (12) month period beginning after
     the effective date of the Registration Statement.

               (f)  During a period of five (5) years after the date hereof and
     for so long as the Company is subject to Section 13 or 15 of the Exchange
     Act, the Company will furnish to its shareholders as soon as practicable
     after the end of each respective period, annual reports (including
     financial statements audited by independent certified public accountants)
     and unaudited quarterly reports of operations for each of the first three
     quarters of the fiscal year, and will furnish to you and the other several
     Underwriters hereunder, upon request (i) concurrently with furnishing such
     reports to its shareholders, statements of operations of the Company for
     each of the first three (3) quarters in the form furnished to the Company's
     shareholders, (ii) concurrently with furnishing to its shareholders, a
     balance sheet of the Company as of the end of such fiscal year, together
     with statements of operations, of shareholders' equity, and of cash flows
     of the Company for such fiscal year, accompanied by a copy of the
     certificate or report thereon of independent certified public accountants,
     (iii) as soon as they are available, copies of all reports (financial or
     other) mailed to shareholders, (iv) as soon as they are available, copies
     of all reports and financial statements furnished to or filed with the
     Commission, any securities exchange or the NASD, (v) every material press
     release and every material news item or article in respect of the Company
     or its affairs which was generally released to shareholders or prepared by
     the Company, and (vi) any additional information of a public nature
     concerning the Company or its business which you may reasonably request.
     During such five (5) year period, if the Company shall have active
     subsidiaries, the foregoing financial statements shall be on a consolidated
     basis to the extent that the accounts of the Company and its subsidiaries
     are consolidated, and shall be accompanied by similar financial statements
     for any significant subsidiary that is not so consolidated.

                                       15
<PAGE>
 
               (g)  The Company will apply the net proceeds from the sale of the
     Shares being sold by it in the manner set forth under the caption "Use of
     Proceeds" in the Prospectus.

               (h)  The Company will maintain a transfer agent and a registrar
     (which may be the same entity) for its Common Stock.

               (i)  The Company will file Form SR in conformity with the
     requirements of the Act and the Rules and Regulations.

               (j)                   [reserved]

               (k)  If at any time during the ninety (90) day period after the
     Registration Statement becomes effective, any rumor, publication or event
     relating to or affecting the Company shall occur as a result of which in
     your opinion the market price of the Common Stock has been or is likely to
     be materially affected (regardless of whether such rumor, publication or
     event necessitates a supplement to or amendment of the Prospectus), the
     Company will, if reasonably requested by you, forthwith prepare, and, if
     permitted by law, disseminate a press release or other public statement,
     reasonably satisfactory to you, responding to or commenting on such rumor,
     publication or event.

               (l)  During the Lock-up Period, the Company will not, without the
     prior written consent of the Representatives, effect the Disposition of,
     directly or indirectly, any Securities other than (i) the sale of the Firm
     Shares and the Option Shares hereunder and, (ii) the Company's issuance of
     options or Common Stock under the Company's presently authorized stock
     option plans or restricted stock plans (collectively, the "Option Plans").

     7.   Expenses.

               (a) The Company agrees with each Underwriter that:

                    (i)  The Company will pay and bear all costs and expenses in
          connection with the preparation, printing and filing of the
          Registration Statement (including financial statements, schedules and
          exhibits), Preliminary Prospectuses and the Prospectus and any
          amendments or supplements thereto; the printing of this Agreement, the
          Agreement Among Underwriters, the Selected Dealer Agreement, the
          Preliminary Blue Sky Survey and any supplemental Blue Sky Survey, the
          Underwriters' Questionnaire and Power of Attorney, and any instruments
          related to any of the foregoing; the issuance and delivery of the
          Shares hereunder to the several Underwriters, including transfer
          taxes, if any, the cost of all certificates representing the Shares
          and transfer agents' and registrars' fees; the fees and disbursements
          of counsel and accountants for the Company; all fees and other charges
          of the Company's independent certified public accountants; the cost of
          furnishing to the several Underwriters copies of the Registration
          Statement (including appropriate exhibits), Preliminary Prospectus and
          the Prospectus, and any amendments or supplements to any of the
          foregoing; NASD filing fees and the cost of 

                                       16
<PAGE>
 
          qualifying the Shares under the laws of such jurisdictions as you may
          designate (including filing fees and fees and disbursements of counsel
          for the Underwriters related to such qualification); the Company's
          road show costs and expenses, the cost of preparing bound volumes of
          the documents relating to the public offering of Common Stock
          contemplated hereby; and all other expenses directly incurred by the
          Company in connection with the performance of its obligations
          hereunder.

                    (ii)                 [reserved].

                    (iii)  In addition to its other obligations under Section
          7(a)(i) hereof, if the Shares are sold pursuant to this Agreement, the
          Company will pay to the Representatives a nonaccountable expense
          allowance equal to 3.0% of the aggregate sales price of the Shares to
          the public. This nonaccountable expense allowance with respect to the
          Firm Shares shall be paid to you on the Closing Date and the
          nonaccountable expense allowance with respect to the Option Shares
          shall be paid to you on the closing of the sale to you of such Option
          Shares. The $20,000 previously paid to the Representatives by the
          Company shall be credited against this nonaccountable expense
          allowance.

                    (iv)  In addition to its other obligations under Section 9
          hereof, the Company agrees that, as an interim measure during the
          pendency of any claim, action, investigation, inquiry or other
          proceeding described in Section 9(a) hereof, it will reimburse the
          Underwriters and Selling Shareholders, as the case may be, on a
          monthly basis for all reasonable legal or other expenses incurred in
          connection with investigating or defending any such claim, action,
          investigation, inquiry or other proceeding, notwithstanding the
          absence of a judicial determination as to the propriety and
          enforceability of the Company's obligation to reimburse the
          Underwriters for such expenses and the possibility that such payments
          might later be held to have been improper by a court of competent
          jurisdiction. To the extent that any such interim reimbursement
          payment is so held to have been improper, the Underwriters shall
          promptly return such payment to the Company together with interest,
          compounded daily, determined on the basis of the prime rate (or other
          commercial lending rate for borrowers of the highest credit standing)
          listed from time to time in The Wall Street Journal which represents
          the base rate on corporate loans posted by a substantial majority of
          the nation's five (5) largest banks (the "Prime Rate"). Any such
          interim reimbursement payments which are not made to the Underwriters
          within thirty (30) days of a request for reimbursement shall bear
          interest at the Prime Rate from the date of such request.

               (b)  In addition to their other obligations under Section 9(b)
     hereof, the Underwriters severally and not jointly agree that, as an
     interim measure during the pendency of any claim, action, investigation,
     inquiry or other proceeding described in Section 9(b) hereof, they will
     reimburse the Company and Selling Shareholders, as the case may be, on a
     monthly basis for all reasonable legal or other expenses incurred in
     connection with investigating or defending any such claim, action,
     investigation, inquiry or other proceeding, notwithstanding the absence of
     a judicial determination as to the propriety and enforceability of the
     Underwriters' obligation to reimburse the Company for such expenses and the
     possibility that such payments might later be held to have been improper by
     a court of competent jurisdiction. To the extent that any such interim
     reimbursement payment is so held to have been improper, the Company shall

                                       17
<PAGE>
 
     promptly return such payment to the Underwriters together with interest,
     compounded daily, determined on the basis of the Prime Rate. Any such
     interim reimbursement payments which are not made to the Company within
     thirty (30) days of a request for reimbursement shall bear interest at the
     Prime Rate from the date of such request.

               (c)  It is agreed that any controversy arising out of the
     operation of the interim reimbursement arrangements set forth in Sections
     7(a)(iv) and 7(b) hereof, including the amounts of any requested
     reimbursement payments, the method of determining such amounts and the
     basis on which such amounts shall be apportioned among the reimbursing
     parties, shall be settled by arbitration conducted pursuant to the Code of
     Arbitration Procedure of the NASD in Orange County, California (or as close
     geographically to Orange County, California as is reasonably practical).
     Any such arbitration must be commenced by service of a written demand for
     arbitration or a written notice of intention to arbitrate, therein electing
     the arbitration tribunal. In the event the party demanding arbitration does
     not make such designation of an arbitration tribunal in such demand or
     notice, then the party responding to said demand or notice is authorized to
     do so. Any such arbitration will be limited to the operation of the interim
     reimbursement provisions contained in Sections 7(a)(iv) and 7(b) hereof and
     will not resolve the ultimate propriety or enforceability of the obligation
     to indemnify for expenses which is created by the provisions of Sections
     9(a) and 9(b) hereof or the obligation to contribute to expenses which is
     created by the provisions of Section 9(d) hereof.

     8.   Conditions of Underwriters' Obligations.  The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company and the performance by the
Company of its obligations hereunder and to the following additional conditions:

               (a)  The Registration Statement shall have become effective not
     later than 2:00 P.M., California time, on the date of this Agreement, or
     such later date as shall be consented to in writing by you; and no stop
     order suspending the effectiveness thereof shall have been issued and no
     proceedings for that purpose shall have been initiated or, to the knowledge
     of the Company or any Underwriter, threatened by the Commission, and any
     request of the Commission for additional information (to be included in the
     Registration Statement or the Prospectus or otherwise) shall have been
     complied with to the satisfaction of Underwriters' Counsel.

               (b)  All corporate proceedings and other legal matters in
     connection with this Agreement, the form of Registration Statement and the
     Prospectus, and the registration, authorization, issuance, sale and
     delivery of the Shares, shall have been reasonably satisfactory to
     Underwriters' Counsel, and such counsel shall have been furnished with such
     documents and information as they may reasonably have requested to enable
     them to pass upon the matters referred to in this Section.

                                       18
<PAGE>
 
               (c)  You shall be satisfied that since the respective dates as of
     which information is given in the Registration Statement and Prospectus,
     (i) there shall not have been any change in the capital stock of the
     Company other than pursuant to the exercise of outstanding options and
     warrants disclosed in the Prospectus or any material change in the
     indebtedness of the Company, (ii) except as set forth or contemplated by
     the Registration Statement or the Prospectus, no material verbal or written
     agreement or other transaction shall have been entered into by the Company,
     which is not in the ordinary course of business, (iii) no loss or damage
     (whether or not insured) to the property of the Company shall have been
     sustained which materially and adversely affects the condition (financial
     or otherwise), business, results of operations or prospects of the Company,
     (iv) no legal or governmental action, suit or proceeding affecting the
     Company which is material to the Company or which affects or may affect the
     transactions contemplated by this Agreement shall have been instituted or
     threatened and (v) there shall not have been any material change in the
     condition (financial or otherwise), business, management, results of
     operations or prospects of the Company which makes it impractical or
     inadvisable in the judgment of the Representatives to proceed with public
     offering or purchase the Common Shares as contemplated hereby.

               (d)  You shall have received on the Closing Date and on any later
     date on which Option Shares are purchased, as the case may be, an opinion
     of Schreeder, Wheeler, Flint, counsel for the Company, dated the Closing
     Date or such later date on which Option Shares are purchased, addressed to
     the Underwriters (and stating that it may be relied upon by Underwriters'
     Counsel in rendering its opinion pursuant to Section 8 (d) of this
     Agreement) and with reproduced copies or signed counterparts thereof for
     each of the Underwriters, to the effect that:

                    (i)  The Company and each of its subsidiaries has been duly
          incorporated and is validly existing and in good standing under the
          laws of the jurisdiction of its incorporation;

                    (ii)  The Company and each of its subsidiaries has full
          corporate power and authority to own, lease and operate its properties
          and to conduct its business as described in the Registration
          Statement;

                    (iii)  The Company and each of its subsidiaries is duly
          qualified to do business as a foreign corporation and is in good
          standing in each jurisdiction, if any, in which the ownership or
          leasing of its properties or the conduct of its business requires such
          qualification, except where the failure to be so qualified or be in
          good standing would not have a material adverse effect on the
          condition (financial or otherwise), earnings, operations or business
          of the Company taken as a whole. To such counsel's knowledge, Company
          has no subsidiaries or other than as listed in Exhibit 21 to the
          Registration Statement;

                    (iv)  The authorized, issued and outstanding capital stock
          of the Company is as set forth in the Prospectus under the caption
          "Capitalization";

                                       19
<PAGE>
 
          all outstanding shares of capital stock of the Company have been duly
          and validly issued and are fully paid and nonassessable, and, to such
          counsel's knowledge, have not been issued in violation of or subject
          to any preemptive right, co-sale right, registration right, right of
          first refusal or other similar right; without limiting the foregoing,
          to such counsel's knowledge, there are no preemptive or other rights
          to subscribe for or purchase any of the Shares;

                    (v)  The certificates evidencing the Shares to be delivered
          hereunder are in due and proper form under Texas law and when duly
          countersigned by the Company's transfer agent and registrar and
          delivered to you against payment of the agreed compensation in
          accordance with this Agreement, the Firm Shares and the Option Shares,
          represented thereby will be duly and validly issued and fully paid and
          nonassessable, and will not have been issued in violation of or
          subject to any preemptive right, co-sale right, registration right,
          right of first refusal or other similar right of shareholders and will
          conform in all respects to the description thereof in the Registration
          Statement;

                    (vi)  the Company has the corporate power and authority to
          enter into this Agreement and to issue, sell and deliver to the
          Underwriters the Shares to be issued and sold by it hereunder;

                    (vii)  The Company has the corporate power and authority to
          enter into the Representatives' Warrant Agreement and to issue, sell
          and deliver to the Representatives the Representatives' Warrants to be
          issued and sold by it thereunder;

                    (viii)  Each of this Agreement, the Representatives' Warrant
          Agreement and the Representatives' Warrants has been duly authorized
          by all necessary corporate action on the part of the Company and has
          been duly executed and delivered by the Company and, assuming due
          authorization, execution and delivery by you, is a valid and binding
          agreement of the Company, enforceable in accordance with its terms,
          except insofar as indemnification provisions may be limited by
          applicable law and to which counsel need not express any opinion and
          except as enforceability may be limited by bankruptcy, insolvency,
          reorganization, moratorium or similar laws relating to or affecting
          creditors' rights generally or by general equitable principles;

                    (ix)  The Registration Statement has become effective under
          the Act and, to such counsel's knowledge, no stop order suspending the
          effectiveness of the Registration Statement has been issued and no
          proceedings for that purpose have been instituted or are pending or
          threatened under the Act;

                    (x)  The Registration Statement and the Prospectus, and each
          amendment or supplement thereto (other than the financial statements
          and

                                       20
<PAGE>
 
          schedules included in the Registration Statement as to which such
          counsel need express no opinion), as of the effective date of the
          Registration Statement, complied as to form in all material respects
          with the requirements of the Act and the applicable Rules and
          Regulations;

                    (xi)  The statements in the Registration Statement and
          Prospectus under the captions "Management," "Certain Transactions,"
          "Description of Capital Stock" and "Shares Eligible For Future Sale,"
          and in the Registration Statement in Items 24 and 26 insofar as they
          constitute matters of law or legal conclusions or are descriptions of
          contracts, agreements or other documents are accurate and complete in
          all material respects and fairly present the information contained
          herein;

                    (xii)  The description in the Registration Statement and the
          Prospectus of the charter and bylaws of the Company and of statutes
          are accurate and fairly present the information required to be
          presented by the Act and the applicable Rules and Regulations and the
          Company is not in violation of its charter or bylaws, or other
          organizational documents;

                    (xiii)  To such counsel's knowledge, there are no
          agreements, contracts, leases or documents to which the Company is a
          party of a character required to be described or referred to in the
          Registration Statement or Prospectus or to be filed as an exhibit to
          the Registration Statement that are not described or referred to
          therein or filed as required;

                    (xiv)  The execution and delivery of this Agreement and the
          Representatives' Warrant Agreement and the performance by the Company
          of its obligations hereunder and thereunder will not (a) result in any
          violation of the Company's charter, bylaws or other organizational
          documents, or (b) result in a material breach or violation of any of
          the terms and provisions of, or constitute a material default under,
          any material bond, debenture, note or other evidence of indebtedness,
          or under any material lease, contract, indenture, mortgage, deed of
          trust, loan agreement, joint venture or other agreement or instrument
          to which the Company is a party or by which its properties are bound,
          or any applicable statute, rule or regulation known to such counsel
          or, to such counsel's knowledge, any order, writ or decree of any
          court, government or governmental agency or body having jurisdiction
          over the Company or over any of its properties or operations;

                    (xv)  To counsel's best knowledge, no consent, approval,
          authorization or order of or qualification with any court, government
          or governmental agency or body having jurisdiction over the Company or
          over any of its properties or operations is necessary in connection
          with the consummation by the Company of the transactions contemplated
          in this Agreement and the Representatives' Warrant Agreement, except
          such as have been obtained under the 

                                       21
<PAGE>
 
          Act or such as may be required under state or other securities or Blue
          Sky laws in connection with the purchase and the distribution of the
          Shares by the Underwriters;

                    (xvi)  To such counsel's knowledge, there are no legal or
          governmental proceedings pending or threatened against the Company of
          a character required to be disclosed in the Registration Statement or
          the Prospectus by the Act or the Rules and Regulations or by the
          Exchange Act or the applicable rules and regulations of the Commission
          thereunder, other than those described therein;

                    (xvii)  The Representatives' Warrants have been duly and
          validly authorized by the Company and upon delivery to you in
          accordance with the Representatives' Warrant Agreement will be duly
          issued and legal, valid and binding obligations of the Company;

                    (xviii)  The Representatives' Warrant Stock to be issued by
          the Company pursuant to the terms of the Representatives' Warrant has
          been duly authorized and, upon issuance and delivery against payment
          therefor in accordance with the terms of the Representatives' Warrant
          Agreement, will be duly and validly issued and fully paid and
          nonassessable, and to such counsel's knowledge, will not have been
          issued in violation of or subject to any preemptive right, co-sale
          right, registration right, right of first refusal or other similar
          right of shareholders;

                    (xix)  To such counsel's knowledge, no holders of Common
          Stock or other securities of the Company have registration rights with
          respect to securities of the Company that have not been waived; and

                    (xx)  The offer and sale of all securities of the Company
          made within the last three years as set forth in Item 15 of the
          Registration Statement were exempt from the registration requirements
          of the Securities Act, pursuant to the provisions set forth in such
          Item, and from the registration or qualification requirements of all
          relevant state securities laws.

                    (xxi)  The Company has satisfied the conditions for use of
          Form SB-2 as set forth in the General Instructions thereto.

                    (xxii)  No transfer taxes are required to be paid in
          connection with the sale and delivery of the Shares to the
          Underwriters.

          In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel that

                                       22
<PAGE>
 
leads them to believe that, at the time the Registration Statement became
effective and at all times subsequent thereto up to and on the Closing Date and
on any later date on which Option Shares are purchased, the Registration
Statement and any amendment or supplement thereto, when such documents became
effective or were filed with the Commission (other than the financial statements
and supporting schedules included in the Registration Statement as to which such
counsel need express no comment) contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or at the Closing Date
or any later date on which the Option Shares are purchased, as the case may be,
the Registration Statement, the Prospectus and any amendment or supplement
thereto contained any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.

          Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the United States upon opinions of local counsel,
and as to questions of fact upon representations or certificates of officers of
the Company, and of government officials, in which case its opinion is to state
that they are so relying and that they have no knowledge of any material
misstatement or inaccuracy in any such opinion, representation or certificate.
Copies of any opinion, representation or certificate so relied upon shall be
delivered to you, as Representatives of the Underwriters, and to Underwriters'
Counsel.

               (e)  You shall have received on the date on which any Option
     Shares are purchased an opinion or opinions of counsel for the Selling
     Shareholders, addressed to the Underwriters and stating that it may be
     relied upon by Underwriters' Counsel in rendering its opinion pursuant to
     Section 8(f) and dated the date on which any Option Shares are purchased,
     to the effect that:

                    (1)  To the best of such counsel's knowledge, this Agreement
          and the Shareholders' Agreement have been duly authorized, executed
          and delivered by or on behalf of each of the Selling Shareholders; the
          Agent has been duly and validly authorized to act as the custodian of
          the Shares and, where applicable, warrants to purchase the Shares, to
          be sold by each such Selling Shareholder; and the performance of this
          Agreement and the Shareholders' Agreement and the consummation of the
          transactions herein contemplated by the Selling Shareholders will not
          result in a breach of, or constitute a default under, any indenture,
          mortgage, deed of trust, trust (constructive or other), loan
          agreement, lease, franchise, license or other agreement or instrument
          to which any of the Selling Shareholders is a party or by which any of
          the Selling Shareholders or any of their properties may be bound, or
          violate any statute, judgment, decree, order, rule or regulation known
          to such counsel of any court or governmental body having jurisdiction
          over any of the Selling Shareholders or any of their properties; and
          to the best of such counsel's knowledge, no approval, authorization,
          order or consent of any court, regulatory body, administrative agency
          or other governmental body is required for the execution and delivery
          of this

                                       23
<PAGE>
 
          Agreement or the Shareholders' Agreement or the consummation by the
          Selling Shareholders of the transactions contemplated by this
          Agreement, except such as have been obtained and are in full force and
          effect under the Act and such as may be required under the rules of
          the NASD and applicable Blue Sky laws;

                    (2)  To the best of such counsel's knowledge, the Selling
          Shareholders have full right, power and authority to enter into this
          Agreement and the Shareholders' Agreement and to sell, transfer and
          deliver the Shares to be sold on such closing date by such Selling
          Shareholders and good and marketable title to such Shares so sold,
          free and clear of all liens, encumbrances, equities, claims,
          restrictions, security interests, voting trusts, or other defects of
          title whatsoever, has been transferred to the Underwriters (whom
          counsel may assume to be bona fide purchasers) who have purchased such
          Shares hereunder;

                    (3)  To the best of such counsel's knowledge, this Agreement
          and the Shareholders' Agreement are valid and binding agreements of
          each of the Selling Shareholders in accordance with their terms except
          as enforceability may be limited by general equitable principles,
          bankruptcy, insolvency, reorganization, moratorium or other laws
          affecting creditors' rights generally and except with respect to those
          provisions relating to indemnities or contributions for liabilities
          under the Act, as to which no opinion need be expressed; and

                    (4)  No transfer taxes are required to be paid in connection
          with the sale and delivery of the Shares to the Underwriters
          hereunder.

               (f)  You shall have received on the Closing Date and on any later
     date on which Option Shares are purchased, as the case may be, an opinion
     of Summit Law Group PLLC in form and substance satisfactory to you, with
     respect to the sufficiency of all such corporate proceedings and other
     legal matters relating to this Agreement and the transactions contemplated
     hereby as you may reasonably require, and the Company shall have furnished
     to such counsel such documents as they may have requested for the purpose
     of enabling them to pass upon such matters.

               (g)  You shall have received on the Closing Date and on any later
     date on which Option Shares are to be purchased, as the case may be, a
     letter from Grant Thornton LLP, addressed to the Company and the
     Underwriters, dated the Closing Date or such later date on which Option
     Shares are purchased, as the case may be, confirming that they are
     independent certified public accountants with respect to the Company within
     the meaning of the Act and the applicable published Rules and Regulations
     and based upon the procedures described in such letter delivered to you
     concurrently with the execution of this Agreement (herein called the
     "Original

                                       24
<PAGE>
 
     Letter"), but carried out to a date not more than three (3) business days
     prior to the Closing Date or such later date on which Option Shares are to
     be purchased, as the case may be, (i) confirming, to the extent true, that
     the statements and conclusions set forth in the Original Letter are
     accurate as of the Closing Date or such later date on which Option Shares
     are to be purchased, as the case may be, and (ii) setting forth any
     revisions and additions to the statements and conclusions set forth in the
     Original Letter which are necessary to reflect any changes in the facts
     described in the Original Letter since the date of such letter, or to
     reflect the availability of more recent financial statements, data or
     information. The letter shall not disclose any change in the condition
     (financial or otherwise), earnings, operations or business of the Company
     from that set forth in the Registration Statement or Prospectus, which, in
     your sole judgment, is material and adverse and that makes it, in your sole
     judgment, impracticable or inadvisable to proceed with the public offering
     of the Shares as contemplated by the Prospectus. The Original Letter from
     Grant Thornton LLP shall be addressed to or for the use of the Underwriters
     in form and substance satisfactory to the Underwriters and shall (i)
     represent, to the extent true, that they are independent certified public
     accountants with respect to the Company within the meaning of the Act and
     the applicable published Rules and Regulations, (ii) set forth its opinion
     with respect to its examination of the balance sheets of the Company as of
     September 30, 1997, and December 31, 1996 and related statements of
     operations, shareholders' equity, and cash flows for the years ended
     December 31, 1995 and 1996, and (iii) address other matters agreed upon by
     Grant Thornton LLP and you. In addition, you shall have received from Grant
     Thornton LLP a letter addressed to the Company and made available to you
     for the use of the Underwriters stating that its review of the Company's
     system of internal accounting controls, to the extent they deemed necessary
     in establishing the scope of its examination of the Company's financial
     statements as of September 30, 1997, did not disclose any weaknesses in
     internal controls that they considered to be material weaknesses.

               (h)  You shall have received on the Closing Date and on any later
     date on which Option Shares are purchased, as the case may be, a
     certificate of the Company, dated the Closing Date or such later date on
     which Option Shares are to be purchased, as the case may be, signed by the
     President and Chief Financial Officer of the Company, to the effect that,
     and you shall be satisfied that:

                    (i)  The representations and warranties of the Company in
          this Agreement are true and correct, as if made on and as of the
          Closing Date or any later date on which Option Shares are to be
          purchased, as the case may be, and the Company has complied, in all
          material aspects, with all the agreements and satisfied all the
          conditions on its part to be performed or satisfied, in all material
          respects, at or prior to the Closing Date or any later date on which
          Option Shares are to be purchased, as the case may be;

                    (ii)  No stop order suspending the effectiveness of the
          Registration Statement has been issued and no proceedings for that
          purpose have been instituted or, to their knowledge, are pending or
          threatened under the Act;

                                       25
<PAGE>
 
                    (iii)  When the Registration Statement became effective and
          at all times subsequent thereto up to the delivery of such
          certificate, the Registration Statement and the Prospectus, and any
          amendments or supplements thereto, contained all material information
          required to be included therein by the Act and the Rules and
          Regulations or the Exchange Act and the applicable rules and
          regulations of the Commission thereunder, as the case may be, and in
          all material respects conformed to the requirements of the Act and the
          Rules and Regulations or the Exchange Act and the applicable rules and
          regulations of the Commission thereunder, as the case may be, the
          Registration Statement, and any amendment or supplement thereto, did
          not and does not include any untrue statement of a material fact or
          omit to state a material fact required to be stated therein or
          necessary to make the statements therein not misleading, the
          Prospectus, and any amendment or supplement thereto, did not and does
          not include any untrue statement of a material fact or omit to state a
          material fact necessary to make the statements therein, in the light
          of the circumstances under which they were made, not misleading, and,
          since the effective date of the Registration Statement, there has
          occurred no event required to be set forth in an amended or
          supplemented Prospectus that has not been so set forth; and

                    (iv)  Subsequent to the respective dates as of which
          information is given in the Registration Statement and Prospectus,
          there has not been (a) any material adverse change in the condition
          (financial or otherwise), earnings, operations or business of the
          Company, (b) any transaction that is material to the Company, (c) any
          obligation, direct or contingent incurred by the Company, that is
          material to the Company, (d) any change in the capital stock or
          outstanding indebtedness of the Company, (e) any dividend or
          distribution of any kind declared, paid or made on the capital stock
          of the Company, or (f) any loss or damage (whether or not insured) to
          the property of the Company which has a material adverse effect on the
          condition (financial or otherwise), earnings, operations or business
          of the Company.

               (i)  The Company shall have obtained and delivered to you an
     agreement from each officer, director and director-nominee of the Company,
     and each beneficial owner of five percent or more of the Common Stock
     immediately after the offering contemplated hereby, in writing prior to the
     date hereof that such person will not, during the Lock-up Period, effect
     the Disposition of any Securities now owned or hereafter acquired directly
     by such person or with respect to which such person has or hereafter
     acquires the power of disposition, otherwise than (i) as a bona fide gift
     or gifts, provided the donee or donees thereof agree in writing to be bound
     by this restriction, (ii) as a distribution to limited partners or
     shareholders of such person, provided that the distributees thereof agree
     in writing to be bound by the terms of this restriction, or (iii) with the
     prior written consent of Cruttenden Roth Incorporated. The foregoing
     restriction is expressly agreed to preclude the holder of the Securities
     from engaging in any hedging or other transaction which is designed to or
     reasonably expected to lead to or result in a Disposition of Securities
     during the Lock-up Period, even if such Securities would be disposed of by
     someone other than the such

                                       26
<PAGE>
 
     holder. Such prohibited hedging or other transactions would include,
     without limitation, any short sale (whether or not against the box) or any
     purchase, sale or grant of any right (including, without limitation, any
     put or call option) with respect to any Securities or with respect to any
     security (other than a broad-based market basket or index) that includes,
     relates to or derives any significant part of its value from Securities.
     Furthermore, such person will have also agreed and consented to the entry
     of stop transfer instructions with the Company's transfer agent against the
     transfer of the Securities held by such person except in compliance with
     this restriction.

               (j)  The Company shall have furnished to you such further
     certificates and documents as you shall reasonably request, including
     certificates of officers of the Company as to the accuracy of the
     representations and warranties of the Company, as to the performance by the
     Company of its obligations hereunder and as to the other conditions
     concurrent and precedent to the obligations of the Underwriters hereunder.

               (k)  The Representatives' Warrant Agreement shall have been
     entered into by the Company and you, and the Representatives' Warrants
     shall have been issued and sold to you pursuant thereto.

          All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.

     9.   Indemnification and Contribution.

               (a)  The Company and each of the Selling Shareholders severally
     agrees to indemnify and hold harmless each Underwriter against any losses,
     claims, damages or liabilities, joint or several, to which such Underwriter
     may become subject (including, without limitation, in its capacity as an
     Underwriter or as a "qualified independent underwriter" within the meaning
     of Schedule E of the Bylaws of the NASD), under the Act, the Exchange Act
     or otherwise, specifically including, but not limited to, losses, claims,
     damages or liabilities, insofar as such losses, claims, damages or
     liabilities (or actions in respect thereof) arise out of or are based upon
     (i) with respect to the Company, any breach of any representation,
     warranty, agreement or covenant of the Company herein contained, or any
     failure of the Company to perform its obligations hereunder or under law,
     (ii) with respect to each of the Selling Shareholders, arise out of or are
     based in whole or in part on any inaccuracy in the representations and
     warranties of such Selling Shareholder contained herein or any failure of
     such Selling Shareholder to perform its obligations hereunder or under law,
     (iii) any untrue statement or alleged untrue statement of any material fact
     contained in the Registration Statement, any Preliminary Prospectus or the
     Prospectus or any amendment or supplement thereto, or the omission or
     alleged omission to state therein a material fact required to be stated
     therein or necessary to make the statements therein, in light of the
     circumstances under which they were made, not misleading (but, with respect
     to each of the Selling Shareholder only to the extent that such untrue
     statement or alleged untrue statement or omission or alleged omission was
     made in reliance upon and in conformity with written information furnished
     by such Selling

                                       27
<PAGE>
 
     Shareholder, in its capacity as such, to the Company or the Underwriters,
     directly or through such Selling Shareholders' representatives,
     specifically for inclusion therein) and agrees to reimburse each
     Underwriter for any legal or other expenses reasonably incurred by it in
     connection with investigating or defending any such loss, claim, damage,
     liability or action; provided, however, that neither the Company nor any
     Selling Shareholder shall be liable in any such case to the extent that any
     such loss, claim, damage, liability or action arises out of or is based
     upon an untrue statement or alleged untrue statement or omission or alleged
     omission made in the Registration Statement, such Preliminary Prospectus or
     the Prospectus, or any such amendment or supplement thereto, in reliance
     upon, and in conformity with, written information relating to any
     Underwriter furnished to the Company as described in Section 4 hereof, and,
     provided further, that the indemnity agreement provided in this Section
     9(a) with respect to any Preliminary Prospectus shall not inure to the
     benefit of any Underwriter from whom the person asserting any losses,
     claims, damages, liabilities or actions based upon any untrue statement or
     alleged untrue statement of material fact or omission or alleged omission
     to state therein a material fact purchased Shares, if a copy of the
     Prospectus in which such untrue statement or alleged untrue statement or
     omission or alleged omission was corrected had not been sent or given to
     such person within the time required by the Act and the Rules and
     Regulations, unless such failure is the result of noncompliance by the
     Company with Section 6(d) hereof.

          The indemnity agreement in this Section 9(a) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any Underwriter within the meaning of the Act or the Exchange
Act. This indemnity agreement shall be in addition to any liabilities which the
Company may otherwise have.

               (b)  Each Underwriter, severally and not jointly, agrees to
     indemnify and hold harmless the Company and the Selling Shareholders
     against any losses, claims, damages or liabilities, joint or several, to
     which the Company may become subject under the Act or otherwise,
     specifically including, but not limited to, losses, claims, damages or
     liabilities, insofar as such losses, claims, damages or liabilities (or
     actions in respect thereof) arise out of or are based upon any untrue
     statement or alleged untrue statement of any material fact contained in the
     Registration Statement, any Preliminary Prospectus or the Prospectus or any
     amendment or supplement thereto, or the omission or alleged omission to
     state therein a material fact required to be stated therein or necessary to
     make the statements therein, in light of the circumstances under which they
     were made, not misleading, to the extent, but only to the extent, that such
     untrue statement or alleged untrue statement or omission or alleged
     omission was made in reliance upon and in conformity with written
     information furnished to the Company as described in Section 4 hereof, and
     agrees to reimburse the Company and the Selling Shareholders for any legal
     or other expenses reasonably incurred by the Company in connection with
     investigating or defending any such loss, claim, damage, liability or
     action.

          The indemnity agreement in this Section 9(b) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed the Registration Statement and each director of the
Company and each person, if any, who controls the Company or any of the Selling
Shareholders within the meaning of the Act or the Exchange Act.

                                       28
<PAGE>
 
This indemnity agreement shall be in addition to any liabilities which each
Underwriter may otherwise have.

               (c)  Promptly after receipt by an indemnified party under this
     Section 9 of notice of the commencement of any action, such indemnified
     party shall, if a claim in respect thereof is to be made against any
     indemnifying party under this Section 9, notify the indemnifying party in
     writing of the commencement thereof but the omission so to notify the
     indemnifying party will not relieve it from any liability which it may have
     to any indemnified party otherwise than under this Section 9. In case any
     such action is brought against any indemnified party, and it notified the
     indemnifying party of the commencement thereof, the indemnifying party will
     be entitled to participate therein and, to the extent that it shall elect
     by written notice delivered to the indemnified party promptly after
     receiving the aforesaid notice from such indemnified party, to assume the
     defense thereof, with counsel reasonably satisfactory to such indemnified
     party; provided, however, that if the defendants in any such action include
     both the indemnified party and the indemnifying party and the indemnified
     party shall have reasonably concluded that there may be legal defenses
     available to it and/or other indemnified parties which are different from
     or additional to those available to the indemnifying party which pose a
     conflict of interest for such counsel, the indemnified party or parties
     shall have the right to select separate counsel to assume such legal
     defenses and to otherwise participate in the defense of such action on
     behalf of such indemnified party or parties. Upon receipt of notice from
     the indemnifying party to such indemnified party of the indemnifying
     party's election so to assume the defense of such action and approval by
     the indemnified party of counsel, the indemnifying party will not be liable
     to such indemnified party under this Section 9 for any legal or other
     expenses subsequently incurred by such indemnified party in connection with
     the defense thereof unless (i) the indemnified party shall have employed
     separate counsel in accordance with the proviso to the next preceding
     sentence (it being understood, however, that the indemnifying party shall
     not be liable for the expenses of more than one separate counsel (together
     with appropriate local counsel) approved by the indemnifying party
     representing all the indemnified parties under Section 9(a) or 9(b) hereof
     who are parties to such action), (ii) the indemnifying party shall not have
     employed counsel satisfactory to the indemnified party to represent the
     indemnified party within a reasonable time after notice of commencement of
     the action or (iii) the indemnifying party has authorized the employment of
     counsel for the indemnified party at the expense of the indemnifying party.
     In no event shall any indemnifying party be liable in respect of any
     amounts paid in settlement of any action unless the indemnifying party
     shall have approved the terms of such settlement; provided that such
     consent shall not be unreasonably withheld. No indemnifying party shall,
     without the prior written consent of the indemnified party, effect any
     settlement of any pending or threatened proceeding in respect of which any
     indemnified party is or could have been a party and indemnification could
     have been sought hereunder by such indemnified party, unless such
     settlement includes an unconditional release of such indemnified party from
     all liability on claims that are the subject matter of such
     indemnification.

               (d)  In order to provide for just and equitable contribution in
     any action in which a claim for indemnification is made pursuant to this
     Section 9 but it is judicially determined (by the entry of a final judgment
     or decree by a court of competent jurisdiction and the

                                       29
<PAGE>
 
     expiration of time to appeal or the denial of the last right of appeal)
     that such indemnification may not be enforced in such case notwithstanding
     the fact that this Section 9 provides for indemnification in such case, all
     the parties hereto shall contribute to the aggregate losses, claims,
     damages or liabilities to which they may be subject (after contribution
     from others) in such proportion so that the Underwriters severally and not
     jointly are responsible pro rata for the portion represented by the
     percentage that the underwriting discount bears to the initial public
     offering price, and the Company is responsible for the remaining portion,
     provided, however, that (i) no Underwriter shall be required to contribute
     any amount in excess of the underwriting discount applicable to the Shares
     purchased by such Underwriter and (ii) no person guilty of a fraudulent
     misrepresentation (within the meaning of Section 11(f) of the Act) shall be
     entitled to contribution from any person who is not guilty of such
     fraudulent misrepresentation. The contribution agreement in this Section
     9(d) shall extend upon the same terms and conditions to, and shall inure to
     the benefit of, each person, if any, who controls the Underwriters or the
     Company within the meaning of the Act or the Exchange Act and each officer
     of the Company who signed the Registration Statement and each director of
     the Company.

               (e)  The parties to this Agreement hereby acknowledge that they
     are sophisticated business persons who were represented by counsel during
     the negotiations regarding the provisions hereof including, without
     limitation, the provisions of this Section 9, and are fully informed
     regarding said provisions. They further acknowledge that the provisions of
     this Section 9 fairly allocate the risks in light of the ability of the
     parties to investigate the Company and its business in order to assure that
     adequate disclosure is made in the Registration Statement and Prospectus as
     required by the Act and the Exchange Act. The parties are advised that
     federal or state public policy, as interpreted by the courts in certain
     jurisdictions, may be contrary to certain of the provisions of this Section
     9, and the parties hereto hereby expressly waive and relinquish any right
     or ability to assert such public policy as a defense to a claim under this
     Section 9 and further agree not to attempt to assert any such defense.

     10.  Representations, Warranties, Covenants and Agreements to Survive
Delivery. All representations, warranties, covenants and agreements of the
Company and the Underwriters herein or in certificates delivered pursuant
hereto, and the indemnity and contribution agreements contained in Sections 7
and 9 and hereof shall remain operative and in full force and effect regardless
of any investigation made by or on behalf of any Underwriter or any controlling
person within the meaning of the Act or the Exchange Act, or by or on behalf of
the Company or any of its officers, directors or controlling persons within the
meaning of the Act or the Exchange Act, and shall survive the delivery of the
Shares to the several Underwriters hereunder or termination of this Agreement.

     11.  Substitution of Underwriters. If any Underwriter or Underwriters shall
fail to take up and pay for the number of Firm Shares agreed by such Underwriter
or Underwriters to be purchased hereunder upon tender of such Firm Shares in
accordance with the terms hereof, and if the aggregate number of Firm Shares
which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be 

                                       30
<PAGE>
 
obligated, severally in proportion to their respective commitments hereunder, to
take up and pay for the Firm Shares of such defaulting Underwriter or
Underwriters.

          If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for twenty-
four (24) hours to allow the several Underwriters the privilege of substituting
within twenty-four (24) hours (including non-business hours) another underwriter
or underwriters (which may include any nondefaulting Underwriter) satisfactory
to the Company. If no such underwriter or underwriters shall have been
substituted as aforesaid by such postponed Closing Date, the Closing Date may,
at the option of the Company, be postponed for a further twenty-four (24) hours,
if necessary, to allow the Company the privilege of finding another underwriter
or underwriters, satisfactory to you, to purchase the Firm Shares which the
defaulting Underwriter or Underwriters so agreed but failed to purchase. If it
shall be arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 11, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven (7)
full business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement or supplements to the Prospectus which
may thereby be made necessary, and (ii) the respective number of Firm Shares to
be purchased by the remaining Underwriters and substituted underwriter or
underwriters shall be taken as the basis of their underwriting obligation. If
the remaining Underwriters shall not take up and pay for all such Firm Shares so
agreed to be purchased by the defaulting Underwriter or Underwriters or
substitute another underwriter or underwriters as aforesaid and the Company
shall not find or shall not elect to seek another underwriter or underwriters
for such Firm Shares as aforesaid, then this Agreement shall terminate.

          In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 11, the Company shall not be liable to any
Underwriter (except as provided in Sections 7 and 9 hereof) nor shall any
Underwriter (other than an Underwriter who shall have failed, otherwise than for
some reason permitted under this Agreement, to purchase the number of Firm
Shares agreed by such Underwriter to be purchased hereunder, which Underwriter
shall remain liable to the Company and the other Underwriters for damages, if
any, resulting from such default) be liable to the Company (except to the extent
provided in Sections 7 and 9 hereof).

          The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 11.

                                       31
<PAGE>
 
     12.  Effective Date of this Agreement and Termination.

               (a)  This Agreement shall become effective at the earlier of (i)
     6:30 A.M., California time, on the second full business day following the
     effective date of the Registration Statement, or (ii) the time of the
     initial public offering of any of the Shares by the Underwriters after the
     Registration Statement becomes effective. The time of the initial public
     offering shall mean the time of the release by you, for publication, of the
     first newspaper advertisement relating to the Shares, or the time at which
     the Shares are first generally offered by the Underwriters to the public by
     letter, telephone, telegram or telecopy, whichever shall first occur. By
     giving notice as set forth in Section 13 before the time this Agreement
     becomes effective, you, as Representatives of the several Underwriters, or
     the Company, may prevent this Agreement from becoming effective without
     liability of any party to any other party, except as provided in Sections 7
     and 9 hereof.

               (b)  You, as Representatives of the several Underwriters, shall
     have the right to terminate this Agreement by giving notice as hereinafter
     specified at any time at or prior to the Closing Date or on or prior to any
     later date on which Option Shares are purchased, as the case may be, (i) if
     the Company shall have failed, refused or been unable to perform any
     agreement on its part to be performed, or (ii) because any other condition
     of the Underwriters' obligations hereunder required to be fulfilled is not
     fulfilled, including, without limitation, any change in the condition
     (financial or otherwise), earnings, operations, business or business
     prospects of the Company from that set forth in the Registration Statement
     or Prospectus, which, in your sole judgment, is material and adverse, or
     (iii) if additional material governmental restrictions, not in force and
     effect on the date hereof, shall have been imposed upon trading in
     securities generally or minimum or maximum prices shall have been generally
     established on the New York Stock Exchange or on the American Stock
     Exchange or in the over the counter market by the NASD, or trading in
     securities generally shall have been suspended on either such exchange or
     in the over the counter market by the NASD, or if a banking moratorium
     shall have been declared by federal, New York or California authorities, or
     (iv) if the Company shall have sustained a loss by strike, fire, flood,
     earthquake, accident or other calamity of such character as to interfere
     materially with the conduct of the business and operations of the Company
     regardless of whether or not such loss shall have been insured, or (v) if
     there shall have been a material adverse change in the general political or
     economic conditions or financial markets as in your reasonable judgment
     makes it inadvisable or impracticable to proceed with the offering, sale
     and delivery of the Shares, or (vi) if there shall have been an outbreak or
     escalation of hostilities or of any other insurrection or armed conflict or
     the declaration by the United States of a national emergency which, in the
     reasonable opinion of the Representatives, makes it impracticable or
     inadvisable to proceed with the public offering of the Shares as
     contemplated by the Prospectus. Any termination pursuant to any of
     subparagraphs (ii) through (vi) above shall be without liability of any
     party to any other party except as provided in Sections 7 and 9 hereof. In
     the event of termination pursuant to subparagraph (i) above, the Company
     shall also remain obligated to pay costs and expenses pursuant to Sections
     7 and 9 hereof.

                                       32
<PAGE>
 
          If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 12, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.

     13.  Notices. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o Cruttenden Roth Incorporated, 18301 Von Karman,
Suite 100, Irvine, California 92715, telecopier number (714) 852-9603,
Attention: James Stearns; if sent to the Company, such notice shall be mailed,
delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by
letter) to 3400 Carlisle Suite 500, Dallas, TX, telecopier number (214) 855-
5277, Attention: Ken Hoofard.

     14.  Parties.  This Agreement shall inure to the benefit of and be binding
upon the several Underwriters and the Company and their respective executors,
administrators, successors and assigns. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person or corporation,
other than the parties hereto and their respective executors, administrators,
successors and assigns, and their controlling persons within the meaning of the
Act or the Exchange Act, officers and directors referred to in Section 9 hereof,
any legal or equitable right, remedy or claim in respect of this Agreement or
any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of the parties hereto and their respective executors, administrators,
successors and assigns and said controlling persons and said officers and
directors, and for the benefit of no other person or corporation. No purchaser
of any of the Shares from any Underwriter shall be construed a successor or
assign by reason merely of such purchase. The Agreement constitutes the entire
agreement and understanding of the parties with respect to the subject matter
hereof.

          In all dealings with the Company under this Agreement, you shall act
on behalf of each of the several Underwriters, and the Company shall be entitled
to act and rely upon any statement, request, notice or agreement made or given
by you on behalf of each of the several Underwriters.

     15.  Applicable Law.  This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California.

     16.  Counterparts.  This Agreement may be signed in several counterparts,
each of which will constitute an original.

          If the foregoing correctly sets forth the understanding among the
Company and the several Underwriters, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement among the Company and the several Underwriters.

                                 Very truly yours,

                                       33
<PAGE>
 
                                 CPS SYSTEMS, INC.


                              By:_______________________________________

                                 Name:__________________________________

                                 Title:_________________________________

                                 SELLING SHAREHOLDERS


                              By:_______________________________________
                                 Attorney-in-fact

                                       34
<PAGE>
 
Accepted as of the date first above written:
 
CRUTTENDEN ROTH INCORPORATED
 
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.

By:  CRUTTENDEN ROTH INCORPORATED


     By:_______________________________________
     
        Name:__________________________________

        Title:_________________________________

JOSEPHTHAL & CO. INC.
 
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.

By:  JOSEPHTHAL & CO. INC..

     By:_______________________________________
     
        Name:__________________________________

        Title:_________________________________

                                       35
<PAGE>
 
                                 SCHEDULE A


<TABLE>
<CAPTION>
                                                                                         Number of
                                                                                        Firm Shares
                                                                                           To Be
             Underwriters                                                                Purchased
- ---------------------------------------                                                 -----------
<S>                                                                                     <C>
Cruttenden Roth Incorporated...........
Josephthal & Co. Inc.
 
 
 
 
 
 
 
 
 
 
 
 
                                                                                      -------------
   Total...............................
                                                                                      =============
</TABLE>

                                       36
<PAGE>
 
                                   SCHEDULE B
<TABLE>
<CAPTION>
                                               Number of
Selling Shareholders                         Option Shares
- --------------------                         -------------
<S>                                          <C>
Sidney H. Cordier...........................    85,660
Brian R. Wilson.............................    85,660
G. Dean Booth...............................    18,288
Hanifen Imhoff Mezzanine Fund, L.P..........    63,472
John K. Percival............................    21,280
Robert J. Newcorn...........................    10,640
</TABLE>

                                       37

<PAGE>
 
                                                                     EXHIBIT 1.2

                               WARRANT AGREEMENT


     This Warrant Agreement (this "Agreement") dated as of March __, 1998 is by
and among CPS Systems, Inc., a Texas corporation (the "Company"), Josephthal &
Co. Inc. ("Josephthal") and Cruttenden Roth Incorporated ("Cruttenden").

     WHEREAS, Cruttenden and Josephthal have each agreed pursuant to an
Underwriting Agreement dated March __, 1998 (the "Underwriting Agreement") to
act as the representative of the several underwriters in connection with the
proposed public offering (the "Public Offering") by the Company of ________
shares of Common Stock, including up to ________ additional shares of Common
Stock to cover over-allotments, if any; and

     WHEREAS, pursuant to Section 1 of the Underwriting Agreement, the Company
has agreed to issue warrants (the "Warrants") to Cruttenden and Josephthal & Co.
Inc. (together, the "Representatives") to purchase, at a price of $0.01 per
warrant, up to an aggregate of ______[10% or #shares in offering] shares
(hereinafter, and as the number thereof may be adjusted hereto, the "Warrant
Shares") of the Company's Common Stock, $0.01 par value per share (the "Common
Stock"), each Warrant initially entitling the holder thereof to purchase one
share of Common Stock.

     NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein and in the Underwriting Agreement set forth and for other good and
valuable consideration, the parties hereto agree as follows:

     1.   ISSUANCE OF WARRANTS: FORM OF WARRANT. The Company will issue and
deliver to (a) Cruttenden, Warrants to purchase _______ Warrant Shares and (b)
Josephthal, Warrants to purchase ____________ Warrant Shares, each on the
Closing Date referred to in the Underwriting Agreement, in consideration for,
and as part of the Representatives' compensation in connection with, its acting
as the representative of the several underwriters for the Public Offering
pursuant to the Underwriting Agreement. The text of the Warrants and of the form
of election to purchase Warrants Shares shall be substantially as set forth in
Exhibit A attached hereto. The Warrants shall be executed on behalf of the
Company by the manual or facsimile signature of the present or any future
Chairman of the Board, President or Vice President of the Company, under its
corporate seal, affixed or in facsimile, attested by the manual or facsimile
signature of the Secretary or an Assistant Secretary of the Company.

     Warrants bearing the manual or facsimile signatures of individuals who were
at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any one of them shall have ceased to
hold such offices prior to the delivery of such Warrants or did not hold such
offices on the date of this Agreement. Warrants shall be dated as of the date of
execution thereof by the Company either upon initial issuance or upon division,
exchange, substitution or transfer.

     2.   REGISTRATION.  The Warrants shall be numbered and registered on the
books of the Company (the "Warrant Register") as they are issued. The Company
shall be entitled to treat the 

                                       1
<PAGE>
 
registered holder of any Warrant on the Warrant Register (the "Holder") as the
owner in fact therefor for all purposes and shall not be bound to recognize any
equitable or other claim to or interest in such Warrant on the part of any other
person, and shall not be liable for any registration or transfer of Warrants
which are registered or are to be registered in the name of a fiduciary or the
nominee of a fiduciary unless made with the actual knowledge that a fiduciary or
nominee is committing a breach of trust in requesting such registration or
transfer, or with the knowledge of such facts that its participation therein
amounts to bad faith. The Warrants shall be registered initially in the name of
(a) with respect to Cruttenden's Warrants, "Cruttenden Roth Incorporated" or in
such other denominations as Cruttenden may request in writing to the Company and
(b) with respect to Josephthal's Warrants, "Josephthal & Co. Inc." or in such
other denominations as Josephthal may request in writing to the Company.

     3.   EXCHANGE OF WARRANT CERTIFICATES.  Subject to any restriction upon
transfer set forth in this Agreement, each Warrant certificate may be exchanged
for another certificate or certificates entitling the Holder thereof to purchase
a like aggregate number of Warrant Shares as the certificate or certificates
surrendered then entitled such Holder to purchase.  Any Holder desiring to
exchange a Warrant certificate or certificates shall make such request in
writing delivered to the Company, and shall surrender, properly endorsed, the
certificate or certificates to be so exchanged.  Thereupon, the Company shall
execute and deliver to the person entitled thereto a new Warrant certificate or
certificates, as the case may be, as so requested.

     4.   TRANSFER OF WARRANTS.  Until March __, 1999, the Warrants will not be
sold, transferred, assigned or hypothecated except to (i) other brokers or
dealers; (ii) one or more bona fide officers and/or partners of the
Representatives; (iii) a successor to the transferring Holder in merger or
consolidation; (iv) a purchaser of all or substantially all of the transferring
Holder's assets; or (v) any person receiving the Warrants from one or more of
the persons listed in this Section 4 at such person's or persons' death pursuant
to will, trust or the laws of intestate succession, each of whom agrees in
writing to be bound by the terms hereof.  The Warrants shall be transferable
only on the Warrant Register upon delivery thereof duly endorsed by the Holder
or by the Holder's duly authorized attorney or representative, or accompanied by
proper evidence of succession, assignment or authority to transfer.  In all
cases of transfer by an attorney, the original power of attorney, duly approved,
or an official copy thereof, duly certified, shall be deposited with the
Company.  In case of transfer by executors, administrators, guardians or other
legal representatives, duly authenticated evidence of their authority shall be
produced and may be required to be deposited with the Company in its discretion.
Upon any registration of transfer, the Company shall deliver a new Warrant or
Warrants to the person entitled thereto.

     5.   TERM OF WARRANTS; EXERCISE OF WARRANTS.

     5.1  Each Warrant entitles the registered owner thereof to purchase one
share of Common Stock at any time from 10:00 a.m., Pacific time, on March __,
1999 (the "Initiation Date") until 6:00 p.m., Pacific time, on March __, 2003
(the "Expiration Date") at a purchase price of $____[165% of public offering
price]_______, subject to adjustment (the "Warrant Price"). Notwithstanding the
foregoing, if at 6:00 p.m., Pacific time on the Expiration Date, any Holder or
Holders of the Warrants have not exercised their Warrants and the Closing Price
(as defined below) for the Common Stock on the Expiration Date is greater than
the Warrant Price, then 

                                       2
<PAGE>
 
each such unexercised Warrant shall be automatically converted into a number of
shares of Common Stock of the Company equal to: (A) the number of shares of
Common Stock then issuable upon exercise of a Warrant multiplied by (B) a
fraction (1) the numerator of which is the difference between the Closing Price
for the Common Stock on the Expiration Date and the Warrant Price and (2) the
denominator of which is the Closing Price for the Common Stock on the Expiration
Date.

     5.2  The Warrant Price and the number of Warrant Shares issuable upon
exercise of each Warrant are subject to adjustment upon the occurrence of
certain events, pursuant to the provisions of Section 11 of this Agreement.
Subject to the provisions of this Agreement, each Holder of Warrants shall have
the right, which may be exercised as expressed in the Warrant Certificate, to
purchase from the Company (and the Company shall issue and sell to such Holder
of Warrants) the number of fully paid and nonassessable Warrant Shares specified
in such Warrant Certificate, upon surrender to the Company, or its duly
authorized agent, of such Warrant Certificate, with the form of election to
purchase on the reverse thereof duly filled in and signed, and upon payment to
the Company of the Warrant Price, as adjusted in accordance with the provisions
of Section 11 of this Agreement, for the number of Warrant Shares in respect of
which such Warrants are then exercised. Payment of such Warrant Price shall be
made in cash, by wire transfer or by certified or official bank check, or any
combination thereof. No adjustment shall be made for any dividends on any
Warrant Shares of stock issuable upon exercise of a Warrant.

     5.3  Upon such surrender of Warrants, and payment of the Warrant Price as
aforesaid, the Company shall issue and cause to be delivered with all reasonable
dispatch to or upon the written order of the Holder of such Warrants and in such
name or names as such registered Holder may designate, a certificate or
certificates for the number of full Warrant Shares so purchased upon the
exercise of such Warrants, together with cash, as provided in Section 12 of this
Agreement, in respect of any fraction of a share otherwise issuable upon such
surrender and, if the number of Warrants represented by a Warrant certificate
shall not be exercised in full, a new Warrant certificate, executed by the
Company for the balance of the number of whole Warrant Shares.

     5.4  If permitted by applicable law, such certificate or certificates shall
be deemed to have been issued and any person so designated to be named therein
shall be deemed to have become a holder of record of such shares as of the date
of the surrender of such Warrants and payment of the Warrant Price as aforesaid.
The rights of purchase represented by the Warrants shall be exercisable, at the
election of the registered Holders thereof, either as an entirety or from time
to time for only part of the shares specified therein.

     6.   COMPLIANCE WITH GOVERNMENT REGULATIONS.  The Company covenants that if
any shares of Common Stock required to be reserved for purposes of exercise or
conversion of Warrants require, under any Federal or state law or applicable
governing rule or regulation of any national securities exchange, registration
with or approval of any governmental authority, or listing on any such national
securities exchange before such shares may be issued upon exercise, the Company
will in good faith and as expeditiously as possible endeavor to cause such
shares to be duly registered, approved or listed on the relevant national
securities exchange, as the case 

                                       3
<PAGE>
 
may be; provided, however, that (except to the extent legally permissible with
respect to Warrants of which the one or both of the Representatives is the
Holder) in no event shall such shares of Common Stock be issued, and the Company
is hereby authorized to suspend the exercise of all Warrants, for the period
during which such registration, approval or listing is required but not in
effect.

     7.   PAYMENT OF TAXES.  The Company will pay all documentary stamp taxes,
if any, attributable to the initial issuance of the Warrants or the securities
comprising the Warrant Shares upon the exercise of Warrants; provided, however,
that the Company shall not be required to pay any tax or taxes which may be
payable in respect of any transfer involved in the issue or delivery of any
warrants or certificate for Warrant Shares in a name other than that of the
registered Holder of such warrants.

     8.   MUTILATED OR MISSING WARRANTS.  In case any of the Warrants shall be
mutilated, lost, stolen or destroyed, the Company shall issue and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant, or
in lieu of and substitution for the Warrant lost, stolen or destroyed, a new
Warrant of like tenor and representing an equivalent right or interest; but only
upon receipt of evidence reasonably satisfactory to the Company of such loss,
theft or destruction of such Warrant and, if requested, indemnity or bond also
reasonably satisfactory to the Company.  An applicant for such substitute
Warrants shall also comply with such other reasonable regulations and pay such
other reasonable charges as the Company may prescribe.

     9.   RESERVATION OF WARRANT SHARES.  There has been reserved out of the
authorized and unissued shares of Common Stock a number of shares sufficient to
provide for the exercise of the Warrants, and the transfer agent for the Common
Stock ("Transfer Agent") and every subsequent Transfer Agent for any shares of
the Company's capital stock issuable upon the exercise of any of the rights of
purchase aforesaid are hereby irrevocably authorized and directed at all times
until the Expiration Date to reserve such number of authorized and unissued
shares as shall be required for such purpose.  The Company will keep a copy of
this Agreement on file with the Transfer Agent and with every subsequent
Transfer Agent for any shares of the Company's capital stock issuable upon the
exercise of the rights of purchase represented by the Warrants.  The Company
will supply such Transfer Agent with duly executed stock certificates for such
purposes and will itself provide or otherwise make available any cash which may
be issuable as provided in Section 12 of this Agreement.  The Company will
furnish to such Transfer Agent a copy of all notices of adjustments, and
certificates related thereto, transmitted to each Holder pursuant to Section
11.2 of this Agreement.  All Warrants surrendered in the exercise of the rights
thereby evidenced shall be cancelled.

     10.  OBTAINING STOCK EXCHANGE LISTINGS.  The Company will from time to time
take all action which may be necessary so that the Warrant Shares, immediately
upon their issuance upon the exercise of Warrants, will be listed on the
securities exchanges and stock markets within the United States of America, if
any, on which other shares of Common Stock are then listed.

     11.  ADJUSTMENT OF WARRANT PRICE AND NUMBER OF WARRANT SHARES.  The number
and kind of securities purchasable upon the exercise of each Warrant and the
Warrant Price shall 

                                       4
<PAGE>
 
be subject to adjustment from time to time upon the happening of certain events
as hereinafter defined. For purposes of this Section 11, "Common Stock" means
shares now or hereafter authorized of any class of common stock of the Company
and any other stock of the Company, however designated, that has the right
(subject to any prior rights of any class or series of preferred stock) to
participate in any distribution of the assets or earnings of the Company without
limit as to per share amount.

     11.1 MECHANICAL ADJUSTMENTS.  The number of Warrant Shares purchasable
upon the exercise of each Warrant and the Warrant Price shall be subject to
adjustment as follows:

          (a)  In case the Company shall (i) pay a dividend in shares of Common
Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its
outstanding shares of Common Stock or (iv) issue by reclassification of its
shares of Common Stock other securities of the Company (including any such
reclassification in connection with a consolidation or merger in which the
Company is the surviving corporation), the number of Warrant Shares purchasable
upon exercise of each warrant immediately prior thereto shall be adjusted so
that the Holder of each Warrant shall be entitled to receive the kind and number
of Warrant Shares or other securities of the Company which he would have owned
or would have been entitled to receive after the happening of any of the events
described above, had such Warrants been exercised immediately prior to the
happening of such event or any record date with respect thereto. An adjustment
made pursuant to this paragraph (a) shall become effective immediately after the
effective date of such event retroactive to the record date, if any, for such
event. Such adjustment shall be made successively whenever any event listed
above shall occur.

          (b)  In case the Company shall distribute to all holders of its shares
of Common Stock (including any such distribution made in connection with a
consolidation or merger in which the Company is the surviving corporation)
evidences of its indebtedness or assets (excluding cash dividends or
distributions payable out of consolidated earnings or earned surplus and
dividends or distribution referred to in paragraph (a) above or in the paragraph
immediately following this paragraph) or rights, options or warrants, or
convertible or exchangeable securities containing the right to subscribe for or
purchase shares of Common Stock, then in each case the number of Warrant Shares
thereafter purchasable upon the exercise of each Warrant shall be determined by
multiplying the number of Warrant Shares theretofore purchasable upon the
exercise of each Warrant by a fraction, the numerator of which shall be the then
current market price per share of Common Stock (as defined in paragraph (c)
below) on the date of such distribution, and the denominator of which shall be
the then current market price per share of Common Stock, less the then fair
value (as reasonably determined by the Board of Directors of the Company) of the
portion of the assets or evidences of indebtedness so distributed or of such
subscription rights, options or warrants, or of such convertible or exchangeable
securities applicable to one share of Common Stock. Such adjustment shall be
made whenever any such distribution is made and shall become effective on the
date of distribution retroactive to the record date for the determination of
stockholders entitled to receive such distribution.

     In the event of a distribution by the Company to all holders of its shares
of Common Stock of a subsidiary or securities convertible into or exercisable
for such stock, then in lieu of an adjustment in the number of Warrant Shares
purchasable upon the exercise of each Warrant, the 

                                       5
<PAGE>
 
Holder of each Warrant, upon the exercise thereof at any time after such
distribution, shall be entitled to receive from the Company, such subsidiary or
both, as the Company shall determine, the stock or other securities to which
such Holder would have been entitled if such Holder had exercised such Warrant
immediately prior thereto, all subject to further adjustment as provided in this
Section 11.1; provided, however, that no adjustment in respect of dividends or
interest on such stock or other securities shall be made during the term of a
Warrant or upon the exercise of a Warrant.

          (c)  For the purpose of any computation under paragraph (b) of this
Section, the current market price per share of Common Stock at any date shall be
the average of the daily Closing Prices for 20 consecutive trading days
commencing 30 trading days before the date of such computation. The selling
price for each day (the "Closing Price") shall be the last such reported sales
price regular way or, in case no such reported sale takes place on such day, the
average of the closing bid and asked prices regular way for such day, in each on
the principal national securities exchange on which the shares of Common Stock
are listed or admitted to trading or, if not listed or admitted to trading, the
average of the closing bid and asked prices of the Common Stock in the over-the
counter market as reported by the Nasdaq National Market System or Nasdaq
SmallCap System or if not approved for quotation on the Nasdaq National Market
System or Nasdaq SmallCap System, the average of the closing bid and asked
prices as furnished by two members of the National Association of Securities
Dealers, Inc. selected from time to time by the Company for that purpose.

          (d)  No adjustment in the number of Warrant Shares purchasable
hereunder shall be required unless such adjustment would require an increase or
decrease of at least one percent (1%) in the number of Warrant Shares
purchasable upon the exercise of each Warrant; provided, however, that any
adjustments which by reason of this paragraph (d) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations shall be made to the nearest one-thousandth of a share.

          (e)  Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as herein provided, the Warrant Price
payable upon exercise of each Warrant shall be adjusted by multiplying such
Warrant Price immediately prior to such adjustment by a fraction, the numerator
of which shall be the number of Warrant Shares purchasable upon the exercise of
each Warrant immediately prior to such adjustment, and the denominator of which
shall be the number of Warrant Shares purchasable immediately thereafter.

          (f)  No adjustment in the number of Warrant Shares purchasable upon
the exercise of each Warrant need be made under paragraph (b) if the Company
issues or distributes to each Holder of Warrants the rights, options, warrants
or convertible or exchangeable securities, or evidences of indebtedness or
assets referred to in those paragraphs which each Holder of Warrants would have
been entitled to receive had the Warrants been exercised prior to the happening
of such event or the record date with respect thereto. No adjustment need be
made for a change in the par value of the Warrant Shares.

          (g)  In the event that at any time, as a result of an adjustment made
pursuant to paragraph (a) above, the Holders shall become entitled to purchase
any securities of the Company 

                                       6
<PAGE>
 
other than shares of Common Stock, thereafter the number of such other shares so
purchasable upon exercise of each Warrant and the Warrant Price of such shares
shall be subject to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with respect to the Warrant
Shares contained in this Section 11, and the other provisions of this Agreement,
with respect to the Warrant and Warrant Shares, shall apply as nearly equivalent
as practicable on like terms to such other securities.

          (h)  Upon the expiration of any rights, options, warrants or
conversion or exchange privileges for which an adjustment was made hereunder, if
any thereof shall not have been exercised, the Warrant Price and the number of
shares of Common Stock purchasable upon the exercise of each Warrant shall, upon
such expiration, be readjusted and shall thereafter be such as it would have
been had it been originally adjusted (or had the original adjustment not been
required, as the case may be) as if (i) the only shares of Common Stock so
issued were the shares of Common Stock, if any, actually issued or sold upon the
exercise of such rights, options, warrants or conversion or exchange rights and
(ii) such shares of Common Stock, if any, were issued or sold for the
consideration actually received by the Company upon such exercise plus the
aggregate consideration, if any, actually received by the Company for the
issuance, sale or grant of all such rights, options, warrants or conversion or
exchange rights whether or not exercised; provided, however, that no such
readjustment shall have the effect of increasing the Warrant Price or decreasing
the number of shares of Common Stock purchasable upon the exercise of each
Warrant by an amount in excess of the amount of the adjustment initially made in
respect to the issuance, sale or grant of such rights, options, warrants or
conversion or exchange rights.

     11.2 NOTICE OF ADJUSTMENT.  Whenever the number of Warrant Shares
purchasable upon the exercise of each Warrant or the Warrant Price of such
Warrant Shares is adjusted, as herein provided, the Company shall promptly mail
by first class, postage prepaid, to each Holder notice of such adjustment or
adjustments and a certificate of a firm of independent public accountants
selected by the Board of Directors of the Company (who may be the regular
accountants employed by the Company) setting forth the number of Warrant Shares
purchasable upon the exercise of each Warrant and the Warrant Price of such
Warrant Shares after such adjustment, setting forth a brief statement of the
facts requiring such adjustment and setting forth the computation by which such
adjustment was made.

     11.3 NO ADJUSTMENT FOR DIVIDENDS.  Except as provided in Section 11.1, no
adjustments in respect of any dividends shall be made during the term of a
Warrant or upon the exercise of a Warrant.

     11.4 PRESERVATION OF PURCHASE RIGHTS UPON MERGER, CONSOLIDATION ETC.  In
case of any consolidation of the Company with or merger of the Company into
another corporation or in case of any sale, transfer or lease to another
corporation of all or substantially all the property of the Company, the Company
or such successor or purchasing corporation, as the case may be, shall execute
with each Holder an agreement that each Holder shall have the right thereafter
upon payment of the Warrant Price in effect immediately prior to such action to
purchase upon exercise of each Warrant the kind and amount of shares and other
securities, cash and property which he would have owned or would have been
entitled to receive after the happening of such 

                                       7
<PAGE>
 
consolidation, merger, sale, transfer or lease had such Warrant been exercised
immediately prior to such action; provided, however, that no adjustment in
respect of dividends, interest or other income on or from such shares or other
securities, cash and property shall be made during the term of a Warrant or upon
the exercise of a Warrant. Such agreement shall provide for adjustments, which
shall be as nearly equivalent as may be practicable to the adjustments provided
for in this Section 11. The provisions of this Section 11.4 shall similarly
apply to successive consolidations, mergers, sales transfer or leases.

     11.5  STATEMENTS ON WARRANTS.  Irrespective of any adjustments in the
Warrant Price or the number or kind of shares purchasable upon the exercise of
the Warrants, Warrants theretofore or thereafter issued may continue to express
the same price and number and kind of shares as are stated in the Warrants
initially issuable pursuant to this Agreement.

     11.6 OPTIONAL CONVERSION.

          (a)  In addition to and without limiting the rights of the Holders of
the Warrants under the terms of this Agreement and the Warrants, the holder of
the Warrants shall have the right (the "Conversion Right") to convert the
Warrants or any portion thereof into shares of Common Stock as provided in this
Section 11.6 at any time or from time to time after the first anniversary of the
date hereof and prior to its expiration, subject to the restrictions set forth
in paragraph (c) below. Upon exercise of the Conversion Right with respect to a
particular number of shares subject to the Warrants (the "Converted Warrant
Shares"), the Company shall deliver to the Holder of the Warrants, without
payment by the Holder of any exercise price or any cash or other consideration,
the number of shares of Common Stock equal to the quotient obtained by dividing
the Net Value (as hereinafter defined) of the Converted Warrant Shares by the
fair market value (as defined in paragraph (d) below) of a single share of
Common Stock, determined in each case as of the close of business on the
Conversion Date (as hereinafter defined). The "Net Value" of the Converted
Warrant Shares shall be determined by subtraction of the aggregate warrant
purchase price of the Converted Warrant Shares (which aggregate warrant purchase
price includes the consideration actually received by the Company upon such
exercise plus the aggregate consideration, if any, actually received by the
Company for the issuance of the Warrants) from the aggregate fair market value
of the Converted Warrant Shares. No fractional shares shall be issuable upon
exercise of the Conversion Right, and if the number of shares to be issued in
accordance with the foregoing formula is other than a whole number, the Company
shall pay to the Holder of the Warrants an amount in cash equal to the fair
market value of the resulting fractional share.

          (b)  The Conversion Right may be exercised by the Holder of the
Warrants by the surrender of such Warrants at the principal office of the
Company together with a written statement specifying that the holder thereby
intends to exercise the Conversion Right and indicating the number of shares
subject to the Warrants which are being surrendered (referred to in paragraph
(a) above as the Converted Warrant Shares) in exercise of the Conversion Right.
Such conversion shall be effective upon receipt by the Company of the Warrants
together with the aforesaid written statement, or on such later date as is
specified therein (the "Conversion Date"), not later than the expiration date of
the Warrants. Certificates for the shares of Common Stock issuable upon exercise
of the Conversion Right together with a check in payment of any 

                                       8
<PAGE>
 
fractional share and, in the case of a partial exercise, new warrants evidencing
the shares remaining subject to the Warrants, shall be issued as of the
Conversion Date and shall be delivered to the holder of the Warrants within 7
days following the Conversion Date.

          (c)  In the event the Conversion Right would, at any time the Warrants
remain outstanding, be deemed by the Company's independent certified public
accountants to give rise to a charge to the Company's earnings for financial
reporting purposes, then the Conversion Right shall automatically terminate upon
receipt by the holder of this Warrant of an opinion of such independent
certified public accountant as to such adverse accounting treatment.

          (d)  For purposes of this paragraph 11.6, the "fair market value" of a
share of Common Stock as of a particular date shall be its "current market
price," calculated as described in paragraph 11.1(c) hereof.

     12.  FRACTIONAL INTERESTS.  The Company shall not be required to issue
fractional Warrant Shares on the exercise of Warrants. If more than one Warrant
shall be presented for exercise in full at the sale time by the same holder, the
number of full Warrant Shares which shall be issuable upon the exercise thereon
shall be computed on the basis of the aggregate number of Warrant Shares
purchasable on exercise of the Warrants so presented. If any fraction of a
Warrant Share would, except for the provisions of this Section 12 be issuable on
the exercise of any Warrant (or specified portion thereof), the Company shall
pay an amount in cash equal to the closing price for one share of the Common
Stock, as defined in Section 11.1(c), on the trading day immediately preceding
the date the Warrant is presented for exercise, multiplied by such faction.

     13.  REGISTRATION UNDER THE SECURITIES ACT OF 1933. Each of the
Representatives represents and warrants to the Company that it will not dispose
of the Warrants or the Warrant Shares except pursuant to (i) an effective
registration statement under the Securities Act of 1933, as amended (the "Act"),
including a post-effective amendment to the Registration Statement, (ii) Rule
144 under the Act (or any similar rule under the Act relating to the disposition
of securities), or (iii) an opinion of counsel, reasonably satisfactory to
counsel of the Company, that an exemption from such registration is available.

     14.  CERTIFICATES TO BEAR LEGENDS. The Warrant, the Warrant Shares or other
securities issued upon exercise of the Warrant shall be subject to a stop-
transfer order and the certificate or certificates therefore shall bear the
following legend:


          THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
     REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
     SECURITIES LAW. SAID SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE
     ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT.

                                       9
<PAGE>
 
     15.  REGISTRATION RIGHTS.

     15.1 Demand Registration Rights. The Company covenants and agrees with the
Representatives and any subsequent Holders of the Warrants and/or Warrant Shares
that, on two occasions, within 60 days after receipt of a written request from
either of the Representatives (provided that in no event shall either of the
Representatives be entitled to request a registration if such Representative has
previously requested (and been granted by the Company) a registration under this
Section) or from Holders of more than 25% in interest of the aggregate of
Warrants and/or Warrant Shares issued pursuant to this Agreement, that either of
the Representatives or such Holders of the Warrants and/or Warrant Shares
desires and intends to transfer more than 25% in interest of the aggregate
number of the Warrants and/or Warrant Shares under such circumstances that a
public offering, within the meaning of the Act, will be involved, the Company
shall, on those occasions, file a registration statement (and use its best
efforts to cause such registration statement to become effective under the Act
at the Company's expense) with respect to the offering and sale or other
disposition of the Warrant Shares (the "Offered Warrant Shares"); provided,
however, that the Company shall have no obligation to comply with the foregoing
provisions of this Section 15.1 if in the opinion of counsel to the Company
reasonably acceptable to the Holder or Holders, from whom such written requests
have been received, registration under the Act is not required for the transfer
of the Offered Warrant Shares in the manner proposed by such person or persons
or that a post-effective amendment to an existing registration statement would
be legally sufficient for such transfer (in which latter event the Company shall
promptly file such post-effective amendment (and use its best efforts to cause
such amendment to become effective under the Act)). Notwithstanding the
foregoing, the Company shall not be obligated to file a registration statement
with respect to the Offered Warrant Shares on more than two occasions.

     The Company may defer the preparation and filing of a registration
statement for up to 90 days after the request for registration is made if the
Board of Directors determines in good faith that such registration or post-
effective amendment would materially adversely affect or otherwise materially
interfere with a proposed or pending transaction by the Company, including
without limitation a material financing or a corporate reorganization, or during
any period of time in which the Company is in possession of material inside
information concerning the Company or its securities, which information the
Company determines in good faith is not ripe for disclosure.

     The Company shall not honor any request to register Warrant Shares pursuant
to this Section 15.1 received later than five (5) years from the effective date
of the Company's Registration Statement on Form SB-2 (File No. 333-39173) (the
"Effective Date"). The Company shall not be required (i) to maintain the
effectiveness of the registration statement beyond the earlier to occur of 90
days after the effective date of the registration statement or the date on which
all of the Offered Warrant Shares have been sold (the "Termination Date");
provided, however, that if at the Termination Date the Offered Warrant Shares
are covered by a registration statement which also covers other securities and
which is required to remain in effect beyond the Termination Date, the Company
shall maintain in effect such registration statement as it relates to Offered
Warrant Shares for so long as such registration statement (or any substitute
registration statement) remains or is required to remain in effect for any such
other securities, or (ii) to cause any registration statement with respect to
the Warrant Shares to become effective 

                                       10
<PAGE>
 
prior to the Initiation Date. All expenses of registration pursuant to this
Section 15.1 shall be borne by the Company (excluding underwriting discounts and
commissions on Warrant Shares not sold by the Company).

     The Company shall be obligated pursuant to this Section 15.1 to include in
the registration statement Warrant Shares that have not yet been purchased by a
Holder of Warrants so long as such Holder of Warrants submits an undertaking to
the Company that such Holder intends to exercise Warrants representing the
number of Warrant Shares to be included in such registration statement prior to
the consummation of the public offering with respect to such Warrant Shares. In
addition, such Holder of Warrants is permitted to pay the Company the Warrant
Price for such Warrant Shares upon the consummation of the public offering with
respect to such Warrant Shares.

     15.2 Piggy-back Registration Rights. The Company covenants and agrees with
the Holders and any subsequent Holders of the Warrants and/or Warrant Shares
that in the event the Company proposes to file a registration statement under
the Act with respect to any class of security (other than in connection with an
exchange offer, a non-cash offer or a registration statement on Form S-8 or
other unsuitable registration statement form) which becomes or which the Company
believes will become effective at any time after the Initiation Date then the
Company shall in each case give written notice of such proposed filing to the
Holders of Warrants and Warrant Shares at least 30 days before the proposed
filing date and such notice shall offer to such Holders the opportunity to
include in such registration statement such number of Warrant Shares as they may
request, unless, in the opinion of counsel to the Company reasonably acceptable
to any such Holder of Warrants or Warrant Shares who wishes to have Warrant
Shares included in such registration statement, registration under the Act is
not required for the transfer of such Warrants and/or Warrant Shares in the
manner proposed by such Holders.  The Company shall not honor any such request
to register any such Warrant Shares if the request is received later than six
(6) years from the Effective Date, and the Company shall not be required to
honor any request (a) to register any such Warrant Shares if the Company is not
notified in writing of any such request pursuant to this Section 15.2 within at
least 20 days after the Company has given notice to the Holders of the filing,
or (b) to register Warrant Shares that represent in the aggregate fewer than 25%
of the aggregate number of Warrant Shares.  The Company shall permit, or shall
cause the managing underwriter of a proposed offering to permit, the Holders of
Warrant Shares requested to be included in the registration (the "Piggy-back
Shares") to include such Piggy-back Shares in the proposed offering on the same
terms and conditions as applicable to securities of the Company included therein
or as applicable to securities of any person other than the Company and the
Holders of Piggy-back Shares if the securities of any such person are included
therein. Notwithstanding the foregoing, if any such managing underwriter shall
advise the Company in writing that it believes that the distribution of all or a
portion of the Piggy-back Shares requested to be included in the registration
statement concurrently with the securities being registered by the Company would
materially adversely affect the distribution of such securities by the Company
for its own account, then the Holders of such Piggy-back Shares shall delay
their offering and sale of Piggyback Shares (or the portion thereof so
designated by such managing underwriter) for such period, not to exceed 120
days, as the managing underwriter shall request provided that no such delay
shall be required as to Piggy-back Shares if any securities of the Company are
included in such registration statement for the 

                                       11
<PAGE>
 
account of any person other than the Company and the Holders of Piggy-back
Shares. In the event of such delay, the Company shall file such supplements,
post-effective amendments or separate registration statement, and take any such
other steps as may be necessary to permit such Holders to make their proposed
offering and sale for a period of 90 days immediately following the end of such
period of delay ("Piggy-back Termination Date"); provided, however, that if at
the Piggy-back Termination Date the Piggyback Shares are covered by a
registration statement which is, or required to remain, in effect beyond the
Piggy-back Termination Date, the Company shall maintain in effect the
registration statement as it relates to the Piggy-back Shares for so long as
such registration statement remains or is required to remain in effect for any
of such other securities. All expenses of registration pursuant to this Section
15.2 shall be borne by the Company, except that underwriting commissions and
expenses attributable to the Piggy-back Shares and fees and disbursements of
counsel (if any) to the Holders requesting that such Piggy-back Shares be
offered will be borne by such Holders.

     The Company shall be obligated pursuant to this Section 15.2 to include in
the Piggy-back Offering, Warrant Shares that have not yet been purchased by a
holder of Warrants so long as such Holder of Warrants submits an undertaking to
the Company that such Holder intends to exercise Warrants representing the
number of Warrant Shares to be included in such Piggy-back Offering prior to the
consummation of such Piggy-back Offering. In addition, such Holder of Warrants
is permitted to pay the Company the Warrant Price for such Warrant Shares upon
the consummation of the Piggy-back Offering.

     If the Company decides not to proceed with a Piggy-back Offering, the
Company has no obligation to proceed with the offering of the Piggy-back Shares,
unless the Holders of the Warrants and/or Warrant Shares otherwise comply with
the provisions of Section 15.1 hereof (without regard to the 60 days' written
request required thereby). Notwithstanding any of the foregoing contained in
this Section 15.2, the Company's obligation to offer registration rights to the
Piggy-back Shares pursuant to this Section 15.2 shall terminate two (2) years
after the Expiration Date.

     15.3 In connection with the registration of Warrant Shares in accordance
with Section 15.1 and 15.2 above, the Company agrees to:

          (a)  Use its best efforts to register or qualify the Warrant Shares
for offer or sale under the state securities or Blue Sky laws of such states
which the Holders of such Warrant Shares shall designate, until the dates
specified in Section 15.1 and 15.2 above in connection with registration under
the Act; provided, however, that in no event shall the Company be obligated to
qualify to do business in any jurisdiction where it is not now so qualified or
to take any action which would subject it to general service of process in any
jurisdiction where it is not now so subject or to register or get a license as a
broker or dealer in securities in any jurisdiction where it is not so registered
or licensed or to register or qualify the Warrant Shares for offer or sale under
the state securities or Blue Sky laws of any state other than the states in
which some or all of the shares offered or sold in the Public Offering were
registered or qualified for offer and sale.

          (b)  (i)  In the event of any post-effective amendment or other
registration 

                                       12
<PAGE>
 
with respect to any Warrant Shares pursuant to Section 15.1 or 15.2 above, the
Company will indemnify and hold harmless any Holder whose Warrant Shares are
being so registered, and each person, if any, who controls such Holder within
the meaning of the Act, against any losses, claims, damages or liabilities,
joint or several, to which such Holder or such controlling person may be
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained, on
the effective date thereof, in any such registration statement, any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; and will reimburse each such Holder and
each such controlling person for any legal or other expenses reasonably incurred
by such Holder or such controlling person in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Company will not be liable in such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
any such registration statement, any preliminary prospectus or final prospectus,
or any amendment or supplement thereto, in reliance upon and in conformity with
written information furnished by such Holder expressly for use in the
preparation thereof. The Company will not be liable to a claimant to the extent
of any misstatement corrected or remedied in any amended prospectus if the
Company timely delivers a copy of such amended prospectus to such indemnified
person and such indemnified person does not timely furnish such amended
prospectus to such claimant. The Company shall not be required to indemnify any
Holder or controlling person for any payment made to any claimant in settlement
of any suit or claim unless such payment is approved by the Company.

               (ii) Each Holder of Warrants and/or Warrant Shares who
participates in a registration pursuant to Section 15.1 or 15.2 will indemnify
and hold harmless the Company, each of its directors, each of its officers who
have signed any such registration statement, and each person, if any, who
controls the Company within the meaning of the Act, against any losses, claims,
damages or liabilities to which the Company, or any such director, officer or
controlling person may become subject under the Act, or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue or alleged untrue statement or any
material fact contained in any such registration statement, any preliminary
prospectus or final prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in any such registration statement, any preliminary prospectus
or final prospectus, or any amendment or supplement thereto, in reliance upon
and in conformity with written information furnished by such Holder expressly
for use in the preparation thereof; and will reimburse any legal or other
expenses reasonably incurred by the Company, or any such director, officer or

                                       13
<PAGE>
 
controlling person in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the indemnity
agreement contained in this subparagraph (ii) shall not apply to amounts paid to
any claimant in settlement of any suit or claim unless such payment is first
approved by such Holder.

               (iii) In order to provide for just and equitable contribution in
any action in which a claim for indemnification is made pursuant to this clause
(b)(iii) of Section 15.3 but is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
this clause (b)(iii) of Section 15.3 provides for indemnification in such case,
all the parties hereto shall contribute to the aggregate losses, claims, damages
or liabilities to which they may be subject (after contribution from others) in
such proportion so that each Holder whose Warrant Shares are being registered is
responsible pro rata for the portion represented by the public offering price
received by such Holder from the sale of such Holder's Warrant Shares, and the
Company is responsible for the remaining portion; provided, however, that (i) no
Holder shall be required to contribute any amount in excess of the public
offering price received by such Holder from the sale of such Holder's Warrant
Shares and (ii) no person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who is not guilty of such fraudulent misrepresentation. This subsection
(b)(iii) shall not be operative as to any Holder of Warrant Shares to the extent
that the Company has received indemnity under this clause (b)(iii) of Section
15.3.
 
     16.  NO RIGHTS AS STOCKHOLDER; NOTICES TO HOLDERS.  Nothing contained in
this Agreement or in any of the Warrants shall be construed as conferring upon
the Holders or their transferee(s) the right to vote or to receive dividends or
to consent to or receive notice as stockholders in respect of any meeting of
stockholders for the election of directors of the Company or any other matter or
any rights whatsoever as stockholders of the Company. If, however, at any time
prior to the expiration of the Warrants and prior to their exercise, any of the
following events occur:

          (a)  the Company shall declare any dividend payable in any securities
upon its shares of Common Stock or make any distribution (other than a cash
dividend) to the holders of its shares of Common Stock: or

          (b)  the Company shall offer to the holders of its shares of Common
Stock any additional shares of Common Stock or securities convertible into or
exchangeable for shares of Common Stock or any right to subscribe to or purchase
any thereof; or

          (c)  a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation, merger, sale, transfer or lease of all
or substantially all of its property, assets and business as an entirety) shall
be proposed,

then in any one or more of said events the Company shall (i) give notice in
writing of such event to the Holders, as provided in Section 17 hereof and (ii)
if there are more than 100 Holders, 

                                       14
<PAGE>
 
cause notice of such event to be published once in The Wall Street Journal
(national edition), such giving of notice and publication to be completed at
least 20 days prior to the date fixed as a record date or the date of closing
the transfer books for the determination of the stockholders entitled to such
dividend, distribution or subscription rights, or for the determination of
stockholders entitled to vote on such proposed dissolution, liquidation or
winding up. Such notice shall specify such record date or the date of closing
the transfer books, as the case may be. Failure to publish, mail or receive such
notice or any defect therein or in the publication or mailing thereof shall not
affect the validity of any action taken in connection with such dividend,
distribution or subscription rights, or such proposed dissolution, liquidation
or winding up.

     17.  NOTICES.  Any notice pursuant to this Agreement to be given or made by
the registered Holder of any Warrant to the Company shall be sufficiently given
or made if sent by first-class mail or facsimile to:

     CPS Systems, Inc.
     3400 Carlisle, Suite 500
     Dallas, TX 95204
     Attn: President
     Fax:  214-770-1380

Notices or demands authorized by this Agreement to be given or made by the
Company to the registered Holder of any Warrant shall be sufficiently given or
made (except as otherwise provided in this Agreement) if sent by first-class
mail to such Holder at the address of such Holder as shown on the Warrant
Register.

     18.  GOVERNING LAW.  This Agreement shall be governed by and construed in
accordance with the laws of the State of California without giving effect to
principles of conflicts of laws.

     19.  SUPPLEMENTS AND AMENDMENTS.  The Company and the Representatives may
from time to time supplement or amend this Agreement in order to cure any
ambiguity or to correct or supplement any provision contained herein, or to make
any other provisions in regard to matters or questions arising hereunder which
the Company and the Representatives may deem necessary or desirable and which
shall not be inconsistent with the provisions of the Warrants and which shall
not adversely affect the interests of the Holders. This Agreement may also be
supplemented or amended from time to time by a writing executed by or on behalf
of the Company and all of the Holders.

     20.  SUCCESSOR.  All the covenants and provisions of this Agreement by or
for the benefit of the Company or the Holders shall bind and inure to the
benefit of their respective successors and assigns hereunder. Assignments by the
Holders of their rights hereunder shall be made in accordance with Section 4
hereof.

     21.  MERGER OR CONSOLIDATION OF THE COMPANY.  So long as Warrants remain
outstanding, the Company will not merge or consolidate with or into, or sell,
transfer or lease all or substantially all of its property to, any other
corporation unless the successor or purchasing 

                                       15
<PAGE>
 
corporation, as the case may be (if not the Company), shall expressly assume, by
supplemental agreement executed and delivered to the Holders, the due and
punctual performance and observance of each and every covenant and condition of
this Agreement to be performed and observed by the Company.

     22.  BENEFITS OF THIS AGREEMENT.  Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Holders, any legal or equitable right, remedy or claim under this Agreement, but
this Agreement shall be for the sole and exclusive benefit of the Company any
the Holders of the Warrants and Warrant Shares.

     23.  CAPTIONS.  The captions of the sections and subsections of this
Agreement have been reserved for convenience only and shall have no substantive
effect.

     24.  COUNTERPARTS.  This Agreement may be executed in any number of
counterparts each of which when so executed shall be deemed to be an original;
but such counterparts together shall constitute but one and the same instrument.

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day, month and year first above written.

                                       CRUTTENDEN ROTH INCORPORATED

Attest:

____________________________           By:_________________________
                                       Name:
                                       Title:

                                       JOSEPHTHAL & CO. INC.

Attest:

____________________________           By:_________________________
                                       Name:
                                       Title:

                                       CPS SYSTEMS, INC.

Attest:

____________________________           By:_________________________
                                       Name:
                                       Title:

                                       16
<PAGE>
 
                                                                       EXHIBIT A

                         [Form of Warrant Certificate]
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW. SAID
SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR
AN EXEMPTION THEREFROM UNDER SAID ACT

                              WARRANT CERTIFICATE
                                      OF

                               CPS SYSTEMS, INC.

                    EXERCISABLE ON OR BEFORE MARCH   , 2003

     No. ___                                                  _________ Warrants


     This Warrant Certificate certifies that the registered holder hereof or its
registered assigns, is the registered holder of Warrants expiring March __, 2003
(the "Warrants") to purchase Common Stock, $0.01 par value per share (the
"Common Stock"), of CPS Systems, Inc., a Texas corporation (the "Company").
Each Warrant entitles the holder upon exercise to receive from the Company from
10:00 a.m., Pacific time, on March __, 1999 through and until 6:00 p.m., Pacific
time, on March __, 2003, one fully paid and nonassessable share of Common Stock
(a "Warrant Share") at the initial exercise price (the "Warrant Price") of
$_____ payable in lawful money of the United States of America upon surrender of
this Warrant Certificate and payment of the Warrant Price at the conditions set
forth herein and in the Warrant Agreement referred to on the reverse hereof.
The Warrant Price and number of Warrant Shares issuable upon exercise of the
Warrants are subject to adjustment upon the occurrence of certain events set
forth in the Warrant Agreement.

     No Warrant may be exercised after 6:00 p.m., Pacific Time, on March __,
2003 (the "Expiration Date"). Notwithstanding the foregoing, if at 6:00 p.m.,
Pacific time on the Expiration Date, any Holder or Holders of the Warrants have
not exercised their Warrants and the Closing Price (as defined in the Warrant
Agreement) for the Common Stock on the Expiration Date is greater than the
Warrant Price, then each such unexercised Warrant shall be automatically
converted into a number of shares of Common Stock of the Company equal to: (A)
the number of shares of Common Stock then issuable upon exercise of a Warrant
multiplied by (B) a fraction (1) the numerator of which is the difference
between the Closing Price for the Common Stock on the Expiration Date and the
Warrant Price and (2) the denominator of which is the Closing Price for the
Warrant Stock on the Expiration Date.

     Reference is hereby made to the further provisions of this Warrant
Certificate set forth on the reverse hereof and such further provisions shall
for all purposes have the same effect as though fully set forth at this price.

                                       17
<PAGE>
 
     This Warrant Certificate shall not be valid unless countersigned by the
Company.

     IN WITNESS WHEREOF, CPS Systems, Inc. has caused this Warrant Certificate
to be signed by its President and by its Chief Financial Officer and has caused
its corporate seal to be affixed hereunto or imprinted hereon.

Dated:  March __, 1998                 CPS SYSTEMS, INC.



                                       ________________________
                                       Ken Hoofard
                                       President



                                       ________________________

                                       Chief Financial Officer

                                       18
<PAGE>
 
                         [Form of Warrant Certificate]

                                   [Reverse]

     The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring March __, 2003 entitling the holder on
exercise to receive shares of Common Stock, $0.001 par value per share, of the
Company (the "Common Stock"), and are issued or to be issued pursuant to a
Warrant Agreement, dated as of March __, 1998 (the "Warrant Agreement"), duly
executed and delivered by the Company, which Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Company and the holders (the words
"holders" or "holder" meaning the registered holders or registered holder) of
the Warrants.  A copy of the Warrant Agreement may be obtained by the holder
hereof upon written request to the Company.

     The Warrants may be exercised at any time on or before March __, 2003.  The
holder of Warrants evidenced by this Warrant Certificate may exercise them by
surrendering this Warrant Certificate, with the form of election to purchase set
forth hereon properly completed and executed, together with payment of the
Warrant Price at the office of the Company designated for such purpose.  In the
event that upon any exercise of Warrants evidenced hereby the number of Warrants
exercised shall be less than the total number of Warrants evidenced hereby,
there shall be issued to the holder hereof or his assignee a new Warrant
Certificate evidencing the number of Warrants not exercised.  No adjustment
shall be made for any dividends on any Common Stock issuable upon exercise of
this Warrant.

     The Warrant Agreement provides that upon the occurrence of certain events
the number of shares of Common Stock issuable upon the exercise of each Warrant
shall be adjusted. If the number of shares of Common Stock issuable upon such
exercise is adjusted, the Warrant Agreement provides that the Warrant Price set
forth on the face hereof may, subject to certain conditions, be adjusted. No
fractions of a share of Common Stock will be issued upon the exercise of any
Warrants but the Company will pay the cash value thereof determined as provided
in the Warrant Agreement. The Warrant Agreement also provides that, while the
Warrants are exercisable, the holders of the Warrants shall have an optional
conversion right to convert, without payment of any exercise price or any cash
or other consideration by such holders, the Warrants or any portion thereof into
a number of shares of Common Stock as specified in the Warrant Agreement.

     The holders of the Warrants are entitled to certain registration rights
with respect to the Common Stock purchasable upon exercise thereof. Said
registration rights are set forth in full in the Warrant Agreement.

     Warrant Certificates, when surrendered at the office of the Company by the
registered holder thereof in person or by legal representative or attorney duly
authorized in writing, may be exchanged, in the manner and subject to the
limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant certificate of Warrant Certificates of like
tenor evidencing in the aggregate a like number of Warrants.

                                       19
<PAGE>
 
     Upon due presentation for registration of transfer of this Warrant
Certificate at the office of the Company, a new Warrant certificate or Warrant
certificates of like tenor and evidencing in the aggregate a like number of
Warrants shall be issued to other transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided in the Warrant Agreement,
without charge except for any tax or other governmental charge imposed in
connection therewith.

     The Company may deem and treat the registered holder(s) thereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, of any distribution to the holder(s) hereof and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
Neither the Warrants nor this Warrant Certificate entitles any holder hereof to
any rights of a stockholder of the Company.

                                       20
<PAGE>
 
                        (Form of Election to Purchase)

                   (To be Executed upon Exercise of Warrant)

     The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to receive ____________ shares of
Common Stock and herewith tenders payment for such shares in accordance with the
terms of the Warrant Agreement. The undersigned requests that a certificate for
such shares be registered in the name of _____________________________, whose
address is _________________________________________ and that such shares be
delivered to _____________________________________________ whose address is
_______________________________________. If said number of shares is less than
all of the shares of Common Stock purchasable hereunder, the undersigned
requests that a new Warrant Certificate representing the remaining balance of
such shares be registered in the name of ________________________, whose address
is _______________________, and that such Warrant Certificate be delivered to
_______________________, whose address is _________________________________.


                                       Signature:

Date:

                                       Signature Guaranteed:

                                       21
<PAGE>
 
                             (Form of Assignment)

                 (To be Executed upon Assignment of Warrants)

     FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto

         (Name and Address of Assignee Must Be Printed or Typewritten)

                      ___________________________________

                      ___________________________________

                      ___________________________________

the within Warrants, hereby irrevocably constituting and appointing
________________ Attorney to transfer said Warrants on the books of the Company,
with full power of substitution in the premises.

Dated: ___________________             _________________________________
                                       Signature of Registered Holder

Note: The signature on this assignment must correspond with the name as it
appears upon the face of the within Warrant Certificate in every particular,
without alteration or enlargement or any change whatever.

Signature Guaranteed: __________________________

(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers, Inc.)

                                       22

<PAGE>
 

              CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We have issued our reports dated February 19, 1998 accompanying the consolidated
financial statements and schedule of CPS Systems, Inc. and subsidiary contained
in the Form SB-2, Registration Statement under the Securities Act of 1933 (the
"Registration Statement") and in the Prospectus which forms a part of that
Registration Statement. We consent to the use of the aforementioned reports in
the Registration Statement and Prospectus, and to the use of our name as it
appears under the caption "Experts".


/s/ Grant Thornton LLP
- ----------------------
 Grant Thornton LLP

Atlanta, Georgia
    
March 20, 1998     




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