SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K
                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                              ---------------------

         For the Fiscal Year May 31, 1998 Commission File Number 0-25104 

                         CONTINENTAL INFORMATION SYSTEMS
                                   CORPORATION
                           (Exact name of registrant)

       New York                                           16-0956508
(State of incorporation)                 (I.R.S. Employer Identification Number)

            45 Broadway Atrium, Suite 1105, New York, New York 10006
              (Address of principal executive offices and zip code)

                                 (212) 771-1000
                         (Registrant's telephone number)

        Securities registered pursuant to Section 12(b) of the Act: NONE

           Securities registered pursuant to Section 12(g) of the Act: 

                     Common Stock, par value $.01 per share

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

                        Yes      [X]          No [ ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best  of  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ ]

The number of the  registrant's  shares of Common Stock  outstanding on June 30,
1998 was 6,939,060.

As of June 30, 1998,  the  aggregate  market value of the shares of Common Stock
held by non-affiliates of the registrant was approximately $10,361,114.*
 
                       DOCUMENTS INCORPORATED BY REFERENCE

Portions  of  Continental  Information  Systems  Corporation's  Notice of Annual
Meeting of Stockholders and Proxy  Statement,  to be filed within 120 days after
the end of the registrant's  fiscal year, are incorporated into Part III of this
Annual Report.

    * Excludes 1,676,940 shares deemed to be held by officers and directors, and
stockholders  whose ownership  exceeds ten percent of the shares  outstanding at
June 30, 1998. Exclusion of shares held by any person should not be construed to
indicate that such person possesses the power, direct or indirect,  to direct or
cause the  direction of the  management or policies of the  registrant,  or that
such person is controlled by or under common control with the registrant.
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                                     PART I

ITEM 1.       BUSINESS

Introduction

The  Company is a  specialized  financial  services  company  that,  through its
operating  subsidiaries,   is  currently  engaged  in  the  leasing,  sales  and
management  of  commercial   aircraft  and  aircraft  engines  (the  "Air  Group
Business"),  equipment  leasing (the  "Equipment  Leasing  Business")  and other
financing  activities,  including commercial real estate financing (the "Finance
Business").

Organization and History of the Company

The Company is a New York  corporation  that was  organized in 1968.  In January
1989, the Company and nine of its affiliated  subsidiaries  filed for protection
under Chapter 11 of the United States  Bankruptcy Code. The Company emerged from
Chapter  11  pursuant  to a Plan  of  Reorganization  (the  "Plan"),  which  was
confirmed  by the  Bankruptcy  Court on  November  29,  1994.  The  Plan  became
effective,  and the  transactions  contemplated  thereby  were  consummated,  on
December 21, 1994 (the "Effective  Date").  Following  confirmation of the Plan,
the  Company  continued  to engage in certain  financing  and  financing-related
business  activities  it had  engaged in prior to filing for  bankruptcy.  These
activities included buying, selling, remarketing and leasing capital assets such
as  computers,   aircraft,  railcars,   telecommunications   equipment,  medical
diagnostic and production equipment and electronic office equipment

Beginning in 1997, the Board of Directors  initiated a  restructuring  of senior
management,   which  was  completed  in  July  1997.  The  Board  installed  new
management,  including  the  appointment  of a  representative  of the Company's
largest  shareholder as Chief  Executive  Officer.  New  management  conducted a
review of the Company's  operations  and developed  plans to focus on and expand
upon the Company's core businesses of buying and selling commercial aircraft and
engines and the leasing of certain other  capital  equipment.  In addition,  the
Company  expanded its  specialized  financing  services,  to include real estate
finance and other special purpose lending activities.  Accordingly,  the Company
has disposed of several non-core business units. On August 31, 1997, the Company
sold its Telecommunications Business Unit, a telecommunications equipment resale
business,  to Meridian Leasing  Corporation of Deerfield,  Illinois.  On May 29,
1998,  the Company  announced  its decision to  discontinue  and  liquidate  its
LaserAccess laser printing business.

Air Group Business

Through its wholly-owned subsidiary, CIS Air Corporation, a Delaware corporation
("CIS Air"),  the Company  participates in the worldwide market for the sale and
leasing of used,  commercial  aircraft and aircraft  engines.  CIS Air generally
acquires whole aircraft or aircraft engines and then sells, leases or dismantles
them  for  resale  as  replacement   parts.   CIS  Air  finances  its  portfolio
acquisitions  with cash flow from  operations  or through  borrowings  under CIS
Air's  revolving  credit  engine  facility.  Engines,  which are  acquired  from
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brokers,  airlines,  and dealers,  are in various used  condition and frequently
need  substantial  repair or  refurbishing.  The Company  contracts with outside
vendors to  complete  this  upgrade  process  before  reselling  or leasing  the
equipment to its customers.  Aircraft  acquired by the Company may be in various
stages of air  worthiness.  Repairs and upgrades may be required to the aircraft
prior to leasing the aircraft.  CIS Air's leases  require the lessee to maintain
the aircraft in accordance with  FAA-approved  maintenance  programs and contain
specific return conditions.

CIS Air  conducts  its sales and leasing  activities  of  aircraft,  engines and
replacement parts through in-house sales personnel, brokers and consignees.

The Company  enters into both  short-term  and  long-term  triple net  operating
leases.  Short-term  operating  leases  have  terms  of up to two  years,  while
long-term  leases may have initial  terms of up to five years.  The Company also
sells aircraft and engines and finances such sales. Air Group Business customers
are primarily  small to  medium-sized  commercial air carriers,  both inside and
outside the United States.

In addition to CIS Air's sales and leasing activities,  a subsidiary of CIS Air,
CIS Aircraft Partners,  Inc., has managed a portfolio of commercial  aircraft on
behalf of two publicly held limited partnerships,  JetStream, L.P. and JetStream
II, L.P. since their inception in 1987 and 1988 in offerings which  collectively
raised $195 million.  As Managing General Partner,  CIS Aircraft Partners,  Inc.
acquired the  portfolio on behalf of the  partnerships,  arranged  leases of the
aircraft and engages in ongoing management  activities including  remarketing to
preserve and protect the value of the portfolio.  The payment of management fees
to CIS Aircraft Partners,  Inc. from Jet Stream,  L.P. was suspended in December
1997, and the payment of management  fees from JetStream II, L.P. is expected to
be suspended in December 1998, because under the terms of the respective limited
partnership  agreements,  these  fees are  subordinate  in right of payment to a
preferred rate of return to the limited partners.  The partnerships  continue to
accrue  payment of such fees to CIS Aircraft  Partners,  Inc. All or part of the
accrued fees may be paid retroactively depending on future cash distributions to
the  limited   partners  and  the  final  rates  of  return  achieved  upon  the
partnerships' termination.

Business   Strategy.   The  Company's   operating  strategy  is  to  employ  its
management's expertise in the aviation, leasing and finance industries to expand
and actively manage its aircraft and aircraft engine portfolio, which is focused
on the  narrowbody  segment of the aircraft  resale market.  Company  management
believes that narrowbody aircraft offer greater potential for profitable leasing
opportunities  than the widebody  segment of the market because of the extensive
customer  base for such  aircraft and their  relatively  stable  market  values.
Company  management  utilizes its  existing  relationships  with other  aviation
industry  participants,  as well as its  technical  expertise,  to identify  and
evaluate profitable acquisition, sale and leasing opportunities.

By steadily  increasing  its asset base  through  profitable  acquisitions,  the
Company  expects to increase its cash flow. By reinvesting  this cash flow while
managing  investment  risk,  the Company hopes to achieve  capital  growth.  The
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Company  is  actively  examining  ways to  expand  the  scale  and  scope of its
activities  in this  business.  In addition,  the Company  seeks to maximize the
residual  value  of  its  portfolio  by  actively  managing  its  assets.  Asset
management  includes  inspections  prior  to  and  during  the  lease  term  and
monitoring of lessee compliance with maintenance and return provisions.

In the normal  course of  business  CIS Air sells and leases to  customers  with
credit  histories  that are below AAA,  including a number of foreign  companies
with less  stringent  record  keeping  controls than their  counterparts  in the
United States. While the Company believes that these credits offer higher yields
than  larger,  more  creditworthy  customers  do, they also  present an inherent
degree of  collection  difficulty.  Leasing  or  selling  on  account to foreign
companies that operate outside the United States may also present  regulatory or
administrative  obstacles to  repossession  of aircraft in the event of default.
Management has established  guidelines to minimize the risk of lessee  defaults.
Under these  guidelines,  the Company  conducts  initial and ongoing analyses of
each lessee's  creditworthiness and the economic environment in the countries in
which they operate.

Industry Conditions.  Demand for aircraft,  aircraft engines and engine parts is
driven  primarily by flying  hours or cycles  (defined as a take-off or landing)
because FAA regulations  require that parts be serviced or replaced at scheduled
intervals,  often after specified  flight hours or cycles.  Thus, the demand for
replacement  engines and parts is a function  of the current  level of world air
travel. The airline industry has experienced significant growth in air travel in
the past five to six years, primarily due to a world economic recovery. Although
this recent industry  improvement has modestly  increased the demand for certain
types of aircraft,  overall conditions in the industry remain  competitive.  The
Company's  business remains dependent upon the overall economic condition of the
airline industry, which historically has been volatile.

Leasing  aircraft,  aircraft  engines  or parts  offers  CIS Air  customers  the
opportunity  to lower  their  overhead  or working  capital  requirements.  Some
carriers  who do not wish to  maintain a pool of spare  engines  use  short-term
leases of engines to manage their  fleet.  Many larger  carriers are  increasing
their use of leased  aircraft as they upgrade their fleets,  and many of the new
carriers have limited  capital  resources  and therefore  prefer to lease rather
than own engines.

Federal Regulation.

Aging Aircraft Maintenance. The Federal Aviation Administration (the "FAA"), has
adopted a series of Airworthiness Directives ("ADs"). ADs are mandates requiring
the airline to perform a specific  maintenance task within a specified period of
time.  The FAA imposes strict  requirements  governing  aircraft  inspection and
certification,  maintenance,  equipment  requirements,  corrosion control, noise
levels and general  operating and flight rules. In negotiating  future leases or
in selling  aircraft CIS Air may be required to bear some or all of the costs of
compliance  with  future  ADs or ADs that  have  been  issued  but which did not
mandate  action during the previous  lessee's  lease term or in respect of which
the previous  lessee failed to comply.  The aggregate  effect of compliance with
these standards is not determinable at this time and will depend
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upon a variety  of  factors,  including,  but not  limited  to, the state of the
commercial  aircraft  market,  the extent of the AD, the availability of capable
repair  facilities and the effect,  if any, that such compliance may have on the
service lives of the affected  aircraft.  As described  above,  the cost of such
compliance  may be  reduced  to the extent  that  current  or future  lessees of
aircraft  effect  such  modifications  under the terms of the  current or future
operating leases.

              Aircraft Noise.  Effective  November 6, 1990,  Congress passed the
Airport  Noise  and  Capacity  Act of  1990  (the  "Act"),  which  required  the
development of a National Noise Policy. On September 25, 1991, final regulations
(the  "Regulations")  were  announced  and  became  effective  immediately.  The
Regulations provide generally,  among other things, for the phase-out of Stage 2
aircraft in the United  States by December 31,  1999,  unless  hushkitted.  Only
Stage 3 or Stage 2  hushkitted  aircraft  will be  allowed  to fly in the United
States after December 31, 1999.

In addition to FAA activity in noise abatement,  other countries have adopted or
are considering  adopting noise compliance  standards which would have a similar
effect of reducing the ability of an airline to operate Stage 2 aircraft in such
jurisdictions.  These regulations may disrupt the market for Stage 2 aircraft at
December 31, 1999. CIS Air believes its current portfolio will not be materially
affected by these regulations.

Since much of CIS Air's assets are subject to operating leases,  CIS Air will be
required to re-lease or sell such  assets  after the  expiration  of the current
lease terms.  Such sale or re-lease  must be done in a timely manner to minimize
off-lease time and allow recovery of CIS Air's investment.  The ability to renew
leases or to sell the  Aircraft  owned by the CIS Air is  dependent  upon  among
other factors:  (a) general economic conditions and market conditions  affecting
the  airline  industry  in  particular;  (b)  regulatory  changes;  (c) costs to
refurbish  assets which is dependent  upon the  condition the asset was returned
in; (d) technological  changes; (e) any cost required to conform the aircraft to
future  Stage 3  noise  restrictions;  (f) the  availability  to the  lessee  or
potential lessee of other similar aircraft from CIS Air's  competition;  and (g)
the ability to effectively market the aircraft.  It is possible that CIS Air may
therefore not realize the residual  value  anticipated or  alternatively  it may
only be able to re-lease assets at lower lease rates.

Dependence on Key Personnel.  The Air Group Business at present is substantially
dependent on the efforts and abilities of a number of its current key management
personnel.  The success of the Air Group  Business will depend to a large extent
on the Company's ability to retain or attract key employees. The loss of certain
of these employees or the Company's inability to retain or attract key employees
in the future  could have an adverse  effect on the  Company's  operations.  The
Company has an employment  contract with the head of its CIS Air subsidiary that
runs through fiscal year end 1999.

Equipment Leasing Business

The  Company's  Equipment  Leasing  Business,  which is  conducted  through  its
operating subsidiary CIS Corporation,  a New York Corporation ("CIS"),  leases a
wide range of equipment,  including computers,  printers and  telecommunications
equipment.  The Company  participates  in the leasing market by originating  new
leases, financing other equipment brokers and engaging in leveraged leasing.
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The Company offers  customers the  flexibility  of buying or leasing  equipment.
Leasing  can  be an  attractive  financing  mechanism  for  customers  acquiring
equipment for various reasons,  including:  (i) the flexibility given lessees to
replace  equipment  at the end of the  initial  lease term in the event that the
equipment  has  become  technologically   obsolete  or  the  lessees'  equipment
requirements  change;  (ii) the smaller  initial  cash outlay that  leasing,  as
opposed to purchasing,  requires;  and (iii) the benefits that off-balance sheet
financing  may  provide.  The  Company  does  not  maintain  inventories  of new
equipment, as lease contracts typically involve lessee-identified equipment.

Equipment Finance Contracts

General. Leasing revenues are primarily derived from the origination and sale of
equipment finance contracts pursuant to which the Company provides financing for
the purchase of various types of equipment.  Substantially all finance contracts
are  non-cancelable  for a  specified  lease  term.  Some of the  contracts  are
structured so that the Company generally receives scheduled payments sufficient,
in the  aggregate,  to cover  borrowing  costs and the  costs of the  underlying
equipment,   and  to  provide  an  appropriate   profit   margin.   The  initial
non-cancelable  term of the  contract  is  equal to or less  than the  estimated
economic life of the equipment.  A portion of the lease contracts are structured
so that the Company needs to look to the residual  value at the end of the lease
term in order to fully recover the cost for the  equipment and borrowing  costs.
Initial terms for new equipment  lease  contracts  generally range from three to
five years.

Terms and  Conditions.  The  terms and  conditions  of the  Company's  equipment
finance contracts,  which are generally  structured  principally as operating or
direct finance leases,  vary somewhat from lease to lease. In substantially  all
cases,  however,  the Company's customers are required to (i) maintain,  service
and  operate  the  equipment  in   accordance   with  the   manufacturer's   and
government-mandated  procedures;  (ii) insure the equipment against property and
casualty loss; (iii) pay all taxes associated with the equipment;  and (iv) make
all scheduled contract payments  regardless of the performance of the equipment.
The Company's standard equipment lease contract provides that, in the event of a
default by the customer,  the Company can require payment of liquidated  damages
to make the Company whole and can seize and remove the equipment for  subsequent
sale, refinancing or other disposal at its discretion.

Credit  Policies and  Procedures.  Management  believes the credit  underwriting
policies and  procedures  have been  effective in the  selection of  appropriate
lessees and in minimizing  the risks of  delinquencies  and credit  losses.  The
underwriting guidelines generally require a credit investigation of an equipment
lessee,  and an analysis of the  equipment so as to estimate  value in case of a
repossession  or residual  value where the  Company has assumed  residual  value
risk.

Most customers of the Equipment  Leasing Business are small  businesses  located
almost exclusively within the United States. Most of these customers have credit
histories  that are below AAA.  These credits offer a higher  interest rate than
AAA credits but have inherently higher risks of default.
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The Company also acts as a funding source for leases originated by other leasing
equipment brokers.  The same procedures and policies are utilized in determining
whether to fund such leases.

Residual  Values.  Some of the  equipment  leasing  provided  by the  Company is
structured  such that the full cost of the equipment and all financing costs are
not repaid  during the initial  financing  term. A residual  interest is usually
maintained  in the equipment at the end of the initial lease term. At the end of
the lease the Company will own the underlying  equipment which may be worth more
or less than the residual value on the Company's  books. At the end of the lease
several  options are  available,  which include  extending  the original  lease,
releasing  the equipment to a different end user or selling the equipment to the
original lessee or in the open market.

The Company also purchases leases originated by other lessors, where the payment
stream on the  lease is paid  during  the term of the lease to the  vendor or an
institution that financed the lease.  The Company's  intention is that the value
of the  equipment  will be  worth  more at the end of the  lease  than  its cash
investment in the lease.  The Company may also, as it has in the past, sell this
lease to another  company  willing to purchase this lease if the current  market
conditions provide an opportunity to recognize profit on such a sale.

Allowance for Doubtful Accounts. The Company maintains an allowance for doubtful
accounts in connection with payments due under equipment  finance contracts held
in the portfolio at a level which it deems sufficient to meet future  receivable
writedowns,  based on an analysis of the  delinquencies,  problem accounts,  and
overall risks and probable losses associated with such contracts,  together with
a review of the historical loss experience.  There can be no assurance that this
allowance will prove to be adequate.

Finance Business

During the prior fiscal year, the Company  decided to diversify into real estate
financing as an extension of its  historical  aircraft and  equipment  financing
business.  On July 3, 1997,  the Company  announced  that it had entered  into a
Joint  Investment  Agreement  (the  "Emmes  Agreement")  with  Emmes  Investment
Management  Co. LLC  ("Emmes")  to provide  up to $8 million to be  invested  in
high-yield, short-term financing for commercial real estate transactions. At May
31, 1998, the Company's  investment in such transactions was approximately  $1.5
million.  Due to  increased  availability  of real  estate  financing  from more
traditional sources that makes the financing structured by Emmes less rewarding,
the Company does not anticipate making substantial  additional investments under
the Emmes Agreement in the near future.

From time to time the Company makes loans to borrowers with profiles that do not
meet  the  requirements  of  traditional  lending  institutions.  The  Company's
determination  whether to make the loan will depend on a number of factors, some
of which  include:  an  evaluation  of the  borrower,  the  purpose of the loan,
collateral  held by the Company,  if any, the nature of the  Company's  security
interest and the time expected to  repayment.  Based on the unique nature of the
loan  the  Company  may  receive  fees,  equity  interests  or  other  forms  of
remuneration in addition to traditional interest.
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Customers and Marketing

The Company  obtains its customers from many sources  including  in-house sales,
equipment  brokers,  vendor  relationships  and  advertising.  A  customer  will
typically sign a single master lease  agreement.  Additional  subsequent  leases
with that customer will be financed under the original master lease agreement by
executing a schedule of additional equipment.  The Company's management believes
that its business is not  dependent on any single  customer or any single source
for the equipment marketed by the Company.

Financing

The Company's  financing strategy has been to use its own capital,  periodically
sell  leases to  selected  institutions  on a  non-recourse  basis,  and develop
leasing relationships with financial organizations to provide lease financing on
a recourse and non recourse basis.

Certain  equipment  leases are  financed  by  assigning  the  rentals to various
lending  institutions at fixed rates on a recourse and  non-recourse  basis. The
Company has in the past also utilized various credit facilities,  including bank
lines of credit and is  currently  in  negotiations  with a  commercial  bank to
establish a $3 million  "warehouse" line of credit. It is also negotiating for a
program to sell its leases on a continuing basis.

The  Company  also  has  a  secured,   revolving  loan  agreement  with  another
institution  to provide lease and inventory  financing for aircraft  engines for
CIS Air in the amount of $10,000,000.  The facility bears interest at prime plus
1/4% and expires in December 2000.

Concentration of Credit Risk

The  Company  extends  credit  through  trade  accounts  receivable  and leasing
transactions  to its  customers  located  primarily  in the United  States.  The
underlying  equipment secures direct financing and operating leases. The Company
generally does not require collateral for trade accounts receivable.

The Company's notes receivable balance of $6,870,000 at May 31, 1998 is with two
companies in the airline industry. Thus, the Company is directly affected by the
well-being of these two companies and the airline industry in general.  However,
the credit risk  associated  with these notes  receivable  is  mitigated  by the
Company's policy requiring collateral on all airline notes receivable.

All   direct   financing   and   operating   leases   are   evaluated   under  a
management-approved  credit policy that restricts  lending on certain assets and
to certain  industries.  An evaluation of the  creditworthiness of an individual
customer  involves a review of both industry- and  company-specific  information
submitted at the time of lease  application.  All financing  requests  follow an
approved  credit  approval  process that involves at least one credit  committee
member and escalates based upon transaction  size. The Company believes that its
lending criteria reflect current industry leasing standards.
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Competition

The Company competes with other companies in each aspect of its business.

The aircraft  leasing  industry is competitive  and the success of any lessor is
largely dependent upon the nature of the aircraft within its portfolio.  The Air
Group Business  competes with aircraft  manufacturers,  distributors,  airlines,
leasing companies,  financial institutions and other parties engaged in leasing,
managing, and marketing aircraft. Such competitors may lease or sell aircraft at
lower  rates  or  prices  than  CIS Air and  provide  benefits,  such as  direct
maintenance crews, and support services which CIS Air cannot provide.

In the Equipment  Leasing  Business,  the Company  competes with other equipment
manufacturers, dealers, brokers, leasing companies, commercial banks, investment
banking firms and other  financial  institutions.  The Real Estate  Finance Loan
Business also competes with an array of financial institutions, including banks,
mortgage lenders and real estate investors.

The  Company's  continued  ability to  compete  effectively  is also  materially
affected by its ability to attract and retain  well-qualified  personnel  and by
the  availability  of  financing  at  competitive  interest  rates.  Many of the
Company's competitors have substantially greater financial resources,  economies
of scale and lower capital costs than the Company and, as a result, no assurance
can be given that the Company will be successful  in operating  profitably or in
obtaining access to competitive capital sources.

The Company believes it competes primarily on the basis of price,  capability to
meet customer needs,  flexibility in structuring transaction terms,  reliability
in  meeting  commitments  and the  degree of  knowledge  and  competence  of key
employees.

Seasonality and Backlogs

Revenues  historically have shown a seasonal  fluctuation,  based largely on the
staggered fiscal years of its customer base as many lease and purchase decisions
are made on the basis of customer budget constraints, but the Company's business
is not  seasonal in nature.  The Company does not have a  significant  amount of
backlog orders as a result of its operations.

Proprietary Rights

The  Company  has no patents or  registered  trademarks.  The  Company  utilizes
software  licensed  from third  parties for certain of its financing and leasing
operations.

Employees

As of June 30, 1998, the Company had approximately 25 full-time employees,  none
of whom is employed under a collective bargaining agreement.  Seventeen of these
employees  work in  administration,  and  eight are  engaged  in sales and sales
support.  Of the  employees  engaged  in sales  and  sales  support,  three  are
marketing  representatives  who are  compensated  substantially  on a commission
basis.
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ITEM 2.       PROPERTIES

The  Company's  executive  offices  are located in New York,  New York,  and its
operating  headquarters  are located in  Syracuse,  New York.  The Company  also
maintains a small sales office in Los Angeles,  California.  The Company  leases
these offices,  which occupy  approximately 12,000 square feet, under short-term
leases for an aggregate monthly rental of approximately $20,000.

ITEM 3.       LEGAL PROCEEDINGS

The  Company is  currently  engaged  in  litigation  with the former  owners and
executives of its discontinued  LaserAccess business. In March 1998, the Company
prepaid  remaining amounts due to the former owners and exercised a right to set
off  approximately  $1.1  million  against  amounts due on  promissory  notes in
connection  with the purchase of  LaserAccess.  The Company has also  terminated
these  individuals  under their  employment  agreements.  On April 7, 1998,  the
former owners filed suit in Superior Court of  California,  County of San Diego,
seeking to recover  damages  allegedly  arising  from the  Company's  set-off of
amounts   due.   Additionally,   the  former   owners  are  seeking  to  recover
approximately  $733,000 in damages  arising from the  Company's  termination  of
their employment contracts. The complaint, as amended, seeks damages for various
other claims,  including  defamation.  The Company has asserted  crossclaims and
intends to vigorously contest these actions.

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

No matters were  submitted to a vote of the  Company's  shareholders  during the
fourth quarter of its fiscal year.

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
               STOCKHOLDER MATTERS

After emerging from reorganization,  the Company's Common Stock began trading on
the Nasdaq  Small-Cap Market under the symbol CISC on May 16, 1995. The high and
low bid information for the last two fiscal years is as follows:
<TABLE>
<CAPTION>
                         First Quarter           Second Quarter            Third Quarter            Fourth Quarter
                         -------------           --------------            -------------            --------------
                         Low      High           Low       High            Low      High           Low         High
                         ---      ----           ---       ----            ---      ----           ---         ----
<S>                     <C>      <C>           <C>       <C>             <C>      <C>            <C>          <C>   
Fiscal Year ended
May 31, 1998            $ 2.13   $ 3.25        $ 2.50    $ 3.56          $ 2.13   $  2.94        $  2.16      $ 3.00
                        
Fiscal Year ended
May 31, 1997            $ 1.63   $ 2.00        $ 1.69    $ 2.25          $ 1.75   $  3.13        $  1.88      $ 2.88
                       
</TABLE>
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
--------------------------------------------------------------------------------

As of June 30, 1998,  there were 1,236 record  holders of the  Company's  Common
Stock.  No cash  dividends  have been paid on the  Common  Stock to date and the
Company does not anticipate paying a dividend in the foreseeable  future, as the
Board of  Directors  intends to retain  earnings  for use in the  business.  Any
future  determination  of dividends  will depend upon any dividend  restrictions
applicable to the Company,  the  Company's  financial  condition,  the Company's
results of  operations  and such other  factors as the Board of Directors  deems
relevant.

ITEM 6.  SELECTED FINANCIAL DATA:

The  following  table  sets  forth a  summary  of  selected  financial  data for
Continental Information Systems Corporation and its Subsidiaries (the "Company")
as of the dates and for each of the periods stated.  To distinguish  between the
operations of the Company  after  reorganization  (sometimes  referred to as the
"Reorganized  Company")  and  operations  prior  to  reorganization,   the  term
"Predecessor   Company"   will  be   used   when   reference   is  made  to  the
pre-reorganization  periods.  Due to the application of "Fresh Start" accounting
as of November 30, 1994 (the "Fresh Start Date"),  the financial  data as of and
for the fiscal year ended May 31, 1995 is presented in two parts:  the six month
period commencing after the Fresh Start Date and ending May 31, 1995 and the six
month  period  ending  on  the  Fresh  Start  Date,  which  was  the  end of the
Predecessor Company's second fiscal quarter.

This  information  should be read in conjunction  with the Company's  historical
financial  statements,  the related notes, and the other  information  contained
herein,  including the information set forth in "ITEM 7. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF  OPERATIONS."  The financial
data for the  Reorganized  Company is generally not  comparable to the financial
data  for the  Predecessor  Company  due to the  application  of  "Fresh  Start"
accounting   upon   emergence   from   Chapter  11   pursuant  to  the  Plan  of
Reorganization.
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                          (Dollars in thousands except per share amounts)
                                                                    Reorganized Company               |     Predecessor Company   
                                              ------------------------------------------------------- | ----------------------------
                                                           Fiscal Year Ended                          |                  Fiscal Year
                                                                May 31,                  For the Six  |   For the Six        Ended
                                              ----------------------------------------   Months Ended |   Months Ended       May 31,
Period Data:                                      1998           1997           1996     May 31, 1995 | November 30, 1994      1994
                                               ---------      ---------      ---------      --------- |     ---------      ---------
<S>                                            <C>            <C>            <C>            <C>             <C>            <C>      
Total Revenues ...........................     $  18,419      $  26,233      $  24,997      $  11,762 |     $  25,707     $  54,193
Costs and expenses .......................        17,563         23,648         23,659          9,529 |        17,501        54,941
                                               ---------      ---------      ---------      --------- |     ---------     ---------
Income (loss) from continuing                                                                         |
    operations before reorganization                                                                  |
    items, income taxes, fresh start                                                                  |
    adjustments and extraordinary item ...           856          2,585          1,338          2,233 |         8,206          (748)
Reorganization items .....................          --             --             --             --   |         8,945       134,224
                                               ---------      ---------      ---------      --------- |     ---------     --------- 
Income (loss) from continuing operations                                                              |
    before income taxes, fresh start                                                                  |
    adjustments and extraordinary item ...           856          2,585          1,338          2,233 |        17,151       133,476
Income taxes .............................           325            982            508            849 |            45           100
                                               ---------      ---------      ---------      --------- |     ---------     ---------
Income (loss) from continuing operations                                                              |
    before fresh start adjustments and                                                                |
      extraordinary item .................           531          1,603            830          1,384 |        17,106       133,376
Income (loss) from discontinued                                                                       |
    operations, net of tax ...............        (5,904)          (517)          (764)        (2,997)|        (4,882)         (575)
                                               ---------      ---------      ---------      --------- |     ---------     ---------
Income  (loss)  before  fresh start                                                                   |
     adjustments and extraordinary item ..        (5,373)         1,086             66         (1,613)|        12,224       132,801
Fresh start adjustments ..................          --             --             --             --   |        (3,264)         --
                                               ---------      ---------      ---------      --------- |     ---------     ---------
Income (loss) before extraordinary item ..        (5,373)         1,086             66         (1,613)|         8,960       132,801
Extraordinary item-Forgiveness of debt ...          --             --             --             --   |        96,317          --
                                               ---------      ---------      ---------      --------- |     ---------     ---------
Net income (loss) ........................     $  (5,373)     $   1,086      $      66      $  (1,613)|     $ 105,277    $ 132,801
                                               =========      =========      =========      ========= |     =========     =========
Basic and Diluted Net Income (Loss)                                                                   |
    Per Common Share:                                                                                 |
Income from continuing operations $ ......     $     .08      $     .23      $     .12      $     .20 |
                                                                                                      |
Income (loss) from discontinued operations          (.85)          (.08)          (.11)          (.43)|
                                               ---------      ---------      ---------      --------- |
            Net income (loss) ............     $    (.77)     $     .15      $     .01      $    (.23)|
                                               =========      =========      =========      ========= |
</TABLE>   
Note:       Net income (loss) per share data are not  presented for  Predecessor
            Company due to the general lack of  comparability as a result of the
            revised capital structure of the Reorganized Company.           
<PAGE>                                                                          
Continental Information Systems Corporation
and its Subsidiaries
--------------------------------------------------------------------------------
<TABLE>                                                                   
<CAPTION>
                                                                         (Dollars in thousands)
                                                                                                                     |  Predecessor
                                                       Reorganized Company                                           |    Company
                                 --------------------------------------------------------------------------------      -------------
                                                                                                                     |  Fiscal Year
                                   Fiscal Year    Fiscal Year    Fiscal Year     For the Six      For the Six        |      Ended
Balance Sheet Data                    Ended          Ended          Ended       Months Ended      Months Ended       |      May 31,
(at period end):                  May 31, 1998   May 31, 1997   May 31, 1996    May 31, 1995   November 30, 1994     |       1994
                                  ------------   ------------   ------------    ------------   -----------------             ---- 
<S>                                <C>            <C>            <C>            <C>              <C>                      <C> 
Total assets .................     $  45,202      $  42,986      $  52,881      $  41,130        $  47,323           |    $ 231,173
Liabilities not subject to                                                                                           |
     compromise ..............        16,242          8,385         19,428          7,743           12,323           |       72,142
Liabilities subject to                                                                                               |
     compromise ..............          --             --             --             --               --             |      268,258
Shareholders' equity (deficit)        28,960         34,601         33,453         33,387           35,000           |     (109,227)
                                                                                                                     
</TABLE>
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
--------------------------------------------------------------------------------

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                AND RESULTS OF OPERATIONS


                                  INTRODUCTION

The following  discussion and analysis of the financial condition and results of
operations of the Company  should be read in conjunction  with the  consolidated
financial  statements and the notes thereto which appear  elsewhere in this Form
10-K.

All statements contained herein that are not historical facts, including but not
limited to, statements regarding  anticipated future capital  requirements,  the
Company's future  development and acquisition  plans,  the Company's  ability to
obtain additional debt, equity or other financing,  and the Company's ability to
generate cash from operations and further savings from existing operations,  are
based on current  expectations.  These  statements are forward looking in nature
and  involve a number of risks and  uncertainties.  Actual  results  may  differ
materially.  Among  the  factors  that  could  cause  actual  results  to differ
materially are the following:  the availability of sufficient capital to finance
the Company's  business plan on terms  satisfactory to the Company;  competitive
factors,  such as the  introduction of new technologies and competitors into the
commercial  aircraft  industries;  the risks  attendant  to real estate  finance
generally,  including the risks of leverage,  risks of borrower default, general
economic and real estate market conditions,  and competition for attractive real
estate finance investments;  pricing pressures which could affect demand for the
Company's  service;  change  in  labor,  equipment  and  capital  costs;  future
acquisitions;  general  business,  economic and regulatory  conditions;  and the
other risk factors  described  from time to time in the Company's  reports filed
with the  Securities  and Exchange  Commission  ("SEC").  The Company  wishes to
caution  readers  not to  place  undue  reliance  on any  such  forward  looking
statements,  which  statements  are  made  pursuant  to the  Private  Securities
Litigation Reform Act of 1995 and, as such, speak only as of the date made.

The Company emerged from Chapter 11 pursuant to a Plan of  Reorganization  which
was  confirmed  by the  Bankruptcy  Court on November 29,  1994.  For  financial
reporting purposes,  the emergence from bankruptcy protection was recorded as of
November 30, 1994. The Plan of  Reorganization  provided for the distribution of
all of the  Company's  assets,  except for  specifically  identified  assets and
liabilities  having a net fair tangible value of $30 million,  and the Company's
newly-issued  common stock,  to a  Liquidating  Estate for  distribution  to the
creditors.  In  addition,  all  liabilities  subject to  compromise  and certain
postpetition  liabilities  were assumed by the Liquidating  Estate.  The Plan of
Reorganization  provided  that no further  recourse to the Company or any of its
subsidiaries may be had by any person with respect to any prepetition  claims or
postpetition  liabilities  assumed by the Liquidating Estate. As a result of the
reorganization   and   application  of  "Fresh  Start"   accounting,   financial
information  before  and  after  November  30,  1994  are  not  comparable.   To
distinguish  between the operations of the Company prior to  reorganization  and
operations after reorganization, the term "Predecessor Company" will be used for
the  pre-reorganization  periods.  The  following  discussion  should be read in
conjunction with the historical financial statements of the Company.
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
--------------------------------------------------------------------------------

The Reorganized  Company applied the "Fresh Start" provisions of AICPA Statement
of Position No. 90-7 ("SOP 90-7") as of November 30, 1994 and, accordingly,  the
assets  retained by the  Reorganized  Company  were  adjusted as of that date to
reflect their fair value. The reorganization  value of $35 million  approximated
the fair value of the Reorganized  Company's net assets,  including net deferred
tax assets of $5 million, and accordingly,  no excess  reorganization value over
amount allocable to identifiable assets has been recognized.

                              RESULTS OF OPERATIONS

Continuing Operations

Revenues
For the three fiscal years being  reviewed,  total  revenues  decreased to $18.4
million in fiscal 1998 from $26.2 million in fiscal 1997,  while increasing from
$25.0  million  in fiscal  1996.  Equipment  sales  followed  the same  pattern,
decreasing  to $10.9  million in fiscal 1998 from $16.5  million in fiscal 1997,
while  increasing  from $14.9 million in fiscal 1996. The  significant  decrease
(34.1%) in sales  during the  current  fiscal year is in part due to the sale of
the Telecommunications Business Unit on August 31, 1997. Additionally,  sales of
equipment in  conjunction  with the Leasing  Business  Unit's  trading  activity
decreased for the current fiscal year.

Equipment  rentals and income from direct  financing  leases  increased  to $5.4
million in fiscal 1998 from $5.0 million in fiscal 1997.  However,  this revenue
category  decreased  significantly  (36.2%) to $5.0  million in fiscal 1997 from
$7.9 million in fiscal 1996. The decrease in fiscal 1997 is chiefly attributable
to the sale of a  substantial  portion of the Company's  leased  equipment to an
institutional  investor  in the second and third  quarters  of fiscal 1997 for a
gain of approximately $2.8 million.

Interest,  fees and other  income  increased to $2.1 million in fiscal 1998 from
$1.9 million in fiscal 1997.  However,  this revenue category  decreased to $1.9
million in fiscal 1997 from $2.3  million in 1996.  The  decrease in fiscal 1997
principally reflects a decline in management fees received from income funds.

Costs and Expenses
Costs and expenses  decreased to $17.6 million in fiscal 1998 from $23.6 million
in fiscal 1997 and $23.7  million in fiscal 1996.  Cost of sales as a percentage
of sales for the fiscal years ended May 31, 1998, 1997 and 1996 was 88.1%, 81.9%
and 72.9%, respectively.  These variances are directly related to the results of
operations of the Air Group Business Unit and reflect the competitive conditions
in the  used  aircraft/engines  marketplace.  Revenues  and  earnings  from  the
aircraft business are likely to continue to vary quarter-to-quarter,  based on a
number of factors, including the volume of transactions.

Depreciation of rental  equipment  increased to $2.6 million in fiscal 1998 from
$2.1  million  in  fiscal  1997.   However,   this  expense  category  decreased
significantly (38.2%) to $2.1 million in fiscal 1997 from $3.4 million in fiscal
1996. This decrease is directly related to the sale of a substantial  portion of
the Company's leased  equipment to an  institutional  investor in the second and
third quarters of fiscal 1997.
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
--------------------------------------------------------------------------------

Interest  expense  decreased to $560,000 in fiscal 1998 from  $865,000 in fiscal
1997.  However,  interest expense increased to the fiscal 1997 level of $865,000
from $551,000 in fiscal 1996. These variances reflect the changes in the average
debt outstanding during the respective periods.

Other operating  expenses decreased from $1,260,000 in fiscal 1996 to $1,207,000
in  fiscal  1997 and to  $922,000  in fiscal  1998.  These  expenses,  which are
principally  related to leased equipment,  will vary from period to period based
on the timing and volume of leasing transactions.

Selling, general and administrative expenses decreased to $4.0 million in fiscal
1998 from $5.9  million in fiscal 1997 and $7.6  million in fiscal  1996.  These
yearly  decreases  are  principally  due to cost  containment  efforts and staff
reductions between the periods.

Income Taxes
For the fiscal years ended May 31, 1998, 1997 and 1996, a provision for deferred
income tax  expense on income from  continuing  operations  was  recorded in the
amounts of $325,000, $982,000 and $508,000, respectively.  Additionally, for the
fiscal years ended May 31, 1998, 1997 and 1996, a deferred income tax benefit on
loss from  discontinued  operations  was  recognized in the amounts of $325,000,
$316,000 and $508,000,  respectively.  In connection with applying "Fresh Start"
accounting as of November 30, 1994, the Reorganized  Company recognized deferred
tax  assets  of  approximately  $5  million,  net of a  valuation  allowance  of
approximately  $7  million,  relating  principally  to  NOL  carryforwards.  Net
deferred  tax  assets  increased  to  $6,080,000  as of May 31,  1995 due to the
Reorganized Company's operating losses during the six months then ended. For the
fiscal year ended May 31, 1997, $666,000 of deferred tax assets were utilized to
offset deferred tax liabilities of a like amount. The pre-reorganization Federal
NOL  carryforwards  giving rise to deferred tax assets  expire  during the years
2004  to  2010.  Utilization  of  the  Company's  pre-organization  Federal  NOL
carryforwards is limited to  approximately $2 million per year.  Management will
periodically  evaluate  the  realizability  of the  deferred  tax  assets  based
principally  on actual  and  expected  operating  results.  In the event that an
adjustment  is  required  to reduce the  reorganized  deferred  tax asset in the
future, such adjustment will be charged to operations. Any future recognition of
the tax  benefits  from the  Company's  pre-reorganization  net  operating  loss
carryforwards  in  excess  of the  net $5  million  initially  recorded  will be
recognized  as a direct  credit to  shareholders'  equity as required  under SOP
90-7.

Discontinued Operations
On May 29, 1998, the Company announced its decision to discontinue and liquidate
its LaserAccess laser printing business.  The Board of Directors  concluded that
the  printing  business was unlikely to operate  profitably  in the  foreseeable
future.  The Company  also decided not to pursue a  previously  announced  joint
venture with another company in the laser printing business. The Board concluded
after  additional  review that the venture,  which would  require a  substantial
infusion of capital from the Company,  would not generate returns  sufficient to
justify the additional capital.
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
--------------------------------------------------------------------------------

The Company  recorded a provision  of  $4,955,000  in the quarter  ended May 31,
1998, relative to the disposal of LaserAccess'  assets,  including the write-off
of  goodwill,  in the amount of  $3,258,000,  and other  charges  related to the
discontinuance   of  the  business   unit.  The  remaining  net  assets  of  the
discontinued  unit consist  principally  of used laser  printing  equipment  and
accounts  receivable.  See  "ITEM 3.  LEGAL  PROCEEDINGS"  for a  discussion  of
litigation related to LaserAccess.

A summary of the results of operations of the discontinued  LaserAccess Business
Unit follows (in thousands):
<TABLE>
<CAPTION>
                                                                Year Ended May 31,
                                                     ---------------------------------------
                                                        1998          1997           1996
                                                     ---------    -----------    -----------
<S>                                                  <C>             <C>           <C>     
    Revenues                                         $  4,281        $  5,068      $  1,825
    Costs and expenses                                  5,555           6,014         1,552
                                                     --------        --------      --------
    Income (loss) from discontinued operations         (1,274)           (946)          273
    Loss on disposal of discontinued operations        (4,955)              -              -
                                                     ---------    -----------    -----------
    Income (loss) before income tax (tax benefit)      (6,229)           (946)          273
    Income tax (tax benefit)                             (325)           (359)          103
                                                     ---------      ----------    ---------
    Net income (loss) from discontinued operations   $ (5,904)       $   (587)     $    170
                                                     =========       =========     ========
</TABLE>

Also, on April 3, 1996,  the Company  announced its decision to  discontinue  an
operation,  including its wholly-owned  subsidiary,  Aviron,  that purchased and
sold used computer equipment and provided related technical services. After that
date,  the Company  attempted  to locate a buyer for the  operation.  On June 5,
1996, the Company  announced it had abandoned its efforts to sell the operations
and would  instead  liquidate  the assets which  consisted  principally  of used
computer equipment  inventories and fixed assets. The net loss from discontinued
operations  for the year ended May 31,  1996,  was  $1,177,000  (net of $698,000
deferred  tax  benefit).  In May 1995,  the Company had  attempted to change the
products and marketing  strategies of Aviron to make it more  competitive in the
current market.  These actions resulted in a restructuring  charge to operations
of $800,000 in the quarter ended May 31, 1995, for employee  severance  programs
affecting 13 employees,  lease termination costs for excess facilities,  and the
write-off of certain  deferred  costs  relating to  non-compete  and  consulting
arrangements  having a book value of approximately  $218,000.  The restructuring
reserve had been  completely  utilized as of May 31,  1996,  as a result of cash
payments for severance and excess facilities costs.
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
--------------------------------------------------------------------------------
 
A summary of the results of operations of the discontinued  buy/sell  operations
follows (in thousands):
<TABLE>
<CAPTION>
                                                                      Year Ended May 31,
                                                         ----------------------------------------
                                                            1998              1997          1996
                                                         ----------         --------      -------
<S>                                                      <C>              <C>            <C>     
    Revenues                                             $        -       $       -      $  5,491
    Costs and expenses                                            -             (24)        6,661
                                                         ----------         --------      -------
    Income (loss) from discontinued operations                    -              24        (1,170)
    Loss on disposal of discontinued operations                   -               -          (705)
                                                         ----------       ---------      ---------
    Income (loss) before income tax (tax benefit)                 -              24        (1,875)
    Income tax (tax benefit)                                      -               9          (698)
                                                         ----------        --------      ---------
    Net income (loss) from discontinued operations       $        -         $    15      $ (1,177)
                                                         ==========         =======      =========
</TABLE>

Additionally,   on  May  25,  1995,   the  Board  of   Directors   approved  the
discontinuance  of NC3,  Inc.,  the  Company's  Excess  Inventory  Business Unit
located in Syracuse,  New York.  The Company  recorded a provision of $1,137,000
(net of  $763,000  deferred  tax  benefit) in the  quarter  ended May 31,  1995,
relative  to the  disposal  of NC3  assets  and  other  charges  related  to the
discontinuance  of the business unit. As of May 31, 1996, the Company had exited
the  business  and  liquidated  substantially  all of the assets.  A total of 14
employees  were  terminated  in  connection  with the closing of this  business.
Liabilities  of the  discontinued  operation  decreased from $744,000 at May 31,
1995 to none as of May 31, 1997, due to cash payments  principally for severance
and  facilities  costs  totaling  approximately  $325,000 and a net reduction of
$419,000  to  adjust  the  amounts  estimated  for the loss on the  inventories,
receivables, fixed assets and leased facility obligations. The adjustment of the
liability  in the amount of $230,000  was  recorded as a gain from  discontinued
operations,  net of deferred tax expenses of $87,000 in the quarter ended August
31, 1995.  An  additional  adjustment of the liability in the amount of $100,000
was recorded as an offset to the loss on disposal of discontinued  operations in
the quarter  ended May 31,  1996.  A final  adjustment  of the  liability in the
amount of $89,000 was  recorded as income from  discontinued  operations  in the
quarter ended May 31, 1997.
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
--------------------------------------------------------------------------------

A summary of the results of  operations  of the  discontinued  NC3 business unit
follows (in thousands):
<TABLE>
<CAPTION>
                                                                      Year Ended May 31,
                                                          --------------------------------------- 
                                                             1998             1997         1996
                                                          ---------        ---------    ---------
<S>                                                      <C>              <C>           <C>      
    Revenues                                             $        -       $       -     $       -
    Costs and expenses                                            -             (89)            -
                                                          ---------        ---------    ---------
    Income (loss) from discontinued operations                    -              89             -
    Loss on disposal of discontinued operations                   -               -           330
                                                          ---------      ----------       -------
    Income (loss) before income tax (tax benefit)                 -              89           330
    Income tax (tax benefit)                                      -              34            87
                                                          ---------        --------      --------
    Net income (loss) from discontinued operations        $       -        $     55       $   243
                                                          =========        ========       =======
</TABLE>
                         LIQUIDITY AND CAPITAL RESOURCES

Cash  provided  by  operations  for the fiscal  year ended May 31, 1998 of $15.4
million was composed of cash from  continuing  operations  of $16.0 million with
$600,000  being used in  discontinued  operations.  Cash  provided by continuing
operations  for the fiscal years ended May 31, 1997 and 1996,  was $12.6 million
and $9.4 million  respectively.  The  significant  increase in cash  provided by
continuing  operations for the current fiscal year was primarily due to deferred
lease  revenue of $5.9 million  generated  by prepaid  lease  transactions.  The
proceeds were used to purchase  rental  equipment.  In fiscal 1997,  significant
cash was  generated by two sales of equipment  subject to lease in the aggregate
amount of $8.7 million in the second and third quarters. In addition to the cash
payments and a short-term  note of  approximately  $560,000,  the buyer  assumed
approximately  $12.8 million of the Company's related  outstanding  non-recourse
lease rental  borrowings  and  approximately  $379,000 of the Company's  related
outstanding  recourse lease rental  borrowings  were paid off. The sales of this
leased equipment  accelerated the earnings and cash flow from the leases,  which
would have been  received over time,  into the second and third  quarters of the
1997 fiscal year.

Purchases of rental  equipment  increased  to $23.8  million in fiscal 1998 from
$11.4 million in fiscal 1997 and $23.0 million in fiscal 1996.  The current year
increase  reflects  additional  equipment  acquired  with  the  proceeds  of the
aforementioned  prepaid  lease  transactions.  Additionally,  during the current
period,   the  Company   invested   approximately   $1.3   million  in  mortgage
participation  notes under its Joint Investment  Agreement with Emmes Investment
Management Co. LLC.

Final payments of $3.4 million on a note payable to the Liquidating  Estate were
made in fiscal 1996.  Proceeds from lease,  bank and institution  financings for
the fiscal years ended May 31, 1998,  1997 and 1996,  were $14.1  million,  $8.2
million and $15.4  million,  respectively,  while  payments  on lease,  bank and
institution  financings for the fiscal years ended May 31, 1998,  1997 and 1996,
were $9.2 million, $5.2 million and $2.4 million, respectively.
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
--------------------------------------------------------------------------------

On May 27,  1997,  the  Company  announced  that  its  Board  of  Directors  had
authorized  the  expenditure  of up to $500,000 for the repurchase of its common
stock. The Company  commenced a voluntary odd lot program through June 30, 1997,
which was  extended  through July 31,  1997.  Shareholders  owning less than 100
shares of the Company's  common stock were offered the  opportunity  to sell all
their shares at the closing  price of the common  stock on the Nasdaq  Small-Cap
Market on May 23, 1997, which was $2.25 per share.  Approximately  20,000 shares
were repurchased by the Company at an aggregate cost of  approximately  $45,000.
Subsequent to the odd lot repurchase program,  the Company intends to repurchase
from time to time  additional  shares of its common  stock up to the  balance of
$500,000  remaining  after the odd lot program.  The Company may  repurchase the
additional  shares at  prevailing  prices in the open market or in negotiated or
other permissible transactions at the discretion of management. The Company will
hold all repurchased shares of common stock in its treasury. As of May 31, 1998,
approximately  143,000 shares had been repurchased by the Company in this manner
at an aggregate cost of  approximately  $361,000.  Additionally,  on October 28,
1997, at the Company's Annual Meeting,  the stockholders  approved the amendment
of the Company's Restated Certificate of Incorporation to increase the number of
authorized  shares from 10 million to 20 million.  The Company  currently has no
plans to issue any additional  shares (other than pursuant to the Company's 1995
Stock Compensation Plan).

The Company expects that  operations  will generate  sufficient cash to meet its
operating expenses and current obligations for the foreseeable future. To expand
its operations,  the Company may in the future issue debt or equity  securities.
Certain  equipment  leases are  financed  by  assigning  the  rentals to various
lending  institutions at a fixed rate on a recourse and non-recourse  basis. The
Company has in the past also utilized various credit facilities,  including bank
lines of credit and is  currently  in  negotiations  with a  commercial  bank to
establish a $3 million  "warehouse"  line of credit.  The loan agreement for the
line of credit is expected to contain various covenants,  including  limitations
on  incurring   additional  liens  and  encumbrances  and  prohibiting   certain
transactions  with affiliates or subsidiaries.  Additionally,  the Company has a
revolving loan agreement  (the "CIS Air Loan  Facility")  with an institution to
provide  lease and inventory  financing  for aircraft  engines for its operating
subsidiary CIS Air, in the amount of $10,000,000.  The facility has a three-year
term and permits  borrowing  equal to a percentage of the appraised value of the
aircraft  engines  financed.  Substantially  all of the  assets  of CIS  Air are
pledged as collateral for the loan. At May 31, 1998, $4,429,000 of this facility
was being utilized.  The CIS Air Loan Facility bears interest at prime plus 1/4%
and expires in December 2000. A revolving  loan  agreement to provide  inventory
financing in the amount of $2,500,000,  for the discontinued  LaserAccess  laser
printing business was terminated on July 31, 1998. At May 31, 1998,  $428,000 of
this facility was being utilized;  this outstanding  balance was paid in full by
July 31, 1998. The Company currently has invested approximately $10.9 million in
capital (equity and intercompany advances) in the Air Group Business,  which has
invested those funds in aircraft and aircraft engines.  The Company's ability to
invest in other  activities is constrained by its ability to upstream funds from
CIS Air, which is limited by certain covenants in the CIS Air Loan Facility.
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
--------------------------------------------------------------------------------

Year 2000
As the year 2000  approaches,  a critical  issue has emerged for all  companies,
including the Company, with respect to whether application software programs and
operating  systems  utilized by a company and the  companies  with which it does
business can accommodate  this date value. In brief,  many existing  application
software  products  in the  marketplace  were  designed  only to  accommodate  a
two-digit date position which  represents the year (e.g.,  "95" is stored on the
system and represents the year 1995).  As a result,  the year 1999 (i.e.,  "99")
could  be the  maximum  date  value  these  systems  will  be  able  to  process
accurately.

The Company  has, for several  months,  been engaged in a review of the software
and  information  systems  it uses in an effort to  determine  whether it or its
operations may be materially  adversely  affected by this so-called  "Year 2000"
conversion.  As a result of that review,  the Company  upgraded and replaced its
hardware  systems with systems that are Year 2000  compliant.  In addition,  the
Company  has  engaged a vendor to provide  new lease  billing  software  and has
identified  another  vendor to replace  its  accounting  software.  The  Company
expects that this software will be installed by the middle of 1999.  The Company
has inquired of, and generally obtained the assurances of, the providers of such
software with respect to its being Year 2000 compliant.  Based on its review the
Company does not presently believe that Year 2000 compliance issues with respect
to its software and systems will cause any material disruptions, malfunctions or
failures of its business.  However,  no assurances can be given that such review
uncovered  every  potential  adverse  effect  of the  Year  2000  conversion  in
connection with any of such software or systems.

With respect to assets other than its  computer  hardware and software  systems,
the  Company is aware  that some of the  equipment  it leases may have  embedded
technology  that is not Year 2000  compliant.  Under  the  terms of the  leases,
however,  the Company is not  responsible for the maintenance and repair of this
equipment,  and the leases  are  non-cancelable.  Failure  to achieve  Year 2000
compliance may materially adversely affect the residual value of such equipment.
No assurance can be given that such decrease in residual  value would not have a
material adverse effect on the Company's business or results of operations.

The Company has only recently begun a review of whether the software and systems
of  the  vendors,  financing  sources,  customers,  equipment  manufacturers  or
distributors  or other  parties with which it deals may, as a result of the Year
2000  conversion,  have  a  materially  adverse  effect  on the  Company  or its
operations.  Accordingly,  it is too early for the Company to be able to predict
whether such software and systems of such parties may have such effect.  As part
of this review,  the Company will attempt to obtain assurances from each of such
parties,  whose  dealings  with the Company  are  material to the Company or its
operations,  that such party does not and will not  utilize  software or systems
that  may  interfere  with  the  Company,  or are or  will be  important  to the
operations of such party,  that may cause  problems to such party or the Company
as a result of the Year 2000  conversion.  However,  no assurances  can be given
that the  Company  will be able to obtain  the  information  from  such  parties
necessary for the Company to determine  whether it may be  materially  adversely
affected by the software or systems of such parties.
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
--------------------------------------------------------------------------------

The Company  currently  believes  that its systems  will be Year 2000  compliant
during 1999 and therefore has not  developed a contingency  plan.  Nevertheless,
the Company will maintain an ongoing effort to recognize and evaluate  potential
exposure  relating to the Year 2000 conversion  arising from its use of software
supplied by other parties or its dealings with other parties.  The total cost to
the Company of these Year 2000  compliance  activities  has not been, and is not
anticipated to be,  material to its financial  position or results of operations
in any given year.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
--------------------------------------------------------------------------------


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


           Financial Statements:                                               
           (a) (1)  Financial Statements
                    Report of Independent Accountants                          

                    Consolidated Balance Sheets
                    May 31, 1998 and 1997                                      

                    Consolidated Statements of Operations
                          Years ended May 31, 1998, 1997 and 1996              

                    Consolidated Statements of Shareholders' Equity
                          Years ended May 31, 1998, 1997 and 1996              

                    Consolidated Statements of Cash Flows
                          Years ended May 31, 1998, 1997 and 1996              

                    Notes to the Consolidated Financial Statements             

                (2)   Financial Statement Schedules
                         Valuation and Qualifying Accounts (Schedule II)       

                    All  other  schedules  are  omitted  because  they  are  not
                    applicable  or the  required  information  is  shown  in the
                    financial statements or notes thereto.


<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS






To the Board of Directors and Stockholders
of Continental Information Systems Corporation



In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated   statements  of   operations   and   consolidated   statements  of
shareholders'  equity and of cash flows listed in the accompanying index present
fairly,  in  all  material  respects,  the  financial  position  of  Continental
Information  Systems Corporation (the "Company") and its subsidiaries at May 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the  three  years in the  period  ended  May 31,  1998,  in  conformity  with
generally accepted  accounting  principles.  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 of these  statements  in  accordance  with  generally  accepted  auditing
standards which 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,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.




PricewaterhouseCoopers LLP

July 17, 1998
Syracuse, New York
<PAGE>
Continental Information Systems Corporation 
and its Subsidiaries
In Thousands (Except Per Share Data)
<TABLE>
<CAPTION>
                                           CONSOLIDATED BALANCE SHEETS
                                                                                                May 31, 
                                                                                     ---------------------------
                                                                                        1998              1997
                                                                                     ---------        ----------
<S>                                                                                  <C>                <C>     
Assets:
Cash and cash equivalents                                                            $   3,211          $  8,968
Accounts receivable, net of allowance for doubtful
         accounts of $76 and $50 at May 31, 1998 and 1997                                  636             1,950
Notes receivable                                                                         6,870             5,094
Investment in mortgage participation notes (Note 4)                                      1,522                 -
Net assets of discontinued operations (Note 2)                                               -             4,761
Inventory                                                                                3,755             5,306
Net investment in direct financing leases (Note 6)                                       4,658             3,446
Rental equipment, net (Note 7)                                                          18,118             7,505
Furniture, fixtures and equipment, net (Note 8)                                            398               206
Other assets                                                                               620               336
Deferred tax assets (Note 13)                                                            5,414             5,414
                                                                                     ---------        ----------

                  Total assets                                                       $  45,202         $  42,986
                                                                                     =========         =========
Liabilities and Shareholders' Equity:
Liabilities:
         Accounts payable and other liabilities                                     $    2,377        $    1,117
         Discounted lease rental borrowings (Note 9)                                     2,594             5,633
         Note payable to institution - secured (Note 10)                                 4,429                 -
         Notes payable to former owners of acquired company (Note 16)                        -             1,536
         Net liabilities of discontinued operations (Note 2)                               866                  -
         Deferred lease revenue                                                          5,976                99
                                                                                    ----------       -----------

                  Total liabilities                                                     16,242             8,385
                                                                                     ---------         ---------
Shareholders' Equity:
Common   stock,  $.01 par value;  authorized  20,000,000 shares at May 31, 1998,
         10,000,000  shares at May 31, 1997;  issued 7,101,668 shares at May 31,
         1998, 7,031,667 shares
         at May 31, 1997 (Notes 11 and 12)                                                  71                70
Additional paid-in capital                                                              35,129            34,992
Accumulated deficit                                                                     (5,834)             (461)
                                                                                     ----------       -----------
                                                                                        29,366            34,601
Treasury stock, at cost:162,608 shares at May 31, 1998,
         960 shares at May 31, 1997 (Note 11)                                             (406)                -
                                                                                    -----------     ------------

                  Total shareholders' equity                                            28,960            34,601
                                                                                     ---------        ----------

                  Total liabilities and shareholders' equity                           $45,202         $  42,986
                                                                                       =======         =========
</TABLE>
The accompanying notes are an integral part of these financial statements. 
<PAGE>
Continental Information Systems Corporation 
and its Subsidiaries
In Thousands (Except Number of Shares)
<TABLE>
<CAPTION>
                                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                                                                      Year Ended May 31, 
                                                                        ---------------------------------------------
                                                                          1998               1997              1996
                                                                        ---------          --------         --------- 
<S>                                                                      <C>               <C>              <C>      
Revenues:
Equipment sales                                                          $ 10,855          $ 16,480         $  14,862
Equipment rentals                                                           4,666             3,829             6,540
Income from direct financing leases                                           760             1,188             1,320
Gain from sale of equipment subject to lease                                   78             2,816                 -
Interest, fees and other income                                             2,060             1,920             2,275
                                                                        ---------          --------         --------- 
                                                                           18,419            26,233            24,997
                                                                        ---------          --------         --------- 
Costs and Expenses:
Cost of sales                                                               9,566            13,500            10,839
Depreciation of rental equipment                                            2,558             2,130             3,445
Interest expense                                                              560               865               551
Other operating expenses                                                      922             1,207             1,260
Selling, general and administrative expense                                 3,957             5,946             7,564
                                                                        ---------          --------         --------- 
                                                                           17,563            23,648            23,659
                                                                        ---------         ---------         ---------

Income from continuing operations before income taxes                         856             2,585             1,338
Provision for income tax                                                      325               982               508
                                                                        ---------          --------         --------- 
Income from continuing operations                                             531             1,603               830
                                                                        ---------          --------         --------- 

Discontinued Operations (Note 2):
         Loss from discontinued operations, net of tax                       (949)             (517)             (555)
         Loss on disposal of discontinued operations                       (4,955)                -              (209)
                                                                        ---------          --------         --------- 
         Net loss from discontinued operations                             (5,904)             (517)             (764)
                                                                        ---------          --------        ----------
Net income (loss)                                                       $  (5,373)         $  1,086        $       66
                                                                        ==========         ========        ==========

Basic and diluted net income (loss) per share (Note 1):
         Income from continuing operations                            $      .08         $     .23         $      .12
         Income (loss) from discontinued operations                         (.85)             (.08)              (.11)
                                                                        ---------          --------         --------- 
                  Net income (loss)                                   $     (.77)        $     .15         $      .01
                                                                      ==========         =========         ==========

Weighted average number of shares of common
         stock outstanding                                                  6,984             7,008             6,999
                                                                            =====             =====             =====
</TABLE>
The accompanying notes are an integral part of these financial statements.   
<PAGE>
Continental Information Systems Corporation 
and its Subsidiaries
In Thousands (Except Number of Shares)
<TABLE>
<CAPTION>
                                       CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY



                                                        Shareholders' Equity 
                                       -----------------------------------------------------
                                                    Additional                                      Treasury         Common
                                       Common        Paid-In       Accumulated      Treasury         Common          Shares
                                       Stock         Capital         Deficit         Stock           Shares          Issued
                                       ------       ---------       ---------      ---------         -------       ---------
<S>                                    <C>          <C>             <C>            <C>                             <C>      
Balance - May 31, 1995                 $   70       $  34,930       $  (1,613)     $       -               -       7,000,000
         Net income                         -               -              66              -               -               -
         Acquisition of
             treasury shares                -               -               -              -            (960)              -
                                       ------       ---------       ---------      ---------         -------       ---------
                                                                                                                           
Balance - May 31, 1996                     70          34,930          (1,547)             -            (960)      7,000,000
         Net income                         -               -           1,086              -               -               -
         Stock options exercised            -              33               -              -               -          16,667
         Stock issued as
             compensation                   -              29               -              -                -         15,000
                                       ------       ---------       ---------      ---------         -------       ---------
Balance - May 31, 1997                     70          34,992            (461)             -            (960)      7,031,667
         Net loss                           -               -          (5,373)             -               -               -
         Acquisition of
             treasury shares                -               -               -            406        (161,648)              -
        Stock options exercised             1             137               -              -               -          70,001
                                       ------       ---------       ---------        -------        --------       ---------
Balance - May 31, 1998                 $   71       $  35,129       $  (5,834)       $   406        (162,608)      7,101,668
                                       ======       =========       ==========       =======        =========      =========

</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Continental Information Systems Corporation 
and its Subsidiaries
In Thousands
<TABLE>
<CAPTION>
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                Year Ended May 31,
                                                                      ------------------------------------
                                                                         1998          1997          1996  
                                                                      --------      --------      --------
<S>                                                                   <C>           <C>           <C>     
Cash flows from operating activities:
Net income (loss)                                                     $ (5,373)     $  1,086      $     66
Less:  Net loss from discontinued operations                            (5,904)         (517)         (764)
                                                                      --------      --------      --------
        Income from continuing operations                                  531         1,603           830
                                                                      --------      --------      --------

Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
        Proceeds from sale of equipment subject to lease                   850         8,703          --
        Gain on sale of equipment subject to lease                         (78)       (2,816)         --
        Proceeds from sale of other leased equipment                     3,828         3,763         2,155
        Proceeds from sale of Telecommunications Business Unit assets      895          --            --
        Amortization of unearned income                                   (760)       (1,188)       (1,320)
        Collections of rentals on direct financing  leases               2,285         3,524         4,651
        Depreciation and amortization expense                            2,765         2,557         3,900
        Effect on cash flows of changes in:
            Accounts receivable                                          1,111          (557)         (191)
            Notes receivable                                            (1,776)       (1,637)       (2,420)
            Inventory                                                      720        (3,607)          459
            Other assets                                                  (284)        1,604        (1,182)
            Accounts payable and other liabilities                         267           (40)        2,511
            Deferred lease revenue                                       5,877          --            --
            Deferred tax assets                                           --             666          --
            Other                                                         (223)           40          --
                                                                      --------      --------      --------
                                                                        15,477        11,012         8,563
                                                                      --------      --------      --------
           Net cash provided by continuing operations                   16,008        12,615         9,393
           Net cash provided by (used in) discontinued operations         (602)          169        (1,893)
                                                                      --------      --------      --------
           Net cash provided by operations                              15,406        12,784         7,500
                                                                      --------      --------      --------

Cash flows from investing activities:
Purchase of rental equipment                                           (23,833)      (11,432)      (22,977)
Purchase of property and equipment                                        (404)          (15)          (43)
Investment in mortgage participation notes                              (1,299)         --            --
Net cash provided by the sale of TLP subsidiaries                         --            --             754
Net cash used in the acquisition of LaserAccess subsidiary                --            --          (2,486)
                                                                      --------      --------      --------
           Net cash used in investing activities                       (25,536)      (11,447)      (24,752)
                                                                      --------      --------      --------
</TABLE>
<PAGE>
Continental Information Systems Corporation 
and its Subsidiaries
In Thousands  
<TABLE>
<CAPTION>
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

                                                                                Year Ended May 31,
                                                                      ------------------------------------
                                                                         1998          1997          1996  
                                                                      --------      --------      --------
<S>                                                                   <C>           <C>           <C>     
 
Cash flows from financing activities:
Payments on note payable to  Liquidating Estate                           --            --          (3,391)
Proceeds from lease, bank and institution financings                    14,098         8,222        15,368
Payments on lease, bank and institution financings                      (9,238)       (5,152)       (2,444)
Payments on notes payable to former owners of acquired company            (218)         (768)         --
Purchase of treasury stock                                                (406)         --            --
Proceeds from exercise of stock options                                    137            33          --
                                                                      --------      --------      --------
           Net cash provided by financing activities                     4,373         2,335         9,533
                                                                      --------      --------      --------

           Net increase (decrease) in cash and cash equivalents         (5,757)        3,672        (7,719)
Cash and cash equivalents at beginning of period                         8,968         5,296        13,015
                                                                      --------      --------      --------
Cash and cash equivalents at end of period                            $  3,211      $  8,968      $  5,296
                                                                      ========      ========      ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
--------------------------------------------------------------------------------
1.    Summary of Significant Accounting Policies

      Continental  Information  Systems  Corporation and its  Subsidiaries  (the
      "Company") are a specialized  financial services company that is currently
      engaged in the leasing,  sales and  management of commercial  aircraft and
      engines,  equipment  leasing  and other  financing  activities,  including
      commercial real estate financing.

      To distinguish between the operations of the Company after  reorganization
      (sometimes referred to as the "Reorganized  Company") and operations prior
      to  reorganization,  the  term  "Predecessor  Company"  will be used  when
      reference is made to the pre-reorganization  periods. On January 13, 1989,
      the Predecessor  Company and certain of its  subsidiaries  filed voluntary
      petitions  for  reorganization  under  Chapter  11 of  the  United  States
      Bankruptcy  Code.  On November  29, 1994 (the  "Confirmation  Date"),  the
      Bankruptcy Court confirmed the Company's Plan of Reorganization.  The Plan
      of   Reorganization   became  effective  on  December  21,  1994  and  the
      Reorganized  Company,  and its subsidiaries  which had filed petitions for
      relief,  emerged from Chapter 11. For financial  reporting  purposes,  the
      emergence from bankruptcy protection was recorded as of November 30, 1994,
      the end of the Predecessor Company's second fiscal quarter. As a result of
      the reorganization and "Fresh Start" reporting,  the financial  statements
      of the Predecessor Company are not comparable to the financial  statements
      subsequent to November 30, 1994.

      Consolidation
      The accompanying consolidated financial statements include the accounts of
      the Company and its wholly-owned  subsidiaries.  All intercompany accounts
      have been eliminated in consolidation.

      Cash and Cash Equivalents
      Cash and cash equivalents  include checking and money market accounts with
      financial institutions having original maturities of 90 days or less.

      Concentration of Credit Risk
      The Company  extends credit through trade accounts  receivable and leasing
      transactions to its customers located primarily in the United States.  The
      underlying  equipment secures direct financing and operating  leases.  The
      Company   generally  does  not  require   collateral  for  trade  accounts
      receivable.

      The  Company's  notes  receivable  balance  at May 31,  1998  is with  two
      companies in the airline industry.  Thus, the Company is directly affected
      by the  well-being  of these two  companies  and the  airline  industry in
      general.  However,  the credit risk associated with these notes receivable
      is mitigated by the Company's policy  requiring  collateral on all airline
      notes receivable.

      Investment in Mortgage Participation Notes
      Investment  in  mortgage  participation  notes  represent  investments  in
      high-yield,  short-term  commercial  real  estate  transactions.  Interest
      income  on the  notes is  recorded  monthly  using  the  weighted  average
      estimated yields on these investments.
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
--------------------------------------------------------------------------------

      Inventory and Related Revenue Recognition
      Inventory   consists  of  various  aircraft   equipment   purchased  on  a
      speculative  basis for future  sale or lease and is stated at the lower of
      cost or market, cost being determined on a specific  identification basis.
      Revenues  from the sale of equipment and the related cost of the equipment
      are reflected in earnings at the time title to the equipment passes to the
      customer.

       The  Company  performs  ongoing  analyses,  at  least  quarterly,  of the
       carrying  value of  inventories  on a specific  identification  basis and
       records  adjustments,  as  considered  necessary,  to reduce the carrying
       value  of  inventories  to  estimated  market  value in the  period  such
       determination  is  made.   These   adjustments  are  recorded  as  direct
       writedowns in the carrying value of the inventory.

       Lease Accounting Policies
       Statement of Financial Accounting Standards No. 13 requires that a lessor
       account for each lease by the direct financing method,  sales-type method
       or  operating  method.   Presently,  the  Company  has  primarily  direct
       financing and operating leases; the dollar value and number of sales-type
       leases are  considered  immaterial.  Net  investment in direct  financing
       leases consists of the present value of the future minimum lease payments
       plus the present value of the  unguaranteed  residual,  representing  the
       estimated fair market value at lease termination. At the end of the lease
       term,  the recorded  residual value of equipment  under direct  financing
       leases is  reclassified to rental  equipment and is depreciated  over its
       estimated remaining useful life.

       Lease income from direct  financing leases consists of interest earned on
       the present value of the lease  payments and residual  value.  Revenue is
       recognized over the lease term using the interest method.

       Rental  equipment  consists of equipment under operating  leases.  Rental
       equipment is depreciated on a  straight-line  basis to its residual value
       over the estimated remaining useful life of such equipment.  The original
       useful lives generally  range from three to seven years.  Operating lease
       revenues consist of the contractual  lease payments and are recognized on
       a  straight-line  basis  over  the  lease  term.  Costs  associated  with
       operating leases principally consist of depreciation of the equipment.

       The Company makes  adjustments to the carrying value of leased assets, if
       necessary,  when market  conditions  have resulted in value that is below
       net book value. In accordance with "Fresh Start" reporting, the Company's
       investments in direct financing leases and rental equipment were adjusted
       to reflect fair value,  and accumulated  depreciation of rental equipment
       was eliminated, as of November 30, 1994.

       Deferred Commissions and Initial Direct Costs
       Commissions  and initial direct costs related to lease  transactions  are
       capitalized  as a component  of the  corresponding  investment  in direct
       financing  leases or rental  equipment and  amortized  over the estimated
       average lease term.  Costs  relating to  investment  in direct  financing
       leases are  amortized  using an  interest  method and costs  relating  to
       rental equipment are amortized using the straight-line method.
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
--------------------------------------------------------------------------------

       Furniture, Fixtures and Equipment
       In accordance  with "Fresh  Start"  reporting,  the Company's  furniture,
       fixtures and equipment was adjusted to reflect fair value and accumulated
       depreciation  was  eliminated  as of November 30, 1994.  Additions  after
       November 30, 1994 are recorded at cost. Furniture, fixtures and equipment
       are being depreciated  using the straight-line  method over the estimated
       useful lives of such assets which range from three to five years.

       Income Taxes
       The  Company  accounts  for income  taxes  under the asset and  liability
       method  required by  Financial  Accounting  Standard  No. 109 (SFAS 109),
       Accounting  for Income  Taxes.  SFAS 109 requires the recording of assets
       and  liabilities  for the future tax  effects  of  temporary  differences
       between the bases of all assets and liabilities  for financial  reporting
       purposes and their tax bases.  When net deferred tax assets  exist,  SFAS
       109 requires the recording of a valuation  allowance to reduce tax assets
       to the amount which is more likely than not to be realized.

       Net Income (Loss) Per Share
       In fiscal 1998, the Company adopted Financial Accounting Standard No. 128
       (SFAS 128),  Earnings Per Share.  SFAS 128  specified  new  standards for
       computing and disclosing  net income (loss) per share.  Basic and diluted
       net income (loss) per share for the fiscal years ended May 31, 1998, 1997
       and 1996, was computed based on the weighted  average number of shares of
       common  stock  outstanding  during  the  periods  which  were  6,984,473,
       7,008,440 and  6,999,399,  respectively.  As of May 31, 1998, the Company
       had outstanding  options to purchase  369,674 shares of common stock (see
       Note 12). The  potential  dilution of these  options is immaterial in the
       computation of diluted net income (loss) per share. Basic and diluted net
       income  (loss)  per  share  data are not  presented  for the  Predecessor
       Company  due to the  general  lack of  comparability  as a result  of the
       revised capital structure of the Reorganized Company.

       Estimates
       The  preparation  of financial  statements in conformity  with  generally
       accepted accounting  principles requires management to make estimates and
       assumptions  that affect the reported  amounts of assets and  liabilities
       and  disclosure of contingent  assets and  liabilities at the date of the
       financial  statements  and the  reported  amounts of revenue and expenses
       during the  reporting  period.  Actual  results  could  differ from those
       estimates.

       Reclassifications
       Certain  prior  period  balances in the  financial  statements  have been
       reclassified  to  conform  to  the  current  period  financial  statement
       presentation.

       Recent Accounting Pronouncements
       In June 1997, the Financial  Accounting  Standards  Board ("FASB") issued
       SFAS No. 130, Reporting  Comprehensive Income. This statement establishes
       standards  for  reporting  and  display of  comprehensive  income and its
       components in a full set of general-purpose  financial  statements.  This
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
--------------------------------------------------------------------------------

       statement   requires   that  an  entity  (a)  classify   items  of  other
       comprehensive  income by their  nature in a financial  statement  and (b)
       display the accumulated balance of other comprehensive  income separately
       from  retained  earnings  and  additional  paid-in  capital in the equity
       section of a  statement  of  financial  position.  At May 31,  1998,  the
       Company does not have any items of  comprehensive  income and  therefore,
       the  adoption of this  Statement is not expected to have an impact on the
       Company's financial statements.

       In June 1997, the FASB issued SFAS No. 131,  Disclosure about Segments of
       an  Enterprise  and  Related  Information.   This  statement  establishes
       standards for the way that  enterprises  report  information  relating to
       operating  segments in annual financial  statements and requires selected
       information about operating  segments in interim financial reports issued
       to shareholders.  It also establishes  standards for related  disclosures
       about products and services,  geographic areas, and major customers. This
       statement   requires  that  a  public  enterprise  report  financial  and
       descriptive information about its reportable segments. Operating segments
       are components of an enterprise for which separate financial  information
       is  available  that  is  regularly  reviewed  by the  enterprise's  chief
       operating decision maker in deciding how resources are to be allocated to
       the  segment  and  assessing  its  performance.  In the  initial  year of
       application, comparative financial information for earlier years is to be
       restated.  The Company will be required to implement  this  statement for
       the fiscal year ended May 31, 1999.

2.     Discontinued Operations

       On May 29, 1998, the Company  announced its decision to  discontinue  and
       liquidate its LaserAccess laser printing business. The Board of Directors
       concluded that the printing  business was unlikely to operate  profitably
       in the  foreseeable  future.  The  Company  also  decided not to pursue a
       previously  announced  joint  venture with  another  company in the laser
       printing  business.  The Board concluded after additional review that the
       venture,  which would require a substantial  infusion of capital from the
       Company,  would not generate returns sufficient to justify the additional
       capital.

       The Company  recorded a provision of  $4,955,000 in the quarter ended May
       31, 1998, relative to the disposal of LaserAccess' assets,  including the
       write-off of goodwill,  in the amount of  $3,258,000,  and other  charges
       related to the  discontinuance  of the business  unit.  The remaining net
       assets  of the  discontinued  unit  consist  principally  of  used  laser
       printing equipment and accounts receivable.

       The Company is currently engaged in litigation with the former owners and
       executives of its discontinued  LaserAccess  business. In March 1998, the
       Company prepaid  remaining amounts due to the former owners and exercised
       a right to set off  approximately  $1.1  million  against  amounts due on
       promissory  notes in  connection  with the purchase of  LaserAccess.  The
       Company has also  terminated  these  individuals  under their  employment
       agreements.  On April 7, 1998,  the former  owners filed suit in Superior
       Court of  California,  County of San Diego,  seeking  to recover  damages
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
--------------------------------------------------------------------------------

       allegedly   arising   from  the   Company's   set-off  of  amounts   due.
       Additionally,  the  former  owners are  seeking to recover  approximately
       $733,000  in damages  arising  from the  Company's  termination  of their
       employment  contracts.  The  complaint,  as  amended,  seeks  damages for
       various  other  claims,  including  defamation.  The Company has asserted
       crossclaims and intends to vigorously contest these actions.

       Also, on April 3, 1996, the Company announced its decision to discontinue
       an  operation,   including  its  wholly-owned  subsidiary,  Aviron,  that
       purchased and sold used computer equipment and provided related technical
       services.  After that date,  the Company  attempted to locate a buyer for
       the operation.  On June 5, 1996,  the Company  announced it had abandoned
       its efforts to sell the operations and would instead liquidate the assets
       which consisted  principally of used computer  equipment  inventories and
       fixed  assets.  The net loss from  discontinued  operations  for the year
       ended  May 31,  1996,  was  $1,177,000  (net  of  $698,000  deferred  tax
       benefit).  In May 1995,  the Company had attempted to change the products
       and  marketing  strategies of Aviron to make it more  competitive  in the
       current  market.  These  actions  resulted in a  restructuring  charge to
       operations  of $800,000 in the quarter  ended May 31, 1995,  for employee
       severance  programs  affecting 13 employees,  lease termination costs for
       excess  facilities,  and the write-off of certain deferred costs relating
       to  non-compete  and  consulting  arrangements  having  a book  value  of
       approximately  $218,000.  The  restructuring  reserve had been completely
       utilized as of May 31, 1996,  as a result of cash  payments for severance
       and excess facilities costs.

       Additionally,  on May 25,  1995,  the  Board of  Directors  approved  the
       discontinuance of NC3, Inc., the Company's excess inventory business unit
       located in  Syracuse,  New York.  The  Company  recorded a  provision  of
       $1,137,000  (net of $763,000  deferred tax benefit) in the quarter  ended
       May 31, 1995,  relative to the  disposal of NC3 assets and other  charges
       related to the  discontinuance  of the business unit. As of May 31, 1996,
       the Company had exited the business and liquidated  substantially  all of
       the assets.  A total of 14 employees were  terminated in connection  with
       the closing of this business.  Liabilities of the discontinued  operation
       decreased  from $744,000 at May 31, 1995 to none as of May 31, 1997,  due
       to cash payments  principally for severance and facilities costs totaling
       approximately  $325,000  and a net  reduction  of  $419,000 to adjust the
       amounts  estimated for the loss on the  inventories,  receivables,  fixed
       assets and leased facility  obligations.  The adjustment of the liability
       in the  amount of  $230,000  was  recorded  as a gain  from  discontinued
       operations,  net of deferred tax expenses of $87,000 in the quarter ended
       August 31, 1995. An additional  adjustment of the liability in the amount
       of  $100,000  was  recorded  as an  offset  to the  loss on  disposal  of
       discontinued  operations  in  the  year  ended  May  31,  1996.  A  final
       adjustment  of the  liability  in the amount of $89,000  was  recorded as
       income from discontinued operations in the year ended May 31, 1997.

       The Consolidated  Statements of Operations for all periods presented have
       been  reclassified  to report  the  results  of  discontinued  operations
       separately  from  continuing  operations.  A summary  of the  results  of
       discontinued operations follows (in thousands):
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                         Year Ended May 31,
                                                ---------------------------------                 
                                                  1998         1997         1996
                                                -------      -------      -------
<S>                                             <C>          <C>          <C>    
Revenues                                        $ 4,281      $ 5,068      $ 7,316
Costs and expenses                                5,555        5,901        8,213
                                                -------      -------      -------
Loss from discontinued operations                (1,274)        (833)        (897)
Loss on disposal of discontinued operations      (4,955)        --           (375)
                                                -------      -------      -------
Loss before income tax benefit                   (6,229)        (833)      (1,272)
Income tax benefit                                 (325)        (316)        (508)
                                                -------      -------      -------
Net loss from discontinued operations           $(5,904)     $  (517)     $  (764)
                                                =======      =======      =======
</TABLE>


       The  Consolidated  Balance Sheets as of May 31, 1998 and 1997,  have been
       reclassified  to report  the net  assets  (liabilities)  of  discontinued
       operations  separately  from the assets  and  liabilities  of  continuing
       operations.  A summary  of the  assets and  liabilities  of  discontinued
       operations follows (in thousands):
<TABLE>
<CAPTION>

                                                                                 May 31,
                                                                         --------------------
                                                                           1998         1997
                                                                         -------      -------
<S>                                                                      <C>          <C>    
Assets:
Cash and cash equivalents                                                $    19      $    37
Accounts receivable, net                                                     198          535
Inventory                                                                    779        1,674
Net investment in direct financing leases                                   --           --
Furniture, fixtures and equipment, net                                        12           12
Other assets                                                                  58          110
Goodwill, net                                                               --          3,632
                                                                         -------      -------
         Total assets                                                      1,066        6,000
                                                                         -------      -------

Liabilities:
Accounts payable and accruals                                              1,469          235
Note payable to institution                                                  463        1,004
                                                                         -------      -------
          Total liabilities                                                1,932        1,239
                                                                         -------      -------
                 Net assets (liabilities) of discontinued operations     $  (866)     $ 4,761
                                                                         =======      =======
</TABLE>
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
--------------------------------------------------------------------------------

3.    Sale of Business Unit

      On August 31, 1997, the Company, through a wholly-owned  subsidiary,  sold
      its  Telecommunications  Business Unit to Meridian Leasing  Corporation of
      Deerfield, Illinois. The sales price approximated the Business Unit's book
      value and therefore did not significantly affect the results of operations
      of the Company for the fiscal year ended May 31, 1998.

4.    Investment in Mortgage Participation Notes

      On July 3, 1997,  the Company  announced  that it had entered into a Joint
      Investment  Agreement with Emmes Investment  Management Co. LLC to provide
      up to $8 million in high-yield,  short-term  financing for commercial real
      estate  transactions.  At May 31, 1998,  the Company's  investment in such
      transactions was approximately $1.5 million.

5.    Sale of Subsidiaries

      As of December 31, 1995, the Company sold TLP Leasing Programs ("TLP"),  a
      group of former subsidiaries  located in Boston,  Massachusetts,  to TLP's
      current management. TLP manages various income funds and partnerships. The
      sales price approximated TLP's book value of approximately  $2,500,000 and
      therefore  did not  significantly  affect the results of operations of the
      Company for the fiscal year ended May 31, 1996.

6.    Net Investment in Direct Financing Leases

      The components of the net investment in direct  financing leases as of May
      31 are as follows (in thousands):
<TABLE>
<CAPTION>
                                                        1998         1997
                                                      -------      -------
<S>                                                   <C>          <C>    
Minimum lease payments receivable                     $ 5,395      $ 3,921
Initial direct costs and deferred commissions              67           34
Estimated unguaranteed residual values                    750          630
Less:  Unearned income                                 (1,554)      (1,139)
                                                      -------      -------
        Net investment in direct financing leases     $ 4,658      $ 3,446
                                                      =======      =======
</TABLE>
      Future minimum lease payments to be received under direct financing leases
      for fiscal years ending May 31 are as follows (in thousands):

                 1999                               $  2,005
                 2000                                  1,494
                 2001                                    991
                 2002                                    629
                 2003                                    276
                                                    -------- 
                                                    $  5,395
                                                    ========

      Approximately  11% of these future lease  streams are allocable to lenders
      under financing agreements.
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
--------------------------------------------------------------------------------

7.    Rental Equipment

      Rental equipment consists of the following as of May 31 (in thousands):
 
                                                         1998         1997
                                                       --------     --------
      Computer equipment                               $ 11,758     $  4,130  
      Capital equipment                                   3,992        6,105  
      Telecommunication equipment                           888          240  
      Aircraft equipment                                  6,556        1,338  
      Printing equipment                                    818          548  
      Deferred commissions and initial direct costs         226           64  
                                                       --------     --------  
                                                         24,238       12,425  
      Less:  accumulated depreciation                    (6,120)      (4,920) 
                                                       --------     --------  
                                                       $ 18,118     $  7,505  
                                                       ========     ========  
                                                                              
      
      Future minimum lease payments to be received  under  operating  leases for
      the fiscal years ended May 31 are as follows (in thousands):

                 1999                             $    6,529
                 2000                                  5,060
                 2001                                    914
                 2002                                    430
                 2003                                      5
                                                  ---------- 
                                                  $   12,938
                                                  ==========

      Approximately  17% of these future lease  streams are allocable to lenders
      under financing agreements.

8.    Furniture, Fixtures and Equipment

      Furniture,  fixtures and  equipment  consist of the following as of May 31
      (in thousands):

                                                     1998         1997
                                                    -------     -------

        Leasehold improvements                      $   136     $   420
        Computer equipment and software                 783         719
        Furniture, fixtures and office equipment         15         207
                                                    -------     -------
                                                        934       1,346
        Less:  accumulated depreciation                (536)     (1,140)
                                                    -------     -------
                                                    $   398     $   206
                                                    =======     =======
        <PAGE>
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
--------------------------------------------------------------------------------

9.    Discounted Lease Rental Borrowings

      The Company  finances  certain  leases by assigning the rentals to various
      lending  institutions at fixed rates on a recourse and non-recourse basis.
      Discounted  lease rental  borrowings  represent  the present  value of the
      lease payments discounted at the rate charged by the lending  institution.
      Discounted  lease rental  borrowings are reduced on a monthly basis as the
      corresponding  lease rental stream is collected  (generally by the lending
      institutions).  Amounts due under recourse  borrowings are  obligations of
      the Company which are secured by the leased  equipment and  assignments of
      lease receivables.  Amounts due under non-recourse  borrowings are secured
      by the leased  equipment  and  assignments  of lease  receivables  with no
      recourse to the general assets of the Company.

      The  Company   finances   leases  on  a  one-on-one   basis  with  certain
      institutions.  Additionally, the Company is currently in negotiations with
      a commercial bank to establish a $3 million "warehouse" line of credit.

      Discounted  lease  rental  borrowings  as of May 31  are  as  follows  (in
      thousands):


                                                    1998      1997
                                                   ------    ------

                  Non-recourse borrowings          $2,346    $5,383
                  Recourse borrowings                 248       250
                                                   ------    ------
                                                   $2,594    $5,633
                                                   ======    ======


      The Company  paid  interest  related to  discounted  lease  borrowings  of
      $272,000  and  $652,000  for the fiscal years ended May 31, 1998 and 1997,
      respectively.

      Discounted lease rental  borrowings for the fiscal years ending May 31 are
      payable as follows (in thousands):

                1999                           $    933
                2000                                688
                2001                                612
                2002                                361
                                               -------- 
                                               $  2,594
                                               ========

10.   Note Payable to Institution

      The Company has a revolving  loan agreement with an institution to provide
      lease and inventory financing for aircraft engines for CIS Air Corporation
      (a wholly-owned  subsidiary),  in the amount of $10,000,000.  The facility
      has a three-year  term and permits  borrowing equal to a percentage of the
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
--------------------------------------------------------------------------------

      appraised value of the aircraft engines financed. Substantially all of the
      assets of CIS Air  Corporation  are pledged as collateral for the loan. At
      May 31, 1998, $4,429,000 of this facility was being utilized.  Interest on
      the facility is at 1/4% above the prime rate.  The Company  paid  interest
      related to this facility of $166,000 in fiscal 1998.

11.   Common Stock

      On October 28, 1997, at the Company's  Annual  Meeting,  the  stockholders
      approved  the  amendment  of  the  Company's   Restated   Certificate   of
      Incorporation to increase the number of authorized  shares from 10 million
      to 20 million.  The Company currently has no plans to issue any additional
      shares  (other than  pursuant  to the  Company's  1995 Stock  Compensation
      Plan).

      On May 27, 1997,  the Company  announced  that its Board of Directors  had
      authorized  the  expenditure  of up to $500,000 for the  repurchase of its
      common stock.  The Company  commenced a voluntary odd lot program  through
      June 30,  1997,  which was extended  through  July 31, 1997.  Shareholders
      owning less than 100 shares of the Company's common stock were offered the
      opportunity  to sell all their  shares at the closing  price of the common
      stock on the Nasdaq  Small-Cap Market on May 23, 1997, which was $2.25 per
      share.  Approximately  20,000 shares were repurchased by the Company at an
      aggregate  cost  of  approximately  $45,000.  Subsequent  to the  odd  lot
      repurchase  program,  the Company  intends to repurchase from time to time
      additional  shares  of its  common  stock up to the  balance  of  $500,000
      remaining  after the odd lot  program.  The  Company  may  repurchase  the
      additional shares at prevailing prices in the open market or in negotiated
      or other  permissible  transactions  at the discretion of management.  The
      Company will hold all repurchased  shares of common stock in its treasury.
      As of May 31, 1998,  approximately  143,000 shares had been repurchased by
      the Company in this manner at an aggregate cost of approximately $361,000.

      Each share of common stock  entitles the holder to one vote on all matters
      submitted to a vote of  shareholders.  The Company does not anticipate the
      payment of dividends on the common stock for the foreseeable future.

12.   Stock Option Plan

      In 1995, the Board of Directors adopted and the stockholders  approved the
      Continental  Information  Systems Corporation 1995 Stock Compensation Plan
      (the "1995  Plan").  The 1995 Plan  provides  for the  issuance of options
      covering up to 1,000,000  shares of common stock and stock grants of up to
      500,000  shares of common stock to  non-employee  directors of the Company
      and, in the  discretion of the  Compensation  Committee,  employees of and
      independent contractors and consultants to the Company. Options granted to
      non-employee  directors of the Company in any year become  exercisable  at
      the next annual stockholders'  meeting while those granted to employees of
      and independent  contractors and consultants to the Company are subject to
      vesting periods determined by the Compensation Committee.  Options granted
      to employees in fiscal 1998 become  exercisable in  installments of 33 1/3
      percent  at the grant date and at each  subsequent  fiscal  year end.  The
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
--------------------------------------------------------------------------------

      Company  applies  APB  Opinion  No. 25,  "Accounting  for Stock  Issued to
      Employees," and related  interpretations  in accounting for the 1995 Plan.
      Accordingly,  no compensation cost has been charged against income for the
      stock option plan. Had compensation cost for the 1995 Plan been determined
      based on the fair  value at the  grant  dates for  awards  under the Plan,
      consistent with the  requirements  of FASB Statement No. 123,  "Accounting
      for Stock-Based Compensation," the Company's net income and net income per
      share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
                                                                 (in thousands, except per share amounts)

                                                                      1998            1997            1996
                                                                  ---------        --------         -------
<S>                                           <C>                 <C>              <C>              <C>    
             Net income (loss)                -  As reported      $  (5,373)       $  1,086         $    66
                                              -  Pro forma        $  (5,613)       $    894         $    50

             Basic and diluted net
                 income (loss) per share      -  As reported      $    (.77)       $    .15         $   .01
                                              -  Pro forma        $    (.80)       $    .13         $   .01
</TABLE>

      The fair value of each stock option  grant has been  estimated on the date
      of each  grant  using the  Black-Scholes  option  pricing  model  with the
      following weighted average assumptions:
<TABLE>
<CAPTION>
                                          1998          1997          1996
                                          ----          ----          ----
<S>                                       <C>           <C>           <C> 
Risk-free interest rate                   6.3%          6.6%          6.3%
Expected life (months)                    46            46            60
Expected volatility                       42%           42%           42%
Expected dividend yield                   --            --            --
</TABLE>

      The  weighted-average  grant date fair  values of options  granted  during
      fiscal  1998,  1997  and  1996  were  $.92,  $.80  and  $1.40  per  share,
      respectively.
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
--------------------------------------------------------------------------------

      A summary  of the  status of the 1995  Plan as of May 31,  1996,  1997 and
      1998,  and changes  during the years  ending on those  dates is  presented
      below:
<TABLE>
<CAPTION>
                                                              Weighted Average
                                                 Number of     Exercise Price
                                                  Options        Per Option
                                                  -------        ----------
<S>                                               <C>            <C>     
Outstanding at
      May 31, 1995 (none exercisable)              15,000         $   3.50
Granted                                             9,000         $   2.50
Exercised                                            --           $    --
Forfeited/expired                                  (9,000)        $   3.50
                                                  -------
Outstanding at
      May 31, 1996 (6,000 exercisable)             15,000         $   2.90
Granted                                           319,000         $   1.97
Exercised                                         (16,667)        $   1.97
Forfeited/expired                                 (33,333)        $   1.97
                                                  -------
Outstanding at
      May 31, 1997  (188,337 exercisable)         284,000         $   2.02
Granted                                           190,674         $   2.38
Exercised                                         (70,001)        $   1.97
Forfeited/expired                                 (38,331)        $   1.97
                                                  -------
Outstanding at
      May 31, 1998 (234,002 exercisable)          366,342         $   2.22
                                                  =======
</TABLE>
      The following table summarizes information about stock options outstanding
      at May 31, 1998:
<TABLE>
<CAPTION>
                                Options Outstanding                                    Options Exercisable
                  --------------------------------------------------------        ---------------------------------
  Range of                        Weighted-Average
  Exercise        Number of           Remaining           Weighted-Average        Number of        Weighted-Average
   Prices          Options        Contractual Life        Exercise Price          Options          Exercise Price
   ------          -------        ----------------        --------------          -------          --------------

<S>                <C>                  <C>                 <C>                   <C>                 <C>    
   $3.50             6,000              2.0                 $   3.50                6,000             $  3.50
    3.00            15,674              4.4                     3.00                    -                3.00
    2.50             9,000              2.3                     2.50                9,000                2.50
    2.38           100,000              3.2                     2.38               33,334                2.38
    2.25            75,000              3.1                     2.25               25,000                2.25
    1.97           151,668              3.0                     1.97              151,668                1.97
    1.84             9,000              3.4                     1.84                9,000                1.84
                   -------                                                       -------- 
         Total     366,342                                                        234,002
                   =======                                                       ========
</TABLE>
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
--------------------------------------------------------------------------------

13.   Income Taxes

      The Company and its  domestic  subsidiaries  file a  consolidated  federal
      income tax  return.  In April  1994,  the  Predecessor  Company  reached a
      settlement with the Internal  Revenue Service relating to taxes for fiscal
      years through May 1992. The liability  associated  with this settlement as
      well as the liability for claims against the Predecessor Company for state
      income taxes,  have been assumed by the  Liquidating  Estate in connection
      with the Plan of Reorganization. As part of the aforementioned settlement,
      the Company is entitled to exclude approximately $141 million of otherwise
      taxable  income from gross  income for the years 1990  through 2005 ("safe
      harbor  income").  However,  if the terms of the agreements  governing the
      safe harbor income are substantially  modified or if certain other changes
      take place,  the IRS is entitled to seek to include the safe harbor income
      in the Company's  taxable income after Fiscal 1993.  Management  considers
      the  prospects  for such  changes and  resultant  actions to be remote and
      accordingly has not provided an income tax liability for such income.

      As of  November  30,  1994,  $5 million in net  deferred  tax assets  were
      recorded under "Fresh Start"  accounting (net of a valuation  allowance of
      $7 million) to reflect the amount of deferred tax assets which  Management
      believed more likely than not to be realized.  The  Company's  total gross
      deferred  tax  assets  as of the  Effective  Date were  approximately  $12
      million.  The deferred tax assets relate  principally to the net operating
      loss  carryforwards  available  to  offset  future  taxable  income of the
      Reorganized  Company,  subject to an annual limitation of approximately $2
      million  (limited in the aggregate to  approximately  $35 million).  These
      carryforwards expire during the years 2004 to 2010.

      In  determining  the amount of deferred tax benefits which are more likely
      than not to be  realized,  the  Company  has  projected  that a minimum of
      approximately $5.4 million of tax benefits will be generated by operations
      during the fiscal  periods ended through May 31, 2004. In order to realize
      this  level of tax  benefit,  cumulative  pretax  income  for the  periods
      through  2004  will  have to be  approximately  $14.2  million,  which the
      Company believes to be achievable. While the Company believes that it will
      have  a  long  operating  life  and  continue  to  generate  profits  from
      operations beyond that period,  Management believes, in the context of the
      "more  likely  than not"  criteria  of FAS 109,  that the  recognition  of
      benefits  in  excess  of  $5.4  million  would  be  inappropriate  in  the
      circumstances.   Any  future  realization  of  tax  benefits  relating  to
      pre-reorganization  net operating loss  carryforwards in excess of the net
      $5 million  initially  recorded  will be  recognized as a direct credit to
      stockholders' equity as required under SOP 90-7.
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
--------------------------------------------------------------------------------

      The  components of the provision for income taxes for both  continuing and
      discontinued operations are as follows (in thousands):
<TABLE>
<CAPTION>

                                                      Year Ended May 31,
                                     -------------------------------------------------
                                        1998               1997                 1996
                                     ---------          ---------            ---------
<S>                                  <C>                <C>                  <C>      
             Current
                   Federal           $       -          $       -            $       -
                   State                     -                  -                    -
                                     ---------          ---------            ---------
                                             -                  -                    -
             Deferred                        -                666                    -
                                     ---------          ---------            --------- 
                                     $       -          $     666            $       -
                                     =========          =========            =========

</TABLE>
      A reconciliation  of income tax expense (benefit) at the statutory rate to
      reported income tax expense  (benefit) for continuing  operations  follows
      (in thousands):
<TABLE>
<CAPTION>
                                                             Year Ended May 31,
                                                          ----------------------
                                                          1998     1997     1996
                                                          ----     ----     ----
<S>                                                       <C>      <C>      <C> 
U.S. Federal statutory rate applied to pretax
      income (loss) from continuing operations            $291     $879     $455

State income taxes, net of federal benefit                  34      103       53

Effect of permanent differences and
         changes in the valuation allowance                --       --       --
                                                          ----     ----     ----
                                                          $325     $982     $508
                                                          ====     ====     ====
</TABLE>
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
--------------------------------------------------------------------------------

      The  income  tax  effect  of the  significant  temporary  differences  and
      carryforwards  which give rise to deferred tax assets and  liabilities are
      as follows as of May 31 (in thousands):
<TABLE>
<CAPTION>


                                                       1998               1997
                                                    --------           --------
<S>                                                 <C>                <C> 
Assets
    Net operating losses                            $ 14,219           $ 15,735
    Prepaid lease revenue                              2,271               --
    Discontinued operations                            2,004               --
    Other                                                 52                426
    Valuation allowance                              (12,886)           (10,541)

Liabilities
    Leased assets                                       (246)              (206)
                                                    --------           --------
                                                    $  5,414           $  5,414
                                                    ========           ========
</TABLE>

14.   Employee Benefit Plans

      The  Company  maintains  a  defined   contribution  401(k)  plan  covering
      substantially  all of its  employees  under which it is  obligated to make
      matching  contributions  at the rate of 50% of the first 2% of participant
      earnings  contributed  to the  plan  and  which  provides  for  an  annual
      discretionary  contribution based on participants'  eligible compensation.
      Matching and discretionary  contributions  made by the Company vest over a
      five-year period.  Company  contributions to the plan for the fiscal years
      ended May 31, 1998 and 1997, were $79,000 and $116,000, respectively.

15.   Management and Services Agreement

      In connection with the Plan of Reorganization,  the Company entered into a
      Management and Services  Agreement  pursuant to which the Company provided
      certain administrative services to the Liquidating Estate. In exchange for
      such services, the Company was paid a fee comprised of the allocable share
      of the Company's direct costs required to perform the agreed upon services
      plus a 10% markup and reasonable out-of-pocket expenses. The agreement was
      terminated in February 1997. The Company received  approximately  $539,000
      and $537,000,  pursuant to this  agreement,  in the fiscal years ended May
      31, 1997 and 1996, respectively.

16.   Commitments and Contingencies

      Rental Commitments
      The Company has various  operating lease agreements for offices and office
      equipment.  These leases  generally have provisions for renewal at varying
      terms. The Company recorded rental expense of $243,000 and $442,000 in the
      fiscal years ended May 31, 1998 and 1997, respectively.
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
--------------------------------------------------------------------------------

      The future minimum lease payments  required under operating leases for the
      fiscal years ended May 31 are as follows (in thousands):

                            1999           $   233
                            2000               227
                            2001               229
                            2002               239
                            2003               194
                            Beyond 2003        299
                                           ------- 
                                           $ 1,421
                                           =======

      Contingencies
      The Company is currently  engaged in litigation with the former owners and
      executives of its discontinued  LaserAccess  business.  In March 1998, the
      Company prepaid remaining amounts due to the former owners and exercised a
      right  to set  off  approximately  $1.1  million  against  amounts  due on
      promissory  notes in  connection  with the  purchase of  LaserAccess.  The
      Company has also  terminated  these  individuals  under  their  employment
      agreements.  On April 7, 1998,  the former  owners  filed suit in Superior
      Court of  California,  County of San Diego,  seeking  to  recover  damages
      allegedly arising from the Company's set-off of amounts due. Additionally,
      the former owners are seeking to recover approximately $733,000 in damages
      arising from the Company's termination of their employment contracts.  The
      complaint,  as amended, seeks damages for various other claims,  including
      defamation. The Company has asserted crossclaims and intends to vigorously
      contest these actions.

17.   Fair Value of Financial Instruments

      The following methods and assumptions were used to estimate the fair value
      of each class of financial instruments:

      Cash and cash  equivalents,  notes  receivable  and investment in mortgage
      participation  notes - The carrying value  approximates fair value because
      of the short maturity of those instruments.

      Discounted  lease rental  borrowings,  notes  payable to former  owners of
      acquired  company  and  note  payable  to  institution  -  Fair  value  of
      discounted  lease rental  borrowings,  notes  payable to former  owners of
      acquired  company  and  note  payable  to  institution  are  based  on the
      borrowing  rates  currently  available  to the Company for bank loans with
      similar terms and average  maturities.  At May 31, 1998 and 1997, the fair
      value of  discounted  lease  rental  borrowings,  notes  payable to former
      owners of acquired  company and note  payable to  institution  approximate
      their carrying values.
<PAGE>
Continental Information Systems Corporation
and its Subsidiaries
Notes to the Consolidated Financial Statements
--------------------------------------------------------------------------------

      The estimated  fair values of the Company's  financial  instruments at May
      31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>


                                                       1998                            1997
                                         ----------------------------    ----------------------------
                                         Carrying Value    Fair Value    Carrying Value    Fair Value
                                         --------------    ----------    --------------    ----------
<S>                                          <C>             <C>             <C>             <C>   
Assets:
    Cash and cash equivalents                $3,211          $3,211          $8,968          $8,968
    Notes receivable                          6,870           6,870           5,094           5,094
    Investment in mortgage
          participation notes                 1,522           1,522            --              --

Liabilities:
    Discounted lease rental
         borrowings                           2,594           2,594           5,633           5,633
    Note payable to institution               4,429           4,429            --              --
    Notes payable to former
        owners of  acquired company            --              --             1,536           1,536


</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                                                                   SCHEDULE II


                                   CONTINENTAL INFORMATION SYSTEMS CORPORATION
                                        VALUATION AND QUALIFYING ACCOUNTS
                                         THREE YEARS ENDED MAY 31, 1998
                                             (Dollars in thousands)



                                                   Charged          Charged
                                 Beginning         to costs         to other      Deductions          Ending
                                  Balance        and expenses       accounts     (Recoveries)         Balance
<S>                               <C>              <C>               <C>             <C>              <C>     
    1996:
    Accounts receivable -
    allowance for doubtful
    accounts                      $  (170)         $   (34)          $      -        $   151          $   (53)
                                  --------         --------          --------        -------          --------


    1997: 
    Accounts receivable - 
    allowance for doubtful
    accounts                          (53)             (34)                 -             37              (50)
                                  --------         --------          --------        -------          --------


    1998: 
    Accounts receivable - 
    allowance for doubtful
    accounts                      $   (50)         $    (10)         $      -        $   (16)         $   (76)
                                  --------         ---------         --------        --------         --------



</TABLE>
<PAGE>
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE

                  None


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  Company  incorporates  herein  by  reference  the  information   concerning
directors and executive  officers  contained in its Notice of Annual  Meeting of
Stockholders  and Proxy  Statement  to be filed within 120 days after the end of
the Company's fiscal year (the "1998 Proxy Statement").


ITEM 11.  EXECUTIVE COMPENSATION

The  Company  incorporates  herein  by  reference  the  information   concerning
executive compensation contained in the 1998 Proxy Statement.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
          AND MANAGEMENT

The Company incorporates herein by reference the information concerning security
ownership  of certain  beneficial  owners and  management  contained in the 1998
Proxy Statement.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company incorporates herein by reference the information  concerning certain
relationships and related transactions contained in the 1998 Proxy Statement.
<PAGE>
                                     PART IV


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
          ON FORM 8-K

(a)             The following documents are filed as part of this Annual Report:

                Financial  Statements.  See "ITEM 8. FINANCIAL  STATEMENTS AND
                SUPPLEMENTARY  DATA" for  Index to  Financial  Statements  and
                Schedules included in this Form 10-K.

               Exhibit No.
               -----------

                  2.1*       Disclosure  Statement  with  respect  to  Trustee's
                             Joint Plan of Reorganization dated October 4, 1994.

                  2.2*       November 29, 1994 Order Confirming  Trustee's Joint
                             Plan of Reorganization dated October 4, 1994.

                  2.3**      Stock  Purchase  Agreement  among CIS  Corporation,
                             GMCCCS Corp.  (dba  LaserAccess),  Greg M. Cody and
                             Charles C.  Sinks,  dated  March 8, 1996  (Filed as
                             Exhibit 2.1 to the  Company's  Form 8-K filed March
                             21, 1996 and incorporated herein by reference).

                  3.1*       Restated  Certificate of Incorporation,  as amended
                             (Filed as Exhibit  3.1 to the  Company's  Form 10-Q
                             for  the  quarter  ended   November  30,  1997  and
                             incorporated herein by reference).

                  3.2**      Restated  Bylaws  (Filed  as  Exhibit  3.2  to  the
                             Company's  Form 10-Q for the quarter  ended  August
                             31, 1995 and incorporated herein by reference).

                  10.1*      Lease  dated  May 5, 1994 between B.G. Sulzle, Inc.
                             and the Trustee.

                  10.2**     1995 Stock Compensation Plan (Filed as Exhibit 10.1
                             to the  Company's  Form 10-Q for the quarter  ended
                             August  31,   1995  and   incorporated   herein  by
                             reference).

                  10.3**     Employment  Agreement  between CIS  Corporation and
                             Greg M. Cody, dated March 8, 1996 (Filed as Exhibit
                             10.1 to the Company's Form 8-K filed March 21, 1996
                             and incorporated herein by reference).

                  10.4**     Employment  Agreement  between CIS  Corporation and
                             Charles C.  Sinks,  dated  March 8, 1996  (Filed as
                             Exhibit 10.2 to the Company's  Form 8-K filed March
                             21, 1996 and incorporated herein by reference).

                  10.5**     Loan and Security Agreement between CIS Corporation
                             and  CoreStates  Bank,  N.A.,  dated  July 9,  1996
                             (Filed as Exhibit 10.17 to the Company's  Form 10-K
                             for  the  Fiscal   Year  ended  May  31,  1996  and
                             incorporated herein by reference).
<PAGE>
                  10.6**     Letter Agreement  regarding  employment with Thomas
                             J.  Prinzing  dated May 20,  1997 (Filed as Exhibit
                             10.11 to the  Company's  Form  10-K for the  fiscal
                             year ended May 31, 1997 and incorporated  herein by
                             reference).

                  10.7**     Letter Agreement regarding employment with Jonah M.
                             Meer dated June 9, 1997 (Filed as Exhibit  10.12 to
                             the  Company's  Form 10-K for the fiscal year ended
                             May 31, 1997 and incorporated herein by reference).

                  10.8**     Advisory   Agreement   for  Real   Estate   Related
                             Investments between Continental Information Systems
                             Corporation and Emmes Investment Management Co. LLC
                             dated June 30, 1997 (Filed as Exhibit  10.13 to the
                             Company's  Form 10-K for the fiscal  year ended May
                             31, 1997 and incorporated herein by reference).

                  10.9**     Loan  and  Security   Agreement   between  CIS  Air
                             Corporation  and  Heller   Financial,   Inc.  dated
                             December  19,  1997  (Filed as Exhibit  10.1 to the
                             Company's  10-Q for the quarter ended  February 28,
                             1998 and incorporated herein by reference).

                  23.1      Consent of Independent Accountants.

                  27.1      Financial Data Schedule.

                  ------------------------
                  *        Filed as an exhibit to the Company's  amended Form 10
                           Registration Statement (Commission File No. 0-25104),
                           originally  filed November 10, 1994 and  incorporated
                           herein by reference.

                  **       Incorporated by reference.

(b)               Reports on Form 8-K

                  The  Company  filed the  following  reports on Form 8-K on the
                  date indicated during the last quarter of the Company's fiscal
                  year:

                  Date                    Description
                  ----                    -----------
                  May 29, 1998            The Company  announces  discontinuance
                                          of its Laser  Printing Business Unit.
                                           

<PAGE>
                                   SIGNATURES


Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned thereunto duly authorized.

                                      CONTINENTAL INFORMATION SYSTEMS
                                      CORPORATION


                                      BY:  /s/MICHAEL L. ROSEN
                                              ----------------
                                              Michael L. Rosen
                                              President, Chief Executive Officer
                                              and Director


                                      BY:  /s/JONAH M. MEER
                                              -------------
                                              Jonah M. Meer
                                              Senior Vice President, 
                                              Chief Operating Officer
                                              and Chief Financial Officer

Dated:     August 24, 1998

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and the dates indicated:


    Signature                     Title                          Date
    ---------                     -----                          ----

/s/ JULIUS S. ANREDER            Director                    August 24, 1998
---------------------
Julius S. Anreder


/s/ DR. LEON H. BLOOM            Director                    August 24, 1998
---------------------
Dr. Leon H. Bloom


/s/ JAMES P. HASSETT             Director and                August 24, 1998
--------------------             Chairman of the Board
James P. Hassett


/s/ GEORGE H. HEILBORN           Director                    August 24, 1998
----------------------
George H. Heilborn


/s/ PAUL M. SOLOMON              Director                    August 24, 1998
-------------------
Paul M. Solomon