U. S. SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, D.C.  20549

                                    FORM 10-QSB



                 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                      OF THE SECURITIES EXCHANGE ACT OF 1934

                 For the quarterly period ended: July 31, 1998
                          Commission file number: 0-20824



                        COMPUTER OUTSOURCING SERVICES, INC. 
         (Exact name of small business issuer as specified in its charter)


                    New York                               13-3252333     
         (State or other jurisdiction of                 (IRS Employer    
          incorporation or organization)              Identification No.)

                 360 West 31st Street     New York, New York 10001
                     (Address of principal executive offices)

                                   (212) 564-3730     
                            (Issuer's telephone number)




Check whether the registrant (1) filed all reports required to be filed by 
Section 13 or 15(d) of the Exchange Act during the past 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 [  ]

There were 4,255,115 shares of the registrant's Common Stock, $0.01 par value,
outstanding as of September 1, 1998.

Transitional Small Business Disclosure Form (check one);     Yes [  ]   No [X]













                                                                Page 1 of 17
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1.  Financial Statements

               
               
               COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
                            CONSOLIDATED BALANCE SHEETS


                                                      
                                                      July          October
                                                    31, 1998        31, 1997
                                                 -------------    -------------
                                                  (Unaudited)
                                  
                   ASSETS

CURRENT ASSETS:
  Cash and cash equivalents, including short-    
    term, interest bearing investments of
    $11,406,245 and $782,583 ..................  $ 11,515,762     $    972,459 

  Trade accounts receivable, net of allowance 
    for doubtful accounts of $196,160 and 
    $111,577 ..................................     4,705,495        3,990,630

  Net assets of discontinued operations (Note 2)        -            6,071,333

  Note receivable (Note 2) ....................       750,000             -

  Prepaid expenses and other current assets ...     1,593,648        1,223,759
                                                   ----------       ----------
                                                   18,564,905       12,258,181
                                                   ----------       ----------
PROPERTY and EQUIPMENT, net ...................     3,198,532        2,578,071
                                                   ----------       ----------
OTHER ASSETS:
  Deferred software costs, net ................     1,672,612        1,545,935

  Intangibles, net ............................     2,528,877        2,715,993

  Due from related parties, net ...............       223,513          176,295
  
  Security deposits and other non-current 
    assets ....................................       530,219          523,797
                                                   ----------       ----------
                                                    4,955,221        4,962,020
                                                   ----------       ----------
TOTAL ASSETS ..................................  $ 26,718,658     $ 19,798,272
                                                   ==========       ==========

                                  



             See Notes to Consolidated Interim Financial Statements    
             
                                                                   
                                                                 Page 2 of 17
<PAGE>
               
               
               COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
                            CONSOLIDATED BALANCE SHEETS
                                   (Continued)
                                                      July          October
                                                    31, 1998        31, 1997
                                                 -------------    -------------
                                                  (Unaudited)
LIABILITIES and STOCKHOLDERS' EQUITY
                                  
CURRENT LIABILITIES:
  Accounts payable ............................  $  1,084,298     $  1,246,516 
                                  
  Current portion of long-term debt ...........       450,664        2,297,546 

  Current portion of capitalized lease 
    obligations ...............................        22,272           23,034 

  Corporate income taxes payable ..............     2,076,947          243,342
  
  Accrued expenses ............................     2,636,185        1,536,330 

  Customer deposits and other current 
    liabilities ...............................       153,404          231,699 
                                                   ----------       ----------
                                                    6,423,770        5,578,467 
                                                   ----------       ----------
LONG-TERM LIABILITIES:
  Long-term debt ..............................        19,271          252,577 
     
  Capitalized lease obligations ...............         3,129           19,414 
                                  
  Deferred income taxes .......................       605,057          645,910 
                                  
  Unearned portion of covenant not to compete .     1,120,000             -    
                                                   
  Deferred lease credits ......................       741,186          762,841
                                                   ----------       ----------
                                                    2,488,643        1,680,742
                                                   ----------       ----------
STOCKHOLDERS' EQUITY:
  Preferred stock, $0.01 par value; 1,000,000 
    shares authorized, none issued ............          -                -
    
  Common stock, $0.01 par value; 10,000,000 
    shares authorized; shares issued and out-
    standing, 4,251,915 and 3,826,104..........        42,519           38,261 

  Additional paid-in capital ..................    11,253,717        9,595,789 

  Retained earnings ...........................     6,510,009        2,905,013 
                                                   ----------       ----------
                                                   17,806,245       12,539,063 
                                                   ----------       ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....  $ 26,718,658     $ 19,798,272 
                                                   ==========       ==========
              See Notes to Consolidated Interim Financial Statements        
                                                                Page 3 of 17
<PAGE>
               
               
               COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (Unaudited)
                                  

                            Nine Months Ended             Three Months Ended
                                 July 31                       July 31,
                       --------------------------    --------------------------
                           1998          1997           1998           1997
                       ------------  ------------    ------------  ------------
                                  
REVENUES ...........   $ 22,751,227  $ 17,845,369    $  7,617,026  $  6,048,603
                         ----------    ----------      ----------    ----------
COSTS and EXPENSES:
  Data processing 
    costs ..........     14,819,111    12,692,903       5,027,780     4,177,121
  Selling and promo-
    tion costs .....        992,652       925,712         358,466       292,806
  General and 
    administrative
    expenses .......      4,664,770     3,223,343       1,517,492     1,033,246
  Interest expense, 
    net of interest
    income .........       (396,648)      193,263        (155,786)       68,898
                         -----------   ----------      -----------   ----------
                         20,079,885    17,035,221       6,747,952     5,572,071
                         -----------   ----------      -----------   ----------

Income from continu-  
  ing operations     
  before income tax   
  provision ........      2,671,342       810,148         869,074      476,532
Provision for income 
  taxes ............      1,097,846       324,100         297,076      190,500
                         -----------   ----------      ----------    ----------
Income from continu- 
  ing operations ...      1,573,496       486,048         571,998      286,032
Income/(loss) from     
  discontinued 
  operations, net of
  income taxes             
  (Note 2) .........        (60,509)       27,452            -        (102,133)
Gain on sale of the
  Payroll Division, 
  net of income
  taxes (Note 2) ...      2,092,009          -            491,088         -
                         ----------    ----------      ----------    ----------
NET INCOME .........   $  3,604,996  $    513,500    $  1,063,086  $   183,889
                         ==========    ==========      ==========    ==========
                                                                     


                                Continued on Next Page

                                                                
                                                                Page 4 of 17

<PAGE>

               
               COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (Unaudited)
                                 
                            Nine Months Ended             Three Months Ended
                                 July 31,                      July 31,
                       --------------------------    --------------------------
                           1998          1997           1998           1997
                       ------------  ------------    ------------  ------------
EARNINGS PER COMMON
  SHARE (Note 3):

Basic earnings per
  common share:

Income from continuing  
  operations ......... $       0.40  $       0.12   $       0.14  $       0.08
Income/(loss) from       
  discontinued 
  operations .........        (0.02)         0.01            -           (0.03)
Gain on Sale of the
  Payroll Division ...         0.52           -             0.11           -
                         -----------   ----------     ----------    -----------
Net income ........... $       0.90  $       0.13   $       0.25  $       0.05
                         ===========   ==========     ==========    ===========
                                                                     
Weighted average number
  of common shares
  outstanding ........    3,985,296     3,769,354      4,177,866     3,789,849
                         ==========    ==========     ==========    ==========
                                                   
Diluted earnings per 
  common share:

Income from continuing
  operations ......... $       0.36  $       0.12   $       0.13  $       0.08
Income/(loss) from 
  discontinued
  operations .........        (0.01)         0.01            -           (0.03)
Gain on Sale of the 
  Payroll Division ...         0.48           -             0.10           -
                         -----------   ----------     ----------    -----------
Net income ........... $       0.83  $       0.13   $       0.23  $       0.05
                         ===========   ==========     ==========    ===========

Weighted average
  number of common
  shares and other 
  dilutive securities              
  outstanding ........    4,360,804     3,929,188      4,571,900     3,980,807
                         ==========    ==========     ==========    ==========
               

               See Notes to Consolidated Interim Financial Statements


                                                                Page 5 of 17
<PAGE>


              COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
                                                 
                                                   Nine Months Ended July 31, 
                                                 ------------------------------
                                                      1998             1997
                                                 -------------    -------------

CASH FLOWS FROM OPERATING ACTIVITIES:                                         
Income from continuing operations .............  $  1,573,496     $    486,048
Adjustments to reconcile income from continuing
  operations to cash (used in)/provided by 
  operating activities:                                                       
  Depreciation and amortization ...............     1,010,635        1,098,900
  Increase/(reduction) in deferred income taxes       (35,355)         175,545
  Decrease/(increase) in:  
    Trade accounts receivable .................      (714,865)        (730,271)
    Prepaid expenses and other current assets .      (369,889)        (289,759)
    Security deposits and other noncurrent 
      assets ..................................       (48,992)        (184,453)
  Increase/(decrease) in:
    Accounts payable ..........................      (162,218)          96,767
    Income taxes payable ......................       120,092          (27,939)
    Accrued expenses ..........................    (1,832,096)          34,853
    Customer deposits and other current 
      liabilities .............................       (78,295)         (58,152)
  Deferred lease credits ......................       (53,965)            -
                                                    ----------       ----------
    Net cash (used in)/provided by operating       
      activities ..............................      (591,450)         601,539
                                                    ----------       ----------

CASH FLOWS FROM INVESTING ACTIVITIES:                                          
  Purchase of property and equipment ..........    (1,227,425)        (281,976)
  Disposal of equipment .......................        14,960            2,074
  Proceeds from the sale of the Payroll 
    Division ..................................    12,210,000             -   
  Proceeds from a covenant not to compete .....     1,440,000             -
  Settlement of contingencies relating to
    acquisitions ..............................          -            (423,938)
  Increase in deferred software costs .........      (603,311)        (353,772)
                                                   -----------      -----------
    Net cash provided by/(used in) investing 
      activities ..............................  $ 11,834,224     $ (1,057,612)
                                                   -----------      -----------
                                

                            Continued on Next Page
              
              
             See Notes to Consolidated Interim Financial Statements        



                                                                Page 6 of 17

<PAGE>
              
              COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (Unaudited - Continued)
                                                
                                                   Nine Months Ended July 31,
                                                 ------------------------------
                                                      1998             1997
                                                 -------------    -------------
CASH FLOWS FROM FINANCING ACTIVITIES:                                          
  Repayment of long-term debt .................  $ (2,080,188)     $ (789,928)
  Proceeds from the exercise of options and                  
    warrants ..................................     1,662,186            -
  Proceeds from longterm debt .................          -            500,000
  Repayments from/(borrowings by) related 
    parties, net ..............................       (47,218)         22,735
  Repayments of capital leases ................       (17,047)        (77,935)
                                                   -----------      ----------
    Net cash used in financing activities .....      (482,267)       (345,128)
                                                   -----------      ----------
  CASH FLOWS FROM DISCONTINUED OPERATIONS:                                 
  Income/(loss) from discontinued operations ..       (60,509)          27,452
  Adjustments to reconcile income/(loss) from
    discontinued operations to cash (used in)/
    provided by discontinued operations:
    Depreciation and amortization .............       151,118          627,380
    Increase in net assets of discontinued         
      operations ..............................      (307,813)        (459,701)
                                                   -----------      -----------
    Net cash (used in)/provided by discontinued 
      operations ..............................  $   (217,204)    $    195,131
                                                   -----------      -----------
    Net increase/(decrease) in cash and cash
      equivalents .............................    10,543,303         (606,070)
    Cash and cash equivalents at the beginning
      of the period ...........................       972,459          857,204
                                                   -----------      -----------
    Cash and cash equivalents at the end of the
      period ..................................  $ 11,515,762     $    251,134
                                                   ===========      ===========
SUPPLEMENTAL CASH FLOW INFORMATION:                                            
  Cash paid during the period for:
    Interest ..................................  $    110,622     $    205,906
                                                   ===========      ===========
    Income taxes ..............................  $  1,013,106     $     91,958
                                                   ===========      ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
  INVESTING AND FINANCING ACTIVITIES:
    Capitalized leases for data processing
      equipment ...............................          -              81,312
                                                   ==========       ===========
    Note received in connection with the sale  
      of the Payroll Division (Note 2) ........  $    750,000     $       -    
                                                   ==========       ===========
For the nine months ended July 31, 1997, $19,594 (net of tax benefits) was
accreted through a charge to retained earnings in connection with a stock 
option.
             See Notes to Consolidated Interim Financial Statements    
                                                                Page 7 of 17
<PAGE>

              
              COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                        NINE MONTHS ENDED JULY 31, 1998
                                  (Unaudited)
                                                         
                       
                       Common      Par      Paid in     Retained   
                       Shares     Value     Capital     Earnings     Total
                    -----------------------------------------------------------

Balances,           
  October 31, 1997.  3,826,102  $  38,261  $ 9,595,789  $2,905,013  $12,539,063
  
Exercises of stock  
  options .........    283,848      2,838      831,479                  834,317

Exercises of
  warrants ........    141,965      1,420      826,449                  827,869


Net income ........                                      3,604,996    3,604,996

                    -----------------------------------------------------------
Balances, 
  July 31, 1998 ..   4,251,915  $  42,519  $11,253,717  $6,510,009  $17,806,245
                    ===========================================================
        
        
              
              


















              
              See Notes to Consolidated Interim Financial Statements
                                                                   

                                                         
                                                         
                                                         
                                                                 Page 8 of 17
                                                                 
<PAGE>                                                         


              COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
               NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


1.  BASIS OF PRESENTATION
    ---------------------

The Consolidated Balance Sheet as of July 31, 1998, and the Consolidated 
Statements of Income and the Consolidated Statements of Cash Flows for the 
nine month periods ended July 31, 1998 and 1997, have been prepared by the 
Company without audit.  In the opinion of management, all adjustments 
(consisting of only normal recurring adjustments) necessary to present fairly 
the financial position, results of operations, and cash flows for the periods 
indicated have been made.

The results of operations for the periods ended July 31, 1998 and 1997 are not 
necessarily indicative of the operating results for the full fiscal years.  
Certain reclassifications have been made to the prior periods to conform to 
the current presentation.

Certain disclosures normally included in financial statements prepared in 
accordance with generally accepted accounting principles have been condensed 
or omitted.  These consolidated interim financial statements should be read 
in conjunction with the Company's Annual Report on Form 10-KSB for the fiscal 
year ended October 31, 1997.

The consolidated financial statements include the accounts of Computer 
Outsourcing Services, Inc. and its wholly-owned subsidiaries (collectively, 
the "Company").  All significant intercompany balances and transactions have 
been eliminated.

2.  SALE OF THE PAYROLL DIVISION
    ----------------------------

On December 19, 1997, the Company consummated the sale (the "Sale") of all 
the outstanding capital stock of Daton Pay USA, Inc., NEDS, Inc., Pay USA of 
New Jersey, Inc. and Key-ACA, Inc., each a wholly-owned subsidiary of the 
Company, and together comprising the Payroll Division ("Pay USA"), to Zurich
Payroll Solutions, Ltd. (the "Buyer").  At closing, the Company received 
$12,900,000, of which $12,150,000 was in cash and $750,000 was in the form of 
a note from the Buyer.  The amount received at closing included $1,440,000 
for a three-year covenant not to compete and $500,000 in connection with a
services agreement.

The note is due on July 15, 1999, is subject to acceleration pro-rata if  
certain contingent liabilities of the Buyer were satisfied in whole or part, 
and requires quarterly payments of interest at 8.5% per annum.  At July 31, 
1998, the contingent liabilities were satisfied, and the Note became due.  On 
August 14, 1998, the Buyer paid $601,607 plus interest, and asserted 
approximately $150,000 in charge-backs under the Sale Agreement as payment of 
the remainder of the Note.  The chargebacks have not yet been agreed to by the
Company. 
         

         
                                                                Page 9 of 17

<PAGE>         
         
         
             COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
        NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)


The terms of the Sale also provided for an additional payment by the Buyer of 
up to $1,500,000, which amount was contingent on the revenue of Pay USA for 
the three months following the Sale, and was also subject to adjustment based 
on a final determination of the net amount of assets and liabilities 
transferred to the Buyer on December 19, 1997.  On June 1, 1998, the Company 
received the $1,500,000 contingent payment.

Including the contingent payment, the Company has recognized a pretax gain of 
approximately $3,820,700 after recording various costs of the transaction 
amounting to approximately $2,926,700.  These costs include, among other 
things, the assumption of certain contractual obligations related to the 
Company's original acquisitions of the companies comprising Pay USA, and 
payments and accruals relating to certain employment agreements.  Income 
related to the $1,440,000 covenant not to compete is being recognized over the
three-year term of the agreement. 

Of the cash received at the closing, $1,713,509 was used to repay a term loan 
and the outstanding balance on a line of credit.

During the nine month period ended July 31, 1998 and the nine and three month 
periods ended July 31, 1997, revenues relating to the discontinued operations 
of Pay USA approximated $1,117,000, $6,731,000, and $2,129,000, respectively, 
and pretax operating results approximated a loss of $137,000, income of $46,000,
and a loss of $170,000, respectively.


3.  BASIC AND DILUTED EARNINGS PER COMMON SHARE
    -------------------------------------------

The Company has adopted the provisions of Statement of Financial Accounting 
Standards No. 128 "Earnings per Share" ("SFAS 128"), which establishes new 
standards for computing and presenting earnings per share and applies to 
entities with publicly held common stock or potential common stock such as
employee stock options.  SFAS 128 replaces the presentation of primary 
earnings per share with a presentation of basic earnings per share and also 
requires, among other things, a dual presentation of basic and diluted 
earnings per share for all entities with complex capital structures.  Basic 
earnings per share excludes dilution and is computed by dividing the 
components of net income by the weighted-average number of shares outstanding 
for each period presented.  Diluted earnings per share is computed by dividing
the components of net income by the weighted-average number of shares 
outstanding plus dilutive potential common shares which would result from the 
exercise of stock options and warrants.








                                                                Page 10 of 17

<PAGE>

             COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
        NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

The following is a reconciliation of the weighted-average shares used in the 
computations of basic and dilutive earnings per share.

                             Nine Months ended July   Three Months ended July
                             ----------------------   -----------------------
                             31, 1998      31, 1997    31, 1998      31, 1997
                             --------      --------    --------      --------
Weighed-average common      
  shares outstanding used 
  for basic earnings per 
  share ...................  3,985,296    3,769,354    4,177,866    3,789,849
Weighted-average number of 
  shares from assumed 
  exercises of dilutive
  options and warrants, 
  computed by the treasury-
  stock method ............    375,508      159,834      394,034      190,958
                             ---------    ---------    ---------    ---------
Weighted-average common 
  shares outstanding used 
  for dilutive earnings per 
  share ...................  4,360,804    3,929,188    4,571,900    3,980,807
                             =========    =========    =========    =========
Total number of options and 
  warrants excluded from the 
  calculation of diluted 
  earnings per share because
  they are anti-dilutive ..     63,900      271,402       27,500      273,902
                             =========    =========    =========    =========
4. STOCK OPTIONS
   -------------
The Company applies the provisions of APB Opinion 25 and related Interpreta-
tions in accounting for its stock options.  Accordingly, no compensation cost 
has been recognized for stock options granted.  The excess, if any, of the fair
market value of shares on the measurement date over the exercise price is 
charged to operations each year as the options become exercisable.  Had compen-
sation cost for options granted since November 1, 1995 been determined using 
the Black-Scholes option-pricing model described in Statement of Financial 
Accounting Standards No. 123("FASB 123") (which permits, but does not require, 
companies to recognize as expense over the vesting period the fair value of 
all stock-based awards, measured as of the date of grant), the Company would 
have recorded aggregate compensation expense of approximately $1,508,669 which
would be expensed over the options' vesting period as follows:
                        Fiscal Years Ended October 31,
                        ------------------------------
                               1998         $   75,433
                               1999            301,731  
                               2000            301,731  
                               2001            246,312  
                               2002            186,148  
                               2003             38,141  
                                            ---------- 
                                            $1,149,496
                                            ==========
                                                                Page 11 of 17
<PAGE>

             
             COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
        NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)


The assumptions used in the option-pricing model include a risk-free interest 
rate of 6.5%, expected lives of between six months and five years, and 
expected volatility of 48.6%.  The pro forma impact of following the 
provisions of FASB 123 on the Company's reported net income and net income 
per share would be as follows:

                                       Nine  Months Ended    Nine Months Ended
                                         July 31, 1998         July 31, 1997
                                       ------------------    -----------------
Net income              - as reported     $  3,604,996          $   513,500
                                          ============          ===========
                        - pro forma       $  3,416,838          $   434,742
                                          ============          ===========
                                         
Basic earnings per 
  share                 - as reported     $       0.90          $      0.13
                                          ============          =========== 
                        - pro forma       $       0.86          $      0.11
                                          ============          =========== 
                                      
Diluted earnings per 
  share                 - as reported     $       0.83          $      0.13
                                          ============          ===========
                        - pro forma       $       0.78          $      0.11
                                          ============          ===========


Net income per common share has been calculated using the weighted average 
number of shares of common stock outstanding during the period.



             
             
             
             
             
             
             
             
             
             
             
             
             
             
             
             
             
             
             
                                                                Page 12 of 17
             
<PAGE>             
             
             
             COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES

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

On December 19, 1997, the Company sold four subsidiaries comprising the 
Payroll Division.  In the accompanying financial statements, all revenues and 
expenses of the Payroll Division have been classified as discontinued 
operations.  Unless otherwise noted, the following discussion relates only to 
the results from continuing operations.

RESULTS OF OPERATIONS, NINE MONTH PERIODS ENDED JULY 31, 1998 AND 1997 

During the nine month period ended July 31, 1998 (the "current period"), 
revenues from continuing operations were $22,751,000, an increase of 28% over 
the $17,845,000 recorded in the nine month period ended July 31, 1997 (the 
"prior period").  This increase is the result of several new Information 
Services contracts, as well as approximately $1,127,000 in income from the 
covenant not to compete and service contracts with the Buyer of the Payroll 
Division.

Data processing costs increased $2,126,000 to $14,819,000 (65% of revenues) 
during the current period compared to $12,693,000 (71% of revenues) in the 
prior year's period.  The improvement in margin arises from increases in 
revenue and improved margins on a contract-by-contract basis.

Selling and promotion costs increased slightly, to $993,000, but decreased 
1% as a percentage of revenues.  General and administrative expenses increased 
$1,441,000 to $4,665,000 in the current period, an increase of 2% as a 
percentage of revenues, primarily due to increased rent and utility costs 
related to the Company's new computer center in New Jersey.

The Company recorded net interest income of $397,000 in the current period, as 
compared to net interest expense of $193,000 in the prior period.  The Company 
repaid substantially all of its bank debt on December 19, 1997, and has 
invested the cash obtained from the proceeds of the sale of the Payroll 
Division.

The Company recorded income from continuing operations of $1,573,000 ($0.40 
and $0.36 per share for basic and diluted shares, respectively) for the period 
ended July 31, 1998, a threefold increase compared to the profit of $486,000 
($0.12 per share, basic and diluted) for the period ended July 31, 1997.

In connection with the sale of the Payroll Division, the Company recognized a 
gain of approximately $2,092,000 after taxes and after various costs of the 
transaction amounting to approximately $2,926,700.  These costs include, among 
other things, the assumption or settlement of certain contractual obligations 
related to the Company's original acquisitions of the companies comprising 
Pay USA, and payments and accruals relating to certain employment agreements.
         
         



                                                                Page 13 of 16
             
<PAGE>             
             
             
             COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES


RESULTS OF OPERATIONS, QUARTERS ENDED JULY 31, 1998 AND 1997

During the three month period ended July 31, 1998 (the "current quarter"), 
revenues from continuing operations were $7,617,000, an increase of 26% over 
the $6,049,000 recorded for the three month period ended July 31, 1997 (the 
"prior year's quarter").  This increase is the result of several new 
Information Services contracts, as well as approximately $231,000 in income 
from the covenant not to compete and service contracts with the Buyer of the 
Payroll Division.

Data processing costs increased $851,000 to $5,028,000 (66% of revenues) 
during the current quarter compared to $4,177,000 (69% of revenues) in the 
prior year's quarter.  The improvement as a percentage of revenues arises 
from the increase in revenue and improved margins on a contract-by-contract
basis.  

Selling and promotion costs increased $66,000 to $358,000, but remained the 
same as a percentage of revenues.  General and administrative expenses 
increased $484,000 to $1,517,000 in the current quarter, an increase of 3% 
as a percentage of revenues, primarily due to increased rent and utility costs 
connected with the Company's new computer center in New Jersey.  

The Company recorded net interest income of $156,000 in the current quarter, 
as compared to a net interest expense of $69,000 in the prior period.  The 
Company repaid substantially all of its bank debt on December 19, 1997, and 
has invested the cash obtained from the proceeds of the sale of the Payroll 
Division.

The Company recorded income from continuing operations of $572,000 ($0.14 and 
$0.13 per share for basic and diluted shares, respectively) for the current 
quarter, double the profit of $286,000 ($0.08 per share - basic and diluted) 
for the prior year's quarter.

In connection with the sale of the Payroll Division, the Company received a
contingent payment of $1,500,000 in the current quarter and recognized a gain 
of approximately $491,100 after taxes and after various additional costs of the
transaction amounting to approximately $794,000.  These costs include, among 
other things, the settlement of certain contractual obligations related to the
Company's original acquisitions of the companies comprising Pay USA.

LIQUIDITY AND CAPITAL RESOURCES

During the nine months ended July 31, 1998, the Company used approximately 
$591,000 in continuing operations.  This amount is net of depreciation and 
amortization of $1,011,000 and includes, among other things, a $1,832,000 
increase in accrued taxes, primarily as a result of the sale of the Payroll 
Division.

The Company generated cash from investing activities of approximately 
$11,834,000 during the period ended July 31, 1998, principally from the 
proceeds from the sale of the Payroll Division and $1,440,000 for a related 
covenant not to compete.  This amount is net of purchases of fixed assets of 
$1,227,000 and software cost deferrals of $603,000.
                                                               Page 14 of 17
<PAGE>         
         
         
         COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES


LIQUIDITY AND CAPITAL RESOURCES (Continued)

In financing activities for the period, the Company used cash of approximately 
$482,000, including $2,097,000 to repay long term debt and capital leases, 
offset by $1,662,000 generated from the exercises of stock warrants and 
employee stock options.

As of July 31, 1998, the Company had cash and cash equivalents of $11,516,000 
and working capital of $12,141,000.  Its current ratio  (i.e., the ratio of 
current assets to current liabilities) was 2.89 to 1, and the ratio of total 
liabilities to equity was 0.50 to 1.

In March 1997, the Company and a bank entered into an agreement for a 
revolving line of credit whereby the Company could borrow up to $1,500,000.  
Interest on borrowings would have been at either the Adjusted Eurodollar Rate 
(as defined) plus 2.25%, or the bank's prime rate.  The line of credit 
expired on April 30, 1998.

Management believes that its cash on hand and its anticipated cash flow from 
operations will be sufficient to fund the Company's operations for at least 
the next twelve months.  The Company continues to seek acquisition 
opportunities that are consistent with the Company's long-term strategy.


Forward-looking statements in this report that are not historical or current 
facts are "forward-looking statements" made pursuant to the safe harbor 
provisions of the Private Securities Litigation Reform Act of 1995.  Investors 
are cautioned that forward-looking statements may be subject to certain risks 
and uncertainties, including but not limited to, continued acceptance of the 
Company's products and services in the marketplace, competitive factors, new 
products, technological changes, the Company's dependence on third-party 
suppliers, intellectual property rights and other risks detailed from time to 
time in the Company's periodic report filings with the Securities and Exchange 
Commission.  Accordingly, the actual results of the Company could differ 
materially from such forward-looking statements.
















                                                                 Page 15 of 17


<PAGE>



              COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES


PART II - OTHER INFORMATION

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

        The Annual Meeting of Stockholders of the Company was held on June 3,
        1998, at which the following actions were taken:

        (1)     Five directors of the Company were elected for terms of one
        year, or until their respective successors are duly elected and
        qualified.  The following table lists the name of each candidate for
        director, and the number of shares voted for or withheld from each
        candidate:

                                         Shares Voted            Shares 
                   Nominee               For Election           Withheld
                -----------------        ------------           --------

                Zach Lonstein              3,111,483             251,064

                Jeffrey Millman            3,111,483             251,064

                Robert B. Wallach          3,111,483             251,064

                Howard Waltman             3,111,483             251,064

                John C. Platt              3,111,483             251,064

        (2)     The Company amended Article 4.1 in the Company's Restated 
        Certificate of Incorporation to provide that the total number of 
        shares of stock which the Corporation shall have authority to issue 
        is 11,000,000, consisting of 1,000,000 shares of preferred stock, par
        value $0.01 per share ("Preferred Stock)", and 10,000,000 shares of
        common stock, par value $0.01 per share ("Common Stock").  The 
        shareholders approved this amendment by a vote of 3,088,693 for, 
        250,954 against, and 22,900 abstaining.

ITEM 6 -        Exhibits and Reports on Form 8-K

          (a)   Exhibits:

                None

          (b)   Reports on Form 8-K:

                None
                
           
                                                                 
                                                                 
                                                                 Page 16 of 17

 
 <PAGE>



               COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES

                                  SIGNATURES

        
        In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.



                                    COMPUTER OUTSOURCING SERVICES, INC.


                                     /s/
                                    -----------------------------------
September 11, 1998                  Zach Lonstein
                                    Principal Executive Officer


                                     /s/
                                    -----------------------------------
September 11, 1998                  Laurence L. Carpenter
                                    Acting Principal Accounting Officer





























                                                                Page 17 of 17