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: January 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 3,934,377 shares of the registrant's Common Stock, $0.01 par value, 
outstanding as of March 10, 1998.



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







<PAGE>
      

PART I - FINANCIAL INFORMATION
ITEM 1.  Financial Statements

         COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
                      CONSOLIDATED BALANCE SHEETS

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

CURRENT ASSETS:
  Cash and cash equivalents ...................  $ 10,369,340     $    972,459

  Trade accounts receivable, net of allowance 
    for doubtful accounts of $200,815 and 
    $111,577 ..................................     4,875,157        3,990,630

  Prepaid income taxes ........................       559,700             -
  
  Net assets of discontinued operations (Note 2)         -           6,071,333
  
  Prepaid expenses and other current assets ...       884,142        1,223,759
                                                   ----------       ----------
                                                   16,688,339       12,258,181
                                                   ----------       ----------
PROPERTY and EQUIPMENT, net ...................     2,691,440        2,578,071
                                                   ----------       ----------
OTHER ASSETS:
  Deferred software costs, net ................     1,558,633        1,545,935

  Intangibles, net ............................     2,659,159        2,715,993

  Due from related parties, net ...............       114,252          176,295
                                  
  Notes receivable (Note 2) ...................       780,000           30,000
  
  Security deposits and other non-current 
    assets ....................................       466,823          493,797
                                                   ----------       ----------
                                                    5,578,867        4,962,020
                                                   ----------       ----------
TOTAL ASSETS ..................................  $ 24,958,646     $ 19,798,272
                                                   ==========       ==========

                                  






            See Notes to Consolidated Interim Financial Statements

                                                                 Page 2 of 13
<PAGE>
               
               
               COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
                            CONSOLIDATED BALANCE SHEETS
                                   (Continued)
                                  
                                                  January 31,      October 31,
                                                      1998             1997
                                                 -------------    -------------
                                                  (Unaudited)
     LIABILITIES and STOCKHOLDERS' EQUITY
                                  
CURRENT LIABILITIES:
  Accounts payable ............................  $  1,341,051     $  1,246,516 
                                  
  Current portion of long-term debt ...........       464,404        2,297,546 

  Current portion of capitalized lease 
    obligations ...............................        23,226           23,034 

  Accrued expenses and taxes ..................     4,877,307        1,779,672

  Customer deposits and other current 
    liabilities ...............................       489,074          231,699
                                                   ----------       ----------
                                                    7,195,062        5,578,467
                                                   ----------       ----------
LONG-TERM LIABILITIES:
  Long-term debt ..............................       245,024          252,577
     
  Capitalized lease obligations ...............        13,687           19,414 
                                  
  Deferred income taxes .......................       589,621          645,910 
                                  
  Unearned portion of covenant not to compete .     1,360,000             -

  Deferred lease credits ......................       776,766          762,841
                                                   ----------       ----------
                                                    2,985,098        1,680,742
                                                   ----------       ----------
STOCKHOLDERS' EQUITY:
  Preferred stock, $0.01 par value; 1,000,000 
    shares authorized, none issued ............          -                - 
    
  Common stock, $0.01 par value; 7,000,000 
    shares authorized; shares issued and out-
    standing, 3,862,227 and 3,826,104 .........        38,622           38,261

  Additional paid-in capital ..................     9,803,901        9,595,789

  Retained earnings ...........................     4,935,963        2,905,013
                                                   ----------       ----------
                                                   14,778,486       12,539,063
                                                   ----------       ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....  $ 24,958,646     $ 19,798,272
                                                   ==========       ==========
              See Notes to Consolidated Interim Financial Statements        

                                                                Page 3 of 13
<PAGE>
                
                COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (Unaudited)
                                                 Three Months Ended January 31,
                                                      1998             1997
                                                 -------------    -------------
REVENUES ......................................  $  7,216,595     $  5,899,895 
                                                   ----------       ----------
COSTS and EXPENSES:
  Data processing costs .......................     4,620,995        4,277,101 
  Selling and promotion costs .................       299,905          319,521 
  General and administrative expenses .........     1,512,387        1,145,460 
  Interest (income)/expense, net ..............       (91,576)          65,674 
                                                   -----------      ---------- 
                                                    6,341,711        5,807,756 
                                                   -----------      ----------
Income from continuing operations before       
  provision for income taxes ..................       874,884           92,139 
Income tax provision ..........................       384,346           40,300 
                                                   ----------       ----------
Income from continuing operations .............       490,538           51,839 
Income/(loss) from discontinued operations,
  net of income tax (Note 2) ..................       (60,509)          94,648
Gain on the sale of the Payroll Division, net
  of income taxes (Note 2) ....................      1,600,921            -
                                                   -----------      ----------
NET INCOME ....................................  $   2,030,950    $    146,487
                                                   ===========      ==========
Earnings per Common Share (Note 3):  
Basic earnings per share:
Income from continuing operations .............  $        0.13    $       0.01
Income/(loss) from discontinued operations ....          (0.02)           0.03
Gain on the sale of the Payroll Division ......           0.42             -
                                                   ------------     ----------
Net income ....................................  $        0.53    $       0.04
                                                   ============     ==========
Weighted average number of common shares
  outstanding .................................      3,829,895       3,740,285
                                                   ============     ==========
              
Diluted earnings per share:              
Income from continuing operations .............  $        0.11    $       0.01
Income/(loss) from discontinued operations ....          (0.01)           0.03
Gain on the sale of the Payroll Division ......           0.36             -
                                                   ------------     ----------
Net income ....................................  $        0.46    $       0.04
                                                   ============     ==========
Weighted average number of common shares and
  share equivalents outstanding ...............      4,429,484       3,839,991
                                                   ============     ==========
            
            
            See Notes to Consolidated Interim Financial Statements
                                                                


                                                                Page 4 of 13

<PAGE>


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

CASH FLOWS FROM OPERATING ACTIVITIES:                                          
Income from continuing operations .............  $    490,538     $     51,839 
Adjustments to reconcile income from continuing 
  operations to cash provided by operating 
  activities:
                                                                     
  Depreciation and amortization ...............       339,088          348,267 
  Current tax provision .......................       435,134           40,300 
  Increase/(reduction) in deferred income taxes       (50,788)          23,935
  Decrease/(increase) in:  
    Trade accounts receivable .................      (884,527)        (236,243)
    Prepaid income taxes ......................      (559,700)          17,784
    Prepaid expenses and other current assets .       339,617         (233,423)
    Security deposits and other noncurrent 
      assets ..................................         1,700           33,046 
  Increase/(decrease) in:
    Accounts payable ..........................        94,535          213,962 
    Accrued expenses and taxes ................      (974,053)        (149,289)
    Customer deposits and other current 
      liabilities .............................       257,375          (14,486)
    Deferred lease credits ....................       (18,385)            -
                                                 -------------    -------------
  Net cash provided by operating activities ...      (529,466)          95,692
                                                 -------------    -------------

CASH FLOWS FROM INVESTING ACTIVITIES:                                          
  Purchase of property and equipment ..........      (312,098)        (113,101)
  Disposal of equipment .......................        14,960            2,074
  Proceeds from the sale of the Pay USA 
    Division ..................................    10,710,000             -
  Proceeds from a covenant not to compete .....     1,440,000             - 
  Settlement of contingencies relating to 
    acquisitions  .............................          -             (35,472)
  Increase in deferred software costs .........      (133,599)        (136,393)
                                                   -----------      -----------
  Net cash (provided by)/used in investing 
    activities ................................  $ 11,719,263     $   (282,892)
                                                   ----------       -----------
                                Continued on Next Page
              
              
              
              
              
              See Notes to Consolidated Interim Financial Statements        

                                                                Page 5 of 13


<PAGE>


              COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
                                                 
                                                 Three Months Ended January 31,
                                                      1998             1997
                                                 -------------    -------------
CASH FLOWS FROM FINANCING ACTIVITIES:                                          
  Repayment of long-term debt .................  $ (1,840,693)    $   (202,083)
  Proceeds from the exercise of options and 
    warrants ..................................       208,473             -
  Repayments of amounts by related 
    parties, net ..............................        62,043            6,716 
  Repayments of capital leases ................        (5,535)         (20,671)
                                                   -----------      -----------
  Net cash used in financing activities .......    (1,575,712)        (216,038)
                                                   -----------      -----------
  
CASH FLOWS FROM DISCONTINUED OPERATIONS:
  Income/(loss) from discontinued operations ..       (60,509)          94,648
  Adjustments to reconcile income/(loss) from
   discontinued operations to cash (used in)/
   provided by discontinued operations:         
    Depreciation and amortization .............       151,118          206,766
    Increase in net assets of discontinued
      operations ..............................      (307,813)        (261,319)
                                                   -----------      -----------
  Net cash (used in)/provided by discontinued
    operations ................................      (217,204)          40,095
                                                   -----------      -----------
  Net increase/(decrease) in cash and cash 
    equivalents ...............................     9,396,881         (363,143)
  Cash and cash equivalents at the beginning 
    of the period..............................       972,459          857,204 
                                                   -----------      -----------
  Cash and cash equivalents at the end of the 
    period.....................................  $ 10,369,340     $    494,061 
                                                   ===========      ===========
                                  
SUPPLEMENTAL CASH FLOW INFORMATION:                                            
  Cash paid during the period for:
    Interest ..................................  $     49,868     $     73,006 
                                                   ==========       ==========
    Income taxes ..............................  $    559,700     $     51,215 
                                                   ==========       ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
 INVESTING AND FINANCING ACTIVITIES:
Note received for a portion of the sale price 
  of the Pay USA Division (Note 2) ............  $    750,000     $       -
                                                   ==========       ==========

For the three months ended January 31, 1997, $8,397 (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 6 of 13
<PAGE>


             COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                      THREE MONTHS ENDED JANUARY 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 
  warrants .......       24,225       242     152,376                  152,618 

Exercises of
  stock options ..       11,900       119      55,736                   55,855

Net income .......                                      2,030,950    2,030,950
                      ---------  --------- ----------  ----------  -----------
Balances, January 
  31, 1998 .......    3,862,227   $38,622  $9,803,901  $4,935,963  $14,778,486
                      =========  ========= =========== ==========  ===========



                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           
                           

                           
                           
                           
                           
            See Notes to Consolidated Interim Financial Statements
                                                                Page 7 of 13


<PAGE>


             COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
              
1.      Basis of Presentation
        ---------------------
The consolidated balance sheet as of January 31, 1998, and the consolidated 
statements of income and cash flows for the three month periods ended January 
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 January 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. ("Zurich" or 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 note is due on July 15, 1999 and 
requires quarterly payments of interest at 8.5% per annum.  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 terms of the Sale also provide for an additional payment by the Buyer of 
up to $1,500,000, which amount is contingent on the revenue of Pay USA for 
the three months following the Sale, and is also subject to adjustment based 
on a final determination of the amounts of assets and liabilities transferred 
at December 19, 1997.

The Company has recognized a pretax gain of approximately $3,099,000 after 
recording various costs of the transaction amounting to approximately 
$2,133,000.  These costs include, among other things, the assumption of 
certain contractual obligations related to the original acquisitions, and 
payments and accruals relating to certain employment agreements.  Income 
related to the $1,440,000 covenant not to compete will be recognized over 
the three-year term.  Any contingent payment received from the Buyer will be 
recognized as income in the period received.

                                                                Page 8 of 13
<PAGE>
         
         
             COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
        NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Continued)

2.      Sale of the Payroll Division (cont'd)
        ----------------------------
Of the cash received at the closing, $1,713,509 was used to repay a bank for a 
term loan and the outstanding balance on a line of credit (including interest 
accrued).

During the eight-week period ended December 19, 1997 and the three month 
period ended Janaury 31, 1997, revenues relating to the discontinued 
operations approximated $1,117,000 and $2,409,000, and pretax operating 
results approximated a loss of $137,000 and income of $81,000, 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 presentaion 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.  The prior period has been restated to reflect the
requirements of SFAS 128.

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

                                                           January 31,
                                                     ------------------------
                                                        1998          1997
                                                     ----------     ----------
Weighed-average common shares outstanding used
  for basic earnings per share ...................    3,829,895      3,740,285

Weighted-average number of shares resulting from 
  imputed exercises of dilutive stock options and 
  warrants, computed using the treasury-stock 
  method .........................................      599,589         99,706
                                                     ----------     ----------
Weighted-average common shares outstanding used 
  for dilutive earnings per share ................    4,429,484      3,839,991
                                                     ==========     ==========
Total number of options and warrants excluded from 
  the calculation of diluted earnings per share 
  because they are anti-dilutive .................       25,000        998,040
                                                     ==========     ==========
                                                                

                                                                Page 9 of 13
<PAGE>


             COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES

ITEM 2 -  Management's Discussion and Analysis of
          Financial Condition and Results of Operations 
          ---------------------------------------------

Results of Operations, Three Month Periods Ended January 31, 1998 and 1997 

On December 19, 1997, the Company sold the 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.  The following discussion relates only to continuing operations.

During the period ended January 31, 1998, revenues from continuing operations
increased $1,317,000 to $7,217,000, an increase of 22% over the period ended 
January 31, 1997.  This increase is the result of several new Information 
Services contracts, including those for Year-2000 testing.

Data processing costs increased $344,000 to $4,621,000 (64% of revenues) 
during the current period compared to $4,277,000 (72% of revenues) in the 
prior year's period.  The improvement in margin is derived from economies 
of scale and improved margins on a contract-by-contract basis.

Selling and promotion costs decreased $20,000 to $300,000, and decreased 1.2% 
as a percentage of revenues.  The decrease as a percentage of revenues 
resulted from the consolidation of the sales and marketing efforts in the 
Information Processing Division.

General and administrative expenses increased $367,000 to $1,512,000 in the 
current period, an increase of 1.6% 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 $92,000 in the current period, as
compared to a net interest expense of $66,000 in the prior period.  The 
Company repaid substantially all of its bank debt, and invested significant 
cash balances obtained from the proceeds of the sale of the Payroll Division.

The Company recorded income from continuing operations of $491,000 ($0.13 and
$0.11 per share for basic and diluted shares, respectively) for the period 
ended January 31, 1998, a ninefold increase compared to the profit of $52,000
($0.01 per share - basic and diluted) for the period ended January 31, 1997.

Results from discontinued operations declined from net income of $95,000 for 
the period ended January 31, 1997 to a loss of $61,000 for the period ended 
December 19, 1997, which was primarily the result of excluding revenues after 
the date of the sale.  The month of January historically provided the highest 
revenues among the three months of the Payroll Division's first quarter.

         
      
         
         
   
                                                             Page 10 of 13


<PAGE>


             COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES

Liquidity and Capital Resources

During the three months ended January 31, 1998, the Company used approximately
$529,000 in operating activities.  This amount is net of depreciation and 
amortization of $339,000 and includes, among other things, an increase in 
accounts receivable of $885,000 and payment of $974,000 in accrued expenses.

The Company generated cash from investing activities of approximately 
$11,719,000 during the period ended January 31, 1998, principally from 
the proceeds of the sale of the Payroll Division and $1,440,000 received for 
a related covenant not to compete.

In investing activities for the period, the Company used cash of approximately
$1,576,000, including $1,841,000 to repay long term debt, net of $208,000 
generated from the exercises of stock warrants and employee stock options.

As of January 31, 1998, the Company had cash and cash equivalents of 
$10,369,000 and working capital of $9,493,000.  Its current ratio (i.e., the 
ratio of current assets to current liabilities) was 2.32 to 1, and the
ratio of total liabilities to equity was 0.69 to 1.

In March 1997, the Company and a bank entered into an agreement for a revolving
line of credit whereby the Company may borrow up to $1,500,000.  Interest on 
borrowings, when made, may be at either the Adjusted Eurodollar Rate (as 
defined) plus 2.25%, or the bank's prime rate.  No amounts were outstanding
on this line at January 31, 1998.  The line of credit expires 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 11 of 13

<PAGE>
         
         
             COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES



PART II - OTHER INFORMATION



ITEM 6 - Exhibits and Reports on Form 8-K
         --------------------------------

    (a)  Exhibits:

         27   Financial Data Schedule, filed electronically only.

    (b)  Reports on Form 8-K:

         A Form 8-K was filed on January 5, 1998, and amended January 23, 1998,
         reporting the sale of the Payroll Division on December 19, 1997.
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
                                                               Page 12 of 13
<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/
March 16, 1998                      -------------------------------------   
                                    Zach Lonstein
                                    Principal Executive Officer


                                                  /s/
March 16, 1998                      -------------------------------------   
                                    Laurence L. Carpenter - Controller and
                                    Acting Principal Accounting Officer