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: April 30, 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 4,162,415 shares of the registrant's Common Stock, $0.01 par value, 
outstanding as of June 5, 1998.

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









                                                                Page 1 of 16

<PAGE>



PART I - FINANCIAL INFORMATION
ITEM 1.  Financial Statements

               COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
                            CONSOLIDATED BALANCE SHEETS


                                                      April         October
                                                    30, 1998        31, 1997
                                                 -------------    -------------
                                                  (Unaudited)
                                  
                   ASSETS

CURRENT ASSETS:
  Cash and cash equivalents, including 
    short-term, interest bearing invest-
    ments of $10,690,916 and $782,583 .........  $ 10,700,095     $    972,459

  Trade accounts receivable, net of allowance 
    for doubtful accounts of $290,814 and 
    $111,577 ..................................     4,715,342        3,990,630

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

  Prepaid expenses and other current assets ...     1,304,805        1,223,759
                                                   ----------       ----------
                                                   16,720,242       12,258,181
                                                   ----------       ----------
PROPERTY and EQUIPMENT, net ...................     2,847,490        2,578,071
                                                   ----------       ----------
OTHER ASSETS:
  Deferred software costs, net ................     1,608,288        1,545,935

  Intangibles, net ............................     2,591,249        2,715,993

  Due from related parties, net ...............       105,269          176,295
                                  
  Notes receivable (Note 2) ...................       780,000           30,000

  Security deposits and other non-current 
    assets ....................................       529,609          493,797
                                                   ----------       ----------
                                                    5,614,415        4,962,020
                                                   ----------       ----------
TOTAL ASSETS ..................................  $ 25,182,147     $ 19,798,272
                                                   ==========       ==========

                                
             See Notes to Consolidated Interim Financial Statements    
             
                                                                
                                                                
                                                                Page 2 of 16


<PAGE>
               
               
               COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
                            CONSOLIDATED BALANCE SHEETS
                                   (Continued)
                                                      April         October
                                                    30, 1998        31, 1997
                                                 -------------    -------------
                                                  (Unaudited)
                                  
     LIABILITIES and STOCKHOLDERS' EQUITY
                                  
CURRENT LIABILITIES:
  Accounts payable ............................  $  1,260,084     $  1,246,516 
                                  
  Current portion of long-term debt ...........       450,027        2,297,546 

  Current portion of capitalized lease 
    obligations ...............................        23,220           23,034 

  Accrued expenses and taxes ..................     4,355,457        1,779,672 

  Customer deposits and other current 
    liabilities ...............................       209,526          231,699 
                                                   ----------       ----------
                                                    6,298,314        5,578,467 
                                                   ----------       ----------
LONG-TERM LIABILITIES:
  Long-term debt ..............................        27,150          252,577 
     
  Capitalized lease obligations ...............         8,012           19,414 
                                  
  Deferred income taxes .......................       583,234          645,910 
                                  
  Unearned portion of covenant not to compete .     1,240,000             -    
                                                   
  Deferred lease credits ......................       758,976          762,841
                                                   ----------       ----------
                                                    2,617,372        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, 4,048,438 and 3,826,104..........        40,484           38,261 

  Additional paid-in capital ..................    10,779,054        9,595,789 

  Retained earnings ...........................     5,446,923        2,905,013 
                                                   ----------       ----------
                                                   16,266,461       12,539,063 
                                                   ----------       ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....  $ 25,182,147     $ 19,798,272 
                                                   ==========       ==========
              See Notes to Consolidated Interim Financial Statements        
                                                                
                                                                Page 3 of 16
<PAGE>
               
               
               
               COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (Unaudited)
                                  

                            Six Months Ended             Three Months Ended
                                April 30,                     April 30,
                       --------------------------    --------------------------
                           1998          1997           1998           1997
                       ------------  ------------    ------------  ------------
                                  
REVENUES ...........   $ 15,173,675  $ 11,796,766    $  7,957,080  $  5,896,871
                         ----------    ----------      ----------    ----------
COSTS and EXPENSES:
  Data processing 
    costs ..........      9,830,805     8,515,782       5,209,810     4,238,681
  Selling and promo-
    tion costs .....        634,186       632,906         334,281       313,385
  General and 
    administrative
    expenses .......      3,147,278     2,190,097       1,634,891     1,044,637
  Interest expense, 
    net of interest
    income .........       (240,862)      124,365        (149,286)       58,691
                         -----------   ----------      -----------   ----------
                         13,371,407    11,463,150       7,029,696     5,655,394
                         -----------   ----------      -----------   ----------

Income from continu-  
  ing operations     
  before income tax   
  provision ........      1,802,268       333,616         927,384       241,477
Provision for income 
  taxes ............        800,770       133,600         416,424        93,300
                         ----------    ----------      ----------    ----------
Income from continu- 
  ing operations ...      1,001,498       200,016         510,960       148,177
Income/(loss) from     
  discontinued 
  operations, net of
  income taxes (Note 2)     (60,509)      129,585            -           34,937
Gain on sale of the
  Payroll Division, 
  net of income
  taxes (Note 2) ...      1,600,921          -               -             -
                         ----------    ----------      ----------    ----------
NET INCOME .........   $  2,541,910  $    329,601    $    510,960  $    183,114
                         ==========    ==========      ==========    ==========
                                                                     


                                
                                Continued on Next Page


                                                                Page 4 of 16
<PAGE>

               
               
               COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (Unaudited)
                                 
                            Six Months Ended             Three Months Ended
                                April 30,                     April 30,
                       --------------------------    --------------------------
                           1998          1997           1998           1997
                       ------------  ------------    ------------  ------------
EARNINGS PER COMMON
  SHARE (Note 3):

Basic earnings per
  common share:

Income from continuing  
  operations ......... $       0.26  $       0.05   $       0.13  $       0.03
Income/(loss) from       
  discontinued 
  operations .........        (0.02)         0.03            -            0.01
Gain on Sale of the
  Payroll Division ...         0.41           -              -             -
                         -----------   ----------     ----------    ----------
Net income ........... $       0.65  $       0.08   $       0.13  $       0.04
                         ===========   ==========     ==========    ==========
                                                                     
Weighted average 
  number of common 
  shares             
  outstanding ........    3,888,159     3,758,937      3,956,190     3,778,219
                         ==========    ==========     ==========    ==========
                                                   
Diluted earnings per 
  common share:
Income from continuing
  operations ......... $       0.23  $       0.05   $       0.12  $       0.03
Income/(loss) from 
  discontinued
  operations .........        (0.01)         0.03            -            0.01
Gain on Sale of the 
  Payroll Division ...         0.36           -              -             -
                         -----------   ----------     ----------    ----------
Net income ........... $       0.58  $       0.08   $       0.12  $       0.04
                         ===========   ==========     ==========    ==========

Weighted average
  number of 
  common shares and
  other dilutive 
  securities              
  outstanding ........    4,379,701     3,895,610      4,222,087     3,937,936
                         ==========    ==========     ==========    ==========
               
               See Notes to Consolidated Interim Financial Statements

                                                                Page 5 of 16
<PAGE>


              
              COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
                                                 
                                                    Six Months Ended April 30,
                                                 ------------------------------
                                                      1998             1997
                                                 -------------    -------------

CASH FLOWS FROM OPERATING ACTIVITIES:                                         
Income from continuing operations .............  $  1,001,498     $    200,016
Adjustments to reconcile income from continuing
  operations to cash (used in)/provided by 
  operating activities:                                                       
  Depreciation and amortization ...............       718,648          710,250
  Increase/(reduction) in deferred income taxes       (57,175)          41,372
  Decrease/(increase) in:  
    Trade accounts receivable .................      (724,712)        (267,323)
    Prepaid expenses and other current assets .       (81,048)        (181,880)
    Security deposits and other noncurrent 
      assets ..................................       (67,054)          26,415
  Increase/(decrease) in:
    Accounts payable ..........................        13,568          246,284
    Accrued expenses and taxes ................    (1,060,770)          88,239
    Customer deposits and other current 
      liabilities .............................       (22,173)         (42,278)
  Deferred lease credits ......................       (36,175)            -
                                                    ----------       ----------
    Net cash (used in)/provided by operating       
      activities ..............................      (315,393)         821,095
                                                    ----------       ----------

CASH FLOWS FROM INVESTING ACTIVITIES:                                          
  Purchase of property and equipment ..........      (690,777)        (225,588)
  Disposal of equipment .......................        14,960            2,074
  Proceeds from the sale of the Payroll 
    Division ..................................    10,710,000             -   
  Proceeds from a covenant not to compete .....     1,440,000             -
  Settlement of contingencies relating to
    acquisitions ..............................          -             (82,858)
  Increase in deferred software costs .........      (386,307)        (205,842)
                                                   -----------       ----------
    Net cash provided by/(used in) investing 
      activities ..............................  $ 11,087,876     $   (512,214)
                                                   -----------       ----------
                                


                                Continued on Next Page
              
              
              
             See Notes to Consolidated Interim Financial Statements        

                                                                Page 6 of 16

<PAGE>
              
              
              COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (Unaudited - Continued)
                                                
                                                   Six Months Ended April 30,
                                                 ------------------------------
                                                      1998             1997
                                                 -------------    -------------
CASH FLOWS FROM FINANCING ACTIVITIES:                                          
  Repayment of long-term debt .................  $ (2,072,944)     $ (618,685)
  Proceeds from the exercise of options and                  
    warrants ..................................     1,185,489            -
  Repayments of amounts by related 
    parties, net ..............................        71,026          15,843
  Repayments of capital leases ................       (11,214)        (73,973)
                                                   -----------      ----------
    Net cash used in financing activities .....      (827,643)       (676,815)
                                                   -----------      ----------
  CASH FLOWS FROM DISCONTINUED OPERATIONS:                                 
  Income/(loss) from discontinued operations ..       (60,509)         129,585
  Adjustments to reconcile income/(loss) from
    discontinued operations to cash (used in)/
    provided by discontinued operations:
    Depreciation and amortization .............       151,118          412,928
    Increase in net assets of discontinued         
      operations ..............................      (307,813)        (423,475)
                                                   -----------      -----------
    Net cash (used in)/provided by discontinued 
      operations ..............................  $   (217,204)    $    119,038
                                                   -----------      -----------
    Net increase/(decrease) in cash and cash
      equivalents .............................     9,727,636         (248,896)
    Cash and cash equivalents at the beginning
      of the period ...........................       972,459          857,204
                                                   -----------      -----------
    Cash and cash equivalents at the end of the
      period ..................................  $ 10,700,095     $    608,308
                                                   ===========      ===========
SUPPLEMENTAL CASH FLOW INFORMATION:                                            
  Cash paid during the period for:
    Interest ..................................  $     87,929     $    154,126
                                                   ===========      ===========
    Income taxes ..............................  $    894,803     $     51,215
                                                   ===========      ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
  INVESTING AND FINANCING ACTIVITIES:
  Note received in connection with the sale  
    of the Payroll Division (Note 2) ..........  $    750,000     $       -    
                                                   ==========       ===========

For the six months ended April 30, 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 16
<PAGE>

              
              
              COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                        SIX MONTHS ENDED APRIL 30, 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 .........     80,371        804      356,816                  357,620

Exercises of
  warrants ........    141,965      1,419      826,449                  827,868


Net income ........                                      2,541,910    2,541,910

                    -----------------------------------------------------------
Balances, 
  April 30, 1998 ..  4,048,438  $  40,484  $10,779,054  $5,446,923  $16,266,461
                    ===========================================================
        
        
              
              
              
              See Notes to Consolidated Interim Financial Statements
                                                                   


















                                                                   
                                                                   
                                                                Page 8 of 16
                                                                   

<PAGE>



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


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

The Consolidated Balance Sheet as of April 30, 1998, and the Consolidated 
Statements of Income and the Consolidated Statements of Cash Flows for the six 
month periods ended April 30, 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 April 30, 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 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 net amounts of assets and liabilities transferred 
at December 19, 1997.



        
                                                                Page 9 of 16

<PAGE>


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


2.      SALE OF THE PAYROLL DIVISION (cont'd)
        -------------------------------------

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 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 will be recognized over the three-year term.  Any 
contingent payment received from the Buyer will be recognized as income in 
the period received.

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 eight-week period ended December 19, 1997 and the six and three 
month periods ended April 30, 1997, revenues relating to the discontinued 
operations of Pay USA approximated $1,117,000, $4,602,000, and $2,193,000, 
respectively, and pretax operating results approximated a loss of $137,000, 
income of $216,000, and income of $135,000, 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.  The prior period has
been restated to reflect the requirements of SFAS 128.





              



                                                                Page 10 of 16

<PAGE>



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


3.      BASIC AND DILUTED EARNINGS PER COMMON SHARE (cont'd)
        ----------------------------------------------------

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


                           Six Months ended April     Three Months ended April
                          ------------------------   --------------------------
                           30, 1998      30, 1997      30, 1998       30, 1997
                          -----------   ----------   ------------   -----------

Weighed-average common 
  shares outstanding 
  used for basic earnings
  per share ..............  3,888,159    3,758,937      3,956,190    3,778,219

Weighted-average number 
  of shares from imputed 
  exercises of dilutive
  options and warrants, 
  computed by the treasury-
  stock method ...........    491,542      136,673        265,897      159,717
                            ---------    ---------      ---------    ---------
Weighted-average common 
  shares outstanding used 
  for dilutive earnings
  per share ..............  4,379,701    3,895,610      4,222,087    3,937,936
                            =========    =========      =========    =========

Total number of options 
  and warrants excluded 
  from the calculation 
  of diluted earnings 
  per share because they 
  are anti-dilutive ......    111,100      537,600        111,100       537,600
                            =========    =========      =========    ==========













                                                                Page 11 of 16

<PAGE>


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

4.      STOCK OPTIONS
        -------------
The Company applies the provisions of APB Opinion 25 and related 
Interpretations 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 compensation 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 
("SFAS 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 $1,509,000.  The remaining annual
amortization over the options' remaining vesting periods is as follows:

                          Fiscal Years Ended
                              October 31,
                          ------------------
                                 1998             $  150,866
                                 1999                301,731
                                 2000                301,731
                                 2001                246,312
                                 2002                186,148
                                 2003                 38,141
                                                  ----------
                                                  $1,224,929
                                                  ==========
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 SFAS
123 on the Company's reported net income and net income per share would be 
as follows:
                                           Six Months Ended   Six Months Ended
                                            April 30, 1998     April 30, 1997
                                           ----------------   ----------------
Net income                 - as reported      $ 2,541,910        $   329,601
                                              ===========        ===========
                           - pro forma        $ 2,429,185        $   278,605
                                              ===========        ===========
Basic earnings per share   - as reported      $      0.65        $      0.08
                                              ===========        ===========
                           - pro forma        $      0.62        $      0.07
                                              ===========        ===========
Diluted earnings per share - as reported      $      0.58        $      0.08
                                              ===========        ===========
                           - pro forma        $      0.55        $      0.07
                                              ===========        ===========

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 16
<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, SIX MONTH PERIODS ENDED APRIL 30, 1998 AND 1997 

During the six month period ended April 30, 1998, revenues from continuing 
operations were $15,174,000, an increase of 29% over the six month period 
ended April 30, 1997.  This increase is the result of several new Information 
Services contracts, as well as approximately $912,000 in income from the 
covenant not compete and service contracts with the Buyer of the Payroll 
Division.

Data processing costs increased $1,315,000 to $9,831,000 (65% of revenues) 
during the current period compared to $8,516,000 (72% of revenues) in the 
prior year's period.  The seven percent improvement in margin is derived from 
economies of scale and improved margins on a contract-by-contract basis.

Selling and promotion costs increased slightly, to $634,000, but decreased 1% 
as a percentage of revenues.  General and administrative expenses increased 
$957,000 to $3,147,000 in the current period, an increase of 2% 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 $241,000 in the current period, 
as compared to a net interest expense of $124,000 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 $1,001,000 ($0.26 
and $0.23 per share for basic and diluted shares, respectively) for the period 
ended April 30, 1998, a fivefold increase compared to the profit of $200,000 
($0.05 per share, basic and diluted) for the period ended April 30, 1997.

Results from discontinued operations declined from net income of $130,000 for 
the period ended April 31, 1997 to a loss of $61,000 for the period ended 
December 19, 1997, primarily as a result of excluding revenues after the date 
of the Sale.







                                                                Page 13 of 16

<PAGE>


               COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES

RESULTS OF OPERATIONS, QUARTERS ENDED APRIL 30, 1998 AND 1997

During the three month period ended April 30, 1998, revenues from continuing 
operations were $7,957,000, an increase of 35% over the three month period 
ended April 30, 1997.  This increase is the result of several new Information 
Services contracts, as well as approximately $499,000 in income from the 
covenant not to compete and service contracts with the Buyer of the Payroll
Division.

Data processing costs increased $971,000 to $5,210,000 (66% of revenues) 
during the current quarter compared to $4,239,000 (72% of revenues) in the 
prior year's quarter.  The improvement as a percentage of revenues is derived
from economies of scale and improved margins on a contract-by-contract basis.

Selling and promotion costs increased $21,000 to $334,000, decreasing 1% as a 
percentage of revenues.  General and administrative expenses increased $590,000
to $1,635,000 in the current period, 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 $149,000 in the current period, as 
compared to a net interest expense of $59,000 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 $511,000 ($0.13 and 
$0.12 per share for basic and diluted shares, respectively) for the quarter 
ended April 30, 1998, a 244% increase compared to the profit of $148,000 
($0.03 per share - basic and diluted) for the quarter ended April 30, 1997.

LIQUIDITY AND CAPITAL RESOURCES

During the six months ended April 30, 1998, the Company used approximately 
$315,000 in continuing operations.  This amount is net of depreciation and 
amortization of $719,000 and includes, among other things, a $1,061,000 
increase in accrued expenses and taxes, primarily as a result of the sale of 
the Payroll Division.

The Company generated cash from investing activities of approximately 
$11,088,000 during the period ended April 30, 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 
$691,000 and software cost deferrals of $386,000.

In financing activities for the period, the Company used cash of approximately 
$828,000, including $2,084,000 to repay long term debt and capital leases,  
offset by $1,185,000 generated from the exercises of stock warrants and 
employee stock options.
                                                                
                                                                
                                                                

                                                                Page 14 of 16

<PAGE>



               COMPUTER OUTSOURCING SERVICES, INC. AND SUBSIDIARIES


LIQUIDITY AND CAPITAL RESOURCES (cont'd)

As of April 30, 1998, the Company had cash and cash equivalents of $10,700,000
and working capital of $10,422,000.  Its current ratio  (i.e., the ratio of 
current assets to current liabilities) was 2.65 to 1, and the ratio of total 
liabilities to equity was 0.55 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.


PART II - OTHER INFORMATION

ITEM 6 -        Exhibits and Reports on Form 8-K
                --------------------------------
          
          (a)   Exhibits:

                None

          (b)   Reports on Form 8-K:

                None
            





                                                                Page 15 of 16


<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/
June 12, 1998                        ------------------------------------
                                    Zach Lonstein
                                    Principal Executive Officer


                                                     /s/
June 12, 1998                        ------------------------------------
                                    Laurence L. Carpenter
                                    Acting Principal Accounting Officer





























                                                                  
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