10-K 1 cis10k03.txt ANNUAL REPORT FOR CIS CORP. FOR MAY 31, 2003 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 --------------- For the Fiscal Year Ended May 31, 2003 Commission File Number 0-25104 CONTINENTAL INFORMATION SYSTEMS CORPORATION (Exact name of registrant as specified in its charter) New York 16-0956508 -------- ---------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation) 7 Mikve Israel, # 36351, Tel Aviv Israel 61362 ----------------------------------------- ----- (Address of principal executive offices) (Zip Code) (972) 66-394451 --------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No X ----- ----- The number of the registrant's shares of Common Stock outstanding on June 30, 2003 was 3,991,212. As of November 29, 2002 the aggregate market value of the shares of Common Stock held by non-affiliates of the registrant was approximately $362,929. DOCUMENTS INCORPORATED BY REFERENCE Portions of Continental Information Systems Corporation's Notice of Annual Meeting of Stockholders and Proxy Statement, to be filed within 120 days after the end of the registrant's fiscal year, are incorporated by reference into Part III of this Annual Report. * Excludes 1,246,861 shares deemed to be held by officers and directors, and stockholders whose ownership exceeds ten percent of the shares outstanding at November 29, 2002. Exclusion of shares held by any person should not be construed to indicate that any such person possesses the power, directly or indirectly, to direct or cause the direction of the management or policies of the registrant, or that any such person is controlled by or under common control with the registrant. - 1 - CONTINENTAL INFORMATION SYSTEMS CORPORATION 2003 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Page PART I Item 1. Business 3-5 Item 2. Properties 5 Item 3. Legal Proceedings 6 Item 4. Submission of Matters to a Vote of Security Holders 6 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 7 Item 6. Selected Financial Data 7-8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-14 Item 7a. Quantitative and Qualitative Disclosures About Market Risk 14 Item 8. Financial Statements and Supplementary Data 15 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 36 PART III Item 10. Directors and Executive Officers of the Registrant 36 Item 11. Executive Compensation 36 Item 12. Security Ownership of Certain Beneficial Owners and Management 36 Item 13. Certain Relationships and Related Transactions 36 Item 14 Controls and Procedures 36 PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 37 - 2 - FORWARD LOOKING STATEMENTS All statements contained herein that are not historical facts, including but not limited to, statements regarding anticipated future capital requirements, Continental Information Systems Corporation's with its subsidiaries (the "Company") future development plans, the Company's ability to obtain additional debt, equity or other financing, and the Company's ability to generate cash from operations and further savings from existing operations, are based on current expectations. These statements are forward looking in nature and involve a number of risks and uncertainties. Actual results may differ materially. Among the factors that could cause actual results to differ materially are the following: the availability of sufficient capital to finance the Company's business plan on terms satisfactory to the Company and the potential impact on asset realization; risks associated with collecting on the Company's notes receivable arising out of various settlements in the aviation business; risks attendant to the Company's finance activities generally, including the risks of leverage, risks of borrower default, general economic and real estate market conditions, and pricing pressures which could affect the value of the Company's assets; general business, economic and regulatory conditions; and the other risk factors described from time to time in the Company's reports filed with the Securities and Exchange Commission ("SEC"). The Company cautions readers not to place undue reliance on any such forward looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. The Company undertakes no obligation to update such forward-looking statements. PART I ITEM 1. BUSINESS INTRODUCTION AND HISTORY Continental Information Systems Corporation is a New York Corporation that was organized in 1968. The Company was a specialized financial services company that engaged in the leasing, sales and management of commercial aircraft and engines, among other assets, and was also engaged in other financing activities, including commercial real estate financing. In August 1999, the Company ceased entering into new equipment leases and sold a substantial portion of its remaining lease portfolio. Since then, the Company has disposed of the balance of its remaining lease portfolio. In July 2000, one of the Company's subsidiaries, CIS Air Corporation, a Delaware corporation, ("CIS Air") exited the aviation business. In August 1999, the Company changed its focus to the development and commercialization of a Web-enabled electronic securities processing software platform using proprietary technology. The subsidiary that was formed to engage in this line of business is T1Xpert Corp. ("T1Xpert"). T1Xpert had begun developing a suite of middle and back office brokerage products and solutions. The products and solutions were designed to serve as a software platform for risk reduction for the next generation of real time systems and in preparation for settling trades in one day referred to as "T+1" as opposed to three days. T1Xpert expended approximately $6.2 million from its inception in August 1999 through May 31, 2003. Prior to September 11, 2001, T1Xpert had begun work on a software development project for a global investment bank. This project was canceled as a result of the terrorist attacks of September 11, 2001 against the United States of America which had a negative effect on the U.S. securities industry and T1Xpert. On December 27, 2001, the Company ceased active operations and additional funding of product development at T1Xpert for several reasons. The Company made claims under its existing policies of insurance for compensation in order to continue operations. The Company believed it had sufficient coverage to allow it to continue development and installation under its existing contract and sufficient funding to locate a substitute investment banking customer to replace the cancelled contract had it received sufficient insurance proceeds. Efforts to collect under the Company's insurance policies resulted in the Company reaching a settlement agreement with its insurance company. In exchange for a release, certain representations, and assignment of certain rights of its subsidiary T1Xpert Corp., the Company received settlement proceeds, which leaves the Company with insufficient resources to recommence its operations as previously established. The Company announced that it had appointed Mr. Guy Zahavi of Tel Aviv, Israel, a specialist in brokerage technology and business operations, to attempt to maximize the value, if any, of T1Xpert's remaining assets. Under current conditions the Company believes that it is unlikely that any significant value will be realized from the remaining T1Xpert assets. - 3 - The financial statements contained herein have been prepared by management in accordance with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company has ceased active operations and has ceased additional funding of T1Xpert, has sustained substantial operating losses and has used substantial amounts of working capital in its operations. In view of these matters, realization of the assets of the Company is dependent upon the Company's ability to meet its financing requirements and the success of future operations. The financial statements do not include adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. The financial statements contained herein do not include any adjustments that might result from the outcome of this uncertainty. CUSTOMERS AND MARKETING The Company having ceased operations has no customers. COMPETITION The Company having ceased operations has no competitors. PROPRIETARY RIGHTS The Company having ceased operations and disbanded its management team decided that it was imprudent and unable to pursue any patent applications. The Company retains ownership of its software which is proprietary to the Company but which in the opinion of the Company is not likely to realize significant value. DISCONTINUED OPERATIONS The Company has two subsidiaries that have previously discontinued their operations. Through its wholly owned subsidiary, CIS Air, the Company participated in the worldwide market for the sale and leasing of used, commercial aircraft and aircraft engines. In recent periods, CIS Air's activities consisted primarily of acquiring aircraft engines and then selling, leasing or selling them subject to lease. CIS Air financed its portfolio acquisitions with cash flows from operations or through borrowings under CIS Air's revolving credit facility. In July 2000, the Company sold a portion of its engine portfolio and began to liquidate the balance of its engine portfolio and other aviation assets. The proceeds of the sales were used to pay down CIS Air's existing credit facility with its lender. As of June 21, 2001, the balance on the credit facility was fully paid. The Company reflected the aviation business as a discontinued operation with appropriate disclosure and valuation under accounting principles generally accepted in the United States of America. As of May, 2002, the majority of the assets and liabilities relating to CIS Air's business have been sold or settled. Therefore, any remaining assets or liabilities have not been accounted for as discontinued operations. In February 2001, a subsidiary of CIS Air, CIS Aircraft Partners Inc., ceased operations. In August 1999, the Company's subsidiary, CIS Corporation, ceased entering into new equipment leases and sold a substantial portion of its remaining lease portfolio. The Consolidated Balance Sheets and Statements of Operations for all periods presented have been reclassified to report the results of discontinued operations separately from those of continuing operations. OTHER FINANCE ACTIVITIES In July 1997, the Company entered into a Joint Investment Agreement with Emmes Investment Management Co. LLC to provide up to $8 million in high-yield, short-term funding for commercial real estate transactions. The Company has ceased making additional investments under the Agreement and has no obligation to make any additional investments under the Agreement. At May 31, 2003, the Company's sole remaining investment in such transactions was approximately $165,287, net of a reserve for loss on investment of $324,447. - 4 - The Company has made loans or loan guarantees to borrowers with profiles that did not meet the requirements of traditional lending institutions. Based on the unique nature of the loans, the Company received fees, equity interests or other forms of remuneration in addition to traditional interest. The Company made loans to high technology companies during the fiscal year ended May 31, 2000. In recognition of weak market conditions and based on management's assessment of the probability of collection, the Company wrote down its investments in all its high technology companies by $1.3 million in the fiscal year ended May 31, 2001. During the fiscal year ended May 31, 2003 the Company recovered $120,000 of the amount previously written off. The Company believes there will be no further recoveries. FINANCING The Company's financing strategy had been primarily to use its own capital, except in the aviation subsidiary where the Company also had a collateralized, revolving loan agreement with an institution to provide lease and inventory financing for aircraft engines for CIS Air in the amount of $10,000,000. The facility bore interest at prime plus 1/4% and expired in December 2000. The Company arranged for several extensions with its lender. On June 21, 2001, the debt was fully paid with proceeds from the sale of the engines. Going forward the Company does not expect to seek or obtain, nor does believe it currently has the ability to obtain, any outside financing. CONCENTRATION OF CREDIT RISK The Company's notes receivable balance of $649,000 is owed by one customer in the aviation business. Thus, the Company is directly affected by the well being of this one company and the airline industry in general. The events of September 11, 2001, negatively impacted the airline industry. The credit risk associated with this customer is mitigated by the note being collateralized; however a substantial portion of such collateral is outside the United States, thereby creating potential difficulties for the recovery of collateral in case of default. Further, it is estimated that the value of the underlying collateral is below the carrying value of the note. The customer during the year requested temporary postponements of certain payments, which the Company granted. When making payments the customer has not been timely in its payments. EMPLOYEES As of June 30, 2003, the Company has one full-time and one part-time employee. These employees work in administration and are not employed under a collective bargaining agreement. ITEM 2. PROPERTIES The Company's previous executive offices were located in downtown Manhattan. The Company occupied office space under a lease which was in the aggregate approximately 6,000 square feet, for an aggregate monthly rental of approximately $14,000. On February 26, 2002, the Company entered into a lease termination agreement with its landlord for the remaining three years of its lease rental obligations. This agreement released the Company from its lease obligation on the premises. Such obligation was estimated to be $501,000 of base rent plus additional utilities and operating expenses. In connection with this agreement, the Company incurred a loss on disposal of fixed assets in the amount of $48,000, incurred two months' rental expense and incurred estimated moving costs of approximately $14,500. On August 29, 2002, the Company entered into another agreement for a new office space in Manhattan. This agreement requires the Company to pay monthly rent through August 31, 2004. The aggregate monthly rent will be $3,338 through the period August 31, 2003 and $3,927 through August 31, 2004. On August 15, 2003 the Company moved its executive offices to Tel Aviv, Israel for a nominal rental. It remains liable for the office space previously contracted for in Manhattan. - 5 - ITEM 3. LEGAL PROCEEDINGS On November 8, 2002 the claim asserted by Dallas Aerospace against the Company was resolved with a ruling in favor of the Company granting the Company's summary judgment motion and dismissing all claims raised by Dallas Aerospace. This judgment was entered in the United States District Court for the Southern District of New York. Dallas Aerospace has filed an appeal with the Second Circuit Court of Appeals in New York on November 12, 2002. The parties are awaiting delivery of oral arguments in the case. On April 24, 2000 CIS Air filed suit in the United States District Court for the Northern District of New York against American Air Ventures, Inc. ("American Air"), a Florida corporation. The suit seeks reimbursement in connection with losses incurred in joint venture agreements between the parties for the purchase and sale of engines. The suit further seeks indemnification from American Air should CIS Air be found liable to Dallas AeroSpace, because CIS Air purchased the engine sold to Dallas AeroSpace from American Air. The parties settled their lawsuit under the joint venture agreement, but left open all issues related to the Dallas matter. If the Company prevails in the Dallas AeroSpace litigation CIS Air's claim for indemnification from American Air would be moot. There can also be no certainty that should the Company need to do so, that it will prevail on its indemnification claim, nor that if it should prevail on such claim American Air will have the financial resources to meet such indemnification. On March 7, 2000 CIS Air filed suit against Express One International, Inc. ("Express One"), a Delaware corporation, in the Supreme Court, State of New York, County of New York. The suit seeks damages of approximately $118,000 in unpaid rent and repair charges. Express One filed for bankruptcy in March 2002 shortly after CIS filed its motion for summary judgment. An automatic stay in connection with the bankruptcy proceeding prevents further action at this time. CIS Air filed a claim in the bankruptcy court action against Express One, but does not anticipate any material recovery. In July 2001 CIS Air filed suit in State Court of Florida, Broward County against Aviation Systems International ("ASI") and the TIMCO division of Aviation Sales Company relating to damage sustained by a CIS Air aircraft. The aircraft was parked at TIMCO's maintenance facility when it was struck and severely damaged by two other aircraft owned by ASI. CIS Air has been reimbursed for a portion of the damages by its insurance carrier, and was seeking to recover the $500,000 deductible and other unpaid costs from TIMCO and ASI. To avoid a lengthy trial and litigation process the Company agreed to settle the suit with the Company receiving its deductible, less payment of certain legal expenses. The Bankruptcy Trustee in the bankruptcy case of Sky Trek International, a former lessee of aircraft engines of CIS Air, filed a claim against CIS Air seeking to obtain the return of $116,000 in security deposits on two aircraft engines that were returned to CIS Air prior to the lease expirations. The claim has been settled by the parties, and this settlement was approved by the Court ,with CIS Air returning $17,500 of the deposit received from Sky Trek to the Trustee. On June 3, 2002 the Company commenced an action in the Southern District of New York against its insurer, Federal Insurance Company, seeking reimbursement for losses under its insurance policy associated with the September 11, 2001 terrorist attack in downtown Manhattan. In July 2003 the Company settled with its insurer. In exchange for a release, certain representations, and assignment of certain rights of its subsidiary T1Xpert Corp., the Company received settlement proceeds, net of legal expenses, of approximately $375,000. On July 30, 2002, the Company filed suit in the United States District Court for the Southern District of New York against three stockholders of the Company and another party alleging that these parties formed an undisclosed group and wrongfully used material, non-public information concerning the Company in violation of applicable federal securities laws and state statutes. The Company settled with one of these stockholders as of September 3, 2002 and the remaining parties separately on January 31, 2003. As a part of these settlements, mutual releases of the parties, their officers, directors and certain affiliates thereof were exchanged, the stockholders and certain affiliates sold their shares in the Company back to the Company at the prevailing market price or at a discount from market price and the stockholders and certain affiliates agreed not to acquire any additional shares in the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's shareholders during the fourth quarter of the Company's fiscal year. - 6 - PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Until December 2001, the Company's Common Stock traded on the Nasdaq Small-Cap Market under the symbol CISC. Beginning in January of 2002, the Company's Common Stock began trading on the Over-the-Counter Bulletin Board under the symbol CISC. The high and low bid information for the last two fiscal years is as follows:

August 31 November 30 February 28 May 31 --------------- --------------- --------------- --------------- First Quarter Second Quarter Third Quarter Fourth Quarter --------------- --------------- --------------- --------------- Low High Low High Low High Low High ------ ------ ------ ------ ------ ------ ------ ------ Fiscal year ended May 31, ~~2002~~2003 $ .7012 $ 1.0625 $ .2812 $ .8018 $ .1912 $ .7414 $ .2013 $ .2514 Fiscal year ended May 31, ~~2001~~2002 $ .6370 $ 1.2506 $ .7528 $ 1.1980 $ .9419 $ 1.1974 $ .5020 $ 1.1325

As the trading in the Company's stock has been illiquid, the market price of the Company's stock may not be indicative of the value of the Company's stock and further that a shareholder wishing to buy or sell shares of the Company's stock may not be able to do so at prices consistent with previous market prices. As of June 30, 2003, the Company believes that there were approximately 393 record holders of the Company's Common Stock. No cash dividends have been paid on the Common Stock to date and the Company does not anticipate paying a dividend in the foreseeable future, as the Board of Directors intends to retain any earnings for use in the business. Any future determination of dividends will depend upon any dividend restrictions applicable to the Company, its financial condition, results of operations and such other factors as the Board of Directors deems relevant. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth a summary of selected consolidated financial data for the Company and its Subsidiaries as of the dates and for each of the years stated. This information should be read in conjunction with the Company's historical consolidated financial statements, the related notes, and the other information contained herein, including the information set forth in "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."

For the Year Ended May 31, -------------------------------------------------------------------- Period Data 2003 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- -------- (Dollars in thousands except per share amounts) Total revenues $ 315 $ 354 $ 1,272 $ 8,465 $ 8,797 $ 6,347 Costs and expenses 1,955 4,366 7,500 10,854 11,720 7,243 -------- -------- -------- -------- -------- -------- Loss from continuing operations before provision (benefit) for income taxes (1,640) (4,012) (6,228) (2,389) (2,923) (896) Provision (benefit) for income taxes - - - - 5,448 (341) -------- -------- -------- -------- -------- ~~Loss from continuing operations (4,012) (6,228) (2,389) (8,371) (555) Income (loss) from discontinued operations, net of taxes~~ - ~~743 (5,703) 1,544 (4,818)~~ -------- -------- -------- -------- -------- Net loss $ (4,012) $ (5,485) $ (8,092) $ (6,827) $ (5,373) ======== ======== ======== ======== ======== Basic and Diluted Net (Loss) Income Per Common Share: ------------------------- (Loss) from continuing operations $ (.72) $ (1.00) $ (0.36) $ (1.21) $ (0.08) Income (loss) from discontinued operations - 0.12 (0.85) 0.22 (0.69) -------- -------- -------- -------- -------- Net (loss) $ (.72) $ (0.88) $ (1.21) $ (0.99) $ (0.77) ======== ======== ======== ======== ========

- 7 -

For the Year Ended May 31, -------------------------------------------------------------------- ~~Balance~~Period ~~Sheet~~ Data 2003 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- -------- (Dollars in thousands except per share amounts) ~~Total~~Loss ~~assets~~from $continuing 3operations (1,~~522~~640) $(4,012) (6,228) (2,389) (8,~~815~~371) $(555) 14Income (loss) from dis- continued operations,~~253~~ $net 25of taxes - - 743 (5,~~218~~703) $1,544 39(4,~~861~~818) ~~Liabilities~~-------- ~~529~~-------- -------- -------- -------- -------- Net loss $ (1,~~413~~640) ~~672~~$ 3(4,~~142~~012) 10$ (5,~~901~~485) ~~Shareholders'~~$ ~~equity 2~~(8,~~993~~092) 7$ (6,~~402~~827) 13$ (5,~~581~~373) ======== ======== ======== ======== ======== ======== Basic and Diluted Net (Loss) Income Per Common Share: --------------------------- Loss from continuing operations $ (.36) $ (.72) $ (1.00) $ (0.36) $ (1.21) $ (0.08) Income (loss) from dis- continued operations - - 0.12 (0.85) 0.22~~,076~~ ~~28,960~~(0.69) -------- -------- -------- -------- -------- -------- Net loss $ (.36) $ (.72) $ (0.88) $ (1.21) $ (0.99) $ (0.77) ======== ======== ======== ======== ======== ========

For the Year Ended May 31, ------------------------------ ~~2002 2001 2000~~ -------- -------- -------- ~~Revenues $~~ -------------- $Balance ~~3,005~~Sheet $Data ~~4,135~~2003 ~~Costs~~2002 ~~and~~2001 ~~expenses~~2000 -1999 ~~2,262~~1998 ~~5,767~~ -------- -------- -------- ~~Income (loss) from discontinued operations~~ - ~~743 (1,632) Loss on disposal of discontinued operations~~ - - ~~(4,071)~~ -----~~---~~ -------- -------- ~~Income~~ (~~loss)~~Dollars ~~before~~in ~~provision~~thousands ~~for~~except ~~income~~per ~~taxes~~share -amounts) ~~743~~Total (5assets $ 1,~~703)~~777 ~~Provision~~$ ~~for~~3,522 ~~income~~$ ~~taxes~~8,815 -$ -14,253 -$ ~~--------~~25,218 ~~--------~~$ ~~--------~~39,861 ~~Net~~Liabilities ~~income~~574 ~~(loss)~~529 ~~from~~1,413 ~~discontinued~~672 ~~operations~~3,142 $10,901 -Shareholders' $equity ~~743~~1,203 $2,993 (57,~~703)~~402 ~~========~~13,581 ~~========~~22,076 ~~========~~28,960

- 8 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements and the notes thereto which appear elsewhere in this Form 10-K. RESULTS OF OPERATIONS CONTINUING OPERATIONS REVENUES For the three fiscal years ended May 31, 2003, total revenues decreased to $315,000 in fiscal 2003 from $354,000 in fiscal 2002 and from $1.3 million in fiscal 2001. Equipment sales decreased to $-0- in fiscal 2003 and 2002, and from $633,000 in fiscal 2001. With the discontinuation of lease originations in August 1999 and sale of a substantial portion of the portfolio in fiscal 2000, there were no equipment sales in fiscal 2003 and 2002. Equipment rentals and income from direct financing leases decreased to $-0- in fiscal 2003 from $34,000 in fiscal 2002, and from $110,000 in fiscal 2001. The decreases are primarily attributable to the sale of the lease portfolio during the fiscal years 2001 and 2000. Interest, fees and other income decreased to $315,000 in fiscal 2003 from $320,000 in fiscal 2002, and from $529,000 in fiscal 2001. The decrease is primarily the result of lower interest income earned on notes receivable, lower interest income earned on cash balances, and the loss of income from T1Xpert's operations offset by the receipt of a World Trade Center business recovery grant received in 2003. Interest income earned on notes receivable was $138,000 in 2003, compared to $215,000 in 2002 and $235,000 in 2001. Interest income earned on cash balances was $15,000 in 2003, compared to $43,000 in 2002 and $190,000 in 2001. Lower interest income earned on cash balances was due to lower cash balances due to the funding of T1Xpert's operations and lower interest rates. During the 2003 fiscal year the Company received a one time World Trace Center business recovery grant in the amount of $150,000. The Company's revenues from T1Xpert's operations were $-0- in 2003 and 2002, compared to $50,000 in 2001. Since the Company sold its portfolio of leases, discontinued the aviation business and ceased the T1Xpert operations, management expects that there will be no operating revenue in future periods from these operations. COSTS AND EXPENSES Total costs and expenses decreased to $1.9 million in fiscal 2003 from $4.4 million in fiscal 2002, and from $7.5 million in fiscal 2001. The decrease is a result of lower cost of sales incurred in the equipment leasing and sales business, decreases in loss on investments and lower research and development expenses incurred by T1Xpert, and lower other operating expenses and selling, general and administrative expenses. Cost of sales decreased to $-0- in fiscal 2003 and 2002 from $1.0 million in fiscal 2001. Loss on investments increased to $51,000 in 2003 from $31,000 in 2002. The loss on investments in 2001 of $1.45 million was principally due to the Company's write down of its investments in high technology companies. Other operating expenses decreased to $31,000 in 2003 from $97,000 in 2002, and from $189,000 in 2001. Depreciation of rental equipment decreased to $-0- in fiscal 2003 and 2002 from $26,000 in fiscal 2001. These decreases are due to a decrease in the amounts of owned rental equipment as a result of the sale of the leasing portfolio. Interest expense decreased to $-0- in fiscal 2003 and 2002 from $5,000 in fiscal 2001. The Company having no interest expense is due to the repayment of the revolving loan agreement on June 21, 2001. Loss on investments during the 2003 fiscal year amounted to $51,000 as compared to a $31,000 loss in 2002 and a $1,450,000 loss in 2001. The 2003 amount represents a write down of $171,000 on its real estate held for sale - 9 - offset by a $120,000 collection received during the year relating to an investment in a high technology company which was written-down by the Company in a previous year. The 2002 amount represents a write down of its real estate held for sale. The 2001 amount principally represents a write down of the Company's investments in high technology companies. Research and development expenses decreased to $-0- in fiscal 2003 from $1.7 million in fiscal 2002 and from $2.8 million in fiscal 2001. The decreases in fiscal 2003 and 2002 were the result of the cessation of operations by T1Xpert in December 2001. Selling, general and administrative expenses decreased to $1.8 million in fiscal 2003 from $2.5 million in fiscal 2002, and from $2.0 million in fiscal 2001. In fiscal 2003 the decrease in selling, general and administrative expenses was principally due to cost containment efforts made by the Company including, but not limited to, lower legal expenses of approximately $416,000, lower insurance costs of approximately $166,000, lower rent expenses of approximately $91,000, and lower lease termination costs of $113,000. In fiscal 2002 the increase in selling, general and administrative expenses was principally due to costs associated with restructuring of the Company's operations, including but not limited to increased professional fees in the amount of $530,000 and lease termination expense in the amount of $113,000. Such increases were offset by lower salaries in the amount of $79,000 and lower director fees in the amount of $70,000. The decrease in fiscal 2001 was principally due to cost containment efforts and staff reduction between the periods. Management expects that general and administrative costs (including legal and accounting) may increase in future periods because of ongoing litigation matters. In addition, selling costs will be minimal since the Company does not expect to resume selling activities. INCOME TAXES The Company's ability to realize any of its deferred tax assets is dependent on the Company generating future taxable earnings, the income taxes on which would be offset by the Company's NOL carryforwards. The NOL carryforwards resulted from the Company's emergence from bankruptcy pursuant to a chapter 11 plan of reorganization in November 1994. The Company provided a full valuation allowance for these deferred tax assets as of May 31, 2001, 2002 and 2003 since, in management's opinion, the future realizability of the deferred tax assets is uncertain in light of its actual operating results since reorganization. This action itself does not impair the availability of the NOL carryforwards to offset any future taxable earnings. The Company periodically reviews the adequacy of the valuation allowance for the remaining NOL carryforwards and will recognize benefits only if a reassessment indicates that it is more likely than not that the benefits will be realized. DISCONTINUED OPERATIONS In July 2000, the Company placed its commercial aircraft engine portfolio up for competitive bid with plans to exit the aviation business. The Company accounts for the aviation business as a discontinued operation. The Company recorded a provision for losses on the disposal of discontinued assets of $4,071,000 in the year ended May 31, 2000, relative to the disposal of CIS Air assets, including $2,679,000 representing estimated losses on sale of equipment, and other revenues and charges related to the discontinuance of the business unit. During the year ended May 31, 2001, in the opinion of management, there was further price erosion in the aviation industry relating to assets carried by CIS Air, and management recorded an additional provision for costs and expenses relative to the disposal of CIS Air's assets in the amount of $2.3 million, which includes an inventory valuation allowance of $735,000 and other revenue and charges related to the discontinuance of the business unit. As a result of the settlement of legal proceedings against Eastwind Airlines and UM Holding Inc. (the "Eastwind settlement"), a gain of $3.0 million was recorded by CIS Air which, when offset by the $2.3 million charge for costs as expenses, resulted in a gain of $743,000 on the disposal of discontinued assets. This gain is attributable to activities by CIS Air in connection with its leasing of engines and aircraft and is accordingly shown in the discontinued operations section of CIS Air's financial statements. As of May, 2002, the majority of the asset and recorded liabilities relating to the Air Group Business have been sold or settled. Therefore, any remaining assets or liabilities have not been accounted for as discontinued operations. A summary of the results of operations of the discontinued CIS Air business unit follows (in thousands): - 10 -

~~2002~~For ~~2001~~the Year Ended May 31, -------- -------- ASSETS: Current assets: Cash and cash equivalents $ 1,386 $ 1,545 Accounts receivable (Note 4) 33 5 Notes receivable, net of allowance for doubtful accounts of $1,000 in 2002 and 2001 747 747 Investment in mortgage participation notes 197 201 Restricted cash - ~~900 Other current assets 208 189 Net assets of discontinued operations (Note 3)~~ - ~~3,550~~ -------- -------- ~~Total~~2003 ~~current~~2002 ~~assets~~2001 ~~2,571 7,137~~ -------- -------- ~~Property, plant and equipment, net (Note 6 and 8) 37 197~~ -------- ~~--------~~Revenues ~~Other~~$ ~~assets:~~- ~~Notes~~$ ~~receivable,~~- ~~net~~$ ~~of current portion 577 1~~3,~~064~~005 ~~Real~~Costs ~~estate~~and ~~held~~expenses ~~for~~- ~~sale, net (Note 5) 337 367 Other~~ - 502,262 -------- -------- ~~Total other assets 914 1,481~~ -------- ~~--------~~Income ~~Total~~(loss) ~~assets~~from $discontinued ~~3,522~~operations $- ~~8,815~~- ~~========~~743 ~~========~~Loss ~~LIABILITIES~~on ~~AND~~disposal ~~SHAREHOLDERS'~~of ~~EQUITY:~~discontinued ~~Current~~operations ~~liabilities:~~- ~~Accounts payable and other liabilities $ 529 $ 513 Loan guarantee~~ - ~~900~~ -~~-------~~ -------- ~~Total current liabilities 529 1,413~~ -------- -------- ~~Commitment~~Income ~~and contingencies~~ (~~Note 12 and 13~~loss) ~~SHAREHOLDERS'~~before ~~EQUITY:~~provision ~~Common~~for ~~stock,~~income ~~$.01~~taxes ~~par~~- ~~value;~~- ~~authorized~~743 ~~20,000,000~~Provision ~~shares~~for ~~issued~~income ~~7,101,668~~taxes ~~shares~~- ~~at May 31, 2002 and 2001 (Notes 9 and 10) 71 71 Additional paid~~-in ~~capital 35,233 35,129 Accumulated deficit (30,250) (26,238) 5,054 8,962 Treasury stock, at cost: 1,935,516 shares at May 31, 2002 and 1,217,782 shares at May 31, 2001 (Note 9) (2,061) (1,560)~~ -~~-------~~ -------- ~~Total shareholders' equity 2,993 7,402~~ -------- -------- ~~Total~~Net ~~liabilities~~income ~~and~~(loss) ~~shareholders'~~from ~~equity~~discontinued operations $ ~~3,522~~- $ ~~8,815~~- $ 743 ======== ======== ========

EQUIPMENT LEASING BUSINESS In August 1999, the Company's subsidiary had sold a substantial portion of its remaining lease portfolio and ceased entering into new equipment leases. The Company outsourced the administration of its remaining lease portfolio, the termination dates of which exceed one year. In October 2000, the Company sold all but one of the remaining equipment leases to the administrator. In May 2002, the remaining equipment lease was sold to the administrator for an immaterial amount. SELECTED QUARTERLY OPERATIONS DATA The following tables set forth selected unaudited statement of operations data for each of the quarters in the years ended May 30, 2003, 2002 and 2001. This data has been derived from the Company's unaudited financial statements that have been prepared on the same basis as the audited financial statements and in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the information when read in connection with the financial statements and the related notes. The Company's quarterly operating results have varied substantially in the past and may vary substantially in the future. Conclusions about the Company's future results for any period should not be drawn from the selected unaudited statement of operations data, either for any particular quarter or taken as a whole. In thousands (except per share data)

~~2002~~For ~~2001~~the ~~2000~~Quarter ~~--------~~Ended -------- -------- ~~REVENUES: Equipment sales $~~ - ~~$ 633 $ 4,671 Equipment rentals 30 76 2,747 Income from direct financing leases 4 34 297 Interest, fees and other income 320 529 750~~ -------- -------- -------- ~~354 1,272 8,465~~ ---~~-----~~ ~~--------~~Aug. ~~-------- COSTS AND EXPENSES: Cost of sales - 1,005 3,718 Depreciation of rental equipment - 26 2,445 Interest expense - 5 16 Other operating expenses 97 189 612 Loss on investments~~ 31 1,~~450~~ -Nov. ~~Research and development 1~~30,~~699~~ ~~2,795~~Feb. 128,~~611~~ ~~Selling,~~May ~~general and administrative expenses 2~~31,~~539~~ ~~2,030~~2002 ~~2,452~~2002 ~~--------~~2003 ~~--------~~2003 -------- ~~4,366 7,500 10,854~~ -------- -------- -------- ~~Loss from continuing operations before provision for income taxes~~ (~~4,012~~Unaudited) ~~(6,228)~~Revenue ~~(2,389)~~$ ~~Provision~~61 ~~for~~$ ~~income~~193 ~~taxes~~$ ~~(Note~~37 ~~11)~~$ -24 -Gross profit - -~~-------~~ -~~-------~~ -~~-------~~ Loss ~~from~~before ~~continuing~~extraordinary ~~operations~~item ~~(4,012)~~and ~~(6,228)~~income taxes (~~2,389~~474) ~~-------- -------- -------- Discontinued operations~~ (~~Note 3~~430): (~~Loss~~377) ~~from discontinued operations - -~~ (~~1,632~~359) ~~Gain~~Net (loss) ~~on disposal of discontinued operations, net of income taxes - 743~~ (~~4,071~~474) ~~-------- -------- -------- - 743~~ (~~5,703~~430) ~~-------- -------- -------- Net loss $~~ (~~4,012~~377) $ (~~5,485~~359) ~~$ (8,092) ======== ======== ========~~ Basic and diluted ~~net~~ loss ~~per~~before ~~share~~extraordinary ~~(Note~~item ~~10):~~per ~~Loss~~common ~~from~~share ~~continuing operations $~~ (.7209) $ (1.0009) $ (0.3608) ~~Income~~ (~~loss) from discontinued operations - 0~~.~~12 (0.85~~08) ~~--------~~Basic ~~--------~~and ~~--------~~diluted ~~Net~~ loss per common share $ (.7209) $ (0.8809) $ (1.2108) ~~======== ======== ======== Weighted average number of shares of common stock outstanding 5,596 6,222 6,696 ===== ===== =====~~(.08)

- 11 -

~~Common~~For ~~Additional~~the ~~Treasury~~Quarter ~~Shares~~Ended ~~Common Paid~~-~~In Accumulated Treasury Common Issued Stock Capital Deficit Stock Shares~~ --------- -------- -------- -------- -------- --~~--------~~ ~~1,000,000~~Aug. ~~$(10~~31,~~000~~ ~~$(10,000~~Nov. ~~$(10~~30,~~000~~ ~~$(10~~Feb. 28,~~000~~ (1May 31,~~000,000)~~ ~~---------~~2001 ~~--------~~2001 2002 2002 -------- -------- -------- ---------- ~~Balance~~(Unaudited) -Revenue ~~May~~$ ~~31,~~85 ~~1999~~$ ~~7,101,668~~79 $ 71 $ ~~35,129~~119 ~~$(12,661)~~Gross $profit ~~(463) (216,824) Net loss~~ - - - ~~(8,092)~~ - -Loss ~~Acquisition~~before ofextraordinary ~~treasury~~item ~~shares~~and -income -taxes ~~- -~~ (~~403~~1,261) (~~308~~1,~~600~~021) ~~--------- -------- -------- -------- -------- ---------- Balance - May 31, 2000 7,101,668 71 35,129~~ (201,~~753~~130) (~~866~~600) ~~(525,424)~~ Net loss ~~- - -~~ (51,~~485~~261) ~~- - Acquisition of treasury shares - - - -~~ (~~694~~1,021) (~~692~~1,~~358~~130) ~~---------~~(600) ~~--------~~Basic ~~--------~~and ~~--------~~diluted ~~--------~~loss ~~----------~~before ~~Balance~~extraordinary -item ~~May~~per ~~31,~~common ~~2001~~share ~~7,101,668 $ 71 $ 35,129 $~~(~~26,238~~0.21) $ (~~1,560~~0.17) (~~1,217,782~~0.21) ~~Net loss - - -~~ (~~4,012~~0.13) -Basic -and ~~Acquisition~~diluted ofloss ~~treasury~~per ~~shares~~common -share ~~- - -~~ (~~501~~0.21) (~~717,734~~0.17) ~~Fair value of officers' compensation - - 104 - - - --------- -------- -------- -------- -------- ---------- Balance - May 31, 2002 7,101,668 $ 71 $ 35,233 $~~(~~30,250~~0.21) $ (~~2,061~~0.13) ~~(1,935,516) ========= ======== ======== ======== ======== ==========~~

~~2002~~For ~~2001~~the ~~2000~~Quarter Ended -------- -------- -------- ~~CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (4,012) $ (5,485) $ (8,092) Less: gain (loss) from discontinued operations~~ - ~~743 (5,703)~~ -------- -------- ---~~-----~~ ~~Loss~~Aug. ~~from~~31, ~~continuing~~Nov. ~~operations (4~~30,~~012)~~ (6Feb. 28,~~228)~~ (2May 31,~~389)~~ 2000 2000 2001 2001 -------- -------- -------- ~~Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities: (Gain) loss on sale of equipment~~ - ~~372 (953) Loss on disposal of fixed assets 48~~ - - ~~Loss on investments 31 1,450~~ - ~~Depreciation and amortization expense 99 130 2,850 Fair value of officers' compensation 104~~ - - ~~Effect on cash flows of changes in: Net accounts receivable (29) 1,090 (1,002) Notes receivable 488 328 638 Inventory~~ - - ~~- Other assets 110~~ (10Unaudited) ~~(241)~~Revenue ~~Accounts~~$ ~~payable~~282 ~~and~~$ ~~other~~638 ~~liabilities~~$ ~~(266)~~130 4$ ~~(48)~~222 ~~Deferred~~Gross ~~lease~~profit ~~revenue~~8 -1 - (~~2,378~~381) ~~Other~~Loss -before -extraordinary ~~123~~item ~~--------~~and ~~--------~~income ~~--------~~taxes ~~585 3,364~~ (~~1,011~~866) ~~-------- -------- -------- Net cash used in continuing operations~~ (~~3,427~~999) (21,~~864~~153) (3,~~400~~210) Net ~~cash~~loss ~~provided by~~ (~~used in~~866) ~~discontinued~~501 ~~operations 3,775 717~~ (21,~~220~~353) ~~-------- -------- -------- Net cash provided by~~ (~~used in) operating activities 348 (2~~3,~~147~~767) ~~(5,620)~~Basic ~~--------~~and ~~--------~~diluted ~~--------~~loss ~~CASH~~before ~~FLOWS~~extraordinary ~~FROM~~item ~~INVESTING~~per ~~ACTIVITIES:~~common ~~Proceeds~~share ~~from sale of equipment - 634 4,671 Purchase of rental equipment - -~~ (~~158~~0.13) ~~Purchase of property and equipment~~ (~~7) (~~0.15) (100.20) ~~Collections of rentals on direct financing leases, net of amortization of unearned income - 131 566 Proceeds of~~ (~~investment in~~0.52) ~~mortgage~~Basic ~~participation~~and ~~notes~~diluted 1loss ~~417~~per ~~(336)~~common ~~Restricted~~share ~~cash - -~~ (~~900~~0.13) ~~--------~~0.08 ~~-------- -------- Net cash provided by~~ (~~used in~~0.23) ~~investing activities~~ (60.60) ~~1,167 3,833 -------- -------- --------~~

LIQUIDITY AND CAPITAL RESOURCES Net cash used by operations for the year ended May 31, 2003 was $631,000 as compared to net cash provided by operations for the year ended May 31, 2002 of $348,000 and as compared to net cash used in operations of $2,147,000 for the year ended May 31, 2001; net cash used in continuing operations for the year ended May 31, 2003 was $631,000 as compared to $3,400,000 for the year ended May 31, 2002 and $2,900,000 for the year ended May 31, 2001. Net cash provided by discontinued operations for the year ended May 31, 2003 was $-0-, as compared to net cash provided by discontinued operations for the year ended May 31, 2002 of $3,800,000, and net cash provided by discontinued operations for the year ended May 31, 2001 of $717,000. For the year ended May 31, 2002, cash provided by discontinued operations was primarily due to the transfer of the discontinued operations assets to current operations. During the year ended May 31, 2001, the Company received proceeds, net of legal and other costs, of $3,000,000 from the settlement of the Eastwind claim. Net cash used in investing activities for the year ended May 31, 2003 was $45,000 compared to net cash used in investing activities for the year ended May 31, 2002 of $6,000, and net cash provided by investing activities of $1,200,000 for the year ended May 31, 2001. During the year ended May 31, 2003, the Company received $120,000 resulting from a settlement of one of its investments in a high technology company. In addition, the Company purchased additional fixed assets in connection with its move to a new office. The Company's expectations on making future investments will depend on future settlements of any litigation matters and on sales of its current investments. The Company's sale of equipment generated no proceeds in the years ended May 31, 2003 and 2002 as compared to $634,000 for the year ended May 31, 2001. The Company's investment in mortgage participation notes generated $1,000 in proceeds during the year ended May 31, 2002, as compared to $417,000 in proceeds during the year ended May 31, 2001. In future periods cash flows from investing activities will depend on cash collections of the mortgage participation notes and other investments. The Company does not expect significant proceeds from equipment sales in future periods. - 12 - Net cash used in financing activities for the year ended May 31, 2003 was $150,000, compared to $501,000 for the year ended May 31, 2002 and $857,000 for the year ended May 31, 2001. The decrease in the 2003 fiscal year was due to the lower dollar cost per share of acquisitions of treasury stock. The decrease in cash used in fiscal 2002 was due to the November 20, 2000 transaction when the Company completed a repurchase of 607,158 shares of outstanding common stock from The Chase Manhattan Bank and its wholly owned subsidiaries. The reacquired shares represented 9.30% of the 6,527,344 shares then outstanding. The shares were purchased at $ .9882 per share, which was less than the market price. Cash used for financing activities for the year ended May 31, 2002 was primarily due to the December 26, 2001 transaction when the Company completed a repurchase of 100,800 shares of outstanding common stock from Mark Jaindl. On that same date, the Company completed a repurchase of 592,534 shares of common stock from Frederick J. Jaindl, the father of Mark Jaindl (together the "Jaindl Shares"). The reacquired shares represented approximately 12% of the issued and outstanding common stock of the Company. The shares were purchased for a total of $475,000 or $.685 per share, which was greater than the market price. In connection with the purchase of the Jaindl Shares, Mark and Frederick Jaindl were granted a 10% passive carried interest in T1Xpert which may result in additional amounts paid to the Jaindls if the Company makes cash distributions to shareholders in excess of $2,525,000. The Jaindls have agreed not to purchase any more shares of the Company. The Company and the Jaindls have executed mutual releases. The repurchase reduced the number of outstanding shares from 5,859,486 to 5,166,152. As of May 31, 2003, the Company had $560,000 in cash and cash equivalents, as compared to $1.4 million at May 31, 2002. The Company established the CIS Air Loan Facility with a financing institution to provide lease and inventory financing for aircraft engines for its operating subsidiary CIS Air, in the amount of $10,000,000. The facility had a three-year term that expired in December 2000 and permitted borrowing equal to a percentage of the appraised value of the aircraft engines financed. The CIS Air Loan Facility bore interest at prime plus 1/4%. The facility was not renewed, but repayment had been extended beyond the original expiration date. Substantially all of the assets of CIS Air were pledged as collateral for the loan. At May 31, 2001, $765,542 of this facility was being utilized and was paid off in June 2001. As of May 31, 2003, 3,110,456 shares had been repurchased by the Company at an aggregate cost of approximately $2,211,000. On August 26, 2002, the Board of Directors authorized the expenditure of an additional $100,000 for the repurchase of its common stock in market transactions. The Company believes it has sufficient cash on hand to meet current anticipated administrative needs until various claims against the Company can be resolved. There can be no assurance that the Company's estimate as to the validity and valuation of the claims against the Company is accurate, in which case the Company may be unable to meet claims against it. This may result in the Company needing to sell off assets at distressed prices or liens filed against the Company also resulting in distressed asset sales or the Company seeking bankruptcy protection. Any such distressed asset sales may further diminish the Company's ability to meet its obligations. The Company does not have sufficient funds on hand to develop its T1Xpert products. The Company does not anticipate entering into financing arrangements with financial institutions, involving collateralizing and/or leveraging the Company's assets. In August 2003 the Company announced that it had appointed Guy Zahavi, a specialist in brokerage technology and business operations as a Director. Mr. Zahavi had been serving as a consultant to the Company since July 21, 2003. Mr. Zahavi holds a B.A. in Economics and Management from The Academic College of Tel Aviv, of Tel Aviv University. Mr. Zahavi served in the Israeli Air Force attaining the rank of Major. Mr. Zahavi was also appointed the Chief Executive Officer of the Company following the resignation of Jonah Meer as a Director and Officer. Mr. Meer will remain as a consultant to the Company to assist the Company in winding down its businesses, recovering on its assets and resolving its litigation. - 13 - NEW ACCOUNTING PRONOUNCEMENTS In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", was issued which nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit and Activity (including Certain Costs Incurred in a Restructuring)". The adoption of SFAS No. 146 had no effect on the financial position and results of operations of the Company. In December 2002, SFAS 148, Accounting for Stock-Based Compensations - Transition and Disclosure, was issued which is an amendment of SFAS 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that statement to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. The Company has determined not to adopt SFAS 148 as of May 31, 2003 as the Company has limited stock option activity. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others an Interpretation of SFAS No. 5, 57, and 107, and recession of FASB Interpretation No. 34. The interpretation elaborates on the disclosures to be made by a guarantor in its financial statements. It also requires a guarantor to recognize a liability for the fair value of the obligation undertaken in issuing the guarantee at the inception of a guarantee. Management does not expect the adoption of this interpretation to have a significant effect on the financial position and results of operations of the Company. In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest annuities. FIN No. 46 clarifies the application of Accounting Research Bulletin ("ARB") No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have characteristics of controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The application of the majority voting interest requirement in ARB 51 to certain types of entities may not identify the party with a controlling financial interest because the controlling financial interest may be achieved through arrangements that do not involve a controlling interest. FIN No. 46 applies immediately to variable interest entities created after January 31, 2003 and to fiscal years beginning after June 15, 2003 for variable interest entities acquired before February 1, 2003. Management does not expect the adoption of FIN No. 46 to have a significant impact on the Company's financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK DISCLOSURES The Company is not exposed to material risks associated with interest rate changes. The Company does not foresee any significant changes in its exposure to fluctuations in interest rates in the near future. At May 31, 2003 the Company did not have any outstanding debt. - 14 - ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Report of Independent Accountants - Current 16 - Predecessor 17 Financial Statements: Consolidated Balance Sheets May 31, 2003 and 2002 18 Consolidated Statements of Operations Years ended May 31, 2003, 2002 and 2001 19 Consolidated Statements of Shareholders' Equity Years Ended May 31, 2003, 2002 and 2001 20 Consolidated Statements of Cash Flows Years Ended May 31, 2003, 2002 and 2001 21-22 Notes to Consolidated Financial Statements 23-34 Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts 35 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. - 15 - REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Continental Information Systems Corporation: In our opinion, the consolidated financial statements listed in the accompanying index on page 15 present fairly, in all material respects, the consolidated financial position of Continental Information Systems Corporation and its subsidiaries (the "Company") at May 31, 2003 and 2002, and the results of their operations and their cash flows for the years ended May 31, 2003 and 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, on December 27, 2001, the Company ceased operations and ceased additional funding of T1Xpert. The Company is now considering various strategic alternatives without the use of additional Company funds to continue T1Xpert's product development. There is currently no demonstrated market for this product and the Company does not have any contracted clients which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Lazar Levine & Felix LLP New York, New York July 17, 2003 - 16 - REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Continental Information Systems Corporation: In our opinion, the consolidated financial statements listed in the accompanying index on page 15 present fairly, in all material respects, the consolidated financial position of Continental Information Systems Corporation and its subsidiaries (the "Company") at May 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2001 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company is in the initial stages of developing its securities processing software business, the product, T1Xpert, has not yet been released or tested for functionality. There is currently no demonstrated market for this product and the Company does not have any contracted clients which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. PRICE WATERHOUSECOOPERS LLP New York, New York August 17, 2001 - 17 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS In Thousands (Except Share Data) May 31, 2003 and 2002 --------------------------------------------------------------------------------

2003 2002 ~~2001 2000~~ -------- -------- ~~--------~~ASSETS: ~~CASH~~Current ~~FLOWS~~assets: ~~FROM~~Cash ~~FINANCING~~and ~~ACTIVITIES:~~cash ~~Proceeds~~equivalents ~~from~~$ ~~lease~~560 $ 1,386 ~~bank~~Accounts ~~and~~receivable ~~institution~~- ~~financings~~33 $Notes -receivable, $net -of $allowance ~~205~~for ~~Payments~~doubtful onaccounts ~~lease~~of $1,000 ~~bank~~in 2003 and ~~institution~~2002 ~~financings~~600 -747 ~~(163)~~Investment ~~(249)~~in ~~Purchase~~mortgage ofparticipation ~~treasury~~notes ~~stock~~197 ~~(501)~~197 ~~(694)~~Other ~~(403)~~investments 126 - Other current assets 32 208 -------- -------- Total current assets 1,515 2,571 -------- ~~Net~~-------- ~~cash~~Property, ~~used~~plant inand ~~financing~~equipment, ~~activities~~net (~~501)~~Note ~~(857~~5) ~~(447)~~48 ~~--------~~37 -------- -------- ~~Net~~Other ~~decrease~~assets: inNotes ~~cash~~receivable, ~~and~~net ~~cash~~of ~~equivalents~~current ~~(159)~~portion ~~(1,837)~~49 ~~(2,234)~~577 ~~CASH~~Real ~~AND~~estate ~~CASH~~held ~~EQUIVALENTS:~~for ~~Beginning~~sale, ofnet ~~year~~(Note ~~1,545~~4) ~~3,382~~165 ~~5,616~~337 -------- -------- Total other assets 214 914 -------- ~~End~~-------- ofTotal ~~year~~assets $ 1,~~386~~777 $ ~~1,545 $~~ 3,~~382~~522 ======== ======== ~~========~~LIABILITIES ~~SUPPLEMENTAL~~AND ~~CASH~~SHAREHOLDERS' ~~FLOW~~EQUITY: ~~DISCLOSURES~~Current liabilities: ~~Cash~~Accounts ~~paid~~payable ~~for~~and ~~interest~~other liabilities $ -574 $ 5529 $-------- 16-------- ~~========~~Total ~~========~~current ~~========~~liabilities ~~SUPPLEMENTAL~~574 ~~SCHEDULE~~529 OF-------- ~~NONCASH~~-------- ~~ACTIVITIES:~~Commitment ~~Inventory~~and ~~arising~~contingencies ~~from~~(Notes ~~transfers~~9, of10 ~~equipment~~and ~~that~~11) ~~came~~SHAREHOLDERS' ~~off-lease~~EQUITY: $Common -stock, $.01 ~~685~~par $value; -authorized ~~========~~20,000,000 ~~========~~shares, ~~========~~issued ~~Transfer~~7,101,668 ofshares ~~inventory~~at ~~from~~May ~~discontinued~~31, ~~operations~~2003 toand ~~other~~2002 ~~assets~~(Notes $6 52and $7) 71 71 Additional paid-in $capital 35,233 35,233 Accumulated deficit (31,890) (30,250) -------- ~~========~~-------- ~~========~~3,414 ~~========~~5,054 ~~Transfer~~Treasury ofstock, ~~other~~at ~~assets~~cost: ~~from~~3,110,456 ~~discontinued~~shares ~~operations~~at toMay ~~other~~31, ~~assets~~2003 $and 51,935,516 $shares -atMay $31, -2002 ~~========~~(Note ~~========~~6) ~~========~~(2,211) ~~Transfer~~(2,061) of-------- ~~payable~~-------- ~~from~~Total ~~discontinued~~shareholders' ~~operations~~equity to1,203 ~~accounts~~2,993 ~~payable~~-------- $-------- ~~(282)~~Total liabilities and shareholders' equity $ -1,777 $ -3,522 ======== ======== ~~========~~

-------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. - 18 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS In Thousands (Except Per Share Data) Years Ended May 31, 2003, 2002 and 2001 --------------------------------------------------------------------------------

~~Year~~2003 ~~Ended~~2002 ~~May~~2001 ~~31,~~-------- -------- -------- REVENUES: Equipment sales $ - $ - $ 633 Equipment rentals - 30 76 Income from direct financing leases - 4 34 Interest, fees and other income 315 320 529 -------- -------- ~~2002~~-------- ~~2001~~315 ~~2000~~354 1,272 -------- -------- -------- ~~Revenues~~COSTS $AND EXPENSES: Cost of sales - $- 1,005 Depreciation of rental equipment - $- 426 Interest expense - - 5 Other operating expenses 31 97 189 Loss on investments 51 31 1,~~135~~450 ~~Costs~~Research and development - 1,699 2,795 Selling, general and administrative expenses 1,873 2,539 2,030 -------- -------- 5-------- 1,~~767~~955 4,366 7,500 -------- -------- -------- ~~Income~~Loss ~~(loss)~~ from ~~discontinued~~continuing operations -before -provision for income taxes (1,~~632~~640) (~~Loss~~4,012) ~~gain~~(6,228) onBenefit ~~disposal~~for ofincome ~~discontinued~~taxes ~~operations~~- - ~~743~~- -------- -------- -------- Loss from continuing operations (Note 8) (1,640) (4,~~071~~012)* (6,228) -------- -------- -------- ~~Income~~Discontinued operations (~~loss~~Note 3): ~~before~~Gain ~~provision~~on ~~for~~disposal ~~income~~of ~~taxes~~discontinued ~~- 743 (5~~operations,~~703)~~ ~~Provision~~net ~~for~~of income taxes - - -743 -------- -------- -------- ~~Net~~- ~~income~~- ~~(loss)~~743 ~~from~~-------- ~~discontinued~~-------- ~~operations~~-------- Net loss $ -(1,640) $ ~~743~~(4,012) $ (5,~~703~~485) ======== ======== ======== *Basic ~~The~~and ~~principal~~diluted ~~components~~net ofloss ~~this~~per ~~balance~~share ~~are~~(Note 10): Loss from continuing operations $~~2,679~~ ~~representing~~(.36) $ (.72) $ (1.00) Income (loss) onfrom ~~the~~discontinued ~~sale~~operations of- ~~remaining~~- ~~equipment~~0.12 ~~and~~-------- -------- -------- Net loss per share $~~1,257~~ ~~representing~~(.36) ~~expenses~~$ ~~during~~(.72) ~~the~~$ ~~wind-down~~(0.88) ======== ======== ======== Weighted average number of shares of common stock outstanding 4,608 5,596 6,222 ======== ======== ========

-------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. - 19 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY In Thousands (Except Number of Shares) Years Ended May 31, 2003, 2002 and 2001 --------------------------------------------------------------------------------

~~May~~Common ~~31,~~Additional Treasury Shares Common Paid-In Accumulated Treasury Common Issued Stock Capital Deficit Stock Shares --------- ------ ---------- ~~2002~~----------- ~~2001~~ -------- ----------- ~~Assets:~~Balance ~~Cash~~- ~~and~~May ~~cash~~31, ~~equivalents~~2000 7,101,668 $ -71 $ 335,~~066~~129 ~~Accounts~~$(20,753) ~~receivable~~$ -(866) ~~660 Inventory~~(525,424) ~~net~~Net loss - ~~745~~- ~~Net~~- ~~investment~~(5,485) in- ~~direct~~- ~~financing~~Acquisition ~~leases~~of -treasury ~~250~~shares ~~Rental~~- ~~equipment~~- - - ~~Other~~(694) ~~assets~~(692,358) --------- ~~119~~---- -------- -------- ~~Total assets~~ - ~~4,840~~ ------ -- -------- ~~Liabilities:~~Balance ~~Accounts~~- ~~payable~~May ~~and~~31, ~~costs~~2001 7,101,668 71 35,129 (26,238) (1,560) (1,217,782) Net loss - - - (4,012) - - Acquisition of ~~discontinuance~~treasury shares - ~~524~~- ~~Other~~- ~~liabilities~~- (501) (717,734) Fair value of officers' compensation - - ~~Note~~104 ~~payable~~- to- ~~institution~~- --------- ~~766~~---- -------- -------- ~~Total~~------- ~~liabilities~~---------- Balance - May 31, 2002 7,101,668 71 35,233 (30,250) (2,061) (1,~~290~~935,516) Net loss - - - (1,640) - - Acquisition of treasury shares - - - - (150) (1,174,940) --------- ~~Net~~---- ~~assets~~-------- of-------- ~~discontinued~~------- ~~operations~~---------- $Balance - May 31, 2003 7,101,668 $ 71 $ 35,233 $(31,890) $(2,211) (3,~~550~~110,456) ========= ==== ======== ======== ======= ==========

-------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. - 20 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS In Thousands Years Ended May 31, 2003, 2002 and 2001 --------------------------------------------------------------------------------

2003 2002 2001 -------- ~~Minimum~~-------- ~~lease~~-------- ~~payments~~CASH ~~receivable~~FLOWS FROM OPERATING ACTIVITIES: Net loss $ 25(1,640) $ (4,012) $ (5,485) Less: ~~Unearned~~gain ~~income~~from discontinued operations - - 743 -------- -------- -------- Loss from continuing operations (1,640) (4,012) ~~Write~~(6,228) ~~off~~-------- -------- -------- Adjustments to reconcile loss from continuing operations to net cash provided by (21used in) operating activities: Loss on sale of equipment - - 372 Loss on disposal of fixed assets - 48 - Loss on investments 51 31 1,450 Depreciation and amortization expense 27 99 130 Fair value of officers' compensation - 104 - Effect on cash flows of changes in: Net accounts receivable 33 (29) 1,090 Notes receivable 677 488 328 Other assets 176 110 (10) Accounts payable and other liabilities 45 (266) 4 -------- -------- -------- 1,009 585 3,364 -------- -------- -------- Net ~~investment~~cash used in continuing operations (631) (3,427) (2,864) Net cash provided by discontinued operations - 3,775 717 -------- -------- -------- Net cash provided by (used in) operating activities (631) 348 (2,147) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of equipment - - 634 Purchase of property and equipment (39) (7) (15) Purchase of investments bonds (126) - - Collections of rentals on direct financing leases, $net of amortization of unearned income - ~~========~~- 131 Proceeds from mortgage participation notes - 1 417 Proceeds from investments recovery 120 - - -------- -------- -------- Net cash provided by (used in) investing activities (45) (6) 1,167 -------- -------- --------

-------------------------------------------------------------------------------- (Continued) - 21 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) In Thousands Years Ended May 31, 2003, 2002 and 2001 --------------------------------------------------------------------------------

2003 2002 2001 -------- ~~Printing~~-------- ~~equipment~~-------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on lease, bank and institution financings $ 84- ~~Less~~$ ~~accumulated~~- ~~depreciation~~$ (64163) Purchase of treasury stock (150) (501) (694) -------- -------- -------- Net cash used in financing activities (150) (501) (857) -------- -------- -------- Net decrease in cash and cash equivalents (826) (159) (1,837) CASH AND CASH EQUIVALENTS: Beginning of year 1,386 1,545 3,382 -------- -------- -------- End of year $ 20560 $ 1,386 $ 1,545 ======== ======== ======== SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid for interest $ - $ - $ 5 ======== ======== ======== SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES: Inventory arising from transfers of equipment that came off-lease $ - $ - $ 685 ======== ======== ======== Transfer of inventory from discontinued operations to other assets $ - $ 52 $ - ======== ======== ======== Transfer of other assets from discontinued operations to other assets $ - $ 5 $ - ======== ======== ======== Transfer of payable from discontinued operations to accounts payable $ - $ (282) $ - ======== ======== ========

-------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. - 22 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2003, 2002 and 2001 -------------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies ------------------------------------------ Nature of Operations -------------------- Continental Information Systems Corporation is a New York Corporation that was organized in 1968. Together with its subsidiaries (the "Company") it was a specialized financial services company that engaged in the leasing, sales and management of commercial aircraft and engines, among other assets, and was also engaged in other financing activities, including commercial real estate financing. In August 1999, the Company ceased entering into new equipment leases and sold a substantial portion of its remaining lease portfolio. Since then, the Company has disposed of the balance of its remaining lease portfolio. In July 2000 the Company's subsidiary, CIS Air Corporation, exited the aviation business. In August 1999, the Company changed its focus to the development and commercialization of a Web-enabled electronic securities processing software platform which would use proprietary technology and adapt to changes in the securities industry including operational changes related to increased volume, the ability to effect trades through the Internet, Electronic Crossing Networks, decimalization, expanded trading hours, various rule changes and the shift from settling trades in three days to settling trades in one day. This latter shift is commonly referred to as "T+1." The subsidiary that was formed to engage in this line of business is T1Xpert Corp. ("T1Xpert"). The terrorist attacks of September 11, 2001 against the United States of America had a negative effect on the U.S. securities industry and T1Xpert. T1Xpert had begun work on a software development project for a global investment bank. This project was canceled as a result of the events of September 11, 2001. On December 27, 2001, the Company ceased active operations and any additional funding of T1Xpert. T1Xpert has expended approximately $6.2 million from its inception in August 1999 through May 31, 2003. The Company made claims under its existing policies of insurance for compensation in order to continue operations. The Company believed it had sufficient coverage to allow it to continue development and installation under its existing contract and sufficient funding to locate a substitute investment banking customer to replace the cancelled contract had it received sufficient insurance proceeds. Efforts to collect under the Company's insurance policies resulted in the Company reaching a settlement agreement with its insurance company. In exchange for a release, certain representations, and assignment of certain rights of its subsidiary T1Xpert Corp., the Company received settlement proceeds, which leaves the Company with insufficient resources to recommence its operations as previously established. The Company announced that it had appointed Mr. Guy Zahavi of Tel Aviv Israel, a specialist in brokerage technology and business operations, to attempt to maximize the value, if any, of T1Xpert's remaining assets. Under current conditions the Company believes that it is unlikely that any significant value will be realized from the remaining T1Xpert assets. Consolidation ------------- The accompanying consolidated financial statements include the accounts of Continental Information Systems Corporation and its wholly owned subsidiaries. All intercompany accounts have been eliminated in consolidation. Cash and Cash Equivalents ------------------------- Cash and cash equivalents include checking and money market accounts and short term commercial paper with financial institutions having original maturities of 90 days or less. Other Investments ----------------- Other investments consists of investment grade corporate bonds with maturities in excess of one year. - 23 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2003, 2002 and 2001 -------------------------------------------------------------------------------- Reclassification ---------------- In years prior to May 31, 2002, the Company had active leases and believed that an unclassified balance sheet more appropriately reflected its leasing activities. In light of the Company's cessation of leasing operations, the Company believes a classified balance sheet reflects its current status. Accordingly, the consolidated balance sheet as of May 31, 2002 has been prepared in a classified format. Concentration of Credit Risk ---------------------------- Financial instruments which potentially subject the Company to credit risk consist principally of cash with financial institutions and notes receivable. The Company maintains cash deposits with major banks and financial institutions which may exceed federally insured limits. The Company periodically assesses the financial condition of the institutions and believes the risk of any loss is minimal. At May 31, 2003, cash in excess of FDIC limits amounted to approximately $460,000. The Company's notes receivable balance of $649,000 is owed by one customer in the aviation business. Thus, the Company is directly affected by the financial condition of this company and the airline industry in general. The credit risk associated with this customer is somewhat mitigated by the note being collateralized; however, a substantial portion of such collateral is outside the United States, thereby creating potential difficulties of recovery of collateral in case of default. The value of the collateral is estimated to be below the carrying value of the note. The customer during the year requested temporary postponements of certain payments, which the Company granted. When making payments the customer has not been timely. Investment in Mortgage Participation Notes ------------------------------------------ Investment in mortgage participation notes represents investments in high-yield, short-term commercial real estate transactions and are carried at the lower of cost or market. Interest income on the notes is recorded monthly using the weighted average estimated yields on these investments. In June 2003 the Company was advised that the mortgage was in arrears, that the Lead Lender would be taking title to the property and that additional funds would be needed to be raised from investors. This requires the original loan to be modified on terms believed to be less favorable to the Company. Property, Plant and Equipment ----------------------------- Property, plant and equipment are recorded at cost and are being depreciated using the straight-line method over the estimated useful lives of such assets. Leasehold improvements were depreciated over three to seven years being the lesser of the lease term or useful life of the asset. Computer equipment and software is depreciated over three to five years and furniture, fixtures and office equipment over seven years and aircraft engines over seven years from the date of purchase. Income Taxes ------------ The Company accounts for income taxes under the asset and liability method required by Statement of Financial Accounting Standards No. 109 ("SFAS 109"), Accounting for Income Taxes. SFAS 109 requires the recording of deferred tax assets and liabilities for the future tax effects of temporary differences between the bases of all assets and liabilities for financial reporting purposes and tax purposes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company periodically reviews the adequacy of the valuation allowance and will recognize benefits only if reassessment indicates that it is more likely than not that the benefits will be realized. A valuation allowance for the full amount of deferred tax assets was provided for in income tax expense in 2003, 2002 and 2001. - 24 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2003, 2002 and 2001 -------------------------------------------------------------------------------- Net Income (Loss) Per Share --------------------------- Earnings per share is calculated in accordance with Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share, which specifies standards for computing and disclosing net income (loss) per share. Basic and diluted net loss per share for the fiscal years ended May 31, 2003, 2002 and 2001, was computed based on the weighted average number of shares of common stock outstanding during the periods. As of May 31, 2003, the Company had no issued and outstanding options to purchase shares of common stock (see Note 7). Estimates --------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates. Research and Development Expenditures ------------------------------------- Research and development expenditures in connection with the development of the T1Xpert securities processing software platform were expensed as incurred. If the Company were to enter a production environment and technological feasibility were achieved, future capital costs would be capitalized in accordance with FASB Statement No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." 2. T1Xpert Corp. ------------- On December 27, 2001, the Company ceased active operations and additional funding of product development at T1Xpert for several reasons. The Company made claims under its existing policies of insurance for compensation due to the events of September 11, 2001 in order to continue operations. The Company believed it had sufficient coverage to allow it to continue development and installation under its existing contract and sufficient funding to locate a substitute investment banking customer to replace the cancelled contract had it received sufficient insurance proceeds. Efforts to collect under the Company's insurance policies resulted in the Company reaching a settlement agreement with its insurance company. In exchange for a release, certain representations, and assignment of certain rights of its subsidiary T1Xpert Corp., the Company received settlement proceeds, which leaves the Company with insufficient resources to recommence its operations as previously established. Risks and Uncertainties ----------------------- On July 23, 2003 the Company announced that it will appoint Mr. Guy Zahavi of Tel Aviv Israel, a specialist in brokerage technology and business operations, to attempt to maximize the value, if any, of T1Xpert's remaining assets. Under current conditions the Company believes that it is unlikely that any significant value will be realized from the remaining T1Xpert assets. - 25 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2003, 2002 and 2001 -------------------------------------------------------------------------------- 3. Discontinued Operations ----------------------- On July 14, 2000, the Company announced that it was offering for sale its commercial aircraft engine portfolio by competitive bid, that upon completion of the sale it would exit the aviation business, and that it would account for and report the Air Group Business as a discontinued operation. In the quarter ended May 31, 2000, the Company wrote down CIS Air's assets by $4,071,000, including $2,679,000 representing estimated losses on sale of equipment, and other revenues and charges related to the discontinuance of the business unit. During the year ended May 31, 2001, in the opinion of management, there was further price erosion in the aviation industry relating to assets carried by CIS Air and management recorded an additional provision relative to the disposal of CIS Air's assets in the amount of $2.2 million, which includes an inventory valuation allowance of $735,276. As a result of the settlement of legal proceedings against Eastwind Airlines and UM Holding Inc. (the "Eastwind settlement"), a gain of $3.0 million was recorded by CIS Air. This gain is included, net of taxes in the discontinued operations section of the Company's financial statements. As of May, 2003, the majority of the assets relating to the Air Group Business have been sold. The Company had a revolving loan agreement (the "CIS Air Loan facility") with an institution to provide lease and inventory financing for aircraft engines for CIS Air, in the amount of $10,000,000. The CIS Air Loan facility had a three-year term and permitted borrowings equal to a percentage of the appraised value of the aircraft engines financed. Substantially all of the assets of CIS Air were pledged as collateral for the CIS Air Loan facility. At May 31, 2001, $765,542 of the CIS Air Loan facility was being utilized. The CIS Air Loan facility bore interest at prime plus .25% (7.25% and 9.75% at May 31, 2001 and 2000, respectively) and expired in December 2000. The Company arranged for several extensions of the CIS Air Loan facility so as to allow sufficient time for an orderly paydown. The Company paid interest related to the CIS Air Loan facility of $199,516 and $619,000 in fiscal 2001 and 2000, respectively. Proceeds of sale were used to permanently pay down the CIS Air Loan facility. On June 21, 2001, the CIS Air Loan facility was completely repaid. The Consolidated Statement of Operations for 2001 has been reclassified to report the results of discontinued operations separately from those of continuing operations. The income (loss) from and net assets of discontinued operations reflected on the accompanying Consolidated Financial Statements consist of the following (in thousands):

Year Ended May 31, -------------------------------- 2003 2002 2001 -------- -------- ~~Leasehold~~-------- ~~improvements~~Revenues $ - $ ~~129~~- ~~Computer~~$ ~~equipment~~- Costs and ~~software~~expenses ~~254~~- ~~355~~- ~~Furniture,~~- ~~fixtures~~-------- ~~and~~-------- ~~office~~-------- ~~equipment~~Income (loss) from discontinued operations - 19- - Gain on disposal of discontinued operations - - 743 -------- -------- ~~254~~-------- ~~503~~Income ~~Less~~before ~~accumulated~~provision ~~depreciation~~for ~~217~~income ~~(326)~~taxes - - 743 Provision for income taxes - - - -------- -------- -------- Net income from discontinued operations $ 37- $ ~~177~~- $ 743 ======== ======== ========

- 26 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2003, 2002 and 2001 -------------------------------------------------------------------------------- 4. Real Estate Held for Sale ------------------------- On July 3, 1997, the Company announced that it had entered into a Joint Investment Agreement with Emmes Investment Management Co. LLC to provide up to $8 million in high-yield, short-term financing for commercial real estate transactions. At May 31, 2003, the Company's sole remaining investment in such transactions was carried at approximately $165,000, net of a reserve for loss on investment of $324,000. During the year ended May 31, 2001, the underlying property was foreclosed and is therefore included in real estate held for sale on the accompanying balance sheet. 5. Property, Plant and Equipment ----------------------------- Property, plant and equipment consist of the following as of May 31 (in thousands):

~~(In~~2003 ~~thousands, except per share amounts)~~ 2002 ~~2001 2000~~ -------- -------- ~~--------~~Computer ~~Net~~equipment ~~loss~~and -software ~~as reported~~ $ ~~(4,012)~~254 $ ~~(5,485)~~254 ~~$ (8~~Furniture,~~092)~~ -fixtures ~~pro forma $ (4,015) $ (5,507) $ (8,174) Basic~~ and ~~diluted~~office ~~net~~equipment ~~loss~~38 ~~per~~- ~~share~~-------- -------- as292 ~~reported~~254 $Less ~~(.72)~~accumulated $depreciation ~~(.88)~~244 ~~$(1.21)~~217 -------- ~~pro~~-------- ~~forma~~ $ ~~(.72)~~48 $ ~~(.89)~~37 ~~$(1.22)~~======== ========

6. Common Stock ------------ Each share of common stock entitles the holder to one vote on all matters submitted to a vote of shareholders. The Company does not anticipate the payment of dividends on the common stock for the foreseeable future. As of May 31, 2003, approximately 3,110,000 shares had been repurchased by the Company at an aggregate cost of approximately $2,211,000. Subject to approval from the Board of Directors, the Company may repurchase additional shares at prevailing prices in the open market or in negotiated or other transactions. The Company will hold all repurchased shares of common stock in its treasury. 7. Stock Option Plan ----------------- In 1995, the Board of Directors adopted and the stockholders approved the Continental Information Systems Corporation 1995 Stock Compensation Plan (the "1995 Plan"). The 1995 Plan provides for the issuance of options covering up to 1,000,000 shares of common stock and stock grants of up to 500,000 shares of common stock to non-employee directors of the Company and, at the discretion of the Compensation Committee or the Board of Directors, employees of and independent contractors and consultants to the Company. Options granted to non-employee directors of the Company in any year become exercisable at the next annual stockholders' meeting while those granted to employees of and independent contractors and consultants to the Company are subject to vesting periods determined by the Compensation Committee or the Board of Directors. Options granted to employees in fiscal 1999 become exercisable in installments of 33-1/3 percent at the grant date and at each subsequent fiscal year end except for options granted to two executive officers which become fully exercisable one year from the grant date. The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for the 1995 Plan. Accordingly, no compensation cost has been charged against income for the stock option plan. Had compensation cost for the 1995 Plan been determined based on the fair value at the grant dates for awards under the Plan, consistent with the requirements of FASB Statement No. 123, "Accounting for Stock-Based Compensation," the Company's net income (loss) and net income (loss) per share would have reflected the pro forma amounts indicated below: - 27 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2003, 2002 and 2001 --------------------------------------------------------------------------------

(In thousands, except per share amounts) 2003 2002 2001 ~~2000~~ -------- -------- -------- ~~Risk~~Net loss -~~free~~ ~~interest~~as ~~rate~~reported -%$ 5.(1,640) $ (4%,012) $ (5~~.4%~~,485) ~~Expected~~- ~~life~~pro forma $ (~~months~~1,640) -$ 48(4,012) 60$ ~~Expected~~(5,507) ~~volatility~~Basic -%and ~~68%~~diluted ~~58%~~net ~~Expected~~loss ~~dividend~~per ~~yield~~share - -as reported $ (.36) $ (.72) $ (.88) - pro forma $ (.36) $ (.72) $ (.89)

The fair value of each stock option grant has been estimated on the date of each grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

~~Weighted~~2003 ~~Average~~2002 ~~Exercise~~2001 ~~Number of Price Per Options Option~~ --------- --------- ~~Outstanding at May 31, 1999 (298,008 exercisable) 421,674 $ 2.18 Granted 13,280 $ 1.40 Exercised~~ - - ~~Forfeited/expired (119,671) $ 2.10~~ ------~~---~~ Risk-~~--------~~free ~~Outstanding~~interest atrate ~~May~~-% ~~31,~~-% ~~2000 (302,003 exercisable) 315,283 $ 2~~5.184% ~~Granted~~Expected ~~15,000~~life ~~$ 1.06 Exercised - - Forfeited/expired~~ (~~107,667~~months) ~~$ 2.19~~ -~~--------~~ -~~--------~~ ~~Outstanding~~48 atExpected ~~May~~volatility ~~31, 2001 (207,616 exercisable) 222,616 $ 2.09 Granted~~ -% -% ~~Exercised~~68% -Expected -dividend ~~Forfeited/expired~~yield ~~(67,666) $ 2.27~~ -~~--------~~ -~~--------~~ ~~Outstanding at May 31, 2002 (154,950 exercisable) 154,950 $ 2.02 ========~~-

The weighted-average fair value of options granted during fiscal 2001 was $.58 per share. There were no options granted in fiscal 2003 and 2002. A summary of the status of the 1995 Plan as of May 31, 2001, 2002 and 2003, and changes during the years ending on those dates is presented below:

~~Options~~Weighted ~~Outstanding~~Average Number of Exercise Price Options ~~Exercisable~~Per Option ---------~~-----------------------~~ ----------------~~----~~ ~~Weighted-~~Outstanding ~~Average~~at ~~Remaining~~May ~~Exercise~~31, ~~Number~~2000 of(302,003 ~~Contractual~~exercisable) ~~Exercise~~315,283 ~~Number~~$ of2.18 ~~Exercise~~Granted ~~Prices~~15,000 ~~Options~~$ ~~Life~~1.06 ~~Price~~Exercised ~~Options Prices~~ -~~-------~~ -~~-------~~ ~~--------~~Forfeited/expired ~~--------~~(107,667) ~~--------~~$ 2.19 --------- $Outstanding ~~3.00~~at 9May 31,~~337~~ $2001 ~~3.00~~(207,616 9exercisable) 222,~~337~~616 $ ~~3.00~~ 2.3809 ~~33,333~~Granted ~~2.38~~- ~~33,333~~- ~~2.38~~Exercised ~~2.25~~- ~~25,000~~- ~~2.25~~Forfeited/expired 25(67,~~000~~666) ~~2.25~~$ 2.0027 ~~50,000~~--------- ~~2.00~~Outstanding ~~50,000~~at ~~2.00~~May ~~1.59 9~~31,~~000~~ ~~1.59~~2002 9(154,~~000~~950 ~~1.59~~exercisable) ~~1.56 4~~154,~~280~~950 ~~1.56~~$ ~~4,280 1~~2.5602 ~~1.32~~Granted ~~9,000~~- ~~1.32~~- ~~9,000~~Exercised ~~1.32~~- ~~1.0625~~- ~~15,000~~Forfeited/expired ~~1.0625 15~~(154,~~000~~950) 1$ 2.~~0625~~02 ------- -- Outstanding at May 31, 2003 (-0-~~---~~ ~~Total~~exercisable) ~~154,950~~- ~~154,950~~- ======= ==~~=====~~

As of May 31, 2003, there were no options outstanding. - 28 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2003, 2002 and 2001 -------------------------------------------------------------------------------- During the year ended May 31, 2003, 154,950 options were forfeited/ expired with a weighted average exercise price of $2.02 per share. In 2000, the Board of Directors of TIXpert adopted the TIXpert Corp. Stock Compensation Plan (the "T1X 2000 Plan"). The T1X 2000 Plan provided for the issuance of stock options covering up to 2,000,000 shares of common stock to employees and advisory board members of TIXpert. Options granted typically do not become exercisable until at least one year from the date of commencement of employment and vest ratably over periods of time as provided at the discretion of the Board of TIXpert. Option grants expire ten years from date of grant, or upon termination of the employee's employment with TIXpert. As of May 31, 2003 there were no outstanding stock options in T1X 2000 plan. During the year ended May 31, 2003, 500,000 options were forfeited/expired with a weighted average exercise price of $0.675 per share under the T1X 2000 Plan. During the year ended May 31, 2002, 1,142,500 options were forfeited/expired with a weighted average exercise price of $0.675 per share. As of May 31, 2002 there were 500,000 options outstanding at an option price of $0.0675. The T1X 2000 Plan was immaterial to the earnings of the Company. 8. Income Taxes ------------ The components of the provision (benefit) for income taxes from continuing and discontinuing operations are as follows (in thousands):

Year Ended May 31, -------------------------------- 2003 2002 2001 ~~2000~~ -------- -------- -------- Current Federal $ - $ - $ - State - - - -------- -------- -------- ~~- - -~~ Deferred (1,499) (2,112) (102) ~~(2,176)~~ Valuation allowance 1,499 2,112 102 ~~2,176~~ -------- -------- -------- $ - $ - $ - ======== ======== ========

A reconciliation of income tax expense (benefit) at the statutory rate to reported income tax expense (benefit) for continuing operations follows (in thousands):

Year Ended May 31, -------------------------------- 2003 2002 2001 ~~2000~~ -------- -------- -------- U.S. federal statutory rate applied to pretax (loss) income from continuing operations $ (656) $ (1,605) $ (2,180) ~~$ (836)~~ State income taxes, net of federal benefit - - - Other, principally temporary differences (843) (507) 2,078 ~~(1,340)~~ Change in the valuation allowance 1,499 2,112 102 ~~2,176~~ -------- -------- -------- $ - $ - $ - ======== ======== ========

- 29 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2003, 2002 and 2001 -------------------------------------------------------------------------------- The income tax effect of the significant temporary differences and carry-forwards which give rise to deferred tax assets (liabilities) are as follows as of May 31 (in thousands):

2003 2002 2001 ~~2000~~ -------- -------- -------- Assets Net operating loss $ 25,700 $ 22,953 $ 19,204 ~~$ 17,525~~ Prepaid lease revenue - - ~~184~~- Discontinued operations - 297 1,547 ~~1,178~~ Deferred expenses - 848 - - Other 129 232 2 ~~331~~ Leased assets - - 1,465 ~~2,898~~ Valuation allowance (2425,~~330~~829) (2224,~~218~~330) (22,~~116~~218) -------- -------- -------- $ - $ - $ - ======== ======== ========

A full valuation allowance was provided for such deferred tax assets since, in management's opinion, the realizability of such assets was uncertain in light of the Company's actual operating results since reorganization. The Company periodically reviews the adequacy of the valuation allowance and will recognize benefits only if a reassessment indicates that it is more likely than not that the benefits will be realized. As of May 31, 2003, the Company had net operating loss carryforwards for future taxable income in the amount of approximately $61,600,000 which will expire from 2005-2022. Such net operating capital loss carryforwards are subject to annual limitations as to use. Further in the event of a change of control, as defined, the operating losses can be substantially eliminated. 9. Employee Benefit Plans ---------------------- The Company maintains a defined contribution 401(k) plan covering substantially all of its employees under which it is obligated to make matching contributions at the rate of 50% of the first 6% of participant earnings contributed to the plan and which provides for an annual discretionary contribution based on participants' eligible compensation. Employees generally became eligible to participate in the plan after the completion of one full year of employment. Matching and discretionary contributions made by the Company vest over a five-year period. Matching Company contributions to the plan for the fiscal years ended May 31, 2003, 2002 and 2001, were $5,000, $18,500 and $26,000, respectively. The Company made no discretionary contribution. 10. Commitments and Contingencies ----------------------------- Rental Commitments ------------------ On February 26, 2002, the Company entered into a lease termination agreement with its landlord for the remaining three years of its lease rental obligations. This agreement released the Company from its lease obligation on the premises. Such obligation was estimated to be $501,000 of base rent plus additional utilities and operating expenses. In connection with this agreement, the Company incurred a loss on disposal of fixed assets in the amount of $48,000, incurred two months rental expense and incurred estimated moving costs of approximately $23,000. The Company temporarily leased space until it could find new space. On August 29, 2002, the Company entered into an agreement for new office space in Manhattan. This agreement requires the Company to pay monthly rent through August 31, 2004. The aggregate monthly rent will be $3,338 through the period August 31, 2003 and $3,927 through August 31, 2004. On August 15, 2003 the Company moved its executive offices to Tel Aviv, Israel for a nominal rent. It remains liable for the office space previously contracted for in Manhattan. - 30 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2003, 2002 and 2001 -------------------------------------------------------------------------------- Contingencies ------------- Legal Proceedings On November 8, 2002 the claim asserted by Dallas Aerospace against the Company was resolved with a ruling in favor of the Company granting the Company's summary judgment motion and dismissing all claims raised by Dallas Aerospace. This judgment was entered in the United States District Court for the Southern District of New York. Dallas Aerospace has filed an appeal with the Second Circuit Court of Appeals in New York on November 12, 2002. The parties are awaiting delivery of oral arguments in the case. On April 24, 2000 CIS Air filed suit in the United States District Court for the Northern District of New York against American Air Ventures, Inc. ("American Air"), a Florida corporation. The suit seeks reimbursement in connection with losses incurred in joint venture agreements between the parties for the purchase and sale of engines. The suit further seeks indemnification from American Air should CIS Air be found liable to Dallas AeroSpace, because CIS Air purchased the engine sold to Dallas AeroSpace from American Air. The parties settled their lawsuit under the joint venture agreement, but left open all issues related to the Dallas matter. If the Company prevails in the Dallas AeroSpace litigation CIS Air's claim for indemnification from American Air would be moot. There can also be no certainty that should the Company need to do so, that it will prevail on its indemnification claim, nor that if it should prevail on such claim American Air will have the financial resources to meet such indemnification. On March 7, 2000 CIS Air filed suit against Express One International, Inc. ("Express One"), a Delaware corporation, in the Supreme Court, State of New York, County of New York. The suit seeks damages of approximately $118,000 in unpaid rent and repair charges. Express One filed for bankruptcy in March 2002 shortly after CIS filed its motion for summary judgment. An automatic stay in connection with the bankruptcy proceeding prevents further action at this time. CIS Air filed a claim in the bankruptcy court action against Express One, but does not anticipate any material recovery. In July 2001 CIS Air filed suit in State Court of Florida, Broward County against Aviation Systems International ("ASI") and the TIMCO division of Aviation Sales Company relating to damage sustained by a CIS Air aircraft. The aircraft was parked at TIMCO's maintenance facility when it was struck and severely damaged by two other aircraft owned by ASI. CIS Air has been reimbursed for a portion of the damages by its insurance carrier, and was seeking to recover the $500,000 deductible and other unpaid costs from TIMCO and ASI. To avoid a lengthy trial and litigation process the Company agreed to settle the suit with the Company receiving its deductible, less payment of certain legal expenses. The Bankruptcy Trustee in the bankruptcy case of Sky Trek International, a former lessee of aircraft engines of CIS Air, filed a claim against CIS Air seeking to obtain the return of $116,000 in security deposits on two aircraft engines that were returned to CIS Air prior to the lease expirations. The claim has been settled by the parties, and this settlement was approved by the Court, with CIS Air returning $17,500 of the deposit received from Sky Trek to the Trustee. - 31 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2003, 2002 and 2001 -------------------------------------------------------------------------------- On June 3, 2002 the Company commenced an action in the Southern District of New York against its insurer, Federal Insurance Company, seeking reimbursement for losses under its insurance policy associated with the September 11, 2001 terrorist attack in downtown Manhattan. In July 2003 the Company settled with its insurer. In exchange for a release, certain representations, and assignment of certain rights of its subsidiary T1Xpert Corp., the Company received settlement proceeds, net of legal expenses, of approximately $375,000. On July 30, 2002, the Company filed suit in the United States District Court for the Southern District of New York against three stockholders of the Company and another party alleging that these parties formed an undisclosed group and wrongfully used material, non-public information concerning the Company in violation of applicable federal securities laws and state statutes. The Company settled with one of these stockholders as of September 3, 2002 and the remaining parties separately on January 31, 2003. As a part of these settlements, mutual releases of the parties, their officers, directors and certain affiliates thereof were exchanged, the stockholders and certain affiliates sold their shares in the Company back to the Company at the prevailing market price or at a discount from market price and the stockholders and certain affiliates agreed not to acquire any additional shares in the Company. The Company commenced an action against a former lessee of equipment and two guarantors for non-payment of lease payments owed. The Company obtained a judgment and is pursuing recovery against one of the guarantors. The second guarantor has filed for bankruptcy and there is no assurance of the amount, if any, that will be recovered from the non-bankrupt guarantor. Tax Claims Various state and city taxing jurisdictions have from time to time asserted tax claims against the Company. The Company is vigorously defending these claims, but there can be no assurance that the Company will prevail. The Company, due to the wind down of its operating businesses, has been filing final returns in various tax jurisdictions as well as withdrawing from doing business in such states. This may precipitate examinations of the Company's tax liabilities in such jurisdictions. While the Company on a consolidated basis may have been unprofitable during recent years, certain subsidiaries of the Company may have been profitable. Further, certain taxes are imposed without regard to income or profitability. 11. Fair Value of Financial Instruments ----------------------------------- The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and Cash Equivalents, Notes Receivable and Investment in Mortgage Participation Notes - The carrying values approximate fair values because of the short maturity of those instruments. 12. Segment Financial Data ---------------------- The Company adopted SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information, as required, in fiscal 2000. The Company's operating subsidiaries were classified into two principal operating segments on the basis of the Company's strategic direction and assessment procedures within the operating subsidiaries, which require different investment and marketing strategies. - 32 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2003, 2002 and 2001 -------------------------------------------------------------------------------- EQUIPMENT LEASING BUSINESS: The Company's Equipment Leasing Business, which was conducted through its operating subsidiary CIS Corporation, a New York Corporation ("CIS"), leased a wide range of equipment, including computers, printers and telecommunications equipment. The Company participated in the leasing market principally by originating new leases and financing other equipment brokers. In August 1999, the Company announced CIS would no longer enter into new equipment leases. In October 2000, the Company sold off all but one remaining equipment lease. In May 2002, the remaining equipment lease was sold to the administrator for an immaterial amount. SECURITIES PROCESSING SOFTWARE BUSINESS: The product was being designed as an electronic securities processing software platform which would use proprietary technology and which would be adapted to changes in the financial market place. On December 27, 2001, the Company ceased daily operations and ceased additional funding of T1Xpert. The Company is now considering various strategic alternatives without the use of additional Company funds to continue T1Xpert's product development. - 33 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2003, 2002 and 2001 -------------------------------------------------------------------------------- Operating Segments (In thousands)

2003 2002 2001 ~~2000~~ -------- -------- -------- Revenues T1Xpert segment $ - $ 50- $ -50 Equipment leasing segment - 34 743 ~~7,960~~ Corporate and other 315 320 479 ~~505~~ -------- -------- -------- Consolidated $ 315 $ 354 $ 1,272 ~~$ 8,465~~ ======== ======== ======== Operating income (loss) T1Xpert segment $ (~~1,701~~15) $ (21,~~740~~701) $ (12,~~611~~740) Equipment leasing segment - 29 (283) ~~1,091~~ Corporate and other (1,625) (2,340) (3,200) ~~(1,853)~~ -------- -------- -------- Consolidated $ (41,~~012~~640) $ (64,~~223~~012) $ (26,~~373~~223) ======== ======== ======== Interest expenses T1Xpert segment $ - $ - $ - Equipment leasing segment - - 16- Corporate and other - - 5 - -------- -------- -------- Consolidated $ - $ 5- $ 165 ======== ======== ======== Loss from continuing operations T1Xpert segment $ (~~1,701~~15) $ (21,~~740~~701) $ (12,~~611~~740) Equipment leasing segment - 29 (~~288~~283) ~~1,075~~ Corporate and other (21,~~340~~625) (32,~~200~~340) (13,~~853~~205) -------- -------- -------- Consolidated $ (41,~~012~~640) $ (64,~~228~~012) $ (26,~~389~~228) ======== ======== ======== Depreciation and amortization T1Xpert segment $ - $ - $ - Corporate and other 27 99 126 ~~2,445~~ -------- -------- -------- Consolidated $ 9927 $ ~~126~~99 $ ~~2,445~~126 ======== ======== ======== Identifiable assets T1Xpert segment $ - $ - $ - Equipment leasing segment - - 20 ~~2,283~~ Corporate and other 1,777 3,522 8,795 ~~11,970~~ -------- -------- -------- Consolidated $ 1,777 $ 3,522 $ 8,815 ~~$ 14,253~~ ======== ======== ========

- 34 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED MAY 31, 2003 (In thousands)

Charged to costs Charged to Beginning ~~costs~~ and to other Deductions Ending balance expenses accounts (recoveries) balance ----------- ---------- ---------- ---------- ----------- ~~2000~~2001: Accounts receivable - allowance for doubtful accounts $ (~~325~~108) $(~~146~~232) $ - $ ~~363~~340 $ - Investment valuation $ - $(~~108~~426) ~~2001:~~$ ~~Accounts~~- $ - $ (426) Notes receivable - allowance for doubtful accounts $(~~108~~1,000,000) $ - $ - $ - $(~~232~~1,000,000) 2002: Investment valuation $ (426) $ - $ ~~340~~- $ - $ (426) Note receivable - allowance for doubtful accounts $(1,000,000) $ - $ - $ - $(1,000,000) 2003: Investment valuation $ (426) $ - $ -171 $(~~426~~120) ~~2002:~~$ ~~Note~~(477) Notes receivable - allowance for doubtful accounts $(~~426~~1,000,000) $ - $ - $ - $(~~426~~1,000,000)

- 35 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Company incorporates herein by reference the information concerning directors and executive officers to be contained in its Proxy Statement to be filed within 120 days after the end of the Company's fiscal year (the "2003 Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION The Company incorporates herein by reference the information concerning executive compensation to be contained in the 2003 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Company incorporates herein by reference the information concerning security ownership of certain beneficial owners and management to be contained in the 2002 Proxy Statement. The following table sets forth information regarding securities authorized for issuance under equity compensation plans.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company incorporates herein by reference the information concerning certain relationships and related transactions to be contained in the 2003 Proxy Statement. ITEM 14. CONTROLS AND PROCEDURES Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon the required evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. - 36 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Annual Report: Financial Statements. See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" for Index to Financial Statements and Schedules included in this Form 10-K. Exhibit No. ----------- 3.1* Restated Certificate of Incorporation, as amended (Filed as Exhibit 3.1 to the Company's Form 10-Q for the quarter ended November 30, 1997 and incorporated herein by reference). 3.2** Restated Bylaws as amended through August 26, 2002. 10.1** 1995 Stock Compensation Plan (Filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended August 31, 1995 and incorporated herein by reference). 10.2** Advisory Agreement for Real Estate Related Investments between the Company and Emmes Investment Management Co. LLC dated June 30, 1997 (Filed as Exhibit 10.13 to the Company's Form 10-K for the fiscal year ended May 31, 1997 and incorporated herein by reference). 10.3** Employment Agreement between the Company and Jonah M. Meer dated June 20, 2002. 10.4 Separation Agreement and Consulting Agreement between the Company and Jonah Meer dated August 15, 2003. 10.5 Employment Agreement between the Company and Guy Zahavi dated August 15, 2003. 21 Subsidiaries of the Registrant: CIS Corporation CIS Air Corporation T1Xpert Corp. 31.1 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification by Guy Zahavi pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Filed as an exhibit to the Company's amended Form 10 Registration Statement (Commission File No. 0-25104), originally filed November 10, 1994 and incorporated herein by reference. ** Incorporated by reference. (b) Reports on Form 8-K. On August 15, 2003, the Company announced that it had appointed Guy Zahavi, a consultant to the Company, as a Director and as Chief Executive Officer of the Company and moved its principal offices to 7 Mikve Israel, # 36351, Tel Aviv 61362 Israel. On July 21, 2003, the Company filed a Form 8-K announcing that it had settled its September 11 claim against its insurer, and it had retained Guy Zahavi to attempt to maximize T1Xpert's remaining assets. On November 8, 2002 the Company filed a Form 8-K announcing that judgment was entered in its favor dismissing the lawsuit filed by Dallas Aerospace, Inc. against the Company. That decision has since been appealed. - 37 - CONTINENTAL INFORMATION SYSTEMS CORPORATION AND ITS SUBSIDIARIES -------------------------------------------------------------------------------- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CONTINENTAL INFORMATION SYSTEMS CORPORATION Date: August 29, 2003 By: /s/Guy Zahavi ------------------------------------------------- Name: Guy Zahavi Title: Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date --------- ----- ---- /s/Guy Zahavi Chief Executive Officer, Chief Operating Officer, Guy Zahavi Chief Financial Officer and Director August 29, 2003 - 38 -

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