FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
 (Mark One)

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

For the quarterly period ended September 30, 1998
                                       OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

For the transition period from ________ to ___________

Commission file number: 333-09789

                              ALLSTAR SYSTEMS, INC.
             (Exact name of Registrant as specified in its charter)

DELAWARE                                             76-0515249
(State or other jurisdiction of                      (I.R.S. Employer
incorporation or organization)                       Identification No.)
6401 SOUTHWEST FREEWAY
HOUSTON, TEXAS 77074
(Address of principal executive offices)  (Zip code)

(713) 795-2000
(Registrant's telephone number including area code)

          Not applicable  (Former name, former address,  and former fiscal year,
          if changed since last report)

     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

           APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
              PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

     Indicate by check mark whether the  registrant  has filed all documents and
reports  required  to be  filed by  Section  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court. Yes ____ No ____

 (APPLICABLE ONLY TO CORPORATE REGISTRANTS)
     Indicate  the  number of  shares  outstanding  of each of the  registrant's
classes of common stock, as of the latest practicable date.

Title                                          Outstanding

Common Stock $.01 par value per share          As of September 30, 1998,
                                               4,522,911 shares outstanding


<PAGE>


PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                     ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
               (In thousands, except share and par value amounts)


                                              September 30,      December 31,
                                                  1998              1997
                                                                (Unaudited)
ASSETS
Current assets:
     Cash and cash equivalents
         Restricted cash                      $                   $      280
                                              
         Cash                                       1,431              1,301
                                                                            
              Total cash and cash equivalents       1,431              1,581
                                              
     Accounts receivable   trade, net              28,671             23,759
                                              
     Accounts receivable   affiliates                 655                434
                                              
     Inventory                                     10,141              4,700
                                              
     Deferred taxes                                   212                212
                                              
     Other current asset                              398                404
                                                                            
              Total current assets                 41,509             31,090
                                              
Property and equipment                              2,281              2,013
                                              
Other assets                                          240                 81
                                                                            
Total                                            $ 44,030           $ 33,184
                                                  =======            =======

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
     Notes payable                              $   7,642          $   1,572
                                              
     Accounts payable                              16,605             12,805
                                              
     Accrued expenses                               5,032              3,565
                                              
     Income taxes payable                             (13)                82
                                              
     Deferred service revenue                         233                242
                                                                            
              Total current liabilities            29,494             18,266
                                              
     Deferred Credit - Stock warrants                 195                195
                                                                            
Total liabilities                                  29,694             18,461
                                              

Commitments and contingencies Stockholders' equity:
     Preferred stock, $.01 par value, 5,000,000 shares
       authorized, no shares issued
     Common stock:
       $.01 par value, 50,000,000 shares authorized,
       4,454,411 and 4,522,911 shares issued and outstanding
       on December 31, 1997 and September 30, 1998, respectively   45     45
     Additional paid in capital                    10,250             10,013
                                          
     Unearned restricted stock                       (270)
                                          
     Treasury stock(271,200 shares, at cost)         (834)                  
                                          
     Retained earnings                              5,145              4,665
                                                                            
              Total stockholders' equity           14,336             14,723
                                                                            
Total                                             $44,030            $33,184
                                                   ======             ======

                 See notes to consolidated financial statements

<PAGE>

                     ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
               (In thousands, except share and per share amounts)
                                   (Unaudited)

                                                Three Months Ended September 30,

                                                    1998                    1997
                                                    ----                    ----

Total Revenue                                   $ 44,775                $ 31,914
             
Cost of sales and services                        38,211                  27,777
                                                 -------                 -------
Gross Profit                                       6,564                   4,137
                                              
Selling, general and administrative expenses       6,325                   3,439
                                                                           
Operating income                                     239                     698
                                              
Interest expense and other income (net)               95                      82
                                                                           
Income before provision for income taxes             144                     616
                                              
Provision for income taxes                            57                     236
                                                                           
Net income                                     $      87              $      380
                                                ========               =========

Net income per share:
         Basic                                     $0.02                   $0.09
                                                    ====                    ====
         Diluted                                   $0.02                   $0.09
                                                    ====                    ====

Weighted average shares outstanding:
         Basic                                 4,340,364               4,268,664
                                               =========               =========
         Diluted                               4,340,364               4,195,991
                                               =========               =========



                                                 Nine Months Ended September 30,

                                                  1998                    1997
                                                  ----                    ----

Total Revenue                                   $117,157                $ 90,745
              
Cost of sales and services                        99,833                  77,850
                                                                                
Gross Profit                                      17,324                  12,895
                                               
Selling, general and administrative expenses      16,364                  10,412
                                                                                
Operating income                                     960                   2,483
                                               
Interest expense and other income (net)              175                     680
                                                                                
Income before provision for income taxes             785                   1,803
                                               
Provision for income taxes                           305                     701
                                                                                
Net income                                           480            $      1,102
                                               =========             ===========

Net income per share:
         Basic                                     $0.11                   $0.34
                                                    ====                    ====
         Diluted                                   $0.11                   $0.34
                                                    ====                    ====

Weighted average shares outstanding:
         Basic                                 4,405,517               3,212,059
                                               =========               =========
         Diluted                               4,395,310               3,187,569
                                               =========               =========

                 See notes to consolidated financial statements
<PAGE>

<TABLE>
<CAPTION>
                     ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
               (In thousands, except share and per share amounts)
                                   (Unaudited)


<S>                                                                  <C>                     <C>
                                                                     Nine Months             Nine Months
                                                                        ended                   ended
                                                                     September 30,           September 30,
                                                                         1998                    1997

Net income                                                           $    480              $    1,102
                                                                  
Adjustments to reconcile net income to net cash
     provided by (used in) operating activities
     Gain of disposal of assets                                                                      
                                                                  
     Depreciation and amortization                                        573                     384
                                                                  
     Deferred taxes                                                                               190
                                                                  
     Deferred offering costs                                                                      412
                                                                  
Changes in assets and liabilities that provided (used) cash:
     Accounts receivable   trade, net                                  (4,911)                 (2,482)
                                                                  
     Accounts receivable   affiliates                                    (221)                    (87)
                                                                  
     Inventory                                                         (5,441)                   (143)
                                                                  
     Other current assets                                                   6                    (176)
                                                                  
     Other assets                                                        (159)                       
                                                                  
     Accounts payable                                                   3,800                     809
                                                                  
     Accrued expenses                                                   1,466                     325
                                                                  
     Income taxes payable                                                 (95)                   (552)
                                                                  
     Deferred service revenue                                              (9)                   (112)
                                                                                                     

         Net cash provided by (used in) operating
              activities                                               (4,511)                   (330)
                                                                  

Cash flows from investing activities:
     Capital Expenditures                                                (842)                   (467)
                                                                                                     

         Net cash used in investing activities:                          (842)                   (467)
                                                                  

Cash flows from financing activities:
     Net proceeds from issurance of common stock                           33                   8,706
                                                                  
     Purchase of treasury stock                                          (900)                       
     Net increase (decrease) in notes payable                           6,070                  (7,021)
                                                                                                     

         Net cash provided by (used in) financing activities:           5,203                   1,685
                                                                  

Net increase (decrease) in cash and cash
     equivalents                                                         (150)                    888
                                                                  
Cash and cash equivalents at beginning of period                        1,581                     229
                                                                                                     
Cash and cash equivalents at end of period                          $   1,431                $  1,117
                                                                     ========                 =======
Supplemental disclosures of cash flow information:
     Cash paid for interest                                        $      254               $     794
                                                                    =========                ========
     Cash paid for taxes                                           $      401               $     976
                                                                    =========                ========

<FN>
                 See notes to consolidated financial statements
</FN>
</TABLE>

<PAGE>

                     ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

               (In thousands, except share and per share amounts)

1.    BASIS OF PRESENTATION

     Allstar Systems, Inc. and subsidiaries  ("Allstar"') is engaged in the sale
and service of computer and  telecommunications  hardware and software products.
Allstar's wholly owned subsidiary, Stratasoft, Inc. creates and markets software
related to the integration of computer and telephone  technologies.  In January,
1997  Allstar  formed IT  Staffing  Inc.  to  provide  temporary  and  permanent
placement services of technical personnel. In March, 1998 Allstar formed Allstar
Systems Rio Grande,  Inc., a wholly owned subsidiary,  to conduct  operations in
West  Texas  and New  Mexico.  All  operations  of the  business  are  primarily
conducted from offices located in Houston, Dallas, Austin, McAllen, San Antonio,
and El Paso, Texas and in Albuquerque and Las Cruces,  New Mexico.  In addition,
Allstar conducts sales of computer products through  representatives  located in
Florida, Missouri and Oklahoma.

     A substantial  portion of Allstar's sales and services are authorized under
arrangements with product  manufacturers and Allstar's  operations are dependent
upon  maintaining  its approved status with such  manufacturers.  As a result of
these  arrangements and arrangements  with its customers,  gross profit could be
limited by the  availability  of products  or  allowance  for volume  discounts.
Furthermore,  net income  before  income  taxes  could be affected by changes in
interest  rates,  which  underlie  the credit  arrangements,  which are used for
working capital.

     The  condensed   consolidated  financial  statements  presented  herein  at
September  30, 1998 and for the three and nine months ended  September  30, 1998
are unaudited; however, all adjustments which are, in the opinion of management,
necessary  for a  fair  presentation  of  the  financial  position,  results  of
operations  and cash flows for the periods  covered  have been made and are of a
normal,  recurring nature.  Accounting  measurements at interim dates inherently
involve  greater  reliance on  estimates  than at  year-end.  The results of the
interim periods are not necessarily indicative of results for the full year. The
consolidated  balance  sheet  at  December  31,  1997 is  derived  from  audited
consolidated  financial statements but does not include all disclosures required
by generally accepted  accounting  principles.  Although management believes the
disclosures are adequate,  certain information and disclosures normally included
in the notes to the  financial  statements  has been  condensed  or  omitted  as
permitted  by  the  rules  and   regulations  of  the  Securities  and  Exchange
Commission.

     New  Accounting  Pronouncements.   On  January  1,  1998,  Allstar  adopted
Statement  of  Financial   Accounting  Standards  ("SFAS")  No.  130,  Reporting
Comprehensive  Income.  Comprehensive  income  is  a  more  inclusive  financial
reporting  methodology that includes disclosure of certain financial information
that  historically  has not been  recognized in the  presentation of net income.
SFAS No. 130 requires the reporting of  comprehensive  income in addition to net
income from  operations.  For the three and nine months ended September 30, 1998
and  1997,  Allstar  had no  items  of  comprehensive  income,  and as a  result
Allstar's reported net income was the same as comprehensive income.

     In March 1998, the Accounting  Standards  Executive  Committee ("ACSEC") of
the American  Institute  of Certified  Public  Accountants  ('AICPA')  reached a
consensus on Statement of position ("SOP") No. 98-1,  Accounting for the Cost of
Computer  Software  Developed  or Obtained  for  Internal  Use,  which  provides
guidance  on  accounting  for the costs of  computer  software.  SOP No. 98-1 is
effective  for fiscal years  beginning  after  December 15, 1998.  Management is
evaluating   what,   if  any,   impact  this  SOP  will  have  on  Allstar  upon
implementation.

     In April 1998,  the ACSEC of the AICPA reached a consensus on SOP No. 98-5,
Reporting on the Costs of Start-up Activities,  which provides that the costs of
such  activities  be expensed as incurred.  SOP No. 98-5 is effective for fiscal
years beginning after December 15, 1998.  Management is evaluating what, if any,
impact this SOP will have on Allstar upon implementation.

     In March 1998, the Emerging  Issues Task Force ("EITF") of the FASB reached
a consensus on Issue No. 97-11,  Accounting  for the Internal  Costs Relating to
Real  Estate  Property  Acquisitions,  which  requires  that  internal  costs of
identifying  and  acquiring  operating   properties  be  expensed  as  incurred.
Management is currently evaluating the impact this EITF, which was effective for
transactions on or after March 20, 1998, will have on Allstar.

2.    INCENTIVE STOCK PLANS

     In  September  1997  Allstar  adopted  the 1997  Incentive  Stock Plan (the
"Incentive  Plan") and the 1997  Non-Employee  Director  Stock  Option Plan (the
"Director Plan"). Under the Incentive Plan, Allstar's Compensation Committee may
grant up to  417,500  shares of common  stock,  which  have  been  reserved  for
issuance,  to certain key employees of Allstar.  The Incentive Plan provides for
the granting of incentive awards in the form of stock options, restricted stock,
phantom stock,  stock bonuses and cash bonuses in accordance with the provisions
of the plan. Additionally,  no shares may be granted after the tenth anniversary
of the Incentive Plan's adoption.  Allstar has reserved for issuance,  under the
Director Plan, 100,000 shares of common stock,  subject to certain  antidilution
adjustments.  The Director Plan provides for a one-time  option by newly elected
directors to purchase up to 5,000 common  shares,  after which each  director is
entitled to receive an option to purchase  up to 2,000  common  shares upon each
date of re-election to Allstar's  Board of Directors.  Options granted under the
Director Plan have an exercise  price equal to the fair market value on the date
of grant and  generally  expire ten years after the grant date.  As of September
30, 1998,  28,000 stock  option  grants have been issued to directors  under the
Director Plan. The exercise price of 20,000 of the directors'  options is $4.625
per share and 8,000  options  have an exercise  price of $3.69 per share.  As of
September 30, 1998  incentive  stock options  totaling  267,700 shares have been
issued to employees.  The exercise price of 80,000 of the stock option grants is
$6.00 per share,  100,300 of the stock option  grants have an exercise  price of
$4.625 per share and 87,400  options have an exercise  price of $3.75 per share.
The stock  option  grants will vest  ratably  over the five year period from the
date of issuance. In addition,  incentive awards in the form of restricted stock
were granted for 14,286  shares which will vest ratably over the two year period
ending July 7, 1999 and 63,500 shares which will vest ratably over the five-year
period ending May 20, 2003.

3.   LITIGATION

     Allstar is party to  litigation  and claims which  management  believes are
normal in the course of its operations; while the results of such litigation and
claims cannot be predicted with certainty, Allstar believes the final outcome of
such  matters  will not have a  materially  adverse  effect  on its  results  of
operations or financial position.



<PAGE>


     ITEM 2.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATION

                              ALLSTAR SYSTEMS, INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The  following  discussion  is  qualified in its entirety by, and should be
read in  conjunction  with,  the Company's  Consolidated  Financial  Statements,
including the Notes thereto.

OVERVIEW

     The Company is engaged in the  business  of  reselling  computer  hardware,
business telephone systems and software products and providing related services.
In  addition,  the  Company  derives  revenue  from  providing  IT  Services  to
purchasers of Computer  Products and other customers.  The Company operates from
offices in Houston,  Austin, El Paso, McAllen, San Antonio and Dallas, Texas and
in  Albuquerque  and Las Cruces,  New Mexico.  While all offices offer  computer
related products and services,  certain offices do not offer  telecommunications
products and services. The Company develops and markets CTI Software through its
wholly owned subsidiary Stratasoft,  Inc. To date, most of the Company's revenue
has been  derived  from  Computer  Products  sales.  During  the  quarter  ended
September  30,  1998,  Computer  Products  totaled  85.4% of  revenues  while IT
Services,  Telecom  Systems  and CTI  Software  totaled  7.9%,  5.1% and 1.6% of
revenues, respectively.

     The Company's  Computer  Products division sells a wide variety of computer
hardware  and  software  products  available  from over 600  manufacturers.  The
Company's products include desktop and laptop computers,  monitors, printers and
other peripheral  devices,  operating system and application  software,  network
products and  mid-range  host and server  systems.  The Company is an authorized
reseller  of  products  from a  number  of  leading  manufacturers  of  computer
hardware, software and networking equipment.

     Generally, Computer Products sales are made on a purchase order basis, with
few on-going  commitments to purchase from its customers.  On certain occasions,
large "roll-out" orders are received with delivery scheduled over a longer term,
such as six to nine months,  while normal  orders are received and  delivered to
the customers  usually  within  approximately  thirty days of the receipt of the
order. Because of this pattern of sales and delivery,  the Company normally does
not have a significant backlog of computer product sales.

     IT  Services  are  provided  by the Company  both in  conjunction  with and
separately from its Computer Products sales. The Company typically prices its IT
Services on a time and  materials  basis or under  fixed fee service  contracts,
depending on customer  preference and the level of service commitment  required.
In  markets  where  the  Company  does not  maintain  branch  offices,  it often
subcontracts for necessary technical personnel,  particularly where required for
larger scope or prolonged duration contracts.  The Company's IT Services include
information systems support,  authorized  warranty service,  hardware repair and
maintenance  services,  complex network  diagnostic  services,  end user support
services  and software  diagnostic  services.  The Company also offers  complete
outsourcing  of a  customer's  computer  and network  management  and  technical
support needs on a contract basis. In addition,  the Company provides  temporary
and permanent staffing services.

     To support  and  maintain  the  quality of these  services  and to maintain
vendor  accreditation  necessary to resell and service its  significant  product
lines, the Company's  technical staff participates in various  certification and
authorization   programs  sponsored  by  hardware   manufacturers  and  software
suppliers.  The Company's  ability to attract and retain qualified  professional
and technical  personnel is critical to the success of its IT Services business.
The most  significant  portion of the costs  associated  with the delivery of IT
Services  are  personnel  costs.  Therefore,  in  order  to be  successful,  the
Company's billable rates must be in excess of the personnel costs and its margin
is dependent upon  maintaining  high  utilization of its service  personnel.  In
addition,  the competition for high quality personnel has generally  intensified
causing the Company's, along with other IT Service providers, personnel costs to
increase. The Company's costs of goods and services includes the personnel costs
of its billable technical staff.

     While the Company has service contracts with its larger customers,  many of
these contracts are project based or are terminable on relatively short notice.

     Through the Telecom Systems  division,  the Company  markets,  installs and
services  business  telephone  systems,  including large PBX systems and smaller
"key systems"',  along with a variety of related products including hardware and
software  products for data and voice  integration,  wide area  connectivity and
telephone system networking, wireless communications and video conferencing.

     The Company develops and markets proprietary CTI Software, which integrates
business telephone systems and networked computer systems,  under the trade name
"Stratasoft."' Basic products offered by the Company are typically customized to
suit a customer's  particular needs and are often bundled with computer hardware
supplied by the Company at the customer's  request.  Stratasoft products include
software for call center  management,  both in-bound and  out-bound,  as well as
interactive voice response software.

     The  Company  believes  that  each  of its  four  separate  businesses  are
complementary  to each other and allow the  Company to offer a broader  range of
integrated products and services in order to satisfy its customers'  information
and  communication  technology  requirements  than many of its competitors.  The
Company's  strategy  is to  maintain  and  expand  its  relationships  with  its
customers by satisfying a greater portion of these requirements.

     A significant portion of the Company's selling,  general and administrative
expenses  relate to  personnel  costs,  some of which are variable and others of
which  are  relatively  fixed.  The  Company's   variable  personnel  costs  are
substantially  comprised of sales  commissions,  which are typically  calculated
based upon the Company's gross profit on a particular sales transaction and thus
generally  fluctuate with the Company's  overall gross profit.  The remainder of
the Company's selling,  general and administrative  expenses are relatively more
fixed and, while still somewhat variable,  do not vary with increases in revenue
as directly as do sales commissions.

     Inacom Corp.  ("Inacom")  is the largest  supplier of products  sold by the
Company.  In August 1996, the Company renewed its long-term  supply  arrangement
with Inacom and agreed to purchase at least 80% of its  Computer  Products  from
Inacom,  but only to the extent that such products are made  available  within a
reasonable  period of time at reasonably  competitive  pricing.  Inacom does not
carry  certain  product  lines sold by the  Company  and Inacom may be unable to
offer reasonable product  availability and reasonably  competitive  pricing from
time to time on those  product  lines that it carries.  The Company thus expects
that less than 80% of its total purchases will be made from Inacom, and that any
increase or decrease  over  historical  levels in the  percentage of products it
purchases  from Inacom  under the Inacom  agreement  will not have any  material
impact on the Company's results of operations.

     The  Company  manages  its  inventory  in order to  minimize  the amount of
inventory held for resale and the risk of inventory  obsolescence  and decreases
in market value. The Company attempts to maintain a level of inventory  required
to reach  only its near  term  delivery  requirements  by  relying  on the ready
availability  of products from its  principal  suppliers.  Manufacturers  of the
Company's major products  generally provide price protection,  which reduces the
Company's  exposure to decreases in prices.  In recent  periods,  the  Company's
Computer Product  suppliers  generally  allowed for returns of excess inventory,
which, on a limited basis, were made without material  restocking fees. However,
the Company's  significant suppliers recently revised their policies to restrict
the amount of returns allowed. It is expected that this change will increase the
Company's risks associated with inventory ownership. In particular,  the Company
will have greater risk  associated  with  inventory  obsolescence.  In addition,
certain   manufacturers   of  computer   products  have  generally  become  more
restrictive with respect to price  protection.  This will increase the Company's
risks,  as they relate to the value of  inventories.  Each of these  changes may
cause a reduction of gross margins realized on the sale of computer products.

     This Form 10-Q contains  forward-looking  statements that involve risks and
uncertainties.  The Company's actual results may differ  significantly  from the
results  discussed  in  the  forward-looking  statements.  Such  forward-looking
statements include risks and uncertainties.  Such risks and uncertainties,  many
of which are not within the control of the Company, may cause the actual results
to  differ  materially  from  the  results  discussed  in  the  forward  looking
statements,  including, but not limited to, the Company's ability to execute and
implement its plans and strategies  and /or control the economic  environment in
which the Company operates.

     The  following  table  sets  forth,  for  the  periods  indicated,  certain
financial data derived from the Company's consolidated  statements of operations
for the  three  months  ended  September  30,  1998 and 1997 and  indicates  the
percentage of total revenue for each item.
<TABLE>
<CAPTION>
                                                                  Three Months ended September 30,
                                                                       1998        1997
<S>                                                               <C>         <C>       <C>         <C> 
                                                                  Amount        %       Amount        %
Revenue(1)
   Computer Products                                             $38,217      85 4      $27,767     87 0
   IT Services                                                     3,533       7 9        2,696      8 5
   Telecom systems                                                 2,302       5 1          801      2 5
   CTI Software                                                      723       1 6          650      2 0
                                                                --------       ---     --------      ---
     Total revenue                                                44,775     100 0       31,914    100 0

Gross Profit
   Computer Products                                               4,484      11 7        2,879     10 4
   IT Services                                                     1,127      31 9          843     31 3
   Telecom Systems                                                   549      23 9          183     22 8
   CTI Software                                                      404      55 9          232     35 7
                                                                --------       ---     --------      ---
     Total Gross Profit                                            6,564      14 7        4,137     13 0

Selling, general and administrative expense                        6,325      14 1        3,439     10 8
                                                                --------       ---     --------      ---
Operating income                                                     239       0 5          698      2 2
Interest expense (net of other income)                                95       0 2           82      0 3
                                                                --------       ---     --------      ---
Income before provision for income taxes                             144       0 3          616      1 9
Provision (benefit) for income taxes                                  57       0 1          237      0 7
                                                                --------       ---     --------      ---
Net Income                                                       $    87       0 2     $    380      1 2
                                                                 =======       ===     ========      ===

Earnings per share                                                 $0 02                  $0 09
                                                                    ====                   ====

   Weighted average shares outstanding                         4,340,364              4,268,664
                                                               =========              =========

<FN>
(1)  Percentages  shown are  percentages of total  revenue,  except gross profit
     percentages,  which  represent  gross  profit  by each  business  unit as a
     percentage for each such unit.
</FN>
</TABLE>

Three Months Ended September 30, 1998 Compared To Three Months Ended September
30, 1997

     TOTAL REVENUE.  Total revenue increased by $12.9 million (40.3%) from $31.9
million  in 1997  compared  to $44.8  million  in 1998.  Revenue  from  Computer
Products  increased by $10.5 million (37.7%) from $27.8 million in 1997 to $38.2
million in 1998. Revenue from Computer Products as a percentage of total revenue
decreased 1.6% from 87.0% in 1997 to 85.4% in 1998.  Approximately  $2.5 million
of the increase in Computer  Products  from the prior period was realized in new
offices  while $7.9  million was  realized in offices  existing  during the 1997
period. Revenue from IT Services increased $837,000 (31.0%) from $2.7 million in
1997 to $3.5 million in 1998 because of the continued  expansion of its billable
technical  staff,  together  with the addition of new  customers.  Approximately
one-half of the increase in IT Services revenue was realized in new offices with
the other half being  realized in offices  existing in the 1997 period.  Revenue
from IT Services as a percentage of total revenue decreased from 8.5% in 1997 to
7.9% of total  revenues  in 1998 due to the higher  rates of growth  realized in
Computer Products and Telecom Systems. Revenue from Telecom Systems increased by
$1.5  million  (187.4%)  from  $801,000  in 1997 to $2.3  million  in 1998.  The
increase in Telecom  Systems  revenue was  primarily the result of the Company's
ability  to obtain  new orders  for  system  installations  from new  customers.
Revenue from Telecom  Systems as a percentage  of total revenue  increased  from
2.5% in 1997 to 5.1% in 1998. CTI Software revenue  increased by $73,000 (11.2%)
from $650,000 in 1997 to $723,000 in 1998. The increase in CTI Software revenues
was due to the  installation  of a greater  number of  systems in 1998 than were
installed in 1997. Revenue from CTI Software,  as a percentage of total revenue,
decreased  from 2.0% in 1997 to 1.6% in 1998  because  the  growth  rates of the
Company's  other  divisions were higher than the 11.2% increase  achieved by CTI
Software.

     GROSS  PROFIT.  Gross profit  increased  by $2.4 million  (58.6%) from $4.1
million in 1997 to $6.6 million in 1998 and gross margin increased from 13.0% in
1997 to 14.7% in 1998.  The gross margin for Computer  Products  increased  from
10.4% in 1997 to 11.7% in 1998,  which was  primarily  the  result of lower unit
costs on the products  purchased relative to their selling prices which reflects
intensified  competition  among the  Company's  suppliers and the ability of the
Company's  sales force to obtain  marginally  higher  prices in the 1998 period.
While the  Company's  sales  force has been able to  increase  the gross  margin
realized on Computer Products revenues,  in certain  instances,  the Company has
been  providing  a higher  level of service to its  customers.  The  increase in
services  provided  has  enhanced  the  margin  realized  while  increasing  the
Company's selling,  general and  administrative  costs. The gross profit from IT
Services  increased  33.8% from $843,000 in 1997 to $1.1 million in 1998.  Gross
margin increased slightly from 31.3% in 1997 to 31.9% in 1998. While the Company
incurred  higher rates of compensation  for its billable  technical staff during
the 1998 period,  the higher rates were offset by a greater  utilization rate in
1998,  resulting in a slight decrease in labor costs overall. The Company treats
its costs associated with its technical staff as part of the cost of sales. When
higher utilization rates are realized,  cost of sales, expressed as a percentage
of revenues,  decreases. The wage costs of the Company's billable staff continue
to be higher in the 1998 period compared to the 1997 period, due to the relative
scarcity of qualified  technical staff in the computing services  industry.  The
gross profit for Telecom Systems sales increased $366,000 (200%) from 183,000 in
1997 to 549,000 in 1998.  Gross margin improved  nominally by 1.1% but continues
to reflect  less that  industry  norms for gross profit  realization.  The gross
margin for CTI Software increased from 35.7% in 1997 to 55.9% in 1998 due to the
company's  ability to realize higher prices for its CTI products relative to the
hardware and installation costs than in the 1997 period.

     SELLING,  GENERAL  AND  ADMINISTRATIVE   EXPENSES.   Selling,  general  and
administrative  expenses  increased by $2.9 million (83.9%) from $3.4 million in
1997 to $6.3 million in 1998. As a percentage of total revenue, selling, general
and administrative expenses increased from 10.8% in 1997 to 14.1% in 1998. Those
components  of selling,  general and  administrative  expenses  which  increased
significantly,  as a  percentage  of revenues,  were  personnel  related  costs,
general expenses related to opening new offices and expanding  existing offices.
In the 1998 period the Company operated offices in El Paso, San Antonio, McAllen
and New Mexico which did not exist in the 1997 period. In addition,  the Company
has  commenced  selling  through its direct sales  representatives  in Oklahoma,
Missouri and Florida.  Throughout  1998 and especially  during the 1998 quarter,
when compared to the 1997 period,  the Company employed a significant  number of
new employees in its new offices,  as well as increases in its Austin and Dallas
office staffs. Since these employees generally receive compensation prior to the
realization  of  significant  revenues  the  amount  of  selling,   general  and
administrative  expenses  increased  both  as to  amount  and  as a  percent  of
revenues.  The Company also  increased  the number of  administrative  employees
relative  to the  increases  in revenues in order to enhance its ability to meet
the  requirements  expected  of revenue  growth and  increases  in the number of
employees  and of the number of offices  operated by the Company.  Most notably,
the Company upgraded its computing  systems to enhance the speed and capacity of
its systems.  During the 1998  quarter the Company  maintained a higher level of
sales and  administrative  personnel  than in the 1997 period.  The costs of the
personnel  were  greater,  as a percentage  of revenue,  because the increase in
personnel exceeded the increase in revenues realized.

     The Company has opened the new offices and  employed  additional  sales and
administrative  personnel with the expectation  that revenues would be increased
commensurate  with the increases in sales and  administrative  personnel.  While
revenues  increased in excess of 40% and gross profit increased by over 58% over
the prior year period,  sales and  administrative  personnel  costs increased by
approximately 85% over the prior period. The Company believes that revenues will
increase over time to restore the balance  between the higher level of personnel
costs and revenues.  However,  such forward looking statements include risks and
uncertainties  many of which are not within the control of the Company and which
may cause actual results to differ materially from the expectations expressed in
such statements.  The risks and  uncertainties,  include but are not limited to,
the Company's ability to realize such expectations in the highly competitive and
rapidly changing businesses in which it is engaged,  the Company's reliance upon
its  suppliers  and  product  availability,  the  Company's  reliance on its key
customers and the  establishment  of new customer  relationships to increase its
revenues.  There can be no  assurance  that the Company  will  realize  revenues
commensurate with its increases in selling and administrative expenses.

     OPERATING  INCOME.  Operating  income  decreased  by $459,000  (65.8%) from
$698,000  in 1997 to  $239,000  in 1998 due,  principally,  to  higher  selling,
general and administrative expenses.  Operating income decreased as a percentage
of total revenue from 2.2% in 1997 to 0.5% in 1998. Contributing to the decrease
in operating income were operating losses incurred in newly opened offices.  The
combined  pretax losses  incurred in the operation of newly opened  offices were
approximately  $570,000 during the three months ended September 30, 1998,  while
similar losses were $65,000 in the 1997 period..

     INTEREST  EXPENSE  (NET OF OTHER  INCOME).  Interest  expense (net of other
income) increased $13,000 from $82,000 during 1997 period compared to $95,000 in
the 1998 period.  This reflects a higher level of the Company's  short-term debt
during the 1998 period when compared to 1997 and lower interest rates during the
1998 period when compared to 1997.

     NET INCOME. Net income, after a provision for income taxes totaling $57,000
(reflecting  an effective  tax rate of 38.5% in 1997 compared to 39.6% in 1998),
decreased by $293,000 from $380,000 in 1997 to $87,000 in 1998.

     The  following  table  sets  forth,  for  the  periods  indicated,  certain
financial data derived from the Company's consolidated  statements of operations
for the nine  months  ended  September  30,  1998 and  1997  and  indicates  the
percentage of total revenue for each item.
<TABLE>
<CAPTION>
                                                                  Nine months ended September 30,
<S>                                                                    <C>         <C> 
                                                                       1998        1997
                                                              Amount        %       Amount    %
Revenue(1)
   Computer Products                                            $100,417      85.7      $78,620     86.6
   IT Services                                                     9,487       8.1        7,413      8.2
   Telecom systems                                                 5,192       4.4        3,038      3.4
   CTI Software                                                    2,061       1.8        1,674      1.8
     Total revenue                                               117,157     100.0       90,745    100.0

Gross Profit
   Computer Products                                              11,724      11.7        8,602     10.9
   IT Services                                                     3,142      33.1        2,725     36.8
   Telecom Systems                                                 1,508      29.0          820     27.0
   CTI Software                                                      950      46.1          748     44.7
     Total Gross Profit                                           17,324      14.8       12,895     14.2

Selling, general and administrative expense                       16,364      14.0       10,412     11.5
Operating income                                                     960       0.8        2,483      2.7
Interest expense (net of other income                                175       0.1          680      0.7
Income before provision for income taxes                             785       0.7        1,803      2.0
Provision (benefit) for income taxes                                 305       0.3          701      0.8
Net Income                                                      $    480       0.4   $    1,102      1.2

Earnings per share                                                 $0.11                  $0.34

   Weighted average shares outstanding                         4,405,517              3,212,059

<FN>
(1)  Percentages  shown are  percentages of total  revenue,  except gross profit
     percentages  which  represent  gross  profit  by  each  business  unit as a
     percentage for each such unit.
</FN>
</TABLE>

<PAGE>


Nine Months Ended September 30, 1998 Compared To Nine Months Ended September 30,
1997.

     TOTAL REVENUE.  Total revenue increased by $26.4 million (29.1%) from $90.7
million in 1997  compared  to $117.2  million  in 1998.  Revenue  from  Computer
Products increased by $21.8 million (27.7%) from $78.6 million in 1997 to $100.4
million in 1998. Revenue from Computer Products as a percentage of total revenue
decreased 0.9% from 86.6% in 1997 to 85.7% in 1998.  Approximately  $5.0 million
of the increase in Computer  Products  from the prior period was realized in new
offices  while $16.8  million was realized in offices  existing  during the 1997
period.  Revenue  from IT Services  increased  $2.1  million  (28.0%)  from $7.4
million in 1997 to $9.5  million in 1998 because of the  continued  expansion of
its billable  technical  staff,  together with the addition of new customers and
the opening of new offices,  approximately  $800,000 of the increase between the
1997 period and the 1998 period was attributable to new offices. Revenue from IT
Services as a percentage of total revenue decreased from 8.2% in 1997 to 8.1% of
total revenues in 1998.  Revenue from Telecom Systems  increased by $2.2 million
(70.9%)  from $3.0  million in 1997 to $5.2  million in 1998.  The  increase  in
Telecom  Systems  revenue was primarily  the result of the Company's  ability to
obtain new orders for system  installations  from new customers and the addition
of sales  personnel.  Revenue  from  Telecom  Systems as a  percentage  of total
revenue  increased  from  3.4% in 1997 to 4.4% in  1998.  CTI  Software  revenue
increased by $387,000 (23.2%) from $1.6 million in 1997 to $2.1 million in 1998.
The  increase in CTI  Software  revenues  was the result of the  addition of new
customers and expanded marketing.  Revenue from CTI Software, as a percentage of
total revenue, remained at 1.8% in both periods.

     GROSS  PROFIT.  Gross profit  increased by $4.4 million  (34.3%) from $12.9
million in 1997 to $17.3 million in 1998 and gross margin  increased  from 14.2%
in 1997 to 14.8% in 1998. The gross margin for Computer Products  increased from
10.9% in 1997 to 11.7% in 1998,  which was  primarily  the  result of lower unit
costs on the products  purchased relative to their selling prices which reflects
intensified  competition  among the  Company's  suppliers and the ability of the
Company's sales force to obtain marginally higher prices in the 1998 period. The
gross profit from IT Services  increased 15.3% from $2.7 million in 1997 to $3.1
million in 1998.  Gross margin for IT Services  decreased  from 36.8% in 1997 to
33.1% in 1998.  This  decrease in gross margin was primarily  attributable  to a
lower utilization rate, as well as, higher  compensation rates for the Company's
billable technical staff, leading to higher labor costs as a percent of revenue.
The Company treats its costs  associated with its technical staff as part of the
cost of sales. Due to the relatively fixed nature of technical staff costs, when
lower  than  expected  revenues  are  realized,  cost of sales,  expressed  as a
percentage of revenues, increases proportionately.  Additionally, the wage costs
of the Company's billable staff are generally higher in the 1998 period compared
to the 1997 period, due to the relative scarcity of qualified technical staff in
the computing  services  industry.  Gross profit for Telecom  Systems  increased
$688,000  (83.9%) from $820,000 in the 1997 period to $1.5 million in 1998.  The
gross margin for Telecom  Systems sales increased from 27.0% in 1997 to 29.0% in
1998,  reflecting  modest  reduction in the installation  costs,  expressed as a
percentage of revenues.  The gross margin for CTI Software  increased from 44.7%
in 1997 to 46.1% in the 1998 due to  improvement  in the pricing of CTI software
products.

     SELLING,  GENERAL  AND  ADMINISTRATIVE   EXPENSES.   Selling,  general  and
administrative  expenses increased by $6.0 million (57.2%) from $10.4 million in
1997 to $16.4  million  in 1998.  As a  percentage  of total  revenue,  selling,
general and  administrative  expenses  increased  from 11.5% in 1997 to 14.0% in
1998. Those  components of selling,  general and  administrative  expenses which
increased  significantly,  as a percentage  of  revenues,  were  commissions  in
Computer Products,  personnel related costs, general expenses related to opening
new  offices  and  expanding  existing  offices  and costs  associated  with the
settlement  of a law suit.  The  increase  in  commission  expense  in  Computer
Products  was due to an increase in gross margin  during the 1998 period  versus
the 1997 period and  payments of "unearned  commissions'  in the form of minimum
commissions  guaranteed  to newly hired sales  personnel  during their  start-up
period.  During the 1998 period,  when compared to the 1997 period,  the Company
employed a significant  number of new employees in its San Antonio,  El Paso and
New Mexico offices, as well as increases in its Austin and Dallas office staffs.
Since  the new  employees  in all  offices  received  compensation  prior to the
realization  of  significant  revenues  the  amount  of  selling,   general  and
administrative  expenses  increased  both  as to  amount  and  as a  percent  of
revenues.  The Company also  increased  the number of  administrative  employees
relative  to the  increases  in revenues in order to enhance its ability to meet
the  requirements  of  revenue  growth  and  increases  in the number of offices
operated by the  Company.  Most  notably,  the Company  upgraded  its  computing
systems to enhance  the speed and  capacity of its  systems.  During the upgrade
significant  overtime  and other costs were  incurred  as the system  change was
implemented. Some of these excess costs may continue into subsequent periods. In
addition,  during the 1998  period the  Company  incurred  costs  related to the
opening of offices in San Antonio,  McAllen and El Paso,  Texas and  Albuquerque
and Las Cruces,  New Mexico without realizing  revenues  commensurate with those
expenses.

     OPERATING  INCOME.  Operating income decreased by $1.5 million (61.3%) from
$2.5  million in 1997 to  $960,000  in 1998 due to higher  selling,  general and
administrative  expenses.  Operating  income  decreased as a percentage of total
revenue  from  2.7% in 1997 to 0.8% in 1998.  Contributing  to the  decrease  in
operating  income were operating  losses incurred in newly opened  offices.  The
combined  pretax losses  incurred in the operation of newly opened  offices were
approximately $553,000 compared to $65,000 during the 1997 period..

     INTEREST  EXPENSE  (NET OF OTHER  INCOME).  Interest  expense (net of other
income) decreased $505,000 from $680,000 during 1997 period compared to $175,000
in the 1998 period. This reflects the reduced level of the Company's  short-term
debt  during  the  1998  period  when  compared  to  1997.   The  reduction  was
accomplished  by applying all of the net proceeds  from the sale of common stock
in July, 1997 to the repayment of the Company's debt.

     NET  INCOME.  Net  income,  after a  provision  for income  taxes  totaling
$305,000  (reflecting an effective tax rate of 38.9% in 1997 and 38.9% in 1998),
decreased by $622,000 from $1.1 million in 1997 to $480,000 in 1998.

Liquidity and Capital Resources

     The  Company's  working  capital  was $12.8  million  and $12.0  million at
December 31, 1997 and  September  30, 1998,  respectively.  As of September  30,
1998, the Company had borrowing  capacity under the Company's credit facility of
$26.1 million of which $22.3 million was used under the Company's floor plan and
revolving credit facility.  Unused borrowing  capacity at September 30, 1998 was
$3.8 million.

Cash Flow

     Operating  activities  used net cash  totaling  $4,511,000  during the nine
months ended September 30, 1998.  Operating  activities used net cash during the
nine months ended  September  30, 1998 because of increases in  inventories  and
accounts receivable which were partially offset by increases in accounts payable
and accrued expenses.  Net income and depreciation  provided cash of $953,000 in
the nine months ended September 30, 1998 versus $1.5 million in the 1997 period.
The increase in inventories was primarily the result of increases in inventories
staged for  delivery to  customers  and  inventories  being  stocked for certain
customers.  Of the $5.4 million  increase during the nine months ended September
30, 1998, $3.2 million related to an increase in inventories staged for delivery
to  customers,   $1.6  million  of  the  increase  relates  to  higher  stocking
requirements  imposed by customers  and the balance was due to a higher level of
sales activities.

     Investing  activities  used cash totaling  $842,000  during the nine months
ended  September 30, 1998.  The Company's  investing  activities  that used cash
during this period was  primarily  related to capital  expenditures.  During the
next  twelve  months,  the  Company  expects to incur  capital  expenditures,  a
majority  of which is expected to be incurred  for  leasehold  improvements  and
other capital expenditures in connection with the consolidation of its warehouse
facilities  into  a  single   facility  in  the  Dallas-Fort   Worth  area,  the
refurbishment of its Dallas branch office and the opening of branch offices. The
actual  amount and timing of such capital  expenditures  may vary  substantially
depending upon, among other things, the actual facilities selected, the level of
expenditures  required  to render  the  facilities  suitable  for the  Company's
purposes and the terms of lease arrangements pertaining to the facilities.

     Financing  activities  provided cash  totaling $6.1 million from  borrowing
under the Company's  credit  facility during the nine months ended September 30,
1998.  The Company  expended  $900,000 for the purchase of treasury  stock to be
used for employee incentive stock plans. The Company issued restricted shares to
certain of its employees and charged  expense and increased  paid in capital for
$33,000 during the nine months ended September 30, 1998 relating to the issuance
of such shares.

<PAGE>

Asset Management

     The Company had trade  accounts  receivable,  net of allowance for doubtful
accounts,  of $28.7  million at September  30,  1998.  The number of days' sales
outstanding  in trade accounts  receivable was 53 days,  which is slightly lower
than the days  outstanding of the prior quarter.  The number of days outstanding
continues  to reflect,  improved  but still,  slower than normal  payment by the
Company's  customers  during the three months ended September 30, 1998. Bad debt
expense as a percentage  of total  revenue for the three months ended  September
30,  1998 was 0.2%,  which was 0.1%  less  than bad debt  expense  for the three
months ended September 30, 1997. The Company's  allowance for doubtful accounts,
as a percentage of trade accounts receivable,  was 1.0% at December 31, 1997 and
1.7% at  September  30, 1998.  Inventory  turnover for the three and nine months
ended  September  30, 1998 was 12.6 times,  and 16.4  times,  respectively.  The
decline in inventory  turnover  during the three months ended September 30, 1998
was the result of having a high level of staged  inventory as of  September  30,
1998.

Current Debt Obligations

     Historically,  the Company has satisfied its cash requirements  principally
through borrowings under its lines of credit and through operations. The Company
maintains a cash position sufficient to pay only its immediately due obligations
and expenses. When the amount of cash available falls below its immediate needs,
the  Company  requests  advances  under a credit  facility  provided by Deutsche
Financial Services ("DFS Facility")

     The total credit available under the DFS Facility is $30.0 million, subject
to borrowing base  limitations  which are generally  computed as a percentage of
various classes of eligible accounts receivable and qualifying inventory. Credit
available  under the DFS  Facility for floor plan  financing  of inventory  from
approved manufacturers (the "Inventory Line") is $20.0 million. Available credit
under the DFS Facility,  net of Inventory Line advances, is $10.0 million, which
is used by the Company  primarily  to carry  accounts  receivable  and for other
working capital and general corporate purposes (the "Accounts Line"). Borrowings
under the Accounts Line bear interest at the  fluctuating  prime rate minus 1.0%
per annum.  Under the Inventory Line, DFS pays the Company's  inventory  vendors
directly, generally in exchange for negotiated financial incentives.  Typically,
the financial  incentives received are such that DFS does not charge interest to
the Company until 40 days after the  transaction is financed,  at which time the
Company is  required  to either  pay the full  invoice  amount of the  inventory
purchased  from  corporate  funds or to borrow under the  Accounts  Line for the
amount due to DFS.  Inventory  Line  advances  not paid within 40 days after the
financing  date bear  interest  at the  fluctuating  prime rate plus  5.0%.  For
purposes of  calculating  interest  charges the minimum prime rate under the New
DFS Facility is 7.00%.  DFS may change the computation of the borrowing base and
to disqualify accounts receivable upon which advances have been made and require
repayment  of such  advances  to the  extent  such  disqualifications  cause the
Company's borrowings to exceed the reduced borrowing base.

     The DFS Facility is  collateralized by a security interest in substantially
all of the  Company's  assets,  including  its accounts  receivable,  inventory,
equipment and bank accounts.  Collections of the Company's  accounts  receivable
are required to be applied through a lockbox  arrangement to repay  indebtedness
to DFS; however, DFS has amended the lockbox agreement to make such arrangements
contingent upon certain financial ratios.  Provided the Company is in compliance
with its debt to tangible net worth  covenant,  the Company has discretion  over
the use and  application of the funds  collected in the lockbox.  If the Company
exceeds that financial  ratio,  DFS may require that lockbox payments be applied
to reduce the Company's  indebtedness to DFS. If in the future DFS requires that
all  lockbox  payments  be  applied to reduce the  Company's  indebtedness,  the
Company  would be required  to seek  funding  from DFS or other  sources to meet
substantially all of its cash needs.

     The Company has a $2.0 million credit facility with IBM Credit  Corporation
(the " IBMCC  Facility") for the purchase of IBM branded  inventory from certain
suppliers.  Advances under the IBMCC Facility are typically interest free for 30
days after the  financing  date for  transactions  in which  adequate  financial
incentives  are  received  by IBMCC  from the  vendor.  Within 30 days after the
financing date, the full invoice amount for inventory  financed through IBMCC is
required to be paid by the Company.  Amounts  remaining  outstanding  thereafter
bear interest at the fluctuating  prime rate (but not less than 6.5%) plus 6.0%.
IBMCC retains a security interest in the inventory financed.  The IBMCC Facility
is immediately terminable by either party by written notice to the other.

     Under the DFS  Facility  the Company is required to maintain (i) a tangible
net worth of $10.0  million,  (ii) a ratio of debt  minus  subordinated  debt to
tangible  net worth of 4 to 1 and (iii) a ratio of  current  tangible  assets to
current liabilities of not less than 1.4 to 1.

     Both the IBMCC  Facility  and the DFS  Facility  prohibit  the  payment  of
dividends unless consented to by the lender.



PART II. OTHER INFORMATION

ITEM 1.           LEGAL PROCEEDINGS

     On July 13, 1997, a former customer brought suit against the Company in the
152nd Judicial  District Court of Harris County,  Texas.  The plaintiff  alleges
that the  Company  failed to provide  and  complete  promised  installation  and
configuration  of certain  computer  equipment  within the time  promised by the
Company.  Based on these allegations,  the plaintiff sued for breach of contract
and other statutory violations, seeking actual monetary damages of approximately
$3 million and treble damages under the Texas  Deceptive Trade Practices Act. On
September 17, 1998, the Company  settled suit with the Company paying $70,000 to
the plaintiff.

     The  Company  is party to other  litigation  and  claims  which  management
believes are normal in the course of its  operations;  while the results of such
litigation and claims cannot be predicted with certainty,  The Company  believes
the final outcome of such matters will not have a materially  adverse  effect on
its results of operations or financial position.


                                   SIGNATURES

     Pursuant to the  requirements  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.


                              Allstar Systems, Inc.

November 4, 1998                      By:      /s/ JAMES H. LONG
                                               -----------------
Date                         James H. Long, Chief Executive Officer



November 4, 1998                       By:      /s/ DONALD R. CHADWICK
                                               ----------------------

Date                         Donald R. Chadwick, Chief Financial Officer