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 March 31, 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                                       76-0062751
     (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 ____ No X

              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 March 31, 1998, 4,454,411 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)

                                                       March 31,   December 31,
                                                         1998          1997
                                                      (Unaudited)
ASSETS
Current assets:
     Cash and cash equivalents
         Restricted cash                             $       -       $      280

         Cash                                              3,508          1,301
                                                       ---------       --------
              Total cash and cash equivalents              3,508          1,581

     Accounts receivable - trade, net                     20,701         23,759

     Accounts receivable - affiliates                        527            434

     Inventory                                             6,042          4,700

     Deferred taxes                                          212            212

     Other current asset                                     428            404
                                                       ---------      ---------
              Total current assets                        31,418         31,090

Property and equipment                                     2,004          2,013

Other assets                                                 253             81
                                                       ---------     ----------
Total                                                   $ 33,675       $ 33,184
                                                         =======        =======

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
     Notes payable                                     $   4,821      $   1,572

     Accounts payable                                     10,290         12,805

     Accrued expenses                                      3,528          3,565

     Income taxes payable                                   (194)            82

     Deferred service revenue                                188            242
                                                       ---------     ----------
              Total current liabilities                   18,633         18,266

     Deferred Credit - Stock warrants                        195            195
                                                       ---------     ----------
Total liabilities                                      $  18,828      $  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 4,454,411 shares
       issued and outstanding on December
       31, 1997 and March 31, 1998, respectively              45             45
     Additional paid in capital                           10,013         10,013

     Retained earnings                                     4,789          4,665
                                                       ---------     ----------
              Total stockholders' equity                  14,847         14,723
                                                       ---------     ----------
Total                                                    $33,675        $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 March 31,

                                                            1998         1997
                                                            ----         ----

Total Revenue                                             $ 32,542     $ 26,593

Cost of sales and services                                  27,732       22,762

Gross Profit                                                 4,810        3,831

Selling, general and administrative expenses                 4,576        3,135
                                                          --------     --------
Operating income                                               234          696
                ---------------------------------
Interest expense and other income (net)                         28          289
                                                        ----------    ---------
Income before provision for income taxes                       206          407

Provision for income taxes                                      82          154
                                                        ----------    ---------
Net income                                              $      124   $      253
                                                         =========    =========

Net income per share:
         Basic                                               $0.03        $0.09
                                                              ====         ====
         Diluted                                             $0.03        $0.09
                                                              ====         ====

Weighted average shares outstanding:
         Basic                                           4,454,411    2,675,000
                                                         =========    =========
         Diluted                                         4,457,106    2,675,000
                                                         =========    =========


                 See notes to consolidated financial statements


<PAGE>


                     ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)
                                                      Three Months  Three Months
                                                         ended           ended
                                                        March 31,      March 31,
                                                          1998            1997

Net income                                            $    124        $    253

Adjustments to reconcile net income to net cash
     provided by (used in) operating activities
     Gain of disposal of assets                            ---             ---

     Depreciation and amortization                         167             125

     Deferred taxes                                        ---             ---

Changes in assets and liabilities that provided (used) cash:
     Accounts receivable - trade, net                    3,058            (676)

     Accounts receivable - affiliates                      (93)           (119)

     Inventory                                          (1,342)           (272)

     Other current assets                                  (24)            ---

     Other assets                                         (177)            (40)
     Accounts payable                                   (2,515)          1,896

     Accrued expenses                                      (37)            (71)

     Income taxes payable                                 (276)            136

     Deferred service revenue                              (54)            (69)
                                                        ----------    ---------

         Net cash provided by (used in)
             operating activities                       (1,169)         (1,163)


Cash flows from investing activities:
     Capital Expenditures                                 (153)           (109)

     Proceeds from sale of fixed assets                    ---             ---
                                                       ----------    ---------

         Net cash used in investing activities:           (153)           (109)


Cash flows from financing activities:
     Net increase (decrease) in notes payable            3,249             436
                                                       ----------    ---------

         Net cash provided by (used in) financing
              activities:                                3,249             436


Net increase (decrease) in cash and cash
     equivalents                                         1,927           1,490

Cash and cash equivalents at beginning of period         1,581             229
                                                      --------        --------
Cash and cash equivalents at end of period           $   3,508        $  1,719
                                                      ========         =======
Supplemental disclosures of cash flow information:
     Cash paid for interest                        $        46       $     403
                                                    ==========        ========
     Cash paid for taxes                            $      348        $  1,032
                                                     =========         =======

                 See notes to consolidated financial statements


<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 and El Paso,
Texas and in Albuquerque and Las Cruces, New Mexico.

     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 March
31,  1998 and for the  three-month  period  ended  March  31,  1997 and 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,  the Company  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 months ended March 31, 1998 and 1997, the
Company  had no items of  comprehensive  income,  and as a result the  Company'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  ('AICPN')  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 the  Company  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 the Company 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 the Company.

<PAGE>

2.   INCENTIVE STOCK PLANS

     In  September  1996  Allstar  adopted  the 1996  Incentive  Stock Plan (the
"Incentive  Plan") and the 1996  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 March 31,
1998,  20,000  stock  option  grants  have been  issued to  directors  under the
Director Plan. The exercise price of the directors' options is $4.625 per share.
As of March 31, 1998 incentive stock options  totaling  180,300 shares have been
issued to employees.  The exercise price of 80,000 of the stock option grants is
$6.00 per share and 100,300 of the stock option grants have an exercise price of
$4.625 per share.  The stock option  grants will vest ratably over the five year
period from the date of issuance. In addition, an incentive award in the form of
restricted  stock was granted for 14,286 shares which will vest ratably over the
two year period ending July 7, 1999.

3.   LITIGATION

     On July 13, 1996, 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  is suing  for  breach of
contract and other statutory  violations and is seeking actual monetary  damages
of  approximately  $3 million and treble damages under the Texas Deceptive Trade
Practices Act. The Company is unable to estimate the range of possible  recovery
by the  plaintiff  because the suit is still in the early  stages of  discovery.
However, the Company is vigorously defending the action.

     Allstar 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,  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  and  Dallas,  Texas  and  in
Albuquerque,  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 March 31, 1998,
Computer  Products totaled 85.3% of revenues while IT Services,  Telecom Systems
and CTI Software totaled 8.9%, 3.3% and 2.5% of revenues, respectively.

     The Company's  Computer  Products division sells a wide variety of computer
hardware  and  software  products  available  from  over 600  manufacturers  and
suppliers.   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  participate 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 of  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.


<PAGE>

     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 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 1997, 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 new 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 addition,  its suppliers generally
allow for  returns of excess  inventory,  which,  on a limited  basis,  are made
without material restocking fees.

     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 it operates.

<PAGE>

     The  following  table  sets  forth,  for  the  periods  indicated,  certain
financial data derived from the Company's consolidated  statements of operations
and indicates the percentage of total revenue for each item.


                                             Three months ended March 31,
                                                 1998                   1997
                                             Amount      %    Amount          %
Revenue(1)
   Computer Products...................     $27,752    85.3     $23,222    87.3
   IT Services.........................       2,892     8.9       1,991     7.5
   Telecom systems.....................       1,072     3.3         953     3.6
   CTI Software........................         826     2.5         427     1.6
                                              -----    ----       -----    ----
     Total revenue.....................      32,542   100.0      26,593   100.0

Gross Profit
   Computer Products...................       3,352    12.8       2,555    11.0
   IT Services.........................         975    33.7         782    39.3
   Telecom Systems.....................         172    16.0         303    31.9
   CTI Software........................         311    37.7         191    44.8
                                              -----    ----       -----    ----
     Total Gross Profit................       4,810    14.8       3,831    14.4

Selling, general and
     administrative expense............       4,576    14.1       3,135    11.8
                                              -----    ----       -----    ----
Operating income.......................         234     0.7         696     2.6
Interest expense (net of other income..          28     0.1         289     1.1
                                              -----    ----       -----    ----
Income before provision for
     income taxes                               206     0.6         407     1.5
Provision (benefit) for
     income taxes......................          82     0.3         154     0.6
                                              -----    ----       -----    ----
Net Income.............................    $    124     0.4    $    253     1.0
                                           ========     ===    ========     ===

Earnings per share.....................       $0.03                $0.09
                                               ====                 ====

   Weighted average shares outstanding.   4,457,107            2,675,000
                                           =========            =========

(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.

Three Months Ended March 31, 1998 Compared To Three Months Ended March 31, 1997

     TOTAL REVENUE.  All of the Company's business units increased revenues over
the prior year's  comparable  period.  Total  revenue  increased by $5.9 million
(22.4%) from $26.6 million in 1997  compared to $32.5  million in 1998.  Revenue
from Computer  Products  increased by $4.5 million (19.5%) from $23.2 million in
1997 to $27.8 million in 1998. Revenue from Computer Products as a percentage of
total revenue decreased 2.0% from 87.3% in 1997 to 85.3% in 1998.  Approximately
$1.6  million of the  increase in Computer  Products  from the prior  period was
realized in new offices  while $2.9 million was realized in offices  existing in
1997.  Revenue from IT Services  increased $901,000 (45.3%) from $2.0 million in
1997 to $2.9 million in 1998 because of the continued  expansion of its billable
technical  staff,  together  with an  emphasis on higher  level  services to the
Company's existing customers and the addition of new customers.  Revenue from IT
Services as a percentage of total revenue increased from 7.5% in 1997 to 8.9% of
total  revenues in 1998.  Revenue  from  Telecom  Systems  increased by $119,000
(12.5%) from $953,000  million in 1997 to $1.1 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  decreased from 3.6% in 1997 to
3.3% in 1998 because other  business  units grew revenues at a greater rate than
Telecom  Systems..  CTI  Software  revenue  increased  by $399,000  (93.5%) from
$427,000 in 1997 to $826,000 in 1998.  The growth in CTI  Software  revenues was
primarily due to increased  marketing  efforts which resulted in the addition of
new customers and increased acceptance of the Company's software products in the
marketplace.  Revenue  from CTI  Software,  as a  percentage  of total  revenue,
increased from 1.6% in 1997 to 2.5% in 1998.

 <PAGE>

     GROSS PROFIT.  Gross profit increased by $979,000 (25.5%) from $3.8 million
in 1997 to $4.8 million in 1998 and gross margin increased from 14.4% in 1997 to
14.8% in 1998.  The gross margin for Computer  Products  increased from 11.0% in
1997 to 12.8% 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.  The gross profit from IT Services
increased  24.7%  from  $782,000  in 1997 to  $975,000  in  1998.  Gross  margin
decreased from 39.3% in 1997 to 33.7% in 1998. This decrease in gross margin was
primarily  attributable to a lower  utilization  rate of the Company's  billable
technical  staff  leading  to  higher  labor  costs  as a  percent  of  revenue.
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.  The
gross margin for Telecom  Systems sales decreased from 31.9% in 1997 to 16.0% in
1998,  reflecting  higher  installation  costs than are normally  incurred.  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.  During the 1998 period the
Company  was unable to  complete  the  installation  of several of its  projects
resulting  in the  recognition  of lower  revenues  and gross  profits than were
expected The gross margin for CTI Software decreased from 44.8% in 1997 to 37.7%
in the 1998 due to higher installation costs on its products.

     SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSES  .  Selling,  general  and
administrative  expenses  increased by $1.4 million (45.9%) from $3.1 million in
1997 to $4.6 million in 1998. As a percentage of total revenue, selling, general
and administrative expenses increased from 11.8% in 1997 to 14.1% in 1998. Those
components  of selling,  general and  administrative  expenses  which  increased
significantly,  as a percentage of revenues, were commission expense,  personnel
related costs and general  expenses  related to opening new offices.  Commission
expense increased,  as a percent of revenues,  because gross margin,  upon which
the Company  bases its  commission  rates,  increased in the 1998 period  versus
1997. During the 1998 quarter,  the Company employed a significant number of new
employees in its El Paso and New Mexico offices.  Since these employees received
compensation  prior to the  realization  of  significant  revenues the amount of
selling,  general and administrative expenses increased both as to amount and as
expressed 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
commenced  the  upgrading  of its  computing  systems to  enhance  the speed and
capacity  of its  systems.  In  addition,  during the 1998  period  the  Company
incurred  costs related to the opening of offices in 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 $462,000  (66.3%) from
$696,000  in 1997 to  $234,000  in  1998  due to  higher  selling,  general  and
administrative  expenses.  Operating  income  decreased as a percentage of total
revenue  from  2.6% in 1997 to 0.7% in 1998.  Contributing  to the  decrease  in
operating  income were operating  losses incurred in newly opened  offices.  The
combined  operating losses incurred in the operation of newly opened offices was
approximately $109,000.

     INTEREST  EXPENSE  (NET OF OTHER  INCOME).  Interest  expense (net of other
income) decreased  $261,000 from $289,000 during 1997 period compared to $28,000
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
to the repayment of the Company's debt.

     NET INCOME. Net income, after a provision for income taxes totaling $82,000
(reflecting  an effective  tax rate of 39.8% in 1998 compared to 37.8% in 1997),
decreased by $129,000 from $253,000 in 1997 to $124,000 in 1998.


<PAGE>

Liquidity And Capital Resources

     The  Company's  working  capital  was $12.8  million  and $12.8  million at
December 31, 1997 and March 31, 1998,  respectively.  As of March 31, 1998,  the
Company had  borrowing  capacity  under the Company's  credit  facility of $12.6
million.

Cash Flow

     Operating  activities  used net cash totaling $1.2 million during the three
months ended March 31, 1998. Operating activities used net cash during the three
months  ended  March 31,  1998  because of  decreases  in  accounts  payable and
increases in  inventories.  While trade  accounts  receivable  decreased by $3.1
million  this  decrease  was  offset  by  increases  in  accounts   payable  and
inventories. Net income and depreciation provided cash of $291,000.

     Investing  activities  used cash totaling  $153,000 during the three months
ended March 31, 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 an estimated  $700,000  million for
capital  expenditures,  a  majority  of which is  expected  to be  incurred  for
leasehold  improvements  and other capital  expenditures  in connection with the
planned  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 in El Paso and San Antonio,  Texas.  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 $3.2 million during the three
months ended March 31, 1998.

Asset Management

     The Company had trade  accounts  receivable,  net of allowance for doubtful
accounts,  of $20.7  million  at March  31,  1998.  The  number  of days'  sales
outstanding in trade accounts receivable was 53 days, which is equal to the days
outstanding  of the prior quarter but  reflecting  slower than normal payment by
the Company's  customers  during the three months ended March 31, 1998. Bad debt
expense as a  percentage  of total  revenue for the three months ended March 31,
1998 was 0.3%, which was higher than bad debt expense for the three months ended
March 31, 1997 because during the 1997 period the Company realized a recovery of
a previously charged off account. The Company's allowance for doubtful accounts,
as a percentage of trade accounts receivable, was 1.0% at December 31, 1997, and
1.5% at March 31, 1998.  Inventory turnover for the three months ended March 31,
1998 and 1997 was 18.7 times, and 16.9 times, respectively.

<PAGE>

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.

<PAGE>

PART II.  OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

     On July 13, 1996, 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  is suing  for  breach of
contract and other statutory  violations and is seeking actual monetary  damages
of  approximately  $3 million and treble damages under the Texas Deceptive Trade
Practices Act. The Company is unable to estimate the range of possible  recovery
by the  plaintiff  because the suit is still in the early  stages of  discovery.
However, the Company is vigorously defending the action.

     Allstar 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,  Allstar  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.

MAY 15, 1997               By: /s/ JAMES H. LONG
Date                               James H. Long, Chief Executive Officer



MAY 15, 1997               By:/s/ DONALD R. CHADWICK
Date                                Donald R. Chadwick, Chief Financial Officer
<PAGE>