FORM 10-Q/A

                       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 June 30, 1997
                                       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 X No ____

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



<PAGE>


         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 August 4, 1997,  4,440,125 shares



<PAGE>


                              Allstar Systems, Inc.

                                Table of Contents


                                                                        Page No.

Part I.  Financial Information

Item 1.  Financial Statements (unaudited)

         Consolidated Balance Sheets ..................................    1

         Consolidated Statements of Income ............................    2

         Consolidated Statements of Cash Flows ........................    3

         Notes To Consolidated Financial Statements ...................    4

Item 2.  Management's Discussion and Analysis of Financial ............   11
         Condition and Results of Operations



Part II. Other Information

         Item 1.  Legal Proceedings ...................................   18

         Item 2.  Report of Sales of Securities and Use of Proceeds ...   18




<PAGE>



Part I.  Financial Information

Item 1.  Financial Statements


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

                                                 December 31,        June 30,
                                                     1996              1997
                                                                    (Unaudited)
ASSETS
Current Assets:
     Cash and Cash Equivalents
         Restricted Cash.......................       $94                $1,529
         Cash                                         135                   867
              Total cash and cash equivalents..       229                 2,396
     Accounts receivable - trade, net..........    16,517                19,981
     Accounts receivable - affiliates..........       140                   601
     Inventory.................................     4,862                 4,382
     Deferred Taxes............................       350                   160
     Deferred offering costs...................       412                   512
     Other current assets......................       174                   164
              Total current assets.............    22,684                28,196
Property and equipment.........................     1,644                 1,517
Other assets  .................................       392                    52
Total         .................................   $24,720               $29,765

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Notes payable.............................    $9,975               $11,751
     Accounts payable..........................     7,157                 9,266
     Accrued Expenses..........................     2,759                 3,073
     Income taxes payable......................       206                   421
     Deferred service revenue..................       296                   205
              Total current liabilities........    20,393                24,716
Commitments and contingencies
Stockholders' equity:
     Preferred stock, $.01 par value,
       5,000,000 authorized, no shares issued..
     Common stock, $.01 par value, 50,000,000
       authorized, 2,675,000 issued and
       outstanding..................                   27                    27
     Additional paid in capital................     1,479                 1,479
     Retained earnings.........................     2,821                 3,543
              Total stockholders' equity.......     4,327                 5,049
Total..........................................   $24,720               $29,765



<PAGE>



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

                                                  Three Months Ended June 30,
                                                    1996        1997

Total revenue ..............................   $   32,202   $   32,239
Cost of sales and services .................       28,234       27,312
Gross profit ...............................        3,968        4,927
Selling, general and administrative expenses        2,992        3,839
Operating income ...........................          976        1,088
Interest expense and other .................          285          309
Income before provision for income taxes ...          691          779
Provision for income taxes .................          223          310
Net income .................................   $      468   $      469

Net income per share .......................   $     0.17   $     0.17

Weighted average shares outstanding ........    2,675,000    2,675,000


                                                  Six Months Ended June 30,
                                                    1996        1997

Total revenue ..............................   $   58,150   $   58,831
Cost of sales and services .................       50,960       50,073
Gross profit ...............................        7,190        8,758
Selling, general and administrative expenses        5,666        6,974
Operating income ...........................        1,524        1,784
Interest expense and other .................          582          597
Income before provision for income taxes ...          942        1,187
Provision for income taxes .................          335          465
Net income .................................   $      607   $      722

Net income per share .......................   $     0.23   $     0.27

Weighted average shares outstanding ........    2,675,000    2,675,000



<PAGE>


                     ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands,)
                                   (Unaudited)


                                                      Six months   Six months 
                                                         ended        ended
                                                    June 30, 1996 June 30, 1997

Net income .........................................   $   607      $   722
Adjustments to reconcile net income to net cash
     provided by (used in) operating activities:
     Gain on disposal of assets ....................        --           --
     Depreciation and amortization .................       179          252
     Deferred Taxes ................................       (12)         190
Changes in assets and liabilities that provided
       (used) cash:
     Accounts receivable - trade, net ..............       768       (3,464)
     Accounts receivable - affiliates ..............       104         (121)
     Inventory .....................................    (1,431)         480
     Deferred offering costs .......................        --         (100)
     Other current assets ..........................       (23)          10
     Accounts payable ..............................      (765)       2,109
     Accrued expenses ..............................       583          314
     Income taxes payable ..........................       256          215
     Deferred service revenue ......................      (136)         (91)

       Net cash provided by (used in)operating
         activities                                        130          516

Cash flow from investing activities:
     Capital expenditures ..........................      (303)        (125)
     Proceeds from sale of fixed assets ............        --           --

       Net cash used in investing activities .......      (303)        (125)

Cash flows from financing activities:
     Net increase (decrease) in notes payable ......      (375)       1,776

       Net cash provided by (used in) financing
         activities                                       (375)       1,776

Net increase (decrease) in cash and cash equivalents      (548)       2,167
Cash and cash equivalents at beginning of period ...     1,029          229
Cash and cash equivalents at beginning of period ...   $   481      $ 2,396
Supplemental disclosures of cash flow information:
Cash paid for interest .............................   $   355      $   298
                                                       $    94      $   115


<PAGE>


                     ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (In thousands, except share and per share amounts)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Allstar Systems,  Inc. and subsidiaries  ("Allstar") is engaged in the sale
and service of computer and  telecommunications  hardware and software products.
During 1995 Allstar  formed and  incorporated  Stratasoft,  Inc., a wholly owned
subsidiary, to create and market 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.  All
operations  of the  business are  primarily  conducted  from offices  located in
Houston and Dallas, Texas.

     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 (see Note 5).

     The consolidated financial statements presented herein at June 30, 1997 and
for the three-month periods ended June 30, 1996 and 1997 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.

     Allstar's significant accounting policies are as follows:

     Principles  of  Consolidation  - The  accompanying  consolidated  financial
statements  include the accounts of Allstar  Systems,  Inc. and its wholly owned
subsidiaries.  All significant  intercompany balances and transactions have been
eliminated.

     Inventory  -  Inventory   consists  primarily  of  personal  computers  and
components and is valued at the lower of cost or market with cost  determined on
the first-in first-out method. Management provides a reserve for inventory which
may be slow-moving or obsolete.

     Property  and  Equipment - Property  and  equipment  are  recorded at cost.
Expenditures  for repairs and  maintenance are charged to expense when incurred,
while  expenditures  for betterments are  capitalized.  Disposals are removed at
cost less accumulated  depreciation with the resulting gain or loss reflected in
operations in the year of disposal.

     Impairment of Long-Lived Assets - Effective January 1, 1996 Allstar adopted
Statement  of  Financial  Accounting  Standards  No.  121,  "Accounting  for the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of,"
("SFAS No. 121") which requires that long-lived  assets be reviewed by an entity
for impairment  whenever  events or changes in  circumstances  indicate that the
carrying amount of an asset may not be recoverable. The adoption of SFAS No. 121
in 1996 did not result in a charge to earnings in the accompanying  consolidated
financial statements.

     Federal Income Taxes - Deferred taxes are provided at enacted rates for the
temporary differences between the financial reporting bases and the tax bases of
assets and liabilities.

     Earnings  per Share - Net  earnings  per share of common stock are based on
the  weighted  average  number  of  shares of  common  stock  and  common  stock
equivalents,  if any,  outstanding  during each  period.  In October  1996,  the
Company completed a reincorporation  in order to change its state of domicile to
Delaware,  to authorize  50,000,000 shares of $.01 par value common stock and to
authorize   5,000,000   shares  of  $.01  par   value   preferred   stock.   The
reincorporation had the effect of an 8.15-for-1 split of Allstar's common stock.
All applicable share and per share data in the consolidated financial statements
and  related  notes give  effect to this  reincorporation  and  resulting  stock
conversion.

     Revenue  Recognition  -  Revenue  from the  sale of  computer  products  is
recognized  when the product is shipped.  Service  income is recognized  ratably
over the  service  contract  life.  Revenues  resulting  from  installations  of
equipment for which duration is in excess of three months are  recognized  using
the  percentage-of-completion  method.  The percentage of revenue  recognized on
each contract is based on the most recent cost estimate available.  Revisions of
estimates  are  reflected  in the  period in which the facts  necessitating  the
revision become known; when a contract indicates a loss, a provision is made for
the total  anticipated  loss.  At June 30,  1996 and 1997,  Allstar  had no such
contracts in process.

     Research and Development  Costs - Expenditures  relating to the development
of  new  products  and  processes,   including   significant   improvements  and
refinements to existing products, are expensed as incurred.

     Fair Value of  Financial  Instruments  -  Allstar's  financial  instruments
consist of cash and cash equivalents,  accounts receivable, accounts payable and
notes payable for which the carrying  values  approximate  fair values given the
short-term  maturity of the  instruments.  It is not practicable to estimate the
fair values of related-party receivables due to the nature of the instruments.

     Cash and Cash  Equivalents - Cash and cash  equivalents  include any highly
liquid debt  instruments with a maturity of three months or less when purchased.
See Note 5 for discussion of restricted cash.

     Use  of  Estimates  -  The  preparation  of  the  financial  statements  in
conformity with generally accepted accounting  principles requires management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from these estimates.

     Accounting  Pronouncements  - In October  1995,  the  Financial  Accounting
Standards Board ("FASB") issued Statement of Financial  Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") which determines
compensation cost using the fair value method of accounting. Allstar has elected
to continue to follow  Accounting  Principles Board Opinion No. 25,  "Accounting
for Stock Issued to Employees,"  which  determines  compensation  cost using the
intrinsic  value based method of  accounting.  At December 31, 1996 and June 30,
1997 Allstar had no stock options or similar equity instruments outstanding (see
Note 9);  accordingly,  SFAS No.  123 had no  effect on  Allstar's  consolidated
financial statements or Notes thereto.

In February  1997, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards No. 128, Earnings Per Share ("SFAS
128"), which is effective for periods ending after December 15, 1997,  specifies
the computation,  presentation and disclosure requirements of earnings per share
("EPS") and  supersedes  Accounting  Principles  Board  Opinion No. 15 ("APB No.
15"). SFAS 128 requires a dual presentation of basic and diluted EPS. Basic EPS,
which  excludes the impact of common stock  equivalents,  replaces  primary EPS.
Diluted EPS, which utilizes the average market price per share as opposed to the
greater of the average  market price per share or ending  market price per share
when applying the treasury stock method in determining common stock equivalents,
replaces  fully diluted EPS. Pro forma basic and diluted EPS for all  historical
periods presented,  assuming SFAS No. 128 was effective at the beginning of each
such historical period, would not be materially different than the presentations
using APE No. 15.

     In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
and SFAS No.  131,  Disclosures  About  Segments  of an  Enterprise  and Related
Information.  SFAS No. 130 establishes standards for reporting and displaying of
comprehensive income and its components.  SFAS No. 131 establishes standards for
the way that public  business  enterprises  report  information  about operating
segments and related  information  in interim and annual  financial  statements.
SFAS No. 130 and 131 are  effective  for periods  beginning  after  December 15,
1997.  These three  statements  will not have any effect on the  Company's  1997
financial statements,  however, management is evaluating what, if any additional
disclosures may be required when these three statements are implemented.

2.   ACCOUNTS RECEIVABLE

     Accounts  receivable  consisted  of the  following at December 31, 1996 and
June 30, 1997:

                                                    1996                1997

Trade ..........................                 $ 16,736             $ 20,219
Allowances for doubtful accounts                     (219)                (238)
         Total .................                 $ 16,517             $ 19,981


3.   DEFERRED OFFERING COSTS

     Deferred  offering  costs  represent  amounts  incurred by Allstar  through
December  31, 1996 in  preparation  of filing an offering  document.  If Allstar
determines not to go forward with the offering, these amounts will be charged to
expense at that time. (see Note 10)

4.    PROPERTY AND EQUIPMENT

     Property and equipment  consisted of the following at December 31, 1996 and
June 30, 1997

                                                      1996              1997

Equipment ...............................           $   282           $   286 
Computer equipment ......................             1,964             2,086 
Furniture and fixtures ..................               294               293 
Leasehold improvements ..................                47                47 
Vehicles ................................               105               105 
                                                      2,692             2,817 
Accumulated depreciation and amortization            (1,048)           (1,300)
         Total ..........................           $ 1,644           $ 1,517 
                                                                      
5.   CREDIT ARRANGEMENT

     Allstar  has two  revolving  lines  of  credit  with a  commercial  finance
company. This agreement, which continues in full force and effect for successive
13 month  periods  until  terminated  by 60 day  written  notice from either the
lender or Allstar,  is  collateralized  by substantially all of Allstar's assets
and a personal guarantee of the principal  stockholder of Allstar. The agreement
contains  restrictive  covenants  which,  among other things,  require  specific
ratios of revenue to working  capital,  total  liabilities to tangible net worth
and net profit after tax to revenue.  The terms of the  agreement  also prohibit
the payment of dividends, the purchase of Allstar common stock and other similar
expenditures,  including  advances to related parties.  During 1996, Allstar was
not in compliance with certain of these covenants;  however, the finance company
waived such noncompliance  through December 31, 1996 and executed  amendments to
the  agreement to  liberalize  certain  financial  covenants.  Throughout  1997,
Allstar was in compliance with these less restrictive  financial  covenants.  In
April 1996 the aggregate  maximum  combined  lines of credit were increased from
$15.0 million to $20.0 million and in September 1996 were temporarily  increased
to $30.0 million for the period from  September  1996 through  February 1997, to
$28.0 million  during March 1997 and to $25.0 million in April 1997,  thereafter
returning  to the stated  credit line of $20.0  million.  The  maximum  combined
credit  limit is subject  to  borrowing  base  limitations  which are  generally
computed as a percentage of various classes of eligible accounts  receivable and
qualifying  inventory  (as  defined).  Allstar  pays an annual  facility  fee of
$18,000.

     Under the first revolving line of credit (the "Accounts Line"), outstanding
principal and interest are due upon  termination of the agreement.  Transactions
on the  Accounts  Line  are  reflected  as  Notes  Payable  in the  consolidated
financial statements.  The Accounts Line accrues interest at the prime rate plus
2% (10.25% at December  31,  1996 and 10.50% at June 30,  1997).  The  agreement
requires  that  all  payments   received  from  customers  on  pledged  accounts
receivable  be  applied  to  the  outstanding  balance  on  the  Accounts  Line.
Accordingly,  accounts  receivable  payments  received  in the amount of $94 and
$1,529 at December 31, 1996 and June 30, 1997, respectively, but not yet applied
to the line of credit, are shown as restricted cash in the accompanying  balance
sheets.

     The  second  revolving  line of credit  (the  "Inventory  Line") is used by
Allstar to floor plan  inventory  purchases.  At December  31, 1996 and June 30,
1997,  aggregate  borrowings  on the  Inventory  Line were  $6,134  and  $4,806,
respectively.  Interest  accrues  at the prime  rate plus 6% (14.50% at June 30,
1997) for all outstanding balances over 30 days.

     In  addition,  Allstar  maintains a $3.0  million  credit line with another
financing company to be used to floor plan inventory purchases.  At December 31,
1996 and June 30, 1997,  aggregate  borrowings  on this line were $993 and $941,
respectively.  Interest  accrues at the prime rate,  which for  purposes of this
agreement  will not fall below 6.5%,  plus 6% (14.50% at June 30,  1997) for all
outstanding balances over 30 days. This agreement contains restrictive covenants
which,  among other things,  require a specific  ratio of total  liabilities  to
tangible net worth and a minimum  tangible net worth (as defined).  The terms of
this agreement  also prohibit the payment of dividends,  the purchase of Allstar
common  stock and other  similar  expenditures,  including  advances  to related
parties.  During  1996,  Allstar  was not in  compliance  with  certain of these
covenants;  however,  the  finance  company  waived such  noncompliance  through
December  31,  1996.  Throughout  1997,  Allstar  was  in  compliance  with  the
restrictive financial covenants provided in the agreement.

     Amounts  borrowed  under the  Inventory  Line and the $3.0  million line of
credit  (collectively  the "Floor  Plan  Agreements")  are  included in accounts
payable  in  the  consolidated  financial  statements.   Under  the  Floor  Plan
Agreements the financing companies pay Allstar's suppliers directly and maintain
a purchase money security interest in the related inventory.

     The combined  borrowing base under all credit  arrangements was $18,841 and
$18,273 at December 31, 1996 and June 30, 1997, respectively.

6.   INCOME TAXES

     Deferred  tax assets  computed at the  statutory  rate related to temporary
differences at December 31, 1996 and June 30, 1997 were as follows:

                                                                1996      1997  
                                                                                
Deferred tax assets:                                                            
    Accounts receivable .....................................    $142      $ 85
    Deferred service revenue.................................      69        21
    Inventory ...............................................     139        54
         Total ..............................................    $350      $160
                                                                      
7.   ACCRUED EXPENSES                                        
                                                             

     Accrued liabilities  consisted of the following as of December 31, 1996 and
June 30, 1997:
                                                                 1996     1997

Sales tax payable ...........................................   $1,309   $1,418
Accrued employee benefits, payroll and other  related costs .      996    1,332
Accrued interest ............................................      209      120
Other .......................................................      245      203
         Total ..............................................   $2,759   $3,073



8.   FRANCHISE FEES

     Allstar entered into an agreement in May 1989 whereby it became a franchise
of Inacom Corp.  ("Inacom").  Annual fees,  amounting to 0.05% of certain  gross
sales, were expensed in the period incurred. Allstar obtained a waiver effective
January 1, 1995 which eliminated the payment of franchise fees.

     Allstar  entered  into an  agreement  in August  1996 in which  Allstar  is
required to purchase at least 80% of its computer  products  from Inacom if such
are  available  within a  reasonable  period of time at  reasonably  competitive
prices. The agreement expires on December 31, 2001 and automatically  renews for
successive  one-year  periods.  A  cancellation  fee of $571 will be  payable by
Allstar in the event of  non-renewal  or early  termination  of the agreement by
either  party;  however,  Allstar does not  anticipate  termination  to occur by
either party prior to the initial  termination  date.  Allstar is accruing  this
cancellation fee over the initial  agreement period by an approximate $9 monthly
charge to earnings.

9.   COMMITMENTS AND CONTINGENCIES

     Operating Leases - Allstar  subleases  office space from Allstar  Equities,
Inc.  ("Equities"),  a company  wholly  owned by the  principal  stockholder  of
Allstar.  In 1996,  Allstar  renewed its office  sublease  with  monthly  rental
payments  of  $31.5 in 1997 and $32 in 1998,  plus  certain  operating  expenses
through December 1998.

     Additionally,  minimum  annual  rentals  at  December  31,  1996  on  other
operating leases amount to approximately $101 for 1997, $23 in 1998, $16 in 1999
and $8 in 2000.  Amounts  paid during the three  months  ended June 30, 1996 and
1997 under such agreements totaled approximately $52 and $33, respectively.

     Benefit  Plans - Allstar  maintains  a group  medical  and  hospitalization
insurance program under which Allstar pays employees' covered health care costs.
Any claims  exceeding $30 per employee or a cumulative  maximum of approximately
$180 per year are insured by an outside insurance  company.  Allstar's claim and
premium expense for this self-insurance  program totaled  approximately  $16,949
for the 2nd quarter 1996 and $106,713 for the 2nd quarter 1997.

     Allstar  maintains a 401(k) savings plan. All full-time  employees who have
completed  one year of service with Allstar are eligible to  participate  in the
plan.  Allstar also has the option of making additional  contributions  based on
net  profitability.  Declaration of such  contributions  is at the discretion of
Allstar's Board of Directors.  Allstar made no additional  contributions  to the
plan for the years ended  December,  1994 and 1995. In 1996 Allstar  contributed
$71 to the plan.

     Allstar  has filed  under the  Internal  Revenue  Service  Walk-in  Closing
Agreement  Program  (the  "Program")  to negotiate a  settlement  regarding  the
qualified status of the 401(k) savings plan in order to meet the requirements of
Section  401(a) of the Internal  Revenue Code.  Under the Program,  any sanction
amount  negotiated is based upon the total tax liability which could be assessed
if the plan were to be  disqualified.  At June 30,  1997 the Company has accrued
$50 for the estimated settlement cost.

     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.  No  incentive
awards or stock options have been granted under these plans at June 30, 1997.

     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.

10.  RELATED-PARTY TRANSACTIONS

     Effective  December 31, 1993,  Allstar  entered into a stock sale agreement
whereby  65,625 shares of Allstar no par value common stock  (535,000  shares of
$.01 par value common stock after effect of reincorporation and conversion - see
Note 1) were sold for $1.5  million.  The proceeds  from the stock  subscription
agreement  were  recorded as Accounts  receivable  - affiliates  and  Additional
paid-in  capital at December 31, 1993.  In May 1994 the  subscription  price was
received and the shares of common stock were issued.  The principal  stockholder
of Allstar and this minority  stockholder  have entered into an agreement  under
which  the  minority  stockholder  has  the  option  to  require  the  principal
stockholder to repurchase  these shares at an established  price  dependent upon
the number of months held. In addition,  the principal  stockholder may offer to
have Allstar  purchase these shares;  however,  any such offer will not obligate
Allstar to purchase such shares. Upon completion of a public offering of Allstar
common  stock the option to require the  principal  shareholder  to purchase the
shares becomes inoperative. In addition Allstar is obligated, under a consulting
agreement with the minority  shareholder,  to pay consulting fees of $75,000 per
annum  until  such time as Allstar  completes  a public  offering  of its common
stock.(see Note 11.)

Allstar  has from time to time made  payments  on  behalf  of  Equities  and the
Company's principal  stockholders for taxes,  property and equipment.  Effective
July 1, 1996,  Allstar and its principal  stockholder  entered into a promissory
note to repay certain advances,  which were  approximately $173 at July 1, 1996,
in equal annual installments of principal and interest, from August 1997 through
2001.  This note bears  interest at 9% per year.  Also  effective  July 1, 1996,
Allstar and Equities entered into a promissory note whereby Equities would repay
the balance of amounts advanced,  which were approximately $387 at July 1, 1996,
in monthly  installments  of $6.5,  including  interest,  from July 1996 through
November  1998 with a final  payment of $275 due on December 1, 1998.  This note
bears interest at 9% per year. The principal amounts as of December 31, 1996 are
classified  as Accounts  receivable -  affiliates  and Other assets - affiliates
based on the repayment terms of the promissory  notes. The principal  amounts as
of June 30, 1997 are classified as Accounts receivable - affiliates based on the
expectation  of  repayment  within one year.  At December  31, 1996 and June 30,
1997, Allstar  receivables from these affiliates  amounted to approximately $501
and $549, respectively.

11.      EVENTS SUBSEQUENT TO JUNE 30, 1997:

On July 7, 1997, the Company  successfully  completed an Initial Public Offering
of 1,767,500  shares of common stock and received net proceeds of $8,190  before
deducting  estimated  offering  expenses of $850. On July 29, 1997,  the Company
sold an  additional  265,005  shares  of  common  stock  under  option  with the
Underwriters  to cover  over-allotments  and  received  proceeds of $1,448.  The
company used all of the proceeds to reduce  short-term  debt.  In addition,  the
Company agreed to sell to the  underwriters of the public  offering  warrants to
purchase  176,750  at an  exercise  price of the  greater  of 120% of the public
offering  price or $9.60 per share.  The purchase price of the warrants was $.01
per warrant and the purchase price was paid on July 29, 1997.



<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 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 and Dallas,
Texas. In 1994, the Company began offering Telecom Systems in its Houston office
and during the quarter ended June 30, 1997 commenced offering Telecom Systems in
its Dallas office. In the fourth quarter of 1995, the Company acquired and began
marketing  CTI  Software.  To date,  most of its revenue has been  derived  from
Computer  Products  sales.  During the  quarter  ended June 30,  1997,  Computer
Products  totaled 85.5% of revenues while IT Services,  Telecom  Systems and CTI
Software totaled 8.7%, 4.0% and 1.8% 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. The
Company has historically  operated Telecom Systems only from its Houston office.
During the second quarter of 1997, the Company  commenced  operations of Telecom
Systems in its Dallas office.

         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.

       The  Company's  gross  margin  varies  substantially  between each of its
businesses.  The  Company's  Computer  Products  sales  produced a gross  margin
ranging from 10.3% to 10.4% over the three year period ended  December 31, 1996,
due to the commodity nature of Computer Products market. The gross margin for IT
Services, which reflects direct labor costs, has ranged from 30.4% to 40.9% over
the same period. This variation is primarily attributable to the pricing and the
mix of services  provided,  and to the level of direct  labor as a component  of
cost  during any given  period.  The gross  margin for  Telecom  Systems,  which
includes  both product sales and  services,  has varied  between 23.0% and 42.7%
since the Company  entered the Telecom  Systems market in 1994. The gross margin
for CTI Software was 40.2% in 1996.

         The Company's  overall gross margin has ranged  between 12.3% and 13.3%
for the three year period ended  December 31, 1996.  During any period,  overall
gross margin may vary  significantly  because of the mix of the various products
and services revenues realized by the Company during any such period.  While the
Company  endeavors to  strengthen  its computer  products  sales on a continuing
basis,  the  Company is  endeavoring  to grow its  higher  margin  products  and
services at a higher rate than Computer Products thereby  increasing its overall
gross margins.

       Manufacturers of many of the computer products resold by the Company have
consistently  reduced unit prices near the end of a product's  life cycle,  most
frequently  following the introduction of newer, more advanced models. While the
major  manufacturers  of  computer  products  have a policy of  providing  price
protection to resellers when prices are reduced,  on occasion,  and particularly
during  1994,  manufacturers  introduced  new models of their  products and then
reduced  the  price  of,  or  discontinued,   the  older  models  without  price
protection.  In these  instances,  the Company  often sells the older  models at
reduced prices, which adversely affects gross margin.

       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.  Purchases from Inacom  accounted for  approximately  46.4%,  36.6% and
57.0%  of the  Company's  total  product  purchases  in  1994,  1995  and  1996,
respectively.   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 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.

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 June 30,   Six months ended June 30,
                             1996           1997          1996            1997
                       Amount    %    Amount    %    Amount    %    Amount     %
Revenue(1)
 Computer Products ..$ 29,044  90.2 $ 27,567  85.5 $ 52,425  90.1 $ 50,713  86.2
 IT Services ........   1,800   5.6    2,791   8.7    3,819   6.6    4,857   8.3
 Telecom systems ....   1,009   3.1    1,284   4.0    1,398   2.4    2,237   3.8
 CTI Software .......     349   1.1      597   1.8      508   0.9    1,023   1.7
   Total revenue ....  32,202 100.0   32,239 100.0   58,150 100.0   58,831 100.0

Gross Profit                                                                   
 Computer Products ..   2,706   9.3    3,001  10.9    5,134   9.8    5,452  10.8
 IT Services ........     641  35.6    1,268  45.4    1,235  32.3    2,153  44.3
 Telecom Systems ....     435  43.1      333  26.0      554  39.6      637  28.5
 CTI Software .......     186  53.3      325  54.4      267  52.6      516  50.4
  Total Gross Profit    3,968  12.3    4,927  15.3    7,190  12.3    8,758  14.9
                                                                                
Selling, general and
 administrative
 expense ............   2,992   9.3    3,839  11.9    5,666   9.7    6,974  11.9
Operating income ....     976   3.0    1,088   3.4    1,524   2.6    1,784   3.0
Interest expense
 (net of other
 income) ............     285   0.9      309   1.0      582   1.0      597   1.0
Income before
 provision for
 income taxes .......     691   2.1      779   2.4      942   1.6    1,187   2.0
Provision (benefit)
 for income taxes....     223   0.7      310   1.0      335   0.6      465   0.8
Net Income ..........$    468   1.4 $    469   1.4 $    607   1.0 $    722   1.2

Earnings per share ..$   0.17       $   0.17       $   0.23       $   0.27
                                                        
Weighted average
 shares outstanding..$2,675,000    2,675,000      2,675,000      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.

<PAGE>


THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996

       TOTAL  REVENUE.  All of the Company's  business  units,  except  Computer
Products,  increased  revenues over the prior year's  comparable  period.  Total
revenue increased by $37,000 (.1%) and remained substantially unchanged at $32.2
million in 1996  compared to $32.2  million in 1997.  The absence of growth from
the prior period results from the Company not fully replacing a large "roll-out"
sale which occurred during 1996. This Computer  Products sale was  approximately
$6 million or 19% of 1996  revenues.  Excluding the impact of this order,  total
revenues would have  increased by  approximately  18.8% over 1996.  Revenue from
Computer Products decreased by $1.5 million (5.1%) from $29.0 million in 1996 to
$27.6 million in 1997.  Revenue from Computer  Products as a percentage of total
revenue  decreased  4.7% from  90.2% in 1996 to 85.5% in 1997.  Revenue  from IT
Services increased $991,000 (55.1%) from $1.8 million in 1996 to $2.8 million in
1997 because of the  expansion of its sale force and billable  technical  staff,
together  with an emphasis on higher level  service  offerings to the  Company's
customers.  Revenue from IT Services as a percentage of total revenue  increased
from  5.6% in 1996 to 8.7% of total  revenues  in  1997.  Revenue  from  Telecom
Systems  increased by $275,000 (27.3%) from $1.0 million in 1996 to $1.3 million
in 1997.  The increase in Telecom  Systems  revenue was  primarily the result of
hiring  additional  sales  personnel  and  expanding  marketing  efforts,  which
resulted in the addition of new  customers.  Revenue  from Telecom  Systems as a
percentage of total  revenue  increased  from 3.1% in 1996 to 4.0% in 1997.  CTI
Software revenue increased by $248,000 (71.1%) from $349,000 in 1996 to $597,000
in 1997.  The growth in CTI  Software  revenues was  primarily  due to increased
marketing efforts which resulted in the addition of new customers.  Revenue from
CTI Software,  as a percentage of total revenue,  increased from 1.1% in 1996 to
1.8 % in 1997.

       GROSS  PROFIT.  Gross  profit  increased  by $959,000  (24.2%)  from $4.0
million in 1996 to $4.9 million in 1997, while gross margin increased from 12.3%
in 1996 to 15.3% in 1997. The gross margin for Computer Products  increased from
9.3% in 1996 to 10.9% in 1997,  which was primarily the result of the absence of
large "roll-out" type transactions,  which typically produce lower gross margin,
in 1997. The gross profit from IT Services increased 97.8% from $641,000 in 1996
to $1.3 million in 1997.  Gross margin  increased from 35.6% in 1996 to 45.4% in
1997.  This  increase  in  gross  margin  was  primarily   attributable  to  the
replacement  of less  profitable  IT  Services  business  with  more  profitable
business  from new and  existing  IT  Services  customers.  In 1996 the  Company
commenced the  implementation  of a program to replace less profitable  hardware
maintenance and repair services with a variety of services that were expected to
generate  higher gross  margins.  This program  resulted in the  elimination  of
certain IT Services customer  relationships  which had been producing lower than
average  gross  margin.  The loss of this  lower  margin  revenue  was offset by
revenues from new IT Services  customers  and from existing  customers at higher
gross margins.  The gross margin for Telecom  Systems sales decreased from 43.1%
in 1996 to  26.0%  in 1997,  reflecting  the  commencement  of  Telecom  Systems
operations  in the Company's  Dallas  office,  lower product  margins and higher
installation  costs  than  are  normally  incurred.  In  addition,  the  Company
installed a large complex  system in 1996 which had an unusually  high margin as
compared to the Company's normalized business. The gross margin for CTI Software
increased from 53.3% in 1996 to 54.4 % in the 1997.

       SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSES .  Selling,  general and
administrative  expenses increased by $847,000 (28.3%) from $3.0 million in 1996
to $3.8 million in 1997. As a percentage of total revenue,  selling, general and
administrative  expenses increased from 9.3% in 1996 to 11.9% in 1997. A portion
of the increase,  expressed as a percentage of total revenue, resulted primarily
from the hiring of new employees in sales and sales support  functions,  as well
as  additional  personnel  hired for IT Services  administration  and  financial
administration   functions.   In   addition,   the   Company   incurred   higher
non-capitalized  professional  service fees as it prepared for a public offering
of its common stock.

     OPERATING  INCOME.  Operating  income  increased  by $112,000  (11.5%) from
$976,000  in 1996 to $1.1  million  in 1997.  Operating  income  increased  as a
percentage of total revenue from 3.0% in 1996 to 3.4% in 1997.

       INTEREST  EXPENSE (NET OF OTHER INCOME).  Interest  expense (net of other
income)  increased  $24,000 from $285,000  during 1996 to $309,000  during 1997.
This  reflects  a small  increase  in the  effective  interest  rate paid by the
Company  during 1997 and higher  average  borrowings on the  Company's  lines of
credit during such period.  The weighted  average  interest rate on the Accounts
Line for the three  months  ended June 30,  1996 and 1997 was 10.25% and 10.50%,
respectively.

       NET INCOME.  Net  income,  after a provision  for income  taxes  totaling
$310,000 (reflecting an effective tax rate of 39.8% in 1997 compared to 32.3% in
1996),  increased nominally by $1,000 from $468,000 in 1996 to $469,000 in 1997.
The  unusually low effective tax rate in 1996 was the result of an adjustment of
an excessive provision in a period prior to the quarter ended June 30, 1996.

SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996

       TOTAL  REVENUE.  Total  revenue  increased by $681,000  (1.1%) from $58.2
million  in the six  months  ended  June 30,  1996 to $58.8  million in the 1997
period. Revenue from Computer Products,  which comprised 86.2% of total revenue,
decreased by $1.7 million  (3.3%).  Revenue from Computer  Products for the 1996
period was favorably  impacted by the delivery and  acceptance of  approximately
$9.0 million  (17.2% of Computer  Products  revenue in the 1996 period) of large
"roll-out" installations. No comparable large "roll-out" installations were made
during the 1997  period.  Revenue  from IT Services  increased  by $1.0  million
(26.3%)  from  $3.8  million  in 1996 to $4.8  million  in 1997  because  of the
Company's  implementation  of a program at the beginning of 1996 to replace less
profitable  hardware  maintenance and repair services with a variety of services
that were expected to generate  higher gross margins.  This program  resulted in
the  elimination of certain IT Services  customer  relationships  which had been
producing lower than average gross margin. The loss of this lower margin revenue
has been offset,  however, by sales to new IT Services customers and to existing
customers  in the 1997  period,  generally  at higher  gross  margins than those
earned on sales to the former  customers.  IT Services  revenues also  increased
because  of the  expansion  of its sale  force  and  billable  technical  staff,
together  with an emphasis on higher level  service  offerings to the  Company's
customers.  Revenue from IT Services as a percentage of total revenue  increased
from 6.6% in 1996 to 8.3% in 1997.  Revenue  from Telecom  Systems  increased by
$838,000 (59.9%) from $1.4 million in the six months ended June 30, 1996 to $2.2
million  in the 1997  period.  The  increase  in  Telecom  Systems  revenue  was
primarily  the  result  of  hiring  additional  sales  personnel  and  expanding
marketing efforts, which resulted in the addition of new customers. Revenue from
Telecom Systems as a percentage of total revenue increased from 2.4% in the 1996
period to 3.8% in the 1997 period.  CTI Software  revenue  increased by $515,000
(101.4%)  from $508,000 in the six months ended June 30, 1996 to $1.0 million in
the 1997  period.  The growth in CTI  Software  revenues  was  primarily  due to
increased  marketing  efforts which  resulted in the addition of new  customers.
Revenue from CTI Software, as a percentage of total revenue, increased from 0.9%
in the 1996 period to 1.7 % in the 1997 period.

       GROSS PROFIT.  Gross profit  increased by $1.6 million  (22.2%) from $7.2
million in the six months  ended June 30, 1996 to $8.8 million in the six months
ended June 30, 1997,  while gross margin increased from 12.4% in the 1996 period
to 14.9% in the 1997 period.  The gross margin for Computer  Products  increased
from 9.7% in the six  months  ended June 30,  1996 to 10.8% in the 1997  period,
which was  primarily  a result of a large  "roll-out"  type  transaction,  which
usually  produces  lower gross margin,  which  occurred  during the 1996 period.
Gross profit from IT Services  increased  $918,000  (74.3%) from $1.2 million in
the 1996 period to $2.2  million in the 1997  period.  The gross  margin from IT
Services  increased  from 32.3% in the six months  ended June 30,  1996 to 44.3%
during the 1997 period. As noted above, this increase was primarily attributable
to the replacement of less profitable IT Services  business with more profitable
business from new and existing IT Services customers.  Gross profit from Telecom
Systems  increased by $83,000 (15.0%) from $554,000 in 1996 to $637,000 in 1997.
The gross  margin for Telecom  Systems  sales  decreased  from 39.6% in the 1996
period to 28.5% in the 1997  period,  reflecting  the  commencement  of  Telecom
Systems  operations in the Company's  Dallas office,  lower product  margins and
higher  installation  costs than are  normally  incurred.  Gross profit from CTI
Software  increased  $249,000 (93.3%) from $267,000 in 1996 to $516,000 in 1997.
The gross margin for CTI Software  decreased  from 52.6% in the six months ended
June 30,  1996 to 50.4% in the 1997  period,  which  was  primarily  a result of
increased spending on technical staff related to new product development.

       SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSES.  Selling,  general  and
administrative  expenses  increased by $1.3 million (23.1%) from $5.7 million in
the six months  ended June 30,  1996 to $7.0  million in the 1997  period.  As a
percentage  of total  revenue,  selling,  general  and  administrative  expenses
increased from 9.7% in the 1996 period to 11.9% in the 1997 period. The increase
as a  percentage  of total  revenue  resulted  primarily  from the hiring of new
employees in sales and sales support functions,  as well as additional personnel
hired for IT Services administration and other general administration functions.

       OPERATING  INCOME.  Operating  income increased by $260,000 ( 17.0%) from
$1.5  million in the six months  ended June 30, 1996 to $1.8 million in the 1997
period. Operating income increased as a percentage of total revenue from 2.6% in
the 1996 period to 3.0% in the 1997 period.

       INTEREST  EXPENSE (NET OF OTHER INCOME).  Interest  expense (net of other
income)  increased  slightly from $582,000  during the six months ended June 30,
1996 to  $597,000  during  the 1997  period.  Despite  a small  increase  in the
effective interest rate paid by the Company during the six months ended June 30,
1997,  due to lower average  borrowings on the Company's  lines of credit during
such period, interest expense (net of other income) increased only slightly.

       NET INCOME.  Net  income,  after a provision  for income  taxes  totaling
$465,000  (reflecting  an effective  tax rate of 39.1%  compared to 35.5% in the
1996  period),  increased by $115,000  (19.0%)  from  $607,000 in the six months
ended June 30, 1996 to $722,000 in the 1997  period.  Net income  increased as a
percentage of revenues from 1.0% in the 1996 period to 1.2% in the 1997 period.

LIQUIDITY AND CAPITAL RESOURCES

       The  Company's  working  capital  was $2.3  million  and $3.5  million at
December 31, 1996 and June 30,  1997,  respectively.  As of June 30,  1997,  the
Company had  borrowing  capacity  under the  Company's  credit  facility of $3.2
million.

CASH FLOW

       Operating  activities  used net cash totaling  $645,000 and provided cash
totaling  $516,000  during the three  months  and the six months  ended June 30,
1997,  respectively.  During the three months ended June 30, 1997,  net cash was
used  in  operations  due  primarily  to  increased  levels  of  trade  accounts
receivables  which more than offset net income,  lesser  decreases  in inventory
levels and lesser  increases in trade  accounts  payable.  Operating  activities
provided net cash during the six months ended June 30, 1997 because the increase
in  trade  accounts  receivable  was  offset  by net  income  and  depreciation,
increases in accounts payable and increases in other liabilities.

       Trade accounts  receivable  increased $2.8 million during the three month
period ended June 30, 1997 and by $3.5 million  during the six months ended June
30, 1997.  Inventory decreased by $752,000 and $481,000 during the same periods,
respectively.  The increase in trade  accounts  receivable  resulted from slower
payments by the Company's customers during the second quarter of 1997. Inventory
decreased because of improved inventory turnover, particularly during the second
quarter of 1997.  Accounts payable increased by $213,000 during the three months
ended June 30,  1997 and by $2.2  million  during the six months  ended June 30,
1997,  due  principally  to extension of more liberal  terms from certain of the
Company's  suppliers  and the slower  payment by the  Company of trade  accounts
payable.

       Investing  activities used cash totaling  $17,000 and $125,000 during the
three  months and six months ended June 30, 1997,  respectively.  The  Company's
investing  activities that used cash during these periods were primarily related
to capital  expenditures.  During the next twelve months, the Company expects to
incur an estimated $1.0 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 relocation
of its Dallas branch office and the opening of two branch  offices in Austin 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 $1.3 million and $1.8 million
during the three  months and six month ended June 30,  1997,  respectively.  The
primary source of cash from financing activities each period has been borrowings
on the Company's lines of credit. The lines of credit have been used principally
to finance accounts receivable balances.

ASSET MANAGEMENT

       The Company had trade accounts receivable,  net of allowance for doubtful
accounts,  of $20.0  million  at June  30,  1997.  The  number  of  days'  sales
outstanding in trade accounts receivable was 52 days, which reflects the slowing
of payment by the  Company's  customers  during the three  months ended June 30,
1997.  Bad debt  expense as a percentage  of total  revenue for the three months
ended June 30, 1997 was 0.3%,  which was equal to bad debt expense for the three
months ended June 30, 1996. The Company's allowance for doubtful accounts,  as a
percentage of trade accounts receivable, was 1.3% at December 31, 1996, and 1.1%
at June 30, 1997.  Inventory  turnover for the three months and six months ended
June 30, 1997 was 21.3 times, and 20.1 times, respectively.

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 IBM Credit
Corporation ("IBMCC Facility")

       The total credit  available  under the IBMCC Facility is currently  $20.0
million, subject to borrowing base limitations which are generally computed as a
percentage of various  classes of eligible  accounts  receivable  and qualifying
inventory.  Borrowings  are  available  under the IBMCC  Facility for floor plan
financing of inventory  from approved  manufacturers  (the  "Inventory  Line"').
Available  credit under the IBMCC Facility,  net of Inventory Line advances,  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 plus 2.0% per
annum  (10.5%  at June 30,  1997).  Under the  Inventory  Line,  IBMCC  pays the
Company's  inventory  vendors  directly,  generally in exchange  for  negotiated
financial incentives. Typically, the financial incentives received are such that
IBMCC does not charge interest to the Company until  approximately 30 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 IBMCC.  Inventory  Line
advances not paid within 30 days after the  financing  date bear interest at the
fluctuating prime rate plus 6.0%. IBMCC is permitted to fix a minimum prime rate
for the IBMCC  Facility of not less than the average prime rate in effect at the
time the minimum  prime rate is set but has not done so. IBMCC is  authorized to
change,  on 30  days  notice,  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 IBMCC Facility
renews  for  successive  periods of 13 months  unless  either  party  chooses to
terminate the arrangement on 60 days notice.

       The  IBMCC  Facility  is   collateralized   by  a  security  interest  in
substantially  all of the Company's assets,  including its accounts  receivable,
inventory,  equipment and bank accounts.  The Company's Chief Executive  Officer
and principal stockholder has personally  guaranteed the Company's  indebtedness
to IBMCC.  Collections of the Company's  accounts  receivable are required to be
applied through a lockbox  arrangement to repay indebtedness to IBMCC;  however,
IBMCC  customarily  releases a portion of the Company's daily collections to the
extent  that  they  exceed  the daily  estimated  borrowing  base.  IBMCC is not
obligated to continue  this  accommodation.  If in the future IBMCC insists that
all  lockbox  payments  be  applied to reduce the  Company's  indebtedness,  the
Company  would be required to seek funding  from IBMCC or other  sources to meet
substantially all of its cash needs.

       At June 30, 1997, the total  indebtedness  of the Company under the IBMCC
Facility  was $16.6  million of which $11.8  million was  outstanding  under the
Accounts Line and $4.8 million was  outstanding  under the Inventory  Line.  The
Company's  remaining  available  credit at June 30, 1997, based on its borrowing
base was approximately $3.2 million.

       The Company has a $3.0 million  credit  facility with Deutsche  Financial
Services  (the "DFS  Facility")  for the  purchase  of  inventory  from  certain
suppliers.  As in the case of the IBMCC Inventory  Line,  advances under the DFS
Facility are typically  interest  free for 30 days after the financing  date for
transactions in which adequate financial incentives are received by DFS from the
vendor.  Within 30 days after the financing  date,  the full invoice  amount for
inventory  financed  through DFS 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%.  DFS  retains a  security  interest  in the
inventory financed.  The DFS Facility is immediately  terminable by either party
by written notice to the other. At June 30, 1997, the amount  outstanding  under
the DFS Facility was $940,000.

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

SUBSEQUENT EVENT

On July 7, 1997, the Company  successfully  completed an Initial Public Offering
of 1,767,500  shares of common stock and received net proceeds of $8,190  before
deducting  estimated  offering  expenses of $850. On July 29, 1997,  the Company
sold an  additional  265,005  shares  of  common  stock  under  option  with the
Underwriters  to cover  over-allotments  and  received  proceeds of $1,448.  The
company used all of the proceeds to reduce  short-term  debt.  In addition,  the
Company agreed to sell to the  underwriters of the public  offering  warrants to
purchase  176,750  at an  exercise  price of the  greater  of 120% of the public
offering  price or $9.60 per share.  The purchase price of the warrants was $.01
per warrant and the purchase price was paid on July 29, 1997.


Part II.  Other Information

Item 1.  Legal Proceedings

       As previously reported,  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.

Item 2.  Report of Sales of Securities and Use of Proceeds

For Period ending :        07       31      97

Indicate  whether the report is an initial  report ___ , an amendment ___ , or a
final report X .

If the report is an amendment, indicate the number of such amendment .

1.   (a)  State the name of the issuer or successor issuer filing the report.

          Allstar Systems, Inc.

     (b)  If a  successor  issuer is  filing  the  report  with  respect  to the
          registration  statement  of its  predecessor,  state  the name of such
          predecessor issuer.

          N/A

2. (a) Indicate the effective date of the registration  statement for which this
form is filed.
                                                           MO       DAY     YEAR

                                                           07       07      97

   (b) Provide the SEC file number assigned to the registration.

                                                             2    -    333-09789

   (c) If the issuer has been assigned a CUSIP  number,  specify the first (6)
       digits.

                                                                          019892

3.   (a)  Has the offering commenced?                                        YES


     (b) If yes, indicate the date the offering commenced.
                                                           MO       DAY     YEAR

                                                           07       07      97
          If no, explain briefly:

4.   Did the offering terminate before any securities were sold?
                                                                              NO

          If yes, explain briefly


     Note: if the offering  terminated before any securities were sold, see Rule
     477  under  Regulation  C (17  CFR  230.477)  regarding  withdrawal  of the
     registration

5. Did the offering terminate prior to the sale of all securities registered?
                                                                              NO

          If yes, explain briefly

6. Furnish the name(s) of the managing underwriter(s) if any.

          (1)   Sutro & Co., Incorporated
          (2)   Cruttenden Roth Incorporated

7.        (a) Indicate the title and code of each class of securities registered
          and,  where a class of  convertible  securities  is being  registered,
          indicate the title and code of any class of securities into which such
          securities may be converted.

     Title of Security                                            Code

     Common Stock $.01 par value per share                         EQ


     (b)  Describe briefly any class of securities categorized as "other."

          N/A

8.   Indicate on the following table the amount and aggregate  offering price of
     securities  registered  and sold to date for the  account of the issuer and
     for the account (s) of any selling security holder (s).

     For the account of the issuer     For the account (s) of any selling
                                       security holders (s)

              1,765,125                                   267,500




<PAGE>


Title    Amount     Aggregate    Amount     Aggregate      Amount     
of       registered price of     sold       offering       registered 
security            offering                price of                  
                    amount                  amount                    
                    registered              sold                      

(1)      1,765,125  $10,590,950  1,765,125  $10,590,750    267,500    


          Aggregate     Amount      Aggregate 
          offering      sold        offering  
          price of                  price of  
          amount                    amount    
          registered                sold      
                                              
          $1,605,000    267,500     $1,605,000

9.   State,  if known,  or  furnish a  reasonable  estimate  of,  the  amount of
     expenses  incurred for the issuer's account in connection with the issuance
     and  distribution  of the securities  registered  for each category  listed
     below.  Place an "X" in the box to the left of any amount  given that is an
     estimate.

                 Direct or indirect payments to              Direct or indirect
                 directors, officers, general partners       payments to others
                 or the issuer or their associates; to
                 persons owning ten percent or more
                 of any class of equity securities of the
                 issuer; and to affiliates of the issuer


                                                 (A)                   (B)

         (01)    Underwriting
                 discounts and
                 commissions                        0            $  794,306

         (02)    Finders' Fees                      0                    -0-

         (03)    Expenses paid to or
                 for underwriters                                   158,861

         (04)    Other expenses    X                                770,000

         (05)    Total Expenses                                  $ ,723,167


10.  Indicate the net offering  proceeds to the issuer after the total  expenses
     in Item 9 above.

                                                                 $  8,867,583


<PAGE>


11.  State,  if known,  or furnish a  reasonable  estimate of, the amount of net
     offering proceeds to the issuer used for each of the purposes listed below.
     Do not  include any amount in  "working  capital" to which a more  specific
     category  is  applicable.  Place an "X" I the box to the left of any amount
     given that is an estimate.


                 Direct of indirect payments to              Direct or indirect
                 directors, officers, general partners       payments to others
                 or the issuer or their associates; to
                 persons owning ten percent or more
                 of any class of equity securities of the
                 issuer; and to affiliates of the issuer


                                                 (A)                   (B)

         (01)    Construction of plant,
                 building and
                 facilities                                            $  0

         (02)    Purchase and installation of
                 machinery and equipment                                  0

         (03)    Purchase of real estate                                  0

         (04)    Acquisition of other business (es)                       0

         (05)    Repayment of indebtedness                       $8,867,583

         (06)    Working capital                                          0

12.  Do the use (s) of  proceeds in Item 11  represent a material  change in the
     use (s) of proceeds described I the prospectus?
                                                                              NO

         If yes, explain briefly


<PAGE>



                                   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.

August 6, 1997                 By:        /s/ James H. Long
Date                               James H. Long, Chief Executive Officer



August 6, 1997                 By:      /s/ Donald R. Chadwick
Date                               Donald R. Chadwick, Chief Financial Officer