FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
                                   (Mark One)

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

For the quarterly period ended September 30, 1999
                                       OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the transition period from ________ to ___________

Commission file number: 333-09789

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

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

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

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

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes _X _ No_ __

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

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

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

Title                                            Outstanding

Common Stock $.01 par value per share            As of November 2, 1999,
                                                 4,171,125 shares outstanding



<PAGE>


PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

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

                                                September 30,       December 31
                                                    1999                 1998
                                                (Unaudited)
ASSETS

Current assets:
     Cash and cash equivalents.................$     3,788         $     2,538
     Accounts receivable, net..................     32,478              34,893
     Accounts receivable - affiliates .........        456                 373
     Inventory.................................     10,002               8,497
     Deferred taxes ...........................        431                 431
     Income taxes receivable...................        637                 637
     Other current assets .....................        346                 559
                                                ----------          ----------
              Total current assets ............     48,138              47,928
Property and equipment.........................      2,611               2,902
Other assets  .................................        160                 198
                                                ----------          ----------
Total    ......................................$    50,909         $    51,028
                                                ==========          ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Notes payable ............................$    12,738         $    15,958
     Accounts payable..........................     19,899              16,641
     Accrued expenses..........................      5,161               5,273
     Deferred service revenue..................        195                 256
                                                ----------          ----------
              Total current liabilities........     37,993              38,128
     Deferred credit - stock warrants..........        195                 195

Commitments and contingencies
Stockholders' equity:
     Preferred stock, $.01 par value,
       5,000,000 shares authorized, no shares
       issued Common stock:
       $.01 par value, 15,000,000 shares
       authorized, 4,442,325 and 4,503,411
       shares issued and outstanding on
       September 30, 1999 and
       December 31, 1998................                44                  45
     Additional paid in capital................     10,037              10,196
     Unearned equity compensation..............         (1)               (269)
     Treasury stock (271,200 shares, at cost)..       (834)               (834)
     Retained earnings.........................      3,475               3,567
                                                ----------          ----------
              Total stockholders' equity.......     12,721              12,705
                                                ----------          ----------
Total..........................................$    50,909         $    51,028
                                                ==========          ==========

See notes to consolidated financial statements


<PAGE>


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


                                                Three Months Ended September 30,

                                                   1999                  1998
                                                   ----                  ----

Total revenue .................................$    51,585          $    44,775
Cost of sales and services.....................     45,378               38,211
                                                ----------           ----------
Gross profit  .................................      6,207                6,564
Selling, general and administrative expenses...      5,527                6,325
                                                ----------           ----------
Operating income...............................        680                  239
Interest expense, net of other income..........        187                   95
                                                ----------           ----------
Income before provision for income taxes.......        493                  144
Provision for income taxes.....................        161                   57
                                                ----------           ----------
Net income    .................................$       332          $        87
                                                ==========           ==========

Net income per share:
         Basic.................................$      0.08          $      0.02
                                                ==========           ==========
         Diluted...............................$      0.08          $      0.02
                                                ==========           ==========

Weighted average shares outstanding:
         Basic.................................  4,169,125            4,340,364
                                                 =========            =========
         Diluted...............................  4,214,064            4,340,364
                                                 =========            =========


                                                Nine Months Ended September 30,


                                                   1999                 1998
                                                   ----                 ----

Total revenue .................................$   149,744          $   117,157
Cost of sales and services.....................    132,420               99,833
                                                ----------           ----------
Gross profit  .................................     17,324               17,324
Selling, general and administrative expenses...     16,802               16,364
                                                ----------           ----------
Operating income...............................        522                  960
Interest expense, net of other income..........        637                  175
                                                ----------           ----------
(Loss) income before (benefit) provision for
     income taxes..............................       (115)                 785
(Benefit) provision for income taxes...........        (23)                 305
                                                ----------           ----------
Net (loss) income..............................$       (92)         $       480
                                                ==========           ==========
Net (loss) income per share:
         Basic.................................$     (0.02)         $      0.11
                                                ==========           ==========
         Diluted...............................$     (0.02)         $      0.11
                                                ==========           ==========
Weighted average shares outstanding:
         Basic.................................  4,169,023            4,405,517
                                                ==========           ==========
         Diluted...............................  4,169,023            4,395,310
                                                ==========           ==========


See notes to consolidated financial statements


<PAGE>


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


                                                 Nine Months Ended September 30,
                                                    1999                1998
                                                    ----                ----


Net (loss) income..............................$       (92)         $       480
Adjustments to reconcile net (loss) income to
     net cash provided by (used in) operating
     activities:
     Depreciation and amortization.............        806                  573
Changes in assets and liabilities that
      provided (used) cash:
     Accounts receivable, net..................      2,415               (4,911)
     Accounts receivable - affiliates..........        (83)                (221)
     Inventory.................................     (1,505)              (5,441)
     Other current assets......................        213                    6
     Other assets..............................        ---                 (159)
     Accounts payable..........................      3,258                3,800
     Accrued expenses..........................         (4)               1,466
     Income taxes payable......................        ---                  (95)
     Deferred service revenue..................        (61)                  (9)
                                               ------------          -----------

         Net cash provided by (used in)
              operating Activities.............      4,947              ( 4,511)
                                                ----------           -----------

Cash flows from investing activities:
     Capital expenditures......................       (477)                (842)
                                               -----------           ----------

         Net cash used in investing activities:       (477)                (842)
                                               -----------           ----------

Cash flows from financing activities:
     Net proceeds from issuance of common stock        ---                   33
     Purchase of treasury stock................        ---                 (900)
     Net (decrease) increase in notes payable..     (3,220)               6,070
                                                ----------           ----------

         Net cash (used in) provided by
              financing activities:............     (3,220)               5,203
                                                ----------           ----------

Net increase in cash and cash
     Equivalents...............................      1,250                 (150)
Cash and cash equivalents at beginning
     of period.................................$     2,538          $     1,581
                                                ----------           ----------
Cash and cash equivalents at end of period.....$     3,788          $     1,431
                                                ==========           ==========
Supplemental disclosures of cash flow information:
     Cash paid for interest                    $       754          $       254
                                                ==========           ==========
     Cash paid for taxes                       $         0          $       401
                                                ==========           ==========

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.    DESCRIPTION OF BUSINESS AND 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., a
wholly owned subsidiary,  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 engage in the sale and service of
computer products in western Texas and New Mexico.

     A substantial  portion of Allstar's sales and services are authorized under
arrangements with product manufacturers. 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
that underlie the credit arrangements that are used for working capital.

     The  condensed   consolidated  financial  statements  presented  herein  at
September 30, 1999 and for the three months and the nine months ended  September
30, 1999 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,  1998 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.

     Reclassifications   -  Certain  amounts  in  the   consolidated   financial
statements  presented  herein have been  reclassified to conform to current year
presentation.

     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  June  1999,  the  Financial  Accounting
Standards  Board issued  Statement of Financial  Accounting  Standards  No. 137,
"Accounting for Derivative  Instruments and Hedging  Activities-Deferral  of the
Effective Date of Statement No. 133" ("SFAS No. 137"). SFAS No. 137 is effective
for all  fiscal  quarters  of  fiscal  years  beginning  after  June  15,  2000.
Management is evaluating what impact the  pronouncement  might have, if any, and
additional disclosures may be required when this statement is implemented.

<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 and the Incentive  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.  The stock option  grants will vest ratably over the five year period from
the date of issuance.

     The number of options  granted and the exercise price under each of the two
Plans were as follows at September 30, 1999:

          Exercise Price            Director Plan                Incentive Plan
              $6.0000                                                 8,000
              $1.7500                    9,000                        2,400
              $1.5000                   28,000                      198,480
              $1.5625                                                18,600
              $1.0630                                               186,672
                                       -------                      -------
     Total granted                      37,000                      414,152
                                       =======                      =======

In addition,  incentive  awards in the form of restricted stock were granted for
14,286  shares that would have vested  ratably over the two-year  period  ending
July 7, 1999 and  50,000  shares,  which  would  have  vested  ratably  over the
five-year  period  ending May 20, 2004.  During the quarter  ended June 30, 1999
Allstar  exchanged  restricted  stock awards for 63,086  shares for stock option
grants on 126,172  shares at an  exercise  price of $1.06 per  share.  The stock
option  grants  vest over the same  period  as the  exchanged  restricted  stock
awards.  As  of  September  30,  1999,   Allstar  had  restricted  stock  awards
outstanding for 2,200 shares.


3.   LITIGATION

     During 1998 Allstar  filed suit  against a former  employee and such former
employee  has  filed  a  counter-claim  against  Allstar.   Allstar  intends  to
vigorously defend such counter claim. Allstar is unable to estimate the range of
possible  recovery by the former employee because the suit is still in the early
stages of discovery.

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



<PAGE>


4.   EARNINGS PER SHARE

The computations of basic and diluted earnings per share for each period were as
follows:

<TABLE>
<CAPTION>
                                                   Three months ended                Nine months ended
                                                      September 30,                    September 30,
                                                   1999           1998               1999            1998
                                                   ----           ----               ----            ----
                                                   (Amounts in thousands except share and per share data)
<S>                                                 <C>            <C>                <C>             <C>
Numerator:
     Net income (loss)......................       $332            $87               ($92)           $480
                                                   ====            ===                ====           ====
Denominator:
     Denominator for basic earnings per
       share - weighted-average shares
       outstanding..........................  4,169,125      4,340,364          4,169,023       4,405,517

Effect of dilutive securities:
     Shares issuable from assumed conversion
       of common stock options, warrants and
  restricted stock..........................     44,939              0                  0          10,207
                                             ----------     ----------          ---------      ----------

Denominator for diluted earnings per share..  4,214,064      4,340,364          4,169,023       4,395,310
                                              =========      =========          =========       =========

Basic earnings per share....................     $ 0.08         $0.02              $(0.02)          $0.11
                                                                 ====               =====            ====
Diluted earnings per share..................     $ 0.08         $0.02              $(0.02)          $0.11
                                                   ====          ====               =====            ====

<FN>
The potentially  dilutive options  totaling 67,559 shares,  calculated under the
treasury stock method,  were not used in the calculation of diluted earnings per
share  for the nine  months  ended  September  30,  1999  since  the  effect  of
potentially dilutive securities in computing a loss per share is antidilutive.
</FN>
</TABLE>


<PAGE>


5.   SEGMENT INFORMATION

     Allstar has three  reportable  segments:  (1) Information  Technology,  (2)
Telecom Systems and (3) CTI Software.  Information  Technology includes products
and services relating to computer products and management  information  systems.
Telecom  Systems  includes  products,  installation  and  services  relating  to
telephone  systems.  CTI Software  includes  software  products that  facilitate
telephony and computer  integration  primarily for telemarketing and call center
applications.  Allstar evaluates  performance of each segment based on operating
income.  Management  only views accounts  receivable,  and not total assets,  by
segment in their decision making. The tables below show the results of the three
reportable segments:

                                     Information  Telecom   CTI
                                     Technology   Systems Software  Consolidated

For the quarter ended
     September 30, 1999:

Total revenue.......................   $ 49,552  $    704  $  1,329  $ 51,585
Cost of sales and services..........     44,208       547       623    45,378
                                        -------   -------   -------   -------

Gross profit........................      5,344       157       706     6,207
Selling, general and
     administrative expenses........      4,438       565       524     5,527
                                        -------   -------   -------   -------
Operating income (loss).............   $    906  $   (408) $    182  $    680
                                        =======   =======   =======   =======
Accounts receivable, net............   $ 28,861  $  2,701  $    916  $ 32,478
                                        =======   =======   =======   =======

For the quarter ended
     September 30, 1998:

Total revenues                         $ 41,750  $  2,302  $    723  $ 44,775
Cost of sales and services..........     36,139     1,753       319    38,211
                                         ------   -------   -------   -------
Gross profit........................      5,611       549       404     6,564
Selling, general and
     administrative expenses........      5,067       863       395     6,325
                                        -------   -------   -------   -------

Operating income (loss).............   $    544  $   (314) $      9  $    239
                                        =======   =======   =======   =======
Accounts receivable, net............   $ 29,164  $  2,985  $    185  $ 32,334
                                        =======   =======   =======   =======

For the nine months ended
     September 30, 1999:

Total revenue.......................   $143,656  $  3,164  $  2,924  $149,744
Cost of sales and services..........    128,638     2,415     1,367   132,420
                                        -------   -------   -------   -------
Gross profit........................     15,018       749     1,557    17,324
Selling, general and
    administrative expenses.........     13,605     1,728     1,469    16,802
                                        -------   -------   -------   -------
Operating income (loss).............   $  1,413  $   (979) $     88  $    522
                                        =======   =======   =======   =======
Accounts receivable, net............   $ 28,861  $  2,701  $    916  $ 32,478
                                        =======   =======   =======   =======

For the nine months ended
    September 30, 1998:

Total revenue.......................   $109,903  $  5,192  $  2,062  $117,157
Cost of sales and services..........     95,037     3,684     1,112    99,833
                                        -------   -------   -------   -------
Gross profit........................     14,866     1,508       950    17,324
Selling, general and
  administrative expenses...........     13,131     2,014     1,219    16,364
                                        -------   -------   -------   -------
Operating income (loss).............   $  1,735  $   (506) $   (269) $    960
                                        =======   =======   =======   =======
Accounts receivable, net............   $ 29,164  $  2,985  $    185  $ 32,334
                                        =======   =======   =======   =======


<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  included  elsewhere  in this  Form  10-Q and the
company's  Form  10-K,   previously  filed  with  the  Securities  and  Exchange
Commission.

Overview

     Allstar  Systems,  Inc. is engaged in the  business of  reselling  computer
hardware, business telephone systems and software products and providing related
services.  In addition,  we derive revenue from providing services to purchasers
of computer  products and other  customers.  We operate from offices in Houston,
Austin,  El Paso,  San  Antonio  and Dallas,  Texas and in  Albuquerque  and Las
Cruces,  New Mexico.  While all offices  offer  computer  related  products  and
services, most offices do not offer telecommunications products and services. We
develop and market CTI Software through our wholly owned subsidiary  Stratasoft,
Inc. To date, most of our revenue has been derived from computer  products sales
and related services.  During the quarter ended September 30, 1999,  Information
Technology  totaled  96.0% of revenues  while  Telecom  Systems and CTI Software
totaled 1.4% and 2.6% of revenues, respectively.

      Information   Technology  sells  a  wide  variety  of  computer  and  data
communications   hardware  and  software   products   available  from  over  600
manufacturers.  We sell  desktop and laptop  computers,  monitors,  printers and
other peripheral  devices,  operating system and application  software,  network
products and mid-range host and server systems. We are an authorized reseller of
products from a number of leading  manufacturers of computer hardware,  software
and networking equipment.

     Generally,  products and system  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 three 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, we normally
do not have a significant backlog of computer product sales.

     Services are provided by Information  Technology  both in conjunction  with
and  separately  from its  product  and system  sales.  We  typically  price our
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 we do not maintain  branch  offices,  we often  subcontract for
necessary technical  personnel,  particularly where required for larger scope or
prolonged duration contracts.  The services provided include information systems
support,  authorized warranty service, hardware repair and maintenance services,
complex  network  diagnostic  services,  end user support  services and software
diagnostic services. We also offer complete outsourcing of a customer's computer
and network  management  and  technical  support needs on a contract  basis.  In
addition, we provide temporary and permanent technical 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,  our  technical  staff   participates  in  various   certifications   and
authorization   programs  sponsored  by  hardware   manufacturers  and  software
suppliers.  Our  ability  to  attract  and  retain  qualified  professional  and
technical  personnel  is critical to the success of our services  business.  The
most  significant  portion of the costs associated with the delivery of services
is personnel  costs.  Therefore,  in order to be successful,  our billable rates
must be in  excess of the  personnel  costs and our  margin  is  dependent  upon
maintaining  high  utilization  of  our  service  personnel.  In  addition,  the
competition for high quality personnel has generally intensified causing our and
other service providers personnel costs to increase.


<PAGE>


     While we often have service  contracts with our larger  customers,  many of
these contracts are project based or are terminable on relatively short notice.

     Through Telecom Systems, we market,  install and service 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.  As with Information Technology,
Telecom System's cost of sales include both product cost and labor cost, and the
labor has a more fixed nature. During periods when there is downward pressure on
pricing  systems,  management of labor cost is necessary for Telecom Systems not
to have erosion of gross margin.

     We develop and market proprietary CTI Software,  which integrates  business
telephone  systems  and  networked  computer  systems,   under  the  trade  name
"Stratasoft."  Our basic products are typically  customized to suit a customer's
particular needs and are often bundled with computer  hardware supplied by us 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.

     We believe  that each of our three  businesses  are  complementary  to each
other and allow us to offer a broader range of integrated  products and services
in order to satisfy our  customers'  information  and  communication  technology
requirements  than many of our  competitors.  Our  strategy is to  maintain  and
expand our  relationships  with our customers by satisfying a greater portion of
these requirements.

     Our cost of sales and services include product cost and labor.  Labor has a
more fixed nature such that higher levels of service revenues produce more gross
margin  while  lower  levels of service  revenues  produce  less  gross  margin.
Management  of labor  cost is  important  in order to  prevent  erosion of gross
margins.

     A significant portion of our selling,  general and administrative  expenses
relate to  personnel  costs,  some of which are variable and others of which are
relatively fixed. Our variable  personnel costs are  substantially  comprised of
sales commissions, which are typically calculated based upon our gross profit on
a particular  sales  transaction  and thus generally  fluctuate with our overall
gross profit. The remainder of 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.

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

Special notice regarding forward-looking statements

     This  quarterly  annual  report  on  Form  10-Q  contains   forward-looking
statements within the meaning of the private securities litigation reform act of
1995 relating to future events or our future  financial  performance  including,
but not limited to,  statements  contained in item 1 "financial  statements" and
item 2. -  "management's  discussion  and  analysis of financial  condition  and
results of  operations."  Readers are cautioned that any statement that is not a
statement of historical fact, including but not limited to, statements which may
be identified by words including,  but not limited to,  "anticipate,"  "appear,"
"believe,"  "could,"   "estimate,"   "expect,"  "hope,"  "indicate,"   "intend,"
"likely,"  "may,"  "might,"  "plan,"   "potential,"  "seek,"  "should,"  "will,"
"would," and other variations or negative  expressions  thereof, are predictions
or  estimations  and are subject to known and unknown  risks and  uncertainties.
Numerous factors, including factors which we have little or no control over, may
affect the  company's  actual  results  and may cause  actual  results to differ
materially  from those  expressed in the  forward-looking  statements  contained
herein.  In evaluating  such  statements,  readers  should  consider the various
factors  identified in the  company's  annual report on Form 10-K, as filed with
the Securities and Exchange  Commission  including matters set forth in item 1.-
"factors which may affect the future results of  operations,"  which could cause
actual events,  performance or results to differ materially from those indicated
by such statements.

     Three  Months  Ended  September  30, 1999  Compared To Three  Months  Ended
September 30, 1998 (Dollars in thousands)

     The  following  table  sets  forth,  for  the  periods  indicated,  certain
financial data derived from our unaudited consolidated  statements of operations
for the three months ended September 30, 1999 and 1998.

                                                Three months ended September 30,
                                                      1999            1998
                                                      ----            ----
                                                 Amount   %      Amount     %

Revenue
Information Technology.........................$ 49,552   96.0  $ 41,750   93.2
Telecom Systems................................     704    1.4     2,302    5.2
CTI Software...................................   1,329    2.6       723    1.6
                                                -------  -----  --------  -----
         Total revenue.........................  51,585  100.0    44,775  100.0
Gross profit:
Information Technology.........................   5,344   10.8     5,611   13.4
Telecom Systems................................     157   22.3       549   23.8
CTI Software...................................     706   53.1       404   55.9
                                                -------  -----  --------  -----
         Total gross profit....................   6,207   12.0     6,564   14.6
Selling, general and administrative expenses...   5,527   10.7     6,325   14.1
                                                -------  -----  --------  -----
Operating income...............................     680    1.3       239    0.5
Interest expense, net of other income..........     187    0.3        95    0.2
                                                -------  -----  --------  -----
(Loss) income before (benefit)
 provision for income taxes....................     493    1.0       144    0.3
(Benefit) provision for income taxes...........     161    0.4        57    0.1
                                                -------  -----  --------  -----
Net (loss) income..............................$    332    0.6  $     87    0.2
                                                =======  =====  ========  =====

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>


     TOTAL REVENUE. Total revenue increased by $6,810 (15.2%) to $51,585 in 1999
from $44,775 in 1998.

     Information  Technology  revenue  increased by $7,802 (18.7%) to $49,552 in
1999  from  $41,750  in 1998.  As a  percentage  of total  revenue,  Information
Technology  revenue  increased to 96.0% in 1999 from 93.2% in 1998. The increase
in Information Technology revenues was attributable to revenues derived from new
customer  relationships in offices opened in late 1997 and during 1998, together
with significant  revenue growth realized from new and existing customers in our
more mature offices in Dallas and Houston.  Information Technology revenues from
our newer  offices,  opened in 1997 and 1998,  increased by $3,480 (61.6%) while
revenues from our more mature offices in Dallas and Houston  increased by $4,322
(12%).

     Telecom  Systems  revenue  decreased by $1,598 (69.4%) to $704 in 1999 from
$2,302 in 1998.  Revenue from Telecom  Systems as a percentage  of total revenue
decreased to 1.4% in 1999 from 5.2% in 1998.  Revenue decreased in 1999 compared
to 1998 because  during the third  quarter of 1998 Telecom  Systems had begun to
realize revenues from a large  installation  for a single customer.  We were not
able to replace  those  revenues  with new orders of the magnitude of that large
installation.  In addition, during the 1999 period, we attempted to make changes
to our Telecom Systems business, which has produced unsatisfactory profitability
results to date, in an attempt to ultimately  improve  financial  performance in
this business  unit,  and this caused  decreased  sales  activity as management,
operational procedure and staffing changes were made.

     CTI Software revenue  increased by $606 (83.8%) to $1,329 in 1999 from $723
in 1998. The increase in CTI Software  revenues was due to both increased  sales
and increased size of sales of its products in 1999.  Revenue from CTI Software,
as a percentage of total revenue, increased to 2.6% in 1999 from 1.6% in 1998.

     GROSS PROFIT.  Gross profit decreased by $357 (5.4%) to $6,207 in 1999 from
$6,564 in 1998. Gross margin decreased to 12.0% in 1999 from 14.6% in 1998.

     Information  Technology  gross  profit  decreased by $267 to $5,344 in 1999
from  $5,611 in 1998 even though  revenues  increased  by 18.7%.  The decline in
gross profit was due to the  realization  of lower margins in 1999.  Information
Technology  gross  margin  decreased  to 10.8% in 1999 from  13.4% in 1998.  The
reduction  in  gross  margin  was the  result  of the  combined  effects  of our
participation  in lower margin large volume sales  transactions,  lower  average
selling prices for computers realized throughout the industry,  costs related to
eliminating  unwanted  inventory  and  excessive  freight costs not passed on to
customers.

     Telecom  Systems  gross  profit  decreased  by $392 (71.4%) to $157 in 1999
compared  to $549 in 1998  due to  lower  revenues  being  realized  in the 1999
period.  Gross margin for Telecom Systems decreased slightly from the prior year
to 22.3% in 1999 from 23.8% in 1998.  Under  normal  circumstances  we expect to
realize  between 25% and 35% gross  margins in Telecom  Systems.  The decline in
gross margin in Telecom  Systems as compared to both the expected  normal levels
and 1998 was due to a reduction in revenue without a corresponding  reduction in
those costs of sales and services which tend to be fixed in nature.

     CTI Software  gross  profit  increased by $302 (74.8%) to $706 in 1999 from
$404 in 1998. Gross margins for CTI Software decreased slightly to 53.1% in 1999
from 55.9% in 1998 but were in line with expectations for this business.

     SELLING,  GENERAL  AND  ADMINISTRATIVE   EXPENSES.   Selling,  general  and
administrative  expenses decreased by $798 (12.6%) to $5,527 in 1999 from $6,325
in 1998. As a percentage of revenue,  these expenses decreased by 3.5%, to 10.6%
of  revenue in 1999 from 14.1% of revenue  in 1998.  The  decrease  in  selling,
general and  administrative  expenses as a percentage  of revenue was the direct
result of our effort to reduce these costs  through the closing of  unprofitable
offices,  the  downsizing of certain branch offices and the reduction of certain
expense structures.  Additionally,  we realigned certain operations to eliminate
redundancies  and improve  efficiency.  During 1998 we  increased  our  spending
relating to opening and  staffing  new  offices  and sales  operations  with the
expectation  of producing a sufficient  revenue base to cover those expenses and
turn these new offices  into  profitable  operations.  Late in 1998,  management
realized that certain of these new offices and  operations  would not be able to
rapidly attain sufficient revenues and gross profits to meet those expectations.
Consequently,  we began  downsizing  or closing  those  operations  and this has
resulted in reduced selling, general and administrative expenses.

     During the quarter our Information  Technology  offices  produced  earnings
before the allocation of corporate  overhead  costs and all but one  Information
Technology office produced earnings before interest and taxes.

     In spite of the fact that  selling,  general  and  administrative  expenses
declined as a percentage of revenue, we were not able to reduce selling, general
and administrative  expenses as much as we desired.  We reduced the total number
of full-time  employees by 17 (3.9%) from  approximately 440 at June 30, 1999 to
423 at  September  30,  1999,  but did not  realize  the full  impact of expense
reduction in the quarter due to the fact that the reductions occurred throughout
the quarter and because of severance paid to certain employees.

     OPERATING INCOME. Operating income increased by $441 (185%) to $680 in 1999
from $239 in 1998 due,  principally,  to the  reduction in selling,  general and
administrative  expenses,  which more than offset  lower gross  profit  realized
because of, lower gross margin.  Operating  income  increased as a percentage of
total revenue to 1.4% in 1999 from 0.5% in 1998.

     INTEREST  EXPENSE,  NET OF OTHER  INCOME.  Interest  expense,  net of other
income increased by $92 to $187 in 1999 compared to $95 in 1998. This reflects a
higher level of borrowing on our credit  facilities  in 1999 as compared to 1998
and higher interest rates in 1999 compared to 1998.

     NET INCOME.  Net income,  after a provision for income taxes  totaling $161
(reflecting  an effective  tax rate of 32.7% in 1999 compared to 39.6% in 1998),
increased by $245 to $332 in 1999 compared to $87 in 1998.

<PAGE>


     Nine  Months  Ended  September  30,  1999  Compared  To Nine  Months  Ended
September 30, 1998 (Dollars in thousands)

     The  following  table  sets  forth,  for  the  periods  indicated,  certain
financial data derived from our unaudited consolidated  statements of operations
for the nine months ended September 30, 1999 and 1998.

                                                 Nine months ended September 30,
                                                   1999                1998
                                                   ----                ----
                                                 Amount     %     Amount    %

Revenue  :
Information Technology.........................$143,656   95.9  $109,903   93.8
Telecom Systems................................   3,164    2.1     5,192    4.4
CTI Software...................................   2,924    2.0     2,062    1.8
                                                -------  -----   -------  -----
         Total revenue......................... 149,744  100.0   117,157  100.0
Gross profit:
Information Technology.........................  15,018   10.5    14,866   13.5
Telecom Systems................................     749   23.7     1,508   29.0
CTI Software...................................   1,557   53.2       950   46.1
                                                -------  -----    ------  -----
         Total gross profit....................  17,324   11.6    17,324   14.8
Selling, general and administrative expenses...  16,802   11.2    16,364   14.0
                                                -------  -----    ------  -----
Operating income...............................     522    0.4       960    0.8
Interest expense, net of other income..........     637    0.5       175    0.1
                                                -------  -----    ------  -----
(Loss) income before (benefit)
 provision for income taxes....................    (115)  (0.1)      785    0.7
Provision for income taxes.....................     (23)  (0.0)      305    0.3
                                                -------  -----   -------  -----
Net (loss) income..............................$    (92) (0.1)  $    480    0.4
                                                =======  =====   =======  =====

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.


     TOTAL REVENUE.  Total revenue  increased by $32,587  (27.8%) to $149,744 in
1999 from $117,157 in 1998.

     Information  Technology revenue increased by $33,753 (30.7%) to $143,656 in
1999 from  $109,903  in 1998.  As a  percentage  of total  revenue,  Information
Technology  revenue  increased to 95.9% in 1999 from 93.8% in 1998. The increase
in Information  Technologies  revenues was attributable to revenues derived from
new  customer  relationships  in offices  opened in late 1997 and  during  1998,
together  with  significant  revenue  growth  realized  from  new  and  existing
customers  in our  more  mature  offices  in  Dallas  and  Houston.  Information
Technology  revenues from the company's newer offices,  opened in 1997 and 1998,
increased by $9,542  (136.4%).  Revenues from our more mature  offices in Dallas
and Houston increased by $16,409 (26.8%).

     Telecom Systems revenue  decreased by $2,028 (39.1%) to $3,164 in 1999 from
$5,192 in 1998.  Revenue from Telecom  Systems as a percentage  of total revenue
decreased to 2.1% in 1999 from 4.4% in 1998.  Revenue decreased in 1999 compared
to 1998 because  during the third  quarter of 1998 Telecom  Systems had begun to
realize revenues from a large  installation  for a single customer.  We were not
able to replace  those  revenues  with new orders of the magnitude of that large
installation.  In addition,  during the 1999 period a portion of the decrease in
Telecom Systems revenue was due to increased pricing competition from a directly
owned  subsidiary of the  manufacturer of the telephone system product line that
has  accounted  for a majority of Telecom  Systems  revenues over the past year.
Several large sales were lost to this competitor at far below the pricing levels
at which we were willing to price such  systems.  In  addition,  during the 1999
period, we attempted to make changes to our Telecom Systems business,  which has
produced  unsatisfactory  profitability  results  to  date,  in  an  attempt  to
ultimately improve financial  performance in this business unit, and this caused
decreased  sales  activity as  management,  operational  procedure  and staffing
changes were made.


<PAGE>


     CTI  Software  revenue  increased  by $862  (41.8%)  to $2,924 in 1999 from
$2,062 in 1998. The increase in CTI Software  revenues was due to both increased
sales and  increased  size of sales of its  products in 1999.  Revenue  from CTI
Software, as a percentage of total revenue,  increased to 2.0% in 1999 from 1.8%
in 1998.

     GROSS PROFIT.  Gross profit remained  unchanged at $17,324 in 1999 and 1998
despite a 27.8%  increase in revenues.  This is because gross margin  percentage
decreased to 11.6% in 1999 from 14.8% in 1998.

     Information  Technology  gross profit  increased by $152 to $15,018 in 1999
from $14,866 in 1998 in spite of the increased  revenues described above, due to
lower  gross  margin  realized  in 1999.  Information  Technology  gross  margin
percentage decreased to 10.5% in 1999 from 13.5% in 1998. The reduction in gross
margin was the result of the  combined  effects  of our  participation  in lower
margin large volume sales  transactions,  of lower  average  selling  prices for
computers  realized  throughout  the industry,  of costs related to  eliminating
unwanted inventory, of excessive freight costs not passed on to customers and of
write-offs of vendor accounts receivable.  In addition, the service component of
Information Technology produced below our expected level of gross margin because
we experienced  lower  utilization of our technical staff during the 1999 period
as we were unable to immediately  reassign staff from completed  projects to new
projects  and due to an effort by us to change our mix of  services  business to
include a higher percentage of what is believed to ultimately be more profitable
services offerings.

     Telecom  Systems  gross  profit  decreased  by $759 (50.3%) to $749 in 1999
compared to $1,508 in 1998  primarily  due to the decrease in revenues and, to a
lesser  extent,  due to a decrease  in gross  margin.  Gross  margin for Telecom
Systems decreased from the prior year to 23.7% in 1999 from 29.0% in 1998. Under
normal  circumstances  we expect to realize between 25% and 35% gross margins in
Telecom  Systems.  The  significant  decline in gross profit and gross margin in
Telecom  Systems as compared to both the expected normal levels and 1998 was due
to the factors described above, which  significantly  decreased gross margin due
to a reduction a revenue  without a  corresponding  reduction  in those costs of
sales and services which tend to be fixed in nature.

     CTI Software gross profit  increased by $607 (63.9%) to $1,557 in 1999 from
$950 in 1998.  Gross  margin for CTI  Software  increased  to 53.2% in 1999 from
46.1%  in 1998 due to a  higher  content  of  software-only  sales in 1999,  our
ability to realize higher prices for its CTI software  products  relative to the
hardware component and to a reduction in the cost of software  development costs
as compared to revenue.

     SELLING,  GENERAL  AND  ADMINISTRATIVE   EXPENSES.   Selling,  general  and
administrative expenses increased by $438 (2.7%) to $16,802 in 1999 from $16,364
in 1998.  These expenses as a percentage of total revenue  decreased to 11.2% of
revenue  in 1999 from  14.0% in 1998.  The  decrease  in  selling,  general  and
administrative  expenses as a percentage of revenue was the direct result of our
effort to reduce  these  costs  through  the  closing of  unprofitable  offices,
through  downsizing  of certain  branch  offices and through  the  reduction  of
certain  expense  structures when expected  revenues were  insufficient to cover
operating expenses.  Additionally,  we realigned certain operations to eliminate
redundancies  and improve  efficiency.  During 1998 we  increased  our  spending
relating to opening and  staffing  new  offices  and sales  operations  with the
expectation  of producing a sufficient  revenue base to cover those expenses and
turn these new offices  into  profitable  operations.  Late in 1998,  management
realized that certain of these new offices and  operations  would not be able to
rapidly attain sufficient revenues and gross profits to meet those expectations.
Consequently,  we began  downsizing  or closing  those  operations  and this has
resulted in reduced  selling,  general  and  administrative  expenses  and lower
losses in the  combined  new  offices.  The company  reduced the total number of
full-time employees by 90 (17.5%) from approximately 513 at December 31, 1998 to
423 at  September  30,  1999,  but did not  realize  the full  impact of expense
reduction in the nine month  period due to the fact that some of the  reductions
occurred  throughout  the nine month  period and  because of  severance  paid to
certain employees.


<PAGE>


     OPERATING  INCOME.  Operating income decreased by $438 (45.6%) to operating
income of $522 in 1999 from operating  income of $960 in 1998 due,  principally,
to lower gross margins  realized in Information  Technology and Telecom  Systems
operations.  Operating  income  decreased  as a percentage  of total  revenue to
income of 0.4% in 1999 from income of 0.8% in 1998.

     INTEREST  EXPENSE,  NET OF OTHER  INCOME.  Interest  expense,  net of other
income  increased $462 to $637 in 1999 compared to $175 in 1998. This reflects a
higher level of  borrowings  on our credit  facility in 1999 as compared to 1998
and higher interest rates in 1999 compared to 1998.

     NET INCOME.  Net income,  after a provision  for income taxes  decreased by
$572 to a net loss of $92 in 1999 compared to net income of $480 in 1998.

Liquidity and Capital Resources

     Our  working  capital  was  $10,145  and $9,800 at  September  30, 1999 and
December 31, 1998,  respectively.  As of September  30, 1999,  we had  borrowing
capacity  under our credit  facility of $30,000 of which  $23,822 was used under
our floor plan and revolving credit facility  leaving unused borrowing  capacity
of $4,165.

Cash Flow

     Operating  activities  provided net cash  totaling  $4,947  during the nine
months ended September 30, 1999.  Operating  activities provided net cash during
the period  primarily  because of cash provided by increases in accounts payable
($3,258) and decreases in accounts receivables ($2,415),  which more than offset
cash used by a increase in inventory ($1,505).  The increase in accounts payable
was  primarily  the result of a increased  purchases  of  inventory  late in the
period,  as well as the size of and the  timing  of the  normal  payment  on our
credit  facility  which  occurred  after the end of the period.  The decrease in
accounts  receivable  was  primarily  the result of  improved  collections.  The
increase  in  inventory  was  primarily  the result of  increases  in  inventory
associated  with  work in  process  due to orders  received  near the end of the
period and a higher than usual level of  inventory  "intransit"  to us or to our
customers at September 30, 1999.

     Investing  activities  used cash totaling $477 during the nine months ended
September  30,  1999  related  entirely  to  capital  expenditures.  During  the
remainder  of 1999,  we  expect to incur  additional  capital  expenditures  for
upgrades  and  replacement  of existing  equipment  and  facilities,  as well as
upgrades of computing equipment.

     Financing  activities  used cash totaling $3,220 as borrowings were reduced
under our credit facility during the nine months ended September 30, 1999.

Asset Management

     We had accounts  receivable,  net of allowance  for doubtful  accounts,  of
$32,478 at September 30, 1999. The number of days' sales outstanding in accounts
receivable was 61 days,  which is slightly lower than the 67 days outstanding at
December 31, 1998. The number of days outstanding  continues to reflect improved
but still  slower than normal  payment by our  customers  during the nine months
ended  September 30, 1999. Bad debt expense as a percentage of total revenue for
the nine months ended  September 30, 1999 was 0.3%,  the same as during the nine
months ended  September  30, 1998.  Our allowance  for doubtful  accounts,  as a
percentage  of accounts  receivable,  was 3.1% at September 30, 1999 and 1.0% at
December 31, 1998, a  significant  portion of the increase  reflects a change in
the method of providing for returns and allowances.  Inventory  turnover for the
nine months  ended  September  30, 1999 was 13.2 times versus 16.4 times for the
comparable period in 1998.


<PAGE>


Current Debt Obligations

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

     The total credit  available  under the DFS  Facility is $30,000  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 $20,000. Available credit under
the DFS Facility,  net of Inventory Line advances, is $10,000 million,  which is
used  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 our inventory vendors  directly,  generally in exchange
for  negotiated  financial  incentives.   Typically,  the  financial  incentives
received  are such that DFS does not charge us interest  until 40 days after the
transaction  is  financed,  at which time we are 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 7.0%.

     The DFS Facility is  collateralized by a security interest in substantially
all of our assets, including our accounts receivable,  inventory,  equipment and
bank accounts. Collections of our 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 we are in compliance  with its debt to tangible net
worth  covenant,  we have  discretion  over the use and application of the funds
collected in the lockbox.  If we exceed that  financial  ratio,  DFS may require
that lockbox  payments be applied to reduce our  indebtedness  to DFS. If in the
future  DFS  requires  that all  lockbox  payments  be  applied  to  reduce  our
indebtedness,  we would be required to seek funding from DFS or other sources to
meet substantially all of our cash needs.

     We have a $2,000 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 amount of invoices for inventory  financed  through IBMCC is required to be
paid. 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 we are required to maintain (i) a tangible net worth
of  $10,000,  defined  under the  agreement  as book value of assets  (excluding
intangibles   such  as   receivables   from  officers,   directors,   employees,
stockholders  and  affiliates,  net leasehold  improvements,  goodwill,  prepaid
expenses,  franchise fees and other similar items) less liabilities (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 1.25 to
1.

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

Year 2000 Issue

     The Year 2000 problem  generally  results from the use in computer hardware
and  software of two digits  rather  than four  digits to define the  applicable
year.  When  computers must process dates both before and after January 1, 2000,
two-digit year "fields" may create processing  ambiguities that can cause errors
and system  failures.  The Year 2000 problem,  including  some of the identified
risks, has been more fully described in our previous periodic reports filed with
the Securities and Exchange Commission,  including our most recent annual report
on form 10K.


<PAGE>


State of Readiness:

     Our board of directors has been briefed  about the Year 2000  problem.  The
board of  directors  has adopted a Year 2000  project  (the "Y2K Plan") aimed at
preventing  our  mission-critical  functions from being impaired due to the year
2000 problem.

     Our Vice President of Information Systems is supervising the implementation
of the Y2K  Plan.  We are  actively  implementing  the Y2K Plan,  which  will be
modified  as events  warrant.  Under the plan,  we have  inventoried  all of the
computer systems and the telephone system at our corporate  offices.  During the
second quarter of 1999 we  substantially  completed a complete  inventory of all
computers,  software and telephone systems used in our branch offices,  replaced
many items that were determined to not be Year 2000 compliant, and are currently
in the process of establishing a time table for upgrading or replacing any other
systems that cannot be verified as warranted by the system's  manufacturer to be
Year  2000   compliant.   In   addition,   in  June,   1999,   we   performed  a
total-system-shut-down,  the purpose of which was to change the  computer  dates
forward to past January 1, 2000 in an attempt to evaluate the system performance
using test transactions.  The test was successful and it was determined that our
primary  computer  systems  performed  correctly.  During the three months ended
September 30, 1999 we continued to collect  information about our vendors' state
of readiness and continued to upgrade computers to be Year 2000 compliant.

     Our Y2K Plan  recognizes  that the computer,  telecommunications  and other
systems of outside  entities  have the  potential  for major,  mission-critical,
adverse  effects on the conduct of company  business.  We do not have control of
these  outside  entities  or outside  systems;  however,  our Y2K Plan  includes
attempting to verify the readiness of those outside  entities or outside systems
which  might  possibly  have  a  material  adverse  effect  on our  business  by
contacting those outside entities to determine their readiness and to coordinate
with those outside  entities to mitigate the  possibility of an  interruption of
any mission-critical process.

Costs to Address Year 2000 Issues:

     We have  incurred  expenditures,  as part of an  overall  upgrading  of its
computer and telecommunications  systems,  during 1998 and through 1999 to date.
We have also  recognized  higher  expenditures  in managing our  information and
telecommunications  systems as staff  members have  expended  time and resources
evaluating the company's Year 2000 readiness and implemented  required  changes.
It is difficult to assess the additional  expenditures over and above what would
have been  expended  under normal  circumstances,  but we estimate  that we have
incurred  expenditures in the form of additional  expenses of approximately $350
over and above that which would have been incurred were it not for the Year 2000
issue.  In addition,  we estimate that we have made capital  expenditures in the
amount of  approximately  $351 over an above the amount of capital  expenditures
that would have been  required if it were not for the Year 2000 issue.  Although
impossible  to  accurately  predict,  we currently  believe that the  additional
expenditures  specifically related to preparing for the Year 2000 issue will not
be significant. Although we believe that our estimates are reasonable, there can
be no  assurance  that the costs of  implementing  the Y2K Plan will not  differ
materially from the estimated costs or that we will not be materially  adversely
affected by year 2000 issues.



PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     During 1998 Allstar  filed suit  against a former  employee and said former
employee  has  filed  a  counter-claim  against  Allstar.   Allstar  intends  to
vigorously defend such counter claim. Allstar is unable to estimate the range of
possible  recovery by the former employee because the suit is still in the early
stages of discovery.


<PAGE>


     We are 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,  We believe the final outcome of such
matters will not have a materially  adverse  effect on its results of operations
or financial position.



                                                      SIGNATURES

     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.


                                             Allstar Systems, Inc.

November 3, 1999                             By:      /s/ JAMES H. LONG
                                                      -----------------
Date                                James H. Long, Chief Executive Officer



November 3, 1999                             By:      /s/ DONALD R. CHADWICK
Date                                Donald R. Chadwick, Chief Financial Officer