FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
 (Mark One)

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

    For the quarterly period ended March 31, 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 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
 lastreport)

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes _ _ No X

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

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

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

Title                                            Outstanding

Common Stock $.01 par value per share            As of March 31, 1999,
                                                 4,232,211 shares outstanding


<PAGE>


PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

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

                                                      March 31,December 31,
                                                      1999           1998
                                                  (Unaudited)
ASSETS
Current assets:
     Cash and cash equivalents..................   $  3,620        $  2,538
     Accounts receivable, net...................     32,280          34,893
     Accounts receivable - affiliates ..........        495             373
     Inventory..................................      7,505           8,497
     Deferred taxes ............................        431             431
     Income taxes receivable....................        637             637
     Other current assets ......................        549             559
                                                    -------         -------
              Total current assets .............     45,517          47,928
Property and equipment..........................      2,876           2,902
Other assets  ..................................        185             198
                                                    -------         -------
Total    .......................................   $ 48,578        $ 51,028
                                                    =======         =======

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Notes payable .............................   $ 15,166        $ 15,958
     Accounts payable...........................     14,631          16,641
     Accrued expenses...........................      5,744           5,273
     Deferred service revenue...................        191             256
                                                    -------         -------
              Total current liabilities.........     35,732          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, 50,000,000 shares authorized,
    4,503,411 and 4,503,411 shares issued and
    outstanding on March 31, 1999 and December 31,
    1998, respectively......                             45              45
  Additional paid in capital....................     10,196          10,196
  Unearned equity compensation..................       (269)           (269)
  Treasury stock (271,200 shares, at cost)......       (834)           (834)
  Retained earnings.............................      3,513           3,567
                                                    -------         -------
              Total stockholders' equity........     12,651          12,705
                                                    -------         -------
Total...........................................   $ 48,578        $ 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 March 31,

                                                       1999             1998
                                                       ----             ----

Total revenue------------------------------------  $ 47,868        $  32,542
Cost of sales and services-----------------------    42,091           27,732
                                                    -------          -------
Gross profit                                          5,777            4,810
Selling, general and administrative expenses-----     5,604            4,576
                                                    -------          -------
Operating income---------------------------------       173              234
Interest expense, net of other income------------       242               28
                                                    -------          -------
(Loss) income before (benefit) provision for
   income taxes----------------------------------       (69)             206
(Benefit) provision for income taxes-------------       (15)              82
                                                    --------         -------
Net(loss)income----------------------------------  $    (54)       $     124
                                                    ========         =======
Net (loss) income per share:
         Basic-----------------------------------    $(0.01)           $0.03
                                                      =====            =====
         Diluted---------------------------------    $(0.01)           $0.03
                                                      =====            =====
Weighted average shares outstanding:
         Basic-----------------------------------  4,168,925       4,454,411
                                                   =========       =========
         Diluted---------------------------------  4,168,925       4,457,106
                                                   =========       =========

The  potentially  dilutive  options were not used in the  calculation of diluted
earnings  per share for the  quarter  ended  March 31,  1999 since the effect of
potentially dilutive securities in computing a loss per share is antidilutive.



<PAGE>


                     ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
               (In thousands, except share and per share amounts)
                                   (Unaudited)
                                                    Three Months    Three Months
                                                         ended          ended
                                                       March 31,      March 31,
                                                          1999           1998

Net (loss) income--------------------------------  $     (54)      $     124

Adjustments to  reconcile  net (loss)
  income to net cash provided by (used in)
  operating activities:
     Depreciation and amortization---------------        265             167

Changes in assets and liabilities
  that provided (used) cash:
     Accounts receivable, net--------------------      2,613           3,058
     Accounts receivable - affiliates------------       (122)            (93)
     Inventory-----------------------------------        992          (1,342)
     Other current assets------------------------         10             (24)
     Other assets--------------------------------        -              (177)
     Accounts payable----------------------------     (2,010)          2,515
     Accrued expenses----------------------------        471              37
     Income taxes payable------------------------                       (276)
     Deferred service revenue--------------------        (65)            (54)
                                                     --------        --------
         Net cash provided by (used in) operating
              activities-------------------------      2,100          (1,169)

Cash flows from investing activities:
     Capital expenditures------------------------       (226)           (153)
                                                     --------        --------
        Net cash used in investing activities:---       (226)           (153)


Cash flows from financing activities:
     Net (decrease) increase in notes payable----       (792)          3,249
                                                     --------        --------

         Net cash (used in) provided by financing
              activities:------------------------       (792)          3,249


Net increase in cash and cash
     equivalents---------------------------------      1,082           1,927

Cash and cash equivalents at beginning of period-  $   2,538       $   1,581
                                                     --------        --------
Cash and cash equivalents at end of period         $   3,620       $   3,508
                                          -------    ========        ========
Supplemental disclosures of cash flow information:
     Cash paid for interest----------------------  $     254       $      46
                                                     ========        ========
     Cash paid for taxes                           $       0       $     348
                                                     ========        ========

                 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") are 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 March
31, 1999 and for the three months ended March 31, 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.

     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 1998,  SFAS No. 133,  Accounting  for
Derivative Instruments and Hedging Activities,  was issued by the FASB. SFAS No.
133 is effective for fiscal years beginning after January 1, 2000. Management is
evaluating what impact, 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.  As of March 31,  1999,  28,000  stock  option  grants have been issued to
directors  under the  Director  Plan.  The  exercise  price of the 28,000 of the
directors'  options is $1.50 per share.  As of March 31,  1999  incentive  stock
options  totaling  268,350  shares have been issued to  employees.  The exercise
price of 8,000 of the stock  option  grants is $6.00 per  share,  260,350 of the
stock option grants have an exercise price of $1.50 per share.  The stock option
grants will vest ratably over the five year period from the date of issuance. In
addition,  incentive  awards in the form of  restricted  stock were  granted for
14,286  shares that will vest ratably over the  two-year  period  ending July 7,
1999 and 49,000 shares, which will vest ratably over the five-year period ending
May 20, 2003.

3.   LITIGATION

     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.

     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.

4.   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.

For the quarter ended March 31, 1999 (unaudited):
<TABLE>
<CAPTION>
                                    Information         Telecom                CTI
                                     Technology         Systems             Software      Consolidated
<S>                                    <C>               <C>              <C>                <C>     
Total revenue....................... $   45,802         $    1,296        $      770        $  47,868
Cost of sales and services..........     40,950                810               331           42,091
                                        -------           --------         ---------         --------
Gross profit........................      4,852                486               439            5,777
Selling, general and
  administrative expenses...........      4,595                512               497            5,604
                                       --------           --------         ---------         --------
Operating income (loss)............. $      257         $      (26)       $      (58)       $     173
                                      =========           ========         =========         ========
Less: Interest expense, net
of other income.....................                                                              242
                                                                                             --------
Loss before benefit for income taxes                                                        $     (69)
                                                                                             ========

Accounts receivable, net............ $   28,151         $    3,511         $     618        $  32,280
                                        =======           ========          ========         ========
</TABLE>

<PAGE>

For the quarter ended March 31, 1998 (unaudited):
<TABLE>
<CAPTION>
                                    Information         Telecom               CTI
                                     Technology         Systems             Software      Consolidated
<S>                                  <C>                <C>                <C>              <C>      
Total revenue....................... $   30,644         $    1,072         $     826        $  32,542
Cost of sales and services..........     26,317                900               515           27,732
                                        -------           --------          --------         --------
Gross profit........................      4,327                172               311            4,810
Selling, general and
administrative expenses.............      3,634                568               374            4,576
                                        -------           --------          --------         --------
Operating income (loss)............. $      693         $     (396)        $     (63)       $     234
                                        =======           ========          ========       
Less: Interest expense, net of
other income........................                                                               28
                                                                                             --------
Income before provision
for income taxes....................                                                        $     206
                                                                                             ========

Accounts receivable, net............ $   16,508          $   3,378        $      815        $  20,701
                                        =======           ========          ========         ========
</TABLE>

<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

     Allstar  Systems,  Inc. is engaged in the  business of  reselling  computer
hardware, business telephone systems and software products and providing related
services.  In addition,  the company derives revenue from providing  services to
purchasers of computer  products and other customers.  The company operates 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. The company develops and markets CTI Software through its wholly owned
subsidiary  Stratasoft,  Inc. To date,  most of the  company's  revenue has been
derived from computer  products sales and related  services.  During the quarter
ended March 31, 1999,  Information  Technology  totaled 95.7% of revenues  while
Telecom   Systems  and  CTI   Software   totaled  2.7%  and  1.6%  of  revenues,
respectively.

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

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

     Services  are  provided  by the  Information  Technology  division  both in
conjunction  with and separately  from its computer  product sales.  The company
typically  prices its 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 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.  The company also
offers complete  outsourcing of a customer's computer and network management and
technical  support needs on a contract basis. In addition,  the company provides
temporary and permanent staffing services.

     To support  and  maintain  the  quality of these  services  and to maintain
vendor  accreditation  necessary to resell and service its  significant  product
lines, the company's technical staff participates in various  certifications 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 services business. The
most  significant  portion of the costs associated with the delivery of services
is 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 service providers,  personnel costs to increase. The
company's  costs of goods  and  services  includes  the  personnel  costs of its
billable technical staff.

<PAGE>

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

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

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

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

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

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

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


<PAGE>

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 the future  financial  performance  of the company
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 the company has 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 March 31, 1999 Compared To Three Months Ended March 31, 1998
                                    (Dollars in thousands)

     TOTAL REVENUE.  Total revenue  increased by $15,326 (47.1%) from $32,542 in
1998 compared to $47,868 in 1999. Revenue from Information  Technology increased
by  $15,158  (49.5%)  from  $30,644 in 1998 to  $45,802  in 1999.  Revenue  from
Information  Technology  as a percentage of total  revenue  increased  1.5% from
94.2% in 1998 to 95.7% in 1999.  This was  primarily  attributable  to  revenues
derived  from  offices  opened  in late  1997 and  during  1998,  together  with
significant  revenue  growth  realized by adding new  customers in the company's
Dallas  office.  Approximately  $5,030  (33%)  of the  increase  in  Information
Technology  revenues  from the prior  period was  realized in new offices  while
$10,296 (67%) was realized in offices existing prior to 1997.

Revenue  from Telecom  Systems  increased by $224 (20.9%) from $1,072 in 1998 to
$1,296 in 1999. The increase in Telecom Systems revenue was primarily the result
of the company's ability to obtain new orders for system  installations from new
customers.  Revenue  from  Telecom  Systems  as a  percentage  of total  revenue
decreased  from  3.3% in 1998 to  2.7% in 1999  because  Information  Technology
revenues increased at a much greater rate. CTI Software revenue decreased by $56
(6.8%) from $826 in 1998 to $770 in 1999. The decrease in CTI Software  revenues
was due to the  installation  of a lesser  number of  systems  in 1999 than were
installed in 1998. Revenue from CTI Software,  as a percentage of total revenue,
decreased  from 2.5% in 1998 to 1.6% in 1999  because  the  growth  rates of the
company's  other  divisions  were higher than the 6.8% decrease  realized by CTI
Software.

     GROSS PROFIT. Gross profit increased by $967 (20.1%) from $4,810 in 1998 to
$5,777 in 1999 and gross margin  decreased  from 14.8% in 1998 to 12.1% in 1999.
The gross  margin for  Information  Technology  decreased  from 14.1% in 1998 to
10.6% in 1999,  which was primarily the result of lower prices  relative to unit
costs and the company's  participation in large volume sales  transactions  with
lower margins.  In addition,  the company  experienced  lower utilization of its
Information Technology technical staff during the 1999 period as the company was
unable to immediately  reassign  staff from  completed  projects to new projects
because of customer needs or their  locations.  While the company's  sales force
has been able to increase  revenues  compared to the 1998 period it was not able
to maintain gross margin at the prior year level because of intense  competition
on the computer  products markets and because the company has undertaken  larger
transactions  at lower  margins  to  obtain or retain  customers.  Overall,  the
revenue  gain  was  greater  than   anticipated   while  the  gross  margin  was
considerably below the anticipated level.


<PAGE>

     The gross profit for Telecom  Systems  increased by $314 (183%) from 172 in
1998 to 486 in 1999.  Gross margin  improved  significantly  over the prior year
from 16.0% in 1998 to 37.5% in 1999.  Under  normal  circumstances  the  company
expects to realize  between 25% and 35% gross margins in Telecom  Systems.  As a
result,  gross margin in the 1999 period was slightly higher than expected.  The
significant  improvement  that was  realized  in the 1999 period was because the
1998  period  was far below  expectations.  During the 1998  period the  company
experienced  very high  installation  costs while  during the 1999 period  these
costs were at normalized  levels.  Gross profit in CTI Software  increased  $128
(41.2%). The gross margin for CTI Software increased from 37.7% in 1998 to 57.0%
in 1999 due to the  company's  ability  to  realize  higher  prices  for its CTI
products relative to the hardware component than in the 1998 period.

     SELLING,  GENERAL  AND  ADMINISTRATIVE   EXPENSES.   Selling,  general  and
administrative  expenses increased by $1,028 (22.5%) from $4,576 million in 1998
to $5,604  million in 1999. As a percentage of total revenue,  selling,  general
and  administrative  expenses decreased from 14.1% in 1998 to 11.7% in 1999. The
decrease in selling,  general and  administrative  expenses as a  percentage  of
revenue  was the direct  result of the  company's  effort to reduce  these costs
through office closing and downsizing when expected  revenues were  insufficient
to  cover  operating  expenses.  Additionally,  the  company  realigned  certain
operations to eliminate redundancies and improve efficiency.  Selling,  general,
and  administrative  expenses  increased in absolute amount when compared to the
1998 period but  declined,  as a percentage  of revenue,  by 2.4%.  In addition,
selling,  general and administrative  expenses declined both in absolute dollars
and as a percentage of revenue from the immediately preceding quarter.  Selling,
general and  administrative  expenses  decreased  from $7,057 (14.1% of revenue)
during  the  fourth  quarter  of 1998 to $5,604  (11.7% of  revenue)  during the
current  quarter,  a decrease of $1,453.  The fourth  quarter of 1998 included a
charge for office closing and downsizing of  approximately  $260,  therefore the
comparative  decrease ongoing  selling,  general and  administrative  expense is
$1,193.  During 1998 the company  increased its spending relating to opening and
manning 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 offices
and  operations  would not be able to attain  sufficient  revenues to meet those
expectations.  Consequently,  the  company  began  downsizing  or closing  those
operations  that has  resulted in reduced  selling,  general and  administrative
expenses and lower losses in the new offices.

     OPERATING  INCOME.  Operating  income decreased by $61 (26.1%) from $234 in
1998 to $173 in 1999  due,  principally,  to lower  gross  margins  realized  in
Information Technology  operations.  Overall the company increased revenue, with
decreased  selling,  general and  administrative  expenses.  However,  operating
income did not  increase  due to the low gross  margins  realized in the sale of
computer  products and the low margins  resulting from the under  utilization of
its technical staff..  Management  attributes this to highly  competitive market
conditions and the high volume of low margin business  conducted during the 1999
period.  Additionally,  the company's  failure to keep its technical staff fully
utilized  caused the incurrence of costs without the  realization of revenues to
cover those costs.  Operating  income decreased as a percentage of total revenue
from 0.7% in 1998 to 0.4% in 1999.

     INTEREST  EXPENSE,  NET OF OTHER  INCOME.  Interest  expense,  net of other
income  increased  $214 from $28 during the 1998 period  compared to $242 in the
1999 period.  This  reflects a higher  level of the  company's  short-term  debt
during the 1999 period when compared to 1998 and slightly  lower  interest rates
during the 1999 period when compared to 1998.

     NET INCOME.  Net  income,  after a benefit for income  taxes  totaling  $15
(reflecting  an  effective  tax rate of 40% in 1998  compared  to 22% in  1999),
decreased by $178 from net income of $124 in 1998 to a net loss of $54 in 1999.

<PAGE>

     The  following  table  sets  forth,  for  the  periods  indicated,  certain
financial data derived from the company's unaudited  consolidated  statements of
operations  for the three months ended March 31, 1999 and 1998 and indicates the
percentage of total revenue for each item.

                                Three months ended March 31,
                                               1999             1998
                                               ----             ----
                                          Amount     %      Amount      %

Revenue  :
Information Technology................. $ 45,802   95.7  $ 30,644   94.2
Telecom Systems........................    1,296    2.7     1,072    3.3
CTI Software...........................      770    1.6       826    2.5
                                         -------  -----   -------  -----
         Total revenue.................   47,868  100.0    32,542  100.0

Gross profit:
Information Technology.................    4,852   10.6     4,327   14.1
Telecom Systems........................      486   37.5       172   16.0
CTI Software...........................      439   57.0       311   37.7
                                         -------   ----   -------   ----
         Total gross profit............    5,777   12.1     4,810   14.8

Selling, general and administrative
  expenses.............................    5,604   11.7     4,576   14.1
                                         -------   ----   -------   ----
Operating income.......................      173    0.4       234    0.7
Interest expense, net of other income..      242    0.5        28    0.1
                                         -------   ----   -------   ----
(Loss) income before (benefit)
 provision for income taxes............      (69)  (0.1)      206    0.6
(Benefit) provision for income taxes...      (15)   0.0        82    0.3
                                         -------   ----   -------   ----
Net (loss) income...................... $    (54)  (0.1) $    124    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.

Liquidity and Capital Resources

     The company's  working  capital was $9,785 and $9,800 at March 31, 1999 and
December 31, 1998, respectively. As of March 31, 1999, the company had borrowing
capacity  under the  company's  credit  facility of $26,546 of which $26,546 was
used  under the  company's  floor plan and  revolving  credit  facility.  Unused
borrowing capacity at March 31, 1999 was $0.

Cash Flow

     Operating  activities  provided net cash  totaling  $2,100 during the three
months ended March 31, 1999.  Operating  activities provided net cash during the
three  months  ended March 31, 1999  because of  decreases  in  inventories  and
accounts  receivable  of $922 and  $2,613,  respectively,  which were  partially
offset by decreases in accounts  payable.  Net income and depreciation  provided
cash of $211 in the three  months  ended  March 31, 1999 versus $291 in the 1998
period.  The decrease in  inventories  was  primarily the result of an effort to
reduce  inventories  that had accumulated to greater than required  levels.  The
decrease in accounts  receivable  was the result of  improved  collections  from
customers.

     Investing  activities used cash totaling $226 during the three months ended
March 31, 1999. The company's  investing  activities  that used cash during this
period was  primarily  related to capital  expenditures.  During the next twelve
months,  the company  expects to incur  capital  expenditures  for  upgrades and
replacement of existing equipment facilities,  as well as, upgrades of computing
equipment  which may be  required to address Y2K  problems,  if any.  The actual
amount and timing of such capital expenditures may vary substantially  depending
upon, among other things, the actual need for replacements and upgrades.

     Financing  activities used cash totaling $792 by reducing  borrowings under
the company's credit facility during the three months ended March 31, 1999.

<PAGE>

Asset Management

     The  company  had  accounts  receivable,  net  of  allowance  for  doubtful
accounts, of $32,280 at March 31, 1999. The number of days' sales outstanding in
accounts  receivable  was 64 days,  which  is  slightly  lower  than the 67 days
outstanding  at December  31, 1998 but higher than 53 days  outstanding  for the
prior year period. The number of days outstanding  continues to reflect improved
but,  still slower than normal  payment by the  company's  customers  during the
three  months ended March 31,  1999.  Bad debt expense as a percentage  of total
revenue for the three months ended March 31, 1999 was 0.2%,  which was less than
the 0.3% for the three months ended March 31, 1998. The company's  allowance for
doubtful accounts, as a percentage of accounts receivable,  was 1.5% at December
31,  1998 and 5.0% at March 31,  1999,  a  significant  portion of the  increase
reflects a change in the method of providing for returns and allowances.  During
the first quarter of 1999 the company began  providing for returns and allowance
based upon the revenue effect of such returns rather than the net cost effect of
such  returns.  The change has no effect on net income but  increases the stated
amount of the  allowance  as compared to accounts  receivable  while  reflecting
higher levels of inventory.  Inventory turnover for the three months ended March
31, 1999 was 12.5 times  versus  18.7 times in  comparable  period in 1998.  The
decline in inventory  turnover  during the three months ended March 31, 1999 was
the result of having a high level of stocking to meet customer  requirements and
having higher levels of inventories than are required.

Current Debt Obligations

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

     The total credit available under the DFS Facility is $30.0 million, subject
to borrowing base  limitations  which are generally  computed as a percentage of
various classes of eligible accounts receivable and qualifying inventory. Credit
available  under the DFS  Facility for floor plan  financing  of inventory  from
approved manufacturers (the "Inventory Line") is $20.0 million. Available credit
under the DFS Facility,  net of Inventory Line advances, is $10.0 million, which
is used by the company  primarily  to carry  accounts  receivable  and for other
working capital and general corporate purposes (the "Accounts Line"). Borrowings
under the Accounts Line bear interest at the  fluctuating  prime rate minus 1.0%
per annum.  Under the Inventory Line, DFS pays the company's  inventory  vendors
directly, generally in exchange for negotiated financial incentives.  Typically,
the financial  incentives received are such that DFS does not charge interest to
the company until 40 days after the  transaction is financed,  at which time the
company is  required  to either  pay the full  invoice  amount of the  inventory
purchased  from  corporate  funds or to borrow under the  Accounts  Line for the
amount due to DFS.  Inventory  Line  advances  not paid within 40 days after the
financing  date bear  interest  at the  fluctuating  prime rate plus  5.0%.  For
purposes of  calculating  interest  charges the minimum prime rate under the New
DFS Facility is 7.0%.  DFS may change the  computation of the borrowing base and
to disqualify accounts receivable upon which advances have been made and require
repayment  of such  advances  to the  extent  such  disqualifications  cause the
company's borrowings to exceed the reduced borrowing base.

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

<PAGE>

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

     Under the DFS  Facility  the company is required to maintain (i) a tangible
net worth of $10.0  million,  (ii) a ratio of debt  minus  subordinated  debt to
tangible  net worth of 4 to 1 and (iii) a ratio of  current  tangible  assets to
current liabilities of not less than 1.25 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. For example, a date represented by "00" may be
interpreted  by the system as referring  to the year 1900 rather than 2000.  The
effects of the Year 2000 problem can be  exacerbated by the  interdependence  of
computer and telecommunications  systems in the United States and throughout the
world. This  interdependence  can affect the company and its suppliers,  trading
partners,  and customers  ("outside  entities").  The Year 2000 problem has been
more fully described in the company's  previous  periodic reports filed with the
Securities and Exchange  Commission,  including the company's most recent annual
report  on form  10K.  Some of the  identified  risks  related  to the Year 2000
problem  include,  but are not limited to,  shortage of technical and managerial
resources  required  to deal with the  problem;  potential  shortcomings  in the
company's ability to identify and resolve all issues related to the problem; the
cascading effect of problems  resulting from the company's  vendors,  suppliers,
customers and governmental agencies readiness.

State of Readiness:

         The  company's  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 the company's mission-critical functions from being impaired
due to the year 2000 problem.  "Mission-critical"  functions are those  critical
functions whose loss would cause an immediate stoppage or significant impairment
to core business processes.

         The company's Vice President of Information  Systems is supervising the
implementation  of the Y2K Plan.  The company is actively  implementing  the Y2K
Plan, which will be modified as events warrant.  Under the plan, the company has
inventoried  all of  the  computer  systems  and  the  telephone  system  at its
corporate  offices.  The company is upgrading all computer and software  systems
that cannot be verified as  warranted by the  system's  manufacturer  to be Year
2000 compliant. The company's corporate offices telephone system is warranted by
the manufacturer to be Year 2000 compliant. During the first quarter of 1999 the
company  continued  its  evaluation of computer  hardware and software  systems,
continuing to upgrade hardware systems that do not pass  standardized  year 2000
compliance  tests and systems  which  cannot be  determined  from the  available
information  made  available  by the  product's  manufacturer,  to be year  2000
compliant.  During the second quarter of 1999, the company plans to complete the
inventory of all  computers,  software and telephone  systems used in its branch
offices and will have  established the time table for upgrading or replacing any
systems that cannot be verified as warranted by the system's  manufacturer to be
Year 2000  compliant.  In  addition,  the company  currently  plans to perform a
total-system-shut-down  test in June,  1999, the purpose of which is to roll the
computer  dates  forward to past  January 1, 2000 in an attempt to evaluate  the
system performance using test transactions.

         The company's 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.  The
company  does not have  control of these  outside  entities or outside  systems;
however,  the company's Y2K Plan includes  attempting to verify the readiness of
those outside  entities or outside  systems which might possibly have a material
adverse effect on the company's 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. In
addition,  the company is  researching  and  documenting  the standard year 2000
readiness  statements  of  all  major  suppliers,   product   manufacturers  and
customers.  The company will, throughout 1999, attempt to evaluate the readiness
of any outside systems that might possibly  create a material  adverse effect on
any mission-critical process.

<PAGE>

         It is  important  to  recognize  that the  processes  of  inventorying,
assessing,  analyzing,  converting (where  necessary),  testing,  and developing
contingency  plans for  mission-critical  items in anticipation of the Year 2000
event may be  iterative  processes,  requiring  a repeat of some or all of these
processes as the company learns more about the Year 2000 problem and its effects
on the internal business  information systems and on outside systems,  and about
the effects of embedded microprocessors on systems and business operations.  The
company  anticipates that it will continue with these processes  through January
1, 2000 and on into the year 2000 in order to assess and remediate problems that
reasonably can be identified only after the start of the new century.

Costs to Address Year 2000 Issues:

     The company has not  incurred  substantial  historical  costs for Year 2000
awareness, inventory,  assessment, analysis, conversion, testing, or contingency
planning and  anticipates  that any future costs for these  purposes,  including
those for  implementing  Year 2000 contingency  plans,  although not possible at
this time to accurately predict,  are not likely to be substantial.  The company
has incurred  expenditures,  as part of an overall upgrading of its computer and
telecommunications  systems,  during 1998 and through 1999 to date.  The company
has  also  recognized  higher  expenditures  in  managing  its  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 the company estimates that it
has incurred  expenditures in the form of additional  expenses of  approximately
$325 over and above that which would have been incurred were it not for the Year
2000  issue.  In  addition,  the  company  estimates  that it has  made  capital
expenditures  in the  amount  of  approximately  $200 to $300  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,  the company
currently  believes that the  additional  expenditures  specifically  related to
preparing for the Year 2000 issue will not be significant.  Although the company
believes that its 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 the company will not be materially adversely affected by year 2000
issues.

Worst Case Scenario:

         The Securities and Exchange  Commission  requires that public companies
must forecast the most reasonably likely worst case Year 2000 scenario, assuming
that  the  company's  Year  2000  plan is not  effective.  Analysis  of the most
reasonably  likely worst case Year 2000  scenarios the company may face leads to
contemplation of the following  possibilities  which,  though  considered highly
unlikely,  must be  included in any  consideration  of worst  cases:  widespread
failure of electrical,  natural gas, and similar  supplies by utilities  serving
the company;  widespread  disruption  of the services of  communications  common
carriers;  similar  disruption  to means  and  modes of  transportation  for the
company and its employees,  contractors,  suppliers, and customers;  significant
disruption to the company's  ability to gain access to, and continue working in,
office  buildings and other  facilities;  the failure of substantial  numbers of
mission-critical hardware and software computer systems, including both internal
business   systems   and   other   systems   (such   as  those   with   embedded
microprocessors); and the failure of outside systems, the effects of which would
have a cumulative  material  adverse  impact on the  company's  mission-critical
systems.  Among other  things,  the  company  could face  substantial  claims by
customers for loss of revenues due to service level interruptions,  inability to
fulfill  contractual  obligations,  inability to account for certain revenues or
obligations  or to bill  customers  or pay  vendors  accurately  and on a timely
basis,  and increased  expenses  associated with  litigation,  stabilization  of
operations following mission-critical failures, and the execution of contingency
plans.  The company could also experience an inability by customers,  and others
to pay,  on a  timely  basis or at all,  obligations  owed to the  company.  The
company's  suppliers may not be able to deliver  goods and services  required by
the company.  Under these circumstances,  the adverse effect on the company, and
the diminution of company revenues, could be material, although not quantifiable
at this time. Further in this scenario,  the cumulative effect of these failures
could  have a  substantial  adverse  effect  on the  economy,  domestically  and
internationally.  The  adverse  effect on the  company,  and the  diminution  of
company  revenues,  from a domestic or global recession or depression also could
be material,  although not  quantifiable at this time. The company will continue
to  monitor  business  conditions  with  the aim of  assessing  and  quantifying
material adverse  effects,  if any, that result or may result from the Year 2000
problem.

<PAGE>

Contingency Plans:

         As part of its Y2K Plan,  the company is developing  contingency  plans
that deal with, among others, two primary aspects of the year 2000 problem:  (i)
that the  company,  despite its  good-faith,  reasonable  efforts,  may not have
satisfactorily remediated all internal,  mission-critical systems; and (ii) that
systems of outside  entities may not be Year 2000 ready,  despite the  company's
good-faith,  reasonable efforts to work with outside entities. These contingency
plans are being designed to mitigate the  disruptions  or other adverse  effects
resulting  from Year 2000  incompatibilities  regarding  these  mission-critical
functions or systems, and to facilitate the early identification and remediation
of  mission-critical  Year 2000 problems that first  manifest  themselves  after
January 1, 2000.

         These   contingency   plans  will  contemplate  an  assessment  of  all
mission-critical  internal information and communications technology systems and
internal   operational   systems  that  use  computer-based   controls  and  any
recognizable  potential  outside entities or systems which might possibly have a
material adverse affect on any mission-critical  processes. This process will be
pursued continuously into the Year 2000 as circumstances require.

         These contingency plans will include the creation, as deemed reasonably
appropriate, of teams that will be standing by on the eve of the new millennium,
prepared to respond  rapidly and otherwise as necessary to mitigate any problems
with mission-critical processes as soon as they become known.

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.

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


                                   SIGNATURES

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


                              Allstar Systems, Inc.

May 17, 1999                                 By:      /s/ JAMES H. LONG
                                                      -----------------
Date                                James H. Long, Chief Executive Officer



May 17, 1999                                 By:      /s/ DONALD R. CHADWICK
                                                      ----------------------

Date                                Donald R. Chadwick, Chief Financial Officer