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 June 30, 1998
                                       OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

For the transition period from ________ to ___________

Commission file number: 333-09789

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

     DELAWARE                                               76-0062751
     (State or other jurisdiction of                        (I.R.S. Employer
     incorporation or organization)                         Identification No.)
     6401 SOUTHWEST FREEWAY
     HOUSTON, TEXAS 77074   (Address of principal executive offices)  (Zip code)

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

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

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

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

     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
                                        June   30,   1998,    4,517,911   shares
                                        outstanding

<PAGE>
PART I.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

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

                                                       June 30,    December 31,
                                                         1998          1997
                                                                   (Unaudited)
ASSETS
Current assets:
   Cash and cash equivalents
      Restricted cash                                   $      -       $    280
      Cash                                                 1,724          1,301
                                                        --------       --------
         Total cash and cash equivalents                   1,724          1,581
   Accounts receivable - trade, net                       24,186         23,759
   Accounts receivable - affiliates                          587            434
   Inventory                                               8,555          4,700
   Deferred taxes                                            212            212
   Other current asset                                       377            404
                                                        --------       --------
         Total current assets                             35,641         31,090
Property and equipment                                     1,885          2,013
Other assets                                                 246             81
                                                        --------       --------
Total                                                   $ 37,772       $ 33,184

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
   Notes payable                                        $  5,166       $   1,572
   Accounts payable                                       12,958         12,805
   Accrued expenses                                        4,110          3,565
   Income taxes payable                                      (63)            82
   Deferred service revenue                                  331            242
                                                        --------       --------
         Total current liabilities                        22,502         18,266
   Deferred Credit - Stock warrants                          195            195
                                                        --------       --------
Total liabilities                                         22,697         18,461

Commitments and contingencies
Stockholders' equity:
   Preferred stock, $.01 par value, 5,000,000 shares
     authorized, no shares issued
   Common stock:
     $.01 par value, 50,000,000 shares authorized,
     4,454,411 and 4,517,911 shares issued and outstanding
     on December 31, 1997 and June 30, 1998, respectively     45             45
   Additional paid in capital................             10,013         10,013
   Treasury stock............................                (40)            --
   Retained earnings.........................              5,057          4,665
                                                        --------       --------
         Total stockholders' equity..........             15,075         14,723
                                                        --------       --------
Total........................................            $37,772        $33,184

                     See notes to consolidated financial statements

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

                           Three Months Ended June 30,

                                                          1998           1997

Total Revenue                                           $ 39,840       $ 32,239
Cost of sales and services                                33,890         27,312
                                                        --------       --------
Gross Profit                                               5,950          4,927
Selling, general and administrative expenses               5,464          3,839
                                                        --------       --------
Operating income                                             486          1,088
Interest expense and other income (net)                       51            309
                                                        --------       --------
Income before provision for income taxes                     435            779
Provision for income taxes                                   165            310
                                                        --------       --------
Net income                                              $    270       $    469

Net income per share:
      Basic                                                $0.06          $0.17
                                                        ========       ========
      Diluted                                              $0.06          $0.17

Weighted average shares outstanding:
      Basic                                            4,436,609      2,675,000
                                                       =========      =========
      Diluted                                          4,444,336      2,675,000
                                                       =========      =========


                            Six Months Ended June 30,

                                                          1998           1997

Total Revenue                                           $ 72,382       $ 58,831
Cost of sales and services                                61,622         50,073
                                                        --------       --------
Gross Profit                                              10,760          8,758
Selling, general and administrative expenses              10,039          6,974
                                                        --------       --------
Operating income                                             721          1,784
Interest expense and other income (net)                       79            597
                                                        --------       --------
Income before provision for income taxes                     642          1,187
Provision for income taxes                                   249            465
                                                        --------       --------
Net income                                            $      393   $        722

Net income per share:
      Basic                                                $0.09          $0.27
                                                        ========       ========
      Diluted                                              $0.09          $0.27
                                                        ========       ========
Weighted average shares outstanding:
      Basic                                            4,438,357      2,675,000
                                                       =========      =========
      Diluted                                          4,442,242      2,675,000
                                                       =========      =========

                     See notes to consolidated financial statements

<PAGE>
                         ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
                         CONSOLIDATED STATEMENTS OF CASH FLOWS
                   (In thousands, except share and per share amounts)
                                      (Unaudited)
                                                      Six Months     Six Months
                                                        ended          ended
                                                       June 30,        June 30,
                                                          1998           1997

Net income                                              $    393       $    722
Adjustments to reconcile net income to net cash
   provided by (used in) operating activities
   Gain of disposal of assets                                ---            ---
   Depreciation and amortization                             358            252
   Deferred taxes                                            ---            190
Changes in assets and liabilities that provided (used) cash:
   Accounts receivable - trade, net                         (427)        (3,464)
   Accounts receivable - affiliates                         (153)          (121)
   Inventory                                              (3,855)           480
   Other current assets                                       27             10
   Other assets..............................               (165)            --
   Deferred offering costs...................                 --           (100)
   Accounts payable                                          153          2,109
   Accrued expenses                                          544            314
   Income taxes payable                                     (145)           215
   Deferred service revenue                                   89            (91)
                                                        --------       --------

      Net cash provided by (used in) operating
         activities                                       (3,181)           516

Cash flows from investing activities:
   Capital Expenditures                                     (230)          (125)
   Proceeds from sale of fixed assets                        ---            ---
                                                        --------       --------

      Net cash used in investing activities:                (230)          (125)

Cash flows from financing activities:
   Purchase of treasury stock................                (40)            --
   Net increase (decrease) in notes payable                3,594           1776
                                                        --------       --------

      Net cash provided by (used in) financing
         activities:                                       3,554          1,776

Net increase (decrease) in cash and cash
   equivalents                                               143          2,167
Cash and cash equivalents at beginning of period           1,581            229
                                                        --------       --------
Cash and cash equivalents at end of period              $  1,724       $  2,396
                                                        ========       ========
Supplemental disclosures of cash flow information:
   Cash paid for interest                               $    117       $    298
                                                        ========       ========
   Cash paid for taxes                                  $    364       $    115
                                                        ========       ========

                     See notes to consolidated financial statements

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

                   (In thousands, except share and per share amounts)

1.   BASIS OF PRESENTATION

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

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

     The condensed  consolidated  financial  statements presented herein at June
30,  1998 and for the three and six months  ended June 30,  1998 are  unaudited;
however, all adjustments which are, in the opinion of management,  necessary for
a fair  presentation of the financial  position,  results of operations and cash
flows for the  periods  covered  have  been made and are of a normal,  recurring
nature.  Accounting  measurements  at interim dates  inherently  involve greater
reliance on estimates than at year-end.  The results of the interim  periods are
not  necessarily  indicative  of  results  for the full year.  The  consolidated
balance  sheet  at  December  31,  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.

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

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

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

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

2.   INCENTIVE STOCK PLANS

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

3.   LITIGATION

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

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

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

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

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

OVERVIEW

     The Company is engaged in the  business  of  reselling  computer  hardware,
business telephone systems and software products and providing related services.
In  addition,  the  Company  derives  revenue  from  providing  IT  Services  to
purchasers of Computer  Products and other customers.  The Company operates from
offices in Houston,  Austin, El Paso, McAllen, San Antonio and Dallas, Texas and
in  Albuquerque  and Las Cruces,  New Mexico.  While all offices offer  computer
related products and services,  certain offices do not offer  telecommunications
products and services. The Company develops and markets CTI Software through its
wholly owned subsidiary Stratasoft,  Inc. To date, most of the Company's revenue
has been derived from Computer Products sales. During the quarter ended June 30,
1998,  Computer  Products  totaled 86.5% of revenues while IT Services,  Telecom
Systems and CTI Software totaled 7.7%, 4.5% and 1.3% of revenues, respectively.

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

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

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

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

<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.  In addition,
certain   manufacturers   of  computer   products  have  generally  become  more
restrictive with respect to price  protection.  This will increase the Company's
risks,  as they relate to the value of  inventories.  Each of these  changes may
cause a reduction of gross margins realized on the sale of computer products.

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

<PAGE>
     The  following  table  sets  forth,  for  the  periods  indicated,  certain
financial data derived from the Company's consolidated  statements of operations
for the three months ended June 30, 1998 and 1997 and indicates  the  percentage
of total revenue for each item.

                                                 Three months ended June 30,
                                                        1998          1997
                                                   Amount     %    Amount    %
Revenue(1)
  Computer Products....................           $34,447   86.5  $27,567  85.5
  IT Services..........................             3,062    7.7    2,791   8.7
  Telecom systems......................             1,818    4.5    1,284   4.0
  CTI Software.........................               513    1.3      597   1.8
                                                  -------  -----  ------- ----- 
   Total revenue.......................            39,840  100.0   32,239 100.0

Gross Profit
  Computer Products....................             3,891   11.3    3,001  10.9
  IT Services..........................             1,037   33.9    1,268  45.4
  Telecom Systems......................               787   43.3      333  26.0
  CTI Software.........................               235   45.8      325  54.4
                                                  -------  -----  ------- ----- 
   Total Gross Profit..................             5,950   14.9    4,927  15.3

Selling, general and administrative expense         5,464   13.7    3,839  11.9
                                                  -------  -----  ------- ----- 
Operating income.......................               486    1.2    1,088   3.4
Interest expense (net of other income).                51    0.1      309   1.0
                                                  -------  -----  ------- ----- 
Income before provision for income taxes              435    1.1      779   2.4
Provision (benefit) for income taxes...               165    0.4      310   1.0
                                                  -------  -----  ------- ----- 
Net Income  ...........................          $    270    0.7 $    469   1.4
                                                  =======  =====  ======= ===== 

Earnings per share.....................             $0.06           $0.17
                                                    =====           =====

  Weighted average shares outstanding..         4,436,609             2,675,000
                                                =========             =========

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


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

     TOTAL REVENUE.  Total revenue  increased by $7.6 million (23.6%) from $32.2
million  in 1997  compared  to $39.8  million  in 1998.  Revenue  from  Computer
Products  increased by $6.9 million  (25.0%) from $27.6 million in 1997 to $34.4
million in 1998. Revenue from Computer Products as a percentage of total revenue
increased 1.0% from 85.5% in 1997 to 86.5% in 1998.  Approximately  $4.7 million
of the increase in Computer  Products  from the prior period was realized in new
offices  while $2.2  million was  realized in offices  existing  during the 1997
period.  Revenue from IT Services increased $271,000 (9.7%) from $2.8 million in
1997 to $3.1 million in 1998 because of the continued  expansion of its billable
technical  staff,  together with the addition of new customers.  Revenue from IT
Services as a percentage of total revenue decreased from 8.7% in 1997 to 7.7% of
total  revenues  in 1998 due to the higher  rate of growth  realized in Computer
Products and Telecom Systems. Revenue from Telecom Systems increased by $534,000
(41.6%)  from $1.3  million in 1997 to $1.8  million in 1998.  The  increase  in
Telecom  Systems  revenue was primarily  the result of the Company's  ability to
obtain new orders for system  installations  from new  customers.  Revenue  from
Telecom Systems as a percentage of total revenue  increased from 4.0% in 1997 to
4.5% in 1998. CTI Software revenue decreased by $84,000 (14.1%) from $597,000 in

<PAGE>
1997 to  $513,000  in 1998.  The  decline in CTI  Software  revenues  was due to
failure to complete the installation of all of the systems  delivered during the
1998  period.  Since  revenue is  recognized  as the systems are  installed  the
failure to complete  the  installations  caused  revenue to fall below the prior
period.  The systems,  which were delivered during the 1998 period, are expected
to be completed  in the  subsequent  period.  Revenue  from CTI  Software,  as a
percentage of total revenue, decreased from 1.8% in 1997 to 1.3% in 1998 for the
same reason.

     GROSS  PROFIT.  Gross profit  increased  by $1.0 million  (20.8%) from $4.9
million in 1997 to $5.9 million in 1998 and gross margin decreased from 15.3% in
1997 to 14.9% in 1998.  The gross margin for Computer  Products  increased  from
10.9% in 1997 to 11.3% in 1998,  which was  primarily  the  result of lower unit
costs on the products  purchased relative to their selling prices which reflects
intensified competition among the Company's suppliers.  The gross profit from IT
Services  decreased  18.2% from $1.3  million  in 1997 to $1.0  million in 1998.
Gross margin  decreased  from 45.4% in 1997 to 33.9% in 1998.  This  decrease in
gross margin was primarily attributable to a lower utilization rate, as well as,
higher compensation rates for the Company's billable technical staff, leading to
higher  labor  costs as a percent  of  revenue.  The  Company  treats  its costs
associated  with its  technical  staff as part of the cost of sales.  Due to the
relatively  fixed nature of  technical  staff  costs,  when lower than  expected
revenues are  realized,  cost of sales,  expressed as a percentage  of revenues,
increases  proportionately.  Additionally,  the  wage  costs  of  the  Company's
billable  staff are  generally  higher in the 1998  period  compared to the 1997
period,  due to the  relative  scarcity  of  qualified  technical  staff  in the
computing  services  industry.  The  gross  margin  for  Telecom  Systems  sales
increased from 26.0% in 1997 to 43.3% in 1998,  reflecting  improved  pricing of
the Company's Telecom products The gross margin for CTI Software  decreased from
54.4%  in 1997 to 45.8% in the  1998  due to  higher  installation  costs on its
products.  Due to the  relatively  fixed nature of technical  staff costs,  when
lower  than  expected  revenues  are  realized,  cost of sales,  expressed  as a
percentage of revenues, increases proportionately.

     SELLING,  GENERAL  AND  ADMINISTRATIVE   EXPENSES.   Selling,  general  and
administrative  expenses  increased by $1.6 million (42.3%) from $3.8 million in
1997 to $5.4 million in 1998. As a percentage of total revenue, selling, general
and administrative expenses increased from 11.9% in 1997 to 13.7% in 1998. Those
components  of selling,  general and  administrative  expenses  which  increased
significantly,  as a  percentage  of revenues,  were  personnel  related  costs,
general expenses  related to opening new offices and expanding  existing offices
and costs associated with the settlement of a law suit. During the 1998 quarter,
when compared to the 1997 period,  the Company employed a significant  number of
new  employees  in its  Austin,  El Paso  and  New  Mexico  offices,  as well as
increases in its Dallas  office  staff.  Since the  employees in El Paso and New
Mexico received  compensation  prior to the realization of significant  revenues
the amount of selling,  general and administrative expenses increased both as to
amount and as a percent of revenues.  The Company also  increased  the number of
administrative  employees  relative  to the  increases  in  revenues in order to
enhance its ability to meet the  requirements of revenue growth and increases in
the number of  offices  operated  by the  Company.  Most  notably,  the  Company
upgraded its computing systems to enhance the speed and capacity of its systems.
During the upgrade  significant  overtime  and other costs were  incurred as the
system  change was  implemented.  Some of these excess  costs may continue  into
subsequent  periods.  In addition,  during the 1998 period the Company  incurred
costs  related to the  opening of  offices  in  McAllen  and El Paso,  Texas and
Albuquerque and Las Cruces, New Mexico without realizing  revenues  commensurate
with those expenses.

     OPERATING INCOME.  Operating income decreased by $602,000 (55.3%) from $1.1
million  in  1997 to  $486,000  in  1998  due to  higher  selling,  general  and
administrative  expenses.  Operating  income  decreased as a percentage of total
revenue  from  3.4% in 1997 to 1.2% in 1998.  Contributing  to the  decrease  in
operating  income were operating  losses incurred in newly opened  offices.  The
combined  losses  incurred  in  the  operation  of  newly  opened  offices  were
approximately $73,000.

     INTEREST  EXPENSE  (NET OF OTHER  INCOME).  Interest  expense (net of other
income) decreased  $258,000 from $309,000 during 1997 period compared to $51,000
in the 1998 period. This reflects the reduced level of the Company's  short-term
debt  during  the  1998  period  when  compared  to  1998.   The  reduction  was
accomplished  by applying all of the net proceeds  from the sale of common stock
in July, 1997 to the repayment of the Company's debt.

<PAGE>
     NET  INCOME.  Net  income,  after a  provision  for income  taxes  totaling
$165,000 (reflecting an effective tax rate of 39.8% in 1997 compared to 37.9% in
1998), decreased by $199,000 from $469,000 in 1997 to $270,000 in 1998.

     The  following  table  sets  forth,  for  the  periods  indicated,  certain
financial data derived from the Company's consolidated  statements of operations
for the six months ended June 30, 1998 and 1997 and indicates the  percentage of
total revenue for each item.

                                                      Six months ended June 30,
                                                        1998            1997
                                                   Amount     %   Amount     %
Revenue(1)
   Computer Products...........................   $62,199   86.5  $50,714  86.2
   IT Services.................................     5,955    7.7    4,857   8.3
   Telecom systems.............................     2,890    4.5    2,237   3.8
   CTI Software                                     1,338    1.3    1,023   1.7
                                                  -------  -----  ------- ----- 
     Total revenue.............................    72,382  100.0   58,831 100.0

Gross Profit
   Computer Products...........................     7,243   11.3    5,452  10.8
   IT Services.................................     2,012   33.9    2,153  44.3
   Telecom Systems.............................       959   43.3      637  28.5
   CTI Software    ............................       546   45.8      516  50.4
                                                  -------  -----  ------- ----- 
     Total Gross Profit........................    10,760   14.9    8,758  14.9

Selling, general and administrative expense....    10,039   13.7    6,974  11.9
                                                  -------  -----  ------- ----- 
Operating income...............................       721    1.2    1,784   3.0
Interest expense (net of other income..........        79    0.1      597   1.0
                                                  -------  -----  ------- ----- 
Income before provision for income taxes.......       642    1.1    1,187   2.0
Provision (benefit) for income taxes...........       249    0.4      465   0.8
                                                  -------  -----  ------- ----- 
Net Income         ............................  $    393    0.7 $    722   1.2
                                                  -------  -----  ------- ----- 
Earnings per share.............................     $0.09           $0.27
                                                    =====           =====

   Weighted average shares outstanding......... 4,438,357       2,675,000
                                                =========       =========

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


Six Months Ended June 30, 1998 Compared To Six Months Ended June 30, 1997

     TOTAL REVENUE.  Total revenue increased by $13.6 million (23.0%) from $58.8
million  in 1997  compared  to $72.4  million  in 1998.  Revenue  from  Computer
Products  increased by $11.5 million (22.6%) from $50.7 million in 1997 to $62.2
million in 1998. Revenue from Computer Products as a percentage of total revenue
decreased 0.3% from 86.2% in 1997 to 85.9% in 1998.  Approximately  $5.9 million
of the increase in Computer  Products  from the prior period was realized in new
offices  while $5.6  million was  realized in offices  existing  during the 1997
period.  Revenue  from IT Services  increased  $1.1  million  (22.6%)  from $4.9
million in 1997 to $6.0  million in 1998 because of the  continued  expansion of
its billable  technical  staff,  together  with the  addition of new  customers.
Revenue from IT Services as a percentage of total revenue decreased from 8.3% in
1997 to 8.2% of total revenues in 1998 due to the higher rate of growth realized
in Telecom Systems and CTI Software.  Revenue from Telecom Systems  increased by
$654,000 (29.2%) from $2.2 million in 1997 to $2.9 million in 1998. The increase
in Telecom Systems revenue was primarily the result of the Company's  ability to
obtain new orders for system  installations  from new  customers.  Revenue  from
Telecom Systems as a percentage of total revenue  increased from 3.8% in 1997 to
4.0% in 1998.  CTI  Software  revenue  increased  by $315,000  (30.8%) from $1.0

<PAGE>
million in 1997 to $1.3 million in 1998.  The increase in CTI Software  revenues
was the result of the  addition of new  customers  and expanded  marketing.  The
increase was partially offset by the failure to complete the installation of all
of the systems  delivered  during the second  quarter of 1998.  Revenue from CTI
Software, as a percentage of total revenue,  increased from 1.7% in 1997 to 1.9%
in 1998.

     GROSS  PROFIT.  Gross profit  increased  by $2.0 million  (22.9%) from $8.8
million in 1997 to $10.8 million in 1998 and gross margin  remained  constant at
14.9% in 1998  versus  14.9% in 1997.  The gross  margin for  Computer  Products
increased from 10.8% in 1997 to 11.6% in 1998, which was primarily the result of
lower unit costs on the  products  purchased  relative to their  selling  prices
which reflects intensified competition among the Company's suppliers.  The gross
profit from IT Services decreased 6.6% from $2.2 million in 1997 to $2.0 million
in 1998.  Gross margin for IT Services  decreased from 44.3% in 1997 to 33.8% in
1998.  This  decrease  in gross  margin was  primarily  attributable  to a lower
utilization  rate,  as well as,  higher  compensation  rates  for the  Company's
billable technical staff, leading to higher labor costs as a percent of revenue.
The Company treats its costs  associated with its technical staff as part of the
cost of sales. Due to the relatively fixed nature of technical staff costs, when
lower  than  expected  revenues  are  realized,  cost of sales,  expressed  as a
percentage of revenues, increases proportionately.  Additionally, the wage costs
of the Company's billable staff are generally higher in the 1998 period compared
to the 1997 period, due to the relative scarcity of qualified technical staff in
the  computing  services  industry.  The gross margin for Telecom  Systems sales
increased from 28.5% in 1997 to 33.2% in 1998,  reflecting  improved  pricing of
the Company's Telecom products. The gross margin for CTI Software decreased from
50.4%  in 1997 to 40.8% in the  1998  due to  higher  installation  costs on its
products.  Due to the  relatively  fixed nature of technical  staff costs,  when
lower  than  expected  revenues  are  realized,  cost of sales,  expressed  as a
percentage of revenues, increases proportionately.

     SELLING,  GENERAL  AND  ADMINISTRATIVE   EXPENSES.   Selling,  general  and
administrative  expenses  increased by $3.0 million (44.0%) from $7.0 million in
1997 to $10.0  million  in 1998.  As a  percentage  of total  revenue,  selling,
general and  administrative  expenses  increased  from 11.9% in 1997 to 13.9% in
1998. Those  components of selling,  general and  administrative  expenses which
increased  significantly,  as a percentage  of  revenues,  were  commissions  in
Computer Products,  personnel related costs, general expenses related to opening
new  offices  and  expanding  existing  offices  and costs  associated  with the
settlement  of a law suit.  The  increase  in  commission  expense  in  Computer
Products  was due to an increase in gross margin  during the 1998 period  versus
the 1997 period.  During the 1998 period,  when compared to the 1997 period, the
Company  employed a significant  number of new employees in its Austin,  El Paso
and New Mexico offices,  as well as increases in its Dallas office staff.  Since
the  employees  in El Paso and New  Mexico  received  compensation  prior to the
realization  of  significant  revenues  the  amount  of  selling,   general  and
administrative  expenses  increased  both  as to  amount  and  as a  percent  of
revenues.  The Company also  increased  the number of  administrative  employees
relative  to the  increases  in revenues in order to enhance its ability to meet
the  requirements  of  revenue  growth  and  increases  in the number of offices
operated by the  Company.  Most  notably,  the Company  upgraded  its  computing
systems to enhance  the speed and  capacity of its  systems.  During the upgrade
significant  overtime  and other costs were  incurred  as the system  change was
implemented. Some of these excess costs may continue into subsequent periods. In
addition,  during the 1998  period the  Company  incurred  costs  related to the
opening of offices in McAllen and El Paso, Texas and Albuquerque and Las Cruces,
New Mexico without realizing revenues commensurate with those expenses.

     OPERATING  INCOME.  Operating income decreased by $1.1 million (59.6%) from
$1.8  million in 1997 to  $722,000  in 1998 due to higher  selling,  general and
administrative  expenses.  Operating  income  decreased as a percentage of total
revenue  from  3.0% in 1997 to 1.0% in 1998.  Contributing  to the  decrease  in
operating  income were operating  losses incurred in newly opened  offices.  The
combined  losses  incurred  in  the  operation  of  newly  opened  offices  were
approximately $182,000.

     INTEREST  EXPENSE  (NET OF OTHER  INCOME).  Interest  expense (net of other
income) decreased  $518,000 from $597,000 during 1997 period compared to $79,000
in the 1998 period. This reflects the reduced level of the Company's  short-term
debt  during  the  1998  period  when  compared  to  1998.   The  reduction  was
accomplished  by applying all of the net proceeds  from the sale of common stock
in July, 1997 to the repayment of the Company's debt.

<PAGE>
     NET  INCOME.  Net  income,  after a  provision  for income  taxes  totaling
$249,000 (reflecting an effective tax rate of 39.2% in 1997 compared to 38.8% in
1998), decreased by $331,000 from $722,000 in 1997 to $393,000 in 1998.

Liquidity and Capital Resources

     The  Company's  working  capital  was $12.8  million  and $13.1  million at
December 31, 1998 and June 30,  1998,  respectively.  As of June 30,  1998,  the
Company had  borrowing  capacity  under the  Company's  credit  facility of $4.9
million.

Cash Flow

     Operating  activities  used net cash  totaling  $3,181,000  during  the six
months ended June 30, 1998.  Operating  activities  used net cash during the six
months ended June 30, 1998 because of increases in  inventories.  Net income and
depreciation  provided  cash  of  $751,000.  The  increase  in  inventories  was
primarily  the  result of  increases  in  inventories  staged  for  delivery  to
customers.  Of the $3.8  million  increase  during the six months ended June 30,
1998, $2.3 million related to an increase in inventories  staged for delivery to
customers  and  the  balance  of  the  increase   relates  to  higher   stocking
requirements imposed by customers and a higher level of sales activities.

     Investing  activities  used cash  totaling  $230,000  during the six months
ended June 30, 1998. The Company's  investing  activities  that used cash during
this  period was  primarily  related to  capital  expenditures.  During the next
twelve months,  the Company expects to incur an estimated  $500,000  million for
capital  expenditures,  a  majority  of which is  expected  to be  incurred  for
leasehold  improvements  and other capital  expenditures  in connection with the
consolidation  of  its  warehouse  facilities  into  a  single  facility  in the
Dallas-Fort  Worth area, the  refurbishment  of its Dallas branch office and the
opening  of branch  offices.  The  actual  amount  and  timing  of such  capital
expenditures  may vary  substantially  depending upon,  among other things,  the
actual  facilities  selected,  the level of expenditures  required to render the
facilities   suitable  for  the  Company's  purposes  and  the  terms  of  lease
arrangements pertaining to the facilities.

     Financing  activities  provided cash  totaling $3.6 million  during the six
months ended June 30, 1998.

Asset Management

     The Company had trade  accounts  receivable,  net of allowance for doubtful
accounts,  of $24.2  million  at June  30,  1998.  The  number  of  days'  sales
outstanding in trade accounts  receivable was 54 days,  which is slightly higher
than the days  outstanding of the prior quarter.  The number of days outstanding
continues  to reflect  slower than  normal  payment by the  Company's  customers
during the three months ended June 30, 1998. Bad debt expense as a percentage of
total revenue for the three months ended June 30, 1998 was 0.3%, which was equal
to bad debt  expense for the three months  ended June 30,  1997.  The  Company's
allowance for doubtful accounts,  as a percentage of trade accounts  receivable,
was 1.0% at December 31, 1998 and 2.4% at June 30, 1998.  Inventory turnover for
the three and six months  ended June 30,  1998 was 13.9  times,  and 17.0 times,
respectively.  The decline in inventory  turnover  during the three months ended
June 30,  1998 was the  result  of  having  an  unusually  high  level of staged
inventory as of June 30, 1998.

Current Debt Obligations

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

   The total credit  available under the DFS Facility is $30.0 million,  subject
to borrowing base  limitations  which are generally  computed as a percentage of
various classes of eligible accounts receivable and qualifying inventory. Credit
available  under the DFS  Facility for floor plan  financing  of inventory  from

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

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

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

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

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

PART II.    OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

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

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

<PAGE>
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     On June 16, 1998 the Company held its annual  meeting of  stockholders  for
the following purposes:

                1.    To elect six directors;

                2.    To   amend   Article   Fourth   of  the   Certificate   of
                      Incorporation  of the  Company  to  reduce  the  number of
                      authorized  shares of common stock,  $0.01 par value, from
                      50,000,000 to 15,000,000

      The voting on the above matters by the stockholders was as follows:

            Matter                         For               Withheld
      Election of Directors:

      James H. Long                  3,800,739                 12,450
      Donald R. Chadwick             3,800,739                 12,450
      G. Chris Andersen              3,800,739                 12,450
      Richard D. Darrell             3,800,739                 12,450
      Jack M. Johnson, Jr.           3,800,739                 12,450
      Donald D. Sykora               3,800,739                 12,450

      Amend Article Fourth of the Certificate of Incorporation
      of the Company to reduce the number of authorized shares
      of common stock, $0.01 par value, from 50,000,000 to
      15,000,000                     3,804,359                  8,900




                                   SIGNATURES

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


                              Allstar Systems, Inc.

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



August 4 1998                    By:      /s/ DONALD R. CHADWICK

Date                             Donald R. Chadwick, Chief Financial Officer