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 EXCHANG
    ACT OF 1934

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

For the transition period from ________ to ___________

Commission file number: 333-09789

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

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

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

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

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

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

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

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

Title                                              Outstanding

Common Stock $.01 par value per share              As of August 3, 1999,
                                                   4,170,125 shares outstanding



<PAGE>


PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

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

                                                        June 30,    December 31,
                                                           1999         1998
                                                      (Unaudited)
ASSETS
Current assets:
     Cash and cash equivalents...................       $  6,734    $     2,538
     Accounts receivable, net....................         35,563         34,893
     Accounts receivable - affiliates ...........            463            373
     Inventory...................................          8,655          8,497
     Deferred taxes .............................            431            431
     Income taxes receivable.....................            813            637
     Other current assets .......................            347            559
                                                      ----------     ----------
              Total current assets ..............         53,006         47,928
Property and equipment...........................          2,856          2,902
Other assets  ...................................            173            198
                                                      ----------     ----------
Total    ........................................      $  56,035      $  51,028
                                                        ========       ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Notes payable ..............................      $  14,836     $   15,958
     Accounts payable............................         23,165         16,641
     Accrued expenses............................          5,284          5,273
     Deferred service revenue....................            166            256
                                                      ----------     ----------
              Total current liabilities..........         43,451         38,128
     Deferred credit - stock warrants............            195            195

Commitments and contingencies
Stockholders' equity:
     Preferred stock, $.01 par value, 5,000,000 shares
       authorized, no shares issued
     Common stock:
       $.01 par value, 15,000,000 shares authorized,
       4,441,325 shares issued and outstanding
       on June 30, 1999 and December 31, 1998....             44             45
     Additional paid in capital..................         10,037         10,196
     Unearned equity compensation................             (1)          (269)
     Treasury stock (271,200 shares, at cost)....           (834)          (834)
     Retained earnings...........................          3,143          3,567
                                                       ---------      ---------
              Total stockholders' equity.........         12,389         12,705
                                                        --------       --------
Total............................................      $  56,035      $  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 June 30,

                                                           1999           1998
                                                           ----           ----

Total revenue....................................     $   50,291     $   39,840
Cost of sales and services.......................         44,951         33,890
                                                      ----------     ----------
Gross profit.....................................          5,340          5,950
Selling, general and administrative expenses.....          5,671          5,464
                                                      ----------     ----------
Operating (loss) income..........................           (331)           486
Interest expense, net of other income............            208             51
                                                      ----------     ----------
(Loss) income before (benefit) provision
for income taxes.................................           (539)           435
(Benefit) provision for income taxes                        (169)           165
                                                      ----------     ----------
Net (loss) income................................     $     (370)  $        270
                                                      ===========   ===========

Net (loss) income per share:
         Basic...................................     $(    0.09)   $      0.06
                                                        =========    ==========
         Diluted.................................     $(    0.09)   $      0.06
                                                        =========    ==========

Weighted average shares outstanding:
         Basic...................................      4,169,017      4,436,609
                                                       =========      =========
         Diluted.................................      4,169,017      4,444,336
                                                       =========      =========

                                                      Six Months Ended June 30,

                                                           1999            1998
                                                           ----            ----

Total revenue....................................     $   98,159     $   72,382
Cost of sales and services.......................     $   87,042         61,622
                                                       ---------      ---------
Gross profit.....................................         11,117         10,760
Selling, general and administrative expenses.....         11,275         10,039
                                                      ----------     ----------
Operating (loss) income..........................           (158)           721
Interest expense, net of other income............            450             79
                                                      ----------     ----------
(Loss) income before (benefit) provision for
   income taxes..................................           (608)           642
(Benefit) provision for income taxes.............           (184)           249
                                                      ----------     ----------
Net (loss) income................................    $      (424)   $       393
                                                     ===========    ===========
Net (loss) income per share:
         Basic...................................    $     (0.10)   $      0.09
                                                     ===========    ===========
         Diluted.................................    $     (0.10)   $      0.09
                                                     ===========    ===========
Weighted average shares outstanding:
         Basic...................................      4,168,971      4,438,357
                                                     ===========    ===========
         Diluted.................................      4,168,971      4,442,242
                                                     ===========    ===========



                 See notes to consolidated financial statements


<PAGE>

<TABLE>
                     ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)
<CAPTION>
<S>                                                                     <C>                      <C>
                                                                      Six Months              Six Months
                                                                        ended                   ended
                                                                        June 30,                June 30,
                                                                         1999                    1998
                                                                         ----                    ----
Net (loss) income...............................................  $      (424)            $       393
Adjustments to reconcile net (loss) income to net cash
     provided by (used in) operating activities:
     Depreciation and amortization..............................          544                     358
Changes in assets and liabilities that provided
     (used) cash:
     Accounts receivable, net...................................         (670)                   (427)
     Accounts receivable - affiliates...........................          (90)                   (153)
     Inventory..................................................         (158)                 (3,855)
     Income Taxes Receivable....................................         (176)
     Other current assets.......................................          212                      27
     Other assets...............................................                                 (165)
     Accounts payable...........................................        6,524                     153
     Accrued expenses...........................................           11                     544
     Income taxes payable.......................................                                 (145)
     Deferred service revenue...................................          (90)                     89
                                                                  -----------              ----------
         Net cash provided by (used in) operating
              activities........................................        5,683                  (3,181)
                                                                  -----------              ----------
Cash flows from investing activities:
     Capital expenditures.......................................         (473)                   (230)
                                                                  -----------              ----------
         Net cash used in investing activities:.................         (473)                   (230)
                                                                  -----------              ----------
Cash flows from financing activities:
     Purchase of treasury stock                                                                   (40)
     Cancellation of restricted stock awards....................          108
     Net (decrease) increase in notes payable...................       (1,122)                  3,594
                                                                  -----------              ----------
         Net cash (used in) provided by financing
              activities:.......................................       (1,014)                  3,554
                                                                  -----------              ----------
Net increase in cash and cash
     equivalents................................................        4,196                     143

Cash and cash equivalents at beginning of period................   $    2,538              $    1,581
                                                                  -----------              ----------
Cash and cash equivalents at end of period......................   $    6,734              $    1,724
                                                                  ===========              ==========
Supplemental disclosures of cash flow information:
     Cash paid for interest.....................................   $      503              $      117
                                                                  ===========              ==========
     Cash paid for taxes........................................   $        0              $      364
                                                                  ===========              ==========

                 See notes to consolidated financial statements
</TABLE>


<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 June
30,  1999 and for the three  months and the six months  ended June 30,  1999 are
unaudited;  however,  all  adjustments  which are, in the opinion of management,
necessary  for a  fair  presentation  of  the  financial  position,  results  of
operations  and cash flows for the periods  covered  have been made and are of a
normal,  recurring nature.  Accounting  measurements at interim dates inherently
involve  greater  reliance on  estimates  than at  year-end.  The results of the
interim periods are not necessarily indicative of results for the full year. The
consolidated  balance  sheet  at  December  31,  1998 is  derived  from  audited
consolidated  financial statements but does not include all disclosures required
by generally accepted  accounting  principles.  Although management believes the
disclosures are adequate,  certain information and disclosures normally included
in the notes to the  financial  statements  has been  condensed  or  omitted  as
permitted  by  the  rules  and   regulations  of  the  Securities  and  Exchange
Commission.

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

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

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


<PAGE>


2.   INCENTIVE STOCK PLANS

     In  September  1996  Allstar  adopted  the 1996  Incentive  Stock Plan (the
"Incentive  Plan"') and the 1996  Non-Employee  Director  Stock Option Plan (the
"Director Plan"). Under the Incentive Plan, Allstar's Compensation Committee may
grant up to  417,500  shares of common  stock,  which  have  been  reserved  for
issuance to certain key employees of Allstar.  The  Incentive  Plan provides for
the granting of incentive awards in the form of stock options, restricted stock,
phantom stock,  stock bonuses and cash bonuses in accordance with the provisions
of the plan. Additionally,  no shares may be granted after the tenth anniversary
of the Incentive Plan's adoption.  Allstar has reserved for issuance,  under the
Director Plan, 100,000 shares of common stock,  subject to certain  antidilution
adjustments.  The Director Plan provides for a one-time  option by newly elected
directors to purchase up to 5,000 common  shares,  after which each  director is
entitled to receive an option to purchase  up to 2,000  common  shares upon each
date of re-election to Allstar's  Board of Directors.  Options granted under the
Director  Plan and the Incentive  Plan have an exercise  price equal to the fair
market value on the date of grant and generally expire ten years after the grant
date.  As of June 30,  1999,  37,000  stock  option  grants  have been issued to
directors  under  the  Director  Plan.  The  exercise  price  of  28,000  of the
directors' options is $1.50 per share and for 9,000 of the directors' options is
$1.75. As of June 30, 1999 incentive stock options  totaling 415,872 shares have
been issued to employees. The exercise price of 8,000 of the stock option grants
is $6.00 per share, 214,600 of the stock option grants have an exercise price of
$1.50 per share, 3900 of the stock option grants have an exercise price of $1.75
and 189,372 of the stock  option  grants have an exercise  price of $1.063.  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 50,000  shares,  which  will vest  ratably  over the  five-year
period  ending May 20,  2004.  During the quarter  ended June 30,  1999  Allstar
exchanged  restricted  stock awards for 63,086 shares for stock option grants on
126,172 shares at an exercise price of $1.06 per share.  The stock option grants
vest over the same period as the exchanged  restricted stock awards.  As of June
30, 1999, Allstar had restricted stock awards outstanding for 1,200 shares.

3.   EARNINGS PER SHARE

The computations of basic and diluted earnings per share for each period were as
follows:
<TABLE>
<CAPTION>
                                            Three months ended June 30,         Six months ended June 30,

<S>                                                <C>          <C>                  <C>             <C>
                                                   1999         1998                 1999            1998

                                                  (Amounts in thousands except share and per share data)
Numerator:
     Net income (loss)......................      $(370)          $270              ($424)           $393
                                                  ======          ====               =====           ====

Denominator:
     Denominator for basic earnings per
       share - weighted-average shares
       outstanding..........................   4,169,017     4,436,609           4,168,971      4,438,357

Effect of dilutive securities:
     Shares issuable from assumed conversion
       of common stock options, warrants and
  restricted stock..........................           0         7,727                   0          3,885
                                              ----------    ----------           ---------     ----------

Denominator for diluted earnings per share..  4,255,459      4,444,336          4,255,413       4,442,242

Basic earnings per share....................     $(0.09)        $0.06              $(0.10)          $0.09
                                                   =====         ====               =====            ====

Diluted earnings per share..................     $(0.09)        $0.06              $(0.10)          $0.09
                                                   =====         ====               =====            ====
<FN>
The potentially  dilutive options  totaling 86,442 shares,  calculated under the
treasury stock method,  were not used in the calculation of diluted earnings per
share for the three  months  and the six months  ended  June 30,  1999 since the
effect of  potentially  dilutive  securities  in  computing  a loss per share is
antidilutive.
</FN>
</TABLE>


<PAGE>

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. The tables below show the results of the three
reportable segments:

<TABLE>
<CAPTION>
<S>                                     <C>                 <C>               <C>             <C>
                                    Information           Telecom             CTI
                                    Technology            Systems          Software       Consolidated

For the quarter ended June 30, 1999 (Unaudited):
Total revenue....................... $   48,302         $    1,164        $      825        $   50,291
Cost of sales and services..........     43,480              1,058               413            44,951
                                      ---------          ---------         ---------          --------
Gross profit........................      4,822                106               412             5,340
Selling, general and
administrative expenses.............      4,572                651               448             5,671
                                     ----------         ----------         ---------         ---------
Operating income (loss)............. $      250         $     (545)       $      (36)       $     (331)
                                     ==========         ===========       ===========        ==========
Accounts receivable, net............ $   30,444         $     4,508       $      611        $   35,563
                                      =========          ==========       ===========        ==========

For the quarter ended June 30, 1998 (Unaudited):
Total revenues                       $   37,509         $    1,818        $      513        $   39,840
Cost of sales and services..........     32,581              1,031               278            33,890
                                         ------          ---------         ---------         ---------
Gross profit........................      4,928                787               235             5,950
Selling, general and
administrative expenses.............      4,431                583               450             5,464
                                     ----------         ----------         ---------         ---------
Operating income (loss)............. $      497         $      204        $     (215)       $      486
                                     ==========          =========        ===========        ==========
Accounts receivable, net............ $   22,963         $    4,259        $      841        $   28,063
                                     ==========          =========        ===========        ==========

For the six months ended June 30, 1999 (Unaudited):
Total revenue....................... $   94,104         $    2,460        $    1,595        $   98,159
Cost of sales and services..........     84,430              1,868               744            87,042
                                      ---------          ---------        ----------         ---------
Gross profit........................      9,674                592               851            11,117
Selling, general and
  administrative expenses...........      9,167              1,163               945            11,275
                                      ---------          ---------        ----------         ---------
Operating income (loss)............. $      507         $     (571)       $      (94)       $     (158)
                                     ==========          =========        ===========        ==========
Accounts receivable, net............  $  30,444         $    4,508        $      611        $   35,563
                                     ==========          =========        ===========        ==========

For the six months ended June 30, 1998 (Unaudited):
Total revenue.......................   $ 68,154         $    2,890        $    1,338        $   72,382
Cost of sales and services..........     58,899              1,931               792            61,622
                                      ---------          ---------        ----------          --------
Gross profit........................      9,255                959               546            10,760
Selling, general and
  administrative expenses...........      8,064              1,151               824            10,039
                                      ---------          ---------        ----------          --------
Operating income (loss).............  $   1,191         $     (192)       $     (278)       $      721
                                     ==========          =========        ===========        ==========
Accounts receivable, net............ $   22,963         $    4,259        $      841        $   28,063
                                     ==========          =========        ===========        ==========
</TABLE>


<PAGE>


5.  CREDIT ARRANGEMENTS

Allstar has a $30.0 million credit agreement with a commercial  finance company.
This agreement contains restrictive covenants which, among other things, require
specific  ratios of current assets to current  liabilities  and debt to tangible
net worth and require Allstar to maintain  minimum  tangible net worth.  Allstar
did not maintain the required ratio of current assets to current liabilities for
the quarter ended June 30, 1999; however, Allstar subsequently received a waiver
from the commercial finance company for the non-compliance.

6.   LITIGATION

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

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


<PAGE>


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

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

     The  following  discussion  is  qualified in its entirety by, and should be
read in  conjunction  with,  the company's  consolidated  financial  statements,
including  the  notes  thereto  included  elsewhere  in this  Form  10-Q and the
company's  Form  10-K,   previously  filed  with  the  Securities  and  Exchange
Commission.

Overview

     Allstar  Systems,  Inc. is engaged in the  business of  reselling  computer
hardware, business telephone systems and software products and providing related
services.  In addition,  we derive revenue from providing services to purchasers
of computer  products and other  customers.  We operate from offices in Houston,
Austin,  El Paso,  San  Antonio  and Dallas,  Texas and in  Albuquerque  and Las
Cruces,  New Mexico.  While all offices  offer  computer  related  products  and
services, most offices do not offer telecommunications products and services. We
develop and market CTI Software through our wholly owned subsidiary  Stratasoft,
Inc. To date, most of our revenue has been derived from computer  products sales
and  related  services.  During the  quarter  ended June 30,  1999,  Information
Technology  totaled  96.1% of revenues  while  Telecom  Systems and CTI Software
totaled 2.3% and 1.6% of revenues, respectively.

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

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

     Services are provided by Information  Technology  both in conjunction  with
and  separately  from its  product  and system  sales.  We  typically  price our
services on a time and  materials  basis or under  fixed fee service  contracts,
depending on customer  preference and the level of service commitment  required.
In markets where we do not maintain  branch  offices,  we often  subcontract for
necessary technical  personnel,  particularly where required for larger scope or
prolonged duration contracts.  The services provided include information systems
support,  authorized warranty service, hardware repair and maintenance services,
complex  network  diagnostic  services,  end user support  services and software
diagnostic services. We also offer complete outsourcing of a customer's computer
and network  management  and  technical  support needs on a contract  basis.  In
addition, we provide temporary and permanent technical staffing services.

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


<PAGE>


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

     Through Telecom Systems, we market,  install and service business telephone
systems,  including  large PBX systems and smaller "key  systems",  along with a
variety of related products  including  hardware and software  products for data
and voice  integration,  wide area connectivity and telephone system networking,
wireless communications and video conferencing.  As with Information Technology,
Telecom System's cost of sales include both product cost and labor cost, and the
labor has a more fixed nature. During periods when there is downward pressure on
pricing  systems,  management of labor cost is necessary for Telecom Systems not
to have erosion of gross margin.

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

     We believe  that each of our three  businesses  are  complementary  to each
other and allow us to offer a broader range of integrated  products and services
in order to satisfy our  customers'  information  and  communication  technology
requirements  than many of our  competitors.  Our  strategy is to  maintain  and
expand our  relationships  with our customers by satisfying a greater portion of
these  requirements.  Our cost of sales and  services  include  product cost and
labor. Labor has a more fixed nature such that higher levels of service revenues
produce more gross margin  while lower levels of service  revenues  produce less
gross margin.  Management of labor cost is important in order to prevent erosion
of gross margins.

     Our cost of sales and services include product cost and labor.  Labor has a
more fixed nature such that higher levels of service revenues produce more gross
margin while lower levels of service  revenues  produce  less gross  margin.  In
periods when there is downward  pressure on service  sales  pricing,  it becomes
more important for management of labor cost in order to prevent erosion of gross
margins.

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

     Inacom  Corp.  ("Inacom")  has  historically  been the largest  supplier of
products sold by the company.  In August 1996,  we renewed our long-term  supply
arrangement  with  Inacom and agreed to  purchase  at least 80% of our  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 us 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. We expect that considerably
less than 80% of our total  purchases  will be made  from  Inacom,  and that any
increase or decrease  over  historical  levels in the  percentage of products we
purchases  from Inacom  under the Inacom  agreement  will not have any  material
impact on the company's  results of operations.  Other major  suppliers  include
Ingram Micro, Inc. and Tech Data Corporation.

     We manage our  inventory in order to minimize the amount of inventory  held
for resale and the risk of inventory obsolescence and decreases in market value.
We attempt to maintain a level of inventory required to reach only our near term
delivery  requirements by relying on the ready availability of products from our
principal suppliers. Manufacturers of our major products generally provide price
protection,  which  reduces our exposure to  decreases  in prices.  In the past,
product suppliers generally allowed for returns of excess inventory, which, on a
limited basis, were made without material restocking fees. However,  significant
suppliers  recently  revised  their  policies to restrict  the amount of returns
allowed. It is expected that thischange increases our risks associated with


<PAGE>

inventory  ownership.  In  particular,  we have  greater  risk  associated  with
inventory obsolescence and declining values. In addition,  certain manufacturers
of  products  have  generally  become  more  restrictive  with  respect to price
protection.  This has  increased  our  risks,  as they  relate  to the  value of
inventories.  Each of these  changes  may  cause a  reduction  of gross  margins
realized on the sale of products.

Special notice regarding forward-looking statements

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

Three Months Ended June 30, 1999 Compared To Three Months Ended June 30, 1998
                             (Dollars in thousands)
     The  following  table  sets  forth,  for  the  periods  indicated,  certain
financial data derived from our unaudited consolidated  statements of operations
for the three months ended June 30, 1999 and 1998.

<TABLE>
<CAPTION>
                                 Three months ended June 30,
                                                             1999                      1998
                                                             ----                      ----
<S>                                                        <C>         <C>           <C>         <C>
                                                         Amount          %         Amount          %

Revenue  :
Information Technology............................... $   48,302       96.1      $  37,509       94.1
Telecom Systems......................................      1,164        2.3          1,818        4.6
CTI Software.........................................        825        1.6            513        1.3
                                                      ----------     ------      ---------     ------
         Total revenue...............................     50,291      100.0         39,840      100.0
Gross profit:
Information Technology...............................      4,822       10.0          4,928       13.1
Telecom Systems......................................        106        9.1            787       43.3
CTI Software.........................................        412       49.9            235       45.8
                                                      ----------     ------      ---------     ------
         Total gross profit..........................      5,340       10.6          5,950       14.9
Selling, general and administrative expenses.........      5,671       11.3          5,464       13.7
                                                       ---------     ------      ---------     ------
Operating income.....................................       (331)      (0.7)           486        1.2
Interest expense, net of other income................        208        0.4             51        0.1
                                                      ----------     ------      ---------     ------
(Loss) income before (benefit)
 provision for income taxes..........................       (539)      (1.1)           435        1.1
(Benefit) provision for income taxes.................       (169)     ( 0.3)           165        0.4
                                                      ----------     ------      ---------     ------
Net (loss) income....................................   $   (370)      (0.8)     $     270        0.7
                                                      ==========     ======      =========     ======
<FN>
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.
</FN>
</TABLE>


<PAGE>


     TOTAL  REVENUE.  Total revenue  increased by $10,451  (26.2%) to $50,291 in
1999 from $39,840 in 1998.
     Information  Technology  revenue increased by $10,793 (28.8%) to $48,302 in
1999  from  $37,509  in 1998.  As a  percentage  of total  revenue,  Information
Technology  revenue  increased to 96.1% in 1999 from 94.1% in 1998. The increase
in  Information  Technology  revenues  was  primarily  attributable  to revenues
derived  from new  customer  relationships  in  offices  opened in late 1997 and
during 1998,  together with  significant  revenue  growth  realized from new and
existing customers in our more mature offices in Dallas and Houston. Information
Technology revenues from our newer offices,  opened in 1997 and 1998,  increased
by $3,279  (69.3%)  while  revenues  from our more mature  offices in Dallas and
Houston increased by $7,514 (22.9%).
     Telecom  Systems  revenue  decreased by $654 (36.0%) to $1,164 in 1999 from
$1,818 in 1998.  Revenue from Telecom  Systems as a percentage  of total revenue
decreased  to 2.3% in 1999 from 4.6% in 1998.  The  decrease in Telecom  Systems
revenue  was  due  to  increased  pricing  competition  from  a  directly  owned
subsidiary of the  manufacturer  of the telephone  system  product line that has
accounted for a majority of Telecom Systems revenues over the past year. Several
large  sales were lost to this  competitor  at far below the  pricing  levels at
which we were  willing  to price  such  systems.  In  addition,  during the 1999
period, we attempted to make changes to our Telecom Systems business,  which has
produced  unsatisfactory  profitability  results  to  date,  in  an  attempt  to
ultimately improve financial  performance in this business unit, and this caused
decreased  sales  activity as  management,  operational  procedure  and staffing
changes were made.
     CTI Software revenue increased by $312 (60.8%) to $825 in 1999 from $513 in
1998. The increase in CTI Software  revenues was due to both increased sales and
increased size of sales of its products in 1999. Revenue from CTI Software, as a
percentage of total revenue, increased to 1.6% in 1999 from 1.3% in 1998.

     GROSS PROFIT. Gross profit decreased by $610 (10.3%) to $5,340 in 1999 from
$5,950 in 1998. Gross margin decreased to 10.6% in 1999 from 14.9% in 1998.
     Information  Technology  gross profit decreased $106 to $4,822 in 1999 from
$4,928 in 1998 in spite of the increased  revenues described above, due to lower
gross margin realized in 1999.  Information Technology gross margin decreased to
10.0% in 1999 from 13.1% in 1998.  The  reduction in gross margin was the result
of the combined effects of our  participation in lower margin large volume sales
transactions, lower average selling prices for computers realized throughout the
industry,  costs related to eliminating  unwanted  inventory,  excessive freight
costs not passed on to customers and write-offs of vendor  accounts  receivable.
In addition,  Information  Technology produced below our expected level of gross
margin because we were unable to immediately  reassign  service  technical staff
from  completed  projects  to new  projects  due to  customer  needs or to their
locations,  and due to an effort  to  change  our mix of  services  business  to
include a higher percentage of what is believed to ultimately be more profitable
services offerings.  Overall, the increase in revenue for Information Technology
was slightly greater than expected while the gross margin was considerably below
the expected level.
     Telecom  Systems  gross  profit  decreased  by $681 (86.5%) to $106 in 1999
compared  to  $787  in  1998.   Gross  margin  for  Telecom  Systems   decreased
significantly  over the  prior  year to 9.1% in 1999 from  43.3% in 1998.  Under
normal  circumstances  we expect to realize between 25% and 35% gross margins in
Telecom  Systems.  The  significant  decline in gross profit and gross margin in
Telecom  Systems as compared to both the expected normal levels and 1998 was due
to the factors described above, which  significantly  decreased gross margin due
to a reduction a revenue without a corresponding  reduction in cost of sales and
services.
     CTI Software gross profit  increased $177 (75.3%) to $412 in 1999 from $235
in 1998. Gross margins for CTI Software increased to 49.9% in 1999 from 45.8% in
1998 due to a higher content of  software-only  sales in 1999, to our ability to
realize  higher  prices for our CTI software  products  relative to the hardware
component,  and to a  reduction  in the cost of  software  development  costs as
compared to revenue.


<PAGE>

     SELLING,  GENERAL  AND  ADMINISTRATIVE   EXPENSES.   Selling,  general  and
administrative  expenses  increased by $207 (3.8%) to $5,671 in 1999 from $5,464
in 1998.  While  selling,  general  and  administrative  expenses  increased  in
absolute  dollars,  the  increase  was  considerably  less than the  increase in
revenue, which resulted in a decrease in these expenses as a percentage of total
revenue of 2.4%, to 11.3% of revenue in 1999 from 13.7% in 1998. The decrease in
selling,  general and administrative expenses as a percentage of revenue was the
direct  result of our  effort to reduce  these  costs  through  the  closing  of
unprofitable offices, the downsizing of certain branch offices and the reduction
of certain expense  structures when expected revenues were insufficient to cover
operating expenses.  Additionally,  we realigned certain operations to eliminate
redundancies  and improve  efficiency.  During 1998 we  increased  our  spending
relating to opening and  staffing  new  offices  and sales  operations  with the
expectation  of producing a sufficient  revenue base to cover those expenses and
turn these new offices  into  profitable  operations.  Late in 1998,  management
realized that certain of these new offices and  operations  would not be able to
rapidly attain sufficient revenues and gross profits to meet those expectations.
Consequently,  we began  downsizing  or closing  those  operations  and this has
resulted in reduced  selling,  general  and  administrative  expenses  and lower
losses in the combined new offices.  In spite of the fact that selling,  general
and  administrative  expenses  declined as a percentage of revenue,  we were not
able to reduce selling,  general and administrative  expenses as much as desired
due to costs of employee  severance  compensation  paid,  higher than normal bad
debt expense,  higher  employee  education  expenses  related to efforts to make
business model changes and increases in professional  fees. We reduced the total
number of  full-time  employees by 33 (7%) from  approximately  473 at March 31,
1999 to 440 at June 30,  1999,  but did not  realize  the full impact of expense
reduction  in the  quarter  due to  the  fact  that  the  terminations  occurred
throughout  the  quarter  and because of  severance  paid to certain  terminated
employees.

     OPERATING INCOME. Operating income decreased by $817 (168%) to an operating
loss of $331 in 1999  from  income of $486 in 1998  due,  principally,  to lower
gross margins realized in Information Technology and Telecom Systems operations.
Operating income decreased as a percentage of total revenue to a loss of 0.7% in
1999 from income of 1.2% in 1998.

     INTEREST  EXPENSE,  NET OF OTHER  INCOME.  Interest  expense,  net of other
income  increased $157 to $208 in 1999 compared to $51 in 1998.  This reflects a
higher level of borrowing on our credit  facilities  in 1999 as compared to 1998
and slightly lower interest rates in 1999 compared to 1998.

     NET INCOME.  Net income,  after a benefit for income  taxes  totaling  $169
(reflecting  an effective  tax rate of 31.4% in 1999 compared to 37.9% in 1998),
decreased  by $640 to a net loss of $370 in 1999  compared to net income of $270
in 1998.


<PAGE>


Six Months Ended June 30, 1999 Compared To Six Months Ended June 30, 1998
                             (Dollars in thousands)
     The  following  table  sets  forth,  for  the  periods  indicated,  certain
financial data derived from our unaudited consolidated  statements of operations
for the six months ended June 30, 1999 and 1998.

<TABLE>
<CAPTION>
                                   Six months ended June 30,
                                                             1999                      1998
                                                             ----                       ---
<S>                                                        <C>        <C>            <C>          <C>
                                                         Amount        %           Amount          %

Revenue  :
Information Technology............................... $   94,104       95.9     $   68,154       94.2
Telecom Systems......................................      2,460        2.5          2,890        4.0
CTI Software.........................................      1,595        1.6          1,338        1.8
                                                      ----------     ------     ----------     ------
         Total revenue...............................     98,159      100.0         72,382      100.0
Gross profit:
Information Technology...............................      9,674       10.3          9,255       13.6
Telecom Systems......................................        592       24.1            959       33.2
CTI Software.........................................        851       53.4            546       40.8
                                                      ----------     ------     ----------     ------
         Total gross profit..........................     11,117       11.3         10,760       14.9
Selling, general and administrative expenses.........     11,275       11.5         10,039       13.9
                                                      ----------     ------     ----------     ------
Operating income.....................................       (158)      (0.2)           721        1.0
Interest expense, net of other income................        450        0.4             79        0.1
                                                      ----------     ------     ----------     ------
(Loss) income before (benefit)
 provision for income taxes..........................       (608)      (0.6)           642        0.9
(Benefit) provision for income taxes.................       (184)      (0.2)           249        0.3
                                                      ----------     ------     ----------     ------
Net (loss) income.................................... $     (424)      (0.4)    $      393        0.6
                                                      ==========    =======     ==========     ======

<FN>
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.
</FN>
</TABLE>

     TOTAL  REVENUE.  Total revenue  increased by $25,777  (35.6%) to $98,159 in
1999 from $72,382 in 1998.
     Information  Technology  revenue increased by $25,950 (38.1%) to $94,104 in
1999  from  $68,154  in 1998.  As a  percentage  of total  revenue,  Information
Technology  revenue  increased to 95.9% in 1999 from 94.2% in 1998. The increase
in  Information  Technologies  revenues was primarily  attributable  to revenues
derived  from new  customer  relationships  in  offices  opened in late 1997 and
during 1998,  together with  significant  revenue  growth  realized from new and
existing customers in our more mature offices in Dallas and Houston. Information
Technology  revenues from the company's newer offices,  opened in 1997 and 1998,
increased by $8,309  (130.4%).  Revenues from our more mature  offices in Dallas
and Houston increased by $17,809 (28.9%).
     Telecom  Systems  revenue  decreased by $430 (14.9%) to $2,460 in 1999 from
$2,890 in 1998.  Revenue from Telecom  Systems as a percentage  of total revenue
decreased  to 2.5% in 1999 from 4.0% in 1998.  The  decrease in Telecom  Systems
revenue  was  due  to  increased  pricing  competition  from  a  directly  owned
subsidiary of the  manufacturer  of the telephone  system  product line that has
accounted for a majority of Telecom Systems revenues over the past year. Several
large  sales were lost to this  competitor  at far below the  pricing  levels at
which we were  willing  to price  such  systems.  In  addition,  during the 1999
period, we attempted to make changes to our Telecom Systems business,  which has
produced  unsatisfactory  profitability  results  to  date,  in  an  attempt  to
ultimately improve financial  performance in this business unit, and this caused
decreased  sales  activity as  management,  operational  procedure  and staffing
changes were made.
     CTI  Software  revenue  increased  by $257  (19.2%)  to $1,595 in 1999 from
$1,338 in 1998. The increase in CTI Software  revenues was due to both increased
sales and  increased  size of sales of its  products in 1999.  Revenue  from CTI
Software, as a percentage of total revenue,  decreased to 1.6% in 1999 from 1.8%
in 1998 because of the higher level of revenue growth in Information Technology.


<PAGE>


     GROSS PROFIT. Gross profit increased by $357 (3.3%) to $11,117 in 1999 from
$10,760 in 1998. Gross margin  percentage  decreased to 11.3% in 1999 from 14.9%
in 1998.
     Information  Technology  gross profit increased $419 to $9,674 in 1999 from
$9,255 in 1998 in spite of the increased  revenues described above, due to lower
gross margin realized in 1999.  Information  Technology gross margin  percentage
decreased to 10.3% in 1999 from 13.6% in 1998. The reduction in gross margin was
the result of the combined  effects of our  participation  in lower margin large
volume  sales  transactions,  of lower  average  selling  prices  for  computers
realized  throughout  the  industry,  of costs related to  eliminating  unwanted
inventory,  of  excessive  freight  costs  not  passed  on to  customers  and of
write-offs of vendor accounts receivable.  In addition, the service component of
Information Technology produced below our expected level of gross margin because
we experienced  lower  utilization of our technical staff during the 1999 period
as we were unable to immediately  reassign staff from completed  projects to new
projects.  and due to an effort by us to change our mix of services  business to
include a higher percentage of what is believed to ultimately be more profitable
services offerings.
     Telecom  Systems  gross  profit  decreased  by $367 (38.3%) to $592 in 1999
compared  to  $959  in  1998.   Gross  margin  for  Telecom  Systems   decreased
significantly  over the prior  year to 24.1% in 1999 from  33.2% in 1998.  Under
normal  circumstances  we expect to realize between 25% and 35% gross margins in
Telecom  Systems.  The  significant  decline in gross profit and gross margin in
Telecom  Systems as compared to both the expected normal levels and 1998 was due
to the factors described above, which  significantly  decreased gross margin due
to a reduction a revenue without a corresponding  reduction in cost of sales and
services.
     CTI Software gross profit  increased $305 (55.9%) to $851 in 1999 from $546
in 1998. Gross margin for CTI Software  increased to 53.4% in 1999 from 40.8% in
1998 due to a higher  content of  software-only  sales in 1999,  our  ability to
realize  higher  prices for its CTI software  products  relative to the hardware
component  and to a  reduction  in the  cost of  software  development  costs as
compared to revenue.

     SELLING,  GENERAL  AND  ADMINISTRATIVE   EXPENSES.   Selling,  general  and
administrative  expenses  increased  by $1,236  (12.3%)  to $11,275 in 1999 from
$10,039 in 1998. While selling, general and administrative expenses increased in
absolute  dollars,  the  increase  was  considerably  less than the  increase in
revenue, which resulted in a decrease in these expenses as a percentage of total
revenue of 2.4%, to 11.5% of revenue in 1999 from 13.9% in 1998. The decrease in
selling,  general and administrative expenses as a percentage of revenue was the
direct  result of our  effort to reduce  these  costs  through  the  closing  of
unprofitable  offices,  through downsizing of certain branch offices and through
the  reduction  of  certain  expense  structures  when  expected  revenues  were
insufficient to cover operating  expenses.  Additionally,  we realigned  certain
operations  to eliminate  redundancies  and improve  efficiency.  During 1998 we
increased  our  spending  relating to opening and staffing new offices and sales
operations with the expectation of producing a sufficient  revenue base to cover
those expenses and turn these new offices into  profitable  operations.  Late in
1998, management realized that certain of these new offices and operations would
not be able to rapidly  attain  sufficient  revenues  and gross  profits to meet
those  expectations.   Consequently,   we  began  downsizing  or  closing  those
operations and this has resulted in reduced selling,  general and administrative
expenses and lower losses in the combined new offices. In spite of the fact that
selling,  general  and  administrative  expenses  declined  as a  percentage  of
revenue, we were not able to reduce selling, general and administrative expenses
as much as desired  due to costs of employee  severance  compensation  paid,  to
higher than  normal bad debt  expense,  to higher  employee  education  expenses
related to efforts to make business model changes. The company reduced the total
number of full-time  employees by 73 (14.2%) from  approximately 513 at December
31, 1998 to 440 at June 30, 1999, but did not realize the full impact of expense
reduction in the six month period due to the fact that the terminations occurred
throughout  the  quarter  and because of  severance  paid to certain  terminated
employees.

     OPERATING  INCOME.  Operating  income  decreased  by  $879  (121.9%)  to an
operating  loss of  $158 in 1999  from  operating  income  of $721 in 1998  due,
principally,  to lower gross  margins  realized in  Information  Technology  and
Telecom Systems operations.  Operating income decreased as a percentage of total
revenue to a loss of 0.2% in 1999 from income of 1.0% in 1998.


<PAGE>


     INTEREST  EXPENSE,  NET OF OTHER  INCOME.  Interest  expense,  net of other
income  increased $371 to $450 in 1999 compared to $79 in 1998.  This reflects a
higher level of  borrowings  on our credit  facility in 1999 as compared to 1998
and slightly lower interest rates in 1999 compared to 1998.

     NET INCOME.  Net income,  after a benefit for income  taxes  totaling  $184
(reflecting  an effective  tax rate of 30.3% in 1999 compared to 38.9% in 1998),
decreased  by $817 to a net loss of $424 in 1999  compared to net income of $393
in 1998.

Liquidity and Capital Resources

     Our working capital was $9,447 and $9,800 at June 30, 1999 and December 31,
1998,  respectively.  As of June 30, 1999, we had borrowing  capacity  under our
credit  facility  of $30,000 of which  $28,590 was used under our floor plan and
revolving credit facility. Unused borrowing capacity at June 30, 1999 was $1,410

Cash Flow

     Operating  activities  provided  net cash  totaling  $5,791  during the six
months ended June 30, 1999.  Operating  activities  provided net cash during the
six months ended June 30, 1999  primarily  because of cash provided by increases
in accounts payable ($6,524),  which more than offset cash used by a increase in
accounts  receivable  ($670). The increase in accounts payable was primarily the
result of a large  transaction  which occurred in the last week of June, as well
as the timing of the normal  payment on our credit  facility  which  occurred on
July 1, 1999.  The increase in accounts  receivable  was primarily the result of
increased levels of sales.

     Investing  activities  used cash  totaling $473 during the six months ended
June 30, 1999 related to capital expenditures.  During the remainder of 1999, we
expect to incur additional capital  expenditures for upgrades and replacement of
existing equipment facilities, as well as upgrades of computing equipment .

     Financing  activities  used cash totaling $1,122 as borrowings were reduced
under our credit facility during the six months ended June 30, 1999.

Asset Management

     We had accounts  receivable,  net of allowance  for doubtful  accounts,  of
$35,563 at June 30,  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. The number of days outstanding  continues to reflect improved
but still  slower than  normal  payment by our  customers  during the six months
ended June 30, 1999.  Bad debt expense as a percentage  of total revenue for the
six months ended June 30, 1999 was 0.3%, the same as during the six months ended
June 30, 1998. Our allowance for doubtful accounts,  as a percentage of accounts
receivable,  was  2.6%  at June  30,1999  and  1.0%  at  December  31,  1998,  a
significant portion of the increase reflects a change in the method of providing
for returns and allowances. Inventory turnover for the six months ended June 30,
1999 was 20.5 times  versus 17.0 times for the  comparable  period in 1998.  The
improvement in inventory turnover for the six months ended June 30, 1999 was the
result of our efforts to decrease the levels of inventory.


<PAGE>

Current Debt Obligations

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

     The total credit  available  under the DFS  Facility is $30,000  subject to
borrowing  base  limitations  which are  generally  computed as a percentage  of
various classes of eligible accounts receivable and qualifying inventory. Credit
available  under the DFS  Facility for floor plan  financing  of inventory  from
approved manufacturers (the "Inventory Line") is $20,000. Available credit under
the DFS Facility,  net of Inventory Line advances, is $10,000 million,  which is
used  primarily to carry accounts  receivable and for other working  capital and
general corporate purposes (the "Accounts Line").  Borrowings under the Accounts
Line bear interest at the fluctuating prime rate minus 1.0% per annum. Under the
Inventory Line, DFS pays our inventory vendors  directly,  generally in exchange
for  negotiated  financial  incentives.   Typically,  the  financial  incentives
received  are such that DFS does not charge us interest  until 40 days after the
transaction  is  financed,  at which time we are required to either pay the full
invoice  amount of the inventory  purchased  from  corporate  funds or to borrow
under the Accounts Line for the amount due to DFS.  Inventory  Line advances not
paid within 40 days after the financing  date bear  interest at the  fluctuating
prime rate plus 5.0%. For purposes of calculating  interest  charges the minimum
prime rate under the New DFS Facility is 7.0%.

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


<PAGE>

     We have a $2,000 credit  facility with IBM Credit  Corporation  (the "IBMCC
Facility")  for the purchase of IBM branded  inventory  from certain  suppliers.
Advances under the IBMCC Facility are typically  interest free for 30 days after
the financing date for transactions in which adequate  financial  incentives are
received by IBMCC from the vendor.  Within 30 days after the financing date, the
full amount of invoices for inventory  financed  through IBMCC is required to be
paid. Amounts remaining outstanding  thereafter bear interest at the fluctuating
prime rate (but not less than 6.5%) plus 6.0%. IBMCC retains a security interest
in the  inventory  financed.  The IBMCC  Facility is  immediately  terminable by
either party by written notice to the other.

     Under the DFS Facility we are required to maintain (i) a tangible net worth
of  $10,000,  defined  under the  agreement  as book value of assets  (excluding
intangibles   such  as   receivables   from  officers,   directors,   employees,
stockholders  and  affiliates,  net leasehold  improvements,  goodwill,  prepaid
expenses,  franchise fees and other similar items) less liabilities (ii) a ratio
of debt  minus  subordinated  debt to  tangible  net worth of 4 to 1 and (iii) a
ratio of current tangible assets to current liabilities of not less than 1.25 to
1. We did  not  maintain  the  required  ratio  of  current  assets  to  current
liabilities  for the  quarter  ended June 30,  1999;  however,  we  subsequently
received a waiver from the commercial finance company for this non-compliance.

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

Year 2000 Issue

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


<PAGE>


State of Readiness:

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

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

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

Costs to Address Year 2000 Issues:

     We have  incurred  expenditures,  as part of an  overall  upgrading  of its
computer and telecommunications  systems,  during 1998 and through 1999 to date.
We have also  recognized  higher  expenditures  in managing our  information and
telecommunications  systems as staff  members have  expended  time and resources
evaluating the company's Year 2000 readiness and implemented  required  changes.
It is difficult to assess the additional  expenditures over and above what would
have been  expended  under normal  circumstances,  but we estimate  that we have
incurred  expenditures in the form of additional  expenses of approximately $350
over and above that which would have been incurred were it not for the Year 2000
issue.  In addition,  we estimate that we have made capital  expenditures in the
amount  of  approximately  $225 to $350  over an above  the  amount  of  capital
expenditures  that  would  have been  required  if it were not for the Year 2000
issue.  Although impossible to accurately predict, we currently believe that the
additional  expenditures  specifically  related to  preparing  for the Year 2000
issue will not be  significant.  Although  we  believe  that our  estimates  are
reasonable,  there can be no assurance  that the costs of  implementing  the Y2K
Plan will not differ  materially from the estimated costs or that we will not be
materially adversely affected by year 2000 issues.



PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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


<PAGE>

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

ITEM 4.  SUBMISSION OF MATTERS TO THE VOTE OF SECURITY HOLDERS

     During the three months ending June 30, 1999,  the election of directors to
serve until the next annual meeting of  stockholders  or until their  successors
are elected and qualified was submitted to  shareholders  at the regular  annual
meeting  of  shareholder.  The below  listed  persons  were  elected to serve as
directors with listed voting therefore as set forth in the table below.

     A total of 4,168,925 shares of the company's common stock,  $0.01 per share
par value, were entitled to vote at the meeting.  Of these shares,  4,054,768 or
97.3% were present and voted as set forth in the table below.

Director              Shares Voted    Shares Voted   Shares Voted        Votes
                                           For          Against        Withheld
James H Long             4,049,768      4,006,918         42,850             0
Donald R. Chadwick       4,048,368      4,005,518         42,850         1,400
Richard D. Darrell       4,048,368      4,005,518         42,850         1,400
Jack M. Johnson, Jr.     4,048,368      4,005,518         42,850         1,400
Mark T. Hilz             4,048,368      4,005,518         42,850         1,400


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



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