<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-Q

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


                 For the quarterly period ended March 30, 1997


                         Commission File Number 0-18238



                                TEXAS MICRO INC.
             (Exact Name of Registrant as Specified in its Charter)


DELAWARE                                                   04-2738973
(State or Other Jurisdiction                            (I.R.S. Employer
of Incorporation or Organization)                      Identification No.)


5959 Corporate Drive, Houston, Texas                         77036
(Address of Principal Executive Offices)                   (Zip Code)


Registrant's telephone number, including area code        (713) 541-8200



     Indicate by check mark whether 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
        -----              -----

     Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

                Class                             Outstanding at April 30, 1997
     Common Stock, $.40 par value                           13,508,906
 
<PAGE>
 
Part I  Financial Information
Item 1.  Financial Statements

<TABLE> 
<CAPTION> 


CONSOLIDATED BALANCE SHEETS                                      TEXAS MICRO INC. AND SUBSIDIARIES    
 
                                                                          (in thousands)            

ASSETS                                                                  March 30,      June 30,   
                                                                          1997          1996 
                                                                       (unaudited) 
                                                                       ------------------------
<S>                                                                       <C>          <C> 
Current Assets:              
    Cash and cash equivalents                                             $10,611      $12,287 
    Accounts receivable, net of allowance for doubtful accounts      
       of $853 at March 30, 1997 and $1,018 at June 30, 1996                9,590       13,371 
    Inventories                                                             8,554       13,491 
    Other current assets                                                    3,425        1,923 
                                                                        -----------------------
            Total current assets                                           32,180       41,072 
                                                                        -----------------------
Equipment and Improvements, at cost: 
    Computer equipment                                                      3,313       12,473 
    Machinery and equipment                                                 3,685        5,293 
    Equipment under capital lease                                               -        2,337 
    Furniture and fixtures                                                    981        1,504 
    Leasehold improvements                                                    968        1,683 
                                                                        -----------------------
                                                                            8,947       23,290 
    Less - Accumulated depreciation and amortization                        5,769       18,603 
                                                                        -----------------------
                                                                            3,178        4,687 
                                                                        -----------------------
Other Assets                                                                  204          592 
                                                                        -----------------------
Total Assets                                                              $35,562      $46,351 
                                                                        =======================
LIABILITIES AND STOCKHOLDERS' EQUITY 

Current Liabilities:         
    Accounts payable                                                       $5,407       $4,743 
    Accrued expenses                                                        4,271        9,203 
    Deferred revenue                                                            -          558 
    Current portion of capital lease obligations                                -           56 
                                                                        -----------------------
            Total current liabilities                                       9,678       14,560 
                                                                        -----------------------

Commitments and Contingencies

Stockholders' Equity:        
    Preferred stock, $.40 par value: 
       Authorized--12,500 shares at March 30, 1997 and June 30, 1996 
       Issued--none                                                             _            _ 
    Common stock, $.40 par value:    
       Authorized--35,000 shares at March 30, 1997 and June 30, 1996 
       Issued--15,643 shares at March 30, 1997, and 15,579 shares    
       at June 30, 1996                                                     6,257        6,232 
    Additional paid-in capital                                             80,314       80,207 
    Accumulated deficit                                                   (57,286)     (54,805)
    Treasury stock, at cost, 1,455 shares at March 30, 1997                (3,355)           - 
    Cumulative translation adjustment                                         (46)         157 
                                                                        -----------------------
            Total stockholders' equity                                     25,884       31,791 
                                                                        -----------------------
Total Liabilities and Stockholders' Equity                                $35,562      $46,351 
                                                                        =======================

</TABLE> 
The accompanying notes are an integral part of these consolidated financial
statements.

                                       2
<PAGE>
 
<TABLE> 
<CAPTION> 

CONSOLIDATED STATEMENTS OF OPERATIONS                             TEXAS MICRO INC. AND SUBSIDIARIES              
(Unaudited)                        



                                                     For the three months ended,        For the nine months ended,  
                                                   March 30, 1997   March 31, 1996    March 30, 1997   March 31, 1996 
                                                   --------------   --------------    --------------   --------------
                                                                 (in thousands, except per share data)             
<S>                                                    <C>             <C>                <C>              <C> 
Revenues  
     Product                                            $14,717          $20,212           $44,374          $68,480 
     Service and Other                                        -            3,442             3,932           10,597 
                                                   --------------   --------------    --------------   --------------
          Total revenues                                 14,717           23,654            48,306           79,077 


Cost of Revenues                   
     Product                                             10,113           13,998            30,855           43,128 
     Service and Other                                        -            2,666             1,846            6,450 
                                                   --------------   --------------    --------------   --------------
          Total cost of revenues                         10,113           16,664            32,701           49,578 

          Gross profit                                    4,604            6,990            15,605           29,499 

Research and Development Expenses                         1,902            3,373             6,670            9,761 
Selling, General and Administrative Expenses              3,263            6,230            11,684           19,364 
Other Charges                                                 -            3,010                 -            3,010 
                                                   --------------   --------------    --------------   --------------
          Total operating expenses                        5,165           12,613            18,354           32,135 

          Income (loss) from operations                    (561)          (5,623)           (2,749)          (2,636)

Interest Income                                             124              113               381              515 
Other Income (Expense)                                        4               10                (9)              29 
                                                   --------------   --------------    --------------   --------------
          Income (loss) before provision for 
           income taxes                                    (433)          (5,500)           (2,377)          (2,092)

Provision for Income Taxes                                   22               47                86              289 
                                                   --------------   --------------    --------------   --------------
          Net income (loss)                               ($455)         ($5,547)          ($2,463)         ($2,381)
                                                   ==============   ==============    ==============   ==============


Net Income (Loss) Per Common and Common 
     Share Equivalent                                    ($0.03)          ($0.35)           ($0.16)          ($0.15)
                                                   ==============   ==============    ==============   ==============
Weighted Average Number of Common and Common     
     Share Equivalents Outstanding                       14,322           15,894            15,018           16,016 
                                                   ==============   ==============    ==============   ==============

</TABLE> 

The accompanying notes are an integral part of these consolidated financial
statements.

                                       3
<PAGE>
 
<TABLE> 
<CAPTION> 

CONSOLIDATED STATEMENTS OF CASH FLOWS                       TEXAS MICRO INC. AND SUBSIDIARIES   
(Unaudited)     
                                                              For the nine months ended,    
                                                                 March 30,   March 31,  
                                                                    1997     1996    
                                                             ----------------------------
                                                                    (in thousands)   
<S>                                                               <C>         <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:   
Net income (loss)                                                ($2,463)    ($2,381) 
Adjustments to reconcile net income (loss) to   
  net cash provided by (used in) operating activities--     
        Depreciation                                               1,208       1,563 
        Amortization                                                 158          92 
        Write down of equipment                                        -          52 
        Provision for inventories                                  1,204       2,784 
        Provision for bad debts                                        5        (236)
        Other charges                                                  -         496 
        Provision for deferred taxes                                   -        (365)
        Changes in assets and liabilities:      
                Accounts receivable                                2,119      (2,109)
                Inventories                                          367      (3,784)
                Income taxes                                           -         475 
                Other current assets                                 732         (43)
                Accounts payable                                   1,438           - 
                Accrued expenses                                  (2,247)        396 
                Deferred revenue                                     510        (174)
                                                             ----------------------------
Net cash provided by (used in) operating activities                3,031      (3,234)
                                                             ----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:   
        Purchase of equipment and improvements                      (895)     (1,533)
        Increase in other assets                                    (499)       (240)
                                                             ----------------------------
Net cash used in investing activities                             (1,394)     (1,773)
                                                             ----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:   
        Repayment of obligations under capital leases                (33)        (93)
        Proceeds from issuance of common stock                       213         942 
        Purchase of treasury stock                                (3,453)          - 
                                                             ----------------------------
Net cash provided by (used in) financing activities               (3,273)        849 
                                                             ----------------------------

Effect of exchange rates on cash                                     (40)         59 
                                                             ----------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS                         (1,676)     (4,099)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                    12,287      15,317 
                                                             ----------------------------

CASH AND CASH EQUIVALENTS, END OF  PERIOD                        $10,611     $11,218 
                                                             ============================


Supplemental Disclosure of Cash Flow Information:           
        Cash paid during the period for:
                Interest                                              $2         $14 
                Income taxes paid (refunds received)                 (58)        144 

</TABLE> 

The accompanying notes are an integral part of these consolidated financial
statements.

                                       4
<PAGE>
 
Notes to Consolidated Financial Statements
Texas Micro Inc. and Subsidiaries
               (unaudited)


NOTE 1 - BASIS OF PRESENTATION

The financial statements included herein have been prepared by Texas Micro Inc.
(the "Company" formerly Sequoia Systems, Inc.)  pursuant to the rules and
regulations of the Securities and Exchange Commission (the "Commission").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. The
Company believes, however, that the disclosures made are adequate to make the
information not misleading. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Company's latest audited financial statements, which are contained in the
Company's Annual Report on Form 10-K for the year ended June 30, 1996, filed
with the Commission on September 25, 1996, as amended by Amendment No. 1 on Form
10-K/A, filed with the Commission on October 28, 1996.  Certain items in the
fiscal 1996 periods have been reclassified to conform to the fiscal 1997
presentation.

This information includes all adjustments (consisting of normal, recurring
adjustments) which the Company considers necessary for a fair presentation of
such information.  The results of operations for the three and nine months ended
March 30, 1997 are not necessarily indicative of results to be expected for the
entire year.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain 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 amounts of revenues and expenses during the
reporting period.  Actual results could differ from these estimates.


NOTE 2 - DISPOSITION OF ASSETS

On October 11, 1996, the Company completed the sale of substantially all of the
net assets of its Sequoia Enterprise Systems business unit (SES), which markets
the Sequoia brand, to General Automation, Inc. for approximately $11,000,000 of
consideration in General Automation, Inc. common stock, warrants and deferred
payments.  SES markets fault tolerant and business critical systems and upgrade
products for on-line transaction processing and other interactive applications,
in which system availability, fast response times and data integrity are
critical.  Results of operations, assets, and liabilities related to the
operations sold are included in the Company's consolidated financial statements
through October 11, 1996.  The effects of this transaction are reflected in
other current assets and did not affect fiscal 1997 earnings.  The net book
value of the net assets sold and the expenses incurred related to the
transaction approximates $5,140,000.  The amount of consideration exceeding
$5,140,000 was not recognized as a gain during fiscal 1997 due to the
uncertainty of realizing the deferred payments.  As consideration is received
exceeding $5,140,000, the Company will recognize 

                                       5
<PAGE>
 
Notes to Consolidated Financial Statements
Texas Micro Inc. and Subsidiaries
                (unaudited)


the consideration as a gain related to the disposition. Deferred payments of
$790,000 were received in connection with the disposition during the three
months ended March 30, 1997.

NOTE 3 - OTHER CHARGES

During fiscal 1996, in response to the accelerating decline in demand for the
Motorola based products, the Company decided to curtail investment in its
Motorola products, refocus its research and development activities and
consolidate certain functions. As a result of management's actions, the Company
recorded other charges of $3,010,000 in the third quarter of  fiscal 1996
related to severance costs and other asset write-downs.  These other charges
included: $2,401,000 of severance and related costs, $284,000 to write off other
current and long term assets which were no longer to be used and $325,000 for
other contractual obligations related to these actions. The workforce reductions
comprised approximately 10%, or 43 personnel, and were across all functions.
Payments of approximately $494,000, $1,268,000 and $1,195,000 were made in
connection with these charges during the three and nine months ended March 30,
1997 and the year ended June 30, 1996, respectively. Remaining liabilities of
$121,000 at March 30, 1997 predominantly consisted of severance and related
costs which are expected to be paid out by June 30, 1997.


NOTE 4 - INVENTORIES

Inventories including materials, labor and manufacturing overhead consisted of
the following:

                                           (in thousands)       
                                         March 30,  June 30,    
                                           1997       1996      
                                         -------------------    
Raw materials                              $6,093   $ 9,884     
Work-in-process                             1,434     2,057     
Finished goods                              1,027     1,550     
                                         -------------------    
                                           $8,554   $13,491     
                                         ===================     
 
NOTE 5 - NET INCOME (LOSS) PER SHARE

Primary and fully diluted net income (loss) per share are not separately stated
as they are substantially the same. Net income (loss) per share was based on the
weighted average number of common and common share equivalents outstanding
during the period, computed in accordance with the treasury stock method. For
loss periods, weighted average common share equivalents are excluded from the
calculation as their effect would be antidilutive.

                                       6
<PAGE>
Notes to Consolidated Financial Statements
Texas Micro Inc. and Subsidiaries
             (unaudited)
 
NOTE 6 - IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

Effective July 1, 1996, the Company adopted the Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and Long-Lived Assets to be Disposed Of".  The adoption of SFAS No.
121 did not have an impact on the Company's financial position or results of
operations as it is consistent with existing Company policy.


NOTE 7 - COMMON STOCK

On September 10, 1996, the Board of Directors authorized the repurchase of up to
2,000,000 shares of the Company's common stock, on the open market or in
negotiated transactions, during the fiscal year ending June 30, 1997.  During
the nine months ended March 30, 1997, the Company repurchased approximately
1,498,000 shares of its common stock at an average price of $2.31 per share for
an aggregate purchase price of approximately $3,453,000.  In April 1997, the
Board of Directors authorized increasing the repurchase of up to an additional
500,000 shares of the Company's common stock.  Therefore, the total shares
authorized to be repurchased during the fiscal year ending June 30, 1997 is
2,500,000.  As of April 30, 1997, the Company repurchased 2,191,000 shares of
common stock for an aggregate purchase price of approximately $5,016,000.


NOTE 8 - LINE OF CREDIT

The Company maintained a line of credit with Texas Commerce Bank, National
Association (TCB), which expired on October 31, 1996.  The Company is currently
negotiating a new credit facility with TCB.

                                       7
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS

The Company is a provider of specialized microcomputers targeted at specific
vertical markets.  The Company provides highly reliable microcomputer systems
and single board computers ("SBCs") for the industrial and communications
markets. The Company operates in one segment, computer systems, and is a leading
supplier of highly reliable microcomputers.

On October 11, 1996, the Company completed the sale of substantially all of the
net assets of its Sequoia Enterprise Systems business unit (SES), which markets
the Sequoia brand, to General Automation, Inc. for approximately $11,000,000 of
consideration in General Automation, Inc. common stock, warrants and deferred
payments.  SES markets fault tolerant and business critical systems and upgrade
products for on-line transaction processing and other interactive applications,
in which system availability, fast response times and data integrity are
critical.  Results of operations, assets, and liabilities related to the
operations sold are included in the Company's consolidated financial statements
through October 11, 1996. The effects of this transaction are reflected in other
current assets and did not affect fiscal 1997 earnings.  The net book value of
the net assets sold and the expenses incurred related to the transaction
approximates $5,140,000.  The amount of consideration exceeding $5,140,000 was
not recognized as a gain during fiscal 1997 due to the uncertainty of realizing
the deferred payments.  As consideration is received exceeding $5,140,000, the
Company will recognize the consideration as a gain related to the disposition.
Deferred payments of $790,000 were received in connection with the disposition
during the three months ended March 30, 1997.


RESULTS OF OPERATIONS

The following table summarizes the effect of the disposition of SES on
consolidated revenues and gross profit.

<TABLE>
<CAPTION>
                                                         For the three months ended,  For the nine months ended,
                                                          March 30,      March 31,     March 30,      March 31, 
                                                            1997           1996          1997           1996
                                                         -----------------------------------------------------
<S>                                                        <C>            <C>          <C>             <C> 
 Consolidated Revenues                                     $14,717        $23,654      $48,306         $79,077
 Less Disposed Operations of SES                                 -          6,481        5,585          24,558
                                                           -------        -------      -------         -------
 Revenues from Ongoing Operations                          $14,717        $17,173      $42,721         $54,519
                                                           =======        =======      =======         =======
 
 Consolidated Gross Profit                                 $ 4,604        $ 6,990      $15,605         $29,499
 Less Disposed Operations of SES                                 -          1,146        2,497           9,800
                                                           -------        -------      -------         -------
 Gross Profit from Ongoing Operations                      $ 4,604        $ 5,844      $13,108         $19,699
                                                           =======        =======      =======         =======
</TABLE>

                                       8
<PAGE>
 
REVENUES

The Company's revenues for the third quarter of fiscal 1997 of $14,717,000
decreased 38% from $23,654,000 for the third quarter of fiscal 1996.  The
revenue decline was due to the disposition of SES and a decrease in ongoing
product revenues.  Revenues from ongoing operations for the third quarter of
1997 were $14,717,000, which decreased 14% from $17,173,000 for the third
quarter of 1996. During the third quarter of 1997, units shipped from ongoing
operations increased 21% and the average unit selling price declined 29% as
compared with the third quarter of 1996.

The Company's revenues for the first nine months of fiscal 1997 of $48,306,000
decreased 39% from $79,077,000 for the first nine months of fiscal 1996.  The
revenue decline was due to the disposition of SES and a decrease in ongoing
product revenues.  Revenues from ongoing operations for the first nine months of
1997 were $42,721,000, which decreased 22% from $54,519,000 for the first nine
months of 1996. During the first nine months of 1997, units shipped from ongoing
operations remained constant and the average unit selling price declined 21% as
compared with the first nine months of 1996.  Sales to the top five customers
represented only 21% of total revenues from ongoing operations for the first
nine months of fiscal 1997 compared to 27% of total revenues from ongoing
operations for the year ago period.

Revenues from ongoing operations for both the three and nine months ended March
30, 1997 are lower than the comparable periods a year ago due to the decrease in
orders from certain significant customers.  Even though sales to these
significant customers are continuing and in certain instances have increased
from the three months ended December 29, 1996 to the three months ended March
30, 1997, it is unlikely in the short-term that sales volumes to these customers
will return to the prior year levels.

The trend towards an increase in units shipped and the decline in average unit
selling price was substantially caused by a shift in the mix from systems sales
to a higher proportion of SBCs sales.

Sales from ongoing operations outside the United States for the third quarter of
fiscal 1997 increased to $4,303,000 or 29% of total revenues, from $4,046,000 or
24% of total revenues for the third quarter of fiscal 1996.  For the nine months
ended March 30, 1997, sales from ongoing operations outside the United States
comprised $13,770,000, or 32% of total revenues, as compared to $11,458,000, or
21%, for the comparable period a year ago.


GROSS MARGIN

Gross margin of 31% for the third quarter of  fiscal 1997 reflected an increase
of 1 percentage point from 30% in the third quarter of fiscal 1996.  The
increase in gross margin reflects the disposition of the SES business unit,
which recorded significant inventory write-downs in the third quarter of fiscal
1996.  Excluding the effect of SES, gross margin was 31% for the third quarter
of 1997 compared to 34% in the third quarter of fiscal 1996.

                                       9
<PAGE>
 
Gross margin of 32% for the first nine months of fiscal 1997 reflected a decline
of 5 percentage points from 37% for the first nine months of fiscal 1996. The
decline in gross margin reflects the disposition of the higher profit margin
revenues associated with the SES business unit as well as a decline in the gross
margin of the ongoing business. Excluding the effect of SES, gross margin was
31% for the first nine months of 1997 compared to 36% for the first nine months
of 1996.

This decrease in product margin from ongoing operations over the prior year
periods was substantially caused by a shift in the mix of revenues to lower
margin products and lower revenue levels.

Continued fluctuations in future margin levels may result from the mix of
product revenues.


RESEARCH AND DEVELOPMENT EXPENSES

The Company's research and development expenses of $1,902,000 for the third
quarter of fiscal 1997 decreased 44% from $3,373,000 for the third quarter of
fiscal 1996.  As a percent of revenues, research and development expenses
decreased to 13% for the third quarter of 1997, as compared to 14% for the third
quarter of 1996.

The Company's research and development expenses of $6,670,000 for the first nine
months of fiscal 1997 decreased 32% from $9,761,000 for the first nine months of
fiscal 1996.  As a percent of  revenues, research and development expenses
increased to 14% for the nine months of 1997 from 12% for the first nine months
of 1996, which is a result of the reduction in revenues.

The decrease in research and development expenses from the year ago periods was
primarily due to the sale of SES, as well as the completion of certain research
and development projects.


SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses decreased 48% to $3,263,000, or 22%
of revenues, for the third quarter of fiscal 1997 from $6,230,000, or 26% of
revenues, for the third quarter of fiscal 1996.

Selling, general and administrative expenses decreased 40% to $11,684,000, or
24% of revenues, for the first nine months of fiscal 1997 from $19,364,000, or
24% of revenues, for the first nine months of fiscal 1996.

The significant decline in spending from the prior year periods was a result of
the sale of SES, the reduction in corporate expenses and the actions taken in
fiscal 1996 to refine the business strategy, including reducing the workforce
and relocating the corporate office to Houston.

                                       10
<PAGE>
 
OTHER CHARGES

During the third quarter of 1996, the Company recorded other charges related to
severance costs and other asset write-downs.  (See Note 3 to consolidated
financial statements).


OPERATING INCOME (LOSS)

The Company reported a loss from operations of $561,000 and $2,749,000 for the
third quarter  and first nine months of fiscal 1997, compared to loss from
operations of $5,623,000 and $2,636,000 for the third quarter and first nine
months of fiscal 1996.  The decrease in operating loss from the third quarter of
the prior year resulted primarily from the Other Charges and the significant
inventory write-downs recorded by the SES business unit in the third quarter of
fiscal 1996.


OTHER INCOME

The Company generated other income, primarily interest income, of $128,000 and
$372,000 during the three and nine months ended March 30, 1997, as compared to
$123,000 and $544,000 for the comparable periods a year ago.  The decrease in
other income resulted primarily from a decrease in cash and cash equivalents.


INCOME TAXES

The Company recorded provisions for income taxes of $22,000 and $86,000 during
the three and nine months ended March 30, 1997, as compared to $47,000 and
$289,000 for the comparable periods a year ago.  The provisions are primarily
for state income taxes.


LIQUIDITY AND CAPITAL RESOURCES

At March 30, 1997, the Company had cash and cash equivalents of $10,611,000 and
working capital of $22,502,000.  This compared to cash and cash equivalents of
$12,287,000 and working capital of $26,512,000 at June 30, 1996.

Cash generated from operations was $3,031,000 for the nine months ended March
30, 1997.  Cash provided from operations was favorably impacted by the
significant decrease in accounts receivable and increase in accounts payable,
which was partially offset by the decrease in accrued expenses primarily
resulting from the payments of Other Charges.

During fiscal 1996, in response to the accelerating decline in demand for the
Motorola based products, the Company decided to curtail investment in its
Motorola products, refocus its research and development activities and
consolidate certain functions. As a result of management's actions, the Company
recorded other charges of $3,010,000 in the third quarter of fiscal 1996.
Payments 

                                       11
<PAGE>
 
of approximately $1,268,000 were made in connection with these charges during
the nine months ended March 30, 1997. Remaining liabilities of $121,000 at March
30, 1997 predominantly consisted of severance and related costs which are
expected to be paid out by June 30, 1997.

The Company's capital expenditures during the nine months ended March 30, 1997
were held to a minimum in response to the Company's current operating results.
Capital expenditures during the fourth quarter are expected to continue at a
comparable level.

On September 10, 1996, the Board of Directors authorized the repurchase of up to
2,000,000 shares of the Company's common stock, on the open market or in
negotiated transactions, during the fiscal year ending June 30, 1997. During the
nine months ended March 30, 1997, the Company repurchased approximately
1,498,000 shares of common stock at an average price of $2.31 per share for an
aggregate purchase price of approximately $3,453,000. In April 1997, the Board
of Directors authorized increasing the repurchase of up to an additional 500,000
shares of the Company's common stock.  Therefore, the total shares authorized to
be repurchased during the fiscal year ending June 30, 1997 is 2,500,000.  As of
April 30, 1997, the Company repurchased 2,191,000 shares of common stock for an
aggregate purchase price of approximately $5,016,000.

The Company maintained a line of credit with Texas Commerce Bank, National
Association (TCB), which expired on October 31, 1996.  The Company is currently
negotiating a new credit facility with TCB.

The Company believes that its present cash flow and cash balances are adequate
for its operating needs, capital expenditures and stock repurchases through
fiscal 1997 as well as the expected cash requirement to settle its remaining
severance and related obligations, resulting from the other charges recorded in
fiscal 1996.

Effective July 1, 1996, the Company adopted the Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and Long-Lived Assets to be Disposed Of".  The adoption of SFAS No.
121 did not have an impact on the Company's financial position or results of
operations as it is consistent with existing Company policy.

Effective July 1, 1996, the Company adopted only the disclosure requirements of
SFAS No. 123, "Accounting for Stock-Based Compensation".  The Company has
elected to continue utilizing the accounting for stock issued to employees
prescribed by APB No. 25.  Therefore, the adoption of SFAS No. 123 did not have
an impact on the Company's financial position or results of operations.

In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, "Earnings Per Share".  The Company intends to adopt this standard in
fiscal year 1998.  The Company does not expect the adoption of this standard to
have a material effect on its reported earnings per share.  Also in February
1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital
Structures".  The Company intends to adopt this standard in fiscal year 1998.
The Company does not expect the adoption of this standard to have a significant
impact on its disclosure.

                                       12
<PAGE>
 
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

This Quarterly Report on Form 10-Q contains forward-looking statements that
involve a number of risks and uncertainties.  There are a number of factors that
could cause the Company's actual results to differ materially from those
forecasted or projected in such forward-looking statements.  Readers are
cautioned not to place undue reliance on these forward-looking statements which
speak only as of the date hereof.  The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
which may be made to reflect events or changed circumstances after the date
hereof or to reflect the occurrence of unanticipated events.

The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this
Quarterly Report on Form 10-Q and presented elsewhere by management from time to
time:

  The markets for the Company's products for the industrial market are
  characterized by rapidly changing technology and user needs, requiring
  significant investment for product development.  The Company believes that a
  large part of its ability to increase revenue in the future will depend upon
  its ability to develop, manufacture and market new and differentiated
  products, which meet new market requirements and changing user needs in a
  cost-effective and timely manner.  There can be no assurance that these
  efforts will be successful.

  The Company competes against a wide range of companies.  The Company believes
  that it competes effectively based on its engineering responsiveness to
  special needs and the price/performance characteristics of its products.
  However, the computer marketplace is highly competitive.  Many of the
  Company's competitors have significantly greater financial, marketing and
  technological resources.  There can be no assurance that the Company will have
  the resources necessary to compete successfully in the future.

  The Company purchases most of the components of its products and virtually all
  of its peripheral devices from a limited number of suppliers.  Although the
  Company believes that alternate sources of these items could be developed in a
  short period of time if required, future shortages of such components or
  peripherals could result in production delays.  Certain microprocessors used
  in the highly reliable product lines are available only from Intel Corporation
  and Sun Microsystems, Inc., and changes in the availability of these
  components at any time could adversely affect the Company's operations.

  A substantial portion of the Company's revenue in each quarter generally
  results from orders received in that quarter.  Therefore, differences in the
  receipt of customer orders in any quarter may produce significant fluctuations
  in quarterly revenue and profits.  This pattern is likely to continue and
  makes the Company's quarterly financial results difficult to predict.

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<PAGE>
 
PART II  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

The Company is from time to time a party to various lawsuits arising in the
ordinary course of business.  The Company knows of no pending litigation which
is reasonably likely to have a material adverse impact on its financial
condition or its results of operations.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K


  a) Exhibits
 
     3.4   Certificate of Amendment of Restated Certificate of Incorporation
           of the Company.
    10.24  Employment Agreement dated March 21, 1997 between the Company and
           Jack J. Stiffler.
    10.25  Amendment No. 2 to the 1993 Employee Stock Purchase Plan, adopted
           April 16, 1997.
    10.26  Amendment No. 1 to the 1996 Long-Term Incentive Plan, adopted
           April 16, 1997.
    27     Financial Data Schedule
 

  b) Reports on Form 8-K

     None.

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<PAGE>
 
                                   SIGNATURES

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


                                    TEXAS MICRO INC.

Date:  May 12, 1997                 By: /s/ J. Michael Stewart
                                        ----------------------
                                        J. Michael Stewart
                                        President and Chief Executive Officer

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