SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

                X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1999

                                       OR

                TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
             For the transition period from ________ to ___________

                         Commission file number: 0-21479

                              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, TX                   77074
 (Address of principal executive offices) (Zip code)

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

Securities  registered  pursuant  to  Section 12(b) of the Act:
                                      None

Securities registered  pursuant  to  section 12(g) of the Act:

                          COMMON STOCK, $.01 Par Value
                                (Title of Class)

     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 ____

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x

     The aggregate  market value of the voting stock held by  non-affiliates  of
the  registrant,  based upon the closing  price of the Common Stock on March 17,
2000, as reported on NASDAQ Small Cap Market, was approximately $7,805,300.

     The number of shares of Common  Stock,  $.01 Par Value,  outstanding  as of
March 17, 2000 was 4,060,525.

                                        DOCUMENTS INCORPORATED BY REFERENCE

<PAGE>

PART I

Item 1.  Business

SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS

THIS ANNUAL REPORT ON FORM 10-K CONTAINS  FORWARD-LOOKING  STATEMENTS WITHIN THE
MEANING OF THE  PRIVATE  SECURITIES  LITIGATION  REFORM ACT OF 1995  RELATING TO
FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY INCLUDING,  BUT
NOT  LIMITED  TO,  STATEMENTS  CONTAINED  IN  ITEM  1. -  "BUSINESS"  ITEM  2. -
"PROPERTIES,"  ITEM  3.  -  "LEGAL  PROCEEDINGS"  AND  ITEM  7.  -  "MANAGEMENTS
DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF  OPERATIONS."
READERS ARE CAUTIONED  THAT ANY STATEMENT  THAT IS NOT A STATEMENT OF HISTORICAL
FACT,  INCLUDING BUT NOT LIMITED TO, STATEMENTS WHICH MAY BE IDENTIFIED BY WORDS
INCLUDING,  BUT NOT  LIMITED TO,  "ANTICIPATE,"  "APPEAR,"  "BELIEVE,"  "COULD,"
"ESTIMATE,"  "EXPECT" "HOPE,"  "INDICATE,"  "INTEND,"  "LIKELY," "MAY," "MIGHT,"
"PLAN,"  "POTENTIAL," "SEEK," "SHOULD," "WILL," "WOULD," AND OTHER VARIATIONS OR
NEGATIVE  EXPRESSIONS THEREOF, ARE PREDICTIONS OR ESTIMATIONS AND ARE SUBJECT TO
KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES.  NUMEROUS FACTORS,  INCLUDING FACTORS
WHICH THE COMPANY HAS LITTLE OR NO CONTROL OVER, MAY AFFECT THE COMPANY'S ACTUAL
RESULTS AND MAY CAUSE ACTUAL RESULTS TO DIFFER  MATERIALLY  FROM THOSE EXPRESSED
IN  THE  FORWARD-LOOKING   STATEMENTS   CONTAINED  HEREIN.  IN  EVALUATING  SUCH
STATEMENTS,  READERS  SHOULD  CONSIDER THE VARIOUS  FACTORS  IDENTIFIED  IN THIS
ANNUAL  REPORT ON FORM 10-K,  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.



<PAGE>

GENERAL

     Allstar Systems, Inc. is engaged in the business of providing its customers
with single-source solutions to their information and communications  technology
needs.  We  market  our  products  and  services  primarily  in Texas  from five
locations in the Houston,  Dallas-Fort  Worth,  El Paso,  Austin and San Antonio
metropolitan  areas. Our customer base of approximately  2,800 accounts has been
comprised  primarily  of  mid-sized  customers  and  regional  offices of larger
customers in commercial,  educational  and  governmental  sectors.  In 1999, our
revenue was derived through four primary areas of business:

(1)  IT  Services  has  provided  a variety  of  services  related to the use of
     information  technology,   including  primarily:   Consulting  and  project
     management  services  related  to  networking.  Supplemental  IT  technical
     staffing.  Computer  equipment  repair  services  and desktop  computer and
     application support.

(2)  CTI Software,  through a wholly owned  subsidiary,  Stratasoft,  Inc.,  has
     engaged in  marketing  its own  software  products  for  computer-telephony
     integration,  including  products  for call  center and other  high  volume
     calling applications.

(3)  Computer  Products has engaged in the business of selling a wide variety of
     computer  hardware and software  products from over 600  manufacturers  and
     suppliers.


(4)  Telecom Systems has engaged in the business of selling  business  telephone
     systems, including large "PBX" systems and smaller "key" systems.

     As discussed below in further detail in Item 1. "Recent  Developments,"  we
recently sold certain key assets of, and the ongoing business operations of, our
Telecom  Systems  business  and entered  into an  agreement  to sell certain key
assets  of, and the  ongoing  business  operations  of,  our  Computer  Products
business.

INDUSTRY CHANGES

     The market for  information  and  communications  technology  products  and
services has experienced tremendous growth over the past decade and the industry
has changed  significantly  as the market has grown and  evolved.  Reselling  of
popular  computing  hardware  and  software   products,   and  the  support  and
maintenance  of such  products,  which was  formerly  an early stage high growth
industry sector, has now matured. Other information technology industry sectors,
such as  consulting  and project  management  related to Internet  and  Intranet
network  infrastructure  are still somewhat early stage  industry  sectors.  Yet
other information  technology  industry sectors,  such as consulting and project
management  related to Web-enabled Supply Chain Management and Customer Resource
Management  systems are in their infancy.  As the information  technology market
has evolved,  both challenges and  opportunities  have been created for industry
participants.

     Our Computer  Products  business,  which has evolved from a business  model
created  in the early  1980's,  has been  struggling  with  numerous  challenges
related to the  evolution  of the computer  reselling  industry.  Major  product
manufacturers  have been changing their business  models and their  relationship
with the computer  reseller  community.  Web-based  product reselling and direct
selling by the major manufacturers is creating rapid change that has resulted in
lower gross margins  throughout the industry.  The proliferation of new products
has created an increasingly  complex  environment in which we and other computer
resellers are forced to operate.  Changes related to B2B e-commerce are changing
the purchasing habits of corporations  related to computer products  purchasing.
Many companies  engaged in computer  reselling have had difficulty  adjusting to
these changes and many of these companies have experienced financial difficulty.


<PAGE>

     At the same time, we believe the market for information technology services
has grown increasingly  larger, and increasingly more complex and varied. Only a
few short  years  ago,  it was  normal  for a  mid-sized  corporation  to have a
single-source  provider for all of its information technology services, but that
has changed. The increasing number of software and hardware providers,  combined
with the increasing  diversity of, and complexity of, computing  technology used
by corporate America today demands that information technology service providers
specialize.  Focus and specialization create improved quality,  productivity and
operational   effectiveness.   Corporate   America   today   realizes  this  and
increasingly looks to specialized service providers for their needs.

     The  proliferation  of  network  computing,  using  standardized  operating
systems and application software,  combined with the continuing evolution of the
Internet,  continue  to create  new  industry  sectors.  The  implementation  of
Web-enabled  extended  enterprise  applications  such as supply chain management
systems,   customer  relationship  management  systems,  and  systems  used  for
e-Business and e-Commerce,  are changing the shape of the information technology
services industry.

     In addition,  business  opportunities  are  currently  being created by the
manner in which the Internet is destined to change commerce and  communications.
Web commerce, both business-to-consumer (B2C) and business-to-business (B2B), is
expected to create very  extensive  change in the buying  patterns and habits of
both consumer and business  buyers.  This is creating  unprecedented  change and
opportunity for businesses that offer products and services that can be marketed
via the Internet.  The Internet is also expected to radically  change the method
by  which  we  communicate.   Internet  voice   communications  is  expected  to
significantly  change the market for long-distance  communications over the next
three-to-five years.

     Mindful of the manner in which the Internet is expected to change  commerce
and  communications,  and realizing that focused  specialization by an operating
company was key to  operational  and marketing  effectiveness,  we evaluated our
situation  and decided that change was  prudent.  We decided that we should exit
our  Telecom  Systems  business  primarily  because we had been  ineffective  at
achieving  profitably  since we began  Telecom  Systems in 1994 and  secondarily
because the  business of selling and  installing  telephone  systems is a mature
industry that offers less  opportunity  for growth than other emerging areas. We
decided to sell our Computer  Products  division  because,  in spite of the fact
that Computer  Products is profitable,  we could deploy the proceeds from a sale
of  Computer  Products  in other ways that we  believe  will  ultimately  create
greater stockholder value.
<PAGE>

RECENT DEVELOPMENTS

     On March 16,  2000 we  entered  into  separate  agreements  whereby we sold
certain  key assets of, and the  ongoing  business  operations  of, our  Telecom
Systems  business  and we propose to sell certain key assets of, and the ongoing
business operations of, our Computer Products business.

Proposed Disposition of Computer Products Business

     On March 16, 2000 Allstar  entered into an agreement to sell certain assets
of and the ongoing  operations  of our Computer  Products  division,  along with
certain assets and operations of our IT Services division related to our El Paso
branch office.  Under this agreement,  said assets and operations are to be sold
to  Amherst  Computer  Products   Southwest,   L.P.,  an  affiliate  of  Amherst
Technologies,  L.L.C. The sale transaction is expected to close on or before May
31, 2000 after shareholder and other required  consents are obtained.  The terms
of the  agreement  include cash  consideration  of $14.25  million,  plus a cash
payment related to the purchase of certain  inventory and equipment,  the amount
of which is to be determined, plus the possibility of receiving a future payment
of up to  $500,000  from an  escrow  account.  The terms of the  agreement  also
include possible future cash payments  contingent upon future performance of the
operations   being  sold.   Allstar   Systems  expects  to  realize  a  gain  of
approximately  $5.6 million,  net of taxes, on the sale. Upon the closing of the
proposed  transaction  and after  realization  of the  retained  current  assets
related to the Computer Products division, we expect to have no debt and cash on
hand of approximately $18 to $20 million.  Additional information regarding this
proposed  transaction  can be found in the recently  filed Proxy  related to the
transaction.

Sale of Telecom Systems Business

     Through Telecom Systems,  until March 16, 2000, we marketed,  installed and
serviced business telephone systems,  including large PBX systems and small "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.
Because we have been unable to profitably  operate the Telecom Systems business,
we  determined  to exit this business on November 2, 1999. On March 16, 2000, we
sold Telecom Systems to Communications World International,  Inc. ("CommWorld"),
a publicly  traded company (OTC Bulletin  Board:  CWII).  Under the terms of the
sale, for the inventory and operations of Telecom Systems,  we received $250,000
cash, and the ability to obtain up to approximately 100,000 shares of restricted
common  stock of  CommWorld  depending  upon  the  performance  of the  acquired
operations   during  a  period   ending  six  months  after  the  closing  date.
Additionally,  the  purchaser  assumed all of our telephone  equipment  warranty
obligations  up to a maximum of $30,000.  Any excess  warranty costs incurred by
the  purchaser  will be billed to us at an agreed  upon rate.  A disposal  loss,
including  an estimate  of the  operating  results  from the  measurement  date,
November 2, 1999 to the closing date of the sale of $580,000,  and estimates for
impairment  of assets  caused by the  disposal  decision of  $558,000,  totaling
$1,138,000  (net of an income tax saving of $586,000) was  recognized.  The loss
from  discontinued  operations (net of income tax savings of $167,000,  $159,000
and  $505,000)  was  $323,000,  $310,000  and  $981,000 in 1999,  1998 and 1997,
respectively.  We  will  retain  accounts  receivable  of $1.4  million,  net of
reserves,  fixed  assets of  $30,000  and  liabilities  related  to the  Telecom
division.  Fixed assets are being redeployed in the continuing  operations.  The
accounts  receivable  will be collected  in the ordinary  course of business and
these  amounts will be used to repay all  remaining  liabilities  of the Telecom
division.  Any  excess  cash will be used to repay  our line of credit  and fund
general corporate purposes.


<PAGE>

BUSINESS STRATEGY

     We believe the proposed  sale of our Computer  Products  division  provides
sufficient cash to initiate a fundamental  change in our business  strategy that
will allow us to deploy our increased  capital in endeavors that we believe will
ultimately result in improved stockholder value.

     We  believe  we  can  produce  more  rapid  growth,  and  better  financial
performance,  by segregating  the various IT Services  operations  into focused,
specialized companies. We intend to organize our existing IT Services operations
into wholly owned  subsidiary  companies,  each branded to pursue a  specialized
mission  and each led by a  separate  management  team with  personal  financial
incentives tied to their company's financial performance.

     We plan to continue to expand our CTI Software  business through our wholly
owned subsidiary,  Stratasoft, Inc. Stratasoft is an example of our successfully
entering a new market with a start-up  operation and rapidly creating a valuable
vertical  market  software   company   producing  high  levels  of  revenue  and
profitability  growth in a short time.  Stratasoft is working to enable its call
center systems to utilize voice-over-IP  technology and as voice-over-IP becomes
a viable voice communications  methodology, we expect the Stratasoft call center
product  to be ready for the  significant  change  that will be  created in call
center communications.

     After the  completion of the sale of Computer  Products,  we also intend to
pursue starting,  acquiring or investing in, including taking significant stakes
in other  companies  that we  expect  to  benefit  from the  manner in which the
Internet  is changing  commerce  and  communications.  Targeted  businesses  are
expected  to  include  B2B  e-commerce  product  or  services  sales  companies,
companies  providing  IT  services  related to network and Web  development  and
companies involved in the enabling of e-Commerce and e-Business.

PRODUCTS AND SERVICES

IT Services:

     To date,  we have  marketed a variety of service  offerings  related to the
service  and  support of  information  technology  systems.  We have  priced our
services on a time and materials  basis,  under fixed price  project  pricing or
under fixed fee service  contracts,  depending  on customer  preference  and the
level of service  commitment  required.  To support and  maintain the quality of
these services and to maintain vendor  accreditation  necessary to service their
significant   product  lines,  our  technical  staff   participates  in  various
certification and authorization programs sponsored by hardware manufacturers and
software suppliers. 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. IT services include the following:

     o    Consulting and project management services related to networking.

     o    Supplemental IT technical staffing.

     o    Computer   equipment   repair   services  and  desktop   computer  and
          application support.

As mentioned  above in Item 1.  "Business  Strategy,"  we intend to organize our
various IT Services  offerings  into  separate  wholly  owned  companies  with a
specialized focus in order to maximize management and operational  effectiveness
and  because we  believe  that doing so will  result in overall  higher  revenue
growth and improved financial results.


<PAGE>

CTI Software:

     Through  our wholly  owned  subsidiary,  Stratasoft,  Inc.,  we develop and
market  Stratasoft's   proprietary  CTI  Software,   which  integrates  business
telephone  systems  and  networked  computer  systems,   under  the  trade  name
"Stratasoft."  Stratasoft's products are designed to improve the efficiency of a
call center or other type of high volume calling  application,  for both inbound
and outbound calls. The software  products  offered are typically  customized to
suit a customer's  particular needs and are often bundled with computer hardware
supplied by us or by one of Stratasoft's value added resellers at the customer's
request.  Stratasoft  currently  has  two  primary  computer-telephony  software
products,  which it markets under the trade names  StrataDial  and  StrataVoice.
These products are further described below:

     o    StrataDial.  StrataDial is a predictive  dialer  software  product for
          outbound  call  center  applications  such  as  sales  and  promotion,
          collections,  surveys,  lead generation and announcements that require
          personal contact.  StrataDial features  inbound/outbound call blending
          without  requiring  an  automated  call  distribution  feature  of the
          telephone  system.  StrataDial  collects campaign specific data during
          the telephone  call and provides  comprehensive  on line reporting and
          statistical  analysis of the campaign data.  StrataDial  also features
          open  architecture  that allows easy  interaction  with the customer's
          other   database   applications.   Dialing   parameters  and  campaign
          characteristics can be changed without shutting down the dialer, as is
          required with many competing products.

     o    StrataVoice.  StrataVoice is an outbound  dialing product designed for
          high  volume  applications  that  do not  require  human  interaction.
          StrataVoice applications include appointment confirmation and setting,
          court appearance notification, surveys, community notification such as
          school   closings  and   emergency   evacuation,   employee   updates,
          absenteeism   notification,   telemarketing  and  market  research.  A
          telephone system utilizing  StrataVoice  dials a computerized  list of
          numbers  and can ask the  contacted  person  a  number  of  questions,
          including  branching  to  other  questions  and  statements  based  on
          responses.  StrataVoice  also  allows  the  contacted  person to leave
          messages.  Scripting tools are included that allow the user to develop
          campaigns.  The system  builds a database of  respondent  data and has
          comprehensive response reporting capabilities.

Computer Products:

     Our Computer  Products business has offered our customers a wide variety of
computer  hardware  and  software  products  available  from  approximately  600
manufacturers and suppliers.  Our products include desktop and laptop computers,
monitors,   printers  and  other  peripheral   devices,   operating  system  and
application software, network products and mid-range host and server systems. We
are an authorized reseller of products from a number of leading manufacturers of
computer  hardware,  software and networking  equipment.  The Computer  Products
division had  operating  income in 1999 of $2,702,000 as compared to $560,000 in
1998.  Downward  pressures on product  pricing  margins have been a trend in the
industry,  although growth of revenues of 27.4% in 1999 as compared to 1998 were
achieved in spite of continuing  downward pressure on prices. As computer prices
decrease,  more significant  increases in the number of units sold must occur in
order  to  produce  revenue  growth.  As  discussed  above  in Item  1.  "Recent
Developments,"  the proposed sale of the Computer  Products division is expected
to close on or before May 31, 2000.


<PAGE>

FINANCIAL INFORMATION BY BUSINESS SEGMENT

     See Item 7.  "Management's  Discussion and Analysis of Financial  Condition
and Results of  Operations"  for financial  information on revenue and operating
income of each business segment.

SALES AND MARKETING

     To date,  we have  primarily  marketed our  products  and services  through
direct sales representatives. Direct sales representatives have been teamed with
in-house  customer  service  representatives  and assigned to specific  customer
accounts.  We believe that direct sales lead to better account  penetration  and
management,   better   communications  and  long-term   relationships  with  its
customers. Our sales personnel,  including account managers and customer service
representatives,  are  partially  compensated,  and in  some  cases  are  solely
compensated,   on  the  profitability  of  accounts  that  they  participate  in
developing.  Our  three  remaining  business  segments  have  utilized  slightly
different methods of sales and marketing:

     (1)  IT Services. The IT Services business segment operates from all of our
          offices,  and promotes its products and services  through  general and
          trade  advertising,  participation  in trade  shows and  telemarketing
          campaigns.  We believe that a significant  portion of IT Services' new
          customers  have  originated  through   word-of-mouth   referrals  from
          existing  customers  and  industry  partners  such  as  manufacturers'
          representatives,  and through customer and lead sharing with our other
          two business units.

     (2)  CTI Software.  Stratasoft,  Inc., our CTI Software  business  segment,
          operates   from  our  Houston   office  and  utilizes   telemarketing,
          participation  in trade shows and general trade  advertising to market
          its  products.  Leads  are  followed  up on  and  managed  by  account
          managers.  In  addition,  Stratasoft  markets its  products  through a
          network  of value  added  resellers,  who  typically  integrate  their
          products  with  Stratasoft's  software  products to provide a complete
          solution.

     (3)  Computer  Products.  Our Computer  Products  business segment operates
          from all of our  offices,  and  promotes  its  products  and  services
          through general and trade  advertising,  participation  in trade shows
          and telemarketing  campaigns. As previously discussed, we entered into
          an  agreement  on March 16,  2000 to sell  certain  assets of, and the
          ongoing operations of this business.

CUSTOMERS

     The focus of our  marketing  efforts has been on  mid-sized  customers  and
regional  offices of larger  customers  located  within the  regions in which we
maintain  offices.  We have  occasionally  provided  products and/or services in
markets  where we do not have an  office,  typically  to  branch  operations  of
customers with which we have an established relationship.  Our customer base has
not been  concentrated in any industry group.  Our top ten customers (which have
varied from year to year)  accounted  for 21.2%,  31.7% and 28.4% of our revenue
during  1997,  1998  and  1999,  respectively.   Approximately  2,800  customers
purchased  products or services from us during 1999. In 1999, the largest single
customer  constituted  8.3% of total  revenues;  however,  in prior  years,  our
largest  customer has  constituted as high as 11.2% of revenues.  We have only a
small amount of backlog  relative to total revenues because we have no long-term
commitments by customers to purchase  products or services from us.  Although we
have service contracts with many of our large customers,  such service contracts
are project-based and/or terminable upon relatively short notice.

SUPPLY AND DISTRIBUTION

     We have  relied  on  wholesale  distributors  to supply a  majority  of the
products  that we have sold  through  our  Computer  Products  and CTI  Software
business  segments.  We have  purchased  the majority of our products from three
primary suppliers to obtain competitive pricing, better product availability and
improved quality control.


<PAGE>

MANAGEMENT INFORMATION SYSTEMS

     We utilize a highly customized  management  information  systems ("MIS") to
manage most  aspects of our  business.  Our MIS has  provided  our sales  staff,
customer service  representatives and certain customers with product pricing and
availability  from its principal  suppliers'  warehouses  throughout  the United
States.  The  purchasing  systems are real time,  allowing  buyers to act within
minutes on a newly received and  credit-approved  sales order.  Our MIS contains
productivity  tools for sales lead  generation,  including  integration  between
telemarketing  and  prospect  database  management.  Sales  management  features
include  a  variety  of  reports  available  for any  combination  of  customer,
salesperson,  sales team and  office  criteria.  We use our MIS to manage  sales
orders, purchasing,  service contracts,  service calls and work orders, engineer
and  technician  scheduling  and time tracking,  service parts  acquisition  and
manufacturer   warranties.   Reporting   can  also  be  generated   for  project
profitability,  contract and customer analysis, parts tracking and employee time
tracking.

EMPLOYEES

     As of December  31,  1999 we employed  approximately  417  individuals.  Of
these,  approximately 98 were employed in sales, marketing and customer service,
171 were employed in engineering  and technical  positions and 148 were employed
in  administration,  finance and MIS. We believe that our ability to recruit and
retain highly skilled and experienced technical,  sales and management personnel
has been,  and will  continue  to be,  critical  to our  ability to execute  our
business  plans.  None of our employees are  represented by a labor union or are
subject to a collective bargaining agreement. We believe that our relations with
our employees are good.

HISTORY AND REINCORPORATION

     Our  company  was  incorporated  under  Texas  law in 1983  under  the name
Technicomp Corp. On June 30, 1993, we changed our name to Allstar-Valcom,  Inc.,
and then again,  on December 28, 1993,  we changed our name to Allstar  Systems,
Inc. On December 27, 1993, we engaged in a merger in which we were the surviving
corporation.  In the merger,  Allstar Services,  Inc. and R. Cano, Inc., both of
which were affiliated with us, were merged with and into Allstar  Systems,  Inc.
in  order  to  streamline  the  business.  In  1995 we  formed  a  wholly  owned
subsidiary,  Stratasoft, Inc., to purchase and develop our CTI Software business
segment. In 1997, we formed another wholly-owned subsidiary,  IT Staffing, Inc.,
for the  purpose of  conducting  business  in the  placement  of  temporary  and
permanent  technical   personnel.   In  1998  we  formed  another  wholly  owned
subsidiary,  Allstar  Systems Rio Grande,  Inc., to develop and manage  business
opportunities  in the Rio  Grande  region  congruent  with the  business  of the
parent. In October 1996, we effected a  reincorporation  and merger in the State
of  Delaware  through  which  the  328,125  shares of our  predecessor,  Allstar
Systems, Inc., a Texas corporation,  which were outstanding prior to the merger,
were converted into  approximately  2,675,000  shares of the newly  incorporated
Delaware corporation (the "Reincorporation").  The effect of the Reincorporation
on the number of shares outstanding prior to the  Reincorporation was similar in
effect to an approximately 8.15-for-1 stock split.

RISKS OF OUR NEW BUSINESS STRATEGY

     We plan to sell our Computer Products Division,  retain our IT Services and
Stratasoft businesses,  and embark on new lines of business that we have not yet
identified.  Our new  business  strategy is based on our ability to redeploy the
proceeds from the sale of our Computer  Products to both improve the performance
of businesses  we will retain and to enter new lines of business.  This strategy
involves many risks including the following:


<PAGE>

Closing of Computer Products Division Sale

     We believe that having cash on hand from the sale of the Computer  Products
Division  will improve our ability to  negotiate  and  consummate  acquisitions,
pursue  investment  opportunities  and better enable us to start-up new lines of
business,  once we have identified the specific businesses we wish to pursue. We
also will seek to grow our retained  businesses  using  proceeds  from the sale.
Closing of the Computer  Products  Division  sale is,  however,  subject to many
contingencies  which could  cause the  transaction  not to close.  Some of these
conditions include:

     o    the absence of any material  adverse  change in our business  prior to
          closing;

     o    the truth of the  representations  and  warranties  made by us and the
          buyer in the Asset Purchase Agreement;

     o    consent of a number of our  principal  suppliers  and customers to the
          assignment to the buyer of our contracts with them;

     o    other conditions  included in the Asset Purchase Agreement relating to
          the Computer  Products Division sale, a copy of which is an exhibit to
          this report.

If for any reason the proposed sale of the Computer  Products  Division does not
close, we will not have sufficient cash to pursue our new business strategy.

Risks of Potential Future Acquisitions and Investments

     Our  business  will  depend in the  future on the  successful  acquisition,
integration, financing and performance of businesses we have not yet identified.
Following  the  sale of our  Computer  Products  Division,  we  plan  to  pursue
starting-up,  acquiring or taking significant  stakes in businesses  involved in
internet  commerce and  communications.  We have not yet identified any specific
businesses  to start,  purchase  or invest in, and thus many of the risks of our
strategy are unascertainable. Our strategy involves the substantial risk that we
will not find suitable  businesses to acquire on terms we believe are reasonable
and that the new  businesses we choose to enter will not provide the benefits we
expect. Our future business prospects should therefore be considered in light of
the risks, expenses, problems and delays inherent in starting or acquiring a new
business.  We cannot be certain  that we will  identify  and assess these risks.
Some of the  acquisition  and  operating  risks that could  adversely  affect us
include the following:

     o    We may be  unsuccessful  in  identifying  new business  opportunities,
          completing and financing acquisitions and start-ups on favorable terms
          and in subsequently operating the businesses profitably.

     o    Competition for the acquisition of companies in the internet  commerce
          and communication  sector will likely be intense.  Our competitors for
          suitable new  businesses  may have greater  financial,  personnel  and
          technical  resources  than us which  may put us at a  disadvantage  in
          finding and concluding acquisitions. These competitive limitations may
          compel  us to  select  less  attractive  acquisitions  than  if we had
          greater resources at our disposal.

     o    Businesses in the internet commerce and  communication  sector are the
          general focus of our new business  expansion  strategy.  Businesses in
          this sector often have an undeveloped or unproven product,  technology
          or marketing strategy which may prove unsuccessful.


<PAGE>

     o    We may  choose to acquire  or invest a  business  that is  financially
          unstable or that is in the early stages of development,  including one
          without earnings or positive cash flow, which may require  substantial
          additional capital infusions to support.

     o    Because we plan to seek new businesses with growth potential, there is
          a substantial  likelihood that the new business will be in competition
          with much larger, more established and better capitalized competitors,
          thus putting it at a competitive disadvantage.

     o    Our  success  in a new  business  will also  depend on our  ability to
          integrate a new business and its personnel with our existing  business
          and  personnel  with a minimum of  disruption to both existing and new
          enterprises,  including management information systems. We also may be
          unable to attract and retain new,  qualified  personnel to operate and
          grow our new businesses.

     o    If we choose to make a strategic  investment  by  acquiring a minority
          interest in a business,  we may lack  sufficient  control to influence
          the  operations  and  strategy of the business and thus will depend on
          that entity's management for our success;  additionally,  if we choose
          to make an investment  in a publicly  traded  company such  investment
          would also be subject to market risks.

Possible Need for Additional Financing

     We may be required to obtain cash to supplement our then available proceeds
from the Computer  Products Division Sale to acquire or begin a new business and
for working capital to run existing businesses and any businesses we acquire. We
have no commitments to provide any such additional  capital and we may be unable
to find suitable capital on terms we consider acceptable.

     If we obtain  additional  debt financing for our existing  businesses or to
acquire  new  businesses,  we will be  subject  to the  risks  inherent  in debt
financing. Some of these include:

     o    interest rate fluctuations;

     o    inability to obtain additional debt financing;

     o    insufficiency of cash flow to pay interest and principal; and

     o    restrictive  debt  covenants  imposed  by  lenders  that may  limit or
          prohibit business activities we consider desirable.

     We may seek to raise equity  capital to meet our future cash needs.  We may
also issue additional  shares of our common stock or other equity  securities to
acquire new businesses. If we do issue additional equity securities, some of the
possible adverse possible effects include:

     o    the  percentage  of our common  stock owned by  existing  stockholders
          could be substantially reduced;

     o    possible  increases  in the number of shares of our common  stock that
          are considered  restricted stock for federal and state securities laws
          purposes, the actual or potential future sale of which could adversely
          effect the price of our common stock; and

     o    we may be required to issue  preferred  stock which could have rights,
          privileges  and  preferences  superior  to those of our then  existing
          stockholders.


<PAGE>

Increased Dependence on IT Services and Stratasoft

     Our IT  Services  and  Stratasoft  software  business  will be our only two
business segments  immediately after the sale of our Computer Products Division.
Because of that,  the  success of these  business  segments  will take on a much
greater  significance to us. We plan to concentrate our efforts on growing these
businesses and we expect to have  additional  financial  resources to do so from
the proceeds of the Computer Products Division sale. The risk exists that we may
be unable to accomplish this improvement,  and the operations of these remaining
businesses may not enable us to operate profitably.

Risks of Our Existing Businesses

     As noted  above,  if our  Computer  Products  Division  is sold and our new
business strategy is implemented,  the nature and magnitude of risks relating to
our  business  will  change  significantly.  If,  however,  we do not  close the
Computer Products sale as expected,  our business will continue to be subject to
the risks and uncertainties we have identified in the past,  including those set
forth below:

Adverse Changes in Our Industry

     As described above under the caption "Changes in Industry  Conditions," our
industry is undergoing  rapid changes that may adversely affect us. If we do not
successfully  adapt our business  strategy to these new  conditions,  there is a
growing risk that we may be unable to compete and be profitable in the future.

Risk of Low Margin Business

     Significant  levels of competition that  characterize the computer reseller
market,  In order to attract  and retain many of our larger  customers,  we have
frequently  agreed to volume discounts and maximum  allowable markups that serve
to limit the profitability of sales to such customers. Any increase in inventory
devaluation  risks that  cannot be passed  onto our  customers  would  result in
write-offs or markdowns of the value of such  inventory  with the result being a
charge to gross profit. All of these factors have contributed to our decision to
make the Computer Products Division available for sale.

Dependence on Availability of Credit

     Our business activities have been capital intensive in that we are required
to finance  accounts  receivable  and  inventory.  In order to obtain  necessary
working  capital,  we have relied  primarily  on lines of credit under which the
available  credit  is  dependent  on the  amount  and  quality  of our  accounts
receivable and inventory.  As a result, the amount of credit available to us was
adversely  affected by factors such as delays in collection or  deterioration in
the quality of our accounts receivable, inventory obsolescence,  economic trends
in the computer industry, interest rate fluctuations and the lending policies of
our lenders.  Many of these  factors  were beyond our  control.  Any decrease or
material  limitation  on the amount of capital  available to us under our credit
lines and other financing  arrangements could limit our ability to fill existing
sales  orders,  purchase  inventory or expand our sales  levels and,  therefore,
would have a material  adverse effect on our financial  condition and results of
operations.  (See Item 7  "Management's  Discussion  and  Analysis of  Financial
Condition and Results of Operations").

Interest Rates

     Any  significant  increases  in interest  rates will  increase  our cost of
capital and would have an adverse effect on our financial  condition and results
of operations.  Our inability to have continuous access to capital at reasonable
costs would materially and adversely impact our financial  condition and results
of operations.  (See Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations").


<PAGE>

Highly Competitive Business

     We have been engaged in business activities that are intensely  competitive
and rapidly changing.  Price competition could have a material adverse effect on
our financial  condition and results of  operations.  Our  competitors  included
major computer products and telephone equipment  manufacturers and distributors,
including  certain  manufacturers and distributors that supplied products to us.
Other competitors  include established  national,  regional and local resellers,
systems integrators,  telephone systems dealers,  computer-telephony value-added
resellers and other computer-telephony software suppliers.

Management of Growth

     We have  experienced  rapid growth that has, and may continue into 2000 to,
put strains on our management and operational  resources.  Our ability to manage
growth  effectively  required  it to  continue  to  implement  and  improve  its
operational,  financial and sales systems, to develop the skills of our managers
and supervisors and to hire, train, motivate and manage its employees.  With the
proceeds of the proposed sale of our Computer Products division,  our management
and operational resources will be facing new and different  challenges,  but the
need to develop the skills of our managers and supervisors remains unchanged.

Regional Concentration

     For the foreseeable  future, we expect that we will continue to derive most
of our revenue from  customers  located  within the regions in which we maintain
offices.  Accordingly,  an economic downturn in any of those  metropolitan areas
within the region in general, would likely have a material adverse effect on our
financial condition and results of operations.

Dependence on Key Personnel

     Our success for the foreseeable future will depend largely on the continued
services  of key  members of  management,  leading  salespersons  and  technical
personnel.  We do  not  maintain  key  personnel  life  insurance  on any of our
executive  officers or salespersons  other than our Chairman and Chief Executive
Officer. Our success also depends in part on our ability to attract, hire, train
and retain qualified managerial,  technical and sales and marketing personnel at
a reasonable cost, particularly those involved in providing systems integration,
support  services and training.  Competition for such personnel is intense.  Our
financial  condition  and results of operations  could be  materially  adversely
affected  if we  are  unable  to  attract,  hire,  train  and  retain  qualified
personnel.

Dependence on Continued Authorization to Resell and Provide
  Manufacturer-Authorized Services

     Our future  success in both product sales and services  depends  largely on
our  continued  status as an  authorized  reseller of products and its continued
authorization   as  a  service   provider.   We   maintain   sales  and  service
authorizations with many industry-leading  product  manufacturers.  Without such
sales and  service  authorizations,  we would be unable to provide  the range of
products and services currently offered.  In addition,  some of these agreements
are based upon our continued supply  relationship  with our major  distributors.
Furthermore,  loss of  manufacturer  authorizations  for products that have been
financed under our credit facilities  constitutes an event of default under such
credit  facilities.  In  general,  the  agreements  between  us and our  product
manufacturers either provide for fixed terms or for termination on 30 days prior
written notice.  Failure to maintain such  authorizations  could have a material
adverse effect on our financial condition and our results of operations.


<PAGE>

Dependence on Suppliers

     Our  business  depends  upon our  ability to obtain an  adequate  supply of
products and parts at competitive  prices and on reasonable terms. Our suppliers
are not obligated to have product on hand for timely delivery to us nor can they
guarantee product availability in sufficient quantities to meet our demands. Any
material  disruption  in our supply of  products  would have a material  adverse
effect on our financial condition and results of operations.

Inventory Obsolescence

     The business in which we compete is  characterized  by rapid  technological
change and frequent introduction of new products and product  enhancements.  Our
success  depends in large part on our  ability to identify  and obtain  products
that  meet  the  changing  requirements  of  the  marketplace.  There  can be no
assurance  that we will be able to  identify  and offer  products  necessary  to
remain  competitive  or avoid losses  related to obsolete  inventory and drastic
price reductions.  We attempt to maintain a level of inventory  required to meet
our near term  delivery  requirements  by relying on the ready  availability  of
products from our principal suppliers. Accordingly, the failure of our suppliers
to maintain  adequate  inventory levels of products demanded by our existing and
potential customers and to react effectively to new product  introductions could
have a  material  adverse  effect on our  financial  condition  and  results  of
operations.

Reliance on Key Customers

     Our top ten customers,  which have varied from year to year,  accounted for
21.2%, 31.7% and 28.4% of our revenue during 1997, 1998 and 1999,  respectively.
During 1999, our largest customer  accounted for 8.3% of total revenues,  but in
past years the single  largest  customer has  accounted  for as much as 11.2% of
total  revenues.  Based upon historical  results and our existing  relationships
with customers,  we believe that a substantial  portion of our total revenue and
gross  profit  will  continue to be derived  from sales to  existing  customers.
However,  while our revenues  will be greatly  reduced by the new  direction the
company is taking,  the higher margins generated by the existing divisions along
with reductions in overhead  association with the proposed sale,  should move us
toward  profitability  in  2000.  There  are no  long-term  commitments  by such
customers  to purchase  products or services  from the  company.  A  significant
reduction in business  with any of our largest  customers  could have a material
adverse effect on our financial condition and results of operations.

Reliance on MIS

     Our success is largely  dependent on the accuracy,  quality and utilization
of the information generated by our customized MIS, which affects our ability to
manage our sales, accounting,  inventory and distribution. We anticipate that we
will continually need to refine and enhance our management  information  systems
as we grow and the needs of our business evolve. We have not yet experienced any
serious  problems  arising  from the  Year  2000  issue,  and  therefore  do not
anticipate  any  future   interruption   or  errors  in  our   information   and
telecommunications  systems which would have an adverse  effect on our financial
condition  and  results of  operations.  (See Item 1 -  "Management  Information
Systems" and Item 7 - "Year 2000 Issue").

Acquisition Risk

     We intend to pursue potential acquisitions of complementary businesses.
The  success  of this  strategy  depends  not only upon our  ability  to acquire
complementary businesses on a cost-effective basis, but also upon our ability to
integrate acquired operations into our organization  effectively,  to retain and
motivate key personnel and to retain customers of acquired firms.


<PAGE>

Control by Existing Stockholders

     James  H.  Long,  founder,  Chairman  of the  Board,  President  and  Chief
Executive Officer,  owns 50.1% of the outstanding Common Stock and Mr. Long will
have the  ability to control  the  election  of a majority of the members of our
board of  directors,  prevent the  approval  of certain  matters  requiring  the
approval  of at least  two-thirds  of all  stockholders  and  exert  significant
influence over our affairs.

Anti-Takeover Considerations

     Our Certificate of Incorporation and Bylaws contain certain provisions that
may delay, deter or prevent a change in our control.  Among other things,  these
provisions  authorize our board of directors to issue shares of preferred  stock
on such terms and with such rights, preferences and designations as the board of
directors may determine without further stockholder action and limit the ability
of  stockholders   to  call  special   meetings  or  amend  our  Certificate  of
Incorporation  or  Bylaws.  Each of these  provisions,  as well as the  Delaware
business combination statute could, among other things,  restrict the ability of
certain  stockholders  to  effect a merger  or  business  combination  or obtain
control of the company.

Uncertain Revenue Sources

In order to maintain a profit, we will have to grow the revenues of the retained
business  at a much  greater  rate than we have  historically  been able to grow
those revenues.  The relatively high level of operating expenses remaining after
the divestiture of Computer  Products will contribute to operating losses unless
new revenues can be generated to offset the loss of revenues from the businesses
that are sold. (See Item 1. "Recent Developments")

Absence of Dividends

     We expect to retain cash generated from operations to support our cash
needs and do not anticipate the payment of any dividends on the Common Stock for
the  foreseeable  future.  In  addition,  our  credit  facilities  prohibit  the
declaration  or payment of  dividends,  unless  consent  is  obtained  from each
lender.

Item 2.  Properties

FACILITIES

     We do not own any real  property  and  currently  lease all of our existing
facilities.  We lease  our  Houston  office  that is  housed  in a  freestanding
building of approximately  48,000 square feet. On November 30, 1999 the building
was acquired by a related  Corporation  and a new lease was signed which expires
on December 1, 2004.

     Our  Dallas  office  has  been  housed  in  a   freestanding   building  of
approximately  20,000 square feet. The Dallas facility lease expired on June 30,
1998 and was renewed for an  additional  three  years  under  similar  terms and
conditions.  During 1997, the company added additional  offices in Austin and El
Paso,  Texas and during 1998 we opened an additional  office in San Antonio.  In
1998 we expanded our  distribution  capabilities  by entering  into a three year
lease on a 30,000 square foot warehouse in Dallas.

     The Dallas  office and  distribution  center  leases  will  transfer to the
purchaser under the terms of the proposed sale of the Computer Products division
we will acquire space nearby to house our IT Service  technicians working in the
Dallas market.  The Austin,  San Antonio and El Paso office leases will likewise
be assumed by the purchaser.  We will find suitable facilities in Austin and San
Antonio as needed.  Under the terms of the proposed sale the purchaser will also
be acquiring the El Paso portion of our IT Service Division.


<PAGE>

Item 3.  Legal Proceedings

     We are party to litigation and claims which management  believes are normal
in the course of our 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  material  adverse  effect  on our  results  of  operations  or
financial position.

     On February 1, 2000, a  competitor  brought a suit against our wholly owned
subsidiary Stratasoft, Inc. in the United States District Court for the Northern
District of Georgia. The plaintiff alleges infringement of certain patents owned
by the competitor and is seeking  unspecified  monetary damages.  The suit is in
its early stages of  discovery,  and  therefore  we are unable to determine  the
ultimate  costs of this matter.  We believe that this suit is without  merit and
intend to vigorously defend such action.

Item 4.  Submission of Matters to a Vote of Security Holders

     No matters  were  submitted  during the fourth  quarter of the fiscal  year
covered by this report to a vote of security  holders,  through the solicitation
of proxies or otherwise.

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

     The  Company's  shares are traded on the Nasdaq  Small Cap Market under the
symbol "ALLS".

                                                          High         Low
Fiscal 1998
        First quarter                                    5.50          3.875
        Second quarter                                   5.125         3.625
        Third quarter                                    4.125         1.875
        Fourth quarter                                   3.25          1.25

Fiscal 1999
        First quarter                                    2.1875        1.00
        Second quarter                                   2.875         1.0625
        Third quarter                                    1.75          1.0625
        Fourth quarter                                   1.875         1.00

     As of March 17,  2000,  there were 45  shareholders  of record.  Management
estimates  that there are  approximately  890  beneficial  holders of our common
stock. We have never declared or paid any cash dividends on our Common Stock. On
March 17,  2000,  the  closing  sales  price of our Common  Stock as reported by
Nasdaq was $ 4.00 per share.  We  currently  anticipate  that we will retain all
earnings  for use in our  business  operations.  The  payment  of  dividends  is
prohibited under our credit agreements, unless approved by the lenders.

<PAGE>

Item 6.  Selected Financial Data

     The  following  sets forth the  selected  data of the  company for the five
years ended December 31, 1999.

<TABLE>
<CAPTION>
                                                    Year ended December 31,
                                       (In Thousands except share and per share amounts)

                                         1995       1996       1997       1998       1999
                                     --------   --------   --------   --------   --------
<S>                                 <C>        <C>        <C>        <C>        <C>
Operating Data:
Revenue                             $  89,627  $ 116,535  $  23,764  $ 159,674  $ 201,817
Cost of sales and services             78,734    101,837    107,135    139,866    179,026
                                     --------   --------   --------   --------   --------
   Gross profit                        10,893     14,698     16,629     19,808     22,791
Selling, general and
  Administrative expenses               8,496     11,121     12,527     20,659     20,183
                                     --------   --------   --------   --------   --------
    Operating income (loss)             2,397      3,577      4,102       (851)     2,608
Interest expense (net of
  other income)                         1,212      1,145        642        319        648
                                     --------   --------   --------   --------   --------
Income (loss) from continuing
  operations before provision
  (benefit) for income taxes            1,185      2,432      3,496     (1,170)     1,960
Provision (benefit) for
  income taxes                            452        933      1,305       (382)       686
                                     --------   --------   --------   --------   --------
     Net income (loss) from
       continuing operations              733      1,499      2,191       (788)     1,274

Discontinued Operations:
  Net income (loss) from
   discontinued operations, net
   of taxes                              (214)       104       (323)      (310)      (981)
  Loss on disposal, net of taxes                                                   (1,138)
     Net income (loss)              $     519  $   1,603  $   1,844  $  (1,098) $    (845)
                                     ========   ========   ========   =========  ========

Net income (loss) per share:
Basic
Net income (loss) from
  continuing operations             $    0.17  $    0.36  $    0.62  $   (0.18) $    0.31
Net income (loss) from
  discontinued operations               (0.05)      0.02      (0.10)     (0.07)     (0.24)
Loss on disposal                                                                    (0.27)
                                     --------   --------   --------   --------   --------
     Net income (loss) per share    $    0.12  $    0.38  $    0.52  $   (0.25) $   (0.20)
                                     ========   ========   ========   ========   ========
Diluted
Net income (loss) from
  continuing operations             $    0.17  $    0.36  $    0.61  $   (0.18) $    0.30
Net income (loss) from
  discontinued operations               (0.05)      0.02      (0.09)     (0.07)     (0.23)
Loss on disposal                                                                    (0.27)
                                     --------   --------   --------   --------   --------
     Net income (loss) per share    $    0.12  $    0.38  $    0.52  $   (0.25) $   (0.20)
                                     ========   ========   ========   =========  ========
</TABLE>

<TABLE>
<CAPTION>
                                                    As of December 31,
                                                      (In Thousands)
                                         1995       1996       1997       1998       1999
                                     --------   --------   --------   --------   --------
<S>                                 <C>        <C>        <C>        <C>        <C>
Balance Sheet Data:
Working Capital                     $   1,732  $   2,291  $  12,738  $   9,800  $   9,567
Total Assets                           24,266     24,720     34,855     51,028     53,916
Short-term borrowings (1)               9,912      9,975      1,572     15,958     15,869
Long-term debt                            -0-        -0-        -0-        -0-        -0-
Stockholders' equity                    2,724      4,327     14,637     12,705     11,830

<FN>
(1) See Note 6 to our Consolidated  Financial Statements.  Short-term borrowings
do not include  amounts  recorded as floor plan financing  which are included in
accounts payable.
</FN>
</TABLE>

     The  following  discussion  is  qualified in its entirety by, and should be
read in conjunction with, our Consolidated  Financial Statements,  including the
Notes thereto, included elsewhere in this Annual Report on Form 10-K.

Overview

     Our company  was formed to engage in the  business  of  reselling  computer
hardware and software products and providing related services.  To date, most of
our  revenue  has been  derived  from sales of  computer  products  and  related
services.  Operations  are  primarily  conducted  in Houston and Dallas,  Texas.
During 1997 we opened offices in Austin,  McAllen and El Paso, Texas, and during
1998 opened additional  offices in Albuquerque and Las Cruces,  New Mexico,  and
San Antonio,  Texas.  During 1999 we reevaluated the structure of our operations
of the new offices and merged their operations where a physical presence was not
necessary,  thereby retaining the El Paso, Austin and San Antonio offices, which
we believe can effectively serve the targeted markets.

     Through  Telecom  Systems,  we marketed,  installed  and serviced  business
telephone  systems,  including large PBX systems and small "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. On November 2, 1999,
we approved a plan to sell or close our Telecom  Systems  division.  Offers were
entertained  for the  acquisition  of a  significant  portion  of the  assets of
Telecom Systems and to assume any ongoing  operations of the division.  The sale
was finalized on March 16, 2000. Under the terms of the sale we received for the
sale of the inventory and operations of Telecom  Systems  $250,000 cash, and the
ability  to  obtain  restricted  stock  in the  purchaser  contingent  upon  the
performance of the acquired  operations  during a period ending six months after
the closing  date.  Additionally,  the  purchaser  assumed all of our  telephone
equipment warranty  obligations up to a maximum of $30,000.  Any excess warranty
costs  incurred by the purchaser  will be billed to us at an agreed upon rate. A
disposal  loss,  including  an  estimate  of  the  operating  results  from  the
measurement date,  November 2, 1999 to the closing date of the sale of $580,000,
and  estimates  for  impairment  of assets  caused by the  disposal  decision of
$558,000,  totaling  $1,138,000  (net of an income tax saving of  $586,000)  was
recognized.  Our loss from discontinued operations (net of income tax savings of
$167,000,  $159,000 and $505,000)  was $323,000,  $310,000 and $981,000 in 1999,
1998 and 1997, respectively. We will retain accounts receivable of $1.4 million,
net of reserves,  fixed assets of $30,000 and liabilities related to the Telecom
division.  Fixed assets are being redeployed in the continuing  operations.  The
accounts  receivable  will be collected  in the ordinary  course of business and
these  amounts will be used to repay all  remaining  liabilities  of the Telecom
division.  Any  excess  cash will be used to repay  our line of credit  and fund
general corporate purposes.

     Our  continuing  operations  are  reported  as  three  segments  and are IT
Services,  CTI  Software  and Computer  Products.  Telecom  Systems was reported
previously as a segment,  accordingly,  Telecom  Systems has been presented as a
discontinued operation for all information presented.  The Computer Products and
IT  Services  business  units  were  previously  combined  and  reported  as the
Information  Technology segment during past reporting periods. On March 16, 2000
Allstar  entered into an  agreement  to sell  certain  assets of and the ongoing
operations of its Computer Products  division.  The sale is expected to close on
or before  May 31,  2000  after  shareholder  and other  required  consents  are
obtained.


<PAGE>

     The  gross  margin  varies  substantially  between  each of these  business
segments.  Over the past three years the gross  margin in IT Services has ranged
between  39.3% and 29.5%;  the gross margin for CTI Software has ranged  between
43.0% to 50.8% and the gross margin in Computer Products has ranged between 8.9%
and 10.5%. IT Services,  CTI Software and Computer Products  accounted for 7.4%,
2.1% and 90.5% of total revenues, respectively, during 1999.

     In order to reduce  freight costs and selling,  general and  administrative
expenses associated with product handling, we drop ship orders directly from our
suppliers to our customers where possible.  Drop shipped orders (measured as the
cost of goods drop  shipped as a  percentage  of total cost of goods  sold) were
31.9 % in 1998 and 44.4 % in 1999.  While we have not believed that it is in our
best interest to drop ship all orders,  we have attempted to increase the volume
of drop shipments with the expectation of reducing our freight, distribution and
administrative costs related to these revenues.

     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 our 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.

     Manufacturers  of many of the computer  products resold by the company have
consistently  reduced unit prices near the end of a product's  life cycle,  most
frequently following the introduction of newer, more advanced models. While some
manufacturers  of  products  sold by us offer  to  price-protect  the  inventory
carried by us for a certain  length of time  following  a price  decrease by the
manufacturer,  recently many  manufacturers have moved to more restrictive price
protection  policies or have largely eliminated price protection.  Additionally,
manufacturers have developed  specialized marketing programs designed to improve
or protect the  manufacturer's  market share.  These  programs often involve the
granting of rebates to  resellers  to  subsidize  sales of computer  products at
reduced  prices.  While these  programs  generally  enhance  revenues  they also
generally  result in lower  margins  being  realized  by the  reseller.  We have
participated  in an increasing  number of these programs in recent years.  Based
upon recent trends, we believe that the number and amount of these programs will
increase.

     Inacom  Corp.  ("Inacom")  has  historically  been the largest  supplier of
products we sell,  but purchases from Inacom have declined  recently.  Purchases
from Inacom  accounted for  approximately  51.4%,  33.2%, and 17.7% of our total
product  purchases  in 1997,  1998 and 1999,  respectively.  We have a long-term
supply  arrangement  with Inacom under which we have agreed to purchase at least
80% of our products from Inacom,  but only to the extent that such products were
available  through Inacom and made available within a reasonable  period of time
at reasonably  competitive pricing.  Inacom does not carry certain product lines
that we sell and Inacom may be unable to offer reasonable  product  availability
with reasonably  competitive  pricing on those product lines that it does carry.
We expect  prospectively  that less than 80% of our total purchases,  as in past
years, will be made from Inacom.

<PAGE>

Results of Operations

     The  following  table  sets  forth,  for  the  periods  indicated,  certain
financial  data derived  from our  consolidated  statements  of  operations  and
indicates the percentage of total revenue for each item.

<TABLE>
<CAPTION>
                                                     Year ended December 31,

<S>                                           <C>              <C>              <C>
                                              1997             1998             1999
                                          Amount    %      Amount    %      Amount    %
                                                       (Dollars in thousands)
Revenue
  IT Services                           $ 10,240   8.3%  $ 13,183   8.3%  $ 14,857   7.4%
  CTI Software                             2,145   1.7      3,095   1.9      4,318   2.1
  Computer Products                      111,379  90.0    143,396  89.8    182,642  90.5
                                         ------- -----    ------- -----    ------- -----
    Total                                123,764 100.0    159,674 100.0    201,817 100.0
Gross profit
  IT Services                              4,029  39.3      4,208  31.9      4,385  29.5
  CTI Software                               922  43.0      1,492  48.2      2,192  50.8
  Computer Products                       11,678  10.5     14,108   9.8     16,214   8.9
                                         ------- -----    ------- -----    ------- -----
    Total                                 16,629  13.4     19,808  12.4     22,791  11.3
Selling, general and
  administrative expenses
  IT Services                              4,005  39.1      5,238  39.7      4,711  31.7
  CTI Software                             1,096  51.1      1,873  60.5      1,960  45.4
  Computer Products                        7,426   6.7     13,548   9.4     13,512   7.4
                                         ------- -----    ------- -----    ------- -----
    Total                                 12,527  10.1     20,659  12.9     20,183  10.0
Operating income (loss)
  IT Services                                 24   0.2     (1,030) (7.8)      (326) (2.2)
  CTI Software                              (174) (8.1)      (381)(12.3)       232   5.4
  Computer Products                        4,252   3.8        560   0.4      2,702   1.5
                                         ------- -----    ------- -----    ------- -----
    Total                                  4,102   3.3       (851) (0.5)     2,608   1.3
Interest expense (net of other income)       642   0.5        319   0.2        648   0.3
                                         ------- -----    ------- -----    ------- -----
Income (loss from continuing
  operations before provision              3,460   2.8     (1,170) (0.7)     1,960   1.0
Provision (benefit) for income taxes       1,293   1.0       (382) (0.2)       686  (0.3)
                                         ------- -----    ------- -----    ------- -----
Net income (loss) from continuing
  operations                               2,167   1.8       (788)  0.5      1,274   0.7

Discontinued operations:
Income (loss) from discontinued
  operations, net of taxes                  (323  (0.3)      (310) (0.2)      (981) (0.5)
Loss on disposal, net of taxes                                              (1,138) (0.6)
                                         ------- -----   -------- -----    ------- -----
Net income                              $  1,844   1.5%  $ (1,098) (0.7)% $   (845)  0.4%
                                         ======= =====    ======= =====    ======= =====

<FN>

(1)  Percentages  shown in the table  above  are  percentages  of total  company
     revenue,  except  for each  individual  segment's  gross  profit,  selling,
     general  and  administrative  expenses,  and  operating  income,  which are
     percentages of the respective segment's revenue.
</FN>
</TABLE>

<PAGE>

Year Ended  December  31,  1999  Compared  to the Year Ended  December  31, 1998
(Dollars in thousands)

     Revenue.  Total revenue  increased $42,143 (26.4%) to $201,817 in 1999 from
$159,674 in 1998.

     Total 1999 IT  Services  revenue  which  comprised  7.4% of total  revenues
compared  to 8.3% in 1998,  increased  $1,674  (12.7%)  to  $14,857 in 1999 from
$13,183 in 1998. The increase in revenue is  attributable to growth in our newer
offices and increased sales to existing customers and to new customers.

     Revenue from CTI Software,  which  comprised 2.1% of total revenue in 1999,
compared to 1.9% in 1998, increased $1,223 (39.5%) to $4,318 in 1999 from $3,095
in 1998.  The increased  revenues from CTI Software were primarily the result of
sales to new customers and the expansion of geographic market.

     Revenue from Computer  Products,  which comprised 90.5% of total revenue in
1999 compared to 89.8% in 1998,  increased  $39,246  (27.4%) to $182,642 in 1999
from $143,396 in 1998. The increase in Computer  Products  revenue was generally
attributable  to  increased  sales of products  and services to new and existing
customers  and to sales  generated in our newer branch  offices.  Of the $39,246
increase in Computer Products  revenue,  $25,396 (64.7%) resulted from increased
sales in our more established  offices in Houston and Dallas and $13,850 (35.3%)
resulted from sales in our newer offices opened since mid-1997.  The increase of
$25,396  from  the  older,  more  established  offices  in  Houston  and  Dallas
represented  an increase of 20.3% to $150,624 in 1999 from $125,228 in 1998. The
increase of $13,850 from our newer  branch  offices  represented  an increase of
76.2% to $32,018 in 1999 from $18,168 in 1998.

     Gross Profit. Gross profit increased $2,983 (15.1%) to $22,791 in 1999 from
$19,808 in 1998,  while gross  margin  decreased  to 11.3% in 1999 from 12.4% in
1998.

     IT  Services  gross  profit  increased  by $177  (4.2%)  to  $4,385 in 1999
compared to $4,208 in 1998.  Gross  margin  rates for IT Services  were 29.5% in
1999 as compared to 31.9% in 1998. The increase in gross profit is  commensurate
with the increase in revenues as discussed above.

     The gross  profit for CTI  Software  increased by $700 (46.9%) to $2,192 in
1999 from $1,492 in 1998. Gross margin rates for CTI Software were 50.8% in 1999
as compared to 48.2% in 1998. This increase was due primarily to higher revenues
coupled with lower system  installation costs,  relative to revenue,  reflecting
improved  productivity and efficiency due to improved software  installation and
customization tools introduced in 1998.

     Gross  profit and gross  margin in 1998 were  affected  by asset  valuation
markdowns of $2,040 in our  Computer  Products  segment  related to reducing the
carrying  value  of  that  segment's   inventory  and  certain  vendor  accounts
receivables.  In 1999 we sold at auction some of the inventory  which had become
aged.  In  addition,  we continued to  experience  downward  pressure on product
selling  prices  from our  customers.  The gross  margin for  Computer  Products
decreased  to 8.9% in 1999  from  9.8% in 1998,  reflecting  the  effect  of the
aforementioned  auctions,  the downward pressures on pricing,  excessive freight
costs  not  passed  on  to  customers  and  of  write-offs  of  vendor  accounts
receivable.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative expenses decreased $476 (2.3%) to $20,183 in 1999 from $20,659 in
1998.  As a percentage of total  revenue,  selling,  general and  administrative
expenses  for  continuing  operations  decreased  to 10.0% in 1999 from 12.9% in
1998.


<PAGE>

     The dollar decrease of approximately $476 was attributable to a decrease in
Delaware franchise tax of $152 (26.4%)  attributable to the restructuring of the
authorized stock in 1998 and to reduced property taxes primarily  resulting from
both  appealing the property  taxes for the Houston office and to the closing of
some of the branch  offices  opened in 1998.  Additionally  employee  recruiting
expenses  were reduced by $112 and general  office  expenses  decreased by $137,
primarily  due to the closing of  unprofitable  offices,  downsizing  of certain
branch offices and the reduction of certain expense structures. Additionally, we
realigned certain operations to eliminate  redundancies and improve  efficiency.
Contract labor costs decreased by $429 (60.4%) due to the conversion to employee
status and promotional and advertising expenses were decreased by $452 (221.5%),
primarily due to increased  vendor co-op funds  received in 1999.  These savings
were offset by an increase in sales  commissions of $294 (5.6%)  attributable to
the  increased  sales  volume,  and by and  increase in bad debt expense of $326
(127.9%).

     IT Services' selling, general and administrative expenses decreased $527
(10.1%)  to $4,711  in 1999 from  $5,238  in 1998.  For CTI  Software,  selling,
general and  administrative  expenses increased $87 (4.6%) to $1,960 from $1,873
in 1998.  Selling,  general and  administrative  expenses  in Computer  Products
decreased $36 (0.3%) to $13,512 in 1999 compared to $13,548 in 1998.

     Operating  Income (loss).  Operating  income  increased  $3,459 (406.5%) to
operating  income of $2,608 in 1999 from a loss of $851 in 1998 due primarily to
the  increase  in sales  volume of  $42,143.  Operating  income for IT  Services
increased  $704  (68.3%) to an  operating  loss of $326 in 1999  compared  to an
operating  loss of  $1,030  in 1998.  For CTI  Software,  the  operating  income
increased $613 (160.9%) to income of $232 in 1999 from an operating loss of $381
in 1998.  Computer  Products'  operating  income  increased  $2,142  (382.5%) to
operating income of $2,702 in 1999 from $560 in 1998.

     Interest  Expense  (Net of Other  Income).  Interest  expense (net of other
income)  increased  $329  (103.1%)  to $648 in 1999  compared  to $319 in  1998.
Interest  expense was lower in 1998 due to the  reduction  of  outstanding  debt
resulting  from the 1997 stock  offering  proceeds  applied to the  reduction of
debt. Additionally, increased sales volume in 1999 resulting in higher inventory
purchases and accounts  receivable levels contributed to higher interest expense
in 1999.

     Net Income (Loss) from continuing operations. Net income (loss) from
continuing  operations,  after an income tax provision totaling $686 (reflecting
an  effective  tax rate of 35.0% for 1999  compared  to 32.6% for 1998),  became
income of $1,274 in 1999 compared to a loss of $788 in 1998.

     Discontinued operations. On November 2, 1999 we approved a plan to sell
or close our Telecom Systems division.  A sale of certain assets of the division
and its ongoing  operations  closed on March 16, 2000. As a consequence of these
events,   the  operations  of  Telecom  Systems  are  reported  as  discontinued
operations.  The company experienced a net loss on the operations of the Telecom
Division of $981 in 1999, net of a tax benefit of $505 and a loss on disposal of
$1,138,  net of a tax benefit of $586.  The loss on  discontinued  operations in
1998 was $ 310, net of taxes of $159.

<PAGE>

Year Ended  December  31,  1998  Compared  to the Year Ended  December  31, 1997
(Dollars in thousands)

     Revenue.  Total revenue  increased $35,910 (29.0%) to $159,674 in 1998 from
$123,764 in 1997.

     Total 1998 IT Services  revenue  consisted of $13,183 (8.3%) as compared to
$10,240 (8.3%) , in 1997.


<PAGE>

     Revenue from CTI Software,  which  comprised 1.9% of total revenue in 1998,
compared to 1.7% in 1997,  increased  $950 (44.3%) to $3,095 in 1998 from $2,145
in 1997.  The increased  revenues from CTI Software were primarily the result of
sales to new customers,  the introduction of a new call center software product,
the addition of several new resellers for their products and the  integration of
products with several third-party software products.

     Revenue from Computer  Products,  which comprised 89.8% of total revenue in
1998 compared to 90.0% in 1997,  increased  $32,017  (28.7%) to $143,396 in 1998
from $111,379 in 1997. The increase in Computer  Products  revenue was generally
attributable  to  increased  sales of products  and services to new and existing
customers  and to sales  generated in our newer branch  offices.  Of the $32,017
increase in Computer Product's revenue,  $15,898 (49.7%) resulted from increased
sales in our more established  offices in Houston and Dallas and $16,119 (50.3%)
resulted from sales in our newer offices opened since mid-1997.  The increase of
$15,898  from  the  older,  more  established  offices  in  Houston  and  Dallas
represented  an increase of 14.6% to $124,851 in 1998 from $108,953 in 1997. The
increase of $16,119 from our newer  branch  offices  represented  an increase of
785.9% to $18,170 in 1998 from $2,051 in 1997.

     Gross Profit. Gross profit increased $3,174 (19.1%) to $19,808 in 1998 from
$16,629 in 1997,  while gross  margin  decreased  to 12.4% in 1998 from 13.4% in
1997.  Gross profit and gross margin were affected by asset valuation  markdowns
of $2,040 in our  Computer  Products  division  related to reducing the carrying
value of that segment's  inventory and certain vendor accounts  receivables.  We
decided that the  mark-downs  in inventory  value were  necessary  based upon an
analysis of the impact of supplier's  changes in product  return  privileges and
price protection policies made available by product manufacturers and suppliers.
The markdowns  related to reducing the carrying value of certain vendor accounts
receivables  were due to our inability to collect  certain  accounts  related to
special promotional funds owed to us from certain of our suppliers.

     Gross profit for IT Services  increased  $179 to $4,208 in 1998 from $4,029
in 1997  while  gross  margins  decreased  in 1998 to 31.9%  from  39.3% in 1997
reflecting pricing pressures.

     The gross  profit for CTI  Software  increased  $570 to $1,492 in 1998 from
$922 in 1997 while gross margins  increased to 48.2% in 1998 from 43.0% in 1997.
This increase was due primarily to lower system installation costs,  relative to
revenue,  reflecting  improved  productivity  and  efficiency  due  to  improved
software installation and customization tools introduced in 1998.

     The gross profit for Computer Products decreased to 9.8% in 1998 from 10.5%
in 1997, reflecting the effect of the aforementioned asset valuation markdowns

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative expenses increased $8,132 (64.9%) to $20,659 in 1998 from $12,527
in 1997. As a percentage of total revenue,  selling,  general and administrative
expenses increased to 12.9% in 1998 from 10.1% in 1997.

     The dollar increase of approximately  $3,200 was attributable to a 60.7% in
sales  personnel  compensation  due to our  efforts to expand  our sales  force,
particularly in the newer branch offices,  and to increased  commissions paid to
sales  staff  resulting  from  increases  in revenue;  approximately  $2,500 was
attributable  to a 59.5% increase in compensation  to  administrative  personnel
primarily  related  to  the  opening  of  additional   offices;   and  $840  was
attributable  to a 79.3%  increase in rent,  utilities  and  telephone  expenses
primarily  related to operating  eight  physical  branch  offices and a regional
distribution  facility  at the end of the 1998  period  compared  to only  three
branch  offices at the end of 1997.  Other costs were  generally  higher in 1998
compared to 1997 due to opening and operating the additional  branch offices and
the distribution center and due to increased levels of business activity.


<PAGE>

     Selling, general and administrative expenses in IT Services increased
$1,233  (30.8%) to $5,238 in 1998 compared to $4,005 in 1997.  For CTI Software,
selling,  general and  administrative  expenses increased $777 (70.9%) to $1,873
from $1,096 in 1997. For Computer products,  selling, general and administrative
expenses increased $6,122 (82.4%) to $13,548 from $7,426.

     Operating  Income (loss).  Operating  income  decreased $4,953 to a loss of
$851 in 1998 from a profit of $4,102 in 1997 due  primarily  to the  increase in
selling,   general   and   administrative   expenses   and  the  effect  of  the
aforementioned  asset  valuation  markdowns.  Operating  income  in IT  Services
decreased  $1,054 to a loss of $1,030  in 1998 from  operating  income of $24 in
1997.  For CTI Software,  the operating  loss increased $207 (119.0%) to $381 in
1998 from $174 in 1997. For Computer  Products,  the operating  income decreased
$3,692 (86.8%) to $560 in 1998 from $4,252 in 1997.

     Interest  Expense  (Net of Other  Income).  Interest  expense (net of other
income)  decreased  $323  (50.3%)  to  $319 in 1998  compared  to $642 in  1997.
Interest  expense  decreased in 1998 due to the  reduction of  outstanding  debt
resulting  from the 1997 stock  offering  proceeds  applied to the  reduction of
debt.

     Net Income  (Loss)  From  Continuing  Operations.  Net income  (loss)  from
continuing operations,  after an income tax benefit totaling $382 (reflecting an
effective tax rate of 32.6% for 1998 compared to 37.4% for 1997),  became a loss
of $788 in 1998 compared to a profit of $2,167 in 1997.

     Discontinued  Operations.  The loss on discontinued  operations was $310 in
1998, net of taxes of $159, as compared to $323 in 1997, net of taxes of $167.

<PAGE>

Quarterly Results of Operations

     The  following  table  sets forth  certain  unaudited  quarterly  financial
information  for  each  of our  last  eight  quarters  and,  in the  opinion  of
management,  includes  all  adjustments  (consisting  of only  normal  recurring
adjustments)  which the company  considers  necessary for a fair presentation of
the information set forth therein.  Our quarterly results may vary significantly
depending on factors such as the timing of large customer orders,  timing of new
product  introductions,  adequacy of product  supply,  variations in our product
costs,  variations  in our product  mix,  promotions,  seasonal  influences  and
competitive  pricing  pressures.  Furthermore,  we generally have  experienced a
higher volume of product orders in our computer products business segment in the
fourth quarter,  which we attribute to year-end  capital spending by some of our
customers.  Any decrease in the number of year-end  orders we experience may not
be offset by increased revenues in our first three quarters.  The results of any
particular  quarter  may not be  indicative  of results for the full year or any
future period.
<TABLE>

<CAPTION>
                                                    1998                                          1999
                                    -------------------------------------        --------------------------------------
<S>                                   <C>       <C>       <C>       <C>             <C>       <C>       <C>       <C>
                                     First    Second     Third    Fourth           First    Second     Third    Fourth
                                    Quarter   Quarter   Quarter   Quarter         Quarter   Quarter   Quarter   Quarter
Revenue
    IT Services                   $  2,892  $  3,062  $  3,533  $  3,696        $  3,548  $  3,691  $  3,591  $  4,027
    CTI Software                       826       513       723     1,033             770       825     1,329     1,394
    Computer Products               27,752    34,447    38,217    42,980          42,254    44,611    45,961    49,816
                                   -------   -------   -------   -------         -------   -------   -------   -------
    Total                           31,470    38,022    42,473    47,709          46,572    49,127    50,881    55,237
Cost of sales and services
    IT Services                      1,917     2,025     2,406     2,627           2,531     2,479     2,415     3,047
    CTI Software                       515       278       319       491             331       413       623       759
    Computer Products               24,400    30,556    33,733    40,599          38,419    41,001    41,793    45,215
                                   -------   -------   -------   -------         -------   -------   -------   -------
    Total                           26,832    32,859    36,458    43,717          41,281    43,893    44,831    49,021
Gross Profit
    IT Services                        975     1,037     1,127     1,069           1,017     1,212     1,176       980
    CTI Software                       311       235       404       542             439       412       706       635
    Computer Products                3,352     3,891     4,484     2,381           3,835     3,610     4,168     4,601
                                   -------   -------   -------   -------         -------   -------   -------   -------
    Total                            4,638     5,163     6,015     3,992           5,291     5,234     6,050     6,216
Selling, general and
   administrative expenses
    IT Services                        972     1,212     1,452     1,602           1,136     1,227     1,201     1,147
    CTI Software                       374       450       395       654             497       448       524       491
    Computer Products                2,662     3,219     3,615     4,052           3,459     3,345     3,237     3,471
                                   -------   -------   -------   -------         -------   -------   -------   -------
    Total                            4,008     4,881     5,462     6,308           5,092     5,020     4,962     5,109
Operating income (loss)
    IT Services                          3      (175)     (325)     (533)           (119)      (15)      (25)     (167)
    CTI Software                       (63)     (215)        9      (112)            (58)      (36)      182       144
    Computer Products                  690       672       869    (1,671)            376       265       931     1,130
                                   -------   -------   -------   -------         -------   -------   -------   -------
    Total                              630       282       553    (2,316)            199       214     1,088     1,107
Interest expense (net of
    other income)                       21        44        88       166             222       183       169        74
                                   -------   -------   -------   -------         -------   -------   -------   -------
Income (loss) before
    provision (benefit) for
    income taxes                       609       238       465    (2,482)            (23)       31       919     1,033
Provision (benefit) for
    income taxes                       219        98       166      (865)              1        25       306       354
                                   -------   -------   -------   -------         -------   -------   -------   -------
Net income (loss) from
    continuing operations              390       140       299    (1,617)            (24)        6       613       679
Discontinued operations:
    Net income (loss) from
    discontinued operations,
    net of tax                        (266)      130      (212)       38             (30)     (376)     (281)     (294)
    Loss on disposal                                                                                            (1,138)
                                   -------   -------   -------   -------         -------   -------   -------   -------
Net income (loss)                 $    124  $    270  $     87  $ (1,579)       $    (54) $   (370) $    332  $   (753)
                                   =======   =======   =======   =======         =======   =======   =======   =======
Net Income (loss) per share:
    Basic:
    Continuing  Operations        $   0.09  $   0.03  $   0.07  $  (0.38)       $  (0.01) $   0.01  $   0.15  $   0.16
      Discontinued Operations        (0.06)     0.03     (0.05)     0.01           (0.01)    (0.09)    (0.07)    (0.07)
      Loss on Disposal                                                                                           (0.27)
                                   -------   -------   -------   -------         -------   -------   -------   -------
Net income (loss) per share       $   0.03  $   0.06  $   0.02  $  (0.37)       $  (0.02) $  (0.08) $   0.08  $  (0.18)
                                   =======   =======   =======   =======         =======   =======   =======   =======
    Diluted:
      Continuing  Operations      $   0.09  $   0.03  $   0.07  $  (0.38)        $ (0.01) $   0.01  $   0.14  $   0.16
      Discontinued Operations        (0.06)     0.03     (0.05)     0.01           (0.01)    (0.09)    (0.06)    (0.07)
      Loss on Disposal                                                                                           (0.27)
                                   -------   -------   -------   -------         -------   -------   -------   -------
Net income (loss) per share       $   0.03  $   0.06  $   0.02  $  (0.37)        $ (0.02) $  (0.08) $   0.08  $  (0.18)
                                   =======   =======   =======   =======         =======   =======   =======   =======
</TABLE>
<PAGE>

Liquidity and Capital Resources

     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 our immediate needs we request an
advance  under our credit  facility.  As our total  revenue  has grown,  we have
obtained  increases in our available lines of credit to enable us to finance our
growth. Our working capital was $12,738, $9,800 and $9,567 at December 31, 1997,
1998 and 1999,  respectively.  The decreases in working  capital during 1999 and
1998 were  primarily  attributable  to increases  in our  accounts  payable as a
result of product costs attributable to our revenue growth. At December 31, 1999
we had outstanding  borrowings of $30,129. Our total collateral base was $30,462
at December 31, 1999,  of which $1,952 is available to borrow from our secondary
lenders and $1,620 is payable to the primary  lender.  Such amount was paid from
existing  cash  balances in January 2000. At December 31, 1999, we had a $30,000
credit facility with our primary lender.  As of December 31, 1999, we were fully
borrowed  against  our  available  borrowing  based due to the  higher  level of
business during the fourth quarter.

Cash Flows

     Operating  activities  provided net cash totaling  $2,086 and $2,612 during
1997 and 1999,  respectively,  and used net cash totaling  $10,831  during 1998.
During 1997, net cash was provided from  operations due primarily to net income,
increased  levels of trade accounts payable and accrued expenses which more than
offset  increases  in accounts  receivable.  During  1998,  net cash was used by
operations due primarily to a net loss, a large increase in accounts  receivable
and an  increase  in  inventory,  which was offset  somewhat  by an  increase in
accounts  payable  and  accrued  expenses.  During  1999  net cash  provided  by
operations resulted from increases in accounts payable which offset our increase
in accounts receivable.

     Accounts receivable  increased $8,999,  $9,377 and $3,138 during 1997, 1998
and  1999,  respectively.  Inventory  decreased  $162 and $516 in 1997 and 1999,
respectively, and increased $3,797 in 1998.

     Investing  activities used cash totaling $992, $1,764 and $276 during 1997,
1998 and 1999,  respectively.  Our  investing  activities  that used cash during
these  periods were  primarily  related to capital  expenditures  related to new
offices,  an expanded  work force and  upgrading of computing  equipment and our
management information systems.  During the next twelve months, we do not expect
to incur material capital expenditures.

     Financing  activities  provided cash totaling  $258,  $13,552 and used cash
totaling $227 during 1997,1998 and 1999, respectively. In July 1997, we received
$8,661 net proceeds  from the sale of Common Stock in a public  offering.  Those
proceeds were used to reduce the  outstanding  balance under our line of credit.
The primary source of cash from  financing  activities in other periods has been
borrowings  on our  lines  of  credit.  The  lines  of  credit  have  been  used
principally to satisfy our cash requirements,  including  financing increases in
accounts  receivable and inventory.  During 1998 and 1999 we used $834 and $138,
respectively to repurchase shares that were held in treasury at the end of 1999.


<PAGE>

Asset Management

     Our cash flow from operations has been affected  primarily by the timing of
its collection of accounts  receivable.  We have typically sold our products and
services on  short-term  credit  terms and seek to  minimize  our credit risk by
performing  credit checks and  conducting  our own  collection  efforts.  We had
accounts  receivable,  net of  allowance  for  doubtful  accounts of $34,893 and
$37,726 at December 31, 1998 and 1999,  respectively.  The number of days' sales
outstanding  in trade  accounts  receivable was 60 days, 67 days and 66 days for
years 1997, 1998 and 1999, respectively. The increase in days' sales outstanding
in 1998 was caused by a general slow down in payments by our customers. Bad debt
expense as a percentage of total revenue for the same periods was 0.2%, 0.2% and
0.2%  Our  allowance  for  doubtful  accounts,   as  a  percentage  of  accounts
receivable,  was  1.0%,  1.0% and 1.0% at  December  31,  1997,  1998 and  1999,
respectively.

     We attempt  to 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 have
in the past generally  provided price protection,  which reduces our exposure to
decreases in prices, but during 1998 most major product manufacturers reduced or
largely  eliminated  price  protection.  Our suppliers  generally allow for some
levels of returns  of excess  inventory,  which,  on a limited  basis,  are made
without material  restocking fees.  During 1998, our suppliers  generally became
more  restrictive  in  their  policies   regarding  product  return  privileges.
Inventory  turnover for 1997, 1998 and 1999 was 21.5 times, 22.0 times, and 22.5
times, respectively.

Credit Facilities

     On  February  27,  1998 we  executed  agreements  with  Deutsche  Financial
Services  ("DFS") for a revolving line of credit (the "DFS  Facility")  which is
our  principal  source of liquidity.  We have a credit  facility with IBM Credit
Corporation  ("IBMCC")  for the purchase of IBM branded  computer  products (the
"IBMCC 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,  which we use
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 DFS Facility is 7.0%. DFS may change the computation of the
borrowing base and disqualify  accounts receivable upon which advances have been
made and require repayment of such advances to the extent such disqualifications
cause our borrowings to exceed the reduced borrowing base.


<PAGE>

     The DFS Facility is  collateralized by a security interest in substantially
all of our  assets,  including  its  accounts  receivable,  inventory  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 our 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. The DFS 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 us to maintain
a minimum  tangible net worth.  The terms of the  agreement  also  prohibits the
payment of  dividends  and other  similar  expenditures,  including  advances to
related parties.

     The IBMCC  Facility is a $2,000  credit  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 the  invoice 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 and prohibits payment of dividends.  At December 31,
1999,  we had  $30,080 and $48  outstanding  on the DFS  Facility  and the IBMCC
Facility,  respectively.  A payment was made in January  2000 to comply with the
borrowing base limitations under the DFS Facility.

Year 2000 Issue

     The Year 2000 issue is the result of computer  programs using two digits to
define the applicable year.  These programs were designed without  consideration
for the effect of the change in century and if not  corrected  could have failed
or created  erroneous  results at the turn of the century.  Essentially  all the
company's MIS were potentially affected by the Year 2000 issue.

     In order to prepare for the Year 2000 issue we  implemented  the  following
remediation plan for our MIS:

     (1)  Identification  of all  applications  and hardware with potential Year
          2000 issues.
     (2)  For each item  identified,  perform  an  assessment  to  determine  an
          appropriate action plan and timetable for remediation of each item.
     (3)  Implementation of the specific action plan.
     (4)  Test each application upon completion.
     (5)  Place the new process into  production and conduct system  integration
          testing.

We  successfully  implemented the above  remediation  plan for all affected MIS.
Following the arrival of the Year 2000 we experienced  no  significant  problems
with  any of our  systems  as a result  of the Year  2000  issue.  There  was no
interruption  in our ability to transact  business with suppliers and customers.
We  continue  to  monitor  our  systems,   suppliers   and   customers  for  any
unanticipated  issues that may not have been manifested yet. The  implementation
of the remediation plan was entirely funded from operations. We estimate that we
incurred approximately $300 in expenses during 1998 and 1999 related to the Year
2000 issue.


<PAGE>

Accounting Pronouncements

     In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards  ("SFAS") No. 133,  Accounting  for  Derivative
Instruments and Hedging  Activities which  establishes  accounting and reporting
standards for derivative  instruments,  including certain derivative instruments
embedded in other contracts  (collectively referred to as derivatives),  and for
hedging  activities.  SFAS No. 133, as amended by SFAS No. 137, is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. Management is
evaluating what impact, if any, and additional  disclosures may be required when
this statement is adopted.

     In  March  1998,  the  Accounting   Standards  Committee  ("AcSEC")  issued
Statement  of Position  ("SOP") No. 98-1,  Accounting  for the Costs of Computer
Software  Developed  or Obtained  for  Internal  Use.  This  Statement  provides
guidance on accounting for costs of computer software  developed or obtained for
internal  use.  SOP No.  98-1 is  effective  for fiscal  years  beginning  after
December  15,  1998.  In April 1998,  SOP N0.  98-5,  Reporting  on the Costs of
Start-Up  Activities,  was issued by AcSEC. This Statement  provides guidance on
determining what constitutes a start-up  activity and requires that the costs of
these start-up activities be expensed as incurred. We have implemented these two
Statements in the year ending December 31, 1999.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

     We incur certain market risks related to interest rate  variations  because
we hold floating rate debt.  Based upon the average  amount of debt  outstanding
during 1999,  a  one-percent  increase in interest  rates paid by us on our debt
would have resulted in an increase in interest expense of approximately $135 for
the year.

<PAGE>

Item 8.  Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements:

     Independent Auditors' Report                                             26

     Consolidated Balance Sheets at December 31, 1998 and 1999                27

     Consolidated   Statements  of  Operations  for  the  years  ended
     December 31, 1997, 1998 and 1999                                         28

     Consolidated  Statements  of  Stockholders'  Equity for the years
     ended December 31, 1997, 1998 and 1999                                   29

     Consolidated  Statements  of  Cash  Flows  for  the  years  ended
     December 31, 1997, 1998 and 1999                                         30

     Notes to  Consolidated  Financial  Statements for the years ended
     December 31, 1997, 1998 and 1999                                         31



<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Stockholders of Allstar Systems, Inc.:

     We have audited the  accompanying  consolidated  balance  sheets of Allstar
Systems, Inc. and subsidiaries ("Allstar") as of December 31, 1998 and 1999, and
the related  statements of operations,  stockholders'  equity and cash flows for
each of the three years in the period ended  December 31, 1999.  Our audits also
included the financial  statement schedule listed in the index at Item 14(a)(2).
These   financial   statements   and  financial   statement   schedule  are  the
responsibility  of Allstar's  management.  Our  responsibility  is to express an
opinion on these financial  statements and financial statement schedule based on
our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion,  such consolidated  financial statements present fairly, in
all material  respects,  the financial  position of Allstar at December 31, 1998
and 1999,  and the results of its  operations and its cash flows for each of the
three years in the period ended  December 31, 1999 in conformity  with generally
accepted accounting  principles.  Also, in our opinion, such financial statement
schedule,  when  considered  in  relation  to the basic  consolidated  financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set forth therein.



/s/  Deloitte & Touche LLP
Houston, Texas
March 17, 2000


<PAGE>

ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1999
(In thousands, except share and par value amounts)

ASSETS                                                   1998            1999

Current Assets:
     Cash and cash equivalents                      $    2,538      $    4,647
     Accounts receivable, net                           34,893          37,726
     Accounts receivable - affiliates                      373             423
     Inventory                                           8,497           7,442
     Deferred taxes                                        431             836
     Income taxes receivable                               637
     Other current assets                                  559             384
                                                     ---------       ---------
              Total current assets                      47,928          51,458
Property and equipment, net                              2,902           2,280
Other assets                                               198             178
                                                     ---------       ---------
                                                    $   51,028      $   53,916
                                                     =========       =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
     Notes payable                                  $   15,958      $   15,869
     Accounts payable                                   16,641          21,687
     Accrued expenses                                    5,273           3,896
     Net liabilities related to
       discontinued operations                                             199
     Deferred service revenue                              256             240
                                                     ---------       ---------
              Total current liabilities                 38,128          41,891
Deferred credit - stock warrants                           195             195

Commitments and Contingencies (See Note 11)

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,
              4,503,411 and
              4,442,325 issued at December 31,
              1998 and 1999, respectively                   45              44
     Additional paid in capital                         10,196          10,037
       Unearned equity compensation                       (269)             (1)
       Treasury stock, at cost,
       271,200 and 381,800 shares at                      (834)           (972)
       December 31, 1998 and 1999, respectively
     Retained earnings                                   3,567           2,722
                                                     ---------       ---------
              Total stockholders' equity                12,705          11,830
                                                     ---------       ---------
                                                    $   51,028      $   53,916
                                                     =========       =========
See notes to consolidated financial statements.


<PAGE>

<TABLE>
<CAPTION>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(In thousands, except share and per share amounts)
                                                                        Years ended December 31
                                                        ----------------------------------------------
                                                              1997            1998            1999

<S>                                                          <C>             <C>             <C>
Total revenue                                           $     123,764   $     159,674   $     201,817

Cost of goods and services                                    107,135         139,866         179,026
                                                         ------------    ------------    ------------

          Gross profit                                         16,629          19,808          22,791

Selling, general and administrative expenses                   12,527          20,659          20,183
                                                         ------------    ------------    ------------

Operating income (loss)                                         4,102            (851)          2,608

Interest expense (net of other income)                            642             319             648
                                                         ------------    ------------    ------------
Income (loss) from continuing operations before
     provision (benefit) for income taxes                       3,460          (1,170)          1,960

Provision (benefit) for income taxes                            1,293            (382)            686
                                                         ------------    ------------    ------------

Net income (loss) from continuing operations                    2,167            (788)          1,274

Discontinued operations:
     Net loss from discontinued operations, net of taxes         (323)           (310)           (981)
     Loss on disposal, net of taxes                                                            (1,138)
                                                         ------------    ------------    ------------

Net income (loss)                                       $       1,844   $      (1,098)  $        (845)
                                                         ============    ============    ============
Net income (loss) per share:

     Basic:
         Net income (loss) from continuing operations   $        0.62   $       (0.18)  $        0.31
         Net loss from discontinued operations                  (0.10)          (0.07)          (0.24)
         Loss on disposal                                                                       (0.27)
                                                         ------------    ------------    ------------
              Net loss per share                        $       (0.52)  $       (0.25)  $       (0.20)
                                                         ============    ============    ============

     Diluted:
         Net income (loss) from continuing operations   $        0.61   $       (0.18)  $        0.30
         Discontinued operations                                (0.09)          (0.07)          (0.23)
         Loss on disposal                                                                       (0.27)
                                                         ------------    ------------    ------------
              Net loss per share                        $       (0.52)  $       (0.25)  $       (0.20)
                                                         ============    ============    ============

Weighted average number of shares outstanding:
     Basic                                                  3,519,821       4,345,883       4,168,140
                                                         ============    ============    ============
     Diluted                                                3,526,787       4,345,883       4,226,911
                                                         ============    ============    ============
<FN>
See motes to consolidated financial statements
</FN>
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(In thousands, except share and per share amounts)


                                 $.01 par value           Additional                Unearned
                                   Common Stock            Paid-In     Treasury      Equity      Retained
                                   Shares      Amount      Capital       Stock    Compensation   Earnings     Total

<S>                                 <C>         <C>           <C>        <C>          <C>          <C>         <C>
Balance at January 1, 1997       2,675,000  $    27      $   1,479                              $   2,821   $  4,327

Sale of common stock, net of
   initial public offering
   expenses of $2,040
    on conversion                1,765,125       18          8,448                                             8,466

Issuance of restricted stock        14,286       86                               $     (86)

Net income                                                                                          1,844      1,844
                                ----------   ------      ---------     -------     --------      --------    -------

Balance at December 31, 1997     4,454,411       45         10,013                      (86)        4,665     14,637

Issuance of restricted stock        63,500                     237                     (237)

Cancellation of restricted stock   (14,500)                    (54)                      54

Purchase of treasury stock        (271,200)                           $   (834)                                 (834)

Net loss                                                                                           (1,098)    (1,098)
                                ----------   ------      ---------     --------    --------      --------    -------

Balance at December 31, 1998     4,232,211       45         10,196        (834)        (269)        3,567     12,705

Cancellation of restricted stock   (61,086)      (1)          (159)                     268                      108

Purchase of treasury stock        (110,600)                               (138)                                 (138)

Net loss                                                                                             (845)      (845)
                                ----------   ------      ---------     -------     --------      --------    -------

Balance at December 31, 1999     4,060,525  $    44     $   10,037    $   (972)   $      (1)    $   2,722   $ 11,830
                                ==========   ======      =========     =======     ========      ========    =======
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>


<PAGE>

<TABLE>
<CAPTION>
ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
 (In thousands, except share and per share amounts)

                                                                        Years ended December 31
                                                             ----------------------------------------------
                                                                   1997            1998            1999
<S>                                                                <C>              <C>            <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss) from continuing operations                 $       2,167   $        (788)  $       1,274
     Adjustments to reconcile net income (loss) to net
         cash provided by (used in) operating activities:
     Gain on disposal of assets                                                         (7)
     Depreciation and amortization                                     623             882             840
     Deferred tax provision                                            138            (219)
     Changes in assets and liabilities that provided (used) cash:
            Accounts receivable, net                                (8,999)         (9,377)         (3,138)
         Accounts receivable - affiliates                             (294)             61             (50)
         Inventory                                                     162          (3,797)            516
         Income taxes receivable                                                      (637)            637
         Other current assets                                         (144)           (241)            175
         Other assets                                                  311            (117)            (30)
         Accounts payable                                            7,817           2,079           5,046
         Accrued expenses                                              806           1,708            (523)
         Income taxes payable                                         (124)            (82)
         Deferred service revenue                                      (54)             14             (16)
                                                              ------------    ------------    ------------
              Net cash provided by (used in) operating activities    2,409         (10,521)          4,731
     Net operating activities from discontinued operations            (323)           (310)         (2,119)
                                                              ------------    ------------    ------------
              Net cash provided by (used in) operating activities    2,086         (10,831)          2,612
                                                              ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Capital expenditures                                             (992)         (1,774)           (276)
     Proceeds from sale of fixed assets                                                 10
                                                              ------------    ------------    ------------
              Net cash used in investing activities                   (992)         (1,764)           (276)
                                                              ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Purchase of treasury stock                                                       (834)           (138)
     Net proceeds on sale of common stock                            8,661
     Net increase (decrease) in notes payable                       (8,403)         14,386             (89)
                                                              ------------    ------------    ------------
              Net cash provided by (used in) financing activities      258          13,552            (227)
                                                              ------------    ------------    ------------

NET INCREASE CASH AND CASH EQUIVALENTS                               1,352             957           2,109

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                       229           1,581           2,538
                                                              ------------    ------------    ------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                   $       1,581   $       2,538   $       4,647
                                                              ============    ============    ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
     Cash paid for interest                                  $         958   $         403   $         989
                                                              ============    ============    ============
     Cash paid for income taxes                              $       1,032   $         397   $
                                                              ============    ============    ============
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>

<PAGE>

ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
 (In thousands, except share and per share amounts)


1.   DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Allstar Systems,  Inc. and subsidiaries  ("Allstar") is engaged in the sale
and service of computer and telecommunications hardware and software products in
the United States. 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
which underlie the credit  arrangements  which are used for working capital (see
Note 6).

     Allstar's significant accounting policies are as follows:

     Principles  of  Consolidation  - The  accompanying  consolidated  financial
statements  include the accounts of Allstar  Systems,  Inc. and its wholly-owned
subsidiaries.  All significant  intercompany balances and transactions have been
eliminated.

     Inventory  -  Inventory   consists  primarily  of  personal  computers  and
components and is valued at the lower of cost or market with cost  determined on
the first-in first-out method.

     Property  and  Equipment - Property  and  equipment  are  recorded at cost.
Expenditures  for repairs and  maintenance are charged to expense when incurred,
while  expenditures  for betterments are  capitalized.  Disposals are removed at
cost less accumulated  depreciation with the resulting gain or loss reflected in
operations in the year of disposal.

     Property and equipment are depreciated  over their  estimated  useful lives
ranging  from five to ten years  using the  straight-line  method.  Depreciation
expense  totaled $620, $833 and $790 for the years ended December 31, 1997, 1998
and 1999, respectively.

     Impairment  of Long-Lived  Assets - Allstar  records  impairment  losses on
long-lived assets used in operations when events and circumstances indicate that
the assets might be impaired  and the  undiscounted  cash flows  estimated to be
generated by those assets are less than the carrying amounts of those assets.

     Income Taxes- Allstar accounts for income taxes under the liability method,
which  requires,  among  other  things,   recognition  of  deferred  income  tax
liabilities and assets for the expected  future tax  consequences of events that
have been  recognized  in Allstar's  consolidated  financial  statements  or tax
returns.  Under this  method,  deferred  income tax  liabilities  and assets are
determined based on the temporary  differences  between the financial  statement
carrying  amounts and the tax bases of existing  assets and  liabilities and the
recognition of available tax carryforwards.

<PAGE>

     Earnings  per Share - In  accordance  with the  provisions  of Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," basic net
income  per share is  computed  on the basis of the  weighted-average  number of
common shares  outstanding  during the periods.  Diluted net income per share is
computed  based  upon the  weighted-average  number  of common  shares  plus the
assumed issuance of common shares for all potentially  dilutive securities using
the treasury stock method (See Note 13).

     Revenue  Recognition  -  Revenue  from the  sale of  computer  products  is
recognized  when the product is shipped.  Service  income is recognized  ratably
over the  service  contract  life.  Revenues  resulting  from  installations  of
equipment for which duration is in excess of three months are  recognized  using
the  percentage-of-completion  method.  The percentage of revenue  recognized on
each contract is based on the most recent cost estimate available.  Revisions of
estimates  are  reflected  in the  period in which the facts  necessitating  the
revisions  become known;  when a contract  indicates a loss, a provision is made
for the total anticipated loss. At December 31, 1998, Allstar had $3,682 of such
contracts in progress of which $1,567 of revenue had not been  recognized  along
with $826 of cost related to those revenues.  At December 31, 1999,  Allstar had
$1,524 of such  contracts  in  progress  of which $717 of  revenue  had not been
recognized  along  with  $400 of costs  related  to those  revenues.  Costs  and
estimated  earnings in excess of billings on uncompleted  contracts are included
within the heading account receivable, net on the consolidated balance sheets.

     Research and Development  Costs - Expenditures  relating to the development
of  new  products  and  processes,   including   significant   improvements  and
refinements to existing products,  are expensed as incurred. The amounts charged
to expense were  approximately  $200 in the years ended December 31, 1997,  1998
and 1999, respectively.

     Employee Stock Based Compensation- Allstar recognizes  compensation expense
for stock options and other stock based employee compensation plans based on the
intrinsic value of the equity instrument at the measurement date (See Note 12).

     Comprehensive  Income- In June 1997,  the  Financial  Accounting  Standards
Board ("FASB") issued SFAS No. 130, "Reporting  Comprehensive  Income." SFAS No.
130 establishes  standards for the reporting and display of comprehensive income
and its components in a full set of general purpose financial  statements and is
effective for fiscal years  beginning  after December  15,1997.  Allstar adopted
SFAS No.130 in the year ended  December 31, 1998.  Allstar had no  comprehensive
income items to report for all periods presented.

     Segment  Information-  Allstar  follows  the  provisions  of  SFAS  No.131,
"Disclosures about Segments of an Enterprise and Related  Information." SFAS No.
131 changes the way companies  report  selected  segment  information  in annual
financial  statements  and requires the  companies  to report  selected  segment
information  in  interim  financial  reports  to  stockholders.  See Note 14 for
segment information.

     Recently  Issued  Accounting  Standards-  In June  1998,  the  FASB  issued
Statement of Financial  Accounting  Standards ("SFAS") No. 133,  "Accounting for
Derivatives and Hedging  Activities" which establishes  accounting and reporting
standards for derivative  instruments,  including certain derivative instruments
imbedded in other contracts  (collectively referred to as derivatives),  and for
hedging  activities.  SFAS No. 133, as amended by SFAS No. 137, is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. Management is
currently  evaluating what, if any,  additional  adjustment or disclosure may be
required when this statement is adopted.

     In  March  1998,  the  Accounting   Standards  Committee  ("AcSEC")  issued
Statement  of Position  ("SOP") No. 98-1,  Accounting  for the Costs of Computer
Software  Developed  or Obtained  for  Internal  Use.  This  Statement  provides
guidance on accounting for costs of computer software  developed or obtained for
internal  use.  SOP No.  98-1 is  effective  for fiscal  years  beginning  after
December  15,  1998.  In April 1998,  SOP No.  98-5,  Reporting  on the Costs of
Start-Up  Activities,  was issued by AcSEC. This Statement  provides guidance on
determining what constitutes a start-up  activity and requires that the costs of
these start-up  activities be expensed as incurred.  These two  Statements  were
implemented  by Allstar on January 1, 1999.  The  adoption  of SOP P98-1 and SOP
98-5 did not have a  material  impact on the  Company's  financial  position  or
results of operations.

     Fair Value of  Financial  Instruments  -  Allstar's  financial  instruments
consist of cash and cash equivalents,  accounts receivable, accounts payable and
notes payable for which the carrying  values  approximate  fair values given the
short-term  maturity of the  instruments.  It is not practicable to estimate the
fair values of related-party receivables due to the nature of the instruments.

     Cash and Cash  Equivalents - Cash and cash  equivalents  include any highly
liquid debt instruments with maturity of three months or less when purchased.

     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.

     Reclassifications - The accompanying  consolidated financial statements for
the years presented have been reclassified to give retroactive effect to certain
changes in presentation.

3.  DISCONTINUED OPERATIONS

     On November 2, 1999,  Allstar  approved a plan to sell or close its Telecom
division.  This is the measurement date. Allstar entertained offers to acquire a
significant  portion of the  assets of the  Telecom  division  and to assume any
ongoing  operations  of the  division.  A sale was  finalized on March 16, 2000.
Under the terms of the sale  Allstar  received  $250  cash,  and the  ability to
obtain restrictive stock in the purchaser contingent upon the performance of the
acquired  operations  during a period  ending six months after the closing date.
Additionally, the purchaser assumed all telephone equipment warranty obligations
of Allstar up to a maximum of $30.  Any excess  warranty  costs  incurred by the
purchaser  will be billed to Allstar at an agreed  upon rate.  A disposal  loss,
including  an estimate  of the  operating  results  from the  measurement  date,
November  2, 1999 to the closing  date of the sale of $580,  and  estimates  for
impairment of assets caused by the disposal  decision of $558,  totaling  $1,138
(net of income tax savings of $586), was recognized.  The disposal loss includes
an  operating  loss of $284  (net of  income  tax  savings  of  $146)  from  the
measurement date to December 31, 1999. Pretax loss from discontinued  operations
(net of tax savings of $167,  $159 and $505) was $323,  $310,  and $981 in 1997,
1998  and  1999  respectively.   Allstar  will  retain  accounts  receivable  of
approximately  $1,400,  net of  reserves,  fixed  assets of $30 and  liabilities
related  to the  Telecom  division.  Fixed  assets are being  redeployed  in the
continuing  operations.  The balance sheet caption "Net  liabilities  related to
discontinued operations" includes $250 of net inventory not retained and $449 of
estimated  operating  losses for the period  from  January 1, 2000  through  the
disposal date of March 16, 2000.  Revenue for the Telecom division for the years
ended  December  31,  1997,  1998  and  999  was  $5,403,   $7,499  and  $3,975,
respectively. The Company allocates interest expense to its various divisions on
a proportional basis based on accounts receivable. Interest expense allocated to
the Telecom  division for the years ended December 31, 1997 and 1998 and for the
period  from  January  1,  1999 to  November  2,  1999  was $55,  $32,  and $69,
respectively.  The Company has allocated  interest expense from November 2, 1999
to the disposal  date of March 16, 2000 of $20 both of which are included in the
loss on disposal.

4.   ACCOUNTS RECEIVABLE

     Accounts  receivable  consisted  of the  following at December 31, 1998 and
1999:

                                                        1998           1999

    Accounts receivable                             $   31,547      $  35,929
    Accounts receivable retained - Telecom               3,704          2,025
    Allowances for doubtful accounts                      (358)          (228)
                                                     ---------       --------


         Total                                      $   34,893      $  37,726
                                                     =========       ========

5.   PROPERTY AND EQUIPMENT

     Property and equipment  consisted of the following at December 31, 1998 and
1999:
                                                        1998           1999

         Equipment                                  $      502      $     512
         Computer equipment                              4,218          4,067
         Furniture and fixtures                            442            507
         Leasehold improvements                            138            203
         Vehicles                                           27             27
                                                     ---------       --------
                                                         5,327          5,316
         Accumulated depreciation and amortization      (2,425)        (3,036)
                                                     ---------       --------
              Total                                 $    2,902      $   2,280
                                                     =========       ========


<PAGE>

6.   CREDIT ARRANGEMENTS

     On  February  27,  1998  Allstar  entered  into a credit  agreement  with a
commercial finance company. The total credit available under the credit 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  facility  for  floor  plan
financing of inventory from approved  manufacturers  (the  "Inventory  Line") is
$20,000. Available credit under the facility, net of Inventory Line advances, is
$10,000, which is used by Allstar 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 interest  accrues at prime rate,
which for  purposes of this  agreement  will not fall below 7.0%,  plus 5.0% for
outstanding  balances  over 40 days.  At December 31, 1999,  Allstar had $30,080
outstanding  on the  Inventory  Line and Accounts  Line,  respectively,  and was
overdrawn on its available  credit. A payment was made in January 2000 to comply
with the borrowing base limitations.

     This  agreement,  which continues in full force and effect for 36 months or
until  terminated by 30 day written notice from the lender and may be terminated
upon 90 days notice by Allstar,  subject to a termination fee, is collateralized
by substantially all of Allstar's  assets.  The 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 a minimum  tangible net worth. The terms of the agreement also prohibit
the payment of dividends  and limit the purchase of Allstar  common  stock,  and
other similar expenditures, including advances to related parties.

     Allstar  also  maintains  a  $2,000  revolving  credit  line  with  another
commercial finance company to floor plan inventory.  This line of credit accrues
interest at prime (but not less than 6.5%) plus 6% for all outstanding  balances
over 30 days.  At December 31, 1999 Allstar had $1,952  credit  available  under
this line of credit.

     The combined  borrowing base under all credit  arrangements  was $30,462 at
December 31, 1999. The  weighted-average  interest rate for borrowings under all
credit arrangements in effect during 1997, 1998 and 1999 was 10.50%,  7.53%, and
7.13% respectively. Interest expense was $761, $441 and $969 for the years ended
December 31, 1997, 1998 and 1999 respectively.

<PAGE>

7.   INCOME TAXES

     The provision for income taxes for the years ended December 31, 1997,  1998
and 1999 consisted of the following:
<TABLE>
<CAPTION>
                                                                       1997         1998         1999
                                                                       ----         ----         ----
<S>                                                                   <C>           <C>          <C>
     Current provision (benefit):
         Federal                                                  $   1,015     $   (166)     $   686
         State                                                          140            3
                                                                     ------       ------       ------
     Total current provision                                          1,155         (163)         686
     Deferred provision (benefit)                                       138         (219)
                                                                     ------       ------       ------
         Total provision (benefit) from continuing operations         1,293         (382)         686

     Total benefit from discontinued operations                        (167)        (159)        (505)
     Total benefit from loss on disposal                                                         (586)
                                                                     ------       ------       ------
         Total                                                    $   1,126     $   (541)     $  (405)
                                                                     ======       ======       ======
</TABLE>

     The total  provision  for income taxes during the years ended  December 31,
1997,  1998 and 1999  varied  from the U.S.  federal  statutory  rate due to the
following:
<TABLE>
<CAPTION>
                                                                       1997         1998         1999
                                                                       ----         ----         ----
<S>                                                                   <C>           <C>          <C>
Federal income tax at statutory rate                              $   1,176     $   (398)     $   665
Nondeductible expenses                                                   24           26           21
State income taxes                                                      140            3
Other                                                                   (47)         (13)
                                                                     ------       ------       ------
         Total provision (benefit) from continuing operations     $   1,293     $   (382)     $   686
                                                                     ======       ======       ======
</TABLE>

     Net deferred tax assets computed at the statutory rate related to temporary
differences at December 31, 1998 and December 31, 1999 were as follows:

                                                          1998            1999

      Net deferred tax assets:
         Accounts receivable                        $      242      $     172
         Closing and severance costs                        60             76
         Deferred service revenue                           62            (41)
         Inventory                                          67             43
         Net operating loss carryforwards                                 586
                                                     ---------       --------
              Total current deferred tax assets     $      431      $     836
                                                     =========       ========

     At December 31, 1999,  Allstar had  approximately  $1,724 of net  operating
loss carry forwards that expire in 2014.


<PAGE>

8.   ACCRUED EXPENSES

     Accrued liabilities  consisted of the following as of December 31, 1998 and
1999:

                                                         1998           1999
                                                         ----           ----

     Sales tax payable                              $   2,253       $   1,530
     Accrued employee benefits,
       payroll and other related costs                  1,736           1,506
     Accrued interest                                      94               1
     Other                                              1,190             859
                                                       ------          ------
     Total                                          $   5,273       $   3,896
                                                     ========         =======

9.   FRANCHISE FEES

     Allstar  entered  into an  agreement  in August  1996 in which  Allstar  is
required to purchase at least 80% of its computer  products from Inacom Corp. if
such are available within a reasonable period of time at reasonably  competitive
prices. The agreement expires on December 31, 2001 and automatically  renews for
successive  one-year  periods.  A  cancellation  fee of $571 will be  payable by
Allstar in the event of  non-renewal  or early  termination  of the agreement by
either  party;  however,  Allstar does not  anticipate  termination  to occur by
either party prior to the initial  termination  date.  Allstar is accruing  this
cancellation fee over the initial  agreement period by an approximate $9 monthly
charge to earnings.  For the years  December 31,  1997,  1998 and 1999,  Allstar
charged to expense $105, respectively, related to this agreement.

10.  SHAREHOLDERS' EQUITY

     In October 1996, Allstar completed a reincorporation in order to change its
state of domicile to Delaware,  to authorize 50,000,000 shares of $.01 par value
common  stock and to  authorize  5,000,000  shares  of $.01 par value  preferred
stock.  During 1998 the  shareholders  of Allstar  approved a  reduction  in the
number of authorized shares of common stock from 50,000,000 to 15,000,000.

     Allstar's  Board of  Directors  (the  "Board")  authorized  the purchase of
common  stock of  Allstar  from  time to time in the open  market  to be held in
treasury  for the purpose of, but not limited  to,  fulfilling  any  obligations
arising under Allstar's stock option plans. At December 31, 1999, 381,800 shares
were held in treasury under these authorizations.

     Allstar issued 14,286,  63,500 and 1,000 common shares of restricted  stock
in 1997,  1998 and 1999,  respectively,  and cancelled  14,500 and 62,086 common
shares of restricted  stock during 1998 and 1999,  respectively.  The restricted
shares have par value of $0.01 per share. The remaining 2,200 shares,  valued at
$8, vest ratably at the end of each one year period over a five year period from
the date of issuance.

     During 1997,  Allstar issued warrants to purchase  176,750 common shares at
$9.60 per share to  underwriters  in connection with a public offering of common
stock. The warrants expire on July 7, 2002.

     During 1999,  Allstar  purchased 110,600 shares of treasury stock at a cost
of $138,253.

11.  COMMITMENTS AND CONTINGENCIES

     Operating Leases - Allstar  subleases  office space from Allstar  Equities,
Inc.  ("Equities"),  which is  wholly  owned  by the  principal  stockholder  of
Allstar.  In 1999,  Allstar  renewed its office  sublease  with  monthly  rental
payments  of $32 in 1997,  $33 in 1998 and $38 in 1999  plus  certain  operating
expenses through December 1, 2004. Rental expense under this agreement  amounted
to approximately  $378, $390 and $395 during years ended December 31, 1997, 1998
and 1999, respectively.

     Additionally,  minimum annual rentals on other  operating  leases amount to
approximately,  $927 in 2000,  $708 in 2001, $691 in 2002, $643 in 2003, $571 in
2004 and $514 in years thereafter.  Amounts paid during the years ended December
31, 1997, 1998 and 1999 under such agreements totaled  approximately  $142, $509
and $766 respectively.

     Benefit  Plans - Allstar  maintains  a group  medical  and  hospitalization
insurance program under which Allstar pays employees' covered health care costs.
Any claims  exceeding $30 per employee or a cumulative  maximum of approximately
$577 per year are insured by an outside insurance  company.  Allstar's claim and
premium expense for this  self-insurance  program totaled  approximately,  $684,
$581,  and  $521  for the  years  ended  December  31,  1997,  1998,  and  1999,
respectively.

     Allstar  maintains a 401(k) savings plan wherein  Allstar matches a portion
of the employee contribution.  In addition, Allstar has a discretionary matching
fund based on the net profitability of Allstar. All full-time employees who have
completed 90 days of service with  Allstar are  eligible to  participate  in the
plan.  Declaration  of the  discretionary  portion of the  matching  fund is the
decision of the Board. Allstar has made no additional  contributions to the plan
for the years ended December 31, 1997, 1998, or 1999. Under the standard Allstar
matching  program,  Allstar's  match was $24,  $45 and $64 for the  years  ended
December 31, 1997, 1998 and 1999, respectively.

     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  material  adverse  effect  on its  results  of
operations or financial position.

     On February 1, 2000, a competitor  brought a suit against Allstar  Systems,
Inc,  and its wholly  owned  subsidiary  Stratasoft,  Inc. in the United  States
District  Court for the  Northern  District of Georgia.  The  plaintiff  alleges
infringement  of  certain  patents  owned  by  the  competitor  and  is  seeking
unspecified monetary damages. The suit is in its early stages of discovery,  and
therefore  Allstar is unable to  determine  the  ultimate  costs of this matter.
Management  of Allstar  believes  that this suit is without merit and intends to
vigorously defend such action.

12.  STOCK OPTION PLANS

     Under the 1996 Incentive  Stock Plan (the  "Incentive  Plan"') and the 1996
Non-Employee  Director  Stock  Option  Plan  (the  "Director  Plan").  Allstar's
Compensation  Committee may grant up to 442,500  shares of common  stock,  which
have been reserved for issuance to certain employees of Allstar. At December 31,
1999 21,268 shares were available for future grant under the Incentive Plan. 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  of  which  63,000  were
available for future grants at December 31, 1999. 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.  During  1997,  1998 and 1999
Allstar granted options to purchase 20,000, 8,000 and 9,000 common shares to its
directors,  respectively,  which vest  immediately,  and  180,300,  129,850  and
216,872  common  shares to its  employees,  respectively,  which  vest over five
years.  Employees  effected by the sale of the Telecom division (See Note 3) and
the proposed sale of the Computer  Products division (See Note16) will generally
become vested in stock options held at the  transaction  close or two years from
the date of grant.

The plan's activity is summarized below:

<TABLE>
<CAPTION>
                                               1997                    1998                     1999
                                               ----                    ----                     ----
                                                  Weighted                 Weighted                 Weighted
                                                   Average                 Average                  Average
                                                  Exercise                 Exercise                 Exercise
                                        Shares      Price       Shares      Price        Shares      Price
<S>                                      <C>        <C>          <C>        <C>          <C>         <C>
Options outstanding at January 1        200,300   $   5.17      200,300   $   5.17      268,350    $   1.63
Granted during the year                                         137,850       3.13      225,872        1.15
Exercised during the year
Options canceled for repricing                                 (260,350)      4.25
Option granted at new price                                     260,350       1.50
Canceled during the year                                        (69,800)      4.50      (35,990)       1.45
                                                               --------    -------     --------     -------

Options outstanding at December 31      200,300   $   5.17      268,350   $   1.63      458,232    $   1.41
                                        =======     ======      =======     ======      =======     =======
Options exercisable at December 31       20,000   $   5.17       56,940   $   1.63      196,072    $   1.41
                                        =======     ======      =======     ======      =======     =======
Options outstanding price range         $4.625 to $6.00.        $1.5 to $6.00           $1.06 to $1.75
Weighted Average fair value of          $1.61                   $3.16                   $1.07
options granted during the year
Options weighted-average
remaining life                          9.7 Years               9.83 Years              9.87 Years
</TABLE>


<PAGE>

     Allstar  applies  APB  Opinion  No.  25,  "Accounting  for Stock  Issued to
Employees" and related  interpretations  in accounting for options granted under
the  Plans.  Accordingly,  no  compensation  expense  has been  recognized.  Had
compensation  expense been recognized based on the Black-Scholes  option pricing
model value at the grant date for awards consistent with SFAS No. 123, Allstar's
net income  (loss) and  earnings  per share  would have been  reduced to the pro
forma amounts shown below. For purposes of estimating the fair value disclosures
below,  the fair value of each stock option has been estimated on the grant date
or the grant repricing date with a Black-Scholes  option pricing model using the
following   weighted-average   assumptions;   dividend  yield  of  0%;  expected
volatility  of 179% to  126%;  risk-free  interest  rate  of 6.0% to  6.5%;  and
expected lives of eight years from the original date of the stock option grants.
The effects of applying SFAS No. 123 for pro forma disclosures are not likely to
be representative of the effects on reported net income (loss) for future years.

                                          1997          1998          1999
                                          ----          ----          ----
Net Income (loss):
         As reported                  $   1,844     $  (1,098)    $    (845)
         Pro forma                    $   1,815     $  (1,180)    $    (923)

Earnings per share (Basic)
         As reported                  $    0.52     $   (0.25)    $   (0.20)
         Pro forma                    $    0.52     $   (0.27)    $   (0.22)

Earnings per share (Diluted)
         As reported                  $    0.52     $   (0.25)    $   (0.20)
         Pro forma                    $    0.51     $   (0.27)    $   (0.22)

13.  EARNINGS PER SHARE

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

                                          1997          1998          1999
                          (Amounts in thousands except share and per share data)
Numerator:

     Net income (loss) fro
       continuing operations          $   2,167     $   (788)     $  (1,274)

     Discontinued operations:
          Net loss from discontinued
            operations, net of taxes       (323)         (310)         (981)

     Loss on disposal, net of taxes                                  (1,138)
                                       --------      --------      --------
Net income (loss)                     $   1,844     $ (1,098)     $    (845)
                                       ========       =======      ========

Denominator:

     Denominator for basic earnings
       per share - weighted-average
       shares outstanding             3,519,821     4,345,883     4,168,140


<PAGE>

Effect of dilutive securities:

     Shares issuable from assumed
       conversion of common stock
       options, warrants and
       restricted stock                   6,966                      57,786
                                       --------      --------      --------

Denominator for diluted earnings
  per share                           3,526,787     4,345,883     4,225,926
                                      =========     =========     =========

Net income (loss) per share:

Basic:

Net income (loss) from continuing
  operations                          $    0.62     $   (0.18)    $    0.31
Net loss from discontinued operations     (0.10)        (0.07)        (0.24)
Loss on disposal                                                      (0.27)
                                       --------      --------      --------
Net loss per share                    $    0.52     $   (0.25)    $   (0.20)
                                       ========      ========      ========

Diluted:

Net income (loss) from continuing
  operations                          $    0.62     $   (0.18)    $    0.30
Net loss from discontinued operations     (0.10)        (0.07)        (0.23)
Loss on disposal                                                      (0.27)
                                       --------      --------      --------
Net loss per share                    $   (0.52)    $   (0.25)    $   (0.20)
                                       ========      ========      ========

The  potentially  dilutive  options were not used in the  calculation of diluted
earnings  per share for the year  ended  December  31,  1998 since the effect of
potentially dilutive securities in computing a loss per share is antidilutive.

There were warrants to purchase,  176,750 shares of common stock for 1997,  1998
and 1999,  respectively,  which were not  included  in  computing  the effect of
dilutive securities because the inclusion would have been antidilutive.

There were 200,300,  8,000 and 37,600 options to purchase common stock for 1997,
1998 and 1999, respectively,  which were not included in computing the effect of
dilutive securities because the inclusion would have been antidilutive.


<PAGE>

14.  SEGMENT INFORMATION

     Allstar has three reportable  segments:  (1) IT Services,  (2) CTI Software
and (3) Computer  Products.  IT Services  includes various services  relating to
computer  products and management  information  systems.  CTI Software  includes
software products that facilitate telephony and computer  integration  primarily
for telemarketing and call center applications. Computer Products includes sales
of a wide variety of computer  hardware and software  products.  As discussed in
Note 3,  the  Company's  Telecom  Systems  business  segment  is  reported  as a
discontinued  operation.  Accordingly,  all years prior to the disposal date are
not presented below.  Subsequent to the disposal of Telecom Systems, the Company
reevaluated  its assessment of reporting  segments.  The  components  previously
reported  as the  Information  Technology  segment  have been  reflected  as the
reportable  segments  captioned IT Services and Computer  Products for the years
ended December 31, 1997, 1998 and 1999. The accounting  policies of the business
segments  are  the  same  as  those  described  in  Note  1.  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.
Intersegment sales and transfers are not significant.


For the year ended December 31, 1999:
                                          IT        CTI   Computer
                                       Services  Software Products Consolidated

Revenue                               $ 14,857  $  4,318  $182,642   $201,817
Cost of goods sold                      10,472     2,126   166,428    179,026
                                       -------   -------   -------    -------
Gross profit                             4,385     2,192    16,214     22,791
Selling, general and
  administrative expense                 4,711     1,960    13,512     20,183
                                       -------   -------   -------    -------
Operating income (loss)               $   (326) $    232  $  2,702   $  2,608
                                       =======   =======   =======    =======

Accounts receivable                   $  2,593  $    689  $ 34,444   $ 37,726
                                       =======   =======   =======    =======

For the year ended December 31, 1998:
                                          IT        CTI   Computer
                                       Services  Software Products Consolidated

Revenue                               $ 13,183  $  3,095  $143,396   $159,674
Cost of goods sold                       8,975     1,603   129,288    139,866
                                       -------   -------   -------    -------
Gross profit                             4,208     1,492    14,108     19,808
Selling, general and
  administrative expense                 5,238     1,873    13,548     20,659
                                       -------   -------   -------    -------
Operating income (loss)               $ (1,030) $   (381) $    560   $   (851)
                                       =======   =======   =======    =======

For the year ended December 31, 1997:
                                          IT        CTI   Computer
                                       Services  Software Products Consolidated

Revenue                               $ 10,240  $  2,145  $111,379   $123,764
Cost of goods sold                       6,211     1,223    99,701    107,135
                                       -------   -------   -------    -------
Gross profit                             4,029       922    11,678     16,629
Selling, general and
  administrative expense                 4,005     1,096     7,426     12,527
                                       -------   -------   -------    -------
Operating income (loss)               $     24  $   (174) $  4,252   $  4,102
                                       =======   =======   =======    =======


<PAGE>

15.  RELATED-PARTY TRANSACTIONS

     Allstar  has from time to time made  payments  on  behalf of  Equities  and
Allstar's principal stockholders for taxes, property and equipment.  Allstar and
its principal  stockholder  entered into a $173  promissory  note to repay these
advances.  The note  amortizes in equal  annual  installments  of principal  and
interest through 2001. This note bears interest at 9% per year. Also Allstar and
Equities  entered into a promissory  note whereby  Equities  would repay $387 of
amounts  advanced in monthly  installments of $7,  including  interest,  through
November  1998 with a final  payment of $275 due on December 1, 1998.  This note
bears interest at 9% per year. Effective December 1, 1998 this note was extended
for a period of one year,  with interest and principal  becoming due on December
1,  1999.  On  December  1, 1999 a note  payable  from  Equities  was signed for
$335,551  for 60 monthly  payments  of $6,965.  The note bears  interest  at 9%.
Equities made twelve  payments in advance and at December 31, 1999 the Company's
receivables  from Equities  amounted to  approximately  $227,663.  The principal
amounts as of  December  31,  1997 and  December  31,  1998 were  classified  as
Accounts  receivable - affiliates  based on the expectation of repayment  within
one year. At December 31, 1997 and December 31, 1998, Allstar's receivables from
these affiliates amounted to approximately $434 and $373, respectively.


16.   SUBSEQUENT EVENTS

     On March 16, 2000 Allstar  entered into an agreement to sell certain assets
of and the  ongoing  operations  of its  Computer  Products  division.  The sale
transaction is expected to close on or before May 31, 2000 after shareholder and
other required  consents are obtained.  The terms of this agreement include cash
consideration  of $14.25 million plus a cash payment  related to the purchase of
certain inventory and equipment, which is to be determined at closing.


Item 9.   Changes  in and  Disagreements  With  Accountants  on  Accounting  and
          Financial Disclosure

     NONE


PART III

Items 10.  Directors and Executive Officers

Directors

James H. Long - Director, April 1983 to present.

     James H.  Long,  age 41, is the  founder of the  Company  and has served as
Chairman of the Board, Chief Executive Officer and President since the Company's
inception  in 1983.  Prior to  founding  the  Company,  Mr. Long served with the
United  States Navy in a technical  position  and was then  employed by IBM in a
technical position.

Donald R. Chadwick - Director, September 12, 1996 to present.

     Donald R. Chadwick,  age 56, has served as Secretary since  February,  1992
and served as the Chief  Financial  Officer of the Company  from  February  1992
until  December,   1999.  As  Chief  Financial  Officer,   his  duties  included
supervision of finance, accounting and controller functions within the Company.

Richard D. Darrell - Director, July 29, 1997 to present.

     Richard D.  Darrell,  age 44, has been  President  of  American  Technology
Acquisition Corporation,  a company specializing in mergers,  acquisitions,  and
divestitures  of technology  related  companies  since 1995.  Prior to that, Mr.
Darrell  served as  President  and Chief  Executive  Officer of Direct  Computer
Corporation,  a computer  reseller  and  distribution  company  based in Dallas,
Texas.


<PAGE>


Jack M. Johnson, Jr. - Director, July 29, 1997 to present.

     Jack M.  Johnson,  Jr.,  age 60,  has  been  Managing  General  Partner  of
Winterman & Company, a general partnership that owns approximately  25,000 acres
of real  estate in Texas,  which is used in farming,  ranching,  and oil and gas
exploration  activities,  since 1996.  Mr.  Johnson is also  President  of Winco
Agriproducts, an agricultural products company that primarily processes rice for
seed and  commercial  sale. Mr. Johnson was previously the Chairman of the Board
of the Lower Colorado River Authority,  the sixth largest  electrical utility in
Texas,  with  approximately  1,700  employees  and an annual budget of over $400
million. Mr. Johnson was previously Chairman of North Houston Bank, a commercial
bank with assets of approximately  $75 million.  Mr. Johnson currently serves on
the board of directors of Houston  National  Bank, a commercial  bank located in
Houston, Texas with assets of approximately $100 million; Security State Bank, a
commercial bank in Anahuac,  Texas with assets of approximately  $60 million and
Team, Inc. a publicly traded company which provides  environmental  services for
industrial operations.

Mark T. Hilz - Director, June 24, 1999 to present.

     Mark T. Hilz, age 40, has served as Chief  Executive  Officer of Nichecast,
Inc., a privately held internet  services  company.  From 1990 to 1998, Mr. Hilz
was founder, President and Chief Executive Officer of PC Service Source, Inc., a
publicly-held distributor of personal computer hardware for repair industry.

Board and Committee Activity, Structure and Compensation

     During  1999 the board of  directors  held  four  meetings.  Each  director
attended at least 75% of the  meetings  held during 1999 by the Board and all of
the meetings of committees on which he served.

     The Board of Directors has two standing committees,  an Audit Committee and
a Compensation Committee.

     Audit  Committee.  The Audit  Committee  is  currently  composed of Messrs.
Darrell and Johnson.  During 1999, the Audit committee met twice.  The functions
of the Audit Committee include:

     1.   Reviewing the  accounting  principles  and  practices  employed by the
          Company;

     2.   Meeting with Company's  independent auditors to review their report on
          their  examination  of the Company's  accounts,  their comments on the
          integral  controls of the Company and the actions  taken by management
          in response to such comments; and

     3.   Recommending annually to the Board of Directors the appointment of the
          Company's auditors.

     Compensation Committee. The Compensation Committee is currently composed of
Messrs.  Hilz and Darrell.  In November 1998, the Compensation  Committee met on
matters dealing 1999. The functions of the Compensation Committee include:

     1.   Reviewing and making recommendations regarding the compensation of the
          Company's officers; and

     2.   Administrating  and making  awards  under the  Company's  compensation
          plans.

     Each director who is not an employee of the Company is paid $1,000 for each
Board  meeting  attended  and $500  for each  committee  meeting  attended  plus
reasonable   out-of-pocket  expenses  incurred  to  attend  Board  or  committee
meetings.  In addition,  each non-employee director is entitled to receive stock
options pursuant to the Company's  Non-Employee  Director Stock Option Plan (the
"Director  Plan").  Upon his  first  election  to the Board  each such  director
receives  options to  purchase  5,000  shares  and upon each time a director  is
reelected  such  director  receives  options to purchase  2,000 shares of common
stock.  All options  granted vest  immediately.  All options  granted  under the
Director  Plan will have an exercise  price equal to the fair market  value of a
share of Common  Stock on the date of grant and will  expire ten years after the
date of grant (subject to earlier  termination under the Director Plan.  Options
granted  under  the  Director  Plan  are  subject  to early  termination  on the
occurrence of certain  events,  including  termination  of service on the Board,
other than by death.  During  1999,  options to acquire  9,000  shares of Common
Stock were granted under the Director Plan.

Executive Officers

     The executive officers of the Company serve until resignation or removal by
the  Board of  Directors.  Set  forth  below is  certain  information  about the
Company's Executive Officers, other than James H. Long and Donald R. Chadwick.

Frank Cano - President, Computer Products Division, September 1997 to present.

     Frank Cano, age 35, became the President of Information Technology Division
for the Company in September 1997 and was  responsible for the management of the
Computer  Products  Division.  In January 1999, Mr. Cano became President of the
Information  Technology  Division  which  includes the Computer  Products and IT
Services  division.  Prior to that Mr.  Cano was Senior Vice  President,  Branch
Operations from July 1996 to September 1997, and was responsible for the general
management of the Company's  branch  offices.  From June 1992 to June 1996,  Mr.
Cano was the Branch Manager of the Company's Dallas-Fort Worth office.

Thomas N. McCulley - Vice  President,  Information  Systems,  September  1996 to
present.

     Thomas  N.  McCulley,  age 53,  has been the  Vice  President,  Information
Systems for the Company  since July 1996.  From January  1992 to June 1996,  Mr.
McCulley served as the  Information  Services  Director for the Company.  He has
responsibility  for  management  and  supervision  of the  Company's  Management
Information Systems.

William R. Hennessy - President, Stratasoft, Inc., September 1996 to present.

     William R.  Hennessy,  age 40, has served as the  President of  Stratasoft,
Inc., the Company's  wholly owned  subsidiary that was formed in 1995 to develop
and market CTI  Software,  since  joining  the  Company  in  January  1996.  Mr.
Hennessy's  responsibilities include the general management of Stratasoft,  Inc.
From  July 1991 to  January  1996,  Mr.  Hennessy  was  employed  by  Inter-Tel,
Incorporated,  a telephone  systems  manufacturer and sales and service company,
where he  served  as the  Director  of MIS and the  Director  of Voice  and Data
Integration for the central region.

Family Relationships

     James H. Long and Frank Cano are brothers-in-law. There are no other family
relationships among any of the directors and executive officers of the Company.

<PAGE>

Item 11. Executive Compensation

Summary  Compensation  Table.  The following  table  reflects  compensation  for
services to the Company for the years ended December 31, 1999,  1998 and 1997 of
(i) the Chief  Executive  Officer of the  Company and (ii) the three most highly
compensated  executive  officers of the Company  who were  serving as  executive
officers at the end of 1999 and whose  total  annual  salary and bonus  exceeded
$100,000 in 1999 (the "Name Executive Officers").

<PAGE>
<TABLE>
<CAPTION>


                         Annual Compensation                             Long Term Compensation
---------------------------------------------------------------------- --------------------------
                                                                                Awards
                                                                       --------------------------
   Name and Principal     Year     Salary      Bonus    Other Annual   Restricted    Number of
                                                        Compensation     Stock       Securities
                                                             (1)         Awards      Underlying
                                                                                      Options
                                                                                      (8)(10)
        Position

<S>                       <C>      <C>        <C>         <C>          <C>           <C>
James H. Long (2)         1999     $150,000
Chief Executive           1998      150,000    $80,200                                   2,400
Officer                   1997      150,000

Donald R. Chadwick
(3)(5)(9)                 1999      110,000                                             63,572
Chief Financial           1998      108,853                             $15,000          2,400
Officer                   1997       98,458      1,500                   85,716         13,000

Frank Cano (4)(5)(6)      1999      100,000        564                                  20,000
President, Information    1998       96,875     13,051     $10,000       15,000          5,600
Technology                1997       78,125     22,297                                  16,000

William R. Hennessy       1999       85,000     55,856                                  10,000
President Stratasoft,     1998       84,637      3,000                    7,500
Inc. (7)                  1997       81,400     73,880                                   8,000

<FN>
     (1)  Amounts exclude the value of perquisites and personal benefits because
          the aggregate  amount  thereof did not exceed the lesser of $50,000 or
          10% of the Named Executive Officer's total annual salary and bonus.
     (2)  Company has made  personal  loans to Mr.  Long from time to time.  See
          Item 13.  Certain  Relationships  and  Related  Transactions  "Certain
          Transactions."
     (3)  During the year ended December 31, 1999, Mr. Chadwick  received 48,572
          stock options in exchange for 24,286 shares of restricted  stock.  The
          options have an exercise price of $1.06.
     (4)  During the year ended  December 31,  1999,  Mr. Cano  received  20,000
          stock options in exchange for 10,000 shares of restricted  stock.  The
          options have an exercise price of $1.06.
     (5)  Includes   $1,500  as   consideration   for  execution  of  employment
          agreements.
     (6)  Includes  compensation  based upon  attainment of certain  performance
          goals.
     (7)  Includes compensation based upon gross profit realized.
     (8)  Number  of  securities  underlying  options  shown  for 1998  includes
          options originally issued in 1997 and repriced during 1998 and options
          newly issued in 1998.
     (9)  Retired  as Chief  Financial  Officer  effective  December  31,  1999.
          Retains position as Secretary.
     (10) The number of  securities  underlying  options shown for 1999 includes
          options received in exchange for restricted stock originally issued in
          1997 and 1998.
</FN>
</TABLE>

<PAGE>

Stock Options

     Under the Company's 1996 Incentive Stock Option Plan (the "Incentive  Stock
Option Plan")  options to purchase  shares of the Common Stock may be granted to
executive officers and other employees.  As of December 31, 1999, 438,232 shares
were reserved for issuance upon exercise of  outstanding  options and 4,268 were
reserved and remained  available  for future  grants  pursuant to the  Incentive
Stock Option  Plan.  During 1999,  options to purchase  93,572  shares of Common
Stock were granted to the Named  Executive  Officers  under the Incentive  Stock
Option Plan including  78,572 options which were granted at an exercise price of
$1.06 in exchange for 39,286 shares of restricted stock.

     Options   Granted  in  Last  Fiscal  Year.  The  following  table  provides
information  concerning  stock options granted to the Named  Executive  Officers
during the year ended December 31, 1999.
<TABLE>
<CAPTION>

                          Number of   Percent of   Exercise   Expiration    Potential       Potential
                          Shares of     Total      or Base       Date      Realizable       Realizable
                            Common     Options     Price                    Value at         Value at
                            Stock     Granted to   ($/share)             Assumed Annual      Assumed
                          Underlying  Employees                           Rate of Stock    Annual Rate
                           Options    in Fiscal                               Price          of Stock
                           Granted       Year                             Appreciations       Price
                                                                           for Option     Appreciations
                                                                           Term 5% (1)      for Option
                                                                                           Term 10% (1)
<S>                        <C>          <C>          <C>      <C>           <C>             <C>
Donald R. Chadwick         63,572       35.9%        1.06     4/01/09       $ 24,544        $54,236
Frank Cano                 20,000        8.6%        1.06     4/01/09       $  5,874        $12,979
William R. Hennessy        10,000        4.3%        1.06     4/01/09       $  2,937        $ 6,490

<FN>
(1) Actual  gains,  if any, on stock option  exercises  are  dependent on future
performance  of the Common  Stock.  No  appreciation  in the price of the Common
Stock will result in no gain.
</FN>
</TABLE>

<TABLE>
<CAPTION>
Aggregated Option Exercises and Year-End Option Values
                                                        Number of Securities         Value of Unexercised
                            Shares       Value        Underlying Unexercised             In-the money
                           Acquired    Realized             Options at                    Options at
                          on Exercise                    December 31, 1999           December 31, 1999
                                                   Exercisable   Unexercisable   Exercisable  Unexerciable
<S>                          <C>         <C>        <C>               <C>        <C>          <C>
James H. Long                 0           0         2,400               480      $   514       $ 2,056
Donald R. Chadwick            0           0        64,686                 0      $69,266             0
Frank Cano                    0           0        11,520            30,080      $12,336       $32,210
William R. Hennessy           0           0         5,200            12,800      $ 5,568       $13,706
</TABLE>

The Named  Executive  Officers  held 126,686  options that were  exercisable  at
December  31,  1999,  none were  exercised  during  1999 and there  were  93,572
in-the-money unexercised options at December 31, 1999.

<PAGE>

Compensation Committee Report

     The compensation  committee of the Board of Directors (the "Committee") has
furnished the following report on executive compensation for the fiscal 1999:

         The Committee met on November 2, 1998.  The  compensation  of executive
         officers  during 1999 was  continued  under  compensation  arrangements
         existing  prior to the  formation of the  Committee  except that equity
         based  compensation would be enhanced to further align the interests of
         the  officers  of the  Company  with those of the  stockholders.  Those
         compensation arrangements are described below:

     Base compensation for the executive  officers of the company is intended to
afford a  reasonable  payment for the  services  rendered to the Company and the
responsibilities  assumed by the  executive  officer  relative  to the  expected
performance  of the areas  managed by the  officers.  With the  exception of the
Chief  Executive  Officer  and  Chief  Financial  officer,  bonuses,  which  are
generally paid monthly, and stock- based awards are contingent upon attaining or
exceeding predetermined financial performance goals established at the beginning
of each fiscal year. The Chief Executive Officer and Chief Financial Officer may
receive  bonuses  or stock  rewards  based  on the  overall  performance  of the
Company's as well as the Committee's subjective evaluation of their performance.
Mr. Long, the Company's  Chief Executive  Officer,  received his base salary for
the fiscal year ended  December 31, 1999.  The amount of such  compensation  was
determined by the terms of his employment  contract with the Company. A bonus in
the amount of $80,200 was granted to Mr.  Long in 1999 as  compensation  for the
year ended December 31, 1998.

     The stock  options  issued to officers in 1999 were issued in exchange  for
shares of restricted  Common Stock relative to the Company's  1998  performance.
During the 1998 the Board,  as a whole,  determined  that due to the significant
decline in the price of the Common Stock the options  issued in 1997 and 1998 no
longer  provided an  incentive  to  management  and other key  employees  of the
Company due to the decrease in the value of the Company's  Common Stock.  It was
further  determined  that  the  loss of key  management  and  /or its  technical
personnel   would  not  be  conducive  to  regaining  a  higher  value  for  its
stockholders.

     The Committee will be reformed after the annual meeting of the stockholders
with all  non-employee  directors  as members of the  Committee.  The  Committee
intends to meet  during 1999 and review  established  policies  with  respect to
executive officer compensation.

                           THE COMPENSATION COMMITTEE
                               Richard D. Darrell
                                  Mark T. Hilz
                              Jack M. Johnson, Jr.

Employment Agreements

     Each of the Named  Executive  Officers of the  Company has entered  into an
employment agreement (collectively,  the "Executive Employment Agreements") with
the  Company.  Under the terms of their  respective  agreements,  Messrs.  Long,
Chadwick,  Cano and  Hennessy are entitled to an annual base salary of $150,000,
$101,000,  $100,000 and $85,000,  respectively,  plus other bonuses, the amounts
and payment of which are within the  discretion of the  Compensation  Committee.
The Executive  Employment  Agreements may be terminated by the Company or by the
executive officer at any time by giving proper notice. The Executive  Employment
Agreements  generally  provide that the executive officer will not, for the term
of his  employment  and for the period  ranging  from twelve to eighteen  months
following the end of such Named Executive Officer's employment with the Company,
solicit any of the Company's  employees or customers or otherwise interfere with
the business of the Company.

<PAGE>

Item 12. Security Ownership

Security Ownership of Management

     The following  table sets forth,  as of March 22, 1999 the number of shares
of Common  Stock  owned by each  Director,  nominee  as a  Director,  each Named
Executive Officer, as defined in "Executive Compensation," and all Directors and
Executive Officers as a group.

Title of Class  Name of                     Amount and Nature of    Percent
                Beneficial Owner            Beneficial Owner (1)    of Class

Common Stock    James H. Long                    2,051,000          50.5%
Common Stock    Donald R. Chadwick                 105,503    (2)    2.6%
Common Stock    Frank Cano                          11,820    (3)       *
Common Stock    William R. Hennessey                 5,200    (4)       *
Common Stock    All officers and directors       2,179,503          53.5%

     (1)  Beneficial  owner of a security  includes any person who shares voting
          or  investment  power  with  respect  to or has the  right to  acquire
          beneficial ownership of such security within 60 days.

     (2)  Includes  64,686  shares  which  may  be  acquired  upon  exercise  of
          currently  exercisable  options and 517 shares owned by his spouse for
          which Mr. Chadwick disclaims beneficial ownership and 300 shares owned
          by his minor  children  for which Mr.  Chadwick  disclaims  beneficial
          ownership.

     (3)  Includes  11,520  shares  which  may  be  acquired  upon  exercise  of
          currently  exercisable  options  and 300  shares  owned by Mr.  Cano's
          spouse for which Mr. Cano disclaims beneficial ownership.

     (4)  Includes 5,200 shares which may be acquired upon exercise of currently
          exercisable options.

     Security Ownership of Certain Beneficial Owners

Title of Class  Name and Address of         Amount and Nature of      Percent
                Beneficial Owner            Beneficial Owner          Of Class

  Common Stock  Jack B. Corey                           267,500        6.6%
                37102 FM 149, P.O. Box 525
                Pinehurst, TX 77362

<PAGE>

Item 13. Certain Relationships and Related Transactions

Certain Transactions

     The  Company  has from time to time  made  payments  on  behalf of  Allstar
Equities, Inc. a Texas corporation ("Equities"),  which is wholly-owned by James
H. Long, the Company's  President and Chief Executive Officer,  and on behalf of
Mr. Long, personally for taxes, property and equipment. Effective on December 1,
1999 a  note  payable  by  Equities  was  signed  for  $335,551  for 60  monthly
installments  of $6965.  The note bears interest at 9% per year. At December 31,
1999,  the  Company's   receivables  from  Equities  amounted  to  approximately
$277,663.

     The Company leases office space from Equities. In 1998, the Company
extended and existing office sublease through December 13,1998.  Thereafter, and
until  December 1, 1999,  the  Company  occupied  the space on a  month-to-month
basis. On December 1, 1999 Equities purchased the building and executed a direct
lease with the Company with an  expiration  date of December  31, 2004.  The new
lease has rental rates of $37,692 per month and Equities has prepaid interest of
$27,941.

     In August 1996, the Company retained an independent real estate  consulting
firm to conduct a survey of rental rates for  facilities in Houston,  Texas that
are compatible to its Houston headquarters facility. Based upon this survey, and
additional  consultations  with  representatives  of the real estate  consulting
firm, the Company believes that the rental rate and other terms of the Company's
sublease from Allstar  equities are at least as favorable as those that could be
obtained in an arms-length transaction with an unaffiliated third party.

PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K
         (a) List of documents filed as part of this report

               (1) Consolidated Financial Statements - See Index to Consolidated
                   Financial  Statements  on  Page  25

               (2) Exhibits

<TABLE>
<CAPTION>
Exhibits
<S>                       <C>                                                       <C>
                                                                                Filed Herewith

Exhibit                                                                         or Incorporated by
Number                          Description                                     Reference to:

2.1   Plan and Agreement of Merger by and Between                               Exhibit 2.1 to Form
      Allstar Systems, Inc, a Texas corporation and                             S-1 filed Aug. 8, 1996
      Allstar Systems, Inc. a Deleware corporation
3.1   Bylaws of the Company                                                     Exhibit 3.1 to Form
                                                                                S-1 filed Aug. 8, 1996
3.2   Certificate of Incorporation of the Company                               Exhibit 3.2 to Form
                                                                                S-1 filed Aug. 8, 1996
4.1   Specimen Common Stock Certificate                                         Exhibit 4.1 to Form
                                                                                S-1 filed Aug. 8, 1996
4.2   See Exhibits 3.1 and 3.2 for provisions of the Certificate of             Exhibit 4.2 to Form
      Incorporation and Bylaws of the Company defining the rights of the        S-1 filed Aug. 8, 1996
       holders of Common Stock.
10.1  Revolving Loan and Security Agreement by and between                      Exhibit 10.1 to Form
      IBM Credit Corporation and Allstar Systems, Inc.                          S-1 filed Aug. 8, 1996
10.2  Agreement for Wholesale Financing dated September 20, 1993, by            Exhibit 10.2 to Form
      and between ITT Commercial Finance Corp. and Allstar-Valcom, Inc.         S-1 filed Aug. 8, 1996
10.3  Amendment to Agreement for Wholesale Financing dated                      Exhibit 10.3 to Form
      October 25, 1994, by and between ITT Commercial Finance Corp.             S-1 filed Aug. 8, 1996
      and Allstar Systems, Inc.
10.4  Sublease Agreement by and between Allstar Equities and Allstar            Exhibit 10.4 to Form
      Systems, Inc.                                                             S-1 filed Aug. 8, 1996
10.5  Form of Employment Agreement by and between the Company and               Exhibit 10.5 to Form
      certain members of Management.                                            S-1 filed Aug. 8, 1996
10.6  Employment Agreement dated September 7, 1995, by and between              Exhibit 10.6 to Form
      Stratasoft, Inc. and William R. Hennessy.                                 S-1 filed Aug. 8, 1996
10.7  Assignment of Certain Software dated September 7, 1995, by                Exhibit 10.7 to Form
      International Lan and Communications, Inc. and Aspen System               S-1 filed Aug. 8, 1996
      Technologies, Inc. to Stratasoft, Inc.
10.8  Microsoft Solution Provider Agreement by and between Microsoft            Exhibit 10.8 to Form
      Corporation and Allstar Systems, Inc.                                     S-1 filed Aug. 8, 1996
10.9  Novell Platinum Reseller Agreement by and between Novell, Inc.            Exhibit 10.9 to Form
      and Allstar Systems, Inc.                                                 S-1 filed Aug. 8, 1996

<PAGE>

10.10 Allstar Systems, Inc. 401(k) Plan.                                        Exhibit 10.10 to Form
                                                                                S-1 filed Aug. 8, 1996
10.11 Allstar Systems, Inc. 1996 Incentive Stock Plan.                          Exhibit 10.11 to Form
                                                                                S-1 filed Aug. 8, 1996
10.12 Allstar Systems, Inc. 1996 Non-Employee Director Stock Option Plan.       Exhibit 10.12 to Form
                                                                                S-1 filed Aug. 8, 1996
10.13 Primary Vendor Volume Purchase Agreement dated August 1, 1996 by          Exhibit 10.13 to Form
      and between Inacom Corp. and Allstar Systems, Inc.                        S-1 filed Aug. 8, 1996

10.14 Resale Agreement dated December 14, 1995, by and between Ingram           Exhibit 10.14 to Form
      Micro Inc. and Allstar Systems, Inc.                                      S-1 filed Aug. 8, 1996

10.15 Volume Purchase Agreement dated October 31, 1995, by and between          Exhibit 10.15 to Form
      Tech Data Corporation and Allstar Systems, Inc.                           S-1 filed Aug. 8, 1996

10.16 Intelligent Electronics Reseller Agreement by and between Intelligent     Exhibit 10.16 to Form
      Electronics, Inc. and Allstar Systems, Inc.                               S-1 filed Aug. 8, 1996

10.17 MicroAge Purchasing Agreement by and between MicroAge Computer            Exhibit 10.17 to Form
      Centers, Inc. and Allstar Systems, Inc.                                   S-1 filed Aug. 8, 1996

10.18 IBM Business Partner Agreement by and between IBM                         Exhibit 10.18 to Form
      and Allstar Systems, Inc.                                                 S-1 filed Aug. 8, 1996

10.19 Confirmation of Allstar Systems, Inc.'s status as a Compaq authorized     Exhibit 10.19 to Form
      reseller dated August 6, 1996.                                            S-1 filed Aug. 8, 1996

10.20 Hewlett-Packard U.S. Agreement for Authorized Second Tier Resellers       Exhibit 10.20 to Form
      by and between Hewlett-Packard Company and Allstar Systems, Inc.          S-1 filed Aug. 8, 1996

10.21 Associate Agreement by and between NEC America, Inc. and                  Exhibit 10.21 to Form
      Allstar Systems, Inc.                                                     S-1 filed Aug. 8, 1996

10.22 Mitel Elite Dealer Agreement and Extension Addendum by and between        Exhibit 10.22 to Form
      Mitel, Inc. and Allstar Systems, Inc.                                     S-1 filed Aug. 8, 1996

10.23 Dealer Agreement dated March 1, 1995, by and between Applied Voice        Exhibit 10.23 to Form
      Technology and Allstar Systems, Inc.                                      S-1 filed Aug. 8, 1996

10.24 Industrial Lease Agreement dated March 9, 1996, by and between            Exhibit 10.24 to Form
      H-5 J.E.T. Ltd. as lessor and Allstar Systems, Inc. as lessee.            S-1 filed Aug. 8, 1996

10.25 Lease  Agreement  dated June 24,  1992,  by and  between  James J.        Exhibit 10.25 to Form
      Laney, et al. As lessors,  and Technicomp  Corporation  and               S-1 filed Aug. 8, 1996
      Allstar Services as lessees.

10.26 Agreement for Wholesale Financing, Business Financing Agreement           Form 10-K filed Mar.
      and related agreements and correspondence by and between DFS Financia     31, 1998
      Services and Allstar Systems, Inc., dated February 27, 1998

10.27 Sublease Agreement by and between X.O. Spec Corporation and               Form 10-K filed Mar.
      Allstar Systems, Inc. dated May 12, 1997                                  31, 1998

10.28 Lease Agreement dated May 14, 1998 by and between University Hill Plaza   Form 10-K filed April
      and Allstar Systems Rio Grande, Inc.                                      12, 1999

10.29 Lease Agreement dated March 4, 1998 by and between The Rugby              Form 10-K filed April
      Group, Inc., and Allstar Systems, Inc.                                    12, 1999

10.30 Sublease Extention Agreement dated December 31, 1998 by and between       Form 10-K filed April
      Allstar Equities, Inc. and Allstar Systems, Inc.                          12, 1999


<PAGE>

10.31 Amendment to Lease Agreement dated June 24, 1992, by and between          Form 10-K filed April
      James J. Laney, et al. As lessors, and Technicomp Corporation and         12, 1999
      Allstar Services as lessees.

10.32 Lease Agreement by and between Allstar Equities, Inc. and Allstar         Form 10-K filed March
      Systems, Inc.                                                             28, 2000

10.33 Asset Purchase Agreement Between Amherst Computer Products                Exhibit 2.1 to Form
      Southwest, L.P., Amherst Technologies, L.L.C. and Allstar                 8-K filed March 22,
      Systems, Inc. dated March 16, 2000                                        2000

10.34 Voting and Support Agreement between Amherst Computer Products            Exhibit 99.1 to Form
      Southwest, L.P. and Allstar Systems, Inc., dated March 16, 2000           8-K filed March 22,
                                                                                2000
10.35 Promissory Note between James H. Long and Allstar Systems, Inc.           Form 10-K filed March
      dated December 1, 1999                                                    28, 2000

21.1  List of Subsidiaries of the Company.                                      Form 10-K filed Mar.
                                                                                28, 2000

23.1  Independent Auditors' Consent of Deloitte & Touche LLP,.                  Form 10-K filed Mar.
                                                                                28, 2000

27.1  Financial Data Schedule.                                                  Form 10-K filed Mar.
                                                                                28, 2000

99.1  Schedule II Valuation and Qualifying Accounts                             Form 10-K filed Mar.
                                                                                28, 2000

b     No Form 8-K has been filed in the last  quarter of the fiscal year covered
      by this report
</TABLE>

<PAGE>

                                                      SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) 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, March 22, 1999.

                              Allstar Systems, Inc.
                                  (Registrant)

                              By:           /s/ James H. Long
                              James H Long, Chief Executive Officer

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.

                Signature                        Capacity

         /s/ James H. Long          Chief Executive Officer, President and
                                      Chairman of the Board, (Principal
                                      Financial and Accounting Officer)

         /s/ Donald R. Chadwick     Secretary and Director


         /s/ Mark T. Hilz           Director


         /s/ Richard D. Darrell     Director


         /s/ Jack M. Johnson        Director