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, 2001

    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

                              I-SECTOR CORPORATION
             (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 18,
2002, as reported on NASDAQ Small Cap Market, was approximately $1,235,007.

         The number of shares of Common Stock, $.01 Par Value, outstanding as of
March 18, 2002 was 3,849,525.

                       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
"SAFE HARBOR"  PROVISIONS  OF THE PRIVATE  SECURITIES  LITIGATION  REFORM ACT OF
1995. ALL STATEMENTS INCLUDED IN THIS ANNUAL REPORT,  OTHER THAN STATEMENTS THAT
ARE PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS
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.  THESE FORWARD-
LOOKING  STATEMENTS  ARE SUBJECT TO KNOWN AND UNKNOWN  RISKS AND  UNCERTAINTIES.
NUMEROUS  FACTORS,  INCLUDING  FACTORS THAT THE COMPANY HAS LITTLE OR NO CONTROL
OVER,  MAY  AFFECT 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.  "RISKS
RELATED TO OUR BUSINESS STRATEGY," WHICH COULD CAUSE ACTUAL EVENTS,  PERFORMANCE
OR RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH STATEMENTS.

GENERAL

         I-Sector  Corporation is a holding  company and conducts  substantially
all of its operations through its subsidiaries.  Our subsidiaries are engaged in
various aspects of information and communications  technology business. In 2001,
our revenue  from  continuing  operations  was  derived  through  three  primary
subsidiary companies:

o        Allstar  Solutions,   Inc  provides  information  technology  solutions
         including:  technical staff  augmentation  for IT helpdesk  operations;
         turnkey  outsourcing of the IT helpdesk  function;  helpdesk  solutions
         consulting  services;  information  technology  systems  consulting and
         project  management  services,  on site and carry-in  computer  repair;
         application   support;   operating   system  and  network   design  and
         implementation; and turnkey systems support.

o        Internetwork  Experts,  Inc  is a  network  professional  services  and
         integration  organization with areas of practice that include:  network
         design  and  implementation;   turnkey  support;  security  audits  and
         firewall design; and network  infrastructure  management and consulting
         services.

o        Stratasoft, Inc. develops and is engaged in marketing software products
         for computer-telephony integration, including products for professional
         call center and other high volume calling applications.


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  evolved.  Reselling  of popular
computing  hardware and software  products,  and the support and  maintenance of
such  products,  which  was one of the high  growth  segments  in this  industry
sector, has matured.  Other information technology industry sectors are still in
a somewhat  early stage while yet other  sectors  are in their  infancy.  As the
information  technology  market has evolved,  both challenges and  opportunities
have been created for industry participants.

<PAGE>

         Our former Computer Products business had been struggling with numerous
challenges  related to the evolution of the computer reselling  industry.  Major
product manufacturers changed their business models by selling products directly
to the  consumer  through the  Internet  which  resulted in lower gross  margins
throughout the computer product  reselling  industry.  The  proliferation of new
products created an increasingly  complex operating  environment.  These changes
are, in part,  modifying the purchasing  habits of corporations  related to both
information technology products and services.

         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
utilize 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 and
communication  technology  used by  organizations  today  demands that  superior
information  technology service providers  specialize.  Focus and specialization
create  improved  quality,  productivity  and operational  effectiveness.  Today
organizations  realize this and increasingly  look to specialized  providers for
their needs.

         Recently,   during  2000  and  continuing  through  2001,  the  overall
information technology industry experienced a marked slowdown. This slowdown has
been in conjunction  with and is most likely related to, the overall slowdown in
the U.S.  economy  that began at  approximately  the same time and was made more
severe following the events of September 11, 2001. The communications  equipment
sector has  experienced  a greater than average  slowdown due to capital  budget
constraints in the telecom service provider sector.

RECENT SALES OF CERTAIN BUSINESS SEGMENTS

All monetary amounts discussed in Items 1 through 7 are in thousands.

Disposition of IT Staffing Business

         On November  6, 2001 we  determined  to exit the IT Staffing  business,
which had been unprofitable and because we believed that the technical  staffing
industry was most likely to remain weak for the  foreseeable  future.  Effective
December  31,  2001,  the  business  was  sold  to  Echelon  Staffing,  Inc.,  a
corporation  owned by our former employee.  Under the terms of the sale I-Sector
received a note receivable for $52, of which $50 was for the ongoing  operations
and $2 for certain fixed assets  relating to this business.  The note receivable
bears interest at 5% per annum and is collectible in  installments  based on the
total  monthly  revenue of the buyer over 24 months  beginning  in March 2002. A
disposal  loss of $11 (net of tax of $5),  including an  estimated  loss for the
operating  results from the  measurement  date,  November 6, 2001 to the closing
date of the sale of $37, and  estimates  for  impairment of assets caused by the
disposal  decision of $34 was  recognized  in 2001.  Net loss from  discontinued
operations  was $43,  $107 and $167 (net of taxes of $22,  $55 and $87) in 1999,
2000  and  2001,   respectively.   I-Sector  retained  accounts   receivable  of
approximately  $82, net of reserves and  liabilities  related to the IT Staffing
business at December  31,  2001.  Revenue for the IT Staffing  business  for the
years  ended  December  31,  1999,  2000 and 2001 was  $1,191,  $1,242 and $967,
respectively.

<PAGE>

Disposition of Computer Products Business

         On March 16, 2000 we 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.  That sale  closed on May 19, 2000 after  shareholder  and other
required  approvals were obtained.  Under this agreement,  assets and operations
were sold to Amherst Computer Products Southwest,  L.P., an affiliate of Amherst
Technologies,  L.L.C. The terms of the agreement  included cash consideration of
$14,779,  plus the  possibility of receiving a future payment of up to $500 from
an escrow account.  I-Sector  realized a gain of  approximately  $3,700,  net of
taxes,  on the sale.  The  proceeds  of the sale were used to reduce  debt.  The
discontinued  operations of the Computer  Products  Division  produced income of
$1,343 and $302 in 1999 and 2000, respectively (net of taxes of $688 and $156 in
1999 and 2000, respectively). We retained accounts receivable of $20,266, net of
reserves,  fixed assets of $255 and liabilities related to the Computer Products
Division.  At December 31,  2001,  accounts  receivable  related to the Computer
Products  Division had either been  collected or written off.  Fixed assets were
redeployed in continuing operations. In connection with the sale of the Computer
Products  Division,  I-Sector  also sold a portion of the IT  Services  business
located in El Paso,  Texas. The El Paso branch office portion of the IT Services
business  accounted  for  revenues of $2,012,  $955 and $(1) for the years ended
December  31, 1999,  2000,  and 2001,  respectively.  For  financial  accounting
presentation the El Paso services business was included in the corporate segment
of continuing operations for the years ended December 31, 1999, 2000 and 2001.

Sale of Telecom Systems Business

         On November 2, 1999 we determined  to exit the Telecom  business and on
March 16, 2000,  we sold the Telecom  Systems  segment 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 cash. 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 an income tax saving
of $586) was recognized.  The loss from  discontinued  operations (net of income
tax savings of $505, was $981 in 1999. We retained  accounts  receivable of $1.4
million, net of reserves, fixed assets of $30 and liabilities related to Telecom
Systems.  At December  31,  2001,  the Company  had no net  accounts  receivable
related to the Telecom  Systems  segment.  Fixed assets were  redeployed  in the
continuing operations.

BUSINESS STRATEGY

         Mindful of the manner in which the information  technology industry was
evolving,  we  evaluated  our  situation  in 1999 and  decided  that  change was
prudent.  We decided  that we should  exit our  Telecom  Systems  business  both
because  we had been  unable  to  attain  profitability  since we began  Telecom
Systems in 1994 and because the business of selling and  installing  traditional
business  telephone  systems was a mature industry that we believed offered less
opportunity  for growth  than  other  areas.  We  decided  to sell our  Computer
Products Division because,  in spite of the fact that Computer Products had been
a profitable  business for us until that time, we believed that this segment was
declining and that we could deploy the proceeds from a sale of Computer Products
in other ways that we  believed  would  ultimately  create  greater  stockholder
value. We consummated the sale of each of those  businesses in the first half of
2000 and during the second half of the 2000 we restructured  and reorganized the
remaining company for the future.

         After  the  sale of these  two  businesses,  which  had  accounted  for
approximately 90% of our historical revenues,  we planned to utilize our capital
resources to build a portfolio of focused  subsidiary  companies,  each of which
would be involved in some facet of information and/or communications technology.
We believe  that we can produce  higher  rates of growth,  and better  financial
performance, by providing our products and services through focused, specialized
companies,  each  branded  to  pursue a  specialized  mission  and each led by a
separate,  focused,  management team with personal financial  incentives tied to
their company's financial performance. We plan to continue to expand each of our
three  current  subsidiary  companies  through  internally  generated  sales and
possibly  through the  acquisition of compatible and synergistic  companies.  We
will also continue to evaluate the possibility of entering new lines of business
either by starting new subsidiary companies or by acquiring other companies.  We
intend to focus our growth  efforts in niche industry areas that we believe hold
the greatest opportunity for growth and profitability. Each of our three current
subsidiary companies is executing its own unique business strategy.

<PAGE>

Allstar Solutions, Inc.

         Allstar Solutions, Inc. ("Allstar"), which started as the services side
of our former computer reselling organization, has been transforming itself into
a provider of specialized  information  technology solutions and intends to grow
its revenue by aggressively adding additional specialized solutions offerings as
well as by rapidly  expanding its sales force.  By offering  highly  specialized
competence in the niche  solutions areas that it operates in, Allstar intends to
be able to  gain  market  share  against  its  competitors  by  offering  better
solutions and better support for such solutions than its competitors. Allstar is
headquartered in Houston and has a branch office in Dallas.  In markets where it
does not maintain  branch  offices,  Allstar  often  subcontracts  for necessary
technical  personnel,  particularly where required for larger scope or prolonged
duration  contracts.  Allstar  typically  targets  customers  that are medium to
larger corporate clients as well as state and local government organizations.

Internetwork Experts, Inc.

         Internetwork  Experts,  Inc.  ("INX")  intends  to  rapidly  become the
leading regional network professional  services  organization by offering highly
specialized  technical  services of the highest quality and competence,  thereby
rapidly commanding a significant  presence in the network services and equipment
markets.  By aggressively  positioning itself as the most technically  competent
provider of network professional services, INX intends to rapidly be included in
a large  percentage of the large network  consulting and network  implementation
projects in the markets that it serves.  By  concentrating  its efforts on Cisco
technology,  INX intends to build  loyalty  with the leading  network  equipment
manufacturer and more easily achieve superior  technical  competence as compared
to the competition. By rapidly increasing its sales staff, INX intends to pursue
a rapid growth path for the foreseeable  future.  INX is headquartered in Dallas
and has a branch office in Houston.  INX typically  targets  customers  that are
large  corporate  clients and  communications  firms that utilize  large complex
network infrastructures.

Stratasoft Inc.

         Stratasoft,  Inc. ("Stratasoft") intends to continue to further develop
its existing suite of software  products for professional  call centers and high
volume  calling  applications  and to further  strengthen the market share gains
that it has made over the past several years. By upgrading the software products
to take  advantage of newer  technology,  such as  voice-over-IP,  Stratasoft is
continuing  to increase  the features  and  functionality  that it can offer its
clients.  Stratasoft markets its products through its own sales account managers
as well as a network of  resellers.  Stratasoft  plans to increase the number of
both sales  accounts  managers and  resellers  going  forward,  thereby  driving
expected future revenue growth. In addition,  a concentrated  effort to sell its
products  in  markets  other  than the  U.S.  is  expected  to  continue  to add
incremental new growth  opportunities.  Stratasoft is  headquartered in Houston,
but markets its products nationally and internationally.  Stratasoft's customers
are typically call center companies or companies or organizations that operate a
call center, and includes political and non-profit organizations.

PRODUCTS AND SERVICES

         We currently provide all of our products and services,  and produce all
of our revenue,  through our three wholly-owned  subsidiary  companies,  further
details of which are provided below.

<PAGE>

Allstar Solutions, Inc.

         Allstar  offers a variety of service  offerings  related to the service
and support of computing technology. The services that Allstar offers include:

o        Technical staff augmentation for IT helpdesk operations
o        Helpdesk solutions consulting
o        Turn-key outsourcing of the IT helpdesk function
o        Network support and network management
o        IT project management
o        On site and carry-in computer hardware repair
o        Application support
o        Operating system and network migration services
o        Network design and implementation
o        Turnkey systems support

         Allstar  typically  prices its 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 the vendor
accreditation  necessary to service their significant  product lines,  Allstar's
technical staff participates in various certification and authorization programs
sponsored by hardware manufacturers and software suppliers.

Internetwork Experts, Inc.

         INX is a provider of network  infrastructure  professional services and
an integrator of network infrastructure  products manufactured by Cisco Systems,
Inc. ("Cisco"). INX has developed the following areas of network expertise:

o        Network baseline assessment
o        Design/architecture
o        Implementation
o        Network management
o        Project management
o        Network security
o        Knowledge transfer

         Specific technologies in which INX offers expertise include:

o        Routing
o        Switching (LAN/MAN/WAN)
o        Virtual Private Networks (VPN)
o        Voice over X (VoX)
o        Wireless
o        Security
o        IP Telephony
o        Wireless networks

         INX's  consultants  have held  critical  leadership  roles in all major
phases of the project life cycle  including  analysis,  design,  implementation,
support,  management,  and  documentation.  Their  certified  experts  have also
presented many educational  seminars for professional  organizations  within the
networking  industry  and are often  engaged to provide  knowledge  transfer for
clients as well as vendors.

<PAGE>

Stratasoft, Inc.

          Stratasoft  develops and markets its 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  professional  call center or other type of high volume  calling
application, for both inbound and outbound calls. Stratasoft's software products
are often customized to suit a customer's particular needs and are sometimes, at
the  customer's  request,  bundled  with  computer  hardware  supplied by either
Stratasoft or one of their value added resellers.  Stratasoft  currently has two
primary computer-telephony software products, which are marketed under the trade
names StrataDial and StrataVoice:

     o   StrataDial is an inbound/ outbound call center call management  system.
         The system is used predictive dialing 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.
         StrataDial  has  enhanced   messaging   architecture   with  direct  IP
         communications,   allowing  for  greater  ease  in   integrating   with
         off-the-shelf   products   like   collection   applications,   customer
         relationship  management applications and market research applications.
         A terminal  emulator is also core to the  StrataDial  Agent  interface,
         thus allowing easier integration to legacy and mainframe systems.

         StrataDial(R)  Predictive Dialer expands upon its already award winning
         platform  by  leveraging  Intel  Dialogic's  Global  Call(R).  This has
         permitted  Stratasoft  to support any dialing  platform from around the
         world, including T-1, E-1, ISDN. This means that StrataDial(R) can make
         or  receive  calls from  virtually  anywhere  in the world.  The latest
         release of Stratadial will allow us to continue growing our business in
         Asia, India and Europe

     o   StrataVoice  is an outbound  dialing  product  designed for high volume
         calling 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.

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

         All of our  subsidiary  companies  utilize sales  personnel,  including
account  managers and customer service  representatives,  to sell their products
and/or services.  These sales personnel are partially  compensated,  and in some
cases are solely  compensated,  on either the  revenue or the  profitability  of
sales that they participate in developing.  In addition,  Stratasoft markets its
products  through a network of value added  resellers,  who typically  integrate
their  products and services with  Stratasoft's  software  products to provide a
complete solution.  The subsidiary companies promote their products and services
through  general  and  trade  advertising,  participation  in  trade  shows  and
telemarketing  campaigns.  We believe that a significant portion of new customer
relationships  have  originated  through  word-of-mouth  referrals from existing
customers.

<PAGE>

CUSTOMERS

         The  focus  of the  various  subsidiary  companies'  marketing  efforts
varies, as does the makeup of each company's  customer base.  Allstar's customer
base consists  primarily of small to larger commercial  clients as well as state
and local  governmental  organizations,  primarily in Houston and Dallas.  INX's
customers  are  typically  larger  corporate   organizations  or  communications
companies  that utilize large network  infrastructures,  a majority of which are
located in, or make significant network  infrastructure  decisions in, Dallas or
Houston, but for which work is performed nationally.  Stratasoft's customers are
typically  call center  companies or companies or  organizations  that operate a
call center, and includes political and non-profit organizations.  A majority of
Stratasoft's  customers have historically been located in the United States, but
Stratasoft  has  increasingly  sold and  installed  its call  center  systems in
several other countries. In 2001,  approximately 42.9% of Stratasoft's revenues,
and  13.2% of  consolidated  revenues,  were  with  customers  outside  the U.S,
including customers in India, the United Kingdom, Canada and the Philippines. In
2000 approximately 3.9% of Stratasoft revenues and 1.7% of consolidated revenues
were with customers  outside the United States.  We had no single  customer that
represented 10% or greater of our total  continuing  revenues in the years ended
December 31, 2001,  2000 or 1999,  however we had a group of end user  customers
related to a single  reseller  that  represented  10.0% of our total  continuing
revenues in 2001.

SUPPLY AND DISTRIBUTION

         As a majority of our revenue is derived  from  providing  services,  or
from  the  sale of our  own  software  products,  our  reliance  on  supply  and
distribution  channels is limited.  We do, however,  purchase limited amounts of
computing  and  communications  equipment  that  is  sold  in  conjunction  with
Stratasoft's   software  products  and  by  INX  as  part  of  turn-key  network
infrastructure  solutions. We have historically relied on wholesale distributors
to supply a  majority  of the  products  that we have  sold.  We have  typically
purchased the majority of our products from three primary  suppliers in order to
obtain  competitive  pricing,  better product  availability and improved quality
control.  INX recently began purchasing  Cisco products  directly from Cisco. In
addition,  Allstar and INX purchase or exchange service parts, such transactions
typically  being  with  the  product   manufacturer  or  its  authorized   parts
distributor.

MANAGEMENT INFORMATION SYSTEMS

         We  utilize  an  internally  developed,  highly  customized  management
information  system  ("MIS") to manage most aspects of our business.  All of our
subsidiary  companies  utilize our MIS,  which is customized  to their  specific
needs.  We use our MIS to  manage  accounts  payable,  accounts  receivable  and
collections,  general  ledger,  sales  order  processing,   purchasing,  service
contracts, service calls and work orders, engineer and technician scheduling and
time  tracking,  service parts  acquisition  and  manufacturer  warranties,  and
project  management.  Reporting  can be  generated  for  project  profitability,
contract and customer  analysis,  parts and inventory tracking and employee time
tracking.  The system  provides for  separate  company  accounting  and also for
consolidation of all subsidiary company financial information.

EMPLOYEES

         As of December 31, 2001 we employed  approximately 168 individuals.  Of
these,  approximately 36 were employed in sales, marketing and customer service,
81 were employed in engineering and technical  positions and 51 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 nor are
any subject to a collective bargaining agreement.  We believe that our relations
with our employees are good.

<PAGE>

 RECENT ORGANIZATIONAL CHANGES

         We sold our Telecom Systems  business on March 16, 2000 and we sold our
Computer  Products  Division on May 19, 2000.  In July 2000,  we  separated  our
former IT Services business into three separate  businesses,  each of which is a
wholly-owned  subsidiary  corporation.  One of these subsidiary companies was IT
Staffing,  Inc.,  which had already been operated as a  wholly-owned  subsidiary
since 1997.  We  contributed  the non-IT  Staffing  remaining  components of the
former IT Services business to two newly formed  corporations,  Allstar Computer
Services Inc. and Synergy Helpdesk  Solutions,  Inc. Effective June 30, 2001, we
merged Synergy Helpdesk Solutions, Inc. into Allstar Computer Services, Inc. and
subsequently renamed the resulting company Allstar Solutions, Inc. In July 2000,
we  also  formed  another   wholly-owned   subsidiary,   Internetwork   Sciences
Corporation.  In October 2000 Internetwork Sciences Corporation acquired certain
assets and the ongoing operations of an unrelated company, Internetwork Experts,
Inc.,  and adopted the name of the  acquired  firm by changing its legal name to
the latter.

RISKS RELATED TO OUR BUSINESS STRATEGY

         Our business  strategy is to redeploy the proceeds from the sale of our
Computer  Products and Telecom Systems  businesses to improve the performance of
our  existing  businesses,  make  selective  acquisitions  and  pursue  selected
business  opportunities.  This strategy  involves many risks including,  but not
limited to, the following:

Risks of Potential Future Acquisitions and Investments

         Our business may depend in the future on the successful acquisition and
the  integration  and  performance of businesses  that we acquire.  Our strategy
involves  the  substantial  risk that we will not find  suitable  businesses  to
acquire  on  terms  we  believe  are  commercially  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 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  information  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 information 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.

o        We may choose to acquire  or invest in 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.

<PAGE>

Concentration of international revenues

         During 2001 we have recognized revenues on the percentage-of-completion
basis  for  several  projects  associated  with  one  reseller  in  South  Asia.
International revenues represent 13.2% of consolidated revenues in 2001. We have
risk to the  extent  that  this  group of  customers  have not paid us or issued
contractual letters of credit up to the level of cost and earnings recognized.

Project completion

         Our  subsidiary,  Stratasoft,  recognizes  its project  revenues on the
basis of percentage-of-completion for projects that have a duration in excess of
three months. The percent complete is calculated based on a ratio of total costs
incurred to estimated  total costs for each project.  Revisions of estimates are
reflected in the period in which the facts  necessitating  the revisions  become
known. Should one of these projects fail to complete, we have risk that we would
have to reverse some recognized revenues and earnings.

Uncertain Revenue Sources

         In order to reach  profitability  from our existing  businesses we will
have to grow the  revenues.  The  relatively  high level of  operating  expenses
remaining  after  the  divestiture  of  Computer  Products  has  contributed  to
operating  losses,  which were expected to continue  until new revenues could be
generated to offset some of the loss of revenues from the  businesses  that have
been sold. During 2001 we experienced  significant  revenue growth that resulted
in  reductions  of  our  losses  each  quarter  but  we  were  unable  to  reach
profitability by the quarter ended December 31, 2001.

Possible Need For Additional Financing

         We may be required to obtain cash to supplement  our available  capital
to acquire 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 raise capital on terms we consider acceptable.

         If we use 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 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
         affect 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  existing
         stockholders.

<PAGE>

Increased Dependence on Service Businesses and Stratasoft

         Our existing  three  subsidiary  companies,  two of which are primarily
providers  of  information  technology  services  and one of which  develops and
markets software,  are currently our only revenue producing  business  segments.
Because of that,  our ability to be successful in these areas of business  takes
on a much greater  significance  to us than in the past. We plan to  concentrate
our efforts on growing these  businesses.  The risk exists that we may be unable
to accomplish this improvement, and the operations of these businesses alone may
not enable us to operate profitably.

Adverse Changes in Our Industry

         As described above under the caption "Industry Changes" 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.

Highly Competitive Business

         We have been engaged in business activities that are highly competitive
and rapidly changing.  Price competition could have a material adverse effect on
our financial condition and results of operations. Our competitors include major
information  technology  service  organizations,   resellers  and  distributors,
including  certain  manufacturers  and distributors  that supply products to us.
Other competitors include systems  integrators,  computer-telephony  value-added
resellers and other computer-telephony software suppliers.

U. S. Regional Concentration

         For the foreseeable  future,  we expect that we will continue to derive
most of our revenue from customers  located  within the geographic  regions into
which we market.  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 our services  businesses  depends  largely on our
continued status as an authorized reseller and/or 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 services  that we currently  offer.  In addition,  INX's
ability  to  resell  Cisco  network   products  is  dependent   upon  its  Cisco
authorization.   In  general,   the  agreements   between  us  and  our  product
manufacturers  either  have fixed terms or provide  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.

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  could have a material  adverse
effect on our financial condition and results of operations.

<PAGE>

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  with  respect to the product  sales  portion of our
business  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 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,  projects,  accounting  and  inventory.  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.

Control by Existing Stockholders

         James H. Long,  founder,  Chairman  of the Board,  President  and Chief
Executive Officer,  owns 52.8% of the outstanding Common Stock and Mr. Long will
have the  ability  to  control  the  election  of the  members  of our  board of
directors,  prevent the approval of certain  matters  requiring  the approval of
either a majority of stockholders or 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.

Risks Related to Patent Infringement

         Stratasoft settled a patent infringement lawsuit in September 2001, and
as part of the  settlement  agreement  has  obtained  cross-licensing  rights on
patents  filed by the  plaintiff  in such  lawsuit.  It is  possible  that other
companies  may also  believe  that  Stratasoft's  products  infringe  upon their
patents.  Patent  infringement  litigation  is complex and  expensive and future
assertions of patent infringement by other companies, such could have a material
adverse effect on our financial performance, financial condition and our results
of operations.

Absence of Dividends

         We expect to retain any 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.

<PAGE>

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 corporation owned by the Chairman, Chief Executive Officer and
President  of the  Company.  A new lease at reduced  rental  rates was signed on
February 1, 2002,  which  expires on January 31,  2007.  Our Dallas  office is a
space of  approximately  8,960 square feet. The Dallas facility lease term began
July 2000 and expires in July 2003.

Item 3.  Legal Proceedings

         We are party to  litigation  and claims that  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.

         In July 2000,  Benchmark  Research and  Technology,  Inc. made a verbal
claim against us, claiming that we breached our contract with Benchmark, that we
were negligent and breached various warranties, committed fraud and violated the
Deceptive  Trade  Practices  Act. The case was mediated in November  2000 but no
agreement  was reached.  We know of no lawsuit  being filed on this  matter.  We
believe  that the claim is without  merit and intend to  vigorously  contest the
demand.

         In October, 2000, our wholly-owned  subsidiary  Stratasoft,  Inc. filed
suit in the  Harris  County  Texas  County  Court of Law  against  its  customer
Accelerated  Telemarketing  for a  remaining  balance  of $47  on its  contract.
Thereafter  Accelerated  Telemarketing  filed a separate  legal action  claiming
breach of contract,  breach of warranty,  violation of Deceptive Trade Practices
Act and  other  claims.  The  case is in the  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.

         In October 2001,  Inacom Corp.  wrote a demand letter  claiming that we
owed the sum of  approximately  $570 to Inacom as a result of  termination  of a
Vendor  Purchase  Agreement  between  Inacom  and us. At March  18,  2002 we are
unaware of a formal lawsuit being filed,  although one has been  threatened.  We
believe that the demand is without  merit and intend to  vigorously  contest the
demand.

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

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

<PAGE>

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

         The Company's  shares are traded on the NASDAQ Small Cap Market.  Prior
to July 11, 2000 our shares traded under the symbol  "ALLS".  Upon the change of
our  corporate  name on July 11, 2000,  our stock began trading under the symbol
"ISEC".

                                                          High         Low
Fiscal 2000
         First quarter                                   5.00         1.375
         Second quarter                                  3.50         1.938
         Third quarter                                   2.438        1.563
         Fourth quarter                                  1.688        0.625

Fiscal 2001
         First quarter                                   1.188        0.875
         Second quarter                                  1.250        0.980
         Third quarter                                   1.100        0.900
         Fourth quarter                                  1.040        0.600

         As of March 18, 2001, there were 58 shareholders of record.  Management
estimates  that there are  approximately  947  beneficial  holders of our common
stock. We have never declared or paid any cash dividends on our Common Stock. On
March 18,  2002,  the  closing  sales  price of our Common  Stock as reported by
NASDAQ was $ .70 per share.  We  currently  anticipate  that we will  retain all
earnings for use in our business operations.

<PAGE>

Item 6.  Selected Financial Data

        The  following  sets forth the selected data of the company for the five
years ended December 31, 2002.

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


<S>                                     <C>              <C>           <C>           <C>            <C>
                                         1997            1998          1999          2000(1)        2001(1)
Operating Data:
Revenue                             $  11,719      $   15,408    $   17,984      $  17,087      $   23,620
Cost of sales and services              7,057          10,078        11,806         12,968          17,325
   Gross profit                         4,662           5,330         6,178          4,119           6,295
Selling, general and
  administrative expenses               4,915           6,637         6,207          9,479          10,573
   Operating loss                         253           1,307            29          5,360           4,278
Interest and other income, net            (43)            (41)          (23)          (239)           (316)
Loss from continuing operations
  before benefit for income taxes         210           1,266             6          5,121           3,962
(Benefit) provision for income
  taxes                                   (74)           (415)           20         (1,493)            (87)
     Net loss from
       continuing operations              136             851            26          3,628           3,875

Discontinued Operations (2):
  Net income (loss) from
   discontinued operations, net
   of taxes                             1,980            (247)          319            195            (167)
  Income (loss) on

   disposal, net of taxes                                            (1,138)         3,390             337
     Net income (loss)              $   1,844      $   (1,098)   $     (845)     $     (43)     $   (3,705)

Net loss per share:
Basic and diluted:
Net loss from continuing
  operations                        $   (0.02)     $    (0.20)   $    (0.01)     $   (0.90)     $    (0.99)
Net income (loss) from
  discontinued operations                0.54           (0.05)         0.08           0.05           (0.04)
Loss (gain) on disposal                                               (0.27)          0.84            0.08
Net income (loss) per share         $    0.52      $    (0.25)   $    (0.20)     $   (0.01)     $    (0.95)
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                                               Year ended December 31,
                                                                   (In thousands)
<S>                                      <C>             <C>           <C>            <C>             <C>
                                         1997            1998          1999           2000            2001
Balance Sheet Data:
Working Capital                     $  12,738      $    9,800    $    9,567      $  10,098      $    5,983
Total Assets                           34,855          51,028        54,531         17,142          13,548
Short-term borrowings                   1,572          15,958        15,869             -0-            213
Long-term debt                             -0-             -0-           -0-            -0-            410
Stockholders' equity                $  14,637      $   12,705    $   11,830      $  11,912      $    8,015
<FN>

(1) Includes the operations of INX, which was formed in July 2000.
(2) In 1999 we sold our Telecom division.  In 2000 we sold our Computer Products
    division. In 2001 we sold our IT Staffing business.
</FN>
</TABLE>

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

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

Overview

         Through 1999, our revenue was historically derived through four primary
segments, IT Services, CTI Software, Computer Products and Telecom Systems, each
of which were historically  reported separately.  During the year ended December
31, 1999 we  discontinued  our Telecom  Systems  business and during the quarter
ended March 31, 2000 we discontinued our Computer Products business. We sold our
Telecom Systems and Computer Products businesses in separate transactions during
the first quarter of 2000. After the sale of these two businesses, in July 2000,
we  separated  what  had been  the IT  Services  business  into  three  separate
businesses,  of which one was IT Staffing ("IT Staffing,  Inc") and all of which
are wholly-owned subsidiaries.  During 2001 we sold our IT Staffing business. We
contributed the remaining  components of the former IT Services  business to two
newly formed wholly-owned corporations,  Allstar Computer Services, Inc. ("ACS")
and Synergy Helpdesk  Solutions,  Inc.  ("Synergy").  Effective June 30, 2001 we
merged  Synergy  into ACS and  subsequently  renamed  that  business  to Allstar
Solutions,  Inc.  ("Allstar").  In July  2000,  we formed  another  wholly-owned
subsidiary,  Internetworking  Sciences,  Inc. ("INX"),  a professional  services
organization  that focuses on the design,  deployment and support of large-scale
network infrastructure requirements. In October 2000 INX acquired certain assets
of an unrelated  professional  service  company in the Dallas area,  which had a
similar focus,  and  subsequently  underwent a legal name change to Internetwork
Experts,  Inc.  Our CTI  Software  business  was not affected by the sale of the
Computer  Products  and  Telecom  Systems  business  units,  however  we are now
referring to this segment by its corporate name,  "Stratasoft"  rather than "CTI
Software" as we have in the past.

         We market  our  services  businesses  in Texas  from  locations  in the
Houston  and  Dallas-Fort  Worth  metropolitan  areas.  Stratasoft  markets  its
products  worldwide  through  a direct  sales  force  and an  authorized  dealer
network. By operating through these highly focused wholly-owned subsidiaries, we
believe that we will offer better  customer  service,  and improve our financial
performance.

         Cost of sales and services includes the cost of products sold,  amounts
paid to  outside  contractors  for  services  performed  that are  related  to a
particular  sale and the wages and related  taxes and employee  benefits paid to
technical  staff that perform the services that we provide to our  customers.  A
certain  component  of total  technical  staff wages and related  costs are of a
fixed nature,  and therefore  gross margin will vary to the extent that services
revenues fluctuate from period to period.

         Gross  margin  varies  substantially  between  each of  these  business
segments.  Over the past three years gross margin in Allstar has ranged  between
19.5% and 30.9% and gross  margin for  Stratasoft  has ranged  between  46.4% to
54.3%. As a newly formed business, INX experienced negative gross margin of 2.3%
in 2000, but improved its gross margin to 10.3% in 2001.

<PAGE>

         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 primarily 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 do sales commissions.

Discontinued Operations and Sales of Certain Business Units

Sale of IT Staffing

         On  November  6,  2001,  we  approved  a plan to sell  our IT  Staffing
subsidiary and as a  consequence,  the operations of IT Staffing are reported as
discontinued  operations.  A  sale  was  completed  on  December  31,  2001.  In
connection with the sale of IT Staffing,  we recognized a loss from discontinued
operations  of  $167  (net  of  tax  of  $85)  on the  operations  prior  to the
measurement date of November 7, 2001 and we recognized a loss on disposal of $11
(net of tax of $5).

Sale of Computer Products

         On March 16,  2000 we entered  into an  agreement  whereby we agreed to
sell the ongoing business operations of our Computer Products business, together
with certain key assets of our IT Services  business located in El Paso,  Texas.
Under the terms of the sale we received cash consideration of $14,779,  plus the
possibility of receiving a future payment of up to $500 from an escrow  account.
A gain on disposal of the Computer Products  business,  including an estimate of
the operating  results from the measurement date, March 16, 2000, to the closing
date of the sale,  May 19, 2000, of $914, and estimates for impairment of assets
caused by the  disposal  decision  of $2,820,  totaling  $3,734 (net of taxes of
$2,607) was  recognized  in the year ended  December 31,  2000.  Our income from
discontinued  operations of the Computer Products business was $1,343,  and $302
(net of taxes of $688,  and $156) in 1999 and 2000,  respectively.  We  retained
accounts receivable related to the Computer Products business of $20,266, net of
reserves,  fixed assets of $255 and liabilities related to the Computer Products
business.  The accounts  receivable  collected  were used to repay all remaining
liabilities of the Computer Products  Division.  Fixed assets were redeployed in
the continuing operations. The sale of Computer Products closed on May 19, 2000,
after  shareholder  and other required  consents were  obtained.  During 2001 we
recognized  additional gain on the sale of the Computer  Products  Division as a
settlement of the escrow  account of $346,  net of taxes of $179. We experienced
net income on the  operations  of the Computer  Products  Division  prior to the
measurement  date,  March 16, 2000, of $302 in 2000,  net of taxes of $156 and a
gain on disposal of $3,734, net of taxes of $2,607.

Sale of Telecom Systems

         On  November  2, 1999,  we approved a plan to sell or close our Telecom
Systems  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 cash.  Additionally,  the  purchaser  assumed all of our  telephone
equipment  warranty  obligations  up to a maximum of $30,  which was  reached in
October 2000. All future warranty costs incurred by the purchaser will be billed
to us at an agreed  upon  rate.  An  estimate  of the cost of  future  telephone
equipment  warranty  obligations  of $95 is included at December 31, 2000 in the
balance sheet caption "Net liabilities  related to discontinued  operations".  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 an income tax saving of $586) was  recognized.  Our loss
from  discontinued  operations  (net of income tax  savings of $505) was $981 in
1999. We retained accounts  receivable of $1.4 million,  net of reserves,  fixed
assets  of $30  and  liabilities  related  to  the  Telecom  Division.  Accounts
receivable,  net of  reserves,  is $0 at December  31,  2001.  Fixed assets were
redeployed in the continuing operations.  The accounts receivable collected were
used to repay all remaining liabilities of the Telecom Division. During the year
ended  December  31, 2000  additional  expenses  related to the  disposal of the
Telecom Division was recognized of $344 (net of taxes of $240).

<PAGE>

Results of Operations

                           The  following  table  sets  forth,  for the  periods
indicated, certain financial data derived from our

consolidated statements of operations.  Percentages shown in the table below 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.

<TABLE>
<CAPTION>
                                                                  Year ended December 31,
                                                  1999                            2000                         2001

                                            Amount      %       Amount      %      Amount      %
                                                                         (Dollars in thousands)
<S>                                        <C>        <C>      <C>        <C>      <C>       <C>
Revenue

  Allstar                                  $ 10,962    61.0%   $  6,946    40.6%   $ 5,668    24.0%
  INX                                             0     0.0       1,874    11.0     10,775    45.6
  Stratasoft                                  4,318    24.0       6,660    39.0      7,257    30.7
  Corporate                                   2,704    15.0       1,640     9.6         (6)    0.0
  Eliminations                                    0     0.0         (33)   (0.2)       (74)   (0.3)
    Total                                    17,984   100.0      17,087   100.0     23,620   100.0
Gross profit
  Allstar                                     3,382    30.9       1,356    19.5      1,265    22.3
  INX                                             0     0.0         (43)   (2.3)     1,112    10.3
  Stratasoft                                  2,192    50.8       3,087    46.4      3,939    54.3
  Corporate                                     604    22.3        (269)  (16.4)         7  (116.7)
  Eliminations                                    0     0.0         (12)   36.4        (28)   37.8
    Total                                     6,178    34.4       4,119    24.1      6,295    26.7
Selling, general and
  administrative expenses
  Allstar                                     3,273    29.9       3,186    45.9      3,077    54.3
  INX                                             0     0.0         935    49.9      3,103    28.8
  Stratasoft                                  1,960    45.4       3,647    54.8      3,021    41.6
  Corporate                                     974    36.0       1,723   105.1      1,400     (NA)
  Elimination                                           0.0         (12)   36.4        (28)   37.8
    Total                                     6,207    34.5       9,479    55.5     10,573    44.8
Operating income (loss)
  Allstar                                       109    (1.0)     (1,830)  (26.3)    (1,812)  (32.0)
  INX                                             0     0.0        (978)  (52.2)    (1,991)  (18.5)
  Stratasoft                                    232     5.4        (560)   (8.4)       918    12.6
  Corporate                                    (370)  (13.7)     (1,992) (121.5)    (1,393)    (NA)
    Total                                       (29)   (0.2)     (5,360)  (31.4)    (4,278)  (18.1)
Interest and other income, net                  (23)    0.1        (239)    1.4       (316)    0.1
Loss from continuing
  operations before benefit

  for income taxes                                6     0.0       5,121    30.0      3,962    16.8
(Benefit) provision for income taxes             20    (0.1)     (1,493)   (8.7)       (87)   (0.4)
Net loss from continuing
  operations                                     26     0.1       3,628    21.2      3,875    16.4

Discontinued operations:
Income (loss) from discontinued
  operations, net of taxes                      319     1.8         195     1.1       (167)   (0.7)
Gain (loss) on disposal,
   net of taxes                              (1,138)   (6.3)      3,390    19.8        337     1.4
Net loss                                   $    845     4.7%   $     43     0.3%   $ 3,705    15.7%
</TABLE>

<PAGE>

Year Ended  December  31,  2001  Compared  to the Year Ended  December  31, 2000
(Dollars in thousands)

         Revenue. Total revenue increased $6,533 (38.2%) to $23,620 in 2001 from
$17,087  in  2000.   International  sales  accounted  for  $3,111  or  13.2%  of
consolidated  revenues in 2001 as compared to 1.7% in 2000,  and were  primarily
derived from the Stratasoft segment.

         Revenue from Allstar, which comprised 24.0% of total revenues, compared
to 40.6% in 2000,  decreased  $1,278  (18.4%)  to $5,668 in 2001 from  $6,946 in
2000.  The  decrease  in revenue  is  attributable  to the loss of revenue  from
certain customers and the loss of certain  categories of revenue associated with
and dependent upon the former Computer  Products  Division after the sale of the
Computer Products Division in May 2000.

         Revenue from INX, which comprised  45.6% of total revenues  compared to
11.0% in 2000, increased $8,901 (475.0%) to $10,775 in 2001 from $1,874 in 2000.
INX was formed in July 2000 and exerted intense  efforts to introduce  itself to
the market in Dallas and Houston and to form customer relationships. INX revenue
growth is expected to continue to increase in 2002, but not at as high a rate as
in 2001. In October 2000 INX acquired an established service business in Dallas.
The purchase  included an  established  customer list,  seven  engineers and two
sales staff members.  In November 2001 INX achieved gold status with Cisco,  its
primary  product line  manufacturer  which allows INX to purchase  directly from
Cisco at lower pricing levels and enhances INX's  relationship with Cisco in the
areas of lead generation, joint marketing and technical support.

         Revenue from  Stratasoft,  which  comprised  30.7% of total  revenue in
2001,  compared to 39.0% in 2000,  increased  $597 (9.0%) to $7,257 in 2001 from
$6,660 in 2000. The increased revenues from Stratasoft were primarily the result
of increased sales in the international sector, better recognition of Stratasoft
products  in the  market  place,  the  expansion  of the sales  staff and dealer
network and to increased advertising and marketing efforts.

         The Corporate  segment  includes both costs related to the operation of
the corporate  entity that are not  allocated to any  subsidiary  company,  plus
certain  operations  that are not  on-going  because of the sale of the Computer
Products  Division (see discussion at Item 1.  "Disposition of Computer Products
Business"),  and including  installation revenues that were related to a certain
customer of our Computer  Products  Division and revenue from our former El Paso
branch  office,  which  ceased  because  of the  sale of the  Computer  Products
Division.  Corporate  revenue,  which  comprised  0.0% of total revenues in 2001
compared to 9.6% in 2000,  decreased by $1,646 (100.4%) in 2001 to $(6) compared
to $1,640 in 2000.  The  decrease is  attributable  to the sale of the former IT
Services  Division  operations  of the El Paso office,  to the loss of a certain
customer of our former IT  Services  Division in May 2000 due to the sale of the
Computer Products Division and our corporate restructuring.

         Gross Profit.  Gross profit  increased $2,176 (52.8%) to $6,295 in 2001
from $4,119 in 2000, while gross margin increased to 26.7% in 2001 from 24.1% in
2000.

         Allstar  gross  profit  decreased  by $91 (6.7%) to $1,265 in 2001 from
$1,356 in 2000. Gross margin rates for Allstar were 22.3% in 2001 as compared to
19.5% in 2000. Allstar's cost of service consists primarily of labor cost, which
has a more fixed nature. In periods when service revenue  decreases,  it becomes
more important to manage labor cost in order to prevent erosion of gross margin.
Subsequent  to the  separation  of the IT  Services  segment  into  wholly-owned
subsidiary  companies in July 2000, Allstar  experienced lower labor utilization
related  to  lower  revenue.   In  addition  to  the  billable  technical  staff
utilization  issue,  Allstar had a single  large  project in 2000 on which gross
profit margin was about 12% below normal levels,  which negatively  impacted the
overall margin.

         INX gross profit in 2001 was $1,112 as compared to a gross loss in 2000
of $43, an increase of $1,155 (2686.0%) for a gross margin rate of 10.3% in 2001
compared to negative  gross margin of 2.3% in 2000.  INX was formed in July 2000
and as a  newly-formed  start-up  operation  in 2000,  INX had to have  billable
technical staff in place in order to be able to market their  services,  but was
unable to utilize that technical staff sufficiently to cover their labor cost.

         Stratasoft  gross  profit  increased  by $852 (27.6%) to $3,939 in 2001
from $3,087 in 2000.  Gross  margin rates for  Stratasoft  were 54.3% in 2001 as
compared to 46.4% in 2000.  The  increased  gross  margin was  primarily  due to
changing the mix of product sales to include a reduced hardware component.

<PAGE>

         Corporate  gross  profit  increased  by  $276  (102.6%)  to $7 in  2001
compared to a gross loss of $269 in 2000. The El Paso service  business that was
sold on May 19,  2000  produced  a gross  loss of $48 in  2000.  We  experienced
certain costs related to winding up our service operations in the El Paso branch
office that negatively impacted gross profit. Additionally,  the gross margin on
installations  for the customer that was lost in the Computer  Products Division
sale produced a gross loss of $235 in 2000.

         Selling,  General and  Administrative  Expenses.  Selling,  general and
administrative  expenses increased $1,094 (11.5%) to $10,573 in 2001 from $9,479
in 2000. As a percentage of total revenue,  selling,  general and administrative
expenses  for  continuing  operations  decreased  to 44.8% in 2001 from 55.5% in
2000.

         Allstar selling,  general and  administrative  expenses decreased $109,
primarily due to planned administrative staff reductions.  INX selling,  general
and administrative  expenses increased $2,168. INX was newly formed in July 2000
and their operations,  along with the sales staff, have increased steadily since
that  time.  The INX  increase  is offset  by a  decrease  of $626  attributable
primarily to  Stratasoft's  lower legal  expense due to settlement of the eshare
lawsuit.  Corporate selling,  general and  administrative  expenses decreased by
$323, also primarily due to planned administrative staff reductions.

         Operating Loss. Operating loss decreased $1,082 to an operating loss of
$4,278 in 2001 from a loss of $5,360 in 2000 due  primarily  to the  increase in
gross  profit  of  $2,176  offset  by  the  increase  in  selling,  general  and
administrative  expenses of $1,094.  Allstar's  operating  loss decreased $18 to
$1,812 in 2001 from $1,830 in 2000.  INX's operating loss increased  $1,013 to a
loss of $1,991 in 2001 from $978 in 2000.  Stratasoft's operating income of $918
in 2001  compares to an operating  loss of $560 in 2000,  an increase of $1,478.
The operating loss for the Corporate Segment decreased $599 to an operating loss
of $1,393 in 2001 compared to an operating loss of $1,992 in 2000.

         Interest  and  other  income,  net.  Interest  and  other  income,  net
increased  $77  (32.2%)  to  income  of $316 in 2001  compared  to $239 in 2000.
Subsequent  to the sale of the  Computer  Products  Division  in May  2000  cash
balances  were invested in interest  bearing  overnight  deposits.  Beginning in
April 2001,  such cash balances were  invested in Euro dollar  interest  bearing
deposits.  During 2001 interest rates decreased  steadily due to attempts by the
national  government  to  stimulate  the  economy.  The effect of interest  rate
decreases was offset somewhat by the recognition of other income of $65 relating
to an insurance reimbursement in September 2001.

         Net  loss  from  continuing   operations.   Net  loss  from  continuing
operations  was $3,875 in 2001 compared to a loss of $3,628 in 2001. A valuation
allowance against deferred tax assets eliminated the income tax benefit in 2001.
The net  loss  for  2000  was  after  an  income  tax  benefit  totaling  $1,493
(reflecting an effective tax rate of 29.2%).

         Discontinued operations. In connection with the sale of IT Staffing, we
recognized a loss from discontinued  operations of $167 (net of taxes of $85) on
the  operations  prior  to the  measurement  date of  November  7,  2001  and we
recognized  a loss on  disposal  of $11  (net of taxes  of $5).  During  2001 we
recognized  additional  gain on the sale of the  Computer  Products  Division of
$346, net of taxes of $179. We  experienced  net income on the operations of the
Computer  Products  Division prior to the measurement  date,  March 16, 2000, of
$302 in 2000,  net of taxes of $156 and a gain on  disposal  of  $3,734,  net of
taxes of $2,607.  During the year ended  December 31, 2000  additional  expenses
related to the  disposal of the Telecom  Division of $344 (net of taxes of $240)
was recognized.

Year Ended  December  31,  2000  Compared  to the Year Ended  December  31, 1999
(Dollars in thousands)

         Revenue.  Total revenue  decreased  $897 (5.0%) to $17,087 in 2000 from
$17,984 in 1999.

         Allstar  revenue,  which comprised 40.6% of total revenues  compared to
61.0% in 1999,  decreased $4,016 (36.6%) to $6,946 in 2000 from $10,962 in 1999.
The decrease in revenue was attributable to the  reorganization of our former IT
Services  Division  into  wholly-owned  subsidiaries,   each  of  which  have  a
particular market focus, and one of which is Allstar,  together with the loss of
revenue from certain  customers  and the loss of certain  categories  of revenue
that were  associated  with and dependent  upon the Computer  Products  Division
after the sale of the Computer Products Division.

         INX revenue comprised 11.0% of total revenues.  INX was newly formed in
July, 2000 and INX exerted intense efforts to introduce  itself to the market in
Dallas and  Houston  and to form  customer  relationships.  In October  2000 INX
acquired an established  service  business in Dallas.  The purchase  included an
established customer list, seven engineers and two sales staff members.

<PAGE>

         Stratasoft  revenue,  which  comprised  39.0% of total revenue in 2000,
compared  to 24.0% in 1999,  increased  $2,342  (54.2%)  to  $6,660 in 2000 from
$4,318 in 1999. The increased revenues from Stratasoft were primarily the result
of better recognition of Stratasoft  products in the market place, the expansion
of the sales staff and dealer network and to increased advertising and marketing
efforts.

         The Corporate  segment  includes both costs related to the operation of
the corporate  entity that are not  allocated to any  subsidiary  company,  plus
certain  operations  that are not  on-going  because of the sale of the Computer
Products  Division (see discussion at Item 1.  "Disposition of Computer Products
Business"),  and including installation services revenues that were related to a
certain  customer of our former Computer  Products  Division and the IT Services
Division revenue from our former El Paso branch office,  which ceased because of
the sale of the Computer Products Division.  Corporate revenue,  which comprised
9.6% of total  revenues in 2000  compared to 15.0% in 1999,  decreased by $1,064
(39.3)% in 2000 to $1,640  compared to $2,704 in 1999.  The decrease in 2000 was
due to $1,078 decrease in revenues from the El Paso branch office, offset by $76
higher installation  revenues for that certain customer of our Computer Products
Division in spite of the loss of the  customer  in May,  2000 due to the sale of
the Computer Products Division.

         Gross Profit.  Gross profit  decreased $2,059 (33.3%) to $4,119 in 2000
from $6,178 in 1999, while gross margin decreased to 24.1% in 2000 from 34.4% in
1999.

         Allstar  gross  profit  decreased  by $2,026  (59.9%) to $1,356 in 2000
compared to $3,382 in 1999. Gross margin rates for Allstar were 19.5% in 2000 as
compared to 30.9% in 1999. Allstar's cost of service consists primarily of labor
cost.  Labor has a more fixed nature such that higher levels of service  revenue
produce  higher  levels of gross margin  while lower  levels of service  revenue
produce  lower gross  margin.  In periods when  service  revenue  decreases,  it
becomes more important to manage labor cost in order to prevent erosion of gross
margin.   Subsequent  to  the  separation  of  the  IT  Services   segment  into
wholly-owned  subsidiary companies in July 2000, Allstar experienced lower labor
utilization  related to lower revenue due in part to the  elimination of certain
categories  of services  revenues  that were  dependent  upon and related to the
Computer Products Division after the sale of the Computer Products Division.  In
addition to the billable technical staff utilization issue, Allstar had a single
large  project on which gross profit  margin was about 12% below normal  levels,
which negatively impacted the overall margin.

         INX  produced a gross loss was $43 for a gross  margin  rate of (2.3%).
Since INX was formed in July  2000,  there is no history  for  comparison.  As a
newly-formed  start-up  operation,  INX had to have billable  technical staff in
place in order to be able to market  their  services,  but was unable to utilize
that technical  staff  sufficiently to cover their labor cost during their first
partial year of operations.

         Stratasoft  gross  profit  increased  by $895 (40.8%) to $3,087 in 2000
from $2,192 in 1999.  Gross  margin rates for  Stratasoft  were 46.4% in 2000 as
compared to 50.8% in 1999.  The  decreased  gross  margin was  primarily  due to
inventory  markdowns  along with  increased  travel  costs for  technical  staff
traveling nationally and internationally for project installations. Gross margin
was also  negatively  impacted by the mix of sales with a higher  proportion  of
total  systems  sales,  which  include a  hardware  component,  as  compared  to
software-only  sales, which do not have a hardware cost of goods component.  The
lower  gross  margin  rates  were  offset by higher  revenues  in 2000,  thereby
producing increased gross profit.

         Corporate  gross profit  decreased by $873  (144.5%) to a gross loss of
$269 in 2000 compared to a gross profit of $604 in 1999 as revenue  decreased by
39.3%.  Gross  margin  rates for the  Corporate  segment were (16.4%) in 1999 as
compared to 22.3% in 1999.  The El Paso  service  business  that was sold on May
19,2000 produced gross profit of $558 in 1999 as compared to a gross loss of $48
in 2000, a decrease of $606. We experienced  certain costs related to winding up
our service  operations  in the El Paso branch office that  negatively  impacted
gross profit.  Additionally,  the gross margin on installations for the customer
that was lost in the Computer  Products  Division  sale produced a gross loss of
$(235) in 2000 as compared to gross profit of $46 in 1999, a decrease of $281.

         Selling,  General and  Administrative  Expenses.  Selling,  general and
administrative  expenses  increased $3,272 (52.7%) to $9,479 in 2000 from $6,207
in 1999. As a percentage of total revenue,  selling,  general and administrative
expenses  for  continuing  operations  increased  to 55.5% in 2000 from 34.5% in
1999.

<PAGE>

         Of  the  $3,272  increase,   $1,687  was  attributable  to  Stratasoft.
Stratasoft  incurred  increased  sales  compensation  of  $379,  accompanied  by
increased payroll taxes,  employee  benefits,  and advertising  expense,  all of
which is consistent with increased revenues of 54.2%. Additionally, Stratasoft's
bad debt expense increased $393,  primarily due to more conservative reserve and
write off policies and legal  expense  increased  $551,  primarily due to patent
infringement  litigation.  Adding to the increase from Stratasoft,  INX, the new
subsidiary contributed $935 of the increase. Selling, general and administrative
expenses  totaling  $749 from the  Corporate  Segment  represents  the remaining
increase  and  effective  beginning  in July 2000 certain of these costs were no
longer allocated out to the operating segments.

         Operating Loss. Operating loss increased $5,331 to an operating loss of
$5,360  in 2000  from a loss of $29 in 1999 due  primarily  to the  increase  in
selling, general and administrative expenses of $3,272 and the decrease in gross
profit of $2,059 in 2000. The operating loss for the Corporate Segment increased
$1,622 to an operating  loss of $1,992 in 2000 compared to an operating  loss of
$370 in 1999.  Allstar's  operating  loss of  $1,830  in 2000  compares  to $109
operating  income in 1999, an increase of $1,939.  INX  experienced an operating
loss of $978 in 2000.  For  Stratasoft,  the  operating  income  of $232 in 1999
decreased $792 to a loss of $560 in 2000.

         Interest  and  other  income,  net.  Interest  and other  income,  net,
increased  $216 to  income  of $239 in 2000  compared  to income of $23 in 1999.
Subsequent  to the sale of the Computer  Products  Division  cash  balances were
invested in interest bearing overnight deposits.

         Net  loss  from  continuing   operations.   Net  loss  from  continuing
operations,  after an  income  tax  provision  totaling  $1,493  (reflecting  an
effective  tax rate of 29.2% for 2000 as compared to 2.8% for 1999),  was $3,628
in 2000 compared to a loss of $26 in 1999.

         Discontinued  operations.  During 2001 we sold our IT Staffing business
and  as  a  consequence,   the  operations  of  this  business  is  reported  as
discontinued  operations  for all periods  presented.  The IT Staffing  business
experienced  a net loss of $107 (net of taxes of $55) in 2000 as  compared  to a
net loss of $43 (net of taxes of $22) in 1999.  During 2000 we sold the Computer
Products Division and as a consequence,  the operations of the Computer Products
Division are reported as discontinued  operations.  We experienced net income on
the operations of the Computer  Products Division prior to the measurement date,
March 16,  2000,  of $302 in 2000,  net of tax of $156 and a gain on disposal of
$3,734,  net of taxes of $2,607. The loss on disposal of the Telecom Division of
$1,138 (net of taxes of $586) was  recognized  at December 31, 1999.  During the
year ended December 31, 2000 additional  expenses related to the disposal of the
Telecom  Division was recognized of $344 (net of taxes of $240). The income from
discontinued operations in 1999 was $362, net of taxes of $183.

<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
fluctuations  in competitive  pricing  pressures.  The results of any particular
quarter may not be indicative of results for the full year or any future period.

<TABLE>
<CAPTION>
                                                         2000                                      2001
                                           First    Second     Third     Fourth    First    Second     Third  Fourth
                                          Quarter   Quarter   Quarter   Quarter   Quarter   Quarter   Quarter Quarter
<S>                                      <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Revenue

    Allstar                              $  2,289  $  1,979  $  1,412  $  1,266  $  1,216  $  1,178  $  1,682  $  1,592
    INX                                         0         0       700     1,174     1,718     2,646     2,876     3,535
    Stratasoft                              2,473     1,172     1,779     1,236     1,682     1,590     1,687     2,298
    Corporate                                 901       762       (41)       18        (4)        1        (4)        1
    Elimination                                 0         0       (11)      (22)      (11)      (16)                (47)
    Total                                   5,663     3,913     3,839     3,672     4,601     5,399     6,241     7,379
Cost of sales and services
    Allstar                                 1,604     1,601     1,246     1,139     1,080       982     1,181     1,160
    INX                                         0         0       735     1,182     1,714     2,326     2,516     3,107
    Stratasoft                              1,151       674     1,015       733       710       826       841       941
    Corporate                                 603       988        79       239        14       (14)       (5)       (8)
    Elimination                                 0         0       (11)      (10)      (11)       (1)                (34)
    Total                                   3,358     3,263     3,064     3,283     3,507     4,119     4,533     5,166
Gross Profit
    Allstar                                   685       378       166       127       136       196       501       432
    INX                                         0         0       (35)       (8)        4       320       360       428
    Stratasoft                              1,322       498       764       503       972       764       846     1,357
    Corporate                                 298      (226)     (120)     (221)      (18)       15         1         9
    Elimination                                                             (12)                (15)                (13)
    Total                                   2,305       650       775       389     1,094     1,280     1,708     2,213
Selling, general and
   administrative expenses
    Allstar                                   805       841       690       850       940       741       772       624
    INX                                         0         0       327       608       608       783       729       983
    Stratasoft                              1,061       747     1,139       700       746       653       715       907
    Corporate                                 339       293       988       103       525       382       301       192
    Elimination                                                             (12)                (15)                (13)
    Total                                   2,205     1,881     3,144     2,249     2,819     2,544     2,517     2,693
Operating income (loss)
    Allstar                                  (120)     (463)     (524)     (723)     (804)     (545)     (271)     (192)
    INX                                         0         0      (362)     (616)     (604)     (463)     (369)     (555)
    Stratasoft                                261      (249)     (375)     (197)      226       111       131       450
    Corporate                                 (41)     (519)   (1,108)     (324)     (543)     (367)     (300)     (183)
    Total                                     100    (1,231)   (2,369)   (1,860)   (1,725)   (1,264)     (809)     (480)
Interest (income) and other
    income, net                                15       (50)     (100)     (104)      (96)      (61)     (116)      (43)
Income (loss) before
    provision (benefit) for
    income taxes                               85    (1,181)   (2,269)   (1,756)   (1,629)   (1,203)     (693)     (437)
Provision (benefit) for
    income taxes                               27      (391)     (690)     (439)       37      (159)       21        14
Net income (loss) from
    continuing operations                      58      (790)   (1,579)   (1,317)   (1,666)   (1,044)     (714)     (451)
Discontinued operations:
    Net income (loss) from
    discontinued operations,
    net of tax                                286         9       (36)      (64)      (71)      (41)      (41)      (14)
    Gain (loss) on disposal                 4,872      (387)   (1,095)                          348                 (11)
Net income (loss)                        $  5,216  $ (1,168) $ (2,710) $ (1,381) $ (1,737) $   (737) $   (755) $   (476)

Net Income (loss) per share:
    Basic:
      Continuing operations              $   0.01  $  (0.19) $  (0.39) $  (0.33) $  (0.41) $  (0.26) $  (0.18) $  (0.12)
      Discontinued operations                0.08      0.00     (0.01)    (0.01)    (0.03)    (0.02)    (0.02)    (0.00)
      Gain (loss) on disposal                1.20     (0.10)    (0.27)                         0.09               (0.00)
    Net income (loss) per share              $1.29 $  (0.29) $  (0.67) $  (0.34) $  (0.44) $  (0.19) $  (0.20) $  (0.12)
    Diluted:
      Continuing operations              $   0.01  $  (0.19) $  (0.39) $  (0.33) $  (0.41) $  (0.26) $  (0.18) $  (0.12)
      Discontinued operations                0.07      0.00     (0.01)    (0.01)    (0.03)    (0.02)    (0.02)    (0.00)
      Gain (loss) on disposal                1.14     (0.10)    (0.27)                         0.09               (0.00)
    Net income (loss) per share          $   1.22  $  (0.29) $  (0.67) $  (0.34) $  (0.44) $  (0.19) $  (0.20) $  (0.12)

Weighted average number of shares outstanding:

    Basic                                4,048,964 4,048,525 4,048,525 4,048,096 3,945,842 3,905,944 3,853,607 3,853,607
    Diluted                              4,287,201 4,048,525 4,048,525 4,048,096 3,945,842 3,905,944 3,853,607 3,853,607
</TABLE>

Liquidity and Capital Resources

         Historically,  until the sale of our Computer  Products Division in May
2000, we had  satisfied our cash  requirements  principally  through  borrowings
under our lines of credit and through operations.  We maintained a cash position
sufficient to pay only our immediately due obligations and expenses.  Subsequent
to the sale of the Computer  Products Division we had sufficient cash on hand to
meet our requirements and have not had to rely on our line of credit. Because of
the significant growth we are experiencing, we have entered into a $2,500 credit
line agreement with Textron Financial  Corporation,  effective January 31, 2002.
INX is  concentrating  its sales  efforts on Cisco  technology.  While we do buy
Cisco product through wholesale  distributors,  INX has begun to buy its product
direct  through  Cisco as its primary  supplier  in order to obtain  competitive
pricing and better  product  availability.  We have  invested our excess cash in
interest bearing overnight deposits. Our working capital was $9,567, $10,098 and
$5,983 at  December  31,  1999,  2000 and 2001,  respectively.  The  decrease in
working  capital  during 2001 is primarily due to the use of working  capital to
invest in the growth of our INX  subsidiary  and their  operating  losses during
that start-up  period.  The increase in working capital during 2000 is primarily
due to the collection of receivables  related to the discontinued  operations of
the Computer  Products and the Telecom  businesses.  The proceeds of the sale of
the Computer Products business were used to pay off our previous line of credit.
At December 31, 2001 we had outstanding  non-interest-bearing borrowings related
to our intangible assets and fixed assets totaling $623.

Cash Flows

         Operating  activities  used net cash totaling $4,453 and $2,612 in 2001
and 1999, respectively and provided net cash totaling $5,540 during 2000. During
2001,  net cash used by  operations  resulted  from a net loss of $3,705  and an
increase in cost and  estimated  earnings in excess of billings of $1,695 offset
by a decrease in income taxes  receivable  of $712 and a decrease in  inventory.
During 2000, net cash provided by operations resulted from decreases in accounts
receivable  that were  offset by  reductions  in  accounts  payable  and accrued
expenses.  During 1999, net cash provided by operations  resulted from increases
in accounts payable that offset our increase in accounts receivable.

         Accounts  receivable  increased  $1,488 during 1999,  respectively  and
decreased  $30,763  and $171  during  2000  and  2001,  respectively.  Inventory
decreased  $603, $160 and $187 in 1999,  2000 and 2001,  respectively.  The most
recent  two  years'  reductions  were  primarily  the  result of  collection  of
receivables retained from discontinued operations.

         Investing  activities  used cash totaling $276 and $206 during 1999 and
2001,  respectively  and provided  cash of $14,048  during 2000.  Our  investing
activities that used cash during these periods were primarily related to capital
expenditures related to leasehold  improvements and patent license acquisitions.
In 2000, investing activities primarily related to the proceeds from the sale of
the Computer Products business.  During the next twelve months, we do not expect
to incur material capital expenditures.

         Financing  activities used cash totaling $227,  $15,889 and $253 during
1999,  2000 and 2001,  respectively.  The primary  source of cash from financing
activities in1999 was borrowings on our lines of credit when the lines of credit
were used  principally  to satisfy our cash  requirements,  including  financing
increases in accounts receivable and inventory. During 2000 we used the proceeds
of the sale of the  Computer  Products  business  to pay off our line of credit.
During  1999,  2000  and  2001  we used  $138,  $20 and  $195,  respectively  to
repurchase shares that were held in treasury at the end of 2001.

<PAGE>

Asset Management

         Our cash flow from operations has been affected primarily by the timing
of our  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 $4,473 and $4,302
(including  $775 and $82 relating to  discontinued  operations)  at December 31,
2000 and 2001, 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 requirements by relying on the ready availability of products
from our principal suppliers.

Credit Facilities

         At December 31, 2001,  we had no credit  facility in place.  On January
31, 2002 we entered into a credit agreement with Textron  Financial  Corporation
("Textron") for a revolving line of credit (the "Textron Facility") that will be
our principal  source of liquidity.  The total credit available under the credit
facility is $2,500,  subject to borrowing  base  limitations  that are generally
computed as 80% of eligible accounts receivable,  90% of identifiable  inventory
purchased under this agreement and 40% of all other inventory.  Credit available
under  this  facility  for floor  plan  financing  of  inventory  from  approved
manufacturers  is $2,500.  We may use up to $500 of the line for working capital
advances  under  approved  conditions.  Borrowings  under the line  will  accrue
interest at the prime rate plus 2.5% on outstanding  balances that extend beyond
the vendor approved free interest  period and on working  capital  advances from
date of  advance.  Inventory  floor  plan  finance  borrowings  on the  line are
reflected in accounts payable on the accompanying balance sheets.

         This  agreement,  which  continues  in  full  force  and  effect  until
terminated by written notice from us, is  collaterized by  substantially  all of
our assets. The agreement  contains  restrictive  covenants,  which, among other
things,  require us to maintain minimum tangible capital funds and to not exceed
a maximum debt-to-tangible capital funds ratio.

         On September 27, 2001 Stratasoft, our subsidiary, signed a note payable
to a third party for $725,  payable in monthly  installments  through  February,
2007.  The note does not bear  interest and we have imputed  interest at 5.5% to
record the debt and related  patent asset and  recorded  interest of $9 in 2001.
This note payable is collaterized by Stratasoft's patent assets.  Stratasoft has
granted a security  interest in its pending patent  application and the next two
patent  applications filed by Stratasoft.  In connection with this note payable,
we have reported  short-term debt maturing within one year of $200 and long-term
debt of $388.

         In October  2001, we signed an  non-interest  bearing auto note payable
for $39 payable in monthly installments through October 2004. In connection with
this note payable,  we have reported short-term debt maturing within one year of
$13 and long-term debt of $22 at December 31, 2001.

                                                 Payments due by Period

                                                Less
                                                than      1-3    4-5   after 5
     Contractual Obligations            Total   1 year   years  years   years

     Long-term debt                     $ 623   $  213   $ 315  $  95   $   0
     Operating Leases                     570    1,403     483      0       0

Critical Accounting Policy

         Revenue  Recognition  - Revenue from the sale of products is recognized
when the product is shipped.  Service  income is  recognized as the services are
earned.   Revenues  resulting  from  installations  of  equipment  and  software
contracts  for which  duration  is in excess of three  months  and that  require
substantial   modification   or   customization   are   recognized   using   the
percentage-of-completion   method.  The  percentage  of  revenue  recognized  is
determined  principally  on the  basis of the  relationship  of the cost of work
performed on the contract to estimated  total costs.  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.

<PAGE>

         The following reflects the amounts relating to uncompleted contracts at
December 31, 2000 and 2001:

              Costs incurred on uncompleted contracts             $  135  $  995
              Estimated earnings                                     361   1,930
                                                                     496   2,925

              Less: Billings to date                                 999   1,158

              Cost and estimated earnings in excess of billings   $    0  $1,695
              Billings in excess of cost and estimated earnings   $  503  $   72

         During  2001 our  subsidiary,  Stratasoft,  recognized  revenues on the
percentage-of-completion basis for several projects associated with one reseller
in South Asia. I-Sector has risk to the extent that this group of customers have
not paid or  issued  contractual  letters  of credit up to the level of cost and
earnings recognized. On the projects in South Asia we required a cash payment or
letter of credit from the customer prior to shipping the product.

Accounting Pronouncements

         In June 2001, Statement of Accounting Standards ("SFAS"), SFAS No. 141,
"Business Combinations" was approved by the Financial Accounting Standards Board
("FASB").  SFAS No. 141 requires the purchase  method of  accounting be used for
all business combinations  initiated after June 30, 2001. Any resulting goodwill
and  certain  intangible  assets  will  remain on the  balance  sheet and not be
amortized.  On an annual  basis,  and when there is reason to suspect that their
values  have been  diminished  or  impaired,  these  assets  must be tested  for
impairment, and write-downs may be necessary. The adoption of this statement had
no effect on  I-Sector's  consolidated  financial  position  or its  results  of
operations.

         In June 2001, SFAS No. 142 "Goodwill and Other  Intangible  Assets" was
approved by the FASB.  SFAS No. 142 changes the  accounting for goodwill from an
amortization  method to an impairment-only  approach.  Amortization of goodwill,
including  goodwill  recorded  in past  business  combinations,  will cease upon
adoption  of this  statement.  The  adoption of this  statement  had no material
effect  on  I-Sector's   consolidated  financial  position  or  its  results  of
operations.

         In  June  2001,  SFAS  No.  143   "Accounting   for  Asset   Retirement
Obligations:  was approved by the Financial Accounting Standards Board ("FASB").
SFAS No. 143 requires that the fair value of a liability for an asset retirement
obligation  be  recognized  in the period in which it is  incurred.  I-Sector is
required to implement  SFAS No. 143 on January 1, 2003 and it has not determined
the impact, if any, that this statement will have on its consolidated  financial
position or its results of operations.

         In  August  2001,  SFAS No.  144,  "Accounting  for the  Impairment  or
Disposal of Long-Lived Assets" was approved by the FASB. SFAS No. 144 supercedes
SFAS No. 121,  "Accounting for the Impairment of Long-lived  Assets and for Long
Lived  Assets to be  Disposed  of".  SFAS No.  144  required  recognition  of an
impairment loss,  measured as the difference between the carrying amount and the
fair value of the asset,  only if the carrying  amount of a long-lived  asset is
not recoverable from its undiscounted cash flows. The adoption of this statement
had no material  effect on  I-Sector's  consolidated  financial  position or its
results of operations.

<PAGE>

Future Trends

         We expect continued revenue increases in 2002 and beyond, due primarily
to market share gains. While we expect all three of our subsidiary  companies to
produce  significant  revenue growth in 2002, we expect the newer INX to produce
the most rapid growth rates,  although not at the same growth rates  experienced
in 2001, their first full year of operations. We expect that this revenue growth
in 2002  will be  primarily  a result of the  investments  made in late 2000 and
throughout 2001 in the form of increased sales and marketing staff and marketing
programs.

         We expect  gross  margin to  improve  in 2002 for both INX and  Allstar
Solutions,  primarily  because of improved  utilization  of  technical  staffing
resources in the  services  component of their  revenue  bases.  We expect gross
margin for  Stratasoft  to decline  somewhat  from the higher than normal  level
achieved in 2001 due primarily to a more normalized  hardware product  component
as  compared  to the lower than  normal  hardware  mix in 2001.  A higher mix of
hardware in the  Stratasoft  package  produces lower gross margin.  Overall,  we
expect total consolidated company gross margin to decline slightly due primarily
to a higher proportion of lower margin INX revenue in the total revenue mix.

         We expect to be able to contain  the  growth in  selling,  general  and
administrative expenses as a percentage of revenue, as revenue continues to grow
because  of  previous  investments  in sales  and  marketing,  without a further
commensurate  increase in sales and  marketing  expenses and as the increases in
revenues are spread over a relatively  fixed  corporate  administration  expense
base.

         For 2002 we expect our business to be  positively  impacted by a slight
improvement in the depressed  general market  conditions  that we experienced in
2001,  due  primarily  to a likely  upswing in the cyclical  buying  patterns of
customers  for  technology  products.  In 2001  we  experienced  the  depressing
combined  events of a declining  stock  market,  slowing  economy and  terrorist
activity.

Tax Refund

         On March 9, 2002,  President  Bush signed into law the Job Creation and
Worker  Assistance  Act of 2002.  The new law provides for the  carryback of net
operating  losses for any taxable year ending during 2001 or 2002 to each of the
five tax years  preceding the loss year.  Previously,  a net operating  loss was
only  eligible to be carried back to the two years  preceding  the year of loss.
This will result in additional tax refunds of approximately $1,000.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

         We may incur certain  market risks related to interest rate  variations
in the future because as of January 31, 2002 we hold floating rate debt. We have
$2,442 in cash balances in interest bearing accounts. If interest rates decrease
by 1% the net loss will  increase by $24. If interest  rates  increase by 1% the
net loss will decrease by $24.

         We have no off-balance sheet arrangements or derivative instruments.

         We have experienced no material impact of inflation and changing prices
on net sales and income from continuing operations in the last three years.

<PAGE>

Item 8.  Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements:

   Independent Auditors' Report                                               28

   Consolidated Balance Sheets at December 31, 2000 and 2001                  29

   Consolidated  Statements of Operations for the years ended
   December 31, 1999, 2000 and 2001                                           30

   Consolidated  Statements of Stockholders' Equity for the
   years ended December 31, 1999, 2000 and 2001                               31

   Consolidated Statements of Cash Flows for the years ended
   December 31, 1999, 2000 and 2001                                           32

   Notes to Consolidated Financial Statements for the years
   ended December 31, 1999, 2000 and 2001                                     33

<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Stockholders of I-Sector Corporation.:

         We  have  audited  the  accompanying  consolidated  balance  sheets  of
I-Sector  Corporation and subsidiaries  ("I-Sector") as of December 31, 2000 and
2001, and the related  statements of operations,  stockholders'  equity and cash
flows for each of the three years in the period ended  December  31,  2001.  Our
audits also included the  financial  statement  schedule  listed in the index at
Item 14(a)(2).  These financial  statements and the financial statement schedule
are the  responsibility  of  I-Sector's  management.  Our  responsibility  is to
express an opinion on these  financial  statements  and the financial  statement
schedule based on our audits.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States of America.  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 I-Sector as of December 31,
2000 and 2001,  and the results of its operations and its cash flows for each of
the three  years in the  period  ended  December  31,  2001 in  conformity  with
accounting principles generally accepted in the United States of America.  Also,
in our opinion,  such financial statement schedule,  when considered in relation
to the basic consolidated  financial statements taken as a whole, present fairly
in all material respects the information set forth therein.

/s/  Deloitte & Touche LLP
Houston, Texas

March 18, 2002

<PAGE>

I-SECTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 2001
 (In thousands, except share and par value amounts)
..........

ASSETS                                                       2000        2001

 Current Assets:
     Cash and cash equivalents                             $  8,346    $  3,434
     Accounts receivable, net                                 4,473       4,302
     Accounts receivable - affiliates                           303         250
     Accounts receivable - other                                141          21
     Notes receivable                                                       169
     Inventory                                                  774         587
     Cost and estimated earnings in excess of billings                    1,695
     Income taxes receivable                                    863         151
     Other current assets                                       233         302
         Total current assets                                15,133      10,911
 Property and equipment, net                                  1,579       1,226
 Intangible assets                                              326       1,356
 Other assets                                                   104          55
                                                           $ 17,142    $ 13,548

 LIABILITIES AND STOCKHOLDERS' EQUITY

 Current Liabilities:
     Current portion of long term debt                     $           $    213
     Accounts payable                                         1,892       1,772
     Billings in excess of cost and estimated earnings          503          72
     Accrued expenses                                         1,635       2,091
     Net liabilities related to discontinued operations         869         654
     Deferred service revenue                                   136         126
         Total current liabilities                            5,035       4,928
 Long term debt                                                             410
 Deferred credit - stock warrants                               195         195

 Commitments and Contingencies (See Note 10)

Stockholders' Equity:
     Preferred stock, $.01 par value, 5,000,000
         shares authorized, no shares issued
     Common stock, $.01 par value, 15,000,000
         shares authorized, 4,441,325 issued
         at December 31, 2000 and 2001,
         respectively                                            44          44
     Additional paid in capital                              10,182      10,184
       Unearned equity compensation                              (1)
       Treasury stock, at cost, 399,800 and
         591,800 shares at December 31, 2000
         and 2001, respectively                                (992)     (1,187)
     Retained earnings                                        2,679      (1,026)
         Total stockholders' equity                          11,912       8,015
                                                           $ 17,142    $ 13,548
See notes to consolidated financial statements.

<PAGE>

I-SECTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
 (In thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                                      Years ended December 31,
                                                              1999        2000        2001

<S>                                                        <C>         <C>         <C>
Total revenue                                              $ 17,984    $ 17,087    $ 23,620

Cost of goods and services                                   11,806      12,968      17,325

          Gross profit                                        6,178       4,119       6,295

Selling, general and administrative expenses                  6,207       9,479      10,573

Operating loss                                                   29       5,360       4,278

Interest and other income, net                                   23         239         316

Loss from continuing operations before
     benefit for income taxes                                     6       5,121       3,962

Provision (benefit) for income taxes                             20      (1,493)        (87)

Net loss from continuing operations                              26       3,628       3,875

Discontinued operations:
     Net income (loss) from discontinued
     operations, net of taxes                                   319         195        (167)
     Gain (loss) on disposal, net of taxes                   (1,138)      3,390         337

Net loss                                                   $    845    $     43    $  3,705

Net income (loss) per share:

     Basic and diluted:
         Net loss from continuing operations               $  (0.01)   $  (0.90)   $  (0.99)
         Net income (loss) from discontinued operations        0.08        0.05       (0.04)
         Gain (loss) on disposal                              (0.27)       0.84        0.08
              Net loss per share                           $  (0.20)   $  (0.01)   $  (0.95)


Weighted average number of shares outstanding:

     Basic and diluted                                    4,168,140   4,059,618   3,911,019
</TABLE>

See notes to consolidated financial statements

<PAGE>

I-SECTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
 (In thousands, except share and per share amounts)


<TABLE>
<CAPTION>
                                           $.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>       <C>
Balance at January 1, 1999               4,502,411 $     45  $ 10,196  $  (834)  $   (269) $  3,567  $ 12,705

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

Purchase of treasury stock                                                (138)                          (138)

Net loss                                                                                       (845)     (845

Balance at December 31, 1999             4,441,325       44    10,037      (972)       (1)    2,722    11,830

Purchase of treasury stock                                                  (20)                          (20)

Fair value of stock options to
     Non-employees                                                145                                     145

Net loss                                                                                        (43)      (43)

Balance at December 31, 2000             4,441,325       44    10,182      (992)       (1)    2,679    11,912

Purchase of treasury stock                                                 (195)                         (195)

Satisfaction of restricted stock                                                        1                   1

Issuance of restricted stock                                        2                                       2

Net loss                                                                                     (3,705)   (3,705)

Balance at December 31, 2001             4,441,325 $     44  $ 10,184  $ (1,187) $         $ (1,026) $  8,015
</TABLE>

See notes to consolidated financial statements.

<PAGE>

I-SECTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
 (In thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                                  Years ended December 31,
                                                                1999      2000      2001
<S>                                                          <C>       <C>       <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss                                                     $   (845) $    (43) $ (3,705)
     Adjustments to reconcile net loss to net
         cash provided by (used in) operating activities:
     Net (income) loss from discontinued operations              (319)     (195)      167
     (Gain) loss on disposal of discontinued operations         1,138    (3,390)     (337)
     Depreciation and amortization                                850       766       666
     Current income tax benefit                                                       (87)
     Satisfaction of restricted stock                                                   1
     Loss on retirement of assets                                                      10
     Changes in assets and liabilities that provided
       (used) cash:
         Accounts receivable, net                              (1,488)   30,763       171
         Accounts receivable - affiliates                         (50)      (22)      173
         Inventory                                                603       160       187
         Income taxes receivable                                  637      (863)      712
         Notes Receivable                                                            (117)
         Other current assets                                     175      (152)      (69)
         Other assets                                             (30)      140       (13)
         Accounts payable                                       5,046   (19,795)     (119)
         Cost and estimated earnings in excess of billings                         (1,695)
         Billings in excess of cost and estimated earnings       (952)     (112)     (431)
         Accrued expenses                                      (1,377)   (2,261)      456
         Deferred service revenue                                 (16)     (104)      (10)
              Net cash (used in) provided by continuing
                 operations                                     3,372     4,888    (4,040)
     Net operating activities from discontinued operations       (760)      652      (413)
              Net cash (used in) provided by operating
                 activities                                    (2,612)    5,540    (4,453)
CASH FLOWS FROM INVESTING ACTIVITIES:
     Capital expenditures                                                  (324)     (688)
     Proceeds on sale of fixed assets                                                   6
     Acquisition costs                                                     (341)      (50)
Proceeds on sale of discontinued operations                              15,029       526
Net cash (used in) provided by continuing operations                     14,364      (206)
     Net cash used in discontinued operations                    (276)     (316)
              Net cash (used in) provided by investing
                 activities                                      (276)   14,048      (206)
CASH FLOWS FROM FINANCING ACTIVITIES:
     Purchase of treasury stock                                  (138)      (20)     (195)
     Net decrease in notes payable                                (89)  (15,869)      (58)
              Net cash used in financing activities              (227)  (15,889)     (253)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS            2,109     3,699    (4,912)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                2,538     4,647     8,346
CASH AND CASH EQUIVALENTS AT END OF PERIOD                   $  4,647  $  8,346  $  3,434
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
     Cash paid for interest                                  $    989  $    386  $      9
     Cash paid (received) for income taxes                   $      0  $  1,009  $   (712)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
     FINANCING ACTIVITIES:
     Intangible assets acquired through note payable         $         $         $    646
     Fixed assets acquired through note payable                                        35
     Total noncash investing and financing activities        $         $         $    681
</TABLE>

See notes to consolidated financial statements.

<PAGE>

I-SECTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
 (In thousands, except share and per share amounts)


1.       DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         I-Sector  Corporation and  subsidiaries  ("I-Sector") is engaged in the
business of providing computer services and of selling  associated  hardware and
telephony  software products in the United States and abroad.  I-Sector operates
from three wholly-owned subsidiaries:

o        Allstar Service  Solutions,  Inc.  ("Allstar")  provides customers with
         turn-key outsourced IT helpdesk solutions, technical staff augmentation
         for IT helpdesk  operations,  helpdesk solutions  consulting  services,
         on-site and carry-in computer repair, application support and operating
         system and network migration services.

o        Internetwork   Experts,   Inc.  ("INX")  is  a  professional   services
         organization  that  focuses on the  design,  deployment  and support of
         large-scale  networking  infrastructure  requirements  that  are  Cisco
         centric.    INX's   areas   of   practice   include   network   design,
         implementation,  turnkey support,  security audits and firewall design,
         network infrastructure management and network infrastructure consulting
         services.

o        Stratasoft, Inc. ("Stratasoft") creates and markets software related to
the integration of computer and telephone technologies.

         A substantial  portion of I-Sector's  sales and services are authorized
under  arrangements  with  product  manufacturers.   I-Sector's  operations  are
dependent upon maintaining its approved status with such  manufacturers.  Should
I-Sector's  approved status lapse,  revenues and gross profit could be adversely
affected.

         I-Sector's significant accounting policies are as follows:

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

         Inventory - Inventory consists primarily of dialers, 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  three  to  ten  years  using  the  straight-line   method.
Depreciation  expense  totaled $790,  $699 and $475 for the years ended December
31, 1999, 2000 and 2001, respectively.

         Intangible  Assets - Intangible  assets are being  amortized over their
estimated useful lives of five to ten years (see Note 11).

         Impairment of Long-Lived Assets - I-Sector 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 - I-Sector  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  I-Sector'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 -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 products is recognized
when the product is shipped.  Service  income is  recognized as the services are
earned.   Revenues  resulting  from  installations  of  equipment  and  software
contracts  for  which  duration  is in  excess  of  three  months  that  require
substantial   modification   or   customization   are   recognized   using   the
percentage-of-completion   method.  The  percentage  of  revenue  recognized  is
determined  principally  on the  basis of the  relationship  of the cost of work
performed on the contract to estimated  total costs.  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.

         The following reflects the amounts relating to uncompleted contracts at
December 31, 2000 and 2001:

              Costs incurred on uncompleted contracts     $   135    $   995
              Estimated earnings                              361      1,930

                                                              496      2,925
              Less: Billings to date                          999      1,158

              Cost and estimated earnings in excess
                 of billings                              $     0    $ 1,695
              Billings in excess of cost and estimated
                 earnings                                 $   503    $    72

         During    2001    I-Sector    has    recognized    revenues    on   the
percentage-of-completion basis for several projects associated with one reseller
in South Asia. I-Sector has risk to the extent that this group of customers have
not paid or  issued  contractual  letters  of credit up to the level of cost and
earnings recognized.

         Credit Risk - The Company extends credit to its customers in the normal
course of business and generally does not require  collateral or other security.
The Company  performs  ongoing credit  evaluations  of its customers'  financial
condition and historically has not incurred significant credit losses.  Earnings
are charged with a provision for doubtful  accounts based on a current review of
the  collectibility of the accounts.  Accounts deemed  uncollectible are applied
against the allowance for doubtful accounts.

         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.

         Employee Stock Based  Compensation - I-Sector  recognizes  compensation
expense for stock options and other stock based non-employee compensation awards
based on the fair value of the equity instrument at the measurement date. Awards
of stock options and other stock based employee incentive plans measure the cost
of the equity instrument using the intrinsic value method (See Note 12).

         Comprehensive  Income - I-Sector had no  comprehensive  income items to
report for all periods presented.

         Recently  Issued  Accounting  Standards  - In June 2001,  Statement  of
Accounting  Standards  ("SFAS"),  SFAS  No.  141,  "Business  Combinations"  was
approved by the Financial  Accounting  Standards  Board  ("FASB").  SFAS No. 141
requires the purchase method of accounting be used for all business combinations
initiated  after June 30, 2001.  Any resulting  goodwill and certain  intangible
assets  will  remain on the  balance  sheet and not be  amortized.  On an annual
basis,  and when  there is  reason  to  suspect  that  their  values  have  been
diminished  or  impaired,  these  assets  must be  tested  for  impairment,  and
write-downs  may be necessary.  The adoption of this  statement had no effect on
I-Sector's consolidated financial position or its results of operations.

         In June 2001, SFAS No. 142 "Goodwill and Other  Intangible  Assets" was
approved by the FASB.  SFAS No. 142 changes the  accounting for goodwill from an
amortization  method to an impairment-only  approach.  Amortization of goodwill,
including  goodwill  recorded  in past  business  combinations,  will cease upon
adoption  of this  statement.  The  adoption of this  statement  had no material
effect  on  I-Sector's   consolidated  financial  position  or  its  results  of
operations.

<PAGE>

         In  June  2001,  SFAS  No.  143   "Accounting   for  Asset   Retirement
Obligations:  was approved by the Financial Accounting Standards Board ("FASB").
SFAS No. 143 requires that the fair value of a liability for an asset retirement
obligation  be  recognized  in the period in which it is  incurred.  I-Sector is
required to implement  SFAS No. 143 on January 1, 2003 and it has not determined
the impact, if any, that this statement will have on its consolidated  financial
position or its results of operations.

         In  August  2001,  SFAS No.  144,  "Accounting  for the  Impairment  or
Disposal of Long-Lived Assets" was approved by the FASB. SFAS No. 144 supercedes
SFAS No. 121,  "Accounting for the Impairment of Long-lived  Assets and for Long
Lived  Assets to be  Disposed  of".  SFAS No.  144  required  recognition  of an
impairment loss,  measured as the difference between the carrying amount and the
fair value of the asset,  only if the carrying  amount of a long-lived  asset is
not recoverable from its undiscounted cash flows. The adoption of this statement
had no material  effect on  I-Sector's  consolidated  financial  position or its
results of operations.

         Fair Value of Financial  Instruments - I-Sector'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  securities with an original maturity of three months or less when
purchased.

         Use of  Estimates - The  preparation  of the  financial  statements  in
conformity with accounting principles generally accepted in the United States of
America  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 effect to certain changes
in presentation.

2.       DISCONTINUED OPERATIONS

         On November 6, 2001,  I-Sector  approved a plan to sell or close its IT
Staffing business.  This is the measurement date. A sale was finalized effective
December  31,  2001.  Under  the  terms of the  sale  I-Sector  received  a note
receivable for $52, $50 for the ongoing  operations of It Staffing,  Inc. and $2
for certain fixed assets of I-Sector.  The note receivable  bears interest at 5%
per annum and is collectible in installments  based on the total monthly revenue
of the buyer over 24 months beginning in March, 2002. A disposal loss, including
an estimate of the operating results from the measurement date, November 6, 2001
to the closing date of the sale of $17, and estimates  for  impairment of assets
caused by the  disposal  decision  of $43,  totaling  $11 (net of tax of $5) was
recognized in 2001. Net loss from  discontinued  operations was $43, $107,  $167
(net of tax of $22, $55 and $87) in 1999, 2001 and 2001, respectively.  I-Sector
retained accounts receivable of approximately $82, net of reserves, fixed assets
of $52 and liabilities related to the IT Staffing business at December 31, 2001.
Fixed assets were  redeployed in the  continuing  operations.  The balance sheet
caption "Net  liabilities  related to discontinued  operations"  contains $80 of
estimated future expenses relating to the wind-up of the IT Staffing business at
December  31,  2001.  Revenue for the IT Staffing  business  for the years ended
December 31, 1999, 2000 and 2001 was $1,191, $1,242 and $967, respectively.

<PAGE>

         On March 16, 2000,  I-Sector  entered into an agreement to sell certain
assets of and the ongoing operations of its Computer Products Division. The sale
transaction closed on May 19, 2000 after shareholder and other required consents
were obtained.  Under the terms of the sale, I-Sector received $14,529 plus $250
as  reimbursement  of certain  selling costs.  Proceeds of the sale were used to
retire  debt  under  our  existing  credit  facility.  Pretax  income  from  the
discontinued operations of the Computer Products Division (net of taxes of $156)
was $302 for the period from January 1 to March 16, 2000, the measurement  date,
$1,343 (net of taxes of $688) for the year ended  December  31,  1999. A gain on
disposal of $3,734 (net of taxes of $2,607),  which includes  operating  results
from the  measurement  date,  March 16, 2000 to the closing date of the sale, as
well as a loss on  equipment  sold of $352 (net of taxes of $144) and  estimates
for the  impairment of assets caused by the disposal  decision of $2,820 (net of
taxes of $1,156) have been  recognized  in the year ended  December 31, 2000. In
2001  additional  gain on  disposal  of $346  (net of taxes of  $179),  that was
related to a  contingency  clause that was  settled,  was  recognized.  I-Sector
retained  accounts  receivable  of $20,266,  net of  reserves,  and has retained
receivables related to the Computer Products Division of $775 and $0 at December
31, 2000 and 2001, respectively, fixed assets of $255 and liabilities related to
the  Computer  Products  Division.  Fixed  assets  that  were not sold have been
redeployed  in the  continuing  operations.  At December 31, 2000 and 2001,  the
balance  sheet  caption "Net  Liabilities  related to  discontinued  operations"
contains $593 and $301 of estimated future expenses related to the winding up of
the Computer Products Division, and include amounts related to the settlement of
pending  litigation.  Revenue for the Computer  Products  Division for the years
ended  December 31, 1999 and 2000 were $182,642 and $29,323 (net of $5,772 after
the  measurement  date and included in the gain on sale in 2000),  respectively.
The  Company   allocated   interest  expense  to  its  various  divisions  on  a
proportional basis based on accounts  receivable.  Interest expense allocated to
the Computer  Products  Division for the years ended  December 31, 1999 and 2000
for the  period  from  April 1,  2000 to May 19,  2000  was  $671  and  $62.  In
connection with the sale of the Computer Products  Division,  I-Sector also sold
the El Paso  portion of the IT  Services  business.  The El Paso  branch  office
portion of the IT Services business  accounted for revenues of $2,012,  $955 and
$(1) for the years ended  December 31, 1999,  2000 and 2001,  respectively.  For
financial  reporting  presentation the El Paso services business was included in
the continuing operations for the years ended December 31, 1999, 2000 and 2001.

         On  November  2,  1999,  I-Sector  approved a plan to sell or close its
Telecom Division.  This is the measurement date. I-Sector  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 I-Sector received $250 cash. Additionally, the
purchaser assumed all telephone equipment warranty obligations of I-Sector up to
a maximum of $30, all of which was consumed by October,  2000.  Future  warranty
costs  incurred  by the  purchaser  will be billed to I-Sector at an agreed upon
rate.  An  estimate  of  future  warranty  costs of $95 and $59 is  included  at
December  31, 2000 and 2001,  respectively,  in the balance  sheet  caption "Net
liabilities related to discontinued  operations".  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  in 1999.  The  disposal  loss  includes  an
operating loss of $284 (net of income tax savings of $146) from the  measurement
date to December 31, 1999. I-Sector recognized additional losses of $344 (net of
taxes of $240) and $0 in the years 2000 and 2001, respectively. Pretax loss from
discontinued  operations (net of tax savings of $505) was $981 in 1999. I-Sector
retained accounts  receivable of approximately  $1,400,  net of reserves,  fixed
assets of $30 and liabilities  related to the Telecom  Division,  but has no net
retained  receivables at December 31, 2001.  Fixed assets were redeployed in the
continuing  operations.  The balance sheet caption "Net  liabilities  related to
discontinued  operations"  contains $294 and $273 of estimated  future  expenses
relating to the wind-up of the Telecom  Division at December  31, 2000 and 2001,
respectively.  Revenue for the Telecom  Division for the year ended December 31,
1999 was $3,975. The Company allocated interest expense to its various divisions
on a proportional basis based on accounts receivable. Interest expense allocated
to the Telecom  Division for the period from January 1, 1999 to November 2, 1999
was $69. The Company has allocated interest expense from November 2, 1999 to the
disposal date of March 16, 2000 of $20 that was included in the loss on disposal
in 1999.

<PAGE>

3.       ACCOUNTS RECEIVABLE

         Accounts receivable consisted of the following at December 31, 2000 and
2001:

                                                   2000            2001

         Accounts receivable                 $     4,438     $     5,473
         Accounts receivable retained-
            discontinued operations                  775              82
         Allowances for doubtful accounts           (740)         (1,253)

         Total                               $     4,473     $     4,302

4.       PROPERTY AND EQUIPMENT

         Property and equipment  consisted of the following at December 31, 2000
and 2001:

                                                   2000            2001

         Equipment                           $       459     $       460
         Computer equipment                        2,787           2,289
         Furniture and fixtures                      439             285
         Leasehold improvements                      383             552
         Vehicles                                     27              47
                                                   4,095           3,633
         Accumulated depreciation and
            amortization                          (2,516)         (2,407)
              Total                          $     1,579     $     1,226

5.       CREDIT ARRANGEMENTS

         On February 27, 1998 I-Sector  entered into a credit  agreement  with a
commercial finance company.  On May 19, 2000, the day of the closing on the sale
of the Computer Products  Division,  the credit facility was amended to decrease
the total credit  available under the facility from $30,000 to $3,000 subject to
borrowing  base  limitations  that are  generally  computed as a  percentage  of
various classes of eligible  accounts  receivable and qualifying  inventory.  At
December 31, 2000,  I-Sector had $4  outstanding  on the Inventory  Line and had
total credit  availability  of $1,311.  In October  2001,  I-Sector and Deutsche
Financial Services Corporation mutually agreed to terminate their relationship.

         On September 27, 2001  Stratasoft,  a subsidiary of I-Sector,  signed a
note payable to a third party for $725, payable in monthly  installments through
February,  2007.  The note  does not bear  interest  and  I-Sector  has  imputed
interest  at 5.5% to record  the debt and  related  patent  asset  and  recorded
interest of $9 in 2001. This note payable is collaterized by Stratasoft's patent
assets.  Stratasoft  has  granted a  security  interest  to its  pending  patent
application  and the next  two  patent  applications  filed  by  Stratasoft.  In
connection  with  this note  payable,  I-Sector  has  reported  short-term  debt
maturing within one year of $200 and long-term debt of $388.

         In October 2001,  I-Sector  signed a non-interest  bearing note payable
for $39 payable in monthly installments through October 2004. In connection with
this note payable,  I-Sector has reported  short-term  debt maturing  within one
year of $13 and long-term debt of $22 at December 31, 2001.

          The  weighted-average  interest rate for  borrowings  under all credit
line arrangements in effect during 1999, 2000 and 2001 was 7.13%,  7.93% and 0%,
respectively. Interest expense on all credit lines was $969, $385 and $0 for the
years ended December 31, 1999, 2000 and 2001 respectively.

         The aggregate  amounts of  installments  due for the next five years on
long term debt are as follows:

                              2002           $  213
                              2003              157
                              2004               78
                              2005               80
                              2006               95
                              Total          $  623

<PAGE>

6.       INCOME TAXES

         The provision  for income taxes for the years ended  December 31, 1999,
2000 and 2001 consisted of the following:

                                                   1999        2000        2001
         Current provision (benefit):
         Federal                                $    20    $ (1,493)   $    (87)
         State
         Total current provision                     20      (1,493)        (87)
         Deferred provision (benefit)
              Total provision (benefit) from
                 continuing operations               20      (1,493)        (87)

         Total provision for (benefit from)
          discontinued operations                   161         101         (85)
         Total provision for (benefit from)
            gain (loss)on disposal                 (586)      2,367         172
              Total                             $  (405)   $    975    $      0

         The total  provision  for income taxes during the years ended  December
31, 1999, 2000 and 2001 varied from the U.S.  federal  statutory rate due to the
following:

                                                   1999        2000        2001

Federal income tax at statutory rate            $    (2)   $ (1,741)   $ (1,347)
Nondeductible expenses                               22          17          52
State income taxes
Valuation allowance                                             231       1,208

              Total provision (benefit)
                 from continuing operations$         20    $ (1,493)   $    (87)

         Net  deferred  tax assets  computed at the  statutory  rate  related to
temporary  differences  at  December  31,  2000 and  December  31,  2001 were as
follows:

                                                               2000        2001
          Net deferred tax assets:
              Accounts receivable                          $    251    $    426
              Closing and severance costs                       391         395
              Deferred service revenue                           30          43
              Inventory                                         134          49
              Amortization of intangibles                       (23)        (37)
              Net operating loss carryforwards                            1,115
                  Total current deferred tax assets             783       1,991
              Less Valuation allowance                         (783)     (1,991)
                  Total                                    $      0    $      0

              Due to the company's  recurring losses, a valuation  allowance was
established for the deferred tax assets at December 31, 2000 and 2001.

         At December 31, 2001,  I-Sector had no net  operating  loss carry backs
and had net  operating  carry  forwards of $1,115  which will begin to expire in
2021.

<PAGE>

7.   ACCRUED EXPENSES

         Accrued liabilities  consisted of the following as of December 31, 2000
and 2001:

                                                                2000       2001

     Sales tax payable                                     $     121   $    370
     Accrued employee benefits, payroll
        and other related costs                                  860        909
     Accrued property taxes                                        7        152
     Accrued warranty costs                                      238        263
     Other                                                       409        397
     Total                                                 $   1,635   $  2,091

8.       RELATED-PARTY TRANSACTIONS

         I-Sector  has from time to time  made  payments  on  behalf of  Allstar
Equities, Inc. ("Equities"),  which is wholly-owned by the principal stockholder
of  I-Sector,  and  I-Sector's  principal  stockholder  for taxes,  property and
equipment.  At December 31, 2000 and December 31, 2001,  I-Sector's  receivables
from these  affiliates  amounted to approximately  $303 and $239,  respectively.
Included in these  amounts is a note  receivable  that was signed on December 1,
1999 by Equities for $336 in 60 monthly  payments of $7. The note bears interest
at 9%.  Equities  made twelve  payments in advance and at December  31, 2001 the
Company's  receivables from Equities  amounted to $159. The principal amounts as
of December 31, 2000 and December 31, 2001 are classified as Accounts receivable
-  affiliates  based on the  expectation  of  repayment  within  one year.  Also
classified as Accounts  receivable - affiliates are advances to employees.  (See
Note 10 related to lease commitments to Equities.)

         In connection with the sale of the Computer Products Division, a member
of I-Sector's Board of Directors,  who acted as a broker, received a finders fee
of $350.

         On December 31, 2001 I-Sector sold certain assets and the operations of
its IT Staffing business to a former employee (see note 2).

9.       SHAREHOLDERS' EQUITY

         Holders of  I-Sector's  common stock are entitled to one vote per share
on all  matters  to be voted on by  shareholders  and are  entitled  to  receive
dividends,  if any,  as may be  declared  from  time to  time  by the  Board  of
Directors of I-Sector  ("the  Board").  Upon any  liquidation  or dissolution of
I-Sector, the holders of common stock are entitled,  subject to any preferential
rights of the holders of preferred  stock, to receive a pro rata share of all of
the assets remaining available for distribution to shareholders after payment of
all liabilities.

         I-Sector's  Board  authorized  the purchase of common stock of I-Sector
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  I-Sector's stock
option  plans.  At  December  31, 2000 and 2001,  399,800  and  591,800  shares,
respectively, were held in treasury under these authorizations.

         At December 31, 2001 I-Sector had 1,200 shares of restricted stock with
a par value of $0.01 per share outstanding.  The 1,200 shares, valued at $1.563,
vest ratably at the end of each one year period over a five year period from the
date of issuance.

         I-Sector issued warrants to purchase 176,750 common shares at $9.60 per
share to  underwriters  in connection  with its public offering of common stock.
The warrants expire on July 7, 2002.

<PAGE>

10.      COMMITMENTS AND CONTINGENCIES

         Operating Leases - I-Sector  subleases  office space from Equities.  In
1999,  I-Sector  renewed its office  lease for a five year  period with  monthly
rental payments of $38 plus certain operating expenses through December 1, 2004.
The lease was  renewed  February  1, 2002 for a five year  period  with  monthly
rental payments of $37 plus certain operating expenses through January 31, 2007.
Rental expense under this agreement  amounted to  approximately  $395,  $452 and
$452 during years ended December 31, 1999, 2000 and 2001 respectively.

         Additionally,  minimum annual rentals on other operating  leases amount
to  approximately,  $124 in 2002,  $65 in 2003, $0 in 2004, $0 in 2005 and $0 in
years  thereafter.  Amounts paid during the years ended December 31, 1999,  2000
and  2001  under  such  agreements  totaled  approximately  $766,  $296 and $197
respectively.

         I-Sector  maintains a 401(k)  savings plan wherein  I-Sector  matches a
portion of the employee contribution.  In addition, I-Sector has a discretionary
matching  fund  based  on the  net  profitability  of  I-Sector.  All  full-time
employees  who have  completed 90 days of service with  I-Sector are eligible to
participate  in the  plan.  Declaration  of  the  discretionary  portion  of the
matching  fund is the  decision of the Board.  I-Sector  has made no  additional
contributions  to the plan for the years ended December 31, 1999, 2000, or 2001.
Under the standard I-Sector matching program,  I-Sector's match was $64, $46 and
$32 for the years ended December 31, 1999, 2000 and 2001, respectively.

         I-Sector 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,  I-Sector  believes the final
outcome of such matters will not have a material adverse effect on its financial
position, results of operations or cash flows.

         In July 2000,  Benchmark  Research and  Technology,  Inc. made a verbal
claim  against  I-Sector,  claiming  that  I-Sector  breached its contract  with
Benchmark,   that  I-Sector  was  negligent  and  breached  various  warranties,
committed  fraud and violated the Deceptive  Trade  Practices  Act. The case was
mediated in November  2000 but no agreement  was reached.  I-Sector  knows of no
lawsuit  being  filed.  I-Sector  believes  that the claim is without  merit and
intends to vigorously contest the demand.

         In October, 2000, I-Sector's wholly-owned  subsidiary Stratasoft,  Inc.
filed suit in the Harris  County  Texas County Court of Law against its customer
Accelerated  Telemarketing  for a  remaining  balance  of $47  on its  contract.
Thereafter  Accelerated  Telemarketing  filed a separate  legal action  claiming
breach of contract,  breach of warranty,  violation of Deceptive Trade Practices
Act and  other  claims.  The  case is in the  early  stages  of  discovery,  and
therefore  I-Sector is unable to determine  the  ultimate  costs of this matter.
I-Sector  believes  that this suit is without  merit and  intends to  vigorously
defend such action.

         In October  2001,  Inacom Corp.  wrote a demand  letter  claiming  that
I-Sector owed the sum of approximately $570 to Inacom as a result of termination
of a Vendor Purchase  Agreement  between Inacom and I-Sector.  At March 18, 2002
I-Sector  is unaware of a formal  lawsuit  being  filed,  although  one has been
threatened.  I-Sector  believes  that the demand is without merit and intends to
vigorously contest the demand.

<PAGE>

11.      INTANGIBLE ASSETS

                            As of December  31, 2000    As of December 31, 2001
                        Gross Carrying  Accumulated  Gross Carrying  Accumulated
                            Amount     Amortization   Amount        Amortization
Amortized intangible assets

  Patent license rights   $             $            $  1,046         $      28
  Unpatented technology        25                          56                 0
  Customer list               200           10            200                50
  Other                       117            6            167                35

  Total                   $   342       $   16       $  1,469         $     113

         In October  2000,  I-Sector's  wholly  owned  subsidiary  INX  acquired
certain assets and  liabilities of  Internetwork  Experts,  Inc., a professional
services firm focused on the architecture, design, implementation and support of
high-end network infrastructure. The purchase price was $225 in cash and assumed
liabilities of $116. The acquisition was accounted for using the purchase method
of  accounting,  and  accordingly,  the purchase price has been allocated to the
assets and liabilities acquired based on fair values at the date of acquisition.
The excess of the  purchase  price over the fair market  value of the net assets
acquired was approximately  $341, $200 of which has been allocated to a customer
list  and  service  agreements.  The  remaining  has  been  allocated  to  other
intangibles. INX was contingently liable for future payments to the former owner
based on the level of service  revenues  generated  within a specified period of
time and within certain ranges for the customers  included on the customer list.
That  contingent  liability  was settled in 2001 for $50. The customer  list and
other intangibles are amortized over their estimated useful lives of 5 years.

         Patent  license  rights  were  acquired  for a cash  payment and a note
payable.

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").  I-Sector's
Compensation  Committee may grant up to 442,500  shares of common  stock,  which
have been  reserved for issuance to certain  employees of I-Sector.  At December
31, 2001 40,748 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.  I-Sector
has reserved for issuance,  under the Director  Plan,  100,000  shares of common
stock,  subject  to  certain  anti-dilution  adjustments  of  which  3,000  were
available for future grants at December 31, 2001. 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 I-Sector'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.

         In May 2000,  I-Sector adopted the 2000 Stock Incentive Plan (the "2000
Incentive  Plan").  Under  the  2000  Incentive  Plan,  I-Sector's  Compensation
Committee  may grant up to the greater of 400,000  shares of common stock or 10%
of the number of shares of common stock issued and  outstanding on the first day
of the then preceding calendar quarter. The 2000 Incentive Plan provides for the
granting of incentive awards in the form of stock-based  awards and cash bonuses
in  accordance  with  the  provisions  of the  plan.  All  employees,  including
officers, and consultants and non-employee directors are eligible to participate
in the 2000 Stock Incentive Plan. Generally,  the Compensation Committee has the
discretion to determine  the exercise  price of each stock option under the 2000
Incentive  Plan, and they must be exercised  within ten years of the grant date,
except those  classified as Incentive  Stock Option  ("ISO")  grants to a 10% or
greater stockholder.  ISO options grants to a 10% or greater stockholder must be
exercised  within five years of the grant date.  The exercise  price of each ISO
option  grant may not be less than 100% of the fair  market  value of a share of
common  stock  on the  date of  grant  (110%  in the  case  of a 10% or  greater
stockholder).  At December 31, 2001  317,697  shares were  available  for future
grant under the 2000 Incentive Plan.

<PAGE>

         During 1999, 2000 and 2001 I-Sector  granted options to purchase 9,000,
35,000 and  25,000  common  shares to its  directors,  respectively,  which vest
immediately,  and  216,872,  94,671  and  0  common  shares  to  its  employees,
respectively, which vest over five years.

The activity of employees in all plans is summarized below:
<TABLE>
<CAPTION>

                                               1999                2000                2001
                                               Weighted           Weighted            Weighted
                                                Average            Average             Average
                                               Exercise           Exercise            Exercise
                                           Shares     Price    Shares     Price    Shares     Price
<S>                            <C>        <C>      <C>        <C>      <C>        <C>      <C>
Options outstanding at January 1          268,350  $   1.63   458,232  $   1.41   383,112  $   1.72
Granted during the year                   225,872      1.15    71,400      1.76    25,000      1.00
Exercised during the year
Transfers to non-employees                                   (133,220)     2.19
Canceled during the year                  (35,900)     1.45   (13,300)     2.23    (8,300)     1.64
Options outstanding at December 31        458,232  $   1.41   383,112  $   1.72   399,812  $   1.48
Options exercisable at December 31        196,072  $   1.41   254,212  $   1.37   317,722  $   1.58
Options outstanding price range          $1.06 to $ 7.62     $1.06 to $7.62      $1.00 to $7.62
Weighted Average fair value of
options granted during the year          $1.07               $1.15               $1.00
Options weighted-average
remaining life                           9.87 Years          8.00 Years          6.88 Years
</TABLE>

         I-Sector  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,
I-Sector's  net loss and loss per share  would  have been  increased  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
with a Black-Scholes  option pricing model using the following  weighted-average
assumptions;  dividend  yield  of 0%;  expected  volatility  of  59%;  risk-free
interest rate of 5.5%;  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.
                                                1999        2000        2001
Net Income (loss):
              As reported                    $   (845)   $    (43)   $ (3,705)
              Pro forma                      $   (923)   $    (48)   $ (3,961)
Earnings per share (basic and diluted )
              As reported                    $   (0.20)  $   (0.01)  $  (0.95)
              Pro forma                      $   (0.22)  $   (0.01)  $  (1.01)

Employees  affected by the sale of the Telecom Division on March 16, 2000 and of
the  Computer  Products  Division on May 19,  2000 (See Note 2)  retained  their
respective  stock option grants  received prior to I-Sector's  disposal of these
divisions.  In addition,  certain affected  employees were eligible and received
stock  options  awards  subsequent  to their  termination  dates.  The  affected
employees'  awards  will  vest or  continue  to vest  according  to the  periods
specified in their  respective  stock option  agreements,  generally five years,
contingent upon the employment  with the respective  division's  acquiror.  As a
result of their  termination  from I-Sector,  and the change in employee status,
these  awards  were  remeasured  as of the  respective  sale  dates  or  date of
subsequent  issuance.  The fair values of each of these stock option  awards was
estimated  using the  Black-Scholes  option  pricing  model using the  following
assumptions;  dividend  yield  of 0%;  expected  volatility  of 59%;  risk  free
interest rate of 5.5% and an expected  remaining life of 3 to 5 years.  The fair
values have been  reflected as a component of  Stockholder's  equity at December
31, 2000 and are being  recognized as compensation  expense of the  discontinued
operations  over the  estimated  remaining  vesting  period.  For the year ended
December 31, 2000 $145 of compensation expense was recorded.

<PAGE>

The activity of this non-employee group is summarized below:
                                                 2000              2001
                                               Weighted          Weighted
                                                Average           Average
                                           Shares   Exercise  Shares   Exercise
                                                      Price              Price
    Options outstanding at January 1                          183,771    $ 2.18
    Transfer from (to) Employee plan       133,220    $ 2.19
    Grants during the year                  58,271      2.27
    Exercised during the year
    Canceled during the year                (7,720)     1.66   (2,288)     1.64
    Options outstanding December 31        183,771    $ 2.18  181,483      1.45
    Options exercisable December 31         45,500    $ 1.87   83,304      1.37

    Options outstanding price range          $2.31 to $2.86     $1.06 to $2.31
    Weighted average fair value of options
        granted during the year               2.18
    Options weighted average remaining
        life                                  3.85 years         3.13 years

13.      EARNINGS PER SHARE

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

                                                  1999       2000       2001
                                                 Amounts in thousands except
                                                  share and per share data)
Numerator:

    Net loss from continuing operations         $   (26)   $(3,628)   $(3,875)

    Discontinued operations:
             Net income (loss) from
              discontinued operations,
              net of taxes                          319        195       (167)
             Gain (loss) on disposal, net
                of taxes                         (1,138)     3,390        337
             Net loss                           $  (845)   $   (43)   $(3,705)

Denominator:

    Denominator for basic earnings per
    share - weighted-average shares
    outstanding                                 4,168,140  4,059,618  3,911,019

Effect of dilutive securities:

    Shares issuable from assumed conversion
        of common stock options, warrants and
        restricted stock                                0          0          0

Denominator for diluted earnings per share      4,168,140  4,059,618  3,911,019

<PAGE>

Net income (loss) per share:

Basic and diluted:

Net loss from continuing operations             $   (0.01) $   (0.90)  $  (0.99)
Net income (loss) from discontinued operations       0.08       0.05      (0.04)
Gain (loss) on disposal                             (0.27)      0.84       0.08
Net loss per share                              $   (0.20) $   (0.01)  $  (0.95)

         There were  warrants to  purchase,  176,750  shares of common stock for
1999,  2000 and 2001,  respectively,  which were not included in  computing  the
effect  of  dilutive   securities   because  the   inclusion   would  have  been
antidilutive.

         There were  37,600,  48,344 and 0 options to purchase  common stock for
1999,  2000 and 2001,  respectively,  which were not included in  computing  the
effect  of  dilutive   securities   because  the   inclusion   would  have  been
antidilutive.

14.      SEGMENT INFORMATION

         I-Sector  has four  reportable  segments:  (1)  Allstar,  (2) INX,  (3)
Stratasoft,  and (4)  Corporate.  Synergy,  which  was  previously  reported  as
separate  segment  was  merged  into ACS,  and the name was  changed  to Allstar
Solutions,  Inc.  (Allstar).  The IT  Staffing  business,  which was  previously
reported as the IT Services segment,  has been discontinued.  Corporate includes
the  operations of the Company's El Paso service  operations  which were sold on
May 19, 2000, and service  operations  relating to computer  installations for a
certain customer. Allstar provides customers with turnkey outsourced IT helpdesk
solutions,  technical staff  augmentation  for IT helpdesk  operation,  helpdesk
consulting services,  on-site and carry-in computer repair,  application support
and  operating  system  and  network  migration  services.  Stratasoft  produces
software products that facilitate telephony and computer  integration  primarily
for  telemarketing  and call center  applications.  INX is a provider of network
infrastructure   professional   services   and  a  reseller  of  Cisco   network
infrastructure  products.  The accounting  policies of the business segments are
the same as those  described in Note 1. I-Sector  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. The tables below show the results of the four
reportable segments:

<TABLE>
<CAPTION>
For the year ended December 31, 2001:
                                         Allstar      INX   Stratasoft Corporate Elimination Consolidated
<S>                                      <C>       <C>       <C>       <C>       <C>         <C>
Total  revenue                           $  5,668  $ 10,775  $  7,257  $     (6) $    (74)   $   23,620
Cost of sales and services                  4,403     9,663     3,318       (13)      (46)       17,325
Gross profit                                1,265     1,112     3,939         7       (28)        6,295
Selling, general and
     administrative expenses                3,077     3,103     3,021     1,400       (28)       10,573
Operating income (loss)                  $ (1,812) $ (1,991) $    918  $ (1,393) $      0        (4,278)
Interest and other income, net                                                                     (316)
Loss before benefit for income tax                                                               (3,962)
Benefit for income tax                                                                              (87)
Net loss from continuing operations                                                              (3,875)
Net loss from discontinued
     Operations                                                                                    (167)
Net gain on disposal, net of taxes                                                                  337
Net loss                                                                                     $   (3,705)

Accounts receivable, net                 $    857  $  2,567  $    742  $     54  $      0    $    4,220
Accounts receivable retained from
     discontinued operations, net                                                                    82
Total accounts receivable, net                                                               $    4,302
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
For the year ended December 31, 2000:

                                         Allstar     INX    Stratasoft Corporate Elimination Consolidated

<S>                                      <C>       <C>       <C>       <C>       <C>         <C>
Total revenue                            $  6,946  $  1,874  $  6,660  $  1,640  $    (33)   $   17,087
Cost of sales and services                  5,590     1,917     3,573     1,909       (21)       12,968
Gross profit                                1,356       (43)    3,087      (269)      (12)        4,119
Selling, general and
     administrative expenses                3,186       935     3,647     1,723       (12)        9,479
Operating income (loss)                  $ (1,830) $   (978) $   (560) $ (1,992) $      0        (5,360)
Interest and other income, net                                                                     (239)
Loss before benefit for income tax                                                               (5,121)
Benefit for income tax                                                                           (1,493)
Net loss from continuing operations                                                              (3,628)
Income from discontinued operations,
     net of taxes                                                                                   195
Net gain on disposal, net of taxes                                                                3,390
Net loss                                                                                     $      (43)
</TABLE>

<TABLE>
<CAPTION>
For the year ended December 31, 1999:

                                         Allstar     INX    Stratasoft Corporate Elimination Consolidated
<S>                                      <C>       <C>       <C>       <C>       <C>         <C>
Total revenue                            $ 10,962  $      0  $  4,318  $  2,704  $      0    $   17,984
Cost of sales and services                  7,580         0     2,126     2,100         0        11,806
Gross profit                                3,382         0     2,192       604         0         6,178
Selling, general and
     administrative expenses                3,273         0     1,960       974         0         6,207
Operating income (loss)                  $    109  $      0  $    232  $   (370) $      0           (29)
Interest and other income, net                                                                      (23)
Loss before benefit for income tax                                                                   (6)
Provision for income tax                                                                             20
Net loss from continuing operations                                                                 (26)
Income from discontinued operations,
     net of taxes                                                                                   319
Net loss on disposal, net of taxes                                                               (1,138)
Net loss                                                                                     $     (845)
</TABLE>

International  sales accounted for $3,111 or 13.2% of  consolidated  revenues in
2001 and were primarily in the Stratasoft segment.

                                  Reconciliation of Products and Services

                                                  1999        2000        2001

         Product revenue                       $  4,854    $  8,368    $ 16,966
         Service revenue                         13,130       8,719       6,654

         Total Revenue                         $ 17,984    $ 17,087    $ 23,620

<PAGE>

16.      SUBSEQUENT EVENTS

         On January 31,  2002  I-Sector  entered  into a credit  agreement  with
Textron  Financial  Corporation  ("Textron") for a revolving line of credit (the
"Textron  Facility") that will be our principal  source of liquidity.  The total
credit available under the credit facility is $2,500,  subject to borrowing base
limitations that are generally computed as 80% of eligible accounts  receivable,
90% of  identifiable  inventory  purchased  under this  agreement and 40% of all
other  inventory.  Credit available under this facility for floor plan financing
of inventory from approved manufacturers is $2,500. We may use up to $500 of the
line for working capital  advances under approved  conditions.  Borrowings under
the line  will  accrue  interest  at the prime  rate  plus  2.5% on  outstanding
balances  that extend beyond the vendor  approved  free  interest  period and on
working  capital  advances  from date of advance.  Inventory  floor plan finance
borrowings  on the line are  reflected in accounts  payable on the  accompanying
balance sheets. At December 31, 2001, we had no credit facility in place.

         This  agreement,  which  continues  in  full  force  and  effect  until
terminated by written notice from I-Sector, is collaterized by substantially all
of  I-Sector's  assets  except  the  patent  assets.   The  agreement   contains
restrictive  covenants,  which, among other things, require I-Sector to maintain
minimum  tangible  capital  funds and to not  exceed a maximum  debt-to-tangible
capital funds ratio.

         On March 9, 2002,  President  Bush signed into law the Job Creation and
Worker  Assistance  Act of 2002.  The new law provides for the  carryback of net
operating  losses for any taxable year ending during 2001 or 2002 to each of the
5 tax years preceding the loss year.  Previously,  a net operating loss was only
eligible to be carried back to the 2 years preceding the year of loss. This will
result in additional tax refunds of approximately $1,000.

<PAGE>

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

         NONE

PART III

Item 10. Directors and Executive Officers

Directors

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

         James H. Long,  age 43, 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 58, 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 46, 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.

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

         Jack M.  Johnson,  Jr., age 62, 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 that provides  environmental  services for
industrial operations.

Kevin M. Klausmeyer - Director, August 8, 2001 to present.

         Kevin M.  Klausmeyer,  age 43,  has been  Chief  Financial  Officer  of
PentaSafe Security Technologies,  Inc., a security software company and provider
of complete  security  policy and  infrastructure  solutions,  since December 1,
1999.  From 1993 to November 1999,  Mr.  Klausmeyer was Vice President and Chief
Accounting  Officer  of BMC  Software,  Inc.,  a  publicly-held  distributor  of
computer software.  Mr. Klausmeyer is one of three software finance  executives,
who, together with  representatives from the Big Five accounting firms, serve on
the AICPA's  Software  Revenue  Recognition  Task Force,  which  interprets  and
provides  guidance to the software industry on the U.S.  authoritative  software
revenue accounting rules. In addition, Mr. Klausmeyer is the current Chairman of
SOFTEC  (Software  Finance and Tax  Executives  Council),  the primary  software
financial  organization  in the U.S.  Mr.  Klausmeyer  spent 13 years at  Arthur
Andersen LLP in the audit and business consulting practice, with a primary focus
in assisting high technology companies.

<PAGE>

John B. Cartwright - Director, August 8, 2001 to present.

         Mr.  Cartwright,  age 55,  has been the owner of John B.  Cartwright  &
Associates,  a Certified Public  Accounting firm, since 1990. From 1973 to 1990,
Mr.  Cartwright was the managing partner or managing  shareholder of Cartwright,
Matthews,  Gonsoulin  &  Bradley,  PC,  Cartwright,   Matthews  &  Gonsoulin,  a
Partnership  and  Cartwright & Matthews,  a  Partnership.  From 1969 to 1973 Mr.
Cartwright was an Audit  Supervisor of Touche Ross & Co., (now Deloitte & Touche
LLP) in  Houston.  Mr.  Cartwright  is a member  of the  American  Institute  of
Certified Public  Accountants,  Texas Society of Certified  Public  Accountants,
Houston  Chapter of the Texas Society of Certified  Public  Accountants,  and is
currently  the President of the Houston  Chapter of the  Community  Associations
Institute.

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 .

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

         Thomas N. McCulley,  age 55, 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.

Patricia L. Winstead -Vice President and Controller, November 2001 to present.

         Patricia  L.  Winstead,  age  60,  has  been  the  Vice  President  and
Controller for the Company since November 2001. From June 1999 to November 2001,
Mrs. Winstead served as the Controller for the Company.  She has  responsibility
for  supervision  of  accounting,  controller  and  reporting  functions for the
Company.

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

         William R. Hennessy, age 43, 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

         There  are no  family  relationships  among  any of the  directors  and
executive officers of the Company.

Section 16(a) Beneficial Ownership Reporting Compliance

                                   Number of      Number of       Known Failure
         Name of Reporting Person  Late Reports   Transactions        To File

         Winstead, Patricia L.           1              3

<PAGE>

Item 11. Executive Compensation

Summary  Compensation  Table.  The following  table  reflects  compensation  for
services to the Company for the years ended December 31, 2001,  2000 and 1999 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 2001 and whose  total  annual  salary and bonus  exceeded
$100,000 in 2001 (the "Name Executive Officers").

<TABLE>
<CAPTION>
                         Annual Compensation                            Long Term Compensation
                                                                                 Awards
   Name and Principal       Year     Salary      Bonus       Other      Restricted    Number of
                                                             Annual                   Securities
                                                          Compensa-tion    Stock      Underlying
                                                              (1)         Awards       Options
        Position
<S>                         <C>      <C>         <C>       <C>          <C>           <C>
James H. Long (2)           2001     $133,315
Chief Executive             2000      150,000
Officer                     1999      150,000

William R. Hennessy         2001       85,162     60,966
President, Stratasoft,      2000       91,034     59,686
Inc. (3)                    1999       85,000     55,856                              10,000

Mark T. Hilz                2001      185,190
President,                  2000       84,635
Internetwork Experts,
Inc.

Paul Klotz                  2001      144,549
Vice President,             2000       57,404
Internetwork Experts,
Inc.
<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)      Includes compensation based upon gross profit realized.
</FN>
</TABLE>

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, 2000,
409,012 shares were reserved for issuance upon exercise of  outstanding  options
and 33,488 were reserved and remained  available  for future grants  pursuant to
the Incentive Stock Option Plan. During 2000,  options to purchase 15,100 shares
of Common Stock were granted to the Named Executive Officers under the Incentive
Stock Option Plan

<PAGE>

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, 2001.

                                                                      Potential

                                                     Potential       Realizable
                                                    Realizable        Value at
  Number of   Percent of                             Value at         Assumed
  Shares of     Total                             Assumed Annual    Annual Rate
    Common     Options                             Rate of Stock      of Stock
    Stock     Granted to   Exercise                    Price           Price
  Underlying  Employees    or Base                 Appreciations   Appreciations
   Options    in Fiscal    Price      Expiration    for Option       for Option
   Granted       Year      ($/share)     Date       Term 5% (1)     Term 10% (1)

None

 (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.

Aggregated Option Exercises and Year-End Option Values

<TABLE>
<CAPTION>
                      Number of Securities

                      Shares               Underlying Unexercised    Value of Unexercised In-the
                     Acquired    Value             Options at                money Options at
                    on Exercise Realized     December 31, 2001            December 31, 2001
                                         Exercisable   Unexercisable  Exercisable   Unexerciable
<S>                     <C>        <C>     <C>              <C>          <C>             <C>
James H. Long           0          0       1,440            960          $0              $0
William R. Hennessy     0          0      14,400          3,600          $0              $0
Mark T. Hilz            0          0      15,000              0          $0              $0
</TABLE>

         The Named Executive  Officers held 30,840 options that were exercisable
at  December  31,  2001,  none  were  exercised  during  2001 and  there  were 0
in-the-money unexercised options at December 31, 2001.

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,
McCully,  Otto and  Hennessy  are entitled to an annual base salary of $150,000,
$75,000, $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 18,  2001 the number of
shares of Common Stock owned by each 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                          2,034,970        52.8%
Common Stock    Donald R. Chadwick                       107,003    (2)  2.8%
Common Stock    William R. Hennessey                      24,400    (3)     *
Common Stock    Thomas N. McCully                         19,040    (4)     *
Common Stock    All officers and directors             2,250,458        58.4%

(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 74,686 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 14,400 shares which may be acquired upon exercise of currently
         exercisable options.


(4)      Includes 13,840 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                         227,000           5.9%
                  37102 FM 149, P.O. Box 525
                  Pinehurst, TX 77362

  Common Stock    Peak 6 Capital Management L.L.C. (1)  365,000           9.5%
                  209 LaSalle Street, Suite 200
                  Chicago, Illinois 60604

  Common Stock    James H. Long                       2,033,530          52.8%
                  6401 Southwest Freeway
                  Houston, Texas 77074

  (1)  As reported on Schedule 13D July 16, 2001.

<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 $6,965.  The note bears interest at 9% per year. At December 31,
2001,  the  Company's   receivables  from  Equities  amounted  to  approximately
$156,000.  Additionally,  from time to time the  Company  has made  payments  to
unrelated  parties for  transactions  that  should  either  wholly or  partially
benefit Mr. Long and which should  therefore be accounted for as indebtedness by
Mr. Long to the Company.  The company records these transactions as a receivable
to be repaid by him. The balance of  approximately  $80,000 at December 31, 2001
is included in the balance sheet caption "Accounts receivable - affiliates".

         The Company  leases  office  space from  Equities.  On December 1, 1999
Equities  purchased  the  building  and executed a direct lease with the Company
with an  expiration  date of December 31, 2004.  In  conjunction  with  Equities
obtaining  new  financing on the  building,  a new lease was  executed  with the
Company on February 1, 2002 with an expiration date of January 31, 2007. The new
lease has rental rates reduced from $37,692 per month to $37,192 per month.

         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  Equities are at least as favorable as those that
could be obtained  in an  arms-length  transaction  with an  unaffiliated  third
party.

         Directors' Compensation

         Employee  directors  of the  Company  do  not  receive  any  additional
compensation  for their services as a director of the Company.  The Company pays
each  independent  director $1,000 for each Board meeting  attended and $500 for
Committee  meeting  attended,   along  with  reasonable  out-of-pocket  expenses
incurred  by  independent  directors  to attend  Board and  Committee  meetings.
Independent  directors  are also  entitled  to receive  options  pursuant to the
Director Plan (See Note 12).

PART IV

Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K

     (a)   (1) Consolidated  Financial  Statements  - See Index to  Consolidated
               Financial Statements on Page 21

           (2) Consolidated  Financial  Statements  Schedule  II  Valuation  and
               Qualifying Accounts Exhibit 99.1

           (3) Exhibits  - a copy of the  Index  to  Exhibits,  filed  with  the
               Company's  Form 10-K  Report,  can be obtained  free of charge by
               written request to Investor Relations, I-Sector Corporation, 6401
               Southwest Freeway,  Houston,  Texas 77074 or by calling (713) 795
               2525.

<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
3.3   Certificate of Amendment to Certificate of Incorporation                  Form 10-K filed Mar.
      of Allstar Systems, Inc.                                                  24, 2001
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.
10.2  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.
10.5  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
10.10 Allstar Systems, Inc. 401(k) Plan.                                        Exhibit 10.10 to Form
                                                                                S-1 filed Aug. 8, 1996
10.11 Allstar Systems, Inc. 2000 Incentive Stock Plan.                          DEF 14A Filed
                                                                                Mar 14, 2000
10.12 Allstar Systems, Inc. 1996 Non-Employee Director Stock Option Plan.       Exhibit 10.12 to Form
                                                                                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
10.18 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
10.23 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
10.26 Agreement for Wholesale Financing, Business Financing Agreement           Form 10-K filed Mar.
      and related agreements and correspondence by and between DFS Financial    31, 1998
      Services and Allstar Systems, Inc., dated February 27, 1998
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
10.32 Lease Agreement by and between Allstar Equities, Inc. and I-Sector        Form 10-K filed March
      Corporation dated February 1, 2002                                        28, 2002
<PAGE>
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
10.35 Promissory Note between James H. Long and Allstar Systems, Inc.           Form 10-K filed March
      dated December 1, 1999                                                    28, 2000
10.36 Asset Purchase Agreement By and Between Internetworking                   Form 10-K filed Mar
      Sciences Corporation and Internetwork Experts, Inc.                       24, 2001
      dated October 27, 2000
10.37 Lease Agreement By and Between Whitehall-Midway Park                      Form 10-K filed Mar
      North, Ltd. and Allstar systems, Inc. dated July 31, 2000                 24, 2001
10.38 Dealer Loan and Security Agreement between Textron Financial              Form 10-K filed Mar
      Corporation and I-Sector Corporation                                      28, 2002
21.1  List of Subsidiaries of the Company.                                      Form 10-K filed Mar.
                                                                                28, 2002
23.1  Independent Auditors' Consent of Deloitte & Touche LLP,.                  Form 10-K filed Mar.
                                                                                28, 2002
99.1  Schedule II Valuation and Qualifying Accounts                             Form 10-K filed Mar.
                                                                                28, 2002

     (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 18, 2000.

                                       I-Sector Corporation.
                                             (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


     /s/ Patricia L. Winstead   Vice President and Controller, Chief Accounting
                                Officer


     /s/ Donald R. Chadwick     Secretary and Director


     /s/ Kevin M. Klausmeyer    Director


     /s/ Richard D. Darrell     Director


     /s/ Jack M. Johnson        Director


     /s/ John B. Cartwright     Director