SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K/A

               |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1997

                                       OR

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

                         Commission file number: 0-21479

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

                      Delaware                          76-0515249
              (State of Incorporation)     (I.R.S. Employer Identification No.)
               6401 Southwest Freeway
                     Houston, TX                         77074
               (Address of principal executive offices) (Zip code)

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

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

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

                          COMMON STOCK, $.01 Par Value
                                (Title of Class)
         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes __x__ No ____

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

         The aggregate  market value of the voting stock held by  non-affiliates
of the registrant, based upon the closing price of the Common Stock on March 24,
1998,  as  reported  on  NASDAQ  National  Market  System,   was   approximately
$11,591,000.

         The number of shares of Common Stock, $.01 Par Value, outstanding as of
March 24, 1997 was 4,454,411.

                       DOCUMENTS INCORPORATED BY REFERENCE
         Portions of Registrant's definitive Proxy Statement for the 1998 Annual
Meeting of Shareholders  are  incorporated by reference into Part III, Items 10,
11, 12, and 13.
<PAGE>

PART I

Item 1.  Business

Special Notice Regarding Forward-Looking Statements

THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING  STATEMENTS RELATING TO
FUTURE EVENTS OR THE FUTURE FINANIAL  PERFORMANCE OF THE COMPANY,  INCLUDING BUT
NOT LIMITED TO  STATEMENTS  CONTAINED IN ITEM 1 - "FACTORS  WHICH AFFECT  FUTURE
OPERATING  RESULTS," "ITEM 7.  MANAGEMENTS  DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS,"  "PROPERTIES" AND "BUSINESS."  READERS ARE
CAUTIONED  THAT SUCH  STATEMENTS,  WHICH MAY BE  IDENTIFIED  BY WORDS  INCLUDING
"ANTICIPATES,"  "BELIEVES," "INTENDS,"  "ESTIMATES," "EXPECTS" "PLANS" AND OTHER
SIMILAR  EXPRESSIONS,  ARE ONLY  PREDICTIONS OR  ESTIMATIONS  AND ARE SUBJECT TO
KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES,  OVER WHICH THE COMPANY HAS LITTLE OR
NO CONTROL.  IN EVALUATING SUCH STATEMENTS,  READERS SHOULD CONSIDER THE VARIOUS
FACTORS  IDENTIFIED  IN THIS ANNUAL REPORT ON FORM 10-K,  INCLUDING  MATTERS SET
FORTH IN "FACTORS WHICH MAY AFFECT THE FUTURE  OPERATING  RESULTS,"  WHICH COULD
CAUSE ACTUAL  EVENTS,  PERFORMANCE  OR RESULTS TO DIFFER  MATERIALLY  FROM THOSE
INDICATED BY SUCH STATEMENTS.

GENERAL

         Allstar  Systems,  Inc.  (the  "Company")  is a  regional  provider  of
computer  and  telecommunications  hardware  and  software  products and related
services.  The Company primarily markets its products and services in Texas from
five  locations  in  the  Houston,   Dallas-Fort   Worth,  El  Paso  and  Austin
metropolitan  areas and  through a small,  recently  opened  office in  McAllen,
Texas.  During 1997, the Company's customer base of approximately 2,700 accounts
was comprised  primarily of mid-sized  customers and regional  offices of larger
customers in  commercial,  educational  and  governmental  sectors.  The Company
positions itself to provide its customers with single-source  solutions for both
their  computer  and  telecommunications  needs  by  offering  a broad  range of
products  and  services and by  providing  the  expertise to support  integrated
computer and telecommunications applications.

         The Company's  revenue is derived from sales of Computer  Products,  IT
Services,  Telecom  Systems  and CTI  Software.  The  Company  is an  authorized
reseller of computer  products  from Compaq,  Hewlett-Packard,  IBM,  Microsoft,
Novell  and  other  leading   manufacturers.   The  Company  has   long-standing
relationships  with leading  aggregators and wholesale  distributors of computer
hardware and software products which enable the Company to provide its customers
with  competitive  product pricing and ready product  availability.  IT Services
include system design,  installation,  integration  and support  services.  With
respect  to  Telecom  Systems,  the  Company  markets,   installs  and  services
telecommunications   equipment,   including  PBX  telephone  systems  from  NEC,
Inter-tel  and Mitel.  In 1995,  the  Company  introduced  its  proprietary  CTI
Software products which facilitate computer and telephone integration, primarily
for telemarketing, call center and other high volume calling applications.

         The Company was  incorporated  in 1983 as a Texas  corporation  and was
reincorporated  in 1996  as a  Delaware  corporation.  The  Company's  executive
offices  are located at 6401  Southwest  Freeway,  Houston,  Texas 77074 and its
telephone number is (713) 795-2000.

         The  market  for  computer   products  and  services  has   experienced
significant  growth in recent  years and the use of such  products  and services
within  organizations  has been  impacted  by  several  concurrent  trends.  The
introduction of LANs and WANs has allowed organizations to supplement or replace
expensive,  centralized  mainframe  computer  systems  with  more  flexible  and
affordable PC-based  client/server  platforms.  The emergence of widely accepted
industry  standards for hardware and software has  increased  the  acceptance of
open  architecture  LANs and WANs which can and  frequently do contain  products
from numerous manufacturers and suppliers.  Rapid technological  improvements in

<PAGE>

computer  hardware and the introduction of new software  operating  systems have
also created the need to expand or upgrade existing networks and systems. At the
same time,  price decreases have made such networks and systems  affordable to a
larger  number of  organizations.  The Company  believes  that these trends have
increased  the general  demand for  computer  products  and related  information
technology services.

         Distribution  channels  for  computer  products  changed  significantly
beginning  in the  early  1990s.  During  that  period,  many  manufacturers  of
computers  began to scale back their  sales  forces  and, in order to ensure the
continued wide  distribution of their products,  started to offer their products
to wholesale  computer  distributors which previously had sold only software and
peripheral equipment.  In addition,  manufacturers also began allowing resellers
to purchase  products from more than one aggregator or  distributor,  a practice
known as "open sourcing. " Expanding computer sales to distributors and allowing
open  sourcing  intensified  price  competition  among  suppliers.  The  Company
believes that, in general,  the  manufacturers  of its primary product lines are
continuing  to rely to a large  degree on  resellers  of  computer  products  to
distribute a significant  portion of their  products to end-users.  Distribution
patterns  may  continue  to  evolve,   however,   and  any  future  changes  may
significantly affect the Company's business.

         The advent of open  architecture  networks has also impacted the market
for information  technology services.  Wider use of complex networks involving a
variety of manufacturer's equipment, operating systems and applications software
has made it  increasingly  difficult  to  diagnose  problems  and  maintain  the
technical knowledge and repair parts necessary to provide support services.  The
Company  believes  that  increased  outsourcing  of more  sophisticated  support
services by business and institutional customers has resulted from the technical
complexities  created by  multi-manufacturer  and supplier  network  systems and
rapid  technological  change.   Increasingly,   organizations  seeking  computer
products often require  prospective vendors not only to offer products from many
manufacturers  and  suppliers,  but to have  available  and  proficient  service
expertise to assist them in product selection,  system design,  installation and
post-installation  assistance and service. The Company believes that the ability
to offer  customers a  comprehensive  solution to their  information  technology
needs,   including  the  ability  to  work  within  its   customers'   corporate
environments as integral members of their management  information  system staff,
are increasingly important in the marketplace.

         Telecommunications  systems  have  evolved in recent  years from simple
analog telephone systems to sophisticated  digital systems,  with modern digital
systems featuring voice  processing,  automated  attendant,  voice and fax mail,
automatic call distribution and call accounting.  The ability to interface these
new digital phone  systems to the user's  PC-based  computer  systems now allows
these telephone systems to interact with the user's  computerized data to create
powerful business solutions.  New features,  such as "caller ID" that is coupled
with a digital  telephone  system and  integrated  with a computer  system,  can
provide automatic  look-up and display of account  information while the user is
receiving a new call, thereby increasing  productivity and the level of customer
service.  Computerized  "call accounting" allows an organization with integrated
telephone and computer  systems to track  telephone usage and long distance toll
billing and easily interface that data with computerized  accounting and billing
systems. Integrated voice and facsimile handling allows a user to retrieve, send
and manage voice and  facsimile  messages on his computer  screen.  Computerized
telephone  number  listings  allow the user to look up telephone  numbers on the
computer  and then have the  computer  dial the number  automatically.  For more
complex call center applications,  computer systems can manage out-bound calling
campaigns while  automatically  blending  in-bound calls to available  agents in
order to enhance agent productivity.

         The Company believes that the evolution of the digital telephone system
to a more open  architecture,  aided by standards  established  by Microsoft and
Novell for the  interface of telephone  and  computer  technologies,  is causing
rapid  industry  change.  This change is creating  demand for digital  telephone
systems which adhere to these new industry  standards.  These digital  telephone
systems,  along  with the many  software  products  which are  rapidly  becoming
available for use in CTI,  require  sophisticated  installation  and integration
service capability.  The Company believes that the trend toward CTI is likely to
continue and that integrated  voice,  data and video  communication  will become
more  affordable.  As the technology and  management of  telecommunications  and
computer systems converge over the next decade,  the Company expects that growth
opportunities  will be presented for  companies  able to provide and service the
latest integrated telecommunications and computer technologies.
<PAGE>

BUSINESS STRATEGY

         The   Company's   goals   include   continuing   the   growth   of  its
regionally-based  business  while  preparing  the  Company  to become a national
provider of computer and  telephone  hardware and software  products and related
services.  To achieve its  objectives,  the Company  intends to pursue these key
strategies:

Expand  Geographically.  The Company intends to open  additional  offices within
Texas  and  in new  regions  to  service  existing  customers  and  attract  new
customers.  The Company opened new offices in Austin, Texas in the third quarter
of 1997 and in McAllen  and El Paso late in 1997.  The  Company  intends to open
other  offices in Texas and other  regions as  opportunities  and  circumstances
warrant.

Increase Telecom Systems And CTI Software Businesses. The Company began offering
Telecom  Systems  in 1994 in its  Houston  office  and CTI  Software  in 1995 to
capitalize on the growing  trend in CTI. The Company  expanded  Telecom  Systems
operations  to the  Dallas-Fort  Worth  market in the second  half of 1997.  The
Company  intends  to expand its  Telecom  Systems  operations  to (i) all of its
offices,  (ii) pursue  acquisitions of regional  telephone system resellers with
established  customer bases in targeted markets,  and (iii) increase the variety
and capabilities of its CTI Software  products through internal  development and
acquisitions of complementary software products.

Implement  Internet-Based  National  Marketing  Program.  The Company intends to
implement a new method of marketing its Computer Products on a nationwide basis.
By accessing an Internet home page currently  under  development,  the Company's
sales  representatives  and customers will be able to obtain product pricing and
availability  data,  enter or change orders and access  customer  account status
information.  The Company plans to employ  experienced sales  representatives in
selected  metropolitan  markets who will be supported by the new  Internet-based
system and by a national  sales support call center  performing  order entry and
customer service functions.

         After utilizing the  Internet-based  system to support its direct sales
force the Company  expects to establish  customer  relationships  in new markets
under the trade name "800 PC  Deals."  The  Company  then  intends to  establish
branch offices in certain of these markets.  Implementation of this strategy was
anticipated  to  begin  in the  second  half  of  1997  but  has  been  deferred
indefinitely until the Company can better ascertain the potential  profitability
of this program and further develop its Internet based marketing systems.  There
can be no  assurance  that the Company  will  complete  the  development  of the
Internet  system  and if  developed  whether  the  Company  will  implement  the
marketing program.

PRODUCTS AND SERVICES

         The Company's  revenues are derived from the marketing of technological
information  systems.  Management of the Company believes that such revenues are
reliant upon the ability to offer related  services (which comprise less than 10
% of revenues) on those products. For the convenience of the reader the products
offered and the related services have been provided below.

COMPUTER PRODUCTS

         The Company  offers its  customers a wide variety of computer  hardware
and software products  available from over 600 manufacturers and suppliers.  The
Company's products include desktop and laptop computers,  monitors, printers and
other peripheral  devices,  operating system and application  software,  network
products and mid-range host and server systems  including the IBM RS6000 and DEC
Alpha systems.  The Company is an authorized  reseller of products from a number
of  leading   manufacturers  of  computer  hardware,   software  and  networking
equipment,  including  Compaq,  Hewlett-Packard,   IBM,  Microsoft  and  Novell.
Products  manufactured  by  Compaq,  Hewlett-Packard  and  IBM in the  aggregate
accounted for  approximately  53.7%,  58.9%, and 56.8%, for 1995, 1996 and 1997,
respectively,  of the  Company's  total  inventory  purchases.  There  can be no
assurance that the Company will continue to resell such manufacturers'  products
in the future;  however, the Company believes that its relations with all of its
major product manufacturers and distributors are satisfactory.
<PAGE>

IT SERVICES

         IT Services are provided by the Company  both in  conjunction  with and
separately from its Computer Products sales. The Company typically prices its IT
Services on a time and  materials  basis or under  fixed fee service  contracts,
depending on customer  preference and the level of service commitment  required.
In  markets  where  the  Company  does not  maintain  branch  offices,  it often
subcontracts for necessary technical personnel,  particularly where required for
larger scope or prolonged duration contracts.  The Company's IT Services include
the following:

Information  Systems  Support.  The Company is an  authorized  warranty  service
provider for many popular computer and computer peripheral products and provides
hardware repair and maintenance  services,  complex network diagnostic services,
end user support  services and software  diagnostic  services.  The Company also
offers complete  outsourcing of a customer's computer and network management and
technical  support  needs on a contract  basis.  The  Company  provides  on-site
service parts  stocking,  help desk  assistance  and fixed asset  management and
tracking.

Contract  Systems  Engineer,  Technician  And Programmer  Staffing.  The Company
provides  short-term  supplemental  technical  staffing,  including hardware and
software  technicians,  help desk personnel,  systems and network  engineers and
programming staff.

Systems Engineering. The Company provides systems engineering services including
information  technology  consulting,  LAN/WAN design, on-site and remote network
administration,  new  technology  feasibility  and impact  analyses and disaster
recovery plan analyses.

Information   Technology  Project  Management.   The  Company  provides  project
management  services for major hardware and software  upgrades and  conversions,
roll-outs of major new hardware and  software  installations  and large  network
installations, including multiple city WAN implementations.

Telecommunications And Data Systems Cabling. The Company provides networking and
telecommunications   cabling   services   required  for  all  major   networking
topologies,  including  fiber optic  cabling.  The Company  also offers  cabling
services for adding to, moving or changing existing network systems.

Contract Programming Services. Recently, the Company has begun to offer contract
programming   services,   primarily   related   to  SQL   database   design  and
implementation, client server applications and Internet site development.

IT Staffing  Services.  In January  1997 the Company,  through its  wholly-owned
subsidiary IT Staffing,  Inc., began providing technical personnel for temporary
and  permanent  positions  to it  customers.  The  Company  recruits  and places
personnel  for a wide  variety of technical  positions  related  principally  to
computing hardware and software skill sets.

         To support and maintain  the quality of these  services and to maintain
vendor  accreditation  necessary to resell and service its  significant  product
lines, the Company's  technical staff  participate in various  certification and
authorization   programs  sponsored  by  hardware   manufacturers  and  software
suppliers.  The  Company  currently  has  attained  several  certifications  and
authorizations,  most  notably as a  Microsoft  Solution  Provider  and a Novell
Platinum  Reseller.  The  Company's  ability  to attract  and  retain  qualified
professional  and  technical  personnel  is  critical  to the  success of its IT
Services business.

<PAGE>
TELECOM SYSTEMS

         The Company began its Telecom Systems business in 1994 to capitalize on
the trend  toward CTI.  The Company  currently  markets,  installs  and services
business telephone  systems,  including large PBX systems and small key systems,
along  with a variety  of  related  products  including  hardware  and  software
products for data and voice  integration,  wide area  connectivity and telephone
system networking and wireless  communications.  The Company resells PBX systems
manufactured by NEC and Mitel and smaller "key systems," including products from
Macrotel,  NEC and Winn Communications.  Wireless products include products from
Uniden and  Spectralink.  Software  products  include  voice mail  products from
Active Voice and AVT, interactive voice response  applications from AVT and call
center activity reporting products from Taske.

         Prior to 1997,  the  Company  marketed  Telecom  Systems  only from its
Houston  office.  During the second half of 1997, the Company  expanded  Telecom
Systems sales to its Dallas office.  The Company intends to expand the marketing
of its Telecom  Systems  products into each new office as they are  established.
The Company also intends to expand its Telecom Systems products, particularly in
the area of CTI products, as suitable new products become available for resale.

CTI SOFTWARE

         The  Company  develops  and markets  proprietary  CTI  Software,  which
integrates business telephone systems and networked computer systems,  under the
trade name "Stratasoft.  " CTI Software is designed to improve the efficiency of
call  center,   both  inbound  and  outbound  and  other  high  volume   calling
applications.  Basic products offered by the Company are typically customized to
suit a customer's  particular needs and are often bundled with computer hardware
supplied by the Company at the customer's  request.  The Company entered the CTI
Software  business in late 1995 by acquiring  two CTI products,  currently  sold
under the names  StrataDial  and  StrataVoice,  from a corporation  owned by the
individual who presently  manages the Company's CTI Software  operations.  A new
product, Strata-Interactive, has also been developed by the Company. The Company
now markets these three CTI Software products, which are described below:

Stratadial. StrataDial is a predictive dialer software product for outbound call
center  applications  such as sales and promotion,  collections,  surveys,  lead
generation and announcements that require personal contact.  StrataDial features
inbound/outbound  call blending without requiring an automated call distribution
feature  ("ACD")  of the PBX  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  which allows easy  interaction  with the customer's
other database applications. Dialing parameters and campaign characteristics can
be changed without shutting down the dialer,  as is required with many competing
products. During 1997, the Company sold and installed 48 StrataDial systems.

Stratavoice. StrataVoice is an outbound dialing product designed for high volume
applications  that do not require human  interaction.  StrataVoice  applications
include  appointment  confirmation and setting,  court appearance  notification,
surveys,   community   notification   such  as  school  closings  and  emergency
evacuation, employee updates, absenteeism notification, telemarketing and market
research. A telephone system utilizing  StrataVoice dials a computerized list of
numbers  and can ask the  contacted  person a  number  of  questions,  including
branching to other questions and statements based on responses. StrataVoice also
allows the contacted person to leave messages. Scripting tools are included that
allow the user to develop campaigns.  The system builds a database of respondent
data and has comprehensive  response  reporting  capabilities.  During 1997, the
Company sold and installed 122 StrataVoice systems.

Strata-Interactive.  Strata-Interactive is an interactive voice response ("IVR")
software product which allows telephone calls to access computer  information at
any time using a simple  touch-tone  telephone.  Applications for IVR technology
vary and include insurance coverage  verification and claims reporting,  utility
company account  information and outage reporting,  bank account information and
on-line  transactions,  and  shipment  verification  and  tracking  information.
Strata-Interactive  is based upon open architecture and is designed to work with
networked  computers.  The first beta version of the product was  delivered to a
customer  in  June  1996.   In  1997,   the  Company   began   integrating   the
Strata-Interactive  components into the Strata-Dial and  Strata-Voice  products.
The Company  expects  the  majority of the  Strata-Interactive  product  will be
marketed as a component of Strata-Dial.
<PAGE>
SALES AND MARKETING

DIRECT SALES

         The Company markets its products and services  primarily through direct
sales  representatives.  Direct sales  representatives  are teamed with in-house
customer service representatives and are assigned to specific customer accounts.
The Company  believes that direct sales lead to better account  penetration  and
management,   better   communications  and  long-term   relationships  with  its
customers.  The  Company's  sales  personnel,  including  account  managers  and
customer service representatives,  are partially compensated,  and in some cases
fully  compensated,  on the  profitability of accounts which they participate in
developing.  The Company believes that its past and future growth will depend in
large   measure  on  its   ability  to  attract  and  retain   qualified   sales
representatives  and  sales  management  personnel.  The  Company  promotes  its
products and services  through general and trade  advertising,  participation in
trade shows and telemarketing campaigns. The Company believes that a significant
portion of new  customers  of its Computer  Products and IT Services  businesses
originates through word-of-mouth  referrals from existing customers and industry
members, such as manufacturer's representatives.  Additionally,  Telecom Systems
sales personnel seek to capitalize on the many customer relationships  developed
by the Company's Computer Products and IT Services personnel. By virtue of their
computer business  contacts,  Computer Products and IT Services  personnel often
learn at a relatively early stage that their customers may soon be in the market
for  telecommunications  equipment and services.  Sales leads  developed by this
synergy are then  jointly  pursued.  CTI  Software  is marketed by direct  sales
representatives to organizations using telemarketing, call centers or other high
volume  telecommunications  functions.  In  addition,  StrataVoice  is  marketed
through resale arrangements between the Company and a VAR.

INTERNET-BASED SALES SUPPORT SYSTEM

         The Company has been developing an Internet-based  sales support system
that will be used by its entire sales force, however the Company does not intend
to activate the sales support until additional  development  occurs.  The system
will allow sales  representatives  to access  information on product pricing and
availability,  enter and track  specific  orders and  monitor  customer  account
information.  Sales representatives will be able to access the system from their
desktop computers at the Company's  offices or on the Internet.  The system will
also allow selected customers to enter and manage their own orders on-line.  The
Company  believes that when  implemented  this sales support system will enhance
the  productivity  and  flexibility  of its sales force and improve its customer
service.

800 PC DEALS

         The Company  intends to use its proposed  Internet-based  sales support
system to cost-effectively expand its marketing efforts for Computer Products on
a national  level under the trade name 800 PC Deals.  Specifically,  the Company
intends to employ  sales  representatives  with  local  experience  in  targeted
metropolitan  markets to  establish  customer  relationships  utilizing  the new
system.  The Company also plans to operate a national  sales support call center
to serve sales representatives and customers.  Initially, the Company intends to
fulfill a large portion of orders in these new markets by drop shipping  product
directly from suppliers to customers. Once sufficient customer relationships are
established and market knowledge is developed, the Company may seek to establish
a branch office in a market. No definitive schedule has been established for the
commencement of operations as 800 PC Deals.

         There can be no assurance that the new system will function as expected
or, if so, that its implementation  will enable the marketing approach of 800 PC
Deals to be successful.  Many factors could  influence the performance of 800 PC
Deals,  including  competition  by  others  using  similar  systems,   technical
difficulties in the  implementation of the new  Internet-based  system,  lack of
customer  or  supplier  acceptance  and the  inability  of local,  direct  sales
representatives to successfully market Computer Products through 800 PC Deals.
<PAGE>
CUSTOMERS

         The Company  focuses its marketing  efforts on mid-sized  customers and
regional offices of larger customers  located in or near the metropolitan  areas
in Texas in which  the  Company  maintains  offices.  The  Company  occasionally
provides Computer Products and IT Services in markets where the Company does not
have an office,  typically  to branch  operations  of  customers  with which the
Company has an  established  relationship.  The  Company's  customer base is not
concentrated in any industry group. Over 2,700 customers  purchased  products or
services from the Company  during 1997.  In 1997,  the largest  single  customer
constituted 4.8% of total revenues, however in prior years the Company's largest
customer has constituted as high as 11.2% of revenues.

         The  Company  has only a small  amount  of  backlog  relative  to total
revenues  because the Company  has no  long-term  commitments  by  customers  to
purchase products or services from the Company. Although the Company has service
contracts  with  many  of  its  large  customers,  such  service  contracts  are
project-based  and/or  terminable  upon relatively  short notice.  A significant
reduction in orders from any of the  Company's  largest  customers  could have a
material  adverse  effect on the  Company's  financial  condition and results of
operations.

SUPPLY AND DISTRIBUTION

         The  Company  relies  on  aggregators  and   distributors  of  computer
hardware,  software  and  peripherals  to  supply  a  majority  of its  Computer
Products.  Although  the  Company  uses many  industry  suppliers,  the  Company
purchases its Computer  Products chiefly from two suppliers,  Inacom and Ingram,
to obtain competitive pricing,  better product availability and improved quality
control.  The  Company  attempts  to  develop  strategic  arrangements  with its
principal  suppliers,  including the coordination of drop shipment  orders,  the
outsourcing of certain computer  configuration  services,  national roll-out and
installation projects and the sharing of product information. Telecommunications
hardware and  software  products  are  generally  purchased by the Company on an
as-needed basis directly from the original equipment manufacturer.

         The  Company's  largest  supplier  of Computer  Products  is Inacom,  a
leading computer products  aggregator.  Inacom markets and distributes  computer
products and provides various services on a wholesale basis through a network of
franchisees  and resellers and also markets its products  directly to end-users.
During 1995,  1996 and 1997,  the Company  purchased  from Inacom  approximately
36.6%,  57.0% and 51.4%,  respectively,  of its total inventory  purchases.  The
Company purchases Computer Products and obtains drop shipping and other services
from Inacom  pursuant to an  agreement  entered into in August 1996 (the "Inacom
Agreement").  Under the Inacom Agreement, the Company is required to purchase at
least 80% of its Computer Products from Inacom, but only to the extent that such
products are made  available  within a reasonable  period of time at  reasonably
competitive  pricing.  Pricing from Inacom is generally  based on Inacom's  cost
plus a negotiated markup.  With certain  exceptions,  the Company is entitled to
volume discounts at agreed upon levels. The term of the Inacom agreement expires
on December 31, 2001, and  automatically  renews for successive one year periods
unless  notice of  non-renewal  is given 60 days prior to the end of the renewal
period.  A  cancellation  fee of $570,500  will be payable by the Company in the
event of  non-renewal  or early  termination  of the Inacom  Agreement by either
party.

         The Company's second largest  supplier of computer  products is Ingram.
The Company  also  purchases  its Computer  Products  from Ingram on a cost-plus
basis.   During  1995,  1996  and  1997,  the  Company   purchased  from  Ingram
approximately  20.6%,  14.7% and  20.0%  respectively,  of its  total  inventory
purchases.  The Company's agreement with Ingram provides for volume discounts at
agreed upon levels.  The agreement with Ingram may be terminated by either party
upon 30 days prior written notice.


<PAGE>
         Due to intense price competition among computer products resellers, the
price and shipping terms received by the Company from its suppliers,  especially
Inacom and Ingram,  are critical to the Company's ability to compete in Computer
Products.  From  time to time the  availability  of  certain  products  has been
limited.  Although the Company has not experienced unusual product  availability
problems and has been  generally  satisfied  with the product  pricing and terms
available  from its  principal  suppliers,  there can be no assurance  that such
relationships  will  continue  or that,  in the  event of a  termination  of its
relationship  with either Inacom or Ingram,  or both, it would be able to obtain
an  alternative  supplier  or  suppliers  without a material  disruption  in the
Company's ability to provide competitively priced products to its customers.

         The Company maintains standard  authorized  dealership  agreements from
many  leading  manufacturers  of computer  and  telecommunications  hardware and
software. Under the terms of these authorized dealership agreements, the Company
is entitled to resell  associated  products to end-users and to provide warranty
service.  The Company's status as an authorized reseller of key product lines is
essential to the operation of the Company's business. In general, the authorized
dealer  agreements  do not require  minimum  purchases  and include  termination
provisions ranging from immediate  termination to termination upon 90 days prior
written notice. Some of such agreements are conditioned upon the continuation of
the  Company's  supply  arrangement  with  Inacom or  another  major  wholesaler
acceptable to the manufacturer.

         The Company  operates a warehouse at its Houston and Dallas offices for
the purpose of receiving, warehousing,  configuration and shipping products. The
Company  plans to  consolidate  its two  warehouses  into one  central  regional
warehouse located in the Dallas-Fort Worth metropolitan area in order to achieve
further productivity and efficiency enhancements.

         During  1995,  the Company  began an  initiative  to drop ship a higher
percentage  of its orders  directly  from the  supplier  to customer in order to
lower its distribution  costs and freight costs. This initiative has resulted in
the  percentage  of drop  shipped  orders  (measured  by the cost of goods  drop
shipped as a  percentage  of total cost of goods)  growing from 5. 1% during the
six months ended June 30, 1995 to 18.1% during 1996 and 23.9% in 1997. While the
Company  does not  believe  that it is in its  best  interest  to drop  ship all
orders,  it does  intend  to  continue  to move  more of its  Computer  Products
distribution toward drop shipments.

MANAGEMENT INFORMATION SYSTEMS

         The Company depends on its customized MIS to manage most aspects of its
business.   The  Company's  MIS  provides  its  sales  staff,  customer  service
representatives  and certain  customers  with  product  price,  information  and
availability  from its principal  suppliers'  warehouses  throughout  the United
States. The Company utilizes its MIS to rapidly source product from a wide range
of suppliers.  Purchase order expediting features including overdue shipment and
partial  shipment  reporting enable the Company to identify and resolve supplier
and or freight carrier problems quickly.  The purchasing  systems are real time,
allowing  buyers to act within minutes on a newly  received and  credit-approved
sales  order.  The  Company's  MIS  contain  productivity  tools for sales  lead
generation,  including  integration between  telemarketing and prospect database
management. Sales management features include a variety of reports available for
any combination of customer,  salesperson,  sales team and office criteria.  The
Company uses its MIS to manage service contracts, service calls and work orders,
engineer and technician scheduling and time tracking,  service parts acquisition
and  manufacturer  warranties.  Reporting  can  also be  generated  for  project
profitability,  contract and customer analysis, parts tracking and employee time
tracking.

         During the first quarter of 1998 the Company  commenced a conversion of
its MIS to a more powerful  computing  platform  which will allow the Company to
improve and enhance its MIS.  The new system will allow the Company to expand it
uses and more fully  integrate its  operations  with the MIS.  While the Company
expects the system conversion to be fully implemented with only normal debugging
and reprogramming, a failure to fully implement the conversion with only minimal
disruption  of its  operation  could  have an  adverse  effect on the  Company's
results of operations and financial condition.


<PAGE>
         The system  conversion was  implemented  as a general  upgrading of the
Company's MIS and was not for the purpose of achieving Year 2000 compliance. The
Company  believes  its prior MIS was,  and its new MIS is, Year 2000  compliant.
Accordingly,  the Company does not believe that Year 2000 compliance will have a
material adverse effect on its results of operations or financial condition.  It
is possible that the Company could be impacted if its  significant  suppliers or
customers  do not  successfully  and timely  achieve Year 2000  compliance  with
respect to their own computer systems. The Company has inquired of its two major
suppliers  as to the status of their Year 2000  compliance  and has been advised
that they expect to achieve Year 2000 compliance.  If, contrary to the Company's
expectations, it or the significant suppliers and customers fail to achieve Year
2000  compliance in a timely  manner,  the Company's  results of operations  and
financial condition could be materially and adversely effected.

EMPLOYEES

         As of  December  31,  1997,  the  company  employed  approximately  363
individuals.  Of these,  approximately 81 were employed in sales,  marketing and
customer service,  153 were employed in engineering and technical  positions and
129 were employed in administration,  finance and MIS. The Company believes that
its ability to recruit and retain  highly  skilled  and  experienced  technical,
sales and management  personnel has been,  and will continue to be,  critical to
its ability to execute its business plans.  None of the Company's  employees are
represented  by  a  labor  union  or  are  subject  to a  collective  bargaining
agreement. The Company believes that its relations with its employees are good.

COMPETITION

         The markets in which the Company competes are all intensely competitive
and  changing  rapidly.  The Company  believes  that the  principal  competitive
factors in the business  activities in which it operates  include relative price
and  performance,  product  availability,   technical  expertise,  adherence  to
industry standards,  financial stability,  service, support and reputation.  The
Company believes that it has many direct and indirect competitors in each of its
businesses,  none of which is dominant in the Company's  geographic markets. The
Company's  competitors  include major computer products and telephone  equipment
manufacturers,  aggregators and distributors,  including certain  manufacturers,
aggregators  and  distributors  which  supply  products  to the  Company.  Other
competitors include established national, regional and local resellers,  systems
integrators,  telephone systems dealers,  computer-telephony  VARs and other CTI
software suppliers. Some of the Company's current and potential competitors have
longer operating histories and financial, sales, marketing,  technical and other
competitive resources which are substantially greater than those of the Company.

         As the  markets in which the Company  competes  have  matured,  product
price  competition has intensified and is likely to continue to intensify.  Such
price competition could adversely affect the Company's  financial  condition and
results of  operations.  There can be no assurance that the Company will be able
to continue to compete successfully with existing or new competitors.
<PAGE>
HISTORY AND REINCORPORATION

         The  Company  was  incorporated  under Texas law in 1983 under the name
Technicomp   Corp.  On  June  30,  1993,   the  Company   changed  its  name  to
Allstar-Valcom,  Inc. and then again,  on December 28, 1993, the Company changed
its name to Allstar Systems, Inc. On December 27, 1993, the Company engaged in a
merger  in  which  it was the  surviving  corporation.  In the  merger,  Allstar
Services,  Inc.  and R.  Cano,  Inc. , both of which  were  affiliated  with the
Company,  were merged with and into Allstar Systems, Inc. in order to streamline
the business.  In 1995,  Company formed a wholly owned  subsidiary,  Stratasoft,
Inc. , to purchase and develop its CTI Software.  See "Certain Relationships and
Related Transactions--Acquisition of Stratasoft Products. The Company effected a
reincorporation  and merger in the State of Delaware  through  which the 328,125
shares  of  the  Company's   predecessor,   Allstar  Systems,  Inc.  ,  a  Texas
corporation,  which were outstanding prior to the merger, will be converted into
approximately  2,675,000 shares of the newly incorporated  Delaware  corporation
(the  "Reincorporation").  The  effect of the  Reincorporation  on the number of
shares  outstanding  prior to the  Reincorporation  was  similar in effect to an
approximately 8.15-for-1 stock split.

FACTORS WHICH MAY AFFECT FUTURE RESULTS OF OPERATION

Risk Of Low Margin Business

         The  Company's  past growth in net income has been fueled  primarily by
sales growth rather than increased gross profit  margins.  Given the significant
levels of competition  that  characterize the computer  reseller  market,  it is
unlikely that the Company will be able to increase  gross profit  margins in its
core business of reselling  computer  products which accounted for approximately
86% of the Company's  total revenue in 1997.  Moreover,  in order to attract and
retain many of its larger customers, the Company frequently must agree to volume
discounts and maximum allowable markups that serve to limit the profitability of
sales to such customers.  Accordingly, to the extent that the Company's sales to
such customers increase,  the Company's gross profit margins may be reduced and,
therefore,  any  future  increases  in net income  will have to be derived  from
continued  sales growth or effective  expansion  into higher margin  businesses,
neither  of  which  can  be  assured.  Furthermore,  low  margins  increase  the
sensitivity  of the  Company's  results of  operations to increases in operating
expenses,  including costs of financing.  Any failure by the Company to maintain
or increase  its gross  profit  margins and sales  levels  could have a material
adverse effect on the Company's financial condition and results of operations.

<PAGE>
Dependence On Availability Of Credit; Interest Rate

         The Company's  business  activities  are capital  intensive in that the
Company is required to finance  accounts  receivable and inventory.  In order to
obtain  necessary  working  capital,  the Company  relies  primarily on lines of
credit under which the  available  credit and credit limits are dependent on the
amount and quality of the Company's  accounts  receivable  and  inventory.  As a
result,  the amount of credit available to the Company may be adversely affected
by factors such as delays in collection or  deterioration  in the quality of the
Company's accounts receivable,  inventory  obsolescence,  economic trends in the
computer  industry,  interest rate  fluctuations and the lending policies of the
Company's lenders.  Many of these factors are beyond the Company's control.  Any
decrease  or  material  limitation  on the  amount of capital  available  to the
Company under its credit lines and other financing  arrangements would limit the
ability of the Company to fill  existing  sales  orders,  purchase  inventory or
expand its sales levels and, therefore,  would have a material adverse effect on
the Company's  financial condition and results of operations.  In addition,  any
significant  increases in interest  rates will increase the cost of financing to
the  Company  and  would  have an  adverse  effect  on the  Company's  financial
condition  and  results of  operations.  The  inability  of the  Company to have
continuous  access to such  financing at reasonable  costs would  materially and
adversely  impact the Company's  financial  condition and results of operations.
(See Item 7  Management's  Discussion  and Analysis of Financial  Condition  and
Results of Operations).

Highly Competitive Business

         The  Company is  engaged  in  business  activities  that are  intensely
competitive  and rapidly  changing.  The  Company  believes  that the  principal
competitive  factors in the business in which it operates are relative price and
performance,  product availability,  technical expertise,  adherence to industry
standards,   financial   stability,   service  support  and  reputation.   Price
competition has intensified, particularly in the Company's Computer Products and
IT  Services  businesses,  and is likely to continue  to  intensify.  Such price
competition could materially  adversely affect the Company's financial condition
and results of  operations.  The Company's  competitors  include major  computer
products and telephone  equipment  manufacturers,  aggregators and distributors,
including  certain  manufacturers,  aggregators  and  distributors  which supply
products  to  the  Company.  Other  competitors  include  established  national,
regional and local resellers,  systems  integrators,  telephone systems dealers,
computer-telephony VARs and other CTI software suppliers.  Some of the Company's
current and potential competitors have longer operating histories and financial,
sales,   marketing,   technical  and  other  competitive   resources  which  are
substantially  greater than those of the  Company.  As a result,  the  Company's
competitors may be able to adapt more quickly to changes in customer needs or to
devote greater  resources than the Company to sales and service of its products.
Such competitors  could also attempt to increase their presence in the Company's
markets by forming  strategic  alliances with other  competitors of the Company,
offer new or improved  products  and  services  to the  Company's  customers  or
increase  their  efforts to gain and retain  market  share  through  competitive
pricing.

Management Of Growth; Regional Concentration

         The Company has experienced  rapid growth which has and may continue to
put strains on the Company's management and operational resources. The Company's
ability to manage  growth  effectively  will require it to continue to implement
and improve its operational,  financial and sales systems, to develop the skills
of its  managers and  supervisors  and to hire,  train,  motivate and manage its
employees.  The  Company's  future  growth,  if any,  is expected to require the
addition of new management personnel and the development of additional expertise
by  existing  management  personnel.  The  failure  to  do so  could  materially
adversely  affect the  Company's  financial  position and results of  operation.
Within the next 12 months, the Company intends to open new offices.  The Company
also  plans  to  relocate  its   Dallas-Fort   Worth   office  and   consolidate
substantially   all  of  its  warehouse  and  distribution   operations  in  the
Dallas-Fort Worth metropolitan area. The Company  anticipates that it will incur
substantial  costs in  connection  with  these new  office  openings,  including
expenditures for furniture,  fixtures and equipment.  Additional  burdens on the
Company's  working  capital are also expected in connection with the start-up of
such  operations.  Any  significant  disruption  or  unanticipated  expenses  in
connection  with these  plans could also have a material  adverse  effect on the
Company's  financial  condition and results of operations.  For the  foreseeable
future,  the Company  expects that it will  continue to derive most of its total
revenue from  customers  located in or near the  metropolitan  areas in Texas in
which the Company maintains offices. Accordingly, an economic downturn in any of
those  metropolitan  areas,  or in the region in  general,  would  likely have a
material  adverse  effect on the  Company's  financial  condition and results of
operations.
<PAGE>
Dependence On Key Personnel

         The  success of the  Company  for the  foreseeable  future  will depend
largely  on  the  continued  services  of key  members  of  management,  leading
salespersons and technical personnel. The Company is particularly dependent upon
James H. Long,  founder,  Chairman of the Board,  President and Chief  Executive
Officer of the Company,  because of his knowledge of the  Company's  operations,
industry  knowledge,  marketing skills and relationships  with major vendors and
customers.

         The Company does not maintain key  personnel  life  insurance on any of
its  executive  officers or  salespersons  other than Mr.  Long.  The  Company's
success also depends in part on its 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.  The
Company's  financial  condition  and results of  operations  could be materially
adversely affected if the Company were unable to attract, hire, train and retain
qualified personnel.

Dependence On Continued Authorization To Resell And Provide Manufacturer-
Authorized Services

         The Company's future success in both product sales and services depends
largely on its continued  status as an  authorized  reseller of products and its
continued  authorization  as a service  provider.  With respect to the Company's
computer hardware and software product sales and service,  the Company maintains
sales  and  service  authorizations  with many  industry-leading  manufacturers,
including Compaq, Hewlett-Packard,  IBM, Microsoft, NEC and Novell. In addition,
some  of  such  agreements  are  based  upon  the  Company's   continued  supply
relationship with Inacom or another  aggregator or distributor  approved by such
manufacturers.  With respect to the  Company's  Telecom  Systems  business,  the
Company  maintains  sales  and  service   authorizations  with  industry-leading
manufacturers,  including Active Voice, AVT, NEC,  Inter-tel and Mitel.  Without
such sales and service  authorizations,  the Company  would be unable to provide
the  range of  products  and  services  currently  offered  by the  Company.  In
addition,  loss of  manufacturer  authorizations  for  products  that  have been
financed under the Company's credit  facilities  constitutes an event of default
under such credit facilities. In general, the agreements between the Company and
its products  manufacturers either provide for fixed terms or for termination on
30 days prior written notice. Failure to maintain such authorizations could have
a material adverse effect on the Company's financial position and its results of
operations.

Dependence On Suppliers

         The Company's  business  depends upon its ability to obtain an adequate
supply of products and parts at competitive  prices and on reasonable terms. The
Company's  suppliers  are not  obligated  to have  product  on hand  for  timely
delivery  to  the  Company  nor  can  they  guarantee  product  availability  in
sufficient  quantities to meet the  Company's  demands.  The Company  procures a
majority of computers,  computer  systems,  components and parts  primarily from
Inacom  and  Ingram in order to obtain  competitive  pricing,  maximize  product
availability  and  maintain  quality  control.  Any material  disruption  in the
Company's  supply  of  products  would  have a  material  adverse  effect on the
Company's financial condition and results of operations.

Rapid Technological Change

         The business in which the Company  competes is  characterized  by rapid
technological  change and  frequent  introduction  of new  products  and product
enhancements.  The  Company's  success  depends in large part on its  ability to
identify  and  obtain  products  that  meet  the  changing  requirements  of the
marketplace. There can be no assurance that the Company will be able to identify
and offer  products  necessary to remain  competitive or avoid losses related to
obsolete  inventory  and  drastic  price  reductions.  The  Company  attempts to
maintain  a  level  of  inventory  required  to  meet  its  near  term  delivery
requirements by relying on the ready availability of products from its principal
suppliers.  Accordingly,  the  failure of the  Company's  suppliers  to maintain
adequate  inventory  levels of products  demanded by the Company's  existing and
potential customers and to react effectively to new product  introductions could
have a material adverse effect on the Company's  financial condition and results
of operations.  Because certain  products  offered by the Company are subject to
manufacturer  or  distributor  allocations,  which  limit  the  number  of units
available to the Company,  failure of the Company to gain  sufficient  access to
such new  products or product  enhancements  could also have a material  adverse
effect on the Company's financial condition and results of operations.
<PAGE>
Reliance On Key Customers

         The Company's  top ten customers  (which have varied from year to year)
accounted for 27.9%,  33.2% and 21.2% of the Company's revenue during 1995, 1996
and 1997, respectively. Based upon historical results and existing relationships
with  customers,  the Company  believes that a substantial  portion of its total
revenue  and gross  profit will  continue  to be derived  from sales to existing
customers.  There are no  long-term  commitments  by such  customers to purchase
products  or  services  from  the  Company.  Product  sales by the  Company  are
typically made on a purchase order basis. A significant reduction in orders from
any of the Company's  largest  customers could have a material adverse effect on
the Company's financial condition and results of operations. Similarly, the loss
of any one of the Company's  largest customers or the failure of any one of such
customers to pay on a timely basis could have a material  adverse  effect on the
Company's  financial  condition  and  results  of  operations.  There  can be no
assurance  that the Company's  largest  customers  will continue to place orders
with the  Company  or that  orders  by such  customers  will  continue  at their
previous levels.  There can be no assurance that the Company's service customers
will continue to enter into service  contracts with the Company or that existing
contracts will not be terminated.

Reliance On Management Information Systems

         The Company's success is largely dependent on the accuracy, quality and
utilization  of  the   information   generated  by  its  customized   management
information systems, which affects its ability to manage its sales,  accounting,
inventory  and  distribution  systems.  The  Company  anticipates  that  it will
continually need to refine and enhance its management information systems as the
Company  grows and the needs of its business  evolves.  In view of the Company's
reliance on information and telephone communication systems, any interruption or
errors in these  systems could have a material  adverse  effect on the Company's
financial  condition  and  results  of  operations.   (See  Item  1  -  Business
"Management Information Systems").

Acquisition Risk

         The Company intends to pursue  potential  acquisitions of complementary
businesses.  The success of this  strategy  depends not only upon the  Company's
ability to acquire complementary  businesses on a cost-effective basis, but also
upon  its  ability  to  integrate  acquired  operations  into  its  organization
effectively,  to retain and motivate key  personnel  and to retain  customers of
acquired firms. No specific  acquisitions  are being negotiated or planned as of
the date of this annual  report and there can be no  assurance  that the Company
will be able  to  find  suitable  acquisition  candidates  or be  successful  in
acquiring or integrating such businesses. Furthermore, there can be no assurance
that  financing  required  for  any  such  transactions  will  be  available  on
satisfactory terms.

Control By Existing Stockholders

         James H. Long,  founder,  Chairman  of the Board,  President  and Chief
Executive Officer of the Company owns 47.6% of the outstanding  Common Stock and
Mr.  Long will have the  ability to control  the  election  of a majority of the
members of the  Company's  Board of  Directors,  prevent the approval of certain
matters  requiring the approval of at least  two-thirds of all  stockholders and
exert significant influence over the affairs of the Company.


Anti-Takeover Considerations

         The Company's  Certificate of Incorporation  and Bylaws contain certain
provisions that may delay,  deter or prevent a change in control of the Company.
Among other  things,  these  provisions  authorize the board of directors of the
Company to issue shares of  preferred  stock on such terms and with such rights,
preferences  and  designations  as the board of  directors  of the  Company  may
determine  without  further   stockholder   action  and  limit  the  ability  of
stockholders  to call special  meetings or amend the  Company's  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.

Absence Of Dividends


<PAGE>
         The Company expects to retain cash generated from operations to support
its cash  needs and does not  anticipate  the  payment of any  dividends  on the
Common Stock for the  foreseeable  future.  In addition,  the  Company's  credit
facilities  prohibit the declaration or payment of dividends,  unless consent is
obtained from each lender.

                                 GLOSSARY OF NAMES AND TECHNICAL TERMS

COMPANY NAMES

3Com.........................  3Com Corporation
AVT..........................  Applied Voice Technology
Active Voice.................  Active Voice Corporation
Aspen........................  Aspen System Technologies, Inc.
Compaq.......................  Compaq Computer Corporation
DEC..........................  DEC Digital Equipment Corporation
DFS..........................  Deutsche Financial Services Corporation
Epson........................  Epson America, Inc.
Hewlett-Packard..............  Hewlett-Packard Company
IBM..........................  International Business Machines Corporation
IBMCC........................  IBM Credit Corporation
ILC..........................  International Lan and Communications, Inc.
Inacom.......................  Inacom Corp.
Ingram.......................  Ingram Micro, Inc.
Inter-tel....................  Inter-tel, Inc.
Macrotel.....................  Macrotel International Corporation
Microsoft....................  Microsoft Corporation
Mitel........................  Mitel, Inc.
NEC..........................  NEC America, Inc.
Novell.......................  Novell, Inc.
Taske........................  Taske Technology, Inc.
Uniden.......................  Uniden America Corporation

     All  company  names  and  trade  names  are the  legal  property  of  their
respective owners.

TECHNICAL TERMS

Aggregator...................  A company that purchases directly from
                               manufacturers in large quantities, maintains
                               inventory, breaks bulk and resells to
                               distributors, resellers and value-added resellers
Configuration................  The customization of equipment to a customer's
                               specifications which may include the loading of
                               software, adding of memory or combining
                               different manufacturers' equipment in such a
                               way that it will be compatible as an integrated
                               system
CTI..........................  Computer and telephone integration
IVR..........................  Interactive voice response
LAN..........................  Local-area network
MIS..........................  Management information systems
Open architecture networks...  Networks based on industry standard technical
                               specifications  that enable
                               the system to operate  with
                               hardware and software  from
                               different     manufacturers
                               meeting those standards
PBX..........................  Private branch exchange
PC...........................  Personal computer
Price protection.............  A voluntary policy by a manufacturer that when
                               a decrease in the price of its product is
                               instituted, the manufacturer will rebate the
                               Company for the difference between the new
                               price and the price paid by the Company for
                               product in its inventory
Roll-out.....................  Single sale involving a large volume of similar
                               products to be delivered on a pre-specified
                               timetable
SQL..........................  Structured query language
VAR (Value-added reseller)...  A company that purchases equipment or software
                               from a manufacturer, aggregator or distributor,
                               provides value added   services  to  their
                               clients  including  network management,
                               configuration systems integration and
                               training  and  subsequently resells the
                               enhanced product
WAN..........................  Wide-area network
<PAGE>
Item 2.  Properties

FACILITIES

         The Company does not own any real property and currently  leases all of
its existing  facilities.  The Company  subleases its  headquarters  and Houston
office  which are housed in a free  standing  building of  approximately  48,000
square feet.  The Houston  office  sublease  expires on December  31, 1998.  The
Company  expects to enter into a new leasing  arrangement  for the same facility
during 1998. The Company's  Dallas office is housed in a free-standing  building
of  approximately  20,000  square feet.  The Dallas  facility  lease  expired on
September 30, 1997 and has been extended to June 30, 1998.  The Company  expects
to either renew the existing lease for an additional  term of more than one year
or to relocate to different facilities within the Dallas-Ft.  Worth metropolitan
area. The Company also leases a storage facility of  approximately  7,000 square
feet in Houston.  The lease on this warehouse  expires on April 14, 1998 and the
Company intends to extend such lease on a month-to-month  basis after expiration
of the lease.  The Company added offices in Austin,  McAllen and El Paso,  Texas
during  1997.  The Company has leased  interim  offices in each of those  cities
under leases  expiring in less than one year. The Company intends to lease other
facilities in these cities as its business  expands.  The Company  believes that
suitable facilities will be available as needed.

INTELLECTUAL PROPERTY

         The Company's success depends in part upon its proprietary  technology,
including its Stratasoft software. The Company relies primarily on trade secrecy
and  confidentiality  agreements  to  establish  and  protect  its rights in its
proprietary technology.  Additionally,  the Company filed and received copyright
protection for StrataDial and StrataVoice. The Company also applied and received
registration of Stratasoft, StrataDial, StrataVoice as trademarks and intends to
apply for registration of 800 PC Deals as a trademark. There can be no assurance
that the  Company's  present  protective  measures  will be  adequate to prevent
unauthorized  use or disclosure of its  technology  or  independent  third party
development of the same or similar technology.  While the Company's  competitive
position could be affected by its ability to protect its  proprietary  and trade
secret  information,  the Company believes other factors,  such as the technical
expertise and knowledge of the Company's  management and technical personnel and
the timeliness and quality of support  services  provided by the Company,  to be
more significant in maintaining the Company's competitive position.

         The  Company's  various  authorization  agreements  with  manufacturers
generally  permit the Company to refer to itself as an authorized  dealer of the
respective  manufacturer's  products and to use their trademarks and trade names
for marketing  purposes,  but prohibit other uses. The Company considers the use
of these trademarks and trade names in its marketing  efforts to be important to
its business.


Item 3.  Legal Proceedings

         On July 13, 1996, a former customer brought suit against the Company in
the 152nd Judicial District Court of Harris County, Texas. The plaintiff alleges
that the  Company  failed to provide  and  complete  promised  installation  and
configuration  of certain  computer  equipment  within the time  promised by the
Company.  Based on these  allegations,  the  plaintiff  is suing  for  breach of
contract, negligence, negligent misrepresentation and other statutory violations
and is seeking actual monetary  damages of  approximately  $3 million and treble
damages under the Texas  Deceptive  Trade  Practices Act. The Company intends to
vigorously defend such action. The effect of an unfavorable outcome could have a
material adverse effect on the Company's results of operations and its financial
condition.


         The  Company  is from  time  to time  involved  in  routine  litigation
incidental to its business.  The Company believes that none of such proceedings,
including  current  proceedings,  individually  or in the aggregate  will have a
materially adverse effect on the Company.


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

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


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

         On July 7, 1997 the Company completed its initial public offering of it
Common  Stock.  The shares are traded on the Nasdaq  National  Market  under the
symbol "ALLS".

                                                          High         Low

Fiscal 1997
     Third quarter (Commencing July 7, 1997)              8            6
     Fourth quarter                                       7 1/2        3 15/16

         As of March 13,  1998 there were 15 holders of record of the  Company's
common stock.  The Company has never  declared or paid any cash dividends on its
Common Stock. The Company currently anticipates that it will retain all earnings
for use in its business operations. The payment of dividends is prohibited under
the Company's credit agreements, unless approved by the lenders.

<PAGE>
Item 6.  Selected Financial Data

SELECTED FINANCIAL DATA

         The following  sets forth the selected data of the Company for the five
years ended December 31, 1997.
<TABLE>
<CAPTION>

                                                                                     Year ended December 31
                                                        (In Thousands except share and per share amounts)
<S>                                                  <C>           <C>           <C>           <C>           <C> 
                                                     1993          1994          1995          1996          1997
Operating Data:
Total revenue                                         $49,536       $64,076       $91,085      $120,359      $129,167
Cost of sales and services                             42,289        55,541        79,857       104,302       111,126
                                                      -------       -------       -------       -------       -------
    Gross Profit                                        7,247         8,535        11,228        16,057        18,041
Selling, general and administrative expenses            6,060         7,448         9,149        12,284        14,386
                                                      -------       -------       -------       -------       -------
    Operating income                                    1,187         1,087         2,079         3,773         3,655
Interest expense (net of other income)                    644           764         1,218         1,183           685
                                                      -------       -------       -------       -------       -------
    Income before provision for income taxes              543           323           861         2,590         2,970
Provision for income taxes                                229           140           342           987         1,126
                                                      -------       -------       -------       -------       -------
    Net Income                                       $    314      $    183      $    519     $   1,603     $   1,844
                                                     ========      ========      ========     =========     =========
Supplemental Data:
Net income per share:
     Basic                                            $  0.15       $  0.07       $  0.19     $    0.60     $    0.52
     Diluted....................................      $  0.15       $  0.07       $  0.19     $    0.60     $    0.52
Weighted average shares outstanding.............    2,120,242     2,554,808     2,675,000     2,675,000     3,519,821
</TABLE>
<TABLE>

<CAPTION>
                                                                        As of December 31
<S>                                                  <C>           <C>           <C>           <C>           <C> 
                                                     1993          1994          1995          1996          1997

Balance Sheet Data:
Working  Capital.................................      $1,307        $1,363        $1,732        $2,291       $12,824
Total  Assets....................................      17,431        19,077        24,266        24,720        33,183
Short-term borrowings(1)........................        6,896         8,972         9,912         9,975         1,572
Long-term debt..................................           43           -0-           -0-           -0-           -0-
Stockholders' equity............................        2,022         2,205         2,724         4,327        14,723
</TABLE>

(1) See Note 5 to the Company's  Consolidated  Financial Statements.  Short-term
borrowings do not include  amounts  recorded as floor plan  financing  which are
included in accounts payable.

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

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Overview

       The  Company was formed in 1983 to engage in the  business  of  reselling
computer hardware and software products and providing related services. To date,
most of its revenue has been derived from Computer  Products sales. In addition,
the Company derives revenue from providing IT Services to purchasers of Computer
Products  and other  customers.  The Company  operated  from a single  office in
Houston,  Texas until 1992 when it opened a branch office in Dallas,  Texas.  In
1994, the Company began offering  Telecom Systems in its Houston office.  In the
fourth quarter of 1995, the Company  acquired and began  marketing CTI Software.
During 1997 the Company opened offices in Austin,  McAllen and El Paso, Texas to
expand, initially, its Computer Products and IT Services divisions.


<PAGE>
       The  Company's  gross  margin  varies  substantially  between each of its
businesses.  The Company's  Computer Products sales have produced a gross margin
ranging from 10.4% to 10.7% over the three year period ended  December 31, 1997,
reflecting  the  commodity  nature of the Computer  Products  market.  The gross
margin for IT Services, which reflects direct labor costs, has ranged from 30.4%
to 37.6% over the same period.  This variation is primarily  attributable to the
pricing  and the mix of  services  provided,  and the  level of  utilization  of
billable  technical staff. The gross margin for Telecom Systems,  which includes
both product sales and services,  has varied  between 23.0% and 35.5% during the
last three years. This variation reflects the different mix of product sales and
the amount of  services-related  revenue  from period to period and  competitive
pricing of Telecom products. The gross margin for CTI Software was 40.2% in 1996
versus  43.0% in 1997,  primarily  due to the amount  expended by the Company to
acquire and develop the software relative to the level of revenue produced.  CTI
Software  accounted for  approximately  1.1% of the  Company's  revenues in 1996
compared to 1.7% in 1997.

       In order to reduce freight costs and selling,  general and administrative
expenses  associated  with product  handling,  the Company began in 1995 to drop
ship a higher percentage of orders directly from its suppliers to its customers.
This initiative has resulted in the percentage of drop shipped orders  (measured
by the cost of goods  dropped  shipped as a  percentage  of total cost of goods)
growing  from  9.0% in 1995 to 18.1% in 1996  and to  23.9% in 1997.  While  the
Company  does not  believe  that it is in its  best  interest  to drop  ship all
orders,  it does intend to  increase  the volume of drop  shipments  in Computer
Products  with  the  expectation  of  reducing  its  freight,  distribution  and
administrative costs related to these revenues.

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

       Manufacturers of many of the computer products resold by the Company have
consistently  reduced unit prices near the end of a product's  life cycle,  most
frequently  following the introduction of newer, more advanced models. While the
major  manufacturers  of  computer  products  have a policy of  providing  price
protection to resellers when prices are reduced,  on occasion,  and particularly
during  1994,  manufacturers  introduced  new models of their  products and then
reduced  the  price  of,  or  discontinued,   the  older  models  without  price
protection.  In these  instances,  the Company  often sells the older  models at
reduced   prices,   which   adversely   affects  gross   margin.   Additionally,
manufacturers have developed  specialized marketing programs designed to improve
or protect the  manufacturer's  market share.  These  programs often involve the
granting of rebates to  resellers  to  subsidize  sales of computer  products at
reduced  prices.  While these  programs  generally  enhance  revenues  they also
generally  result in lower margins being  realized by the reseller.  The Company
has participated in a number of these programs in recent years.

       Inacom is the largest supplier of products sold by the Company. Purchases
from Inacom accounted for approximately  36.6%, 57.0% and 51.4% of the Company's
total product  purchases in 1995, 1996 and 1997,  respectively.  In August 1996,
the Company renewed its long-term  supply  arrangement with Inacom and agreed to
purchase at least 80% of its  Computer  Products  from  Inacom,  but only to the
extent that such products are made available within a reasonable  period of time
at reasonably  competitive pricing.  Inacom does not carry certain product lines
sold by the  Company  and  Inacom  may be  unable  to offer  reasonable  product
availability  and  reasonably  competitive  pricing  from  time to time on those
product  lines that it carries.  The Company  thus expects that less than 80% of
its total purchases will be made from Inacom,  and that any increase or decrease
over  historical  levels in the  percentage of products it purchases from Inacom
under  the new  Inacom  agreement  will  not  have any  material  impact  on the
Company's results of operations.


<PAGE>
Results of Operations

       The  following  table sets  forth,  for the  periods  indicated,  certain
financial data derived from the Company's consolidated  statements of operations
and indicates the percentage of total revenue for each item.
<TABLE>

<CAPTION>
                                                            Year ended December 31,
                                    -----------------------------------------------------------------------
<S>                                          <C>                     <C>                       <C> 
                                             1995                    1996                      1997
                                    ----------------------    ---------------------    --------------------
                                          Amount        %          Amount        %         Amount        %
                                                               (Dollars in thousands)
Operating Data(1):
Revenue
   Computer Products..............         $81,654    89.6        $107,251     89.1       $111,145     86.0
   IT Services....................           7,900     8.7           7,996      6.6         10,474      8.1
   Telecom Systems................           1,458     1.6           3,824      3.2          5,403      4.2
   CTI Software...................              73                   1,288      1.1          2,145      1.7
                                          --------    ----        --------     ----        -------     ----
                                                       0.1
      Total revenue...............          91,085   100.0         120,359    100.0        129,167    100.0
Gross Profit(1)
   Computer Products..............           8,466    10.4          11,172     10.4         11,832     10.7
   IT Services....................           2,404    30.4           3,008     37.6          3,875     37.0
   Telecom Systems................             335    23.0           1,359     35.5          1,412     26.1
   CTI Software...................              23    31.5             518     40.2            922     43.0
                                          --------    ----        --------     ----        -------     ----
     Total Gross Profit...........          11,228    12.3          16,057     13.3         18,041     13.9
Selling, general and
   administrative expenses........           9,149    10.0          12,284     10.2         14,386     11.1
                                          --------    ----        --------     ----        -------     ----
   Operating income...............           2,079     2.3           3,773      3.1          3,655      2.8
Interest expense (net of
   other income)..................           1,218     1.3           1,183      1.0            685       .5
                                          --------    ----        --------     ----        -------     ----
   Income before provision
     for income taxes.............             861     1.0           2,590      0.8          2,970      2.3
Provision for income taxes........             342     0.4             987      0.8          1,126      0.9
                                          --------    ----        --------     ----        -------     ----
   Net income.....................             519     0.6           1,603      1.3          1,844      1.4
                                          ========    ====        ========     ====        =======     ====

Per Office Data(1)(2):
   Houston Office:
     Revenue......................          53,095    58.3          57,929     48.1         65,614     50.8
     Gross profit.................           6,880    13.0           9,470     16.4          9,356     14.3
   Dallas Office:
     Revenue......................          37,990    41.7          62,430     51.9         61,698     47.8
     Gross profit.................           4,348    11.5           6,587     10.6          8,518     13.8
   Austin Office:
     Revenue......................                                                           1,855      1.4
     Gross profit.................                                                             167      9.0
</TABLE>

(1)  Percentages  shown are  percentages of total  revenue,  except gross profit
     percentage  which  represent  gross  profit by each  product  category as a
     percentage of revenue for each such category.
(2)  Revenue  realized  in the  McAllen  and El Paso  offices  during  1997 were
     insignificant.
<PAGE>
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996

       Total Revenue. Total revenue increased by $8.8 million (7.3%) from $120.4
million in 1996 to $129.2 million in 1997. Revenue from Computer Products, which
comprised 86.0% of total revenue, increased by $3.9 million (3.6%). The increase
in Computer  Products  revenue was generally  attributable to increased sales to
new and  existing  customers.  Revenue  in  Computer  Products  did not  grow as
expected in 1997  principally due to insufficient  capital  resources during the
first half of 1997 and the  inability  of the newly  added  sales  personnel  to
attain the level of  revenue  production  normally  expected  of new  personnel.
Revenue from IT Services  increased by $2.5 million (31.0%) from $8.0 million in
1996 to $10.5  million in 1997.  The increase was due  primarily to sales to new
customers and increases in services  provided to existing  customers as a result
of customers'  increased  out-sourcing of their technical support  requirements.
Revenue from IT Services as a percentage of total revenue increased from 6.6% in
1996 to 8.1% in 1997  due to the  higher  growth  rate in IT  Services  revenues
relative to the growth rate of Computer Products revenues in 1997.  Revenue from
Telecom  Systems,  which  comprised  4.2% of total  revenue,  increased  by $1.6
million  (41.3%).  This  increase in Telecom  Systems  revenue was primarily the
result of adding new customers, of which one customer accounted for $1.3 million
(81.2%) of the increase. Sales of CTI Software increased 66.5% from $1.3 million
in 1996 to $2.1 million in 1997.  The  increased  revenues  were  primarily  the
result of sales to new customers.

       Gross Profit.  Gross profit  increased by $2.0 million (12.4%) from $16.0
million in 1996 to $18.0  million in 1997,  while gross  margin  increased  from
13.3% in 1996 to 13.9% in 1997. The gross margin for Computer Products increased
from  10.4% in 1996 to 10.7% in 1997,  reflecting  the  continuation  of  highly
competitive market conditions for Computer Products.

       The gross margin from IT Services  increased  from 37.6% in 1996 to 37.0%
in 1997.  This  decrease in gross margin was primarily  attributable  increases,
expressed as a  percentage  of revenue,  in the cost of the  billable  technical
staff which is due to the relative scarcity of qualified  technical staff in the
information  technology industry.  These cost increases were almost fully offset
by increases in the prices being  charged for services  which is also due to the
relative  scarcity of qualified  technical staff in the  information  technology
industry.  In 1996 the  Company  commenced  the  implementation  of a program to
replace less profitable hardware  maintenance and repair services with a variety
of services that were expected to generate  higher gross  margins.  This program
resulted in the elimination of certain IT Services customer  relationships which
had been  producing  lower than  average  gross  margin.  The loss of this lower
margin  revenue was offset by revenues  from new IT Services  customers and from
existing customers at higher gross margins.

       The gross margin for Telecom  Systems sales  decreased from 35.5% in 1996
to 26.1% in 1997. In 1997,  Telecom  Systems bid on and won the  installation of
several large systems.  As a result of the competitive  bidding process employed
by certain  customers  these large  systems were  projects  which had lower than
normal margins. In addition,  gross margin decreased in 1997 due to the purchase
of a large system by a single customer at a lower than usual margin.

       CTI  Software  sales  resulted  in a gross  margin  of 43.0% in 1997,  an
increase from 40.2% in 1996.  This reflected  slightly lower, as a percentage of
revenue, installation costs and development costs in 1997 compared to 1996.

       Selling,  General  and  Administrative  Expenses .  Selling,  general and
administrative expenses increased by $ 2.1 million (17.1%) from $12.3 million in
1996 to $14.4  million  in 1997.  As a  percentage  of total  revenue,  selling,
general and  administrative  expenses  increased  from 10.2% in 1996 to 11.1% in
1997.  Of the dollar  increase,  $1.5  million  was  attributable  to  increased
temporary and permanent  personnel,  principally in non-sales  personnel.  Other
costs which grew at a rate in excess of the rate of growth in revenues  includes
expenses  relating  to  becoming  and  being a  publicly  held  corporation  and
professional  fees.  The  increase as a  percentage  of total  revenue  resulted
primarily from increased  expenditures for those expenses which do not fluctuate
with gross profit or revenues.

     Operating Income.  Operating income decreased by $118,000 (3.1 %) from $3.8
million  in 1996 to $3.7  million  in  1997.  Operating  income  decreased  as a
percentage  of total  revenue  from 3.1% in 1996 to 2.8% in 1997  largely due to
increases in selling, general and administrative expenses.

       Interest  Expense (Net of Other Income).  Interest  expense (net of other
income)  decreased by $498,000  (42.1%).  Interest expense  decreased due to the
reduction of outstanding debt by applying the proceeds of the Company's  initial
public offering to the reduction of debt.


<PAGE>
       Net Income.  Net  income,  after a provision  for income  taxes  totaling
$1,126,000 (  reflecting  an  effective  tax rate of 37.9%  compared to 38.1% in
1996),  increased by $241,000 from $1.6 million in 1996 to $1.8 million in 1997.
Net income  increased as a percentage of total revenue from 1.3% in 1996 to 1.4%
in 1997.


Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995

       Total  Revenue.  Total revenue  increased by $29.3  million  (32.1%) from
$91.1 million in 1995 to $120.4 million in 1996. Revenue from Computer Products,
which comprised 89.1% of total revenue,  increased by $25.6 million (31.3%). The
increase in Computer  Products  revenue was generally  attributable to increased
sales to new and  existing  customers  resulting  from the hiring of  additional
sales personnel.  Revenue from IT Services increased by $96,000 (1.2%) from $7.9
million in 1995 to $8.0 million in 1996. The marginal increase was primarily the
result of the Company's  implementation of a program at the beginning of 1996 to
replace less profitable hardware  maintenance and repair services with a variety
of services that were expected to generate  higher gross  margins.  This program
resulted in the elimination of certain IT Services customer  relationships which
had been  producing  lower than  average  gross  margin.  The loss of this lower
margin revenue was offset, however, by sales to new IT Services customers and to
existing customers, generally at higher gross margins than those earned on sales
to the former  customers.  Revenue  from IT  Services as a  percentage  of total
revenue  decreased  from 8.7 % in 1995 to 6.6% in 1996  due to both the  minimal
growth  in IT  Services  revenues  and to growth in the  Company's  three  other
business categories. Revenue from Telecom Systems, which comprised 3.2% of total
revenue,  increased by $2.4 million  (162.3%).  This increase in Telecom Systems
revenue was primarily the result of hiring additional sales personnel and adding
new  customers,  of which one customer  accounted  for  $699,000  (29.5%) of the
increase,  and  expanding  advertising  and  marketing  efforts.  Sales  of  CTI
Software,  which commenced during the fourth quarter of 1995,  contributed total
revenue of $1.3 million during 1996, which comprised 1.1% of the Company's total
revenue.

       Gross Profit.  Gross profit  increased by $4.8 million (43.0%) from $11.2
million in 1995 to $16.1  million in 1996,  while gross  margin  increased  from
12.3% in 1995 to 13.3% in 1996. The gross margin for Computer  Products remained
consistent  at  10.4%  for both  periods.  The  gross  margin  from IT  Services
increased from 30.4% in 1995 to 37.6% in 1996. As noted above, this increase was
primarily  attributable  to the  replacement  of  less  profitable  IT  Services
business  with  more  profitable  business  from new and  existing  IT  Services
customers.  The gross margin for Telecom  Systems sales increased from 23.0 % in
1995 to 35.5% in 1996. In 1995,  Telecom Systems was generally  selling products
and  services  at lower  gross  margin  than in the 1996 period in order to gain
market share during its first year of operation.  In addition,  gross margin for
Telecom Systems increased in 1996 due to the purchase of a large, complex system
by a single customer at a higher than usual margin.  CTI Software sales resulted
in a gross margin of 40.2% in 1996,  which was the first full year of operations
for the Company's CTI Software business.

       Selling,  General  and  Administrative  Expenses .  Selling,  general and
administrative  expenses increased by $ 3.1 million (34.3%) from $9.1 million in
1995 to $12.3  million  in 1996.  As a  percentage  of total  revenue,  selling,
general and  administrative  expenses  increased  from 10.0% in 1995 to 10.2% in
1996. Of the dollar  increase,  $1.2 million was attributable to increased sales
compensation  due to  increased  gross  profits and an increase in the number of
sales  personnel  and $1.0  million was  attributable  to increases in non-sales
personnel  costs.  The  increase  as a  percentage  of  total  revenue  resulted
primarily from increased gross margins and the related  increase in the variable
component of selling,  general and administrative  expenses that fluctuates with
gross profit,  and from the increase in bad debt expense, a portion of which was
due to actual losses and a portion of which was due to increases in reserves for
potential future losses.


<PAGE>
        Operating  Income.  Operating  income increased by $1.7 million (81.5 %)
from $2.1 million in 1995 to $3.8 million in 1996. Operating income increased as
a percentage of total revenue from 2.3% in 1995 to 3.1% in 1996.

        Interest  Expense (Net of Other Income).  Interest expense (net of other
income)  decreased by $35,000 (2.9%).  Interest expense  remained  substantially
unchanged  compared  to  the  increase  in  revenue  due to  decreased  leverage
resulting from increased use of equity and increased asset turns,  together with
advance  payments  for a large  purchase  by a  single  customer  in  1996.  The
prepayments  resulted in reduced accounts  receivable and a related reduction in
borrowing.

        Net Income.  Net income,  after a provision  for income  taxes  totaling
$987,000 ( reflecting an effective tax rate of 38.1% compared to 39.7% in 1995),
increased  by $1.1 million  from  $519,000 in 1995 to $1.6 million in 1996.  Net
income  increased as a percentage  of total revenue from 0.6% in 1995 to 1.3% in
1996.

Quarterly Results of Operations

        The following  table sets forth certain  unaudited  quarterly  financial
information for each of the Company's 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.  The Company's  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
the Company's product costs, variations in the Company's product mix, promotions
by  the  Company,   seasonal   influences  and  competitive  pricing  pressures.
Furthermore,  the Company  generally  experiences  a higher  volume of orders of
Computer  Products  in the  fourth  quarter,  which the  Company  attributes  to
year-end  capital  spending  by its  customers.  Any  decrease  in the number of
year-end  orders  experienced  by the  Company  may not be offset  by  increased
revenues in the Company's  first three  quarters.  The results of any particular
quarter may not be indicative of results for the full year or any future period.
<PAGE>
<TABLE>


<S>                                          <C>                                  <C> 
                                             1996                                 1997
                            -------------------------------------  -------------------------------------
                                                   (In thousands, except per share amounts)
                              First    Second     Third    Fourth     First   Second     Third    Fourth
                            Quarter   Quarter   Quarter   Quarter   Quarter  Quarter   Quarter   Quarter

Total Revenue               $25,948   $32,202   $29,187   $33,022   $26,593  $32,239   $31,914   $38,423
Cost of sales and service    22,727    28,234    24,669    28,672    22,762   27,312    27,777    33,277
                            -------   -------   -------   -------   -------  -------   -------   -------
 Gross Profit                 3,221     3,968     4,518     4,350     3,831    4,927     4,137     5,146
Selling, general and
  administrative expenses     2,674     2,992     3,319     3,299     3,135    3,839     3,439     3,974
                            -------   -------   -------   -------   -------  -------   -------   -------
Operating Income                547       976     1,199     1,051       696    1,088       698     1,172
Interest expense (net of
  other income)                 297       285       338       263       289      309        82         5
                            -------   -------   -------   -------   -------  -------   -------   -------
Income before provision
for income taxes                250       691       861       788       407      779       616     1,167
Provision for income taxes      111       223       362       291       154      310       236       424
                            -------   -------   -------   -------   -------  -------   -------   -------
Net income                  $   139   $   468   $   499   $   497   $   253  $   469   $   380   $   742
                            =======   =======   =======   =======   =======  =======   =======   =======
Net income per share          $0.05     $0.17     $0.19     $0.19     $0.09    $0.17     $0.09     $0.17

</TABLE>

Liquidity and Capital Resources

       Historically, the Company has satisfied its cash requirements principally
through borrowings under its lines of credit and through operations. The Company
maintains a cash position sufficient to pay only its immediately due obligations
and expenses. When the amount of cash available falls below its immediate needs,
the Company requests advances under its credit facility.  As the Company's total
revenue has grown, the Company has obtained  increases in its available lines of
credit to enable it to finance its growth.  The  Company's  working  capital was
$1.7  million,  $2.3 million and $12.8  million at December  31, 1995,  1996 and
1997,  respectively.  The  increase  in  working  capital  from 1996 to 1997 was
attributable  to the  receipt  of net  proceeds  from a public  offering  of the
Company's common stock in July, 1997 and net earnings.  As of December 31, 1997,
the Company had total borrowing capacity, based on its collateral base under its
credit facility of approximately  $23.8 million versus $18.8 million at December
31,  1996.  At December  31, 1997 the Company had unused  borrowing  capacity of
approximately $18.6 million versus $1.2 million at December 31, 1996.

Cash Flow

       Operating  activities  used net cash  totaling  $123,000  during 1995 and
provided  net cash  totaling  $89,000  and $2.0  million  during  1996 and 1997,
respectively.  Net  cash  used in 1995  was  primarily  due to  working  capital
requirements to finance increased  accounts  receivable and inventory.  In 1996,
net cash was provided from  operations  due primarily to the combined  effect of
significantly  increased net income, a relatively small year-to-year increase in
accounts receivable and a year-to-year  decrease in inventory.  During 1997, net
cash was provided from operations due primarily to net income  increased  levels
of trade accounts  payable and accrued expenses which more than offset increases
in accounts receivable.

       Trade  accounts  receivable  increased  $4.4  million,  $695,000 and $7.2
million during 1995, 1996 and 1997, respectively. Inventory increased $21,000 in
1995 and decreased $545,000 and $162,000 in 1996 and 1997, respectively.

       Net cash used in operating activities during 1995 of $ 123,000 was net of
an accrual of $1.4 million for a delinquent  Texas sales tax  liability  for the
period  June 1995 to  November  1995.  Interest  was  accrued on the  liability;
however, all penalties were waived by the state. The delinquency resulted from a
programming  error  in the  Company's  accounting  system  that has  since  been
corrected.  In September  1996, the Company paid the state the agreed upon sales
taxes. Had the sales taxes been timely paid, net cash used in operations  during
1995  would  have been  approximately  $1.5  million  and net cash  provided  by
operations in 1996 would have been $1.5 million.

       Investing  activities used cash totaling $458,000,  $952,000 and $992,000
during 1995, 1996 and 1997,  respectively.  The Company's  investing  activities
that  used  cash  during  these  periods  were  primarily   related  to  capital
expenditures.  During the next twelve  months,  the Company  expects to incur an
estimated $1.0 million for capital expenditures, a majority of which is expected
to be incurred for  leasehold  improvements  and other capital  expenditures  in
connection  with the planned  consolidation  of its warehouse  facilities into a
single  facility in the  Dallas-Fort  Worth area,  the  relocation of its Dallas
branch  office and the  opening of branch  offices in  McAllen,  El Paso and San
Antonio,  Texas.  All or a portion of the $1.0  million in capital  expenditures
currently budgeted by the Company for such purposes are presently expected to be
financed from net cash flow from  operations  or borrowings  under the Company's
line of credit.  The actual amount and timing of such capital  expenditures  may
vary  substantially  depending upon, among other things,  the actual  facilities
selected,  the level of expenditures  required to render the facilities suitable
for the Company's purposes and the terms of lease arrangements pertaining to the
facilities.

       Financing  activities  provided  cash  totaling  $940,000,   $63,000  and
$344,000 during 1995 , 1996 and 1997,  respectively.  In July, 1997, the Company
received  $8.7  million net  proceeds  from the sale of Common Stock in a public
offering.  Those proceeds were used to reduce the outstanding  balance under the
Company's line of credit.  The primary source of cash from financing  activities
in other periods has been borrowings on the Company's lines of credit. The lines
of  credit  have  been  used  principally  to  finance   increases  in  accounts
receivable.

Asset Management

       The Company's cash flow from  operations  has been affected  primarily by
the timing of its collection of trade accounts receivable. The Company typically
sells its products and services on short-term credit terms and seeks to minimize
its credit risk by performing  credit checks and  conducting  its own collection
efforts.  The  Company  had trade  accounts  receivable,  net of  allowance  for
doubtful accounts, of $15.8 million, $16.5 million and $23.8 million at December
31, 1995, 1996 and 1997, respectively.  The number of days' sales outstanding in
trade accounts  receivable was 45 days, 40 days and 53 days for years 1995, 1996
and 1997, respectively.  The increase in days' sales outstanding was caused by a
general  slow down in  payments  by the  Company's  customers.  To improve  this
condition  the  Company  has  increased  its  collection   staff  and  added  an
experienced  credit  manager.  Bad debt expense as a percentage of total revenue
for the same  periods  was 0.1%,  0.2% and 0.2%.  The  Company's  allowance  for
doubtful accounts, as a percentage of trade accounts receivable,  was 2.8%, 1.3%
and 1.0% at December 31, 1995, 1996 and 1997, respectively.

       The Company  manages  its  inventory  in order to minimize  the amount of
inventory held for resale and the risk of inventory  obsolescence  and decreases
in market value. The Company attempts to maintain a level of inventory  required
to reach  only its near  term  delivery  requirements  by  relying  on the ready
availability  of products from its  principal  suppliers.  Manufacturers  of the
Company's major products  generally provide price protection,  which reduces the
Company's exposure to decreases in prices. In addition,  its suppliers generally
allow for  returns of excess  inventory,  which,  on a limited  basis,  are made
without material restocking fees. Inventory turnover for 1995, 1996 and 1997 was
14.6 times, 19.2 times and 21.5 times, respectively.

Prior Debt Obligations

       Throughout  1997, the principal  source of liquidity for the Company,  in
addition to its cash provided from operations,  was its revolving line of credit
with IBMCC (the "IBMCC  Facility").  On February  27, 1998 the Company  executed
agreements  with Deutsche  Financial  Services  ("DFS") for a revolving  line of
credit which will replace the IBMCC Facility as the Company's  principal  source
of liquidity and the IBMCC Facility will be converted into a credit facility for
the purchase of IBM branded computer products.  The credits facilities described
herein as the "Old  IBMCC  Facility"  and the "Old DFS  Facility"  set forth the
provisions of the credit facilities in effect during 1997 and prior periods. The
credit  facilities  described  as the "New  DFS  Facility"  and the  "New  IBMCC
Facility" set forth the provisions of those facilities after the  implementation
of the revolving  credit  agreement  with DFS dated February 27, 1998. The total
credit  available  under the Old IBMCC  Facility was $20.0  million,  subject to
borrowing  base  limitations  which were  generally  computed as a percentage of
various  classes of  eligible  accounts  receivable  and  qualifying  inventory.
Borrowings  were available under the Old IBMCC Facility for floor plan financing
of inventory from approved  manufacturers (the "Old Inventory Line").  Available
credit under the Old IBMCC Facility, net of Inventory Line advances, was used by
the Company primarily to carry accounts receivable and for other working capital
and general corporate  purposes (the "Old Accounts Line").  Borrowings under the
Old  Accounts  Line bore  interest at the  fluctuating  prime rate plus 2.0% per
annum. Under the Old Inventory Line, IBMCC paid the Company's  inventory vendors
directly, generally in exchange for negotiated financial incentives.  Typically,
the financial  incentives received were such that IBMCC does not charge interest
to the Company until approximately 30 days after the transaction is financed, at
which time the Company was required to either pay the full invoice amount of the
inventory  purchased from  corporate  funds or to borrow under the Accounts Line
for the amount due to IBMCC.  Inventory  Line  advances  not paid within 30 days
after the financing date bear interest at the fluctuating  prime rate plus 6.0%.
IBMCC was  permitted to fix a minimum  prime rate for the IBMCC  Facility of not
less than the average prime rate in effect at the time the minimum prime rate is
set but did not do so. IBMCC was  authorized to change,  on 30 days notice,  the
computation of the borrowing  base and to disqualify  accounts  receivable  upon
which  advances  have been made and require  repayment  of such  advances to the
extent  such  disqualifications  cause the  Company's  borrowings  to exceed the
reduced borrowing base.

       The Old IBMCC  Facility  was  collateralized  by a security  interest  in
substantially  all of the Company's assets,  including its accounts  receivable,
inventory,  equipment and bank accounts.  The Company's Chief Executive  Officer
and principal stockholder  personally  guaranteed the Company's  indebtedness to
IBMCC.  Collections  of the Company's  accounts  receivable  were required to be
applied through a lockbox  arrangement to repay indebtedness to IBMCC;  however,
IBMCC  customarily  released a portion of the Company's daily collections to the
extent that they exceed the daily estimated borrowing base.

       Through  most of 1995,  the  Company's  credit  limit under the Old IBMCC
Facility was $15.0  million.  From October 1995  through  February  1996,  IBMCC
extended a temporary  increase in the credit limit to $22.5 million and in April
1996 increased the base credit limit to $20.0 million. Effective September 1996,
the Company was notified by IBMCC that it had received further  temporary credit
limit  adjustments  consisting of increases to $30.0 million from September 1996
through February 1997, $28.0 million in March 1997, $25.0 million in April 1997,
and  returning to the base limit of $20.0  million  thereafter.  At December 31,
1997,  the total  indebtedness  of the Company under the Old IBMCC  Facility was
$4.3 million of which $1.6 million was  outstanding  under the Accounts Line and
$1.1 million was outstanding  under the Inventory Line. The Company's  remaining
available  credit  at  December  31,  1997,  based  on its  borrowing  base  was
approximately $18.6 million.

       The Company had a $3.0 million  credit  facility with Deutsche  Financial
Services  (the "Old DFS  Facility")  for the purchase of inventory  from certain
suppliers.  From October 1995 through May 1996, the Company received a temporary
increase in the available  credit line to $6.0 million and on or about  November
15,  1997 this  facility  was  increased  to $10.0  million in  anticipation  of
increased usage of this facility for inventory purchases.  As in the case of the
Old IBMCC  Inventory  Line,  advances  under the Old DFS Facility were typically
interest free for 30 days after the  financing  date for  transactions  in which
adequate  financial  incentives  are received by DFS from the vendor.  Within 30
days after the financing  date, the full invoice  amount for inventory  financed
through DFS is required to be paid by the Company. On or about November 15, 1997
DFS extended to interest free period for advances  under the Old DFS Facility to
40  days.  Amounts  remaining  outstanding   thereafter  bear  interest  at  the
fluctuating  prime  rate (but not less  than  6.5%)  plus  6.0%.  DFS  retains a
security interest in the inventory financed. The Old DFS Facility is immediately
terminable by either party by written notice to the other. At December 31, 1997,
the amount outstanding under the DFS Facility was $9.4 million.

       The Company was required to comply with certain key  financial  and other
covenants  under the Old IBMCC  Facility and Old DFS  Facility.  During 1994 and
1995 and the first seven  months of 1996,  the Company was in default of certain
financial covenants and certain other covenants under the Old IBMCC Facility and
Old DFS  Facility.  For example,  the Company was  required  under the Old IBMCC
Facility to maintain  during 1995 the following  financial  ratios:  net profits
after taxes to revenue of at least 0.5%;  annualized revenues to working capital
of more  than zero but no  greater  than  35.0 to 1; and  total  liabilities  to
tangible  net worth of more  than  zero but no more  than 12.0 to 1. The  ratios
actually  attained by the Company for the year ended  December  31,  1995,  were
approximately  0.57%,  43.9  to 1 and  12.7  to 1,  respectively.  The  Old  DFS
Facility,  for instance,  requires that at all times the Company's  indebtedness
for borrowed  money and capital  lease  obligations  divided by its tangible net
worth plus  subordinated  debt not exceed  8.0 to 1, but at June 30,  1996,  the
actual ratio attained by the Company was approximately 9.18 to 1. In addition to
financial ratio  covenants,  the Company has violated other covenants under both
credit  facilities,  including timely filing of periodic  financial  reports and
covenants   prohibiting   certain   transactions  with  subsidiaries  and  other
affiliates.  IBMCC and DFS have, however,  waived defaults when requested by the
Company from time to time. Most recently,  IBMCC and DFS waived certain defaults
in August 1996 through December 31, 1996. Additionally, both lenders liberalized
certain financial covenants in connection with their waivers.  DFS increased the
maximum  permitted ratio for  indebtedness for borrowed money plus capital lease
obligations  to tangible  net worth plus  subordinated  debt to 9.5 to 1 through
December 31, 1996, reverting to 8.0 to 1 thereafter. IBMCC increased the maximum
permissible ratio of annualized  revenue to working capital to 56.0 to 1 through
1996 and to 52.0 to 1  thereafter,  reserving  the right to  further  change the
ratio upon notice to the Company. Throughout 1997, the Company was in compliance
with the key financial and other covenants under both the Old IBMCC Facility and
the Old DFS Facility.

New Credit Facilities.

       The total credit  available  under the New DFS Facility is $30.0 million,
subject  to  borrowing  base  limitations  which  are  generally  computed  as a
percentage of various  classes of eligible  accounts  receivable  and qualifying
inventory.  Credit available under the New DFS Facility for floor plan financing
of  inventory  from  approved  manufacturers  (the  "Inventory  Line")  is $20.0
million.  Available  credit under the New DFS  Facility,  net of Inventory  Line
advances,  is $10.0  million,  which is used by the Company  primarily  to carry
accounts receivable and for other working capital and general corporate purposes
(the "Accounts  Line").  Borrowings under the Accounts Line bear interest at the
fluctuating prime rate minus 1.0% per annum.  Under the Inventory Line, DFS pays
the Company's  inventory vendors directly,  generally in exchange for negotiated
financial incentives. Typically, the financial incentives received are such that
DFS does not charge  interest to the Company until 40 days after the transaction
is  financed,  at which  time the  Company  is  required  to either pay the full
invoice  amount of the inventory  purchased  from  corporate  funds or to borrow
under the Accounts Line for the amount due to DFS.  Inventory  Line advances not
paid within 40 days after the financing  date bear  interest at the  fluctuating
prime rate plus 5.0%. For purposes of calculating  interest  charges the minimum
prime rate under the New DFS Facility is 7.00%.  DFS may change the  computation
of the borrowing base and to disqualify  accounts receivable upon which advances
have been  made and  require  repayment  of such  advances  to the  extent  such
disqualifications cause the Company's borrowings to exceed the reduced borrowing
base.

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

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

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

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

Year 2000 Compliance

         During the first quarter of 1998 the Company  commenced a conversion of
it MIS to a more  powerful  computing  platform  which will allow the Company to
improve and enhance its MIS.  The new system will allow the Company to expand it
uses and more fully  integrate its  operations  with the MIS.  While the Company
expects the system conversion to be fully implemented with only normal debugging
and reprogramming, a failure to fully implement the conversion with only minimal
disruption  of its  operation  could  have an  adverse  effect on the  Company's
results of operations and financial condition.

         The system  conversion was  implemented  as a general  upgrading of the
Company's MIS and was not for the purpose of achieving Year 2000 compliance. The
Company  believes  its prior MIS was,  and its new MIS is, Year 2000  compliant.
Accordingly,  the Company does not believe that Year 2000 compliance will have a
material adverse effect on its results of operations or financial condition.  It
is possible that the Company could be impacted if its  significant  suppliers or
customers  do not  successfully  and timely  achieve Year 2000  compliance  with
respect to their own computer systems. The Company has inquired of its two major
suppliers  as to the status of their Year 2000  compliance  and has been advised
that they expect to achieve Year 2000 compliance.  If, contrary to the Company's
expectations, it or the significant suppliers and customers fail to achieve Year
2000  compliance in a timely  manner,  the Company's  results of operations  and
financial condition could be materially and adversely effected.

Accounting Pronouncements

     In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
and SFAS No.  131,  Disclosures  About  Segments  of an  Enterprise  and Related
Information.  SFAS No. 130 establishes standards for reporting and displaying of
comprehensive income and its components.  SFAS No. 131 establishes standards for
the way that public  business  enterprises  report  information  about operating
segments and related  information  in interim and annual  financial  statements.
SFAS No. 130 and 131 are  effective  for periods  beginning  after  December 15,
1997.  These  two  statements  will not have any  effect on the  Company's  1997
financial statements,  however, management is evaluating what, if any additional
disclosures may be required when these two statements are implemented.

Item 7A. Quantitative and Qualitative disclosures about Market Risk.

     This item is inapplicable to the Company.



<PAGE>


Item 8.  Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements:

Independent Auditor's Report.............................................     27

  Consolidated Balance Sheets as of December 31, 1996 and 1997...........     28

  Consolidated Statements of Operations for the years ended
    December 31, 1995, 1996 and 1997..,,.................................     29

  Consolidated Statements of Stockholders' Equity for the years
    ended December 31, 1995, 1996 and 1997...............................     30

  Consolidated Statements of Cash Flows for the years ended
    December 31, 1995, 1996 and 1997.....................................     31

  Notes to Consolidated Financial Statements for the years
    ended December 31, 1995, 1996 and 1997...............................     32


INDEPENDENT AUDITORS' REPORT

To the Stockholders of Allstar Systems, Inc.:

         We have audited the accompanying consolidated balance sheets of Allstar
Systems,  Inc. and  subsidiaries  ("Allstar") at December 31, 1996 and 1997, and
the related  statements of operations,  stockholders'  equity and cash flows for
each of the three years in the period ended  December 31, 1997.  Our audits also
included the financial  statement schedule listed in the index at Item 14(a)(2).
These   financial   statements   and  financial   statement   schedule  are  the
responsibility  of Allstar's  management.  Our  responsibility  is to express an
opinion on these financial  statements and financial statement schedule based on
our audits.

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

         In our opinion, such consolidated  financial statements present fairly,
in all material respects, the financial position of Allstar at December 31, 1996
and 1997,  and the results of its  operations and its cash flows for each of the
three years in the period ended  December 31, 1997 in conformity  with generally
accepted accounting  principles.  Also, in our opinion, such financial statement
schedule,  when  considered  in  relation  to the basic  consolidated  financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set forth therein.




Deloitte & Touche LLP

Houston, Texas
March 27, 1998


<PAGE>


ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997
In thousands, except share and per shares amounts)


ASSETS                                                1996              1997
                                                      ----              ----

Current Assets:
  Cash and cash equivalents:
    Restricted cash                              $        94       $       280
      Cash                                               135              1301
                                                 -----------       -----------
        Total cash and cash equivalents                  229             1,581
  Accounts receivable - trade, net                    16,517            23,759
  Accounts receivable - affiliates                       140               434
  Inventory                                            4,862             4,700
  Deferred taxes                                         350               212
  Deferred offering costs                                412
  Other current assets                                   174               404
                                                 -----------       -----------
        Total current assets                          22,684            31,090
Property and equipment, net                            1,644             2,013
Other assets                                             392                81
                                                 -----------       -----------
                                                 $    24,720       $    33,184
                                                 ===========       ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
  Notes payable                                  $     9,975       $     1,572
  Accounts payable                                     7,157            12,805
  Accrued expenses                                     2,759             3,565
  Income taxes payable                                   206                82
  Deferred service revenue                               296               242
                                                 -----------       -----------
        Total current liabilities                     20,393            18,266
  Deferred credit - Stock warrants                                         195


Commitments and Contingencies

Stockholders' Equity:
  Preferred stock, $.01 par value, 5,000,000 shares authorized,
           no shares issued
  Common   stock, $.01 par value, 50,000,000 shares authorized, 2,675,000 and
           4,454,411 outstanding at December 31,
           1996 and 1997, respectively                    27                45
  Additional paid in capital                           1,479            10,013
  Retained earnings                                    2,821             4,665
                                                 -----------       -----------
        Total stockholders' equity              $      4,327       $    14,723
                                                ------------       -----------
                                                 $    24,720       $    33,184
                                                 ===========       ===========
See notes to consolidated financial statements.


<PAGE>


ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
 (In thousands, except share and per shares amounts)
<TABLE>

<CAPTION>

                                                                           Years  ended  December 31,                   .
<S>                                                                     <C>          <C>          <C> 
                                                                        1995         1996         1997

Total revenue ..................................................   $   91,085   $  120,359   $  129,167

Cost of goods and services .....................................       79,857      104,302      111,126
                                                                   ----------   ----------   ----------

                  Gross profit .................................       11,228       16,057       18,041

Selling, general and administrative expenses ...................        9,149       12,284       14,386
                                                                   ----------   ----------   ----------

Operating income ...............................................        2,079        3,773        3,655

Interest expense and other .....................................        1,218        1,183          685
                                                                   ----------   ----------   ----------

Income before provision for income taxes .......................          861        2,590        2,970

Provision for income taxes .....................................          342          987        1,126
                                                                   ----------   ----------   ----------

Net income .....................................................   $      519   $    1,603   $    1,844
                                                                   ==========   ==========   ==========

Net income per share:
         Basic .................................................   $     0.19   $     0.60   $     0.52
                                                                   ==========   ==========   ==========

         Diluted ...............................................   $     0.19   $     0.60   $     0.52
                                                                   ==========   ==========   ==========

Weighted average number of shares outstanding:
         Basic .................................................    2,675,000    2,675,000    3,519,821
                                                                   ==========   ==========   ==========

         Diluted ...............................................    2,675,000    2,675,000    3,526,787
                                                                   ==========   ==========   ==========

See notes to consolidated financial statements.
</TABLE>



<PAGE>


 ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31,
1995, 1996 AND 1997 (In thousands, except share and per shares amounts)

<TABLE>

<S>                                       <C>        <C>           <C>      <C>           <C>          <C>        <C>
                                          $.01 Par value           No Par Value         Additional
                                           Common Stock            Common Stock          Paid-In     Retained
                                         Shares     Amount       Shares    Amount        Capital     Earnings      Total

BALANCE AT JANUARY 1, 1995                                       328,125   $    2   $      1,504   $      699   $   2,205

Net income                                                                                   519          519
                                                              ----------   ------   ------------   ----------   ---------

BALANCE AT DECEMBER 31, 1995                                     328,125        2          1,504        1,218       2,724

Issuance of common stock
  on conversion (see Note 1)            2,675,000   $  27       (328,125)      (2)           (25)

Net income                                                                                              1,603       1,603
                                       ----------   -----     ----------   ------   ------------   ----------   ---------

BALANCE AT DECEMBER 31, 1996            2,675,000      27                                  1,479        2,821       4,327

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

Issuance of restricted stock               14,286                                             86                       86

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

BALANCE AT DECEMBER 31, 1997            4,544,411   $  45                  $        $     10,013   $    4,665   $  14,723
                                       ==========   =====     ==========    =====   ============   ==========    ========

See notes to consolidated financial statements.
</TABLE>

<PAGE>


ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED  STATEMENTS  OF CASH FLOWS FOR THE YEARS ENDED  DECEMBER  31, 1995,
1996 AND 1997 (In thousands, except share and per shares amounts)
<TABLE>
<CAPTION>
                                                                             Years ended December 31,
<S>                                                                        <C>        <C>        <C> 
                                                                           1995       1996       1997
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income ..........................................................   $   519    $ 1,603    $ 1,844
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Gain on disposal of assets ..........................................        (1)       (11)
Depreciation and amortization .......................................       309        305        623
Deferred tax provision ..............................................      (146)       (92)       138

Changes in assets and liabilities that provided (used) cash:
         Accounts receivable - trade, net ...........................    (4,437)      (695)    (7,242)
         Accounts receivable - affiliates ...........................       (80)       153
                                                                                                 (294)
         Inventory ..................................................       (21)       545        162
         Other current assets .......................................         4       (507)      (230)
         Other assets ...............................................       311
         Accounts payable ...........................................     1,977       (492)     6,060
         Accrued expenses ...........................................     1,673       (598)       806
         Income taxes payable .......................................        53        (77)      (124)
         Deferred service revenue ...................................        27        (45)       (54)
                                                                        -------    -------    -------

                  Net cash provided by (used in) operating activities      (123)        89      2,000

CASH FLOWS FROM INVESTING ACTIVITES:
Capital expenditures ................................................      (518)      (965)      (992)
Proceeds from sale of fixed assets ..................................        60         13
                                                                        -------    -------    -------

                  Net cash used in investing activities                    (458)      (952)      (992)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in notes payable                                    940         63     (8,403)
Net proceeds from sale of common stock                                                          8,747
                                                                        -------    -------    -------

                  Net cash provided from financing activities               940         63        344

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                        359       (800)     1,352

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                            670      1,029        229
                                                                        -------    -------    -------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                             $  1,029  $     229  $   1,581
                                                                        =======  =========   ========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest                                               $    1,189  $   1,140  $     958
                                                                      =========   ========  =========
Cash paid for income taxes                                           $      432  $   1,138  $   1,032
                                                                      =========   ========  =========

See notes to consolidated financial statements.
</TABLE>

<PAGE>


ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO  CONSOLIDATED  FINANCIAL  STATEMENTS  FOR THE YEARS ENDED  DECEMBER 31,
1995, 1996 AND 1997 (In thousands, except share and per shares amounts)


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Allstar Systems, Inc. and subsidiaries  ("Allstar"') is engaged in the sale
and service of computer and  telecommunications  hardware and software products.
During 1995 Allstar  formed and  incorporated  Stratasoft,  Inc., a wholly owned
subsidiary, to create and market software related to the integration of computer
and telephone technologies.  In January, 1997 Allstar formed IT Staffing Inc. to
provide temporary and permanent placement services of technical  personnel.  All
operations of the business are conducted from offices located in Texas.

     A substantial  portion of Allstar's sales and services are authorized under
arrangements with product  manufacturers and Allstar's  operations are dependent
upon  maintaining  its approved status with such  manufacturers.  As a result of
these  arrangements and arrangements  with its customers,  gross profit could be
limited by the  availability  of products  or  allowance  for volume  discounts.
Furthermore,  net income  before  income  taxes  could be affected by changes in
interest rates which underlie the credit arrangements which are used for working
capital (see Note 5).

     Allstar's significant accounting policies are as follows:

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

     Inventory  -  Inventory   consists  primarily  of  personal  computers  and
components and is valued at the lower of cost or market with cost  determined on
the first-in first-out method. Management provides a reserve for inventory which
may be slow-moving or obsolete.

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

     Property and equipment are depreciated  over their  estimated  useful lives
ranging  from five to ten years  using the  straight-line  method.  Depreciation
expense totaled $307, $303 ,and $623 for the years ended December 31, 1995, 1996
and 1997, respectively.

     Impairment of  Long-Lived  Assets  -Allstar  records  impairment  losses on
long-lived  assets,  including  goodwill,  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.

     Federal Income Taxes - Deferred taxes are provided at enacted rates for the
temporary differences between the financial reporting bases and the tax bases of
assets and liabilities.

     Earnings  per Share - Net  earnings  per share of common stock are based on
the  weighted  average  number  of  shares of  common  stock  and  common  stock
equivalents,  if any,  outstanding  during each  period.  In October  1996,  the
Company completed a reincorporation  in order to change its state of domicile to
Delaware,  to authorize  50,000,000 shares of $.01 par value common stock and to
authorize   5,000,000   shares  of  $.01  par   value   preferred   stock.   The
reincorporation had the effect of an 8.15-for-1 split of Allstar's common stock.
All applicable share and per share data in the consolidated financial statements
and  related  notes give  effect to this  reincorporation  and  resulting  stock
conversion.

     In February 1997, the Financial  Accounting Standards Board ("FASB") issued
Statement of Financial  Accounting  Standards No. 128, Earnings Per Share ("SFAS
128").  SFAS 128 requires a dual  presentation of basic and diluted earnings per
share for entities  with  complex  capital  structures.  At December 31 1995 and
1996,  Allstar had no stock options or similar  equity  instruments  outstanding
accordingly SFAS No. 128 had no retroactive effect on the consolidated financial
statement  for the years then ended.  During  1997  Allstar  granted  options to
purchase  200,300  shares,  issued 14,286 shares of restricted  stock and issued
warrants to purchase 176,750 common shares at $9.60 per share to underwriters in
connection  with a public  offering of the common stock.  If Allstar had adopted
the statement in prior years, earnings per share would have been as follows:

                                                 1997       1996        1995
                                                 ----       ----        ----
     Basic......................................$0.52      $0.60       $0.19
     Diluted....................................$0.52      $0.60       $0.19

     Revenue  Recognition  -  Revenue  from the  sale of  computer  products  is
recognized  when the product is shipped.  Service  income is recognized  ratably
over the  service  contract  life.  Revenues  resulting  from  installations  of
equipment for which duration is in excess of three months are  recognized  using
the  percentage-of-completion  method.  The percentage of revenue  recognized on
each contract is based on the most recent cost estimate available.  Revisions of
estimates  are  reflected  in the  period in which the facts  necessitating  the
revision become known; when a contract indicates a loss, a provision is made for
the total  anticipated  loss. At December 31, 1996 Allstar had no such contracts
in process. At December 31, 1997, Allstar had $868 of such contracts in progress
and $401 of revenue has been  deferred  together  with $197 of costs  related to
those revenues.

     Research and Development  Costs - Expenditures  relating to the development
of  new  products  and  processes,   including   significant   improvements  and
refinements to existing products,  are expensed as incurred. The amounts charged
to expense were $13, $96 and $157 in the years ended December 31, 1995, 1996 and
1997, respectively.

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

     Cash and Cash  Equivalents - Cash and cash  equivalents  include any highly
liquid debt instruments with a maturity of three months or less when purchased.
See Note 5 for discussion of restricted cash.

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

     Accounting  Pronouncements  - In June 1997,  the FASB  issued SFAS No. 130,
Reporting  Comprehensive Income, and SFAS No. 131, Disclosures About Segments of
an Enterprise and Related  Information.  SFAS No. 130 establishes  standards for
reporting and displaying of  comprehensive  income and its components.  SFAS No.
131 establishes  standards for the way that public business  enterprises  report
information  about  operating  segments and related  information  in interim and
annual financial statements. SFAS No. 130 and 131 are effective for fiscal years
beginning after December 15, 1997. These two statements will not have any effect
on the Company's 1997 financial  statements,  however,  management is evaluating
what, if any  additional  disclosures  may be required when these two statements
are implemented.

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



2.   ACCOUNTS RECEIVABLE

     Accounts  receivable  consisted  of the  following at December 31, 1996 and
1997:

                                                    1996              1997

     Trade....................................    $16,736           $24,008
     Allowances for doubtful accounts.........       (219)             (249)
                                                  -------           -------
          Total...............................    $16,517           $23,759
                                                  =======           =======

3.   DEFERRED OFFERING COSTS

     Deferred  offering  costs  represent  amounts  incurred by Allstar  through
December  31,  1996 in  preparation  of filing  an  offering  document.  Allstar
completed  a public  offering  of its  common  stock  in 1997  and the  deferred
offering costs were included as a cost of issuance of the common stock.

4.   PROPERTY AND EQUIPMENT

     Property and equipment  consisted of the following at December 31, 1996 and
1997:

                                                    1996              1997

        Equipment.............................    $   282           $   339
        Computer equipment....................      1,964             2,870
        Furniture and fixtures                        294               316
        Leasehold improvements                         47                55
        Vehicles                                      105               105
                                                  -------           -------
                                                  $ 2,692             3,685
        Accumulated depreciation and amortization  (1,048)           (1,672)
                                                  -------           -------
              Total                               $ 1,644           $ 2,013
                                                  =======           =======

5.   CREDIT ARRANGEMENTS

     Allstar had two revolving lines of credit with a commercial finance company
which  were  collateralized  by  substantially  all of  Allstar's  assets  and a
personal  guarantee  of the  principal  stockholder  of Allstar.  The  aggregate
maximum  combined  lines of credit  were  $20.0  million  and $30.0  million  at
December 31, 1996 and 1997, respectively.  The maximum combined credit limit was
subject to  borrowing  base  limitations  which  were  generally  computed  as a
percentage of various  classes of eligible  accounts  receivable  and qualifying
inventory (as defined). Allstar paid an annual facility fee of $18,000.

     Under the first revolving line of credit (the "Accounts Line"), outstanding
principal and interest were due upon termination of the agreement.  Transactions
on the  Accounts  Line  are  reflected  as  Notes  Payable  in the  consolidated
financial statements.  The Accounts Line accrued interest at the prime rate plus
2% (10.25% at December 31, 1996 and 10.50% at December 31, 1997).  The agreement
required  that  all  payments   received  from  customers  on  pledged  accounts
receivable  be  applied  to  the  outstanding  balance  on  the  Accounts  Line.
Accordingly, accounts receivable payments received in the amount of $94 and $280
at December 31, 1996 and 1997, respectively,  but not yet applied to the line of
credit,  are shown as restricted cash in the  accompanying  balance sheets.  The
weighted average interest rate on the Accounts Line for the years ended December
31, 1995, 1996 and 1997 was 12.84%, 10.25% and 10.50%, respectively.

     The second  revolving  line of credit  (the  "Inventory  Line") was used by
Allstar to floor plan inventory purchases. At December 31, 1996 and December 31,
1997,  aggregate  borrowings  on the  Inventory  Line were  $6,134  and  $1,089,
respectively. Interest accrues at the prime rate plus 6% (14.50% at December 31,
1997) for all outstanding balances over 30 days.

     On March 27, 1998,  Allstar and the commercial  finance company  terminated
their credit  arrangement and entered into a new $2.0 million  revolving  credit
line of credit to floor plan inventory.  This line of credit accrues interest at
prime plus 6% (14.50% at December 31, 1997) for all outstanding balances over 30
days.

     In  addition,  Allstar had a $10.0  million  ($3.0  million at December 31,
1996)  credit  line with  another  financing  company  to be used to floor  plan
inventory  purchases.  At December 31, 1996 and  December  31,  1997,  aggregate
borrowings on this line were $993 and $9,391, respectively.  Interest accrues at
the prime rate,  which for purposes of this  agreement will not fall below 6.5%,
plus 6% (14.50% at December 31, 1997) for all outstanding balances over 30 days.

     Amounts  borrowed  under the  Inventory  Line and the $3.0  million line of
credit  (collectively  the "Floor  Plan  Agreements")  are  included in accounts
payable  in  the  consolidated  financial  statements.   Under  the  Floor  Plan
Agreements the financing companies pay Allstar's suppliers directly and maintain
a purchase money security  interest in the related  inventory.  Allstar incurred
interest  expense under the Floor Plan  Agreements of $35, $59 and $4 during the
years ended  December  31,  1995,  1996 and 1997,  respectively.  The Floor Plan
Agreements  require  payment of interest  on a monthly  basis and  principal  on
demand.

     The combined  borrowing base under all credit  arrangements was $18,841 and
$23,871 at December 31, 1996 and 1997, respectively.

New Credit Facilities.

     On February 27, 1998 Allstar  entered  into a new credit  agreement  with a
commercial  finance  company..  The total credit  available under the new credit
facility is $30.0  million,  subject to  borrowing  base  limitations  which are
generally  computed as a  percentage  of various  classes of  eligible  accounts
receivable and qualifying inventory. Credit available under the new facility for
floor plan financing of inventory from approved  manufacturers  (the  "Inventory
Line")  is $20.0  million.  Available  credit  under  the new  facility,  net of
Inventory  Line  advances,  is  $10.0  million,  which  is used  by the  Company
primarily to carry accounts receivable and for other working capital and general
corporate  purposes (the "Accounts  Line").  Borrowings  under the Accounts Line
bear  interest  at the  fluctuating  prime rate minus 1.0% per annum.  Under the
Inventory  Line  interest  accrues at prime  rate,  which for  purposes  of this
agreement  will not fall below 7.0%,  plus 5% for  outstanding  balances over 40
days.

     This  agreement,  which continues in full force and effect for 36 months or
until  terminated by 30 day written notice from the lender and may be terminated
upon 90 days notice by Allstar,  subject to a termination fee, is collateralized
by substantially all of Allstar's assets.  The credit facility is not guaranteed
by the principal  stockholder  of Allstar.  The agreement  contains  restrictive
covenants  which,  among other  things,  require  specific  ratios of revenue to
working  capital,  total  liabilities to tangible net worth and net profit after
tax to  revenue.  The  terms of the  agreement  also  prohibit  the  payment  of
dividends,  the purchase of Allstar common stock and other similar expenditures,
including advances to related parties.

6.   INCOME TAXES

     The provision for income taxes for the years ended December 31, 1995,  1996
and 1997 consisted of the following:

                                                1995         1996         1997
                                                ----         ----         ----
     Current Provision (benefit)
        Federal.....................         $   446       $  962       $  848
        State.........................            42          117          140
                                              ------       ------       ------
     Total current provision..........           488        1,079          988
     Deferred Provision...............          (146)         (92)         138
                                              ------       ------          ---
         Total........................       $   342       $  987       $1,126
                                              ======        =====        =====




     The total  provision  for income taxes during the years ended  December 31,
1995,  1996 and 1997  varied  from the U.S.  federal  statutory  rate due to the
following:

                                                1995         1996         1997
                                                ----         ----         ----

     Federal income tax at statutory rate..    $  301       $  907       $1,010
       Nondeductible expenses..............        48           17           24
       State income taxes..................        28           77           92
       Other...............................       (35)         (14)
                                               ------       ------       ------
         Total.............................    $  342       $  987       $1,126
                                               ======       ======       ======

     Deferred  tax assets  computed at the  statutory  rate related to temporary
     differences at December 31, 1996 and December 31, 1997 were as follows:

                                            December 31           December 31,
                                                 1996                 1997
     Deferred tax assets:
      Accounts receivable..................   $   142               $   149
      Deferred service revenue.............        69                    41
      Inventory............................       139                    22
                                               ------               -------
         Total deferred tax assets.........   $   350               $   212
                                               ======                ======

7.   ACCRUED EXPENSES

     Accrued liabilities  consisted of the following as of December 31, 1996 and
     1997:

                                                 1996                 1997
                                                 ----                 ----
     Sales tax payable                         $1,309                $1,922
     Accrued employee benefits, payroll
       and other related costs                    996                   962
     Accrued interest                             209                    47
     Other                                        245                   634

         Total                                 $2,759                $3,565
                                               ======                ======

8.   FRANCHISE FEES

     Allstar entered into an agreement in May 1989 whereby it became a franchise
of Inacom Corp.  ("Inacom").  Annual fees,  amounting to 0.05% of certain  gross
sales, were expensed in the period incurred. Allstar obtained a waiver effective
January 1, 1995 which eliminated the payment of franchise fees.

     Allstar  entered  into an  agreement  in August  1996 in which  Allstar  is
required to purchase at least 80% of its computer  products  from Inacom if such
are  available  within a  reasonable  period of time at  reasonably  competitive
prices. The agreement expires on December 31, 2001 and automatically  renews for
successive  one-year  periods.  A  cancellation  fee of $571 will be  payable by
Allstar in the event of  non-renewal  or early  termination  of the agreement by
either  party;  however,  Allstar does not  anticipate  termination  to occur by
either party prior to the initial  termination  date.  Allstar is accruing  this
cancellation fee over the initial  agreement period by an approximate $9 monthly
charge to earnings.  For the years  December 31,  1995,  1996 and 1997,  Allstar
charged to expense $0, $44 and $105, respectively, related to this agreement.

9.   COMMITMENTS AND CONTINGENCIES

     Operating Leases - Allstar  subleases  office space from Allstar  Equities,
Inc.  ("Equities"),  a company  wholly  owned by the  principal  stockholder  of
Allstar.  In 1996,  Allstar  renewed its office  sublease  with  monthly  rental
payments  of  $31.5 in 1997 and $32 in 1998,  plus  certain  operating  expenses
through  December  1998.  Rental  expense  under  this  agreement   amounted  to
approximately $372, $372 and $378 during years ended December 31, 1995, 1996 and
1997, respectively.

     Additionally,  minimum  annual  rentals  at  December  31,  1996  on  other
operating leases amount to  approximately  $126 for 1998, $63 in 1999, and $8 in
2000. Amounts paid during the years ended December 31, 1995, 1996 and 1997 under
such agreements totaled approximately $137, $252 and $142, respectively.

     Benefit  Plans - Allstar  maintains  a group  medical  and  hospitalization
insurance program under which Allstar pays employees' covered health care costs.
Any claims  exceeding $30 per employee or a cumulative  maximum of approximately
$180 per year are insured by an outside insurance  company.  Allstar's claim and
premium expense for this self-insurance  program totaled approximately $67, $193
and $684 for the years ended December 31, 1995, 1996 and 1997, respectively.

     Allstar  maintains a 401(k) savings plan. All full-time  employees who have
completed 90 days of service with  Allstar are  eligible to  participate  in the
plan.  Allstar also has the option of making additional  contributions  based on
net  profitability.  Declaration of such  contributions  is at the discretion of
Allstar's Board of Directors.  Allstar made no additional  contributions  to the
plan for the years ended  December,  1995 and 1997. In 1996 Allstar  contributed
$136 to the plan.

     Allstar  has filed  under the  Internal  Revenue  Service  Walk-in  Closing
Agreement  Program  (the  "Program")  to negotiate a  settlement  regarding  the
qualified status of the 401(k) savings plan in order to meet the requirements of
Section  401(a) of the Internal  Revenue Code.  Under the Program,  any sanction
amount  negotiated is based upon the total tax liability which could be assessed
if the plan were to be  disqualified.  At  December  31,  1997 the  Company  has
accrued $28 for the estimated  settlement  cost. In 1998,  the Internal  Revenue
Service accepted the settlement and the Company paid $25.

     On July 13, 1996, a former customer brought suit against the Company in the
152nd Judicial  District Court of Harris County,  Texas.  The plaintiff  alleges
that the  Company  failed to provide  and  complete  promised  installation  and
configuration  of certain  computer  equipment  within the time  promised by the
Company.  Based on these  allegations,  the  plaintiff  is suing  for  breach of
contract and other statutory  violations and is seeking actual monetary  damages
of  approximately  $3 million and treble damages under the Texas Deceptive Trade
Practices Act. The Company is unable to estimate the range of possible  recovery
by the  plaintiff  because the suit is still in the early  stages of  discovery.
However,  the  Company is  vigorously  defending  the  action.  The effect of an
unfavorable  outcome  could  have a  material  adverse  effect on the  Company's
results of operations and its financial condition.

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

10.  STOCK OPTION PLANS

     In  September  1996  Allstar  adopted  the 1996  Incentive  Stock Plan (the
"Incentive  Plan") and the 1996  Non-Employee  Director  Stock  Option Plan (the
"Director Plan"). Under the Incentive Plan, Allstar's Compensation Committee may
grant up to  417,500  shares of common  stock,  which  have  been  reserved  for
issuance,  to certain key employees of Allstar.  The Incentive Plan provides for
the granting of incentive awards in the form of stock options, restricted stock,
phantom stock,  stock bonuses and cash bonuses in accordance with the provisions
of the plan. Additionally,  no shares may be granted after the tenth anniversary
of the Incentive Plan's adoption.  Allstar has reserved for issuance,  under the
Director Plan, 100,000 shares of common stock,  subject to certain  antidilution
adjustments.  The Director Plan provides for a one-time  option by newly elected
directors to purchase up to 5,000 common  shares,  after which each  director is
entitled to receive an option to purchase  up to 2,000  common  shares upon each
date of re-election to Allstar's  Board of Directors.  Options granted under the
Director Plan have an exercise  price equal to the fair market value on the date
of grant and  generally  expire  ten years  after the grant  date.  During  1997
Allstar  granted  options to purchase  200,300  common shares to its  directors,
officers and employees.


The plans activity is summarized below:


                                                          1997
                                                                  Weighted
                                                                   Average
                                                                  Exercise
                                                 Shares             Price
Options outstanding at January 1.......                0       $     0.00
Granted during the year................          200,300             5.17
Exercised during the year..............                0             0.00
Canceled during the year...............                0             0.00
                                                 -------       ----------
Options outstanding at December 31.....          200,300       $     5.17
                                                 =======       ==========
Options exercisable at December 31.....                0       $     5.17
                                                 =======       ==========
Options outstanding price range........          $4.625 to $6.00
Option weighted average remaining life.          9.7 Years

     Allstar  applies  APB  Opinion  No.  25,  "Accounting  for Stock  Issued to
Employees" and related  interpretations  in accounting for options granted under
the  Plans.  Accordingly,  no  compensation  expense  has been  recognized.  Had
compensation  expense been recognized based on the Black-Scholes  option pricing
model  value  at the  grant  date  for  awards  consistent  with  SFAS  no.  123
"Accounting for stock-Based Compensation, ." 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
76.2%;  risk-free interest rate of 6.0%; and expected lives of 10 years of stock
options granted. The effects of using the fair value method of accounting on net
income and earnings per share are indicated in the pro forma accounts below:

     Net Income:
         As Reported..........................................   $    1,844
         Pro forma............................................   $    1,815
     Earnings per share (Basic)
         As reported..........................................   $     0.52
         Pro forma............................................   $     0.52
     Earnings per share (Diluted)
         As reported..........................................   $     0.52
         Pro forma............................................   $     0.51

11.   RELATED-PARTY TRANSACTIONS

     Allstar has from time to time made  payments on behalf of Equities  and the
Company's principal  stockholders for taxes,  property and equipment.  Effective
July 1, 1996,  Allstar and its principal  stockholder  entered into a promissory
note to repay certain advances,  which were  approximately $173 at July 1, 1996,
in equal annual installments of principal and interest, from August 1997 through
2001.  This note bears  interest at 9% per year.  Also  effective  July 1, 1996,
Allstar and Equities entered into a promissory note whereby Equities would repay
the balance of amounts advanced,  which were approximately $387 at July 1, 1996,
in monthly  installments  of $6.5,  including  interest,  from July 1996 through
November  1998 with a final  payment of $275 due on December 1, 1998.  This note
bears interest at 9% per year. The principal amounts as of December 31, 1996 are
classified  as Accounts  receivable -  affiliates  and Other assets based on the
repayment terms of the promissory  notes.  The principal  amounts as of December
31,  1997 are  classified  as  Accounts  receivable  -  affiliates  based on the
expectation of repayment  within one year. At December 31, 1996 and December 31,
1997, Allstar  receivables from these affiliates  amounted to approximately $501
and $434, respectively.


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

         NONE

PART III.

         The  following  items  were  to be  incorporated  by  reference  to the
Company's definitive proxy statement for the 1998 Annual Meeting of Shareholders
but are now being filed by this Amendment on Form 10-K/A to the Company's Annual
Report on Form 10-K.

Item 10.      Directors and Executive Officers of the Registrant

Directors of the Registrant

         Listed below are the Directors of the Registrant  together with certain
information regarding the Directors:


Name, Age, Positions held, Period serving as Director, Principal occupation:

James H. Long - Chairman of the Board,  President Chief Executive Officer April,
1983 to present

James H. Long,  age 38, 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, Chief Financial Officer,  Treasurer,  Secretary,
September 12, 1996 to present.

Donald R. Chadwick,  age 54, has been the Chief Financial Officer of the Company
since February, 1992. As Chief Financial Officer, his duties include supervision
of finance, accounting and controller functions within the Company.

G. Chris Andersen, - Director, July 29,1997 to present

G.  Chris  Andersen,  age 59, is a  principal  of  Andersen,  Weinroth  & Co., a
merchant  banking firm  founded in 1996.  From 1990  through  1995,  he was Vice
Chairman of Paine Webber Incorporated.  Mr. Andersen is also a director of Terex
Corporation,  a publicly traded company that manufactures construction equipment
and truck trailers;  Sunshine Mining Company,  a publicly traded company engaged
in  mining;  Headway  Corporate  Resources,  Inc.,  a  publicly  traded  company
providing staffing services;  and United Waste Systems,  Inc., a publicly traded
company engaged in waste management.

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

Richard  D.  Darrell,   age  43,  has  been  President  of  American  Technology
Acquisition Corporation,  a company specializing in mergers,  acquisitions,  and
divestitures of technology related companies,  for the last four years. 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 59, 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  for  over  five  years.  Mr.  Johnson  is also  President  of  Winco
Agriproducts, an agricultural products company that primarily processes rice for
seed and  commercial  sale. Mr. Johnson was previously the Chairman of the Board
of the Lower Colorado River Authority,  the sixth largest  electrical utility in
Texas,  with  approximately  1,700  employees  and an annual budget of over $400
million. Mr. Johnson was previously Chairman of North Houston Bank, a commercial
bank with assets of approximately  $75 million.  Mr. Johnson currently serves on
the board of directors of Houston  National  Bank, a commercial  bank located in
Houston, Texas with assets of approximately $100 million; Security State Bank, a
commercial bank in Anahuac,  Texas with assets of approximately  $60 million and
Team, Inc. a publicly traded company which provides  environmental  services for
industrial operations.

Donald D. Sykora - Director, July 29, 1997 to present

Donald D. Sykora, age 67, was formerly the President and Chief Operating Officer
of Houston  Industries,  Inc.  and is  currently  attached  to the Office of the
Chairman of Houston  Industries,  Inc. with responsibility for special projects.
Houston  Industries  is an  international  holding  company  with  interests  in
electric and gas utility  companies,  including  Houston Lighting and Power Co.,
with over 8,000  employees  and annual  revenues of over $4 billion.  Mr. Sykora
currently  serves  on the  board of  directors  of Powell  Industries,  Inc.,  a
publicly  traded company which  manufactures  electrical  equipment and systems;
Pool Energy Services, Inc., a publicly traded company which provides oil and gas
well servicing;  American Residential Services,  Inc., a publicly traded company
which provides services for heating,  ventilation,  air conditioning,  plumbing,
electrical,  and indoor air quality systems,  and TransTexas Gas Corporation,  a
publicly traded producer and marketer of natural gas.

Executive Officers of the Registrant

      The executive  officers of the Company serve until  resignation or removal
by the Board of Directors. The Company's executive officers are as follows:

Name, age, Positions held, Period serving as Executive Officer:

James H. Long  - See Directors of the Registrant.

Donald R. Chadwick - See Directors of the Registrant.

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

         Frank Cano, age 33, became the President,  Computer  Products  Division
for the Company in September,  1997 and is responsible for the management of the
Computer  Products  Division.  Prior to that Mr. Cano was Senior Vice President,
Branch  Operations from July,  1996 to September,  1997, and was responsible for
the general  management of the Company's branch offices.  From June 1992 to June
1996, Mr. Cano was the Branch Manager of the Company's Dallas-Fort Worth office.

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


         Thomas N. McCulley,  age 51, 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.


Shabbir K. Ali -  President, IT Services Division, September, 1996 to present

         Shabbir  K. Ali,  age 35,  has been the  President  of the IT  Services
Division since July 1996. From January 1996 to June 1996, Mr. Ali served as Vice
President,  IT Services  Division and between  August 1993 and December  1995 as
Vice  President of Service  Operations.  Between July 1990 and July 1993 Mr. Ali
served as the Company's Operations Manager.  Mr. Ali's present  responsibilities
include the overall management of the Company's IT Services Division.

Michael A. Torigian - President,  Telecom Systems Division,  September,  1996 to
present

         Michael A.  Torigian,  age 39, has been the  President  of the  Telecom
Systems  Division since July 1996.  Between July 1994 and June 1996 Mr. Torigian
served as Vice President, Telecom Systems Division. His current responsibilities
include the overall  management of the Company's Telecom Systems Division.  From
July 1992 to May 1994, Mr. Torigian served as Director of Sales for CTWP,  Inc.,
an Austin-based computer, copier and office equipment dealer.

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

         William R. Hennessy, age 39, 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.

Ronald J. Burger - Chief Operating Officer - Computer Products,  January 1998 to
present

         Ronald J. Burger, age 51, joined the Company as Chief Operating Officer
- Computer  Products  in January  1998.  His  responsibilities  include  overall
management  of  purchasing,  warehousing,  inventory  control and  shipping  and
receiving of inventory  products.  Prior to joining the Company,  Mr. Burger was
Vice President and General Manager for Intelligent  Electronics Inc., a computer
industry  aggregator/distributor from April 1996 to February 1997. Prior to that
period Mr.  Burger was Vice  President of  Distribution  Logistics  for National
Computer Distributors, a computer industry distributor, from April 1993 to April
1996.  Prior to that time, Mr. Burger was VP Distribution and Logistics for Tech
Data Corporation, a computer industry distributor.


Family Relationships

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

Item 11.      Executive Compensation

Summary  Compensation  Table.  The following  table  reflects  compensation  for
services to the Company for the years ended December 31, 1997.  1996 and 1995 of
(i) the Chief  Executive  Officer of the  Company or (ii) the three most  highly
compensated  executive  officers of the Company  who were  serving as  executive
officers at the end of 1997 and whose  total  annual  salary and bonus  exceeded
$100,000 in 1997 (the "Named Executive Officers").

<TABLE>
<CAPTION>
                                                Annual Compensation                                         Long
Term Compensation
                                                                                      Awards                 Payouts

Name and Principal                                    Other Annual   Restricted   Underlying     LTIP       All Other
                                            Bonus     Compensation      Stock
Position              Year     Salary                      (1)         awards     Options     Payouts     Compensation
                                                                                     ($)         ($)
<S>     <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>

James H. Long         1997      $150,000      -             -             -           -           -             -
CEO (2)               1996      $116,000     $35,000        -             -           -           -             -
                      1995       $40,800    $100,000        -             -           -           -             -

Donald R. Chadwick    1997       $98,458      $1,500        -            $85,716      -           -             -
CFO (3)(4)            1996       $75,000      -             -             -           -           -             -
                      1995       $75,000      -             -             -           -           -             -

Frank Cano (4)(5)     1997       $78,125     $22,297        -             -           -           -
President, Computer   1996       $73,500     $23,125        -             -                       -             -
Products              1995       $66,000      -             -             -           -           -             -

William R. Hennessy   1997       $81,400     $73,880        -             -           -           -             -
President             1996       $74,618     $27,501        -             -           -           -             -
Stratasoft,
Inc. (6)              1995        -           -             -             -           -           -             -

<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 -
     "Certain Relationships and Related Transactions."

(3)  As of December 31, 1997,  Mr.  Chadwick  owned,  in the  aggregate,  14,286
     shares of  restricted  Common  Stock,  with an aggregate  value of $58,037.
     These shares will fully vest on July 7, 1999.  Dividends,  if any, will not
     be paid on these shares of restricted Common Stock.
(4)  Includes $1,500 as consideration for execution of employment agreements.
(5)  Includes  compensation  based upon attainment of certain  performance goals.
(6)  Includes compensation based upon gross profit realized.
</FN>
</TABLE>

Employee Options

      Under the Company's 1996 Incentive  Stock Option Plan shares of the Common
Stock may be granted to executive  officers and other employees.  As of December
31, 1997, 200,300 shares were reserved for outstanding  options and 217,200 were
reserved and remained  available  for future  grants  pursuant to the  Incentive
Stock Option  Plan.  During 1997,  options to purchase  37,000  shares of Common
Stock were granted to the Named  Executive  Officers  under the Incentive  Stock
Option Plan.

Option  Grants in Last  Fiscal Year The  following  table  provides  information
concerning stock options granted to the Named Executive Officers during the year
ended December 31, 1997.
<TABLE>
<CAPTION>

                       Number of   Percent of                          Potential Value   Potential Value
                                                                              at                at
                       Shares of     Total                              Assumed Annual    Assumed Annual
                        Common      Options                             Rate of Stock     Rate of Stock
                         Stock     Granted to   Exercise                    Price             Price
                      Underlying   Employees    or base                Appreciation for  Appreciation for
                        Options    in Fiscal     Price     Expiration    Option Term       Option Term
                        Granted       Year     ($/share)      Date            5%               10%
<S>     <C>    <C>    <C>    <C>    <C>    <C>

James H. Long              -           -           -           -              -                 -

Donald R. Chadwick         13,000        7.2%       $6.00    07/07/07           $49,054          $124,312

Frank Cano                 16,000        8.9%       $6.00    07/07/07           $60,374          $152,999

William R. Hennessy         8,000        4.4%       $6.00    07/07/07           $30,187           $76,500
</TABLE>


Option Exercises and Year-End Option Values
<TABLE>
<CAPTION>

                                                                    Number of             Value of
                                                                    Securities            Unexercised
                                                                    Underlying            In-the-money
                                    Shares                          Unexercised           Options at
                                    Acquired on     Value           Options at            December 31, 1997
Named Executive Officer             Exercise        Realized        December 31, 1997
<S>     <C>    <C>    <C>    <C>

James H. Long......................              0               0                     0                     0
Donald R. Chadwick.................              0               0                13,000                     0
Frank Cano.........................              0               0                16,000                     0
William R. Hennessy................              0               0                 8,000                     0
</TABLE>

      No options were  exercisable  at December 31,  1997,  none were  exercised
during 1997 and there were no in-the-money  unexercised  options at December 31,
1997

Director Compensation

      Each  director who is not an employee is paid $1,000 per meeting  attended
and $500 per committee meeting attended plus reasonable  out-of-pocket  expenses
incurred to attend Board or committee meetings.  In addition,  each non-employee
director  is  entitled  to  receive  stock  options  pursuant  to the  Company's
Non-Employee  Director  Stock Option Plan.  Upon his first election to the Board
each such director  receives options to purchase 5,000 shares and upon each time
a director is reelected such director  receives options to purchase 2,000 shares
commencing with those  directors  reelected at the Company's 1998 annual meeting
of stockholders. All options granted vest immediately. All options granted under
the Director Plan will have an exercise  price equal to the fair market value of
a share of Common Stock on the date of grant and will expire ten years after the
date of grant (subject to earlier termination under the Director Plan).  Options
granted  under  the  Director  Plan  are  subject  to early  termination  on the
occurrence of certain events,  including ceasing to be a member of the Company's
Board (other than by death). Employment Agreements

Each of the  executive  officers of the Company has entered  into an  employment
agreement  (collectively,   the  "Executive  Employment  Agreements")  with  the
Company. Under the terms of their respective agreements, Messrs. Long, Chadwick,
Cano and Hennessy  are entitled to an annual base salary of $150,000,  $100,000,
$75,000 and $81,408,  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's  resignation  at any time by  giving  proper  notice.  The  Agreements
generally  provide  that the  executive  officer  will not,  for the term of his
employment and for a period of either twelve or eighteen  months,  whichever the
case may be, following the end of such executive  officer's  employment with the
Company, compete with the Company,  disclose any confidential information of the
Company,  solicit any of the  Company's  employees  or  customers  or  otherwise
interfere with the relations of the Company

Compensation Committee Interlocks and Insider Participation

      None of the members of the Compensation  Committee,  who are identified in
the preceding  paragraph,  has ever been an employee of the Company nor is there
any family  relationship  between the members of the Compensation  Committee and
any executive officer.

Item 12.      Security Ownership of Certain Beneficial Owners and Management

Security Ownership of Management

         The  following  table  sets forth  certain  information  regarding  the
beneficial  ownership of the Common Stock of the Company by (i) all directors of
the Company,  (ii) the chief  executive  officer and each of the other executive
officers, and (iii) all directors and executive officers as a group.


<TABLE>
<CAPTION>
Name of                                                         Amount and Nature of              Percent
Beneficial Owner                                                Beneficial Owner(1)               of Class

<S>                                                                           <C>                      <C>  
James H Long............................................                      2,118,600                47.6%
Donald R. Chadwick......................................                         24,586  (2)               *
Frank Cano..............................................                         10,300  (3)               *
Shabbir K. Ali..........................................                         10,000                    *
Thomas N McCulley.......................................                            300                    *
Donald D. Sykora........................................                          1,000                    *

Directors and executive officers as a group(12 persons).                      2,164,786                48.6%
<FN>

(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  based  solely on  information
     provided to the Company.
(2)  Includes  14,286  restricted  shares  and 300  shares  owned  by his  minor
     children  for which Mr.  Chadwick  disclaims  beneficial  ownership  of the
     shares owned by his minor children.
(3) Includes 300 shares owned by Mr. Cano's spouse for which Mr. Cano  disclaims
beneficial ownership. * Indicates less than 1%
</FN>
</TABLE>

<PAGE>
Security Ownership of Certain Beneficial Owners

         The  following  table  sets forth  certain  information  regarding  the
beneficial  ownership  of the Common Stock of the Company by any person known to
the Company to be the beneficial owner of more than five percent of any class of
Company's voting securities.

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

Common Stock     Kennedy Capital Management Inc.     230,000            5.2%
                 10829 Olive Blv.
                 St. Louis, MO 63141

Item 13. Certain Relationships and Related Transactions

The Company has from time to time made  payments on behalf of Allstar  Equities,
Inc.  a Texas  corporation  ("Equities"),  wholly-owned  by James H.  Long,  the
Company's Chief  Executive  Officer,  and on behalf of Mr. Long,  personally for
taxes, property and equipment.  Effective July 1, 1996, the Company and Mr. Long
entered  into  a  promissory  note  to  repay  certain   advances,   which  were
approximately  $173,000  at  July 1,  1996,  in  equal  annual  installments  of
principal and interest,  from August 1997 through 2001. This note bears interest
at 9% per year.  Also effective  July 1, 1996, the Company and Equities  entered
into a  promissory  note  whereby  Equities  would  repay the balance of amounts
advanced,  which  were  approximately  $387,000  at July  1,  1996,  in  monthly
installments of $6,500, including interest, from July 1996 through November 1998
with a final  payment of  approximately  $275,000 due on December 1, 1998.  This
note  bears  interest  at 9% per year.  At  December  31,  1997,  the  Company's
receivables from Mr. Long and Equities amounted to approximately $434,000.

     The Company subleases office space from Equities.  In 1996, Allstar renewed
its office  sublease with monthly rental payments of $31,500 in 1997 and $32,000
in 1998, plus certain  operating  expenses through December 1998. Rental expense
under this agreement  amounted to  approximately  $378,000 during the year ended
December 31, 1997.

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
comparable to its Houston  headquarters  facility.  Based upon this survey,  and
additional  consultations  with  representatives  of the real estate  consulting
firm, the Company believes that the rental rate and other terms of the Company's
sublease from Allstar  Equities are at least as favorable as those that could be
obtained in an arms-length transaction with an unaffiliated third party.


PART IV

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

  a  (1) Consolidated Financial Statements - See Index to Consolidated Financial
         Statements on Page 27
     (2) Consolidated Financial Statements Schedule II Valuation and Qualifying
         Accounts Exhibit 99.1
     (3) Exhibits

<TABLE>
<CAPTION>
3.    Exhibits

<S>                       <C>                                                       <C>   

                                                                                Filed Herewith

   Exhibit                                                                      or Incorporated by
   Number                         Description                                     Reference to:

2.1   Plan and Agreement of Merger by and Between                               Exhibit 2.1 to Form
      Allstar Systems, Inc, a Texas corporation and                             S-1 filed Aug. 8, 1996
      Allstar Systems, Inc. a Deleware corporation
3.1   Bylaws of the Company                                                     Exhibit 3.1 to Form
                                                                                S-1 filed Aug. 8, 1996
3.2   Certificate of Incorporation of the Company                               Exhibit 3.2 to Form
                                                                                S-1 filed Aug. 8, 1996
4.1   Specimen Common Stock Certificate                                         Exhibit 4.1 to Form
                                                                                S-1 filed Aug. 8, 1996
4.2   See Exhibits 3.1 and 3.2 for provisions of the Certificate of             Exhibit 4.2 to Form
      Incorporation and Bylaws of the Company defining the rights of the        S-1 filed Aug. 8, 1996
       holders of Common Stock.
10.1  Revolving Loan and Security Agreement by and between                      Exhibit 10.1 to Form
      IBM Credit Corporation and Allstar Systems, Inc.                          S-1 filed Aug. 8, 1996
10.2  Agreement for Wholesale Financing dated September 20, 1993, by            Exhibit 10.2 to Form
      and between ITT Commercial Finance Corp. and Allstar-Valcom, Inc.         S-1 filed Aug. 8, 1996
10.3  Amendment to Agreement for Wholesale Financing dated                      Exhibit 10.3 to Form
      October 25, 1994, by and between ITT Commercial Finance Corp.             S-1 filed Aug. 8, 1996
      and Allstar Systems, Inc.
10.4  Sublease Agreement by and between Allstar Equities and Allstar            Exhibit 10.4 to Form
      Systems, Inc.                                                             S-1 filed Aug. 8, 1996
10.5  Form of Employment Agreement by and between the Company and               Exhibit 10.5 to Form
      certain members of Management.                                            S-1 filed Aug. 8, 1996
10.6  Employment Agreement dated September 7, 1995, by and between              Exhibit 10.6 to Form
      Stratasoft, Inc. and William R. Hennessy.                                 S-1 filed Aug. 8, 1996
10.7  Assignment of Certain Software dated September 7, 1995, by                Exhibit 10.7 to Form
      International Lan and Communications, Inc. and Aspen System               S-1 filed Aug. 8, 1996
      Technologies, Inc. to Stratasoft, Inc.
10.8  Microsoft Solution Provider Agreement by and between Microsoft            Exhibit 10.8 to Form
      Corporation and Allstar Systems, Inc.                                     S-1 filed Aug. 8, 1996
10.9  Novell Platinum Reseller Agreement by and between Novell, Inc.            Exhibit 10.9 to Form
      and Allstar Systems, Inc.                                                 S-1 filed Aug. 8, 1996
10.10 Allstar Systems, Inc. 401(k) Plan.                                        Exhibit 10.10 to Form
                                                                                S-1 filed Aug. 8, 1996
10.11 Allstar Systems, Inc. 1996 Incentive Stock Plan.                          Exhibit 10.11 to Form
                                                                                S-1 filed Aug. 8, 1996
10.12 Allstar Systems, Inc. 1996 Non-Employee Director Stock Option Plan.       Exhibit 10.12 to Form
                                                                                S-1 filed Aug. 8, 1996
10.13 Primary Vendor Volume Purchase Agreement dated August 1, 1996 by          Exhibit 10.13 to Form
      and between Inacom Corp. and Allstar Systems, Inc.                        S-1 filed Aug. 8, 1996
10.14 Resale Agreement dated December 14, 1995, by and between Ingram           Exhibit 10.14 to Form
      Micro Inc. and Allstar Systems, Inc.                                      S-1 filed Aug. 8, 1996
10.15 Volume Purchase Agreement dated October 31, 1995, by and between          Exhibit 10.15 to Form
      Tech Data Corporation and Allstar Systems, Inc.                           S-1 filed Aug. 8, 1996
10.16 Intelligent Electronics Reseller Agreement by and between Intelligent     Exhibit 10.16 to Form
      Electronics, Inc. and Allstar Systems, Inc.                               S-1 filed Aug. 8, 1996
10.17 MicroAge Purchasing Agreement by and between MicroAge Computer            Exhibit 10.17 to Form
      Centers, Inc. and Allstar Systems, Inc.                                   S-1 filed Aug. 8, 1996
10.18 IBM Business Partner Agreement by and between IBM                         Exhibit 10.18 to Form
      and Allstar Systems, Inc.                                                 S-1 filed Aug. 8, 1996
10.19 Confirmation of Allstar Systems, Inc.'s status as a Compaq authorized     Exhibit 10.19 to Form
      reseller dated August 6, 1996.                                            S-1 filed Aug. 8, 1996
10.20 Hewlett-Packard U.S. Agreement for Authorized Second Tier Resellers       Exhibit 10.20 to Form
      by and between Hewlett-Packard Company and Allstar Systems, Inc.          S-1 filed Aug. 8, 1996
10.21 Associate Agreement by and between NEC America, Inc. and                  Exhibit 10.21 to Form
      Allstar Systems, Inc.                                                     S-1 filed Aug. 8, 1996
10.22 Mitel Elite Dealer Agreement and Extension Addendum by and between        Exhibit 10.22 to Form
      Mitel, Inc. and Allstar Systems, Inc.                                     S-1 filed Aug. 8, 1996
10.23 Dealer Agreement dated March 1, 1995, by and between Applied Voice        Exhibit 10.23 to Form
      Technology and Allstar Systems, Inc.                                      S-1 filed Aug. 8, 1996
10.24 Industrial Lease Agreement dated March 9, 1996, by and between            Exhibit 10.24 to Form
      H-5 J.E.T. Ltd. as lessor and Allstar Systems, Inc. as lessee.            S-1 filed Aug. 8, 1996
10.25 Lease  Agreement  dated June 24,  1992,  by and  between  James J.  Laney,
      Exhibit 10.25 to Form et al. As lessors,  and Technicomp  Corporation  and
      Allstar Services as S-1 filed Aug. 8, 1996 lessees.

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

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

21.1  List of Subsidiaries of the Company.                                      Form 10-K filed Mar.
                                                                                31, 1998

23.1  Independent Auditors' Consent of Deloitte & Touche LLP,.                  Form 10-K filed Mar.
                                                                                31, 1998

27.1  Financial Data Schedule.                                                  Form 10-K filed Mar.
                                                                                31, 1998

99.1  Schedule II Valuation and Qualifying Accounts                             Form 10-K filed Mar.
                                                                                31, 1998

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 31, 1998.

                              Allstar Systems, Inc.
                                  (Registrant)

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

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

           Signature                                         Capacity

    /s/ James H. Long           Chief Executive Officer, President and Chairman
                                    of the Board


    /s/ Donald R. Chadwick      Chief Financial Officer, Secretary and Treasurer
                                    and Director
                                    (Principal Financial and Accounting Officer)

    /s/ G. Chris Andersen       Director


    /s/ Richard D. Darrell      Director


    /s/ Jack M. Johnson         Director


    /s/ Donald D. Sykora        Director