SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

                [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1998

                                       OR

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

                         Commission file number: 0-21479

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

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

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

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

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

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

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

     The aggregate  market value of the voting stock held by  non-affiliates  of
the  registrant,  based upon the closing  price of the Common Stock on March 31,
1999,  as  reported  on  NASDAQ  National  Market  System,   was   approximately
$2,602,406.

     The number of shares of Common  Stock,  $.01 Par Value,  outstanding  as of
March 31, 1999 was 4,232,211.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of  Registrant's  definitive  Proxy  Statement for the 1999 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 WITHIN THE
MEANING OF THE  PRIVATE  SECURITIES  LITIGATION  REFORM ACT OF 1995  RELATING TO
FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY INCLUDING,  BUT
NOT  LIMITED  TO,  STATEMENTS   CONTAINED  IN  ITEM  1.  -  "BUSINESS"  ITEM  2.
"PROPERTIES," ITEM 3. - "LEGAL PROCEEDINGS" AND ITEM 7. "MANAGEMENTS  DISCUSSION
AND  ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF  OPERATIONS."  READERS ARE
CAUTIONED  THAT  ANY  STATEMENT  THAT IS NOT A  STATEMENT  OF  HISTORICAL  FACT,
INCLUDING  BUT NOT  LIMITED  TO,  STATEMENTS  WHICH MAY BE  IDENTIFIED  BY WORDS
INCLUDING,  BUT NOT  LIMITED TO,  "ANTICIPATE,"  "APPEAR,"  "BELIEVE,"  "COULD,"
"ESTIMATE,"  "EXPECT" "HOPE,"  "INDICATE,"  "INTEND,"  "LIKELY," "MAY," "MIGHT,"
"PLAN,"  "POTENTIAL," "SEEK," "SHOULD," "WILL," "WOULD," AND OTHER VARIATIONS OR
NEGATIVE  EXPRESSIONS THEREOF, ARE PREDICTIONS OR ESTIMATIONS AND ARE SUBJECT TO
KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES.  NUMEROUS FACTORS,  INCLUDING FACTORS
WHICH THE COMPANY HAS LITTLE OR NO CONTROL OVER, MAY AFFECT THE COMPANY'S ACTUAL
RESULTS AND MAY CAUSE ACTUAL RESULTS TO DIFFER  MATERIALLY  FROM THOSE EXPRESSED
IN  THE  FORWARD-LOOKING   STATEMENTS   CONTAINED  HEREIN.  IN  EVALUATING  SUCH
STATEMENTS,  READERS  SHOULD  CONSIDER THE VARIOUS  FACTORS  IDENTIFIED  IN THIS
ANNUAL  REPORT ON FORM 10-K,  INCLUDING  MATTERS  SET FORTH IN ITEM 1.  "FACTORS
WHICH MAY AFFECT THE FUTURE  RESULTS OF  OPERATIONS,"  WHICH COULD CAUSE  ACTUAL
EVENTS, PERFORMANCE OR RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH
STATEMENTS.

GENERAL

     Allstar Systems, Inc. is engaged in the business of providing its customers
with solutions to their  information and  communications  technology  needs. The
company markets its products and services primarily in Texas from five locations
in the Houston,  Dallas-Fort Worth, El Paso, Austin and San Antonio metropolitan
areas. The company's customer base of approximately  2,700 accounts is 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  the   expertise   to  service   and   support   integrated   computer   and
telecommunications applications.

     The company's revenue is derived from three business segments:

          Information  Technology sells computer hardware and software products,
          along with  networking  and data  communications  products,  including
          related integration and support services.

          Telecom  Systems  sells  and  supports   telecommunications   systems,
          including  smaller "key"  telephone  systems,  larger  private  branch
          exchange ("PBX") telephone  systems,  video  conferencing  systems and
          voice mail systems.

          CTI Software,  through a wholly owned  subsidiary,  Stratasoft,  Inc.,
          markets its own software products for computer-telephony  integration,
          including  products  for 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  executive  offices are
located at 6401 Southwest Freeway, Houston, Texas 77074 and the telephone number
is (713) 795-2000.


<PAGE>

     The market for  information  and  communications  technology  products  and
services has experienced  significant growth in recent years and the use of such
products and  outsourced  services  within  organizations  has been  impacted by
several  trends.  The company  believes that the general demand for  information
technology  products and related services has increased because of the following
trends:

          The  introduction  of local-area  and  wide-area  networks has allowed
          organizations   to  supplement  or  replace   expensive,   centralized
          mainframe   computer   systems  with  more  flexible  and   affordable
          microcomputer based client/server platforms.

          The emergence of  widely-accepted  industry standards for hardware and
          software has increased the  acceptance of open  architecture  networks
          that  can,  and  frequently   do,   contain   products  from  numerous
          manufacturers and suppliers.

          Rapid   technological   improvements  in  computer  hardware  and  the
          introduction of new software  operating  systems have also created the
          need to expand or upgrade existing networks and systems.

          The  proliferation  of Internet  access has  increased  the demand for
          increased computing power and network throughput.

          Price decreases have made such networks and systems more affordable to
          a larger number of organizations.

     The  advent of open  architecture  networks  has  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 for users of information and  communications
technology  to diagnose  problems and to 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   technology   products   often  require
prospective  vendors  not only to offer  products  from many  manufacturers  and
suppliers,  but also to have available  proficient  service  expertise to assist
them in product  selection,  system design,  installation and  post-installation
support and service.  The company believes that the ability to offer customers a
comprehensive  solution to their information technology needs, combined with the
ability to work within its customers'  environments as integral members of their
information  and   communications   technology   systems  management  team,  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 user's  computer  systems now allows these  telephone
systems  to  interact  with the  user's  computerized  data to  create  powerful
business  solutions.  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 or her
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 outbound calling campaigns while automatically  blending inbound 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 large  software
manufacturers  for the  interface of telephone  and  computer  technologies,  is
causing rapid industry change.  These digital telephone systems,  along with the
many  software  products  that  are  rapidly  becoming   available  for  use  in
computer-telephony,  require sophisticated  installation and integration service
capability.  The  company  believes  that the  trend  toward  computer-telephony
integration  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  believes  that growth  opportunities  will be presented  for  companies
presently able to provide and service the latest  integrated  telecommunications
and computer technologies.


<PAGE>

BUSINESS STRATEGY

     To  achieve  its  objectives,  the  company  intends  to  pursue  these key
strategies:

     Geographic  Expansion  into  New  Markets.  In  order  to  expand  into new
geographic  markets and create  growth  opportunities  with new  customers,  the
company  opened a number of new offices  over a short period of time during late
1997 and early  1998.  The company  opened new  offices in Austin,  Texas in the
third quarter of 1997 and in McAllen and El Paso,  Texas late in 1997.  Early in
1998,  the company  significantly  increased  the size of its El Paso office and
opened offices in  Albuquerque  and Las Cruces,  New Mexico.  Later in 1998, the
company opened its eighth office in San Antonio,  Texas.  During the second half
of 1998, the company also began  employing  sales  representatives  to work from
their homes in new markets, and employed new sales representatives in the states
of Florida, Nebraska, Missouri and Oklahoma. The expenditures that were required
to establish a marketing  and  operating  organization  in those new markets has
been a factor in  causing  profitability  to decline  during  the past year.  Of
primary short-term  importance is solidifying the revenue gains that the company
has made in those new markets,  while  continuing to increase revenue to a level
at which the new offices are  contributing  to  profitability.  Longer term, the
company intends to evaluate the need for opening additional offices in Texas and
other regions as opportunities and circumstances warrant.

     Pursue "Same Office"  Growth.  The company has continued to produce revenue
growth in its older,  more  mature  offices in Houston and Dallas and intends to
continue to pursue  growth  opportunities  in those  markets  through  increased
numbers of  customer  relationships.  By  expanding  the  number of product  and
service  offerings  made  available to customers,  the company hopes to increase
revenue from existing customers in these mature offices.

     Enhance Services Component in Information  Technology.  For many years, and
continuing through 1998, the company employed a separate sales force,  reporting
to separate management, for the marketing of Information Technology services and
products.  The  company  is  combining  the two  sales  forces  under  a  single
organizational  structure in order to take advantage of the much larger products
sales force to sell services offerings.  The products sales force, at the end of
1998, was  approximately  ten times as large,  in terms of total sales staff, as
the services  sales  force.  The company  intends to pursue  having the products
sales staff market  services in an attempt to produce  higher  growth rates from
services  revenues,  which typically produce higher margins than that of product
revenues.  The company also intends to expand the number of service offerings in
order to provide  additional  sources of service  revenues and to produce higher
rates of growth from services revenues.

     Improve Telecom Systems and CTI Software  Profitability.  The company began
offering  Telecom Systems and CTI Software in 1994 and 1995,  respectively,  and
these two business units have produced high rates of revenue growth. Compared to
the previous year, Telecom Systems revenue grew 41.3% and 38.8% and CTI Software
revenue  grew 66.5% and 44.3%  during 1997 and 1998,  respectively.  While these
business  units produce  higher than company  average  gross  margin,  they have
produced operating losses in each of the past two years. The company's challenge
is to continue the growth in these business units while improving  profitability
during 1999 and thereafter.

PRODUCTS AND SERVICES

     The  company's   revenues  are  derived  from  sales  of  information   and
communications systems and by providing services related to the use of such. The
company  believes that much of its product  sales  revenues are reliant upon the
company's  ability to offer services related to the  installation,  integration,
support and service of such products.  The products and/or services  marketed in
each of the company's three business segments are described below.



<PAGE>


Information Technology:

     The company  offers its  customers a wide variety of computer  hardware and
software products  available from approximately 900 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.  The company is an authorized
reseller  of  products  from a  number  of  leading  manufacturers  of  computer
hardware, software and networking equipment.

     The company markets a variety of services  offerings related to the service
and support of information  technology systems.  The company prices its services
on a time and materials basis,  under fixed price project pricing or under fixed
fee service contracts, depending on customer preference and the level of service
commitment  required.  To support and maintain the quality of these services and
to maintain vendor accreditation necessary to resell and service its significant
product  lines,   the  company's   technical   staff   participates  in  various
certification and authorization programs sponsored by hardware manufacturers and
software  suppliers.  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.  Information
Technology services include the following:

          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,  network design, on-site
          and remote network administration, network diagnostics, 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,  delivery and  installation  "roll-outs" of major new
          hardware and software  installations and large network  installations,
          including multiple citywide-area network implementations.

          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,  fixed asset
          management and tracking.

          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. The company offers contract programming
          services,  primarily  related to 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  customers with
          technical personnel for temporary and permanent positions. The company
          recruits  and  places  personnel  for  a  wide  variety  of  technical
          positions related principally to computing hardware and software skill
          sets.


Telecom Systems:

     The company began its Telecom Systems business in 1994 to capitalize on the
trend toward  computer-telephony  integration.  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.


<PAGE>

CTI Software:

     Through its wholly-owned subsidiary, Stratasoft, Inc., 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 a call center and other types
of high volume calling applications,  for both inbound and outbound calls. 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  computer-telephony  software products,  currently
sold   under   the   names   StrataDial   and   StrataVoice.   A  new   product,
Strata-Interactive,  has also been  developed  by the  company.  The company now
markets these three  computer-telephony  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  of the
          telephone  system.  StrataDial  collects campaign specific data during
          the telephone  call and provides  comprehensive  on line reporting and
          statistical  analysis of the campaign data.  StrataDial  also features
          open  architecture  that allows easy  interaction  with the customer's
          other   database   applications.   Dialing   parameters  and  campaign
          characteristics can be changed without shutting down the dialer, as is
          required with many competing products.

          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.  Strata-Interactive.
          Strata-Interactive  is an interactive  voice response software product
          that allows telephone calls to access computer information at any time
          using a simple  touch-tone  telephone.  Applications  for  interactive
          voice  response   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.

FINANCIAL INFORMATION BY BUSINESS SEGMENT

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

SALES AND MARKETING

     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
are solely compensated,  on the profitability of accounts which they participate
in developing.  The company's three business segments utilize slightly different
methods of sales and marketing:

<PAGE>

      Information  Technology.   The  Information  Technology  business  segment
     operates from all of the company's  offices,  and 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  this  business  segment's  new  customers   originate  through
     word-of-mouth  referrals from existing customers and industry partners such
     as  manufacturers'  representatives,  and through customer and lead sharing
     with the company's other two business units.

      Telecom Systems. The Telecom Systems business unit operates primarily from
     the  company's  Houston  office,  and its sales and  marketing  efforts are
     concentrated in that market. Telecom Systems uses primarily  telemarketing,
     along with  participation  in trade shows and general trade  advertising to
     market its products and services.

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

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 which the  company  maintains  offices.  The  company  occasionally  provides
products  and/or  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.  The company's top ten customers (which have varied from year to
year) accounted for 33.2%, 21.2% and 31.7% of the company's revenue during 1996,
1997 and 1998, respectively. Approximately 2,700 customers purchased products or
services from the company  during 1998.  In 1998,  the largest  single  customer
constituted  9.3% 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.

SUPPLY AND DISTRIBUTION

     The company  relies on wholesale  distributors  to supply a majority of the
products  that it sells  through its  Information  Technology  and CTI  Software
business  units.  The company  purchases the majority of its products from three
primary suppliers to obtain competitive pricing, better product availability and
improved  quality  control.  Products  sold  by the  company's  Telecom  Systems
business  unit are  generally  purchased  directly  from the original  equipment
manufacturer.  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.

     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 these  agreements are conditioned upon the continuation
of  the  company's  supply  arrangement  with  a  major  wholesale   distributor
acceptable to the manufacturer.

     The company operates small warehouses within each of its branch offices and
a major  regional  distribution  center  located in Dallas,  for the  purpose of
receiving, warehousing, configuration and shipping products.


<PAGE>

     In 1995,  the company began an initiative 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  increasing  significantly.
While the company does not believe that it is in its best  interest to drop ship
all orders,  it does intend to try to increase the volume of drop shipments with
the expectation of reducing its freight,  distribution and administrative  costs
related to these revenues.

     While  some  manufacturers  of  products  sold  by  the  company  offer  to
price-protect  the inventory carried by the company for a certain length of time
following a price decrease by the manufacturer, recently many manufacturers have
moved to more restrictive price protection  policies or have largely  eliminated
price  protection.  In  addition,   certain  manufacturers  and  suppliers  have
implemented a more  restrictive  policy regarding  inventory  returns during the
past year.

MANAGEMENT INFORMATION SYSTEMS

     The  company  depends  on its  customized  management  information  systems
("MIS") to manage most aspects of its  business.  The company's MIS provides its
sales staff, customer service representatives and certain customers with product
pricing and availability from its principal suppliers' warehouses throughout the
United States.  The  purchasing  systems are real time,  allowing  buyers to act
within  minutes  on a  newly  received  and  credit-approved  sales  order.  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 sales orders,  purchasing,  service  contracts,  service calls and
work orders, engineer and technician scheduling and time tracking, service parts
acquisition  and  manufacturer  warranties.  Reporting can also be generated for
project  profitability,  contract  and  customer  analysis,  parts  tracking and
employee time tracking.  During the second quarter of 1998 the company completed
a conversion of its MIS to a more powerful  computing  platform which will allow
the company to improve and enhance its MIS.

EMPLOYEES

     As of December 31, 1998 the company employed approximately 513 individuals.
Of these,  approximately  128 were  employed in sales,  marketing  and  customer
service,  214 were employed in engineering and technical  positions and 171 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.

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 the company formed a wholly owned subsidiary,  Stratasoft,
Inc.,  to purchase  and develop its CTI Software  business  unit.  In 1997,  the
company  formed  another  wholly-owned  subsidiary,  IT Staffing,  Inc., for the
purpose of  conducting  business in the  placement  of temporary  and  permanent
technical personnel. In 1998 the company formed another wholly owned subsidiary,
Allstar Systems Rio Grande,  Inc., to develop and manage business  opportunities
in the Rio Grande  region  congruent  with the  business of the parent,  Allstar
Systems, Inc. In October 1996, 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,  were converted into approximately  2,675,000 shares of the
newly incorporated Delaware corporation (the  "Reincorporation").  The effect of
the   Reincorporation   on  the  number  of  shares  outstanding  prior  to  the
Reincorporation  was  similar  in effect to an  approximately  8.15-for-1  stock
split.


<PAGE>

FACTORS WHICH MAY AFFECT FUTURE RESULTS OF OPERATION

Risk of Low Margin Business

     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 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.  In addition,
manufacturers  of  products  sold by the company  have  recently  changed  their
business  practices to largely  eliminate price protection for inventory held by
the  company and have also  reduced  and/or  eliminated  return  privileges  for
inventory held by the company. Any increase in inventory  devaluation risks that
cannot be passed onto the  company's  customers  would result in  write-offs  or
markdowns of the value of such inventory with the result being a charge to gross
profit,  reducing  gross  margin.  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.

Dependence on Availability of Credit

     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 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.  (See Item 7 -  "Management's  Discussion and Analysis of
Financial Condition and Results of Operations").

Interest Rates

         Any significant increases in interest rates will increase the company's
     cost of capital 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 capital 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.  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 and distributors, including certain manufacturers and distributors
that supply  products to the  company.  Other  competitors  include  established
national, regional and local resellers,  systems integrators,  telephone systems
dealers,  computer-telephony  value-added resellers and other computer-telephony
software suppliers.

Management of Growth

         The company has  experienced  rapid growth that 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.



<PAGE>

Regional Concentration

     For the  foreseeable  future,  the company expects that it will continue to
derive most of its revenue from  customers  located in or near the  metropolitan
areas 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.

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 does not maintain key personnel life insurance
on any of its  executive  officers or  salespersons  other than its Chairman and
Chief  Executive  Officer.  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.  The company maintains sales and
service authorizations with many industry-leading product manufacturers. Without
such sales and service  authorizations,  the company  would be unable to provide
the range of products and services currently offered. In addition, some of these
agreements are based upon the company's  continued supply  relationship with its
major  distributors.   Furthermore,  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 product  manufacturers either provide for
fixed  terms or for  termination  on 30 days prior  written  notice.  Failure to
maintain  such  authorizations  could  have a  material  adverse  effect  on the
company's financial condition 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. 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.

Inventory Obsolescence

     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.  Additionally, the company is at risk for decreases in realizable
inventory value for inventory held by the company, due to product obsolescence.



<PAGE>

Reliance on Key Customers

     The  company's  top ten  customers,  which have  varied  from year to year,
accounted for 33.2%,  21.2% and 31.7% of the company's revenue during 1996, 1997
and 1998,  respectively.  During 1998, the company's largest customer  accounted
for 9.3% of total  revenues,  but in past years the single largest  customer has
accounted for as much as 11.2% of total revenues.  Based upon historical results
and its 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.  A significant
reduction in business with any of the company's  largest  customers could have a
material  adverse  effect on the  company's  financial  condition and results of
operations.

Reliance on MIS

     The company's  success is largely  dependent on the  accuracy,  quality and
utilization of the  information  generated by its customized  MIS, which affects
its ability to manage its sales,  accounting,  inventory and  distribution.  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 evolve. Although the company has a plan to try to mitigate any problems
that might arise from the Year 2000 problem, there can be no assurance that this
issue will not impact the company's information and telecommunications  systems.
In view of the  company's  reliance  on its  information  and  telecommunication
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 - "Management Information Systems" and Item 7 - "Year 2000 Issue").

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.

Control by Existing Stockholders

     James  H.  Long,  founder,  Chairman  of the  Board,  President  and  Chief
Executive Officer of the company owns 50.1% of the outstanding  Common Stock and
Mr.  Long will have the  ability to control  the  election  of a majority of the
members of 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

     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.


<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
that are housed in a free standing building of approximately 48,000 square feet.
The Houston office sublease expired on December 31, 1998 and was extended for an
additional  year under similar  terms and  conditions.  The company's  corporate
level operations occupy  approximately 12,600 square feet of the Houston office.
Telecom  Systems and CTI Software  occupy  approximately  6,500 and 3,700 square
feet of the Houston,  respectively  but occupy no space in any of the  company's
other offices.

     The  company's  Dallas  office  is  housed in a  freestanding  building  of
approximately  20,000 square feet. The Dallas facility lease expired on June 30,
1998 and was renewed for an  additional  three  years  under  similar  terms and
conditions.  The company also leases a storage facility of  approximately  7,000
square feet in Houston.  The lease on this  warehouse  expired on April 14, 1998
and the company extended the lease on a month-to-month  basis pending assessment
of future needs.  During 1997, the company added  additional  offices in Austin,
McAllen and El Paso, Texas. During 1998 the company opened additional offices in
San Antonio,  Texas and in Albuquerque and Las Cruces, New Mexico, and moved its
El Paso office to larger  facilities.  The company has leased interim offices in
Albuquerque, Las Cruces and McAllen under leases expiring in less than one year,
in two years  for the San  Antonio  office  and in three  years  for the  Austin
office.  In 1998 the company expanded its distribution  capabilities by entering
into a three year lease on a 30,000 square foot warehouse in Dallas. 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.  All of
the non-Houston facilities are occupied solely by Information Technology.

Item 3.  Legal Proceedings

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


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  an initial  public  offering of its
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
Fiscal 1998
     First quarter                                  5 5/16       4 3/8
     Second quarter                                 4 1/4        3 5/8
     Third quarter                                  3            1 7/8
     Fourth quarter                                 2 15/16      1 3/8

     The  company   estimates  that,  as  of  December  31,  1998,   there  were
approximately 890 beneficial  holders 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

     The  following  sets forth the  selected  data of the  company for the five
years ended December 31, 1998.
<TABLE>
<CAPTION>
                                                        Year ended December 31,
                                            (In Thousands except share and per share amounts)

<S>                                  <C>            <C>            <C>           <C>             <C> 
                                     1994           1995           1996          1997            1998
Operating Data:
Revenue                           $64,076        $91,085       $120,359      $129,167        $167,173
Cost of sales and services         55,541         79,857        104,302       111,126         145,039
   Gross profit                     8,535         11,228         16,057        18,041          22,134
Selling, general and administrative
   expenses                         7,448          9,149         12,284        14,386          23,422
   Operating income (loss)          1,087          2,079          3,773         3,655          (1,288)
Interest expense (net of other
   income                             764          1,218          1,183           685             351
   Income (loss) before
   provision for income taxes         323            861          2,590         2,970          (1,639)
Provision (benefit) for
   income taxes                       140            342            987         1,126            (541)
     Net income (loss)            $   183        $   519       $  1,603      $  1,844       $  (1,098)

Supplemental Data:
Net income (loss) per share:
     Basic                        $  0.07        $  0.19       $  0.60       $   0.52       $ (  0.25)
     Diluted                      $  0.07        $  0.19       $  0.60       $   0.52       $ (  0.25)
Weighted average shares outstanding:
        Basic                   2,554,808      2,675,000     2,675,000      3,519,821       4,345,883
        Diluted                 2,554,808      2,675,000     2,675,000      3,526,787       4,345,883
</TABLE>
<TABLE>
<CAPTION>
                                                             As of December 31,
                                                               (In Thousands)

<S>                                  <C>            <C>            <C>           <C>             <C> 
                                     1994           1995           1996          1997            1998

Balance Sheet Data:
Working Capital                    $1,363         $1,732        $2,291        $12,738          $9,800
Total Assets                       19,077         24,266        24,720         34,855          51,028
Short-term borrowings(1)            8,972          9,912         9,975          1,572          15,958
Long-term debt                          0              0             0              0               0
Stockholders' equity                2,205          2,724         4,327         14,637          12,705
<FN>
(1) See Note 4 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.
</FN>
</TABLE>


<PAGE>

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

     The  following  discussion  is  qualified in its entirety by, and should be
read in  conjunction  with,  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 sales of computer products and related
services. 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 1995, the company  acquired
and began marketing certain  computer-telephony  software products.  During 1997
the company opened  offices in Austin,  McAllen and El Paso,  Texas,  and during
1998 opened additional  offices in Albuquerque and Las Cruces,  New Mexico,  and
San Antonio,  Texas. In addition,  the company employs sales representatives who
work from their homes in Florida, Missouri, Nebraska and Oklahoma.

     Effective  for the year ended  December  31,  1998,  the company will begin
segment  reporting as required by Statement  of  Financial  Accounting  Standard
("SFAS")  No.  131,  Disclosures  about  Segments of an  Enterprise  and Related
Information,  issued by the Financial  Accounting Standards Board ("FASB") Three
segments will be reported,  with results  detailed  down to the earnings  before
interest and taxes line. The three segments are Information Technology,  Telecom
Systems and CTI Software. The results for the new Information Technology segment
are the  combined  Computer  Products and IT Services  business  units for which
revenue and gross profit have been reported during past reporting periods.

     The  gross  margin  varies  substantially  between  each of these  business
segments.  Over the past three years the gross margin in Information  Technology
has ranged  between  11.7% and 12.9%;  the gross  margin in Telecom  Systems has
ranged between 26.1% and 35.5%; and the gross margin for CTI Software has ranged
between 40.2% to 48.2%. Information Technology, Telecom Systems and CTI Software
accounted for 93.6%, 4.5% and 1.9% of total revenues, respectively, during 1998.

     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
as the cost of goods drop shipped as a  percentage  of total cost of goods sold)
growing from 18.1% in 1996, to 31.9% in 1998. 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  with the  expectation  of reducing  its
freight, distribution and administrative costs related to these revenues.

     A significant portion of the 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.

<PAGE>

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

     Inacom Corp.  ("Inacom")  is the largest  supplier of products  sold by the
company.  Purchases from Inacom accounted for  approximately  57.0%,  51.4%, and
33.2%  of the  company's  total  product  purchases  in  1996,  1997  and  1998,
respectively.   In  August  1996,  the  company  renewed  its  long-term  supply
arrangement with Inacom and agreed to purchase at least 80% of its products from
Inacom,  but only to the extent that such products were available through Inacom
and made available within a reasonable period of time at reasonably  competitive
pricing.  Inacom does not carry  certain  product  lines 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,  as in past
years, will be made from Inacom.

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> 
                                             1996                     1997                    1998
                                        Amount       %           Amount        %         Amount       %
                                                         (Dollars in thousands)
Revenue
   Information Technology.......      $ 115,247    95.7%        $121,619     94.1%      $156,579    93.6%
   Telecom Systems..............          3,824     3.2            5,403      4.2          7,499     4.5
   CTI Software.................          1,288     1.1            2,145      1.7          3,095     1.9
      Total.....................        120,359   100.0          129,167    100.0        167,173   100.0
Gross profit
   Information Technology.......         14,180    12.3           15,707     12.9         18,316    11.7
   Telecom Systems..............          1,359    35.5            1,412     26.1          2,326    31.0
   CTI Software.................            518    40.2              922     43.0          1,492    48.2
     Total......................         16,057    13.3           18,041     13.9         22,134    13.2
Selling, general and
  Administrative expenses
   Information Technology.......         10,459     9.1           11,431      9.4         18,786    12.0
   Telecom Systems..............          1,163    30.4            1,859     34.4          2,763    36.8
   CTI Software.................            662    51.4            1,096     51.1          1,873    60.5
     Total......................         12,284    10.2           14,386     11.1         23,422    14.0
Operating income (loss)
   Information Technology.......          3,721     3.2            4,276      3.5           (470)   (0.3)
   Telecom Systems..............            196     5.1             (447)    (8.3)          (437)   (5.8)
   CTI Software.................           (144)  (11.2)            (174)    (8.1)          (381)  (12.3)
     Total......................          3,773     3.1            3,655      2.8         (1,288)   (0.8)
Interest expense (net of
 other income)..................          1,183     1.0              685      0.5            351     0.2
Income (loss) before provision
 (benefit) for income taxes.....          2,590     2.2            2,970      2.3         (1,639)   (1.0)
Provision (benefit) for income
 Taxes..........................            987     0.8            1,126      0.9           (541)   (0.3)
Net income (loss)...............      $   1,603     1.3%        $  1,844      1.4%     $  (1,098)   (0.7)%
<FN>
(1)  Percentages  shown in the table  above  are  percentages  of total  company
     revenue,  except  for each  individual  segment's  gross  profit,  selling,
     general  and  administrative  expenses,  and  operating  income,  which are
     percentages of the respective segment's revenue.
</FN>
</TABLE>

<PAGE>

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

     Revenue.  Total revenue  increased $38,006 (29.4%) to $167,173 in 1998 from
$129,167 in 1997.

     Revenue from Information Technology, which comprised 93.6% of total
revenue in 1998 compared to 94.1% in 1997, increased $34,960 (28.7%) to $156,579
in 1998 from $121,619 in 1997.  The increase in Information  Technology  revenue
was generally  attributable  to increased  sales of products and services to new
and existing  customers  and to sales  generated in the  company's  newer branch
offices.  Of the $34,960  increase in Information  Technology  revenue,  $17,526
(50.1%) resulted from increased sales in the company's more established  offices
in Houston and Dallas and $17,434  (49.9%)  resulted from sales in the company's
newer  offices  opened since  mid-1997.  The increase of $17,526 from the older,
more established  offices in Houston and Dallas represented an increase of 14.6%
to $137,290  in 1998 from  $119,764 in 1997.  The  increase of $17,434  from the
company's  newer branch offices  represented an increase of 939.8% to $19,289 in
1998 from $1,855 in 1997. Total 1998 Information Technology revenue consisted of
$143,407 (91.6% of total Information  Technology revenue) from product sales and
$13,172 (8.4% of total) from  services as compared to $111,145  (91.4% of total)
and  $10,474  (8.6% of total),  respectively,  in 1997.  Information  Technology
revenue from product sales increased  29.0% and revenue from services  increased
25.8% during 1998 compared to 1997.

     Revenue from Telecom  Systems,  which  comprised  4.5% of total  revenue in
1998, compared to 4.2% in 1997,  increased $2,096 (38.8%) to $7,499 in 1998 from
$5,403 in 1997. The increase in Telecom Systems revenue was primarily the result
of increased sales of systems to new and existing  customers and due to sales of
larger systems.  Telecom Systems operates primarily out of the company's Houston
office and, therefore, has insignificant revenues attributable to sales from the
company's other offices.

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

     Gross Profit. Gross profit increased $4,093 (22.7%) to $22,134 in 1998 from
$18,041 in 1997,  while gross  margin  decreased  to 13.2% in 1998 from 13.9% in
1997.  Gross profit and gross margin were affected by asset valuation  markdowns
of $2,040 in the company's  Information  Technology  segment related to reducing
the carrying  value of that  segment's  inventory  and certain  vendor  accounts
receivables.  The company  decided that the  mark-downs in inventory  value were
necessary based upon an analysis of the impact of supplier's  changes in product
return  privileges  and price  protection  policies  made  available  by product
manufacturers  and  suppliers.  The  markdowns  related to reducing the carrying
value of certain vendor accounts receivables were due to the company's inability
to collect certain  accounts  related to special  promotional  funds owed to the
company from certain of its suppliers.

     The gross margin for Information Technology decreased to 11.7% in 1998 from
12.9% in 1997,  reflecting  the  effect of the  aforementioned  asset  valuation
markdowns and lower gross margin produced on the services  revenue  component of
total Information Technology revenues.

     The gross margin for Telecom Systems  increased to 31.0% in 1998 from 26.1%
in 1997. This  improvement in gross margin was primarily due to an increase to a
more normal  gross  margin from the year  earlier  period when gross  margin was
lower than  expected due to a number of  circumstances,  including the fact that
the 1997 period contained a number of larger, lower margin sales.


<PAGE>

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

     Selling,  General  and  Administrative  Expenses.    Selling,  general  and
administrative expenses increased $9,036 (62.8%) to $23,422 in 1998 from $14,386
in 1997. As a percentage of total revenue,  selling,  general and administrative
expenses increased to 14.0% in 1998 from 11.1% in 1997.

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

     Selling,  general and  administrative  expenses in  Information  Technology
increased  $7,355  (64.3%) to $18,786 in 1998  compared to $11,431 in 1997.  For
Telecom Systems,  selling,  general and  administrative  expenses increased $904
(48.6%)  to $2,763  in 1998 from  $1,859  in 1997.  For CTI  Software,  selling,
general and administrative expenses increased $777 (70.9%) to $1,873 from $1,096
in 1997.

     Operating  Income (loss).  Operating income decreased $4,943 (135.2 %) to a
loss of $1,288 in 1998  from a profit  of  $3,655 in 1997 due  primarily  to the
increase in selling,  general and administrative  expenses and the effect of the
aforementioned  asset  valuation  markdowns.  Operating  income  in  Information
Technology  decreased  $4,746  (111.0%) to a loss of $470 in 1998 from operating
income of $4,276 in 1997. For Telecom Systems,  the operating loss decreased $10
(2.2%) to $437 in 1998 from $447 in 1997.  For CTI Software,  the operating loss
increased $207 (119.0%) to $381 in 1998 from $174 in 1997.

     Interest  Expense  (Net of Other  Income).  Interest  expense (net of other
income)  decreased  $334  (48.8%)  to  $351 in 1998  compared  to $685 in  1997.
Interest  expense  decreased in 1998 due to the  reduction of  outstanding  debt
resulting  from the 1997 stock  offering  proceeds  applied to the  reduction of
debt.

     Net Income (Loss). Net income (loss),  after an income tax benefit totaling
$541  (reflecting  an effective tax rate of 33.0% for 1998 compared to 37.9% for
1997), became a loss of $1,098 in 1998 compared to a profit of $1,844 in 1997.

Year Ended  December  31,  1997  Compared  to the Year Ended  December  31, 1996
(Dollars in thousands)

     Revenue.  Total  revenue  increased  $8,808 (7.3%) to $129,167 in 1997 from
$120,359 in 1996. Revenue from Information Technology,  which comprised 94.1% of
total  revenue,  increased  $6,372  (5.5%) to $121,619 in 1997 from  $115,247 in
1996. The increase in Information  Technology revenue was generally attributable
to  increased  sales  to new and  existing  customers.  Revenue  in  Information
Technology  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 Telecom Systems, which comprised 4.2% of
total revenue,  increased  $1,579 (41.2%) to $5,403 in 1997 from $3,824 in 1996.
The increase in Telecom  Systems' revenue was primarily the result of adding new
customers,  of which one customer accounted for approximately  $1,300 (82.3%) of
the increase. Revenue from CTI Software increased $857 (66.5%) to $2,145 in 1997
from $1,288 in 1996.  The increased  revenues were primarily the result of sales
to new customers.

<PAGE>

     Gross Profit. Gross profit increased $1,984 (12.4%) to $18,041 in 1997 from
$16,057 in 1996. Gross margin increased to 13.9% in 1997 from 13.3% in 1996. The
gross margin for Information Technology increased to 12.9% in 1997 from 12.3% in
1996. The gross margin for Telecom Systems decreased to 26.1% in 1997 from 35.5%
in 1996. 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 that 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
gross margin  increased to 43.0% in 1997,  from 40.2% in 1996.  This increase in
CTI Software  gross margin  reflected  slightly  lower,  installation  costs and
development costs (as a percentage of revenue) in 1997 compared to 1996.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative expenses increased $2,102 (17.1%) to $14,386 in 1997 from $12,284
in 1996. As a percentage of total revenue,  selling,  general and administrative
expenses  increased to 11.1% in 1997 from 10.2% in 1996. Of the dollar increase,
approximately  $1,500  (71.4%)  was  attributable  to  increased  temporary  and
permanent personnel,  principally in non-sales personnel.  Other costs that grew
at a rate in excess of the rate of growth in revenues include 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  that do not  fluctuate  with gross  profit or
revenues.  Selling, general and administrative expense in Information Technology
increased  $972  (9.3%) to $11,431  in 1997  compared  to  $10,459 in 1996.  For
Telecom Systems,  selling,  general and  administrative  expense  increased $696
(59.8%)  to $1,859  in 1997 from  $1,163  in 1996.  For CTI  Software,  selling,
general and administrative expense increased $434 (65.6%) to $1,096 in 1997 from
$662 in 1996.

     Operating Income.  Operating income decreased $118 (3.1%) to $3,655 in 1997
from $3,773 in 1996. Operating income as a percentage of total revenue decreased
to 2.8% in 1997 from 3.1% in 1996 largely due to  increases in selling,  general
and administrative expenses. Operating income in Information Technology business
segment  increased  $555  (14.9%)  to $4,276 in 1997  from  $3,721 in 1996.  For
Telecom  Systems,  operating income decreased $643 (327.6%) to an operating loss
of $447 in 1997 compared to operating  income of $196 in 1996. For CTI Software,
the operating loss decreased $30 (20.8%) to $174 in 1997 from $144 in 1996.

     Interest  Expense  (Net of Other  Income).  Interest  expense (net of other
income)  decreased  $498  (42.1%) to $685 in 1997 from $1,183 in 1996.  Interest
expense decreased due primarily to the reduction of outstanding debt by applying
the proceeds of the company's initial public offering to the reduction of debt.

     Net Income. Net income,  after a provision for income taxes totaling $1,126
(reflecting  an effective  tax rate of 37.9% in 1997 compared to 38.1% in 1996),
increased $241 to $1,844 in 1997 from $1,603 in 1996. Net income  increased as a
percentage of total revenue to 1.4% in 1997 from 1.3% in 1996.


<PAGE>

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 product orders
in its Information  Technology business segment in the fourth quarter, which the
company  attributes to year-end capital  spending by some of 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.
<TABLE>
<CAPTION>
                                             1997                                       1998
                                                   (In thousands, except per share amounts)

<S>                           <C>       <C>      <C>       <C>              <C>     <C>      <C>       <C>
                             First    Second    Third     Fourth           First  Second    Third     Fourth
                            Quarter   Quarter   Quarter   Quarter        Quarter  Quarter   Quarter  Quarter
Revenue
   Information Technology.  $25,213   $30,358   $30,463   $35,585        $30,644  $37,509   $41,750   $46,676
   Telecom Systems........      953     1,284       801     2,365          1,072    1,818     2,302     2,307
   CTI Software...........      427       597       650       471            826      513       723     1,033
     Total                   26,593    32,239    31,914    38,421         32,542   39,840    44,775    50,016
Cost of sales and service
   Information Technology.   21,877    26,089    26,741    31,205         26,317   32,581    36,139    43,226
   Telecom Systems........      650       951       618     1,772            900    1,031     1,753     1,489
   CTI Software...........      235       272       418       298            515      278       319       491
     Total                   22,762    27,312    27,777    33,275         27,732   33,890    38,211    45,206
Gross Profit
   Information Technology.    3,336     4,269     3,722     4,380          4,327    4,928     5,611     3,450
   Telecom Systems........      303       333       183       593            172      787       549       818
   CTI Software...........      192       325       232       173            311      235       404       542
     Total                    3,831     4,927     4,137     5,146          4,810    5,950     6,564     4,810
Selling, general and
administrative expenses
   Information Technology.    2,607     3,031     2,773     3,020          3,634    4,431     5,067     5,654
   Telecom Systems........      344       518       351       646            568      583       863       749
   CTI Software...........      184       290       315       307            374      450       395       654
        Total.............    3,135     3,839     3,439     3,973          4,576    5,464     6,325     7,057
Operating Income (loss)
   Information Technology.      729     1,238       949     1,360            693      497       544    (2,204)
   Telecom Systems........      (41)     (185)     (168)      (53)          (396)     204      (314)       69
   CTI Software...........        8        35       (83)     (134)           (63)    (215)        9      (112)
     Total                  $   696   $ 1,088   $   698   $ 1,173        $   234  $   486   $   239   $(2,247)
Interest expense (net of
     other income               289       309        82         5             28       51        95       177
Income (loss) before
     Provision (benefit) for
     income taxes.........      407       779       616     1,168            206      435       144    (2,424)
Provision (benefit) for
     income taxes.........      154       310       237       425             82      165        57      (845)
Net income (loss)           $   253   $   469   $   379   $   743        $   124  $   270   $    87  $ (1,579)
Net income (loss) per share
     (Basic and Diluted)..    $0.09     $0.17     $0.09     $0.17          $0.03    $0.06     $0.02  $  (0.37)
</TABLE>

<PAGE>

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 an advance  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 $2,291,  $12,738 and $9,800 at  December  31,  1996,  1997 and 1998,
respectively.  The increase in working  capital during 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.  The decrease in working  capital during 1998 was
primarily  attributable to the net operating loss and capital  expenditures.  At
December 31, 1998,  the company had total  borrowing  capacity  under its credit
facility of  approximately  $30,000 as compared to $23,900 at December 31, 1997.
At December  31, 1998 the company had  outstanding  borrowings  of $29,999  and,
thus, was fully borrowed  against its credit  facility based upon its collateral
base at that time.  At December  31,  1998,  the  company  had a $30,000  credit
facility with its primary  lender,  which was increased on a temporary  basis to
$40,000 to accommodate an increased level of business.  The company is seeking a
permanent increase in its credit facility to support a higher level of business.
As of December 31, 1998,  the company was fully  borrowed  against its available
borrowing  based due to the higher level of business  during the fourth quarter.
The  company  expects an  increased  level of business in 1999 and to support an
increased  level of  business  over the  fourth  quarter,  the  company  will be
required to increase its borrowing  base  relative to the  borrowing  base as of
December  31,  1998.  The company  expects to  accomplish  this  requirement  by
improved asset  management.  If the company does not increase its borrowing base
it will not be able to  significantly  increase  its level of revenue  over that
which was realized in the fourth quarter.

Cash Flows

     Operating  activities provided net cash totaling $89 and $2,086 during 1996
and 1997, respectively, and used net cash totaling $10,831 during 1998. Net cash
provided during 1996, was 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.  During 1998, net cash was used by operations due primarily
to a net  loss,  a  large  increase  in  accounts  receivable,  an  increase  in
inventory,  which was offset  somewhat by an  increase  in accounts  payable and
accrued expenses.

     Accounts receivable increased $695, $8,999 and $9,377 during 1996, 1997
and  1998,  respectively.  Inventory  decreased  $545 and $162 in 1996 and 1997,
respectively, and increased $3,797 in 1998.

     Investing  activities used cash totaling $952, $992 and $1,764 during 1996,
1997 and 1998,  respectively.  The company's investing activities that used cash
during these periods were primarily related to capital  expenditures  related to
new offices, an expanded work force and upgrading of computing equipment and the
company's  management  information  systems.  During the next twelve months, the
company  expects to incur an estimated $500 for capital  expenditures.  All or a
portion of the $500 in capital expenditures currently anticipated 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 performance of certain of the company's recently opened
branch offices.

     Financing  activities  provided cash totaling $63, $258 and $13,552  during
1996, 1997 and 1998, respectively. In July 1997, the company received $8,661 net
proceeds from the sale of Common Stock in a public offering. Those proceeds were
used to reduce the outstanding  balance under 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 satisfy the company's  cash  requirements,  including  financing
increases in accounts  receivable and  inventory.  During 1998, the company used
$834 to repurchase shares that were held in treasury at the end of 1998.

<PAGE>

Asset Management

     The company's cash flow from operations has been affected  primarily by the
timing of its collection of 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 accounts  receivable,  net of  allowance  for doubtful
accounts,  of $16,517,  $25,516 and $34,893 at December 31, 1996, 1997 and 1998,
respectively. The number of days' sales outstanding in trade accounts receivable
was 40 days,  60 days and 67 days for years 1996,  1997 and 1998,  respectively.
The  increase in days' sales  outstanding  was caused by a general  slow down in
payments by the company's  customers.  Bad debt expense as a percentage of total
revenue for the same periods was 0.2%,  0.2% and 0.2%.  The company's  allowance
for doubtful accounts,  as a percentage of accounts  receivable,  was 1.3%, 1.0%
and 1.0% at December 31, 1996, 1997 and 1998, respectively.

     The company  attempts  to manage 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  have  in  the  past  generally  provided  price
protection,  which  reduces the company's  exposure to decreases in prices,  but
during 1998 most major product manufacturers reduced or largely eliminated price
protection.  The company's  suppliers generally allow for some levels of returns
of excess  inventory,  which,  on a limited  basis,  are made  without  material
restocking  fees.  During 1998, the Companies  suppliers  generally  became more
restrictive in their policies  regarding  product return  privileges.  Inventory
turnover  for 1996,  1997 and 1998 was 19.2 times,  21.5 times,  and 22.0 times,
respectively.

Credit Facilities

     On  February  27,  1998  the  company  executed  agreements  with  Deutsche
Financial  Services  ("DFS") for a revolving line of credit (the "DFS Facility")
which  replaced the  company's  prior primary  credit  facility as the company's
principal source of liquidity.  The company's prior primary credit facility with
IBM Credit  Corporation  ("IBMCC") was converted into a credit  facility for the
purchase of IBM branded computer products (the "IBMCC Facility").

     The total credit  available  under the DFS Facility is $30,000,  subject to
borrowing  base  limitations  which are  generally  computed as a percentage  of
various classes of eligible accounts receivable and qualifying inventory. Credit
available  under the DFS  Facility for floor plan  financing  of inventory  from
approved manufacturers (the "Inventory Line") is $20,000. Available credit under
the DFS Facility,  net of Inventory Line advances, is $10,000,  which 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 DFS
Facility  is 7.0%.  DFS may change the  computation  of the  borrowing  base and
disqualify  accounts  receivable  upon which advances have been made and require
repayment  of such  advances  to the  extent  such  disqualifications  cause the
company's borrowings to exceed the reduced borrowing base.

     The 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.  The DFS  agreement  contains  restrictive

<PAGE>

covenants which,  among other things,  require specific ratios of current assets
to current  liabilities  and debt to tangible  net worth and require  Allstar to
maintain a minimum tangible net worth. The terms of the agreement also prohibits
the payment of dividends and other similar  expenditures,  including advances to
related parties.

     The IBMCC  Facility is a $2,000  credit  facility  for the  purchase of IBM
branded inventory from certain suppliers.  Advances under the IBMCC Facility are
typically interest free for 30 days after the financing date for transactions in
which  adequate  financial  incentives  are  received  by IBMCC from the vendor.
Within 30 days after the  financing  date,  the full  amount of the  invoice for
inventory financed through IBMCC is required to be paid 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 IBMCC Facility is immediately terminable by either party
by written notice to the other.

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

Year 2000 Issue

     The Year 2000 problem  generally  results from the use in computer hardware
and  software of two digits  rather  than four  digits to define the  applicable
year.  When  computers must process dates both before and after January 1, 2000,
two-digit year "fields" may create processing  ambiguities that can cause errors
and system failures.  For example, a date represented by "00" may be interpreted
by the system as referring to the year 1900 rather than 2000. The effects of the
Year 2000  problem can be  exacerbated  by the  interdependence  of computer and
telecommunications  systems in the United States and throughout the world.  This
interdependence can affect the company and its suppliers,  trading partners, and
customers ("outside  entities").  The following are some of the identified risks
related to the Year 2000 problem:

     Shortage of Resources. Between now and the year 2000 it is anticipated that
there will be increased  competition  for people with  technical and  managerial
skills  necessary  to deal  with the Year 2000  problem.  Both the  company  and
outside  entities  could face an inability to attract and/or keep personnel with
the necessary skills to solve and/or mitigate  problems related to the Year 2000
problem.

     Potential  Shortcomings.  The company  estimates that its  mission-critical
systems will be Year 2000-ready  substantially  before January 1, 2000. However,
there is no  assurance  that the Y2K Plan  will  succeed  in  accomplishing  its
purpose, or that unforeseen  circumstances will not arise during  implementation
of the Project that would materially adversely affect the company.

     Cascading  Effect.  The  company is taking  reasonable  steps to  identify,
assess  and,  where  appropriate,  to  replace  devices  that  contain  embedded
microprocessors that cannot be determined to be warranted by the manufacturer to
be Year 2000-ready.  Despite these reasonable  efforts,  the company anticipates
that it will not be able to find and remediate all embedded  microprocessors  in
all systems.  Further,  it is anticipated that outside entities also will not be
able to find and remediate all embedded  microprocessors in their systems.  Some
of the disruptions, failures or errors may spread from the systems in which they
are  located,  including  from  systems  of  outside  entities,  to other of the
company's systems causing adverse effects upon the company's ability to maintain
safe  operations,  to serve its  customers  and  otherwise  to  fulfill  certain
contractual and other legal obligations.

     Third  Parties.  The company  cannot  assure that  suppliers  upon which it
depends for essential goods and services, or customers upon which it depends for
revenue and for timely  payment of amounts due to the company,  will convert and
test their mission-critical systems and processes in a timely manner. Failure or
delay  by all or some of  these  entities,  including  federal,  state  or local
governments,  could create  substantial  disruptions which could have a material
adverse effect on the company's business.

<PAGE>

State of Readiness:

     The  company's  board of  directors  has been  briefed  about the Year 2000
problem. The board of directors has adopted a Year 2000 project (the "Y2K Plan")
aimed at preventing the company's mission-critical functions from being impaired
due to the year 2000 problem.  "Mission-critical"  functions are those  critical
functions whose loss would cause an immediate stoppage or significant impairment
to core business processes.

     The company's  Vice President of  Information  Systems is  supervising  the
implementation  of the Y2K Plan.  The company is actively  implementing  the Y2K
Plan, which will be modified as events warrant.  Under the plan, the company has
inventoried  all of  the  computer  systems  and  the  telephone  system  at its
corporate  offices.  The company is upgrading all computer and software  systems
that cannot be verified as  warranted by the  system's  manufacturer  to be Year
2000 compliant. The company's corporate offices telephone system is warranted by
the  manufacturer to be Year 2000 compliant.  During the second quarter of 1999,
the company will complete an inventory of all computers,  software and telephone
systems used in its branch  offices and will upgrade or replace any systems that
cannot be verified as  warranted by the  system's  manufacturer  to be Year 2000
compliant.

     The company's Y2K Plan recognizes that the computer, telecommunications and
other   systems   of   outside   entities   have  the   potential   for   major,
mission-critical,  adverse  effects  on the  conduct of  company  business.  The
company  does not have  control of these  outside  entities or outside  systems;
however,  the company's Y2K Plan includes  attempting to verify the readiness of
those outside  entities or outside  systems which might possibly have a material
adverse effect on the company's business by contacting those outside entities to
determine  their  readiness  and to coordinate  with those  outside  entities to
mitigate the possibility of an interruption of any mission-critical process. The
company will,  throughout 1999, attempt to evaluate the readiness of any outside
systems  which  might  possibly   create  a  material   adverse  effect  on  any
mission-critical process.

     It is important to recognize that the processes of inventorying, assessing,
analyzing,  converting (where necessary),  testing,  and developing  contingency
plans for  mission-critical  items in anticipation of the Year 2000 event may be
iterative processes, requiring a repeat of some or all of these processes as the
company  learns more about the Year 2000 problem and its effects on the internal
business  information  systems and on outside systems,  and about the effects of
embedded  microprocessors  on  systems  and  business  operations.  The  company
anticipates  that it will continue with these processes  through January 1, 2000
and on into  the year  2000 in  order to  assess  and  remediate  problems  that
reasonably can be identified only after the start of the new century.

Costs to Address Year 2000 Issues:

     The company has not  incurred  substantial  historical  costs for Year 2000
awareness, inventory,  assessment, analysis, conversion, testing, or contingency
planning and  anticipates  that any future costs for these  purposes,  including
those  for  implementing  Year  2000  contingency  plans,  are not  likely to be
substantial.  The  company  has  incurred  expenditures,  as part of an  overall
upgrading  of its  computer  and  telecommunications  systems,  during  1998 and
through 1999 to date. The company has also  recognized  higher  expenditures  in
managing its  information and  telecommunications  systems as staff members have
expended time and resources  evaluating  the company's  Year 2000  readiness and
implemented   required  changes.  It  is  difficult  to  assess  the  additional
expenditures  over  and  above  what  would  have  been  expended  under  normal
circumstances,  but the  company  estimates  that it  incurred  expenditures  of
approximately  $300 over and above that which would have been  incurred  were it
not for the Year 2000 issue. The company currently  believes that the additional
expenditures  specifically related to preparing for the Year 2000 issue will not
be significant. Although the company believes that its estimates are reasonable,
there can be no assurance that the costs of  implementing  the Y2K Plan will not
differ  materially  from the  estimated  costs or that the  company  will not be
materially adversely affected by year 2000 issues.

<PAGE>

Worst Case Scenario:

     The Securities and Exchange  Commission requires that public companies must
forecast the most reasonably likely worst case Year 2000 scenario, assuming that
the company's Year 2000 plan is not effective.  Analysis of the most  reasonably
likely  worst  case  Year  2000   scenarios   the  company  may  face  leads  to
contemplation of the following  possibilities  which,  though  considered highly
unlikely,  must be  included in any  consideration  of worst  cases:  widespread
failure of electrical,  natural gas, and similar  supplies by utilities  serving
the company;  widespread  disruption  of the services of  communications  common
carriers;  similar  disruption  to means  and  modes of  transportation  for the
company and its employees,  contractors,  suppliers, and customers;  significant
disruption to the company's  ability to gain access to, and continue working in,
office  buildings and other  facilities;  the failure of substantial  numbers of
mission-critical hardware and software computer systems, including both internal
business   systems   and   other   systems   (such   as  those   with   embedded
microprocessors); and the failure of outside systems, the effects of which would
have a cumulative  material  adverse  impact on the  company's  mission-critical
systems.  Among other  things,  the  company  could face  substantial  claims by
customers for loss of revenues due to service level interruptions,  inability to
fulfill  contractual  obligations,  inability to account for certain revenues or
obligations  or to bill  customers  or pay  vendors  accurately  and on a timely
basis,  and increased  expenses  associated with  litigation,  stabilization  of
operations following mission-critical failures, and the execution of contingency
plans.  The company could also experience an inability by customers,  and others
to pay,  on a  timely  basis or at all,  obligations  owed to the  company.  The
company's  suppliers may not be able to deliver  goods and services  required by
the company.  Under these circumstances,  the adverse effect on the company, and
the diminution of company revenues, could be material, although not quantifiable
at this time. Further in this scenario,  the cumulative effect of these failures
could  have a  substantial  adverse  effect  on the  economy,  domestically  and
internationally.  The  adverse  effect on the  company,  and the  diminution  of
company  revenues,  from a domestic or global recession or depression also could
be material,  although not  quantifiable at this time. The company will continue
to  monitor  business  conditions  with  the aim of  assessing  and  quantifying
material adverse  effects,  if any, that result or may result from the Year 2000
problem.

     As part of its Y2K Plan, the company is developing  contingency  plans that
deal with, among others, two primary aspects of the year 2000 problem:  (i) that
the  company,   despite  its  good-faith,   reasonable  efforts,  may  not  have
satisfactorily remediated all internal,  mission-critical systems; and (ii) that
systems of outside  entities may not be Year 2000 ready,  despite the  company's
good-faith,  reasonable efforts to work with outside entities. These contingency
plans are being designed to mitigate the  disruptions  or other adverse  effects
resulting  from Year 2000  incompatibilities  regarding  these  mission-critical
functions or systems, and to facilitate the early identification and remediation
of  mission-critical  Year 2000 problems that first  manifest  themselves  after
January 1, 2000.

     These   contingency   plans  will   contemplate   an   assessment   of  all
mission-critical  internal information and communications technology systems and
internal   operational   systems  that  use  computer-based   controls  and  any
recognizable  potential  outside entities or systems which might possibly have a
material adverse affect on any mission-critical  processes. This process will be
pursued continuously into the Year 2000 as circumstances require.

     These  contingency  plans will include the creation,  as deemed  reasonably
appropriate, of teams that will be standing by on the eve of the new millennium,
prepared to respond  rapidly and otherwise as necessary to mitigate any problems
with mission-critical processes as soon as they become known.

Accounting Pronouncements

     SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, were issued by the FASB
in June 1997.  In  February  1998,  the FASB  issued  SFAS No.  132,  Employers'
Disclosure about Pensions and Other  Postretirement  Benefits.  These Statements
became  effective  for the current  fiscal  year.  The company does not have any
items that constitute other comprehensive income for the year ended December 31,
1998, as identified by SFAS No. 130. Consequently it did not include a statement
of comprehensive  income as part of its financial  statements.  SFAS No. 131 was
adopted by the company during 1998 and the segment disclosure  requirements have
been  incorporated  in the notes to the financial  statements  with prior period
information being restated.  SFAS No. 132 revises  employers'  disclosures about
pension and other  postretirement  benefit plans and is an amendment of SFAS No.
87, 88, and 106. This  statement  does not have an impact on the company's  1998
financial statements


<PAGE>

     In June 1998,  SFAS No. 133,  Accounting  for  Derivative  Instruments  and
Hedging Activities, was issued by the FASB. SFAS No. 133 is effective for fiscal
years  beginning  after January 1, 2000. This statement will not have any effect
on the 1998 financial statements.  Management is evaluating what impact, if any,
the adoption of this  statement  may have,  and  additional  disclosures  may be
required when this statement is implemented.

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

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

     The company incurs certain market risks related to interest rate variations
because the company holds  floating rate debt.  Based upon the average amount of
debt outstanding  during 1998, a one-percent  increase in interest rates paid by
the company on its debt would have  resulted in an increase in interest  expense
of approximately $57 for the year.



<PAGE>

Item 8.  Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements:

   Independent Auditors' Report.......................................     25

   Consolidated Balance Sheets as of December 31, 1997 and 1998.......     26

   Consolidated Statements of Operations for the years ended
       December 31, 1996, 1997 and 1998...............................     27

   Consolidated Statements of Stockholders' Equity for the years
       ended December 31, 1996, 1997 and 1998.........................     28

   Consolidated Statements of Cash Flows for the years ended
       December 31, 1996, 1997 and 1998...............................     29

   Notes to Consolidated Financial Statements for the years ended
       December 31, 1996, 1997 and 1998...............................     30



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, 1997 and 1998, and
the related  statements of operations,  stockholders'  equity and cash flows for
each of the three years in the period ended  December 31, 1998.  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, 1997
and 1998,  and the results of its  operations and its cash flows for each of the
three years in the period ended  December 31, 1998 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 31, 1999



<PAGE>

ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED  BALANCE  SHEETS AS OF DECEMBER  31,  1997 AND 1998 (In  thousands,
except share and per share amounts) .........

ASSETS                                                 1997              1998

Current Assets:
     Cash and cash equivalents:
         Restricted cash                         $       280                 0
         Cash                                          1,301         $   2,538
              Total cash and cash equivalents          1,581             2,538
     Accounts receivable, net                         25,516            34,893
     Accounts receivable - affiliates                    434               373
     Inventory                                         4,700             8,497
     Deferred taxes                                      212               431
     Income taxes receivable                               0               637
     Other current assets                                318               559
              Total current assets                    32,761            47,928
Property and equipment, net                            2,013             2,902
Other assets                                              81               198
                                                 $    34,855        $   51,028

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
     Notes payable                               $     1,572        $   15,958
     Accounts payable                                 14,562            16,641
     Accrued expenses                                  3,565             5,273
     Income taxes payable                                 82                 0
     Deferred service revenue                            242               256
              Total current liabilities               20,023            38,128
Deferred credit - Stock warrants                         195               195
<PAGE>

Commitments and Contingencies (See Note 9)

Stockholders' Equity:
     Preferred stock, $.01 par value, 5,000,000 shares authorized,
              no shares issued
     Common stock, $.01 par value, 15,000,000 shares authorized,
              4,454,411 and 4,503,411 issued at December 31,
              1997 and 1998, respectively                 45                45
     Additional paid in capital                       10,013            10,196
       Unearned equity compensation                      (86)             (269)
       Treasury stock, 271,200 shares, at cost             0              (834)
     Retained earnings                                 4,665             3,567
              Total stockholders' equity         $    14,637       $    12,705
                                                 $    34,855       $    51,028

See notes to consolidated financial statements.


<PAGE>

ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
 (In thousands, except share and per share amounts)

                                                    Years ended December 31,

                                                 1996         1997         1998

Total revenue                               $ 120,359  $   129,167  $   167,173

Cost of goods and services                    104,302      111,126      145,039

                  Gross profit                 16,057       18,041       22,134

Selling, general and administrative
    expenses                                   12,284       14,386       23,422

Operating income (loss)                         3,773        3,655       (1,288)

Interest expense (net of other income)          1,183          685          351

Income (loss) before provision (benefit)
 for income taxes                               2,590        2,970       (1,639)

Provision (benefit) for income taxes              987        1,126         (541)

Net income (loss)                           $    1,603  $    1,844  $    (1,098)

Net income (loss) per share:
         Basic                              $     0.60  $     0.52  $     (0.25)

         Diluted                            $     0.60  $     0.52  $     (0.25)

Weighted-average number of shares outstanding:
         Basic                               2,675,000   3,519,821    4,345,883

         Diluted                             2,675,000   3,526,787    4,345,883

See notes to consolidated financial statements.


<PAGE>

ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
 (In thousands, except share and per share amounts)

<TABLE>
<CAPTION>
<S>                                          <C>               <C>             <C>      <C>         <C>           <C>        <C> 

                                       $.01 par value      No par value   Additional              Unearned
                                         Common Stock      Common Stock    Paid-In    Treasury     Equity      Retained
                                       Shares   Amount   Shares   Amount   Capital      Stock   Compensation   Earnings     Total

Balance at January 1, 1996                               328,125   $  2    $ 1,504                              $ 1,218   $ 2,724

Issuance of common stock
    on conversion                    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         4,454,411      45                      10,013                    (86)        4,665    14,637


Issuance of restricted stock            63,500                                 237                   (237)

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

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

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

Balance at December 31, 1998         4,232,211   $  45  $      0   $  0    $10,196    $  (834)   $   (269)       $3,567  $ 12,705

See notes to consolidated financial statements.
</TABLE>

<PAGE>

ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
 (In thousands, except share and per share amounts)

Years ended December 31,
                                                     1996       1997       1998
                                                                     
CASH FLOW FROM OPERATING ACTIVITIES:                                 
Net Income (loss)                                $  1,603   $  1,844  $  (1,098)
Adjustments to reconcile net income                                  
 (loss) to net cash provided by                                      
 (used in) operating activities:                                     
Gain on disposal of assets                            (11)                   (7)
Depreciation and amortization                         305        623        882
Deferred tax provision                                (92)       138       (219)
Changes in assets and liabilities                                    
  that provided (used) cash:                                         
  Accounts receivable, net                           (695)    (8,999)    (9,377)
    Accounts receivable - affiliates                  153       (294)        61
    Inventory                                         545        162     (3,797)
    Income taxes receivable                                                (637)
    Other current assets                             (507)      (144)      (241)
    Other assets                                                 311       (117)
    Accounts payable                                 (492)     7,817      2,079
    Accrued expenses                                 (598)       806      1,708
    Income taxes payable                              (77)      (124)       (82)
    Deferred service revenue                          (45)       (54)        14
      Net cash provided by                                           
      (used in) operating activities                   89      2,086    (10,831)
                                                                     
CASH FLOWS FROM INVESTING ACTIVITIES:                                
Capital expenditures                                 (965)      (992)    (1,774)
Proceeds from sale of fixed assets                     13                    10
      Net cash used in investing activities          (952)      (992)    (1,764)
                                                                     
CASH FLOWS FROM FINANCING ACTIVITIES:                                
Purchase of treasury stock                                                 (834)
Net proceeds on sale of common stock                           8,661 
Net increase (decrease) in notes payable               63     (8,403)    14,386
      Net cash provided from financing activities      63        258     13,552
                                                                     
NET (DECREASE) INCREASE CASH AND CASH EQUIVALENTS    (800)     1,352        957
                                                                     
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD    1,029        229      1,581
                                                                     
CASH AND CASH EQUIVALENTS AT END OF PERIOD        $   229   $  1,581   $  2,538
                                                                     
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                   
Cash paid for interest                            $ 1,140   $    958   $    403
Cash paid for income taxes                        $ 1,138   $  1,032   $    397
                                                            
See notes to consolidated financial statements.

<PAGE>


ALLSTAR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
 (In thousands, except share and per share amounts)


1.   DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Allstar Systems,  Inc. and subsidiaries  ("Allstar") is engaged in the sale
and service of computer and  telecommunications  hardware and software products.
During 1995 Allstar  formed and  incorporated  Stratasoft,  Inc., a wholly-owned
subsidiary, to create and market software related to the integration of computer
and telephone technologies.  In January 1997, Allstar formed IT Staffing Inc., a
wholly-owned  subsidiary,  to provide temporary and permanent placement services
of technical personnel. In March 1998 Allstar formed Allstar Systems Rio Grande,
Inc., a  wholly-owned  subsidiary  to engage in the sale and service of computer
products in western Texas and New Mexico.

     A substantial  portion of Allstar's sales and services are authorized under
arrangements with product manufacturers. Allstar's operations are dependent upon
maintaining  its approved status with such  manufacturers.  As a result of these
arrangements and arrangements with its customers,  gross profit could be limited
by the availability of products or allowance for volume discounts.  Furthermore,
net income  before  income taxes could be affected by changes in interest  rates
which underlie the credit  arrangements  which are used for working capital (see
Note 4).

     Allstar's significant accounting policies are as follows:

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

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

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

     Property and equipment are depreciated  over their  estimated  useful lives
ranging  from five to ten years  using the  straight-line  method.  Depreciation
expense totaled $304, $620, and $833 for the years ended December 31, 1996, 1997
and 1998, respectively.

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

     Federal Income Taxes - Allstar accounts for income taxes in accordance with
Statement of Financial  Accounting  Standards ("SFAS"),  No. 109 "Accounting for
Income Taxes" issued by the Financial Accounting Standards Board ("FASB").  SFAS
No. 109 requires the  recognition  of deferred  tax assets and  liabilities  for
differences between the financial reporting and bases of assets and liabilities.

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


<PAGE>

     Revenue  Recognition  -  Revenue  from the  sale of  computer  products  is
recognized  when the product is shipped.  Service  income is recognized  ratably
over the  service  contract  life.  Revenues  resulting  from  installations  of
equipment for which duration is in excess of three months are  recognized  using
the  percentage-of-completion  method.  The percentage of revenue  recognized on
each contract is based on the most recent cost estimate available.  Revisions of
estimates  are  reflected  in the  period in which the facts  necessitating  the
revisions  become known;  when a contract  indicates a loss, a provision is made
for the total  anticipated  loss.  At  December  31,  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.  At December  31,  1998,  Allstar had $3,682 of such
contracts in progress and $1,567 of revenue has been deferred together with $826
of cost 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 $96,  $157 and $250 in the years ended  December 31, 1996,  1997
and 1998, 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 4 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 - SFAS No. 130, Reporting  Comprehensive Income,
and SFAS No.  131,  Disclosures  about  Segments  of an  Enterprise  and Related
Information,  were issued by the FASB in June 1997. In February  1998,  the FASB
issued  SFAS  No.  132,   Employers'   Disclosure   about   Pensions  and  Other
Postretirement Benefits. These three Statements became effective for the current
fiscal year. Allstar does not have any items that constitute other comprehensive
income for the year ended  December 31,  1998,  as  identified  by SFAS No. 130.
Consequently it did not include a statement of  comprehensive  income as part of
its financial  statements.  SFAS No. 131 was adopted by Allstar  during 1998 and
the segment  disclosure  requirements  have been incorporated in these financial
statements with prior period  information  being restated.  SFAS No. 132 revises
employers'  disclosures about pension and other postretirement benefit plans and
is an amendment  of SFAS No. 87, 88, and 106.  This  statement  does not have an
impact on the 1998 financial statements.

     In June 1998,  SFAS No. 133,  Accounting  for  Derivative  Instruments  and
Hedging Activities, was issued by the FASB. SFAS No. 133 is effective for fiscal
years beginning after January 1, 2000.  Management is evaluating what impact, if
any,  and  additional  disclosures  may  be  required  when  this  statement  is
implemented.

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

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

<PAGE>

2.   ACCOUNTS RECEIVABLE

     Accounts  receivable  consisted  of the  following at December 31, 1997 and
1998:

                                                     1997                 1998

         Accounts Receivable...................... $25,765              $35,251
         Allowances for doubtful accounts.........    (249)                (358)
                  Total........................... $25,516              $34,893

3.   PROPERTY AND EQUIPMENT

     Property and equipment  consisted of the following at December 31, 1997 and
1998:

                                                     1997                 1998

        Equipment                                 $    339             $    502
        Computer equipment                           2,870                4,218
        Furniture and fixtures                         316                  442
        Leasehold improvements                          55                  138
        Vehicles                                       105                   27
                                                  $  3,685                5,327
        Accumulated depreciation and amortization   (1,672)              (2,425)
              Total                               $  2,013             $  2,902

4.   CREDIT ARRANGEMENTS

     On  February  27,  1998  Allstar  entered  into a credit  agreement  with a
commercial finance company. The total credit available under the credit facility
is $30,000,  subject to borrowing base limitations which are generally  computed
as  a  percentage  of  various  classes  of  eligible  accounts  receivable  and
qualifying  inventory.  Credit  available  under the  facility  for  floor  plan
financing of inventory from approved  manufacturers  (the  "Inventory  Line") is
$20,000. Available credit under the facility, net of Inventory Line advances, is
$10,000, which is used by Allstar primarily to carry accounts receivable and for
other working  capital and general  corporate  purposes (the  "Accounts  Line").
Borrowings  under the Accounts Line bear interest at the fluctuating  prime rate
minus 1.0% per annum.  Under the Inventory Line interest  accrues at prime rate,
which for  purposes of this  agreement  will not fall below 7.0%,  plus 5.0% for
outstanding balances over 40 days.

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

     Allstar  also  maintains  a  $2,000  revolving  credit  line  with  another
commercial finance company to floor plan inventory.  This line of credit accrues
interest at prime (but not less than 6.5%) plus 6% (13.75% at December 31, 1998)
for all outstanding balances over 30 days.

<PAGE>

     The credit  facilities  at December  31, 1997  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 $280 at  December  31,  1997,  but not yet
applied to the line of credit,  are shown as restricted cash in the accompanying
balance sheet.

     The combined  borrowing base under all credit  arrangements was $23,871 and
$29,999  at  December  31,  1997 and 1998,  respectively.  The  weighted-average
interest  rate for  borrowings  under all credit  arrangements  in effect during
1996, 1997 and 1998 was 10.25%, 10.50% and 7.53%, respectively.

5.     INCOME TAXES

     The provision for income taxes for the years ended December 31, 1996,  1997
and 1998 consisted of the following:

                                                 1996         1997         1998
     Current provision (benefit):
        Federal.........................      $   962       $  848       $ (325)
        State...........................          117          140            3
     Total current provision............        1,079          988         (322)
     Deferred provision.................          (92)         138         (219)
              Total.....................      $   987       $1,126       $ (541)


     The total  provision  for income taxes during the years ended  December 31,
1996,  1997 and 1998  varied  from the U.S.  federal  statutory  rate due to the
following:

                                                 1996         1997         1998

Federal income tax at statutory rate....       $  907      $ 1,010     $   (557)
Nondeductible expenses..................           17           24           26
State income taxes......................           77           92          (10)
Other    ...............................          (14)
              Total.....................       $  987      $ 1,126     $   (541)


     Deferred  tax assets  computed at the  statutory  rate related to temporary
differences at December 31, 1997 and December 31, 1998 were as follows:

                                                              1997         1998
     Deferred tax assets:
         Accounts receivable............                   $   149      $   242
         Closing and severance costs....                                     60
         Deferred service revenue.......                        41           62
         Inventory......................                        22           67
              Total deferred tax assets.                   $   212      $   431

     Management believes that the realization of the deferred tax assets is more
likely than not, based upon the expectation  that Allstar can utilize a tax loss
carry back. A valuation allowance has not been deemed necessary by management.

<PAGE>

6.   ACCRUED EXPENSES

     Accrued liabilities  consisted of the following as of December 31, 1997 and
1998:
                                                              1997         1998

     Sales tax payable                                     $ 1,922      $ 2,253
     Accrued employee benefits, payroll
        and other related costs                                962        1,736
     Accrued interest                                           47           94
     Other                                                     634        1,190
         Total                                             $ 3,565      $ 5,273

7.   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,  1996,  1997 and 1998,  Allstar
charged to expense $44, $105 and $105, respectively, related to this agreement.

8.   SHAREHOLDERS' EQUITY

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

     On October 23, 1997,  the Board of Directors  (the "Board")  authorized the
purchase  of up to an  aggregate  maximum of 100,000  shares of common  stock of
Allstar  from  time to time in the open  market to be held in  treasury  for the
purpose  of, but not  limited  to,  fulfilling  any  obligations  arising  under
Allstar's stock option plans.  Again, on September 8, 1998, the Board authorized
the purchase of an additional  200,000 shares for the same purpose.  At December
31, 1998, 271,200 shares were held in treasury under these authorizations.

     Allstar  issued 14,286 common shares and 63,500 common shares of restricted
stock in 1997 and 1998,  respectively  and  cancelled  14,500  common  shares of
restricted stock during 1998. These restricted shares had par value of $0.01 per
share.  The 14,286  shares,  valued at $86, vest at the end of a two year period
while the 49,000 shares  (63,500 less the 14,500  cancelled  shares),  valued at
$183,  vest  ratably at the end of each one year  period over a five year period
from the date of issuance.

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

9.   COMMITMENTS AND CONTINGENCIES

     Operating Leases - Allstar  subleases  office space from Allstar  Equities,
Inc.  ("Equities"),  a Allstar  wholly  owned by the  principal  stockholder  of
Allstar.  In 1996,  Allstar  renewed its office  sublease  with  monthly  rental
payments of $32 in 1997 and $33 in 1998, plus certain operating expenses through
December 1998. Such sublease has been extended through December 31, 1999. Rental
expense  under this  agreement  amounted to  approximately  $372,  $378 and $390
during  years  ended  December  31,  1996,  1997 and  1998,  respectively.  This
agreement  requires a minimum  annual rental of $390 for the year ended December
31, 1999.

     Additionally,  minimum annual rentals on other  operating  leases amount to
approximately  $488 in 1999,  $420 in 2000,  $250 in 2001, $239 in 2002, $179 in
2003, and $514 in years thereafter. Amounts paid during the years ended December
31, 1996, 1997 and 1998 under such agreements totaled  approximately  $252, $142
and $509 respectively.

     Benefit  Plans - Allstar  maintains  a group  medical  and  hospitalization
insurance program under which Allstar pays employees' covered health care costs.
Any claims  exceeding $30 per employee or a cumulative  maximum of approximately
$577 per year are insured by an outside insurance  company.  Allstar's claim and
premium  expense for this  self-insurance  program totaled  approximately  $193,
$684,  and  $581  for the  years  ended  December  31,  1996,  1997,  and  1998,
respectively.

     Allstar  maintains a 401(k) savings plan wherein  Allstar matches a portion
of the employee contribution.  In addition, Allstar has a discretionary matching
fund based on the net profitability of Allstar. All full-time employees who have
completed 90 days of service with  Allstar are  eligible to  participate  in the
plan.  Declaration  of the  discretionary  portion of the  matching  fund is the
decision of the Board of Directors. Allstar has made no additional contributions
to the plan for the years ended December,  1997 or 1998, but however,  did elect
to do so in 1996 when Allstar  contributed an additional $136 to the plan. Under
the standard  Allstar  matching  program Allstar match was $72, $24, and $45 for
the years ended December 31, 1996, 1997 and 1998, respectively.

     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
Sections 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 Allstar had accrued
$28 for the estimated  settlement  cost. In 1998, the Internal  Revenue  Service
accepted the settlement and Allstar paid $25.

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

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  employees of Allstar.  The Incentive  Plan provides for the
granting of incentive  awards in the form of stock  options,  restricted  stock,
phantom stock,  stock bonuses and cash bonuses in accordance with the provisions
of the plan. Additionally,  no shares may be granted after the tenth anniversary
of the Incentive Plan's adoption.  Allstar has reserved for issuance,  under the
Director Plan, 100,000 shares of common stock,  subject to certain  antidilution
adjustments.  The Director Plan provides for a one-time  option by newly elected
directors to purchase up to 5,000 common  shares,  after which each  director is
entitled to receive an option to purchase  up to 2,000  common  shares upon each
date of re-election to Allstar's  Board of Directors.  Options granted under the
Director  Plan and the Incentive  Plan have an exercise  price equal to the fair
market value on the date of grant and generally expire ten years after the grant
date.  During 1997 Allstar  granted  options to purchase 20,000 common shares to
its  directors,  which  vest  immediately,  and  180,300  common  shares  to its
employees,  which vest over five years.  During 1998, Allstar granted options to
purchase  8,000 common  shares to its  directors,  which vest  immediately,  and
129,850 common shares to its employees, which vest over five years.


<PAGE>

The plan's activity is summarized below:
                                                1997               1998
                                                    Weighted-          Weighted-
                                                     Average            Average
                                                    Exercise           Exercise
                                           Shares    Price    Shares    Price
Options outstanding  at January 1.......                     200,300   $   5.17
Granted during the year.................  200,300  $  5.17   137,850       3.13
Exercised during the year...............      -       -          -         -
Options canceled for repricing                -       -     (260,350)      4.25
Option granted at new price                   -       -      260,350       1.50
Canceled during the year................      -       -      (69,800)      4.50

Options outstanding at December 31......  200,300  $  5.17   268,350   $   1.63

Options exercisable at December 31......   20,000  $  5.17    56,940   $   1.63

Options outstanding price range.........   $4.625.to.$6.00       $1.50 to $6.00
Options weighted-average remaining life.  9.7.Years          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, Allstar's
net  income and  earnings  per share  would  have been  reduced to the pro forma
amounts  shown below.  For  purposes of  estimating  the fair value  disclosures
below,  the fair value of each stock option has been estimated on the grant date
or the grant repricing date with a Black-Scholes  option pricing model using the
following   weighted-average   assumptions;   dividend  yield  of  0%;  expected
volatility of 179%; risk-free interest rate of 6.0%; and expected lives of eight
years from the original date of the stock option grants.

                                                        1997               1998
     Net Income:
         As reported................                $  1,844           $ (1,098)
         Pro forma..................                $  1,815           $ (1,180)

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

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



<PAGE>

11.  EARNINGS PER SHARE

The  computations of basic and diluted  earnings per share for each year were as
follows:
                                                 1996         1997         1998
                          (Amounts in thousands except share and per share data)

Numerator:

     Net income (loss)..................       $1,603       $1,844      ($1,098)

Denominator:

     Denominator for basic earnings per
       Share - weighted-average shares
       outstanding......................    2,675,000    3,519,821    4,345,883

Effect of dilutive securities:

     Shares issuable from assumed
       conversion of common stock
       options, warrants and
       restricted stock.................            0        6,966      197,140

Denominator for diluted earnings per share. 2,675,000    3,526,787    4,543,023

Basic earnings per share................        $0.60        $0.52       $(0.25)

Diluted earnings per share..............        $0.60        $0.52       $(0.25)

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

There were  warrants to purchase 0,  176,750 and 176,750  shares of common stock
for 1996, 1997 and 1998, respectively,  which were not included in computing the
effect  of  dilutive   securities   because  the   inclusion   would  have  been
antidilutive.

There were 0, 200,300 and 8,000 options to purchase  common stock for 1996, 1997
and 1998,  respectively,  which were not  included  in  computing  the effect of
dilutive securities because the inclusion would have been antidilutive.



<PAGE>


12.  SEGMENT INFORMATION

     Allstar has three  reportable  segments:  (1) Information  Technology,  (2)
Telecom Systems and (3) CTI Software.  Information  Technology includes products
and services relating to computer products and management  information  systems.
Telecom  Systems  includes  products,  installation  and  services  relating  to
telephone  systems.  CTI Software  includes  software  products that  facilitate
telephony and computer  integration  primarily for telemarketing and call center
applications.  The accounting  policies of the business segments are the same as
those described in Note 1. Allstar  evaluates  performance of each segment based
on operating income.  Management only views accounts  receivable,  and not total
assets, by segment in their decision making.  Prior to 1998,  Management did not
view accounts receivable by segment in their decision making.

<TABLE>
<CAPTION>
For the year ended December 31, 1998:
<S>                                     <C>               <C>                  <C>             <C>
                                    Information         Telecom               CTI
                                     Technology         Systems             Software     Consolidated

Revenue  ...........................   $156,579          $   7,499        $    3,095         $167,173
Cost of goods sold..................    138,263              5,173             1,603          145,039
Gross profit........................     18,316              2,326             1,492           22,134
Selling, general and
  administrative expense............     18,786              2,763             1,873           23,422
Operating loss......................       (470)         $    (437)       $     (381)        $ (1,288)
Less:  interest expense and other...                                                              351
Loss before provision for income taxes                                                       $ (1,639)

Accounts receivable.................   $ 30,871          $   3,704        $      676         $  35,251
Allowance for doubtful accounts.....                                                              (358)
Accounts receivable , net...........                                                         $  34,893
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1997:
<S>                                     <C>               <C>                  <C>             <C>
                                    Information         Telecom               CTI
                                     Technology         Systems             Software     Consolidated

Revenue  ...........................   $121,619          $   5,403        $    2,145          $129,167
Cost of goods sold..................    105,912              3,991             1,223           111,126
Gross profit........................     15,707              1,412               922            18,041
Selling, general and
  administrative expense............     11,431              1,859             1,096            14,386
Operating income (loss).............   $  4,276          $    (447)      $      (174)         $  3,655
Less: interest expense and other                                                                   685
Income before provision for income
  taxes                                                                                       $  2,970
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1996:
<S>                                     <C>               <C>                  <C>             <C>
                                    Information         Telecom               CTI
                                     Technology         Systems             Software     Consolidated

Revenue  ...........................   $115,247          $   3,824       $     1,288          $120,359
Cost of goods sold..................    101,067              2,465               770           104,302
Gross profit........................     14,180              1,359               518            16,057
Selling, general and
  administrative expense............     10,459              1,163               662            12,284
Operating income (loss)............    $  3,721          $     196       $      (144)         $  3,773
Less: interest expense and other                                                                 1,183
Income before provision for income
  taxes                                                                                       $  2,590
</TABLE>


<PAGE>


13.  RELATED-PARTY TRANSACTIONS

     Allstar  has from time to time made  payments  on  behalf of  Equities  and
Allstar's principal  stockholders for taxes,  property and equipment.  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 $7,  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. Effective December 1, 1998 this note was extended
for a period of one year,  with interest and principal  becoming due on December
1, 1999.  The  principal  amounts as of December  31, 1997 and December 31, 1998
were classified as Accounts  receivable - affiliates based on the expectation of
repayment  within one year. At December 31, 1997 and December 31, 1998,  Allstar
receivables  from these  affiliates  amounted  to  approximately  $434 and $373,
respectively.

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

     NONE

PART III

Item 10-13.

     The Registrant incorporates the information required by Form 10-K, Items 10
through 13 by reference to Allstar's  definitive  proxy  statement  for its 1999
Annual Meeting of Shareholders  which will be filed with the Commission prior to
April 30, 1999.

PART IV

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

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

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

Exhibit                                                                         or Incorporated by
Number                          Description                                     Reference to:

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

<PAGE>

                                                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     S-1 filed Aug. 8, 1996
      Allstar Services as lessees. 

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

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

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

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

10.30 Sublease Extention Agreement dated December 31, 1998 by and between       Form 10-K filed April
      Allstar Equities, Inc. and Allstar Systems, Inc.                          12, 1999
               
10.31 Amendment to Lease Agreement dated June 24, 1992, by and between James J. Form 10-K filed April
      Laney, et al. As lessors, and Technicomp Corporation and Allstar Services 12, 1999
      as lessees. 

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